CAPITAL

Preparing for a brighter future

With the right global capital standard, the world’s insurers can aid sustainable economic recovery

By Charlotte Clark, chair of the GFIA capital working group

This year, like last year, has been dominated by the health emergency and the global economic impact caused by the COVID-19 pandemic. As we look to brighter days ahead, it has become increasingly important for policymakers to recognise the role that insurers across jurisdictions can play in aiding economic recovery and the transition to net-zero carbon emissions. Insurers hold tens of trillions in assets globally and while investment decisions are clearly multi-faceted, these decisions have increasingly been made on the basis of returns adjusted for required capital.

The funding gap for sustainable infrastructure projects and other productive finance assets around the world should be an important aspect of the plan of the International Association of Insurance Supervisors (IAIS) for an economic impact assessment of the global insurance capital standard (ICS) in 2023, taking into account not just what the global economy looks like today, but what it should look like in 10, 20 and 30 years’ time.

Taking stock on infrastructure

In September 2020, the GFIA capital working group welcomed the IAIS stocktake questionnaire on infrastructure and strategic equity investments and responded to it in December. GFIA provided evidence for and supported the IAIS implementing a differentiated capital treatment for these asset classes, for example based on relatively high historic recovery rates and predictable cashflows associated with infrastructure projects that match well with insurance liabilities.

One important source that GFIA pointed to was a UN Development Programme report on mobilising insurance investment in sustainable infrastructure. This noted that the sustainable infrastructure financing gap over the next 20 years is estimated to be US$16trn, while insurers’ global assets under management sit at around US$33trn.

“Sustainable infrastructure financing gap over next 20 years: $16trn. Insurers’ assets: $33trn.”
“Convergence is what the ICS is all about, while at the same time taking a pragmatic but robust approach to national differences.”

Converging on a solution

Capturing the real risks insurers face in providing guarantees and investing to match often long-term liabilities while getting the right balance with policyholder protection is not always easy. But making every effort to get it right is key to unleashing insurers’ potential to promote economic growth and fund the sustainable transformation the world needs. Following the financial crisis, prudential regulators have sometimes prioritised excessive prudence, limiting insurers’ potential role of supporting customers and society. However, there are reasons to be optimistic. Prudential capital regimes are currently being reviewed around the world and this is providing opportunities for convergence towards the ICS, while also taking economic growth, recovery and sustainability into account.

In the UK, for example, the finance ministry is leading a review of the EU’s Solvency II prudential regime and, as part of this, the prudential regulator is testing the ICS margin over current estimate (MOCE) as a potential replacement for the Solvency II cost of capital risk margin. Debates on this and other aspects of the ICS are influencing reviews in other jurisdictions too, including the Solvency II review in the EU and the development of the new risk-based regime in Japan, to name just two.

Convergence is what the ICS is all about, while at the same time taking a pragmatic but robust approach to national differences. It was in this spirit that GFIA responded to the IAIS consultation on comparability between the ICS and the aggregation method (AM), submitted in January 2021. In this response, GFIA supported ensuring that the ICS and AM both provide robust signals for supervisors to take coordinated action and for the ICS and AM to be correlated in response to financial market conditions. The IAIS is now expected to set out more detailed criteria for comparability before the end of 2021, which GFIA is also likely to comment on.

Resilience under stress

While no one would wish for a global pandemic, the impact of COVID-19 on financial markets has provided a useful stress test for the IAIS to analyse. All in all, the last 12 months have demonstrated more than ever that global problems require coordinated global solutions, whether that is dealing with health and prosperity in the wake of the pandemic or the increasingly frequent natural catastrophes caused by climate change.

The global insurance industry has played a significant role in mitigating the impact of these events, but it should also now seek to play an enhanced role in tackling them head on, improving resilience and investing for the future. Ultimately, if the ICS is to be deemed a success in decades to come, it will need to demonstrate its ability to accommodate rather than stifle this role.

Charlotte Clark

Association of British Insurers