International Association of Insurance Supervisors Issues Report Entitled 'Targeted Jurisdictional Assessment of the Implementation of the Holistic Framework Supervisory Material'

WASHINGTON, May 24 (TNSrep) -- The International Association of Insurance Supervisors, Basel, Switzerland, issued a 35 page report in April 2023 entitled "Targeted Jurisdictional Assessment of the Implementation of the Holistic Framework Supervisory Material."

Here are excerpts:

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About the report

This report reflects the outcomes of the Targeted Jurisdictional Assessment (TJA) of the implementation of the Holistic Framework supervisory material. The TJA was conducted by an Assessment Team, consisting of staff members from the Autorite de Controle Prudentiel et de Resolution (ACPR), Bermuda Monetarv Authority (BMA), Bundesanstalt fur Finanzdienst-leistungsaufsicht (BaFin), European Insurance and Occupational Pensions Authority (EIOPA), Swiss Financial Market Supervisory Authority (FINMA), Istituto per la Vigilanza sulle Assicurazioni (IVASS), Japan Financial Services Agency (JFSA), Monetary Authority of Singapore (MAS), US National Association of Insurance Commissioners (NAIC), US Department of Treasury's Federal Insurance Office (FIO) and US Federal Reserve Board (FRB). The IAIS Secretariat supported the Team and also contributed to the TJA. Furthermore, designated representatives of the ten TJA participating jurisdictions (see paragraph 2) also participated in the assessment.

The report was prepared by the Assessment Team members Patrizia Camurani (IVASS), Nathalie Quintart (ACPR), Marcelo Ramella (BMA), Aaron Wee (MAS), and Elise Tache and Manuela Zweimueller from the IAIS Secretariat.

Contents

Executive Summary ... 4

Acronyms ... 9

1 Introduction ... 12

2 Assessment Scope, Approach, Methodology and Governance ... 13

2.1 Assessment Scope ... 13

2.2 Assessment Approach and Methodology... 14

3 Aggregate Assessment Results and Outcomes... 15

3.1 Cycle 1: Standards relating to the Role of the Supervisor and Macroprudential Supervision... 15

3.2 Cycle 2: Standards relating to Requirements on Insurers in relation to Corporate Governance and Enterprise Risk Management... 18

3.3 Cycle 3: Standards relating to Crisis Management and Planning and Powers of Intervention/Preventive and Corrective Measures... 23

Annexes ... 28

Executive Summary

1. The Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector (HF) was adopted in November 2019 for implementation from the beginning of 2020. The HF consists of an integrated set of macroprudential supervisory policy measures, a Global Monitoring Exercise (GME) and implementation assessment activities.

2. This report summarises the outcomes of the Targeted Jurisdictional Assessment (TJA) of the implementation of the HF supervisory material for ten participating jurisdictions, namely Canada; China; China, Hong Kong; France; Germany; Japan; the Netherlands; Switzerland; the United Kingdom (UK); and the United States (US).

3. The scope of the implementation assessment covered 39 Insurance Core Principles (ICPs) and Common Framework for the Supervision of Internationally Active Insurance Groups (CF) standards specifically related to the HF, including the role of the supervisor, macroprudential supervision, requirements on insurers in relation to corporate governance and enterprise-wide risk management, supervisory powers of intervention/preventive and corrective measures, and crisis management and planning, including recovery and resolution frameworks.

4. The objective of the TJA was to determine whether the supervisor has and exercises the legal authority and supervisory practices to effectively perform the requirements of the relevant HF supervisory material in each participating jurisdiction. This included the assessment of the effective implementation of those HF standards that should be applied "as necessary" (ie how a supervisor decides if a certain policy measure is necessary for a particular insurer, and the application of criteria on which those decisions are based), as well as the application of the proportionality principle.

5. Overall, the TJA results demonstrate strong implementation of the HF standards, with good levels of observance across many of the standards.

6. For instance, the objective of financial stability within the supervision of insurers is well embedded in the regulatory frameworks of participating jurisdictions. Similarly, the identification of Internationally Active Insurance Groups (IAIGs) is generally well conducted, with the exception of one jurisdiction, based on a robust process in line with the IAIS criteria. Macroprudential supervision of the insurance sector is also generally well established, although the assessment of the systemic importance of individual insurers could benefit from more robust processes in some cases. Data collection and analysis by supervisors to support macroprudential supervision is widely in place, even though there are differences in scope and frequency. Furthermore, the embedding of macroprudential elements into the Enterprise Risk Management (ERM) processes is also generally well observed.

