The IAIS is currently minded to adopt a three step process in determining HLA:
- HLA focuses on NTNI activities and hence the definition of NTNI is important.
- The base capital requirement for NT is determined based on local rules applied to the activities and consistency (monitored via an IAIS peer review process). Apply the local rules for required financial resources consistent with Insurance Core Principles (ICPs) and Basel Core Principles for effective banking supervision. HLA is equal to an uplift of at least X% of the base NTNI capital requirement.
- The base capital requirement for NI is determined based on either Basel III or local rules applied to the activities – consistency between the two sectors will be monitored. Apply the capital requirements of the Basel III framework (where HLA equals the 1% uplift corresponding to the lowest of the G-SIB buckets) or non-bank non-insurance capital requirements plus HLA if Basel III does not apply.
- HLA applies in a targeted manner to NTNI activities within effectively separated entities.
- If the effectively separated entity is regarded as a Global Systemically Important Insurer (G-SII) on its own account, the base capital requirement and HLA as described below under step 3 would apply.
- Restrictions and limitations may be applied to NTNI activities to reduce future systemic importance (as measured by the proposed G-SII assessment methodology).
- HLA applies to the base capital requirement for the NTNI activities. Apply the local rule to those activities for required financial resources consistent with ICPs and Basel principles. HLA is equal to an uplift of between Y% and Z% of NTNI base capital requirements (depending on the interconnectedness score or the total score of the group excluding the NTNI score).
- Discussion continues (within the IAIS) on the issue of location of capital at the holding company level versus at the entity conducting the NTNI activities, including discretion of the group supervisor as to its location.
Focussing on NTNI activities is expected to require assessment or development of local capital rules for a limited number of NTNI business types in a limited number of jurisdictions and monitoring (via an IAIS peer review process).
Proposed criteria of effective separation include:
- Ability to operate on a standalone basis (including location of capital for self-sufficiency).
- Adequate levels of independence in management and responsibility.
- Separate entity should have its own solo or group prudential regulator.
- Intra-group transactions at 'arm's length'.
- Acceptable corporate structure and ownership.
- The relevance of reputation risk is under discussion as a possible additional criterion.
The IAIS has taken on board industry concerns, specifically:
- Noting the strong relevance of the risk management practices.
- Mindful of the competition issue between G-SIIs and G-SIBs and that measures adopted should not be different necessarily between sectors.
- Noted fungibility of capital and location of HLA of capital were important considerations.
- The level of comparability between G-SIBs, G-SIIs and others are currently being assessed by the FSB.
It is likely that the designation of which insurance groups are G-SIIs will be made in June.
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