IAIS Says No To DeemedRetractions

The International Association of Insurance Supervisors has released a bevy of documents related to the supervision of Internationally Active Insurance Groups.

Of these, the most important for our purposes is the “Technical Note on ICS Version 2.0 for the monitoring period” which states:

Principal Loss Absorbency Mechanism (PLAM): A distinction is made for mutual and non-mutual IAIGs. For non-mutual IAIGs, the 10% limit for Tier 1 Limited financial instruments will be maintained for Tier 1 Limited financial instruments that do not have a PLAM. An additional 5% allowance is granted to those Tier 1 Limited financial instruments that do have a PLAM. The limits are stated as a % of the ICS capital requirement.

For mutual IAIGs: A PLAM is not required as part of Tier 1 Limited capital resources and the limit for Tier 1 Limited capital resources is maintained at 30% of the ICS capital requirement

So that’s an end to the saga that began in February, 2011. As an investor, I’m shocked; as a taxpayer who will end up footing the bill if one of our outsized insurance companies goes down, I’m disappointed.

Update: An end? Or a new beginning? The Canadian Office of the Superintendent of Financial Institutions – which has disgraced itself throughout the negotiations for ICS 2.0 – has announced:

While broadly supportive of the goals of the Insurance Capital Standard (ICS), the Office of the Superintendent of Financial Institutions (OSFI) did not support the ICS design proposed for a five-year monitoring period at the Executive Committee Meeting of the International Association of Insurance Supervisors (IAIS) in Abu Dhabi, United Arab Emirates.

OSFI’s view is that that the Standard in its current form is not fit for purpose for the Canadian market. Specifically, the proposed capital requirements for long-term products are too high to be compatible with OSFI’s mandate of allowing Canadian insurers to compete and take reasonable risks.

During the five-year monitoring period, OSFI will continue its work in trying to achieve an international capital standard for insurance companies that works for all jurisdictions.

Quick Facts

  • Canadian insurers will continue to be subject to the requirements of OSFI’s robust capital frameworks for federally regulated insurance companies.
  • An initiative of the IAIS, the International Capital Standard is a proposed common capital standard for large internationally active insurance groups.

So, maybe a PLAM for Tier 1 Limited capital resources is a bargaining chip …

Update: There hasn’t been much press coverage of this, but here are two articles:

Update, 2019-11-17: States and Feds Split on Major World Insurance Standards Deal

Update, 2019-11-18: OSFI rebuffs global capital rules for insurers.

8 Responses to “IAIS Says No To DeemedRetractions”

  1. Jeremy says:

    forgive my ignorance but I can’t quite figure out how this ends the saga.

    So IAIS says you don’t need a PLAM to be Tier 1 Limited capital. But isn’t that a separate issue from whether you need “PoNV” / an NVCC clause to be Tier 1? E.g. the bank preferred shares aren’t required to have PLAM, but they still called all the non-NVCC ones. Or am I missing something?

  2. jiHymas says:

    A PLAM simply means that the issue can lose all its value (or be converted to common equity) prior to bankruptcy.

    PLAMs can be ‘high-trigger’ (activated well before bankruptcy, usually activated by defined capital ratios going below the trigger-point) or ‘low-trigger’, activated shortly before bankruptcy as a last ditch effort to avoid insolvency.

    NVCC clauses are the lowest possible trigger for a PLAM; they are only triggered when OSFI determines that the issuer has reached the point of non-viability, but prior to a formal declaration of bankruptcy.

  3. Nestor says:

    James, will you keep deemed retractables as is, or change dates and calculate like any other share? or still too early and you haven’t thought about it yet?

  4. jiHymas says:

    Banks will be left as they are; insurers will be treated like every other share.

    I will be posting about this when I’ve completed the work.

  5. Nestor says:

    ok. thank you again for your efforts. really a shocking decision by IAIS.

