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The adoption of the Insurance Capital Standard (ICS) at the end of 2024 as a global solvency standard for internationally active insurance groups is the most significant regulatory development for global insurers currently, according to a new report.
The changes could also mean changes to investment strategies for insurers.
However, there was one group that could face major complications from its implementation. In its paper on the incoming changes, Fitch Ratings said that US insurers with private equity links would continue to face scrutiny linked to certain risk-factors.
“Strategic themes for 2025 will include climate risks (a consultation on supervisory guidance closes at end-October) and digital innovation."
The watchful eye of the regulator on US insurers with private equity links has been ongoing for several years so the changes should not surprise the industry. “For much of the past 10 years, the National Association of Insurance Commissioners (NAIC) and individual state insurance regulators have highlighted their awareness of the increasing number of insurers controlled by private equity funds,” said a 2021 report from law firm McDermott Will & Emery.
Fitch said that The International Association of Insurance Supervisors (IAIS) is on track to adopt the ICS as a prescribed capital requirement for internationally active insurance groups in 2024.
“Strategic themes for 2025 will include climate risks (a consultation on supervisory guidance closes at end-October) and digital innovation,” it said. Fitch said it expected more jurisdictions to align their regulatory regimes to the ICS from 2025, once the standard is finally adopted.
One of the key features of this adoption could be what it does to US insurers with private equity links, which is a large part of the business.
“US regulatory authorities [have adopted] new review and controls around use of private credit ratings for the risk-based capital (RBC) regime and press on with the closer supervision of insurers with private equity links,” said the report. It added that the Bermudan Monetary Authority’s revisions to its Solvency regime, which focused on the need for insurers to create viable recovery plans, will come into effect on 1 May 2025 and could also have a large effect on the market.
The key consideration will be what it could do to the investment activities of insurers. Fitch Ratings said there could be changes in US life insurers’ investment securities following the adoption of the new private credit rating process.
“We believe the updates may persuade some insurance companies to reduce their asset allocation to riskier securities investments."
In North America, the changes could also mean increased supervision of private equity-affiliated insurers. “Whether the IAIS accepts the US aggregation method as an outcome equivalent approach to the ICS,” Fitch said.
The changes will also bleed into other areas -such as the changes by the NAIC to the Purposes and Procedures Manual, which gave the Securities Valuation Office (SVO) discretionary powers to review, and potentially remove, rated securities designations for RBC purposes.
Fitch said in its report that the SVO changes “could result in higher RBC ratio charges for life insurance companies with exposure to filing-exempt investment securities if the SVO disagrees with the private ratings on certain securities”.
“We also believe the updates may persuade some insurance companies to reduce their asset allocation to riskier securities investments,” said the paper.
Numerous jurisdictions have made notifications to change their RBC regimes – or introduce one – in recent years.
In its press release of the paper, Fitch said that the ICS “should lead to closer alignment of capital standards for internationally active insurers” but added that there will likely remain some national differences.
However, it highlighted some examples such as the US where different styles could lead to some divergence.
“Although the ICS should be able to accommodate the US aggregation method, US-based internationally active groups may be treated differently."
“Particularly where existing economic-capital based solvency regimes, such as Solvency II, have been implemented,” said Fitch Ratings. “While many jurisdictions have adopted Solvency II-like frameworks, which the ICS broadly mirrors, the US is taking a different approach – an aggregation method to calculate insurance group capital. The IAIS is evaluating whether this should be considered an outcome-equivalent approach to the ICS.”
Fitch said it does not expect the ICS to impose significantly different regulatory capital requirements for most internationally active insurance groups. This is because of the widespread adoption of Solvency II-like frameworks.
“Although the ICS should be able to accommodate the US aggregation method, US-based internationally active groups may be treated differently if this is not deemed outcome-equivalent,” it said.
It added that Japan is going live with its implementation of ICS in 2025.
