OPINION: IAIS

INTERNATIONAL REGULATION

Continuity in the face of disruption

The IAIS has progressed key initiatives while rapidly responding to the challenges of COVID-19

By Victoria Saporta, chair, executive committee, International Association of Insurance Supervisors

With the onset of COVID-19, the IAIS quickly adjusted its work programme to focus on assessing the impact of the pandemic and the risks it poses to the global insurance sector. At the same time, we made excellent progress on our ambitious objectives and are moving into the “new normal” with a focused set of activities to deliver on our mission of policyholder protection and the maintenance of global financial stability.

COVID-19 response

The pandemic highlighted the real benefit of the reforms that we agreed in November 2019. A pertinent example is the IAIS’s Global Monitoring Exercise (GME), designed to monitor risks and trends in the insurance sector. The GME collects quantitative and qualitative information from around 60 of the largest international insurers, as well as from IAIS member jurisdictions that account for about 90% of the global market. At the start of the crisis, we quickly repurposed the GME to assess potential vulnerabilities arising from the impact of COVID-19. In December 2020, we published the results, which established that despite a significant initial shock to financial markets, the global insurance sector demonstrated both operational and financial resilience, albeit aided by supervisory measures providing operational relief and by unprecedented monetary and fiscal support measures in certain regions.

A key lesson of the COVID-19 crisis has been the tangible benefits of effective collaboration and cooperation between insurance supervisors globally. To facilitate these interactions, the IAIS created a database that allowed members to share their supervisory actions in response to the pandemic. This helped inform supervisory decisions and supported a better understanding of the impact of COVID-19 on the global insurance sector.

Lessons learnt from the COVID-19 crisis will be critical to future-proof insurance supervision. In April 2021, the IAIS and the Financial Stability Institute of the Bank for International Settlements published a report that examines the challenges and opportunities faced by insurance supervisors as they adapt to the “new normal”. The report found that most supervisors have viewed the shift to remote supervision as yielding considerable efficiency gains and enabling more nimble and frequent supervisory engagements with insurers. However, it also recognises that remote supervision cannot entirely replace on-site supervision. Instead, supervisors may need to adopt an agile, hybrid approach that appropriately balances the efficiencies of remote supervision with critical non-tangible supervisory insights that are better obtained through physical interaction with insurers.

“The global insurance industry demonstrated operational and financial resilience.”
“Climate change, technological innovation, cyber risk and financial inclusion issues will be key drivers of our work across the prudential, market conduct and financial stability pillars of our supervisory objectives.”

Ongoing activities

While the pandemic prompted an urgent response, the IAIS also managed to maintain momentum on its key priorities. These are even more relevant today than they were before the pandemic. The IAIS Roadmap, or work programme, includes a broad range of projects in four thematic areas.

Risk assessment and contributing to the maintenance of financial stability The economic pressures from COVID-19 will persist for some time to come. While the GME has returned to its normal format, a key focus will be on the impact of “low-for-long” interest rates in key markets, increasing credit risk, the risks posed by cyber and climate change, as well as the ongoing assessment of potential vulnerabilities arising from the impact of COVID-19.

Delivering on key post-global financial crisis reforms Delivering on both the further refinement of the global insurance capital standard (ICS) during the remaining four years of the monitoring period and the consistent implementation of the holistic framework for the assessment and mitigation of systemic risk in the insurance industry are key priorities for the IAIS.

Earlier this year, the ICS marked an important milestone with completion of the first year of the monitoring period. We continue to benefit from strong participation and engagement from insurance groups around the world, with further growth in participation this year. As a result of the pandemic, we have already experienced a real-world stress event and will gain valuable information about the performance of the ICS during this time.

To support members in implementing the holistic framework supervisory material, the IAIS developed a set of Application Papers. In the past year, we finalised papers on resolution powers and planning, liquidity risk management and macroprudential supervision.

Implementation support and assessment With our pivot towards a greater focus on implementation activities, we have reinforced our programme of support to help insurance supervisors understand and implement our standards; to gauge progress in the observance of our standards; and to target supervisory capacity-building initiatives. Building on the baseline assessment of the implementation of the holistic framework supervisory material, we will undertake more intensive, targeted jurisdictional assessments in 10 major insurance market jurisdictions by the end of 2022. In addition, our close partnerships with the Access to Insurance Initiative and the Financial Stability Institute allow us to continually extend the geographical reach of our capacity-building activities. Through virtual events, we have been able to reach a larger and broader audience.

Addressing the risks and opportunities of accelerating trends COVID-19 has amplified trends we had already identified, and these trends are relevant in a wide range of jurisdictions. In particular, we see that climate change, technological innovation, cyber risk and financial inclusion issues will be key drivers of our work across the prudential, market conduct and financial stability pillars of our supervisory objectives.

Insurers have a central role in a smooth transition to net-zero emissions and in helping economies and societies adapt to climate change. Equally, supervisors will have an important role to play in supporting this transition. The IAIS recognised early the importance of tackling these risks and has developed a robust toolkit over the past few years. In 2021, we published an Application Paper on the Supervision of Climate-related Risks and a report on insurers’ investment exposures to climate-related risks. We also created a Climate Risk Steering Group to lead the IAIS’s cross-cutting work to address climate risk.

In the area of technological innovation, we see the significant disruptive potential of innovations. As supervisors, we need to have a clear understanding of the impact of these technologies on the sector and what it means for addressing protection gaps, while achieving our objective of protecting policyholders and maintaining global financial stability. The IAIS’s Fintech Forum was set up to enable greater understanding and insight into fintech developments and facilitate timely responses by the IAIS to this evolving landscape.

The fallout from COVID-19 further compounded cyber risk. Our work has recognised that as digitisation, interconnectedness and cyber threats continue to expand, this calls for a growing focus on operational resilience. We have established an Operational Resilience Task Force to tackle these issues. In addition, this leads to challenges in terms of how to supervise the growing cyber insurance market, as set out in an IAIS report published in December 2020.

Finally, diversity, equity and inclusion will be an important sustainability theme for us going forward, including what they mean for insurers in terms of governance, business models and fair treatment of customers.

We have not put the pandemic behind us. Yet, I am pleased to say that as an association we have remained resilient and focused on our core objectives of protecting policyholders and maintaining global financial stability.

“Insurers have a central role in a smooth transition to net zero.”

Victoria Saporta

Chair, executive committee International Association of Insurance Supervisors