Insurance Capital Standard

The Insurance Capital Standard (ICS) is a consolidated group-wide capital standard for Internationally Active Insurance Groups (IAIGs). It is being developed by the International Association of Insurance Supervisors (IAIS) and their main objective is to establish a common regulatory framework that achieves comparable outcomes across jurisdictions. The ICS will provide a common language for supervisory discussions of IAIG solvency and enhance global convergence among group capital standards.

The IAIS has developed a set of principles, standards, and other supporting material for the supervision of the insurance sector. This global supervisory framework is based on a three-tiered approach. Tier 1 consists of the Insurance Core Principles (ICPs). The ICPs seek to encourage the maintenance of consistently high supervisory standards in IAIS member jurisdictions. ICP14 (Valuation) and ICP17 (Capital) relate to ICS. The Common Framework for the Supervision of IAIGs (ComFrame) consists of quantitative and qualitative supervisory requirements. The ICS will be one of the quantitative components of ComFrame.

The ICS roll-out is currently in the 4th year of its 5-year monitoring period. The timeline below highlights key milestones in the IAIS’ workplan over this period. Following the end of the monitoring period in Q4 2024, the intention is for ICS to be implemented as a group-wide prescribed capital requirement.

ICS consists of 3 technical components: market adjusted valuation, qualifying capital resources and a standard method for the ICS capital requirement. The building blocks of the ICS market adjusted valuation are comparable to those in the Solvency II balance sheet. This is illustrated at a high level below.

MAV insurance liabilities are the sum of the current estimate (CE) and a margin over the current estimate (MOCE). The CE is equal to the probability-weighted average of the present values of the future cash-flows associated with insurance liabilities, discounted using an adjusted yield curve.

The adjusted yield curve is based on:

1. Risk adjusted liquid interest rate swaps or government bonds (risk-free yield curve); and
2. An adjustment.

The adjustment to the yield curve is determined using the “Three-Bucket Approach”. This classifies liabilities into the Top Bucket, the Middle Bucket, and the General Bucket, depending on the nature of the liabilities and the assets backing these liabilities.

The MOCE is a margin added to the current estimate, which covers the inherent uncertainty in the cash flows related to insurance obligations.

The ICS capital requirement is based on the potential adverse change in the IAIG’s qualifying capital resources resulting from unexpected changes of specified risks. The target criterion is a 99.5% Value at Risk (VaR) measure over a one-year time horizon. The reference ICS coverage ratio is calculated as:

ICS Ratio = Qualifying capital resources / ICS capital requirement

The categories of risk included in the standard method are:

• Insurance risk
• Market risk
• Credit risk
• Operational risk

Risks are measured using two approaches: a stress approach and a factor-based approach. The Prescribed Capital Requirement (PCR) under ICS is similar in many ways to the Solvency Capital Requirement under Solvency II, in respect of its calculations and its categorisation of risks.

The individual risk charges are combined in a way that recognises risk diversification, using correlation matrices. For the life insurance segment, geographical segmentation is used to calculate the risk charge. This means that the stress factor applied will vary by region. Most of the prescribed stress factors are more stringent under the Solvency II regime. For example, the SII mortality shock is +15% compared to +12.5% for the EEA region under ICS. The ICS risk map does not include a Health module. This risk is implicitly allowed for in the premium and claim reserve risk segments of the non-life module.

The interest rate risk charge is notable in that it is based on a combination of five stresses, as opposed to two stresses under Solvency II (interest rate up and interest rate down). The five stresses for the ICS interest rate risk charge are as follows:

• A mean-reversion scenario;
• A level up scenario;
• A level down scenario;
• A twist up-to-down scenario; and
• A twist down-to-up scenario.

The equity risk charge is calculated as the change in net asset value following the occurrence of a stress scenario that impacts the level and volatility of the fair value of equities. Thanks to a larger number of asset classes and shock scenarios, ICS will estimate more precisely the capital requirements for companies. This precision will in theory imply a lower market PCR compared to its SCR equivalent.

ICS reporting support:

• Perform ICS impact assessment (as part of a monitoring exercise or separately).
• Support in submitting the ICS pack.
• Support in responding to group-wide supervisor on any queries.
• Monitor regulatory developments and communicate specific issues to your business.
• Prepare internal training material on ICS calibration and comparison to Solvency II.

BAU implementation:

• Design BAU process.
• Implement ICS reporting into BAU processes and improve the quality of submissions.
• Strategic support in understanding the ICS figures for your business including on the long-term business strategy.

For more information on this subject, please have a look at our article published earlier this year titled “Insurance Capital Standard: A Closer Look” which is available to download here.

Alternatively, you can contact one of our experienced consultants at insurance@finalyse.com who would be happy to help with all of your ICS needs.