Inside View - Give us some uniformity!

(From Reinsurance)

Byline: Geoffrey Bromley, chairman, Europe and Asia for Guy Carpenter.

Measures of capital adequacy have moved from relatively simplistic leverage ratios to more complex, risk-based standards in global regulatory environments. But because these new standards were developed separately, they lack uniformity.

The question is whether we can expect more uniformity to develop in the future. I would argue that while absolute uniformity is not essential to regulate insurance solvency prudently, the integrity of the process gets called into question when the same company is seen as having more-than-adequate capital in one jurisdiction but totally inadequate capital in another.

Historically, risk-based capital adequacy requirements were first introduced in the US in the early 1990s. This initial initiative was followed by Australia, Canada, the UK, Germany and Japan. In addition, the rating services - notably Standard & Poor's and AM Best - developed their own approaches to risk-based capital standards.

In the US, solvency regulation used to be based on the Insurance Regulatory Information System (IRIS). This system considered nine ratios, including GWP to surplus and NWP to surplus. If a company failed on four or more of these ratios, action by the regulator would be triggered.

Risk-based capital adequacy tests were considered revolutionary in that they took all risks considered in the IRIS tests and converted them to a single number called "required capital". They reflected differences in the mix of business, and took into account risks arising from invested assets, premiums, credit and reserves.