Jonathan DIXON: Insurance supervisors face a number of challenges in this rapidly evolving sector. Three emerging areas we are focused on are FinTech, climate risk and cybersecurity. These are issues that impact all of our Members - both those from developed and developing markets. New thinking on how we work in this environment is required. We are working to be more agile and to collaborate more on these cross-cutting issues.
FinTech is clearly transforming the insurance sector, not only insurer business models but also insurance supervision. Last year, we published a foundational report outlining scenarios and demonstrating the far-reaching impact of technology on the insurance business model. Much of our follow-up work has a focus on the supervision of market conduct. To provide supervisors with a forum to exchange experiences and emerging best practices, the IAIS recently launched a FinTech virtual forum.
Climate risk is an increasingly important issue for insurance supervisors, not only because of the underwriting and transition risks requiring attention and the effect on the protection gap, but also because of the opportunity for insurers to support climate risk signaling, mitigation and management. In its role as risk manager, risk carrier and investor, the global insurance sector plays a cornerstone role in the management of climate-related risks and opportunities. With our recently released Issues Paper on Climate Change Risks to the Insurance Sector, developed in partnership with the UN Sustainable Insurance Forum, it is fair to say that the IAIS - and particular Member insurance supervisors - are at the leading edge of climate risk discussions among standard-setting bodies and other financial sector supervisors.
Cyber security is also getting a great deal of attention from our Members. We recently published for public comment a paper with supervisory guidance on cyber resilience in the insurance sector. While our guidance on cyber resilience for insurers is unlikely to be very different to that of other sectors, insurance nonetheless has an important role to play on the flip side of the coin in terms of also taking on cyber risk through cyber insurance cover. Next year we will further explore the role that insurance supervision can play in supporting sustainable cyber insurance underwriting.
XPRIMM: In the last years it seems that the links between the Western - North American and European - and the Asian markets are more extended than ever, especially in terms of ownership. Is this trend raising specific issues in terms of supervision?
J.D.: The IAIS promotes effective and globally consistent insurance supervision. The need for this is particularly acute in an ever more globalized business like insurance.
As part of our recent comprehensive revision of relevant Insurance Core Principles (ICPs) - the globally accepted framework for the supervision of the insurance sector which generally apply on both an insurance legal entity and group-wide level -- the IAIS addressed group-specific aspects, including the supervision of cross-border groups. For this reason, the IAIS revised ICP 25 Supervisory Cooperation and Coordination, to ensure that supervisors have a solid basis for addressing potential challenges with supervising international insurance groups.
At the same time, the IAIS is continuing its work on developing ComFrame - the Common Framework for the Supervision of Internationally Active Insurance Groups. ComFrame is built and expands upon the ICPs. Internationally active insurance groups require tailored and more coordinated supervision across jurisdictions due to their complexity and international activity. ComFrame will assist supervisors in collectively addressing group-wide activities and risks, identifying and avoiding regulatory gaps and coordinating supervisory activities under the aegis of a group-wide supervisor. Where existing supervisory processes limit comparability, ComFrame is intended to foster commonality.
As part of ComFrame, we are also developing a risk-based, global insurance capital standard (ICS) applicable to the internationally active insurance groups. The ultimate goal is to have a single ICS that includes a common methodology by which one ICS achieves comparable outcomes. Ongoing work is intended to lead to improved convergence over time on the key elements of the ICS towards the ultimate goal.
In July this year we reached an important milestone when we consulted on ComFrame in its entirety. The IAIS plans to adopt ComFrame by the end of 2019, including ICS Version 2.0 for confidential reporting to supervisors during a monitoring phase.
XPRIMM: What should in your opinion the supervisors' role in what innovation is concerned? Are there market or regulatory barriers to innovation that should be addressed by supervisors at global level?
J.D.: Insurance supervisors have differing mandates when it comes to facilitating and responding to innovation. Some are actively promoting innovation through initiatives like innovation hubs and sandboxes.
