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© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
ZZ
Global Group Capital StandardsGlobal Group Capital Standards
Ani Verma
NAIC
© 2016 National Association of Insurance Commissioners
This presentation is pre-qualified for NAIC Designation Renewal Credits (DRCs). If you currently hold an NAIC APIR, PIR, or SPIR designation and are pursuing continuing education credit to maintain it, you may be awarded credits for your participation. To receive credit, you must be in attendance for the duration of the presentation.
Attention APIR, PIR, or SPIR Designees…
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Learning Objectives
At the end of this presentation, you will be able to:
• Understand the methodology and developments in Global Group Capital Standards– Basic Capital Requirement (BCR)
– Higher Loss Absorbency (HLA)
– Risk-based Global Insurance Capital Standards (ICS)
Slide # 3
© 2016 National Association of Insurance Commissioners
Moving Parts
• Work being driven by Capital Solvency and Field Testing Working Group
• IAIS implementation at country level subject to approval from home regulators
IAIS
• Staff of NAIC, Fed and FIO (Team USA) collaborate/ coordinate to identify areas of consensus
Triparty
• Active participation through IAIS and CDAWG
• Development of group capital calculation
State Regulators
• Dodd Frank mandate• Collins Amendment in Dec 2014. No exact
time frame
Federal Reserve Bank
Slide # 4
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
U.S. Regulators’ Views
• View group capital as additional regulatory tool, should it be implemented
• Assumption underlying a consolidated group capital is that monies are fungible within group
Group capital should not
undermine legal entity
requirements
• Stabilizing benefits to retaining diversity in regulatory approaches
• Single capital standard can increase systemic risk
Should result in comparable
outcomes, not necessarily the same capital
ratios
Slide # 5
© 2016 National Association of Insurance Commissioners
IAIS Global Group Capital Standards: Background
G 20 FSB IAIS Mandate
• Basic Capital Requirement (BCR): 2014• Higher Loss Absorbency (HLA): 2015• Currently 9 insurers: 3 U.S. led groups
Globally Systemic Important
Insurers (G-SIIs)
• Insurance Capital Standards (ICS)• Expected about 50 to meet criteria: about 18 in US • Expected 2019
Internationally Active Insurance Groups (IAIGs)
Slide # 6
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
BCR+ HLA Overview
Slide # 7
© 2016 National Association of Insurance Commissioners
Basic Capital Requirement(BCR)
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Purpose and Scope of the BCR
• Qualified Capital ResourceCapital Requirement
BCR Solvency Ratio
• Core Capital• Additional Capital• 50% Capital or more: Core Capital
Capital Resource
• Insurance component (incl. Non Traditional activities)
• Non-Insurance Banking component : Basel III Leverage Ratio
• Other Financial component e.g. securities operation
Capital Requirement
(Full Consolidation)
Slide # 9
© 2016 National Association of Insurance Commissioners
BCR Balance Sheet
Market Adjusted Valuation
• Potential volatility from year to yearAsset
• Current estimates without margins• Conservatism transferred to capital resources• Discount rates
Liability
Slide # 10
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Calculation of BCR for Insurance (pre-uplift)
Slide # 11
© 2016 National Association of Insurance Commissioners
BCR Observations
BCR level intended be at “PCR” or Prescribed Capital Requirement for G-SII• Average level of the BCR is 75% of their
reported jurisdictional PCR• To bring to PCR level, a 33% uplift will be
applied• On average, approximately 83% of G-SII
GAAP capital resources are classified as Core capital
Slide # 12
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Higher Loss Absorbency(HLA)
© 2016 National Association of Insurance Commissioners
HLA Overview
• Base for the HLA will be the BCR with a 33% uplift • Uplift will be phased in over three years• No uplift applied to regulated banking
BCR Uplift
• Depending on G-SII designation score• Mid bucket uses factors that are 50% higher than
low bucket• Highest bucket factors are 50% higher than mid
bucket
Bucketing
• Specific factors for each component of the BCR• Factors for NTNI component are higher than for
traditional components• Regulated Banking is capped based on limits set
by banking requirements
Factors
Slide # 14
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
BCR+HLA Computation
Slide # 15
© 2016 National Association of Insurance Commissioners
BCR & HLA Status
• Confidential supervisory reporting of BCR began in 2015
• Oct 2015, HLA initial development completed. Confidential HLA supervisory reporting will begin in 2016
• Applies to designated GSIIs starting in 2019
• Both HLA and BCR subject to further refinement: Changes to GSII Assessment Methodology and NTNI definition
Slide # 16
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Risk-based Global Insurance Capital Standards(ICS)
© 2016 National Association of Insurance Commissioners
ICS: Criteria for IAIGs
• Total assets of over $50 billion• Gross written premium more
than $10 billionSize
• Premium written in three or more jurisdictions
• At least 10 percent of premium written outside the “home” jurisdiction
International Activity
Slide #18
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
What is ICS?
