1. General guiding principles

1.1 Substance over form

L1-1. The ICS balance sheet differs from publicly reported GAAP financial statements, as it reflects a different objective (prudential supervision as opposed to investor information). For example, certain assets in a GAAP balance sheet do not qualify as assets for the ICS.
L1-2. The economic substance of transactions and events are recorded in the ICS balance sheet rather than just their legal form, in order to present a true and fair view of the risk profile of the entity. This may require the use of judgment when preparing the ICS balance sheet.
L1-3. The allocation of insurance liabilities to the ICS line of business segments follows the principle of substance over form. This means that insurance liabilities are allocated to the segment that best reflects the nature of the underlying risks rather than the legal form of the contract. The definitions for the insurance line of business segmentation are specified in the Level 2 text.

L1-4. Calculations and valuation are subject to the proportionality principle. When the IAIG can demonstrate that taking into account a specific factor/rule in their calculation or valuation would lead to a significant increase in complexity, without material improvement to the quality of the figure produced or to the assessment of risk linked to this figure, then this factor or rule can be ignored or simplified.
L1-5. The materiality of the impact of using a simplification is assessed with regard to:
- • The volume of the item valued;
- • The overall volume of the group’s business and capital resources; and
- • The assessment of risk.

L1-6. In order to assess properly the risk inherent in collective investment funds and other indirect exposures, their economic substance needs to be taken into account. This is achieved, to the extent possible, by applying a look-through approach. Additional requirements on the use of look-through are provided in the Level 2 text.
L2-1. The look-through approach applies to insurance arrangements and indirect investments (including unleveraged mutual funds, other collective investment vehicles, etc.) in order to identify all underlying exposures embedded in such arrangements and investments, including all indirect holdings that may artificially inflate the qualifying capital resources of an Internationally Active Insurance Group (IAIG).
L2-2. When a full look-through is not possible, a partial look-through may be applied, along the lines provided by the Basel III framework .
L2-3. When no look-through is possible, the full investment is considered as unlisted equity for the purpose of calculating the insurance capital standard (ICS) risk charges.

L1-7. The IAIS has developed a mapping between ICS Rating Categories (ICS RC) and credit rating agency ratings. ICS Rating Categories range from 1 to 7. Additional specifications on ICS Rating Categories, including the mapping to agency ratings, are included in the Level 2 text.
L2-4. Whenever the use of an ICS Rating Category (ICS RC) is needed, the IAIG uses the agency ratings listed in the table below. Modifiers such as + or – do not affect the ICS RC.
- – Where two ratings are listed in a cell, the first rating represents a long-term rating, and the second rating represents the short-term rating mapped to the same ICS RC. The short-term rating is used only for instruments with a remaining maturity of one year or less.
- – For purposes of calculating the risk charge on reinsurance exposures, the financial strength rating is used if it exists. Where such a financial strength rating does not exist, the long-term issuer credit rating is used. Financial strength ratings are used only for purposes of calculating the risk charge on reinsurance exposures.

ICS RC	S&P	Moody’s	Fitch	JCR	R&I	DBRS	AM Best
1	AAA	Aaa	AAA	AAA	AAA	AAA	aaa
2	AA / A-1	Aa / P-1	AA / F1	AA / J-1	AA / a-1	AA / R-1	aa / AMB-1+
3	A / A-2	A / P-2	A / F2	A / J-2	A / a-2	A / R-2	a / AMB-1-
4	BBB / A-3	Baa / P-3	BBB / F3	BBB / J-3	BBB / a-3	BBB / R-3	bbb / AMB-2 to AMB-3
5	BB	Ba	BB	BB	BB	BB	bb / AMB-4
6	B / B	B / NP	B / B	B / NJ	B / b	B / R-4	b
7	CCC / C and ↓	Caa and ↓	CCC / C and ↓	CCC and ↓	CCC / c and ↓	CCC / R-5 and ↓	ccc and ↓

〈 Table 1: Mapping to ICS RC (for instruments not in default) Issue / Issuer Credit Rating 〉

ICS RC	S&P	Moody’s	Fitch	DBRS	AM Best
1	AAA	Aaa	AAA	AAA
2	AA	Aa	AA	AA	A+
3	A	A	A	A	A
4	BBB	Baa	BBB	BBB	B+
5	BB	Ba	BB	BB	B
6	B	B	B	B	C+
7	CCC and lower	Caa and lower	CCC and lower	CCC and lower	C and lower

〈 Financial Strength Rating 〉

L2-5. Additionally, the IAIG may use ratings issued by a rating agency that the banking regulator in its jurisdiction (or for a subsidiary, in the subsidiary’s jurisdiction) has recognised as an External Credit Assessment Institution (ECAI) under the Basel II framework. The ICS RC corresponding to a rating produced by such an agency is the Basel II rating category to which the supervisor has mapped the rating (the combined rating class AAA/AA corresponds to ICS RC 2).
L2-6. ICS RCs 1 to 4 in the table above are considered investment grade.
L2-7. The use of ICS RCs is further developed in section 5.4.3.