Society of Actuaries:SOA 2012 Life

7/30/2019 Society of Actuaries:SOA 2012 Life

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SOA 2012 Life & Annuity Symposium

May 21-22, 2012

Session 78, Closing General Session - TheInternational Regulatory Landscape

Moderator:

Terry M. Long, FSA, MAAA

Presenter:

Larry J. Bruning, FSA, MAAA

Primary Competency

Results-Oriented Solutions


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LOS ANGELES, CA

THE INTERNATIONAL REGULATORY

LANDSCAPE

Moderator: Terry M. Long, FSA, MAAA

Presenter: Larry J. Bruning, FSA, MAAA


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Overview of International Organizations

Overview of Dodd-Frank Act (DFA)

Overview of NAIC Solvency ModernizationInitiative (SMI)

Outline

G-20 Finance Ministers and Central Bank Governors

Established in 1999

Bring together systemically important industrialized anddeveloping economies

Discuss key issues related to global economic stability

19 countries plus European Union

Members represent 80% of global gross national

product, 80% world trade and 2/3 of world population



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G-20 Finance Ministers and Central Bank Gov ernors

Argentina India South Africa Ex-Officio Members:

Australia Indonesia Republic of Korea Chairman IMF

Brazil Italy Turkey Managing Director IMF

Canada Japan United Kingdom President of World Bank

China Mexico * United States

France Russia European Union

Germany Saudi Arabia

* 2012 Chair


G-20 Finance Ministers and Central Bank Governors

November 2009 G-20 endorses 20 recommendationsoutlined in Financial Stability Board (FSB) and IMFreport The Financial Crisis and Information Gaps

Recommendations grouped under 4 themes

1) Build-up of risks in the financial system

2) Cross-border financial linkages

3) Vulnerability of domestic economies to shocks

4) Improving communication of official statistics



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Financial Stabi l i ty Board (FSB)

Established April 2009

G20 members + Hong Kong, Netherlands, Singapore,Spain, Switzerland

Promote international financial stability

Information exchange and international cooperation infinancial supervision and surveillance

Address vulnerabilities and develop and implement

strong regulatory and supervisory policies US represented by Federal Reserve, Department of

Treasury and SEC and NAIC (through IAIS)



2010 report Reducing moral hazard posed bysystemically important financial institutions (SIFIs)

Policy framework and timelines endorsed by G-20

Identify SIFIs or G-SIFIs whose disorderly failurebecause of size, complexity and systemicinterconnectedness would cause significant disruption tothe wider financial system and economic activity



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Framework outlines:

A resolution process to insure all financial institutionscan be resolved quickly and safely withoutdestabilizing the financial system

Requirement that SIFIs and G-SIFIs have a higherloss absorbency capacity

More intensive supervisory oversight

Robust core financial market infrastructures to reducecontagion risk


International Ass ociation o f Insu rance Supervisors (IAIS)

Established 1994

180 jurisdictions

100 observers representing industry and professionalassociations, insurers, reinsurers, consultants and internationalfinancial institutions

Standard Setting Body issuing global insurance principles,

standards and guidance papers

26 Insurance Core Principles (ICP) drafted and adopted



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Insurance Core Principles

ICP 1 Objectives, powers and responsibilities of the Supervisor ICP 17 Capital Adequacy

ICP 2 Supervisor ICP 18 Intermediaries

ICP 3 Information Exchange ICP 19 Conduct of Business

ICP 4 Licensing ICP 20 Public Disclosure

ICP 5 Suitability of Persons ICP 21 Countering Fraud in Insurance

ICP 6 Changes in Control and Portfolio Transfers ICP 22 Anti-money Laundering and

ICP 7 Corporate Governance Combating the Financing of

ICP 8 Risk Management and Internal Controls Terrorism

ICP 9 Supervisory Review and Reporting ICP 23 Group-wide Supervision

ICP 10 Preventive and Corrective Measures ICP 24 Macro-prudential Surveillance

ICP 11 Enforcement and Market Analysis

ICP 12 Winding-up and Exit from the Market ICP 25 Supervisory Cooperation and

ICP 13 Reinsurance and Other Forms of Risk Transfer Coordination

ICP 14 Valuation ICP 26 Cross-border Cooperation and

ICP 15 Investment Coordination on Crisis

ICP 16 Enterprise Risk Management for Solvency Purposes Management



Financial Stability Committee (FSC)

June 2010 IAIS Position Statement on Key Financial StabilityIssues

January 2011 delivered FSB draft methodology of quantitativeand qualitative indicators to assess the systemic importance ofinsurers

Provides guidance on how to identify global SIFIs

Data Collection Exercise Underway

Complete G-SIFI project by Quarter 1 of 2013



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Solvency and Actuarial Issues Subcommittee