• Includes non-insurance operations of the group• Comparability across jurisdictions
Consolidated quantitative capital standard
• Supervisors may set higher standards• Not intended to replace or affect capital standards for underlying legal entities
Establish Minimum Standard
• ICS will be foundation for HLA for GSIIs
Objective: Policyholder protection and to contribute to financial stability
• Implementation in 2019
Dec 2014: IAIS releases “Consultation Document” with detailed proposal
Slide # 19
© 2016 National Association of Insurance Commissioners
Ultimate Goal
“The ultimate goal of a single ICS will include a common methodology by which one ICS achieves comparable, i.e. substantially the same, outcomes across jurisdictions. Ongoing work is intended to lead to improved convergence over time on the key elements of the ICS towards the ultimate goal. Not prejudging the substance, the key elements include valuation, capital resources and capital requirements.”
IN IN
TERI
M
CLAR
IFIC
ATIO
N
DECI
SIO
N
In February 2015, IAIS Executive Committee agreed, without specifying a date, on an ultimate goal for the ICS.(Full text in box; emphasis added)
Subsequent communications on ultimate goal indicate that the IAIS agreed on this ultimate goal of the ICS to “avoid regulatory and capital arbitrage”
IAIS will consider interim goals for year-end 2016 and 2018. Will balance need to be ambitious and what is realistically achievable.
Slide # 20
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Current Proposal for ICS
Tier 1 Limit Tier 1 No Limit
Tier 2 Paid Up Tier 2 Non-Paid Up
Capital Resources
Insurance Market
Credit Operational
Capital Requirements
ValuationMarket Adjusted GAAP+ Approach
Qualifying Capital ResourcesCapital Requirement ICS Ratio
Slide # 21
© 2016 National Association of Insurance Commissioners
Valuation: MAV vs GAAP+
IAIS ExCo decision in 2014
• The Market Adjusted Valuation (MAV) approach will be used as the initial basis to develop an example of a standard method in the ICS
Market Adjusted Valuation (MAV)
• GAAP valuation approach data will be collected. Reconciliation between Market-Adjusted valuation approach and GAAP valuation approach will be requested of the participating IAIGs
• This will be used to explore and, if possible, develop a GAAP with adjustment valuation approach
GAAP with Adjustment (GAAP+)
Slide # 22
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
GAAP with Adjustment Approach (GAAP+)
• Starting basis for adjustments: GAAP = US GAAP, SAP for mutual insurers, IFRS (local jurisdictional GAAP)
• Limited adjustmentsSimpler
• Starts with audited financial statements• Easy to map capital standards to public financialsAuditable
• Leverages established company processesLess costly
Slide # 23
© 2016 National Association of Insurance Commissioners
Current Issues: Valuation: Margin Over Current Estimates (MOCE)
Current Estimate
• Entity specific assumptions• Also called “own fulfillment approach”
Prudence Margin
Approach
• “Hypothetical” Transfer to a third party• Market based assumptions• Use Cost of Capital Method
Transfer Value Margin
Approach
Slide # 24
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Current Issues: Valuation
• MAV vs GAAP Plus
• Refinements to jurisdictional GAAP+
• Discounting: Several proposed discounting options being tested under MAV
• Scope of Consolidation
• Treatment of Accumulated Other Comprehensive Income (AOCI)
• Data Quality
Slide # 25
© 2016 National Association of Insurance Commissioners
Definition of Capital Resources
• Capital Resources represent the difference between assets and liabilities. Capital Resources provide loss absorbency on a going concern, in adverse circumstances, and during a winding-up for the purposes of policyholder protection and financial stability
• Two capital tiers are being considered
Total Qualifying Capital Resources
Tier 1No Limit
Limited
Tier 2Paid Up
Non-Paid Up
Slide # 26
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Principles for Categorization
• Extent to which and in what circumstances capital element is subordinated to rights of policyholders and non-subordinated creditors
Subordination
• Extent to which capital element is fully paid and available to absorb loss
Availability
• Period for which the capital element is available
Permanence
• Extent capital element absorbs losses and in which circumstances
Loss Absorbing Capacity
