Insurers asked to share model data as EU-US tussle over capital buffers looms

EU-US Flags

26 June 2017. By Hugo Coelho.

Global regulators writing rules on the level of capital insurers must have are collecting data on how risk-capital models are used in anticipation of a tussle on the matter between Europe and the US, MLex has learned.

Large cross-border insurers last month received a request for information about the calibrations of the "internal models" that enable them to make bespoke capital calculations.

The request was contained in a confidential document setting out the terms of a dry run of the pilot version of the insurance capital standard, or ICS.

According to the request, seen by MLex, the International Association of Insurance Supervisors has asked for "volunteer groups to provide internal model results" similar to the ICS.

Insurers are asked for models used to calculate their regulatory capital requirements and models used for internal risk management.

One European regulator described the data request as a "placeholder." It will give the European side ammunition when making a case to the US for allowing insurers to use models to calculate bespoke capital requirements under the standard.

US regulators would rather force insurers to rely on a standard formula. They fear that models give companies too much leeway and make it harder to compare their capital positions.

The two sides will have to reach some common ground over the next two years, if the IAIS is to honor its commitment to deliver a near-complete industry standard by the 2019 deadline.

A round of negotiations among IAIS members will take place next week, as insurance regulators from across the world head to London to sign off the pilot version of the standard.

'Do-it-yourself'

The request for models was included in the qualitative part of the questionnaire and kept vague. Responses are voluntary. Companies that agree to answer are asked to explain how the structure of their models differs from that of the standard ICS calculations.

In the document, regulators request details from insurers on how they identify and categorize risks, and about the way they account for diversification benefits.

"The technical specifications are not very specific. This is a do-it-yourself exercise," according to an industry representative, who blames the uncertainty on deep-seated disagreements between regulators.

Internal models used by insurers to calculate capital requirements are widespread in Europe, where insurance capital rules have built-in incentives for companies to develop their own model. US insurers, on the other hand, use models mainly as a risk and business management tool.

Regulators will need information about both models if they are to propose a solution that works in both jurisdictions.

The looming tussle over insurance models comes against a background of European and US regulators locking horns over measures to curb the flexibility of banks in their use of such models.

As things stand, the two sides are at odds over the "floor," which sets a minimum level for capital requirements.

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