Higher Loss Absorbency requirements for Global Systemically Important Insurers (G-SIIs)
HLA requirements are part of the July 2013 policy measures for G-SIIs. Their primary purpose is to help reduce the probability and impact on the financial system of the distress or failure of a G-SII.
From 2019, G-SIIs will be expected to hold qualifying regulatory capital that is not less than the sum of the required capital amounts from the BCR and HLA.
The total BCR and HLA required capital consists of the sum of six components. Three components– the BCR approved in 2014, an uplift to the 2014 BCR and the HLA – are each calculated for insurance and non-insurance activities. The first component, the BCR, is the same as announced in 2014. The second component, the BCR uplift, is meant to reduce the expected gap between the BCR and the ICS. As announced, an uplift of 33% will be applied to all insurance and noninsurance activities other than regulated banking non-insurance activities, the uplift for which is determined by reference to banking sector requirements. The uplift will be phased in over three years beginning in 2016.
The HLA required capital formula utilises a factor-based approach. It applies specific factors to a G-SII’s exposures based on the same components found in the BCR required capital formula.
Beginning in 2016, the HLA will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of improving the HLA. The BCR has similarly been reported beginning in 2015. The IAIS plans to annually review the design and calibration of the HLA and BCR and recommend any necessary changes. It will also make any refinements necessitated by changes to the G-SII Assessment Methodology and the definitions of Non-Traditional and Non-Insurance activities, both of which will be the subject of public consultations later this year.
The development of the HLA is the second step of a long-term project to develop risk-based, group-wide global insurance capital standards. The first step was the development of BCR requirements in 2014. The third step is the development of a risk-based group-wide global Insurance Capital Standard (ICS), due to be adopted by the end of 2019. Eventually the ICS will replace the BCR as a foundation for ICS.