• Extent to which the capital element is free from mandatory payments or encumbrances
Absence of Encumbrances
Slide # 27
© 2016 National Association of Insurance Commissioners
Capital Resources: Adjustments
Adjustments, Exclusions and Deductions from Tier 1 Capital Resources
• Goodwill
• Intangible assets, including computer software intangibles
• DTAs that rely on the future profitability of the IAIG
• Net defined benefit pension plan asset
Slide # 28
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Current Issues: Capital Resources• Inventory of various instruments for
categorization
• Surplus Notes/Senior Debt
• Allowable limits for Tier 2– Non Paid Up Capital
– Encumbrances
– Deferred Tax Assets
Slide # 29
© 2016 National Association of Insurance Commissioners
Capital Requirements
• To extent risk not quantified addressed in ComFrame
ICS reflects all material risks
• Risk Measure: 90% TVaR or 99.5% VaR• One year time horizon
Key aspects of quantifying risk in ICS
Slide # 30
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
ICS Covered RisksINSURANCE RISK
LIFE RISK
Mortality LongevityMorb/
DisabilityLapse Expense
NON-LIFE RISK
Premium Claim Reserve Cat*
MARKET RISK
EquityReal
EstateInterest Rate Currency Asset
Concentration
CREDIT RISK Credit RiskOPERATIONAL RISK
Except to extent (implicitly) included above, following are excluded:
Group Liquidity Reputational Strategic
Aggregation of requirements will reflect diversification
31 Slide # 31
© 2016 National Association of Insurance Commissioners
Risk Measurement
Capital Requirements
Deterministic
Factor Based Stress Based
StochasticStochastic Modeling
Structural Modeling
• ICS will involve a combination of risk measurement approaches, particularly:− Factor Based Approach: Factors applied to exposure measure
(approach in most of RBC)− Stress Based Approach: Capital requirement is determined as the
decrease between capital resources on unstressed balance sheet and those on stressed balance sheet
• Example ‘Standard Method’ proposed though there is possibility (in future) of alternatives− Alternate factors; partial/full internal models; etc.
Slide # 32
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Standard Method vs NAIC RBCRisk ICS RBC (Life) RBC (P&C)
Mortality Stress Factor (2) --Longevity Stress -- --
Morbidity / Disability Stress Factor (2) --
Lapse Stress .. --Expense Stress .. --Premium Factor -- Factor
Claims reserves Factor -- FactorCatastrophe Model -- Model(1)Interest Rate Stress Factor(2) --
Equity Stress Factor(3) FactorReal Estate Stress Factor FactorCurrency Stress -- --
Asset concentration Factor Factor FactorCredit Factor Factor Factor
Operational Factor Factor(4) Factor(4)
Notes on Comparison of ICS to NAIC Risk Based Capital(1) Currently factor but models used in near future(2) Model used for fixed annuities and single premium life plans(3) Factor applies to all common stock & Model is used for variable annuities with guarantees(4) Currently excluded but plans underway to include
Slide # 33
© 2016 National Association of Insurance Commissioners
Current Issues: Capital Requirements• Calibration
• Health as separate module
Slide # 34
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
IAIS Process
Slide # 35
© 2016 National Association of Insurance Commissioners
ICS and ComFrame Delivery Time-linesThe following table summarizes key activities leading to the IAIS’s adoption of the ICS, after which Members would begin implementation of the ICS as part of ComFrame:
Slide # 36
© 2016 National Association of Insurance Commissioners
© 2016 National Association of Insurance Commissioners
Additional Resources
• ICPs– http://iaisweb.org/page/supervisory-material/insurance-core-principles
• IAIS BCR for GSIIs, October 23, 2014– http://iaisweb.org/page/news/consultations/closed-consultations/basic-capital-requirements-bcr-for-
g-siis
• IAIS HLA for GSIIs, June 25, 2015– http://iaisweb.org/page/news/consultations/closed-consultations/higher-loss-absorbency-hla-
requirements-for-g-siis//file/52814/hla-consultation-document-25-june-final-clean
• IAIS ICS Consultation Document (CD), December 17, 2014
– http://iaisweb.org/page/news/consultations/closed-consultations/insurance-capital-standard-ics
• NAIC Comments on ICS (CD)– http://www.naic.org/documents/committees_g_related_naic_comments_iais_ics_draft.pdf
Slide # 37
© 2016 National Association of Insurance Commissioners
Questions
?
Slide # 38