AIG 2015 Annual Report Download - page 28

ITEM 1 / BUSINESS
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In addition to the adoption of Dodd-Frank in the United States, regulators and lawmakers around the world are continuing to
review the causes of the financial crisis and taking steps to avoid similar problems in the future. The FSB, consisting of
representatives of national financial authorities of the G20 nations, has issued a series of frameworks and recommendations
intended to produce significant changes in how financial companies, particularly global systemically important financial
institutions, should be regulated. These frameworks and recommendations address such issues as financial group supervision,
capital and solvency standards, systemic financial risk, corporate governance including compensation, and a number of
related issues associated with responses to the financial crisis. The FSB has directed the IAIS to create standards relative to
many of these areas. These new measures go beyond IAIS’ existing set of insurance core principles (ICPs). The ICPs form
the baseline threshold against which countries’ financial services regulatory regimes specific to the insurance sector are
measured. That measurement is made by periodic Financial Sector Assessment Program (FSAP) reviews conducted by the
International Monetary Fund and the World Bank and the reports thereon spur the development of country-specific additional
or amended regulatory changes. Lawmakers and regulatory authorities in a number of jurisdictions in which our subsidiaries
conduct business have, in the past few years, implemented legislative and regulatory changes consistent with these
recommendations, including, for example, updated Insurance Company Ordinances in Hong Kong and consolidated regulation
of insurance holding companies by the Financial Services Agency in Japan.
The FSB has charged the IAIS with developing a framework for measuring systemic risks posed by insurer groups. The IAIS
has requested data from selected insurers around the world to determine which elements of the insurance sector, if any, could
materially and adversely impact other parts of the global financial services sector (e.g., commercial and investment banking,
securities trading, etc.). Based on the IAIS’s assessment methodology for identifying G-SIIs, on July 18, 2013, the FSB, in
consultation with the IAIS and national authorities, identified an initial list of nine G-SIIs, which included AIG. G-SIIs are
designated on an annual basis, and AIG was re-designated as a G-SII by the FSB on November 6, 2014, and again on
November 3, 2015. The IAIS released a public consultation document in November 2015, outlining proposed revisions to the
2013 methodology for identifying G-SIIs. The IAIS intends G-SIIs to be subject to a policy framework that includes recovery
and resolution planning, enhanced group-wide supervision, enhanced liquidity and systemic risk management planning; and
group-wide capital standards, including HLA capital. The IAIS’ basic capital requirement (BCR), which it finalized in October
2014, was endorsed by the FSB in October 2014 and by the G20 nations in November 2014. The BCR covers all group
activities, with AIG reporting its BCR ratios to national authorities on a confidential basis beginning in 2015. The BCR serves
as the initial foundation for the application of HLA. In October 2015, the IAIS announced that it had concluded initial
development of the HLA requirements for G-SIIs, which will be reported on a confidential basis to group-wide supervisors
beginning in 2016. HLA was endorsed by the FSB in September 2015 and by the G20 nations in November 2015. Both the
BCR and HLA are calculated for insurance and non-insurance activities. In particular, the IAIS released another public
consultation in November 2015 on “Non-traditional Non-insurance Activities and Products.” The notion of non-traditional non-
insurance activities and products plays a significant role in the assessment methodology for designating G-SIIs and in the
determination of the BCR and the HLA. Ultimately, the G-SII policy framework is expected to be fully implemented by the IAIS
by 2019.
The IAIS is also developing ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups
(IAIGs), which sets out qualitative and quantitative standards designed to assist supervisors in collectively addressing an
IAIG’s activities and risks, identifying and avoiding regulatory gaps and coordinating supervisory activities. In connection with
ComFrame, the IAIS is in the process of developing a risk-based global ICS applicable to IAIGs. As currently defined under
ComFrame, AIG meets the parameters set forth to define an IAIG. ComFrame standards are expected to be finalized in 2019,
and the IAIS is conducting field testing of ComFrame, including the ICS, ahead of that deadline. It is expected that
implementation of ComFrame and the ICS would begin in 2020.
The standards discussed above, issued by the FSB and/or the IAIS, are not binding on the United States or other jurisdictions
around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and
regulations. At this time it is not known how the IAIS’s frameworks and/or standards might be implemented in the United
States and other jurisdictions around the world, or how they might apply to AIG.
Legislation in the European Union could also affect our international insurance operations. Solvency II, which became effective
on January 1, 2016, reforms the insurance industry’s solvency framework, including minimum capital and solvency
requirements, governance requirements, risk management and public reporting standards. In accordance with Solvency II, in
the absence of decision by the European Commission on whether a supervisory regime outside of the EU is equivalent,