Global Corporate Insurance & Regulatory Bulletin, December 2013

Keywords: IAIS, GSII, policy measures, FSB, reinsurers, capital requirements

GLOBAL

Capital Requirements for Global Systemically Important Insurers

As reported in our July 2013 bulletin, on July 18, 2013, the International Association of Insurance Supervisors (the "IAIS") published a methodology for identifying global systemically important insurers ("GSII") together with a set of policy measures that will apply to such insurers. These measures have been endorsed by the Financial Stability Board ("FSB"). Also on July 18, 2013, FSB released its list of nine GSIIs: Allianz SE, American International Group Inc., Assicurazioni Generali SpA, Aviva plc, AXA S.A., MetLife Inc., Prudential Financial Inc., Prudential plc and Ping An Insurance (Group) Company of China, Ltd. FSB plans to perform an assessment process for determining globally systemically important reinsurers with the aim of creating a list of "systemically important" reinsurers before the end of 2014.

On December 16, 2013, the IAIS released proposals for a public consultation for the development of basic capital requirements ("BCR") for GSIIs. A link to the IAIS press release can be found here. The consultation is designed to receive feedback on the proposal, inform upcoming field testing that is due to start in March 2014, and support the development of BCR. BCR will apply to all group activities, including non-insurance subsidiaries, and is the first step towards developing risk-based, group wide global capital standards. The second step will be the development of high loss absorption ("HLA") requirements to apply to GSIIs, which is supposed to be completed by the end of 2015. The HLA will build on the BCR and will reflect the need for different capital requirements for GSIIs due to their systemic importance in the international financial system.

Responses to the IAIS' initial consultation on BCR are due by February 3, 2014. A second consultation period is expected to commence in July 2014, following the field testing and further development of BCR, which will provide the opportunity for comments on more specific BCR proposals. BCR is expected to be approved by the FSB by November 2014 at the latest in order to allow for its endorsement at the G20 meeting in the same month.

In addition, the IAIS will develop global insurance capital standard for Internationally Active Insurance Groups ("IAIGs") as part of the Common Framework for the Supervision of Internationally Active Insurance Groups ("ComFrame"). The IAIS expects to finish developing the global insurance capital standard for IAIGs under ComFrame by the end of 2016 with an eye towards implementation in 2019.

Although the proposed BCR will only apply to GSIIs and the global insurance capital standards will only directly apply to IAIGs, it is likely that the changed capital standards will eventually have an effect on the standards applicable to all insurance companies.

UK/EUROPE

UK – British Regulators to Cut Red Tape for Insurers Moving to UK

In a bid to boost growth in the City of London, the UK government, together with financial regulators, has pledged to cut the red tape that currently affects foreign insurers attempting to move to the UK.

According to the British finance ministry, the Prudential Regulation Authority (the "PRA") and the Financial Conduct Authority (the "FCA") are committed to ensuring that the authorisation process for prospective insurers wishing to establish themselves in the UK is as streamlined as possible. This commitment has been driven largely by the success of the relocation of the world's biggest broker, Aon Corp, from Chicago to London in 2012 and the resulting increase in London's status in the insurance industry.

The government has also declared it will promote the UK insurance industry in economies key for their fast growth, such as China and Brazil, with the intention of putting the UK at the centre of trade negotiations.

In addition to the proposed streamlined authorisation process, it is hoped that planned cuts to corporation tax and London's already well established links with emerging markets in Africa, the Middle East and Asia, will help entice firms to the UK.

In line with the British government's support of the insurance industry generally, in May 2012 Prime Minister David Cameron helped Lloyd's launch a new strategy for the development of its market, Vision 2025. Vision 2025 targets profitable growth from developed and developing economies and its aim is to ensure that the Lloyd's market remains the global centre for specialist insurance and reinsurance.

Alongside the pledges from the regulators and the government, the UK's biggest insurers have announced that over the course of the next five years they will invest 25 billion pounds in transport and energy projects, backing a government drive to shore up infrastructure investment.

US/AMERICAS

US – SEC's Inquiries and Other Developments Regarding Captives

According to public filings by large publicly traded life insurance companies, the United States Securities and Exchange Commission ("SEC") has requested information from such companies regarding their use and funding of captive entities and the potential financial impact for such companies if state insurance regulators prohibit the use of captives.

As reported in our prior bulletins (see, for instance, here and here), the use of captives by life insurance companies has been under scrutiny by various US regulators. The Captives and Special Purpose Vehicle Use (E) Subgroup of the National Association of Insurance Commissioners (the "NAIC") issued the Captive and Special Purpose Vehicle White Paper in 2013. The NAIC's Principle-Based Reserving Implementation (EX) Task Force ("PBR Task Force"), which is coordinating all of the NAIC's technical groups involved with projects related to the NAIC's principles based reserving initiative for life and health insurance and is also charged with assessing the solvency implications of life insurer-owned captive insurers and alternative mechanisms, is tasked with considering the white paper's recommendations in the context of the proposed principles based reserving system and with making further recommendations, if any, to the NAIC's Executive (EX) Committee. A brief note regarding the issues being considered by the PBR Task Force appears later in this bulletin.

Separately, the New York Department...