A new report from KPMG International finds that the current consultation on financial resolution for global insurers is a crucial step for European and international convergence and calls for an insurance-specific framework. KPMG’s 2013 Evolving Insurance Regulation report, A New Dawn. launched this week at the RiskMinds Insurance event in Amsterdam.
“The current consultation on systemic risk is at a crucial stage for global insurance groups as the international policymakers consider the position regarding systemic risk and the possibility of living wills for insurers,” said Jeremy Anderson, KPMG’s Chairman, Global Financial Services. “This may be the last chance for the insurance sector to get a position on insurance resolution which is right for the insurance sector ahead of expected international proposals.”
Rob Curtis, KPMG’s Global Insurance Regulatory Lead with KPMG in the UK, commented: “The International Association of Insurance Supervisors (IAIS) is working to identify those insurers whose distress or disorderly failure would cause significant disruption to the global financial system or economic activity.”
As a separate exercise, the European Commission (EC) is debating proposals that would create a possible recovery and resolution framework for financial institutions other than banks.
As a starting point, it is imperative that a global framework is developed between insurance supervisors and this framework is likely to have many knock-on effects to existing supervisory structures. Specifically, the KPMG report outlines a number of key suggestions including:
- The expansion of the European Insurance and Occupational Pensions Authority’s (EIOPA) role in the supervision of European insurance groups with assistance from local regulatory authorities as required. This could encourage a better facilitated European response among supervisors, offer a single reference point for insurance groups and provide consistency between sectors given the recent announcements regarding plans to enhance the role and coverage of bank supervision via the European Central Bank.
- The potential development of a European-wide compensation scheme for policyholder protection
- Building on work already done on in the IAIS including the broadening of Own Risk and Solvency Assessments (ORSA) tools developed to analyze risk
- Greater use of reverse stress testing to equip management and supervisors with the necessary information to avoid business failure
- Ongoing lobbying for a global insurance accord
- The formalization of a chief risk officer (CRO) role
KPMG’s Curtis continued: “The systemic risk issue has potentially far-reaching implications for existing regulatory structures in Europe, the US and other global markets. Policymakers should take on board suggestions to build a pan-European and US group-wide approach to supervision, which should help build international consensus in dealing with the issues of systemic risk and recovery and resolution plans for the insurance sector.”
Implementing these reforms will put pressure on regulators to confront current issues, such as sub-optimal supervisory structures, policyholder compensation schemes, group-wide supervision and more coordinated resolution mechanisms.
“KPMG’s submissions to the EC and IAIS urge them to consider an integrated global approach to insolvency structures and requirements,” Curtis said. “We called on the EC to continue taking part in global activities and not develop any EU-specific requirements that might constrain insurers from operating internationally. And we encouraged the IAIS to pursue the creation of a globally accepted common framework, or ComFrame.”
The KPMG report aims to answer how the industry can balance these and other new regulatory demands, while creating positive value for enhanced performance. Based on views from a network of regulatory specialists with KPMG member firms worldwide, the report examines relevant proposals and their implications for insurers globally and through country-specific and regional overviews.
Across the Americas, from Canada to Argentina, all markets are being challenged by the revised insurance core principles of the IAIS.
“Insurers need to review their business strategy against the changing regulations. Prudential standards are at the forefront of recent developments, while consumer protection has often been the poor relation,” said David Sherwood, Head of Insurance Regulatory, KPMG in the US. “Going forward you can expect a continued focus on risk management, solvency standards and enhancements to consumer protection followed by increased enforcement where consumer failings or detriment occur.”
In Asia Pacific, KPMG’s Asia Pacific Insurance Regulatory Lead, Martin Noble, noted a particular focus on prudential regulation and an increasing appetite for reform in the areas of customer treatment and conduct of business. "In an already dynamic and diverse regulatory environment, the establishment of the ASEAN Economic Community (AEC) in 2015 will present a new set of opportunities to insurers and regulators alike in the AEC’s 10 Member States,” said Noble. “The AEC could make the process of conducting cross-border business less costly, subject to fewer barriers to entry and perhaps lead to greater uniformity in regulations.”
Regulatory reform within Europe has hit a major hurdle with the delay to Solvency II. According to KPMG’s Curtis, “It now seems likely that Solvency II’s risk management, governance and possibly reporting standards may be implemented ahead of the capital reforms.”
Meanwhile, countries in the Middle East and Africa are beginning to witness the emerging reform agenda, particularly in the Emirates and South Africa, which is driving substantial change for insurers in those markets.
Over the next six years, Global Systemically Important Insurers (G-SIIs) will need to implement a suite of regulations that aim to reduce the probability and impact of a systemic shock. At the heart of these measures are complex rules for:
- enhanced supervision to ensure that the G-SIIs rapidly achieve higher standards of risk management, with emphasis on group-wide supervision and liquidity planning
- effective resolution to help reduce the impact of a G-SII failing
- capital requirements to ensure higher loss absorbency capacity.
About the Report
KPMG’s 2013 Evolving Insurance Regulation – A New Dawn was developed and written by KPMG’s network of regulatory specialists. The insights are based on discussion with clients, assessment of key regulatory developments and through links with policy bodies.
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About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 156 countries and have 152,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.