  6. jiHymas says:

    A foreign professional writes in and says

    Hi James, I read your prefblog and am happy for your public service. I am Canadian. I work at [REDACTED] and we also happen to be investors in the Canadian Preferred market, particularly low-end resets.

    We got involved during the 2015/16 downturn and are again involved as we think prefs are very undervalued – especially the Lifecos.

    Regarding the IAS PLAM news you wrote about recently, I don’t think that NVCC is necessarily off the table. We are of the view that it is still something that OSFI could implement on their own in the future sometime. I think it is clear that OSFI does not necessarily want to do exactly what IAS is proposing and will ultimately do what they think is right for the Canadian market. In our view, a final decision is a few years out and we think it could go either way. We also think nobody thinks this will happen and that is reflected in really no ‘optionality’ reflected in the market.

    I would be happy to discuss the market anytime with you in general or on the potential for Lifeco deemed retraction.

    The OSFI NVCC related disclosure in their 2018 LICAT document (which I know you have seen):


    18 OSFI continues to explore the applicability of non-viability contingent capital (NVCC) to insurers. In the event insurers become subject to this requirement, the qualifying criteria for Tier 1 capital instruments, other than common shares, and Tier 2 capital instruments will be revised accordingly and further transitioning arrangements may be established for non-qualifying instruments.

    I think the real key final decision will be what the future versions of this document look like.

    I personally think that since Canada was a safe-haven for everyone during the financial crisis (in particular US hedge funds who were worried about the next Lehman or Bear Stearns and flocked to Canadian Bank Prime Brokers), I ultimately think OSFI will end up at some form of NVCC given it would have a more stabilizing effect on Canadian Financial markets. I imagine there is lobbying coming from Lifecos to not have to do this but I believe that the net cost of doing it for them would be immaterial as it would be a fraction of their annual cost of common share dividends / equity buybacks.

  7. jiHymas says:

    Another professional writes in and says:

    Hi James. Wondering if you have any new thoughts on this situation.

    The only updates I see recently are :

    1. 2021/2022 LICAT document which continues to have the footnote that says OSFI continues to assess insurers for NVCC. Notably this is after the 2019 IAIS document above and recent IAIS which has the same 10% / 5% no PLAM / PLAM language.

    Here is the link :


    On page 19: “ OSFI continues to explore the applicability of non-viability contingent capital (NVCC) to insurers. In the event insurers become subject to this requirement, the qualifying criteria for Tier 1 capital instruments, other than common shares, and Tier 2 capital instruments will be revised accordingly and further transitioning arrangements may be established for non-qualifying instruments. “ (this was also in the 2018 LICAT document).

    2. OSFI CEO has been talking about the potential for a general insurance resolution while talking about climate change.

    Perhaps again OSFI wants to do their own thing aside from IAIS and it sounds like NVCC is still on the table as a possibility for now.

    Any new thoughts?

    Canadian dividend investor.

  8. jiHymas says:

    The above follows my response to an earlier eMail:

    At the moment I don’t believe anything is happening – but, of course, I am not privy to conversations at the highest level of insurance regulation!

    I continue to believe, as you do, that the NVCC rules in some form or another will eventually be applied to lifecos – and, given the increasing importance of climate-related property insurance, perhaps to P&C insurers as well. There are mutterings that coastal cities are becoming uninsurable (see
    https://www.insurancejournal.com/news/national/2023/10/25/745457.htm ) and the politicians aren’t going to like that!

    However, I think that this will have to wait until the next iteration of the insurance capital standard. ICS 2.0 is still in its monitoring period (see
    https://www.iaisweb.org/activities-topics/standard-setting/insurance-capital-standard/ ), then implementation will take a while and at some point afterwards discussions about ICS 3.0 will take place. Just when, of course, is up in the air – and as memories of the Credit Crunch fade and are replaced by newer and more exciting crises, the political will to impose new costs on insurance companies will also fade.

    So I keep watching the IAIS website, but am loathe to put any kind of date on my expectation of NVCC.

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