At the IAIS, our emphasis is on a regulatory approach promoting socially-useful innovation while ensuring a high level of policyholder protection. It is important for innovations to lead to fair customer outcomes. For this reason, supervisors should monitor these developments, engage stakeholders both within and outside the insurance industry and consider new supervisory responses to protect consumer interests. The IAIS is providing a forum for Members to explore the use of innovation facilities as a regulatory tool, most recently at our Global Seminar but also in our newly established FinTech Forum, and developing material to support our Members in achieving this result.
XPRIMM: InsurTech companies, insurance providers proposing a new business approach in the specialty market, are already a fast-developing group of players. Is this new group of players - or the new business model they are proposing, needing also a special attention in supervisory terms?
J.D.: As you suggest, insurance supervisors are facing new insurance market participants, like start-ups and "InsureTech" firms, with a different approach to consumer interest and a different track record in operating in a regulated environment compared to traditional incumbent insurers. Supervisors should consider this in the execution of their supervisory responsibilities. They will likely need to take a proactive approach that includes educating these new market participants. At the IAIS, we are developing supervisory guidance to address the increasing use of digital technology on insurance and what it means for supervisors.
XPRIMM: Climate change has been lately a central point on the IAIS agenda. What are the main challenges that climate change raises for insurers and what line of action should supervisors take in relation to this issue?
J.D.: Supervisors are broadening their understanding of climate risk, and developing supervisory capabilities to evaluate the insurance sector's actions in achieving climate resilience across underwriting and investment activities. Intensifying climate risks such as extreme weather events present significant challenges for the insurance sector and warrant ongoing and intensifying scrutiny by supervisors. Of course, the impact on individual insurers will vary depending on a number of factors such as core underwriting business areas, geographic reach, domicile and size. Our recent paper on climate change risk in the insurance sector, jointly developed with the UN's Sustainable Insurance Forum, describes the ways in which climate change is affecting and may affect the insurance sector now and in the future. It discusses how these risks and impacts may be of relevance for the supervision of the sector, and explores potential and contemplated supervisory responses. In doing so, the paper identifies gaps and emerging areas which need to be resolved.
The IAIS and SIF will jointly explore how to support the practical application of lessons from this paper - in particular, how supervisors can work with firms to encourage adoption of best practices.
XPRIMM: Some recent examples in Europe have shown that European insurers' cross border activity based on FOS and FOE may raise some problems when an insurer operating in markets other than its home market goes bankrupt, as the supervisory authority in the host market has almost no means of acting preventively. Has this issue drawn IAIS's attention?
J.D.: This question is specific to cross border operations within the European Union and not directly relevant to the work being undertaken by the IAIS. Speaking more generally in its role as the global standard-setting body for insurance supervision, the IAIS does monitor relevant developments in the global insurance sector and acts accordingly, when needed.
For example, with respect to resolution and supervisory cooperation and coordination, the IAIS is developing and revising our supervisory material as part of our development of ComFrame and the comprehensive review and revision of our Insurance Core Principles. The draft supervisory material contains various requirements and recommendations for supervisors aimed at (i) effective supervision of insurers operating on a cross-border basis (both in going-concern and crisis situations); and (ii) ensuring an orderly process of resolution. Once adopted, ComFrame will require crisis management groups for all internationally active insurance groups and include recommendations on the development of recovery and resolution plans. In developing this material, the IAIS explicitly recognizes the distinct roles of home and host supervisors.
XPRIMM: Among the large diversity of issues needing supervisors' attention at global level, what are currently IAIS's priorities?
J.D.: One, delivering by the end of next year on our current program of post-crisis reforms on ComFrame, including ICS, and our holistic framework for assessing and mitigating systemic risk in the insurance sector.
Second, developing a proactive response to emerging trends and risks in the global insurance sector - eg cyber risk, FinTech, climate change - that impact both our emerging and developed country Members.
Three, pivoting to a greater focus on implementation of agreed global standards and supporting that implementation in jurisdictions where supervisory capacity is a challenge.
We are in the midst of developing a new Strategic Plan and Financial Outlook for 2020-24, which is likely to call for a shift in emphasis in IAIS goals and priorities rather than an overhaul of the core mission. This will formalise our new priorities for the period ahead.
Interview conducted by Daniela GHETU