7. Where there are gaps, continued progress is being made on implementation in most jurisdictions. For example, in the area of recovery and resolution, there is room for improvement in some cases - while noting that implementation progress is expected in the short-/medium-term in some jurisdictions where relevant regulations are in advanced stages of development.

8. This is a very positive outcome given the relatively short interval between the adoption of the HF in November 2019, the commencement of the TJA in March 2021 and the 31 March 2022 cutoff date for what was assessed in each jurisdiction/1 . Generally, observance levels are somewhat...

1 Due to the on-going development of the regulatory framework and/or supervisory practices in each jurisdiction, a common deadline was needed to ensure consistency ("cut-off date"). Therefore, any changes after 31 March 2022 were not reflected in the assessment results for the observance levels. Nevertheless, improvements already proposed or scheduled for implementation

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...lower for CF standards than for the ICP standards (see also Annex 2), but this is not surprising given that the CF was also only adopted in November 2019.

9. The below Chart 1 provides the aggregate observance levels/2 for each HF standard.

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Chart 1: Aggregate observance levels by standard

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10. At jurisdictional level, this positive outcome is confirmed as demonstrated in Chart 2 below (see also Annex 1 for more details on observance levels per cycle). It shows that all jurisdictions have a rating of either Observed or Largely Observed for at least 70% of the HF standards, except for one jurisdiction where the results are impacted by a number of Not Applicable standards (36%). The latter is mainly linked to the fact that no IAIGs were identified (see Annex 3). Two jurisdictions (within the same geographical region and with former GSIIs) are particularly advanced in the implementation of the 39 HF standards, with around 90% of the standards rated as fully Observed (ie 34 and 35 standards). A further six jurisdictions (from three regions) were assessed as having between 54% and 74% of the HF standards assessed as Observed (ie between 21 and 29 standards). The standards that were most frequently assessed as Partly Observed are in the field of resolution scenarios, resolution plans, management information systems (MIS) for resolution plans, and resolution powers (ICP 12.3, CF 12.3.a, CF 12.3.c and CF 12.7.a). For three jurisdictions, CF 12.3.a (resolution plans) had a knock-on effect on the applicability of the subsequent standard CF 12.3.b, which is only applicable if a resolution plan was considered necessary by the supervisors. Overall, the level of Partly Observed standards is below 15% for all jurisdictions and below 5% for three jurisdictions. Only two standards are Not Observed, in only one jurisdiction.

by the supervisor are noted in the assessment report to provide recognition for efforts that are important, but not yet fully implemented.

2 Observed (O), Largely Observed (LO), Partly Observed (PO), Not Observed (N) and Not Applicable (NA).

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Chart 2: Overall observance levels per jurisdiction

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11. More specifically, the assessment indicates that:

*The objective of financial stability (ICP 1.2) within the supervision of insurers is well embedded in the regulatory frameworks of the participating jurisdictions. Consideration of financial stability risks both to and from the insurance sector has become a regular part of the broader financial stability agenda.

*The identification of IAIGs (CF 23.0.a) is generally conducted based on a robust process, in line with the IAIS criteria. Further improvements to establish a regular identification process are expected in one jurisdiction, particularly as the authority supervises large insurance groups.

*Macroprudential supervision (ICPs 24.1-24.5) is generally well-established in the participating jurisdictions; however, the assessment of the systemic importance of individual insurers (ICP 24.3) would benefit from distinct processes being set up in some jurisdictions or further process improvements in some other jurisdictions. Data collection and analysis by supervisors to support macroprudential supervision is widely in place, although there are differences in the scope and frequency of the data collected, analysed and published.

*Requirements with respect to investment allocation (ICP 15.2) and asset-liability matching (ALM; ICP 15.3) were consistently fully observed across participating jurisdictions.

*The embedding of macroprudential elements into Enterprise Risk Management processes (ERM; ICP/CF 16) is also generally well observed in the assessed jurisdictions. Tools are in place to monitor and assess the impact of the macroeconomic environment, including stress testing (ICP 16.2). For certain standards, with more prescriptive requirements, the approach to assess the observance level considered whether the precise requirement was met/3 (eg for ICP 16.6 and CF 16.6.b, whether an appetite statement for counterparty risk exists, or for

3 Consideration was given to whether broader supervisory practices were sufficient to adequately address the macroprudential elements of these requirements.

