Clifford Chance

The National Association of Insurance Commissioners (the "NAIC"), the standard-setting body composed of all United States insurance regulators, recently held its Fall National Meeting in Florida. As part of that meeting, the NAIC International Insurance Relations Committee heard a presentation and held a Q&A session with Jonathan Dixon, Secretary General of the International Association of Insurance Supervisors ("IAIS"). Mr. Dixon provided an update on international activities related to financial stability.

Mr. Dixon reported that in December 2022, the Financial Stability Board ("FSB") endorsed the IAIS holistic framework for the assessment and mitigation of systemic risk in the insurance industry (“Holistic Framework”). Accordingly, the FSB decided to discontinue the annual identification of global systemically important insurers ("G-SIIs") and will instead utilize assessments that will become available through the Holistic Framework to inform its future consideration of systemic risk in the insurance sector.

Background

A key lesson coming out of the 2008 global financial crisis was the recognition that financial institutions are increasingly global and interconnected, and therefore pose potential risks to the global financial system. Accordingly, the FSB asked the IAIS to develop a process to assess insurers' systemic risk and to recommend policy measures designed to prevent a catastrophic failure in the sector.

In 2013, the IAIS adopted an initial assessment methodology to identify G-SIIs, and using that methodology, the FSB identified an initial list of nine multinational insurance groups that were G SIIs. Those insurers were identified because of a concern that the failure of any one of them in a disorderly manner could pose a risk to the stability of the global financial system. The IAIS assessment and FSB identification became an annual process, which resulted in minor changes to the original 2013 list.

In 2017, the IAIS announced a plan to develop a comprehensive framework for assessing and mitigating systemic risk in the insurance sector that would focus on the activities or collective exposures of insurers that could lead to systemic risk, rather than an entity-based approach that focused on risks posed to the system by a few individual insurance groups. As a result of the IAIS's development of the Holistic Framework, the FSB, in consultation with the IAIS and national authorities, announced its decision not to publish a new list of G-SIIs in 2017 and 2018, saying it welcomed the work the IAIS was undertaking to develop an activities-based approach to systemic risk.

This work eventually became the IAIS Holistic Framework, which was adopted in November 2019, after which the FSB decided to suspend G-SII identification as of the beginning of 2020. And in December 2022, the FSB announced that, based on the benefits demonstrated during the initial years of implementation of the Holistic Framework, it would discontinue the annual identification of G-SIIs in favor of assessments that will become available through the Holistic Framework.

The Holistic Framework

The Holistic Framework has three key components. First, as part of the Global Monitoring Exercise, approximately 60 of the largest international insurance groups as well approximately 45 of the largest insurance markets will be monitored by international insurance supervisors (including individual state insurance regulators and the NAIC), who will then analyze and discuss any themes they identify. The findings resulting from the monitoring process will be reported to the FSB and to the public in the Global Insurance Market Report.

Second, Enhanced Macroprudential Supervisory Measures, which are a set of international standards that focus on group-wide supervision of international insurance groups, will be applied to approximately 50 international insurance groups, instead of the nine previously identified G SIIs. These standards were developed by the IAIS as part of the Common Framework for the Supervision of Internationally Active Insurance Groups ("ComFrame"), which sets out a comprehensive range of quantitative and qualitative standards and guidance tailored to the international activity and size of insurance groups and may be applied both at a legal entity and group-wide level.

The third component of the Holistic Framework is a Robust Implementation Assessment, comprising a baseline self-assessment by 26 jurisdictions, including all FSB jurisdictions, and targeted onsite assessments of ten major insurance market jurisdictions, including the NAIC and the states of Connecticut, Maine, Nebraska, New Jersey and New York.

Compared the annual G-SII identification process, the Holistic Framework has already demonstrated benefits in its initial years of implementation. For example, systemic risk assessment through the Global Monitoring Exercise has proven more comprehensive, forward-looking and versatile in times of crises, enhanced supervisory measures for macroprudential purposes are being applied to a much broader set of insurers than those formerly identified as G-SIIs, and assessment of the Holistic Framework supervisory measures helps ensure that they are implemented in a comprehensive and consistent manner across jurisdictions.

The Road Ahead

The FSB is expected to continue to play an active role by reviewing IAIS annual updates on the outcomes of the Global Monitoring Exercise and the application of the Holistic Framework supervisory measures. The IAIS's continued role will include providing input on the FSB’s resolvability monitoring process and its annual public reporting of insurers subject to the FSB Resolution Planning Standards, as well continued enhancement of the Holistic Framework. The IAIS will continue to collect data and seek public input on refining its methods, including the recently-launched consultation on monitoring specific indicators, such as illiquid assets, derivatives, reinsurance, and short-term funding.

In November 2025, the IAIS will undertake its triannual review of the Holistic Framework and the FSB also will review its experiences with the process of assessing and mitigating systemic risk based on the Holistic Framework.