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ICP 16.7 whether the insurer's underwriting policy explicitly addresses macroprudential conditions). Areas where there is greater room for improvement include implementation of the more detailed liquidity risk management standards for IAIGs, in particular with respect to requirements for a contingency funding plan to respond to liquidity stress events (CF 16.9.c) and supervisory practices with respect to IAIGs' reporting of the management of liquidity risk (CF 16.9.d).

*Relatedly, there could also be enhancements in some jurisdictions in supervisory practices with respect to addressing the sufficiency of public disclosures on insurers' liquidity risk (ICP 20.11).

*Jurisdictions have a wide range of effective preventive and corrective measures (ICPs 10.2 and 10.3) to address potential threats to financial stability.

*Progress has been made with respect to implementing recovery and resolution frameworks and powers, but there remain areas for improvement:

- The processes for determining the scope of insurers that are required to evaluate in advance their specific risks and options in possible recovery scenarios (ICP 16.15) is well-established in most participating jurisdictions, but recovery plans for IAIGs (CF 16.15.a) are at varying stages of development across jurisdictions.

- Most jurisdictions have a broad range of relevant powers to resolve insurers (ICP 12.7); although, in some cases, these rely on insolvency procedures for domestic insurers or procedures for firms in general (not insurance-specific), which may not always be as effective for larger, more complex groups as they are for smaller insurers. The standard CF 12.7.a is more prescriptive, setting out 21 specific powers that the supervisor and/or resolution authority should be able to exercise for the resolution of an IAIG; four participating jurisdictions have all or almost all of these powers in place, with more numerous gaps in the other jurisdictions.

- Also less well-observed in a number of participating jurisdictions is an established process whereby the supervisor and/or the resolution authority determine the scope of insurers that are required to evaluate prospectively their specific operations and risks in possible resolution scenarios and to put in place procedures for use during a resolution (ICP 12.3). More than half of the participating jurisdictions were rated either Partly Observed or Not Observed for this ICP standard. Similarly, the process for determining which IAIGs need a resolution plan (CF 12.3.a) could be further strengthened in a number of participating jurisdictions. There are currently relatively few group-wide resolution plans in place. The IAIS has identified this as an area for further follow-up and monitoring.

- Lastly, progress has been made to address crisis management planning for IAIGs, either by establishing specific Crisis Management Groups (CMGs; CF 25.7.a) or otherwise via supervisory colleges, although there remains room for more consistency in implementation across jurisdictions.

12. While enhancing their supervisory practices and regulatory frameworks in implementing the HF, supervisors are simultaneously strengthening their shared understanding of the HF standards through engaging with the implementation assessment projects of the IAIS and exchanging practices with other supervisors and insurers.

13. Finally, a number of jurisdictions have already started to consider the identified implementation gaps and intend to draw-up action plans to address these and/or have ongoing projects in place to continually monitor and enhance their implementation of the HF standards. Continued implementation monitoring of the HF supervisory material is envisaged as well as the clarification of certain standards. Further supervisory guidance and capacity building could be helpful to achieve consistent interpretation and implementation, and to ensure that gaps observed in the implementation of HF supervisory material are addressed.

14. In conclusion, the HF's implementation has improved the supervision of financial stability risks in the insurance sector overall. In this respect, the TJA was considered a valuable and helpful exercise by all involved parties. Particularly for participating jurisdictions, the TJA was a good opportunity to carry out a gap analysis of HF standard implementation and reflect on their supervisory practices. Moreover, the TJA allowed for peer comparison and enabled peer learning, fostering sharing and understanding of a range of practical implementation approaches. Finally, the TJA was a first-of-its-kind assessment, and can, as such, be considered a pilot project.

15. In December 2022, the Financial Stability Board (FSB) in consultation with the IAIS endorsed the HF as an improved framework for the assessment and mitigation of systemic risk in the insurance sector and discontinued the annual identification of global systemically important insurers (G-SIIs), based on the initial years of implementation of the HF. Going forward, the FSB will utilise assessments and progress monitoring available through the HF to inform its considerations of systemic risk in the insurance sector.

16. From 2023 onwards, the FSB will publish in the FSB's Annual Resolution Report and on the FSB's website a list of insurers that - according to Member authorities' assessment and self-reporting - are subject to resolution planning and resolvability assessments, consistent with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs). Should circumstances so warrant, the FSB may, in consultation with the IAIS and national authorities, publicly express its views on whether any individual insurer is systemically important in the global context and the appropriate application of the Holistic Framework supervisory policy measures that it considers necessary to address such systemic importance.

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The report is posted at: https://www.iaisweb.org/uploads/2023/04/Report-on-the-TJA-of-the-Implementation-of-the-HF-Supervisory-Material.pdf

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