Develop Common Framework (Com-Frame) for supervision ofInternationally Active Insurance Groups (IAIGs)

Com-frame will consist of 4 modules

vModule 1 Scope of Com-frame

vModule 2 Requirements of the IAIG

vModule 3 Requirements of the Supervisor

vModule 4 Implementation of Com-frame



Macro-prudential Policy and Surveillance Working Group (MPSWG)

Develop economic expertise within IAIS

Develop macro-prudential tools to assess the insurance sector

Identify components of macro-prudential surveillance relative tosupervision

Identify cross-border and cross-sector issues relative tosupervision

Take measures to mitigate regulatory arbitrage

Liaise with other regulatory bodies both domestic andinternational



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Supervisory Forum

Promote effective and globally consistent regulation andsupervision

Provide platform for supervisors to share ideas, receivefeedback and develop best practices

Evaluate potential impact on large and complex insurers fromglobal macro-economic scenarios


Joint Forum

Established 1996 under aegis of:

Basel Committee on Banking Supervision (BCBS)

International Organization of Securities Commissions (IOSCO)

International Association of Insurance Supervisors (IAIS)

Deal with issues common to banking, securities and insurance

Including regulation of financial conglomerates

Longevity Risk Work-stream



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Dodd -Frank Wall Street Reform and Con sum er Protection Act

Singed into Law July 21, 2010

Creates Inter-agency body Financial Stability Oversight Council(FSOC)

Creates Federal Insurance Office (FIO)

Creates Office of Financial Research (OFR)

Establishes Volcker Rule Bars bank holding companies fromengaging in proprietary trading and limits ability to sponsor and

invest in hedge funds and private equity

Creates the Non-admitted and Reinsurance Reform Act (NRRA)

Overview of Dodd-Frank Act

Dodd -Frank Wall Street Reform and Con sum er Protection Act

FSOC has authority to require nonbank financial companies to besupervised by the Board of Governors of the Federal ReserveSystem if Council determines that material financial distress at sucha firm could pose a threat to the financial stability of the UnitedStates

Above process referred to as the identification of systemicallyimportant financial institutions (SIFIs)



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Identi f ication of SIFIs by FSOC

Final rule and guidance issued April 3, 2010

Designation process of non-bank financial company involves 3 stages:

q Stage 1 - If total consolidated assets of $50 billion and meets orexceeds any one of the following, then moves to Stage 2:

vReference entity with respect to $30 billion or more of credit defaultswaps

vHas $3.5 billion or more of derivative liabilities

vHas $20 billion or more of outstanding loans/bonds

vHas a leverage ratio of 15 to 1 or greater

vHas short term debt-to-assets ratio of 10% or more



q Stage 2 More granular, institution-specific analysis of the individualcompanys risk profile involving quantitative analysis and qualitativejudgment by the Council

q Stage 2 framework divides statutory considerations for designation into6 categories:

vSize

v Interconnectedness

vSubstitutability

vLeveragevLiquidity Risk and Maturity Mismatch

vExisting Regulatory Scrutiny



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q Stage 3

vAdvance notice to company given if being considered as a Stage 3determination

vCompany has opportunity to provide written materials as to whythey should not be designated

v If Council proceeds to designate they must provide a second noticeexplaining the basis

vCompany can request an informal evidentiary hearing to contest thedesignation

vFinal Determination requires 2/3 majority vote of Council

vChairman of Council must have voted in the affirmative


SMI is an NAIC Ini t iat ive to co ndu ct:

A critical self-examination to update the United Statesinsurance solvency regulatory framework

A review of international developments regarding insurancesupervision, banking supervision and international accountingstandards and their potential use in US insurance regulation

Documentation of current US Insurance Financial SolvencyFramework and Core Principles

Overview of NAIC Solvency Modernization Initiative


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Governance &Risk Management

Statutory Accounting &Financial Reporting

Reinsurance

Group SupervisionSMI

Capital Requirements

Group Superv is ion:

November 2nd, 2011 Group Solvency Issues Working Group adoptsthe NAIC Own Risk and Solvency Assessment (ORSA) GuidanceManual

November 5th, 2011 Solvency Modernization Initiative (EX) TaskForce adopts the ORSA, and sends the ORSA to the FinancialCondition E-Committee for implementation consideration

E-Committee implementation issues:

v Legal framework for requiring ORSAv Effective date of ORSA requirement

v Timing of ORSA (due date)

v Confidentiality provisions of ORSA



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Group Superv is ion:

ORSA required if:

v Individual U.S. insurer writes more than $500 million annual directwritten and assumed premium and/or

v Insurance groups collectively write more than $1 billion annual directwritten and assumed premium

ORSA annual summary report provides detail in 3 key sections:

v Section 1 Description of Insurers Risk Management Framework

v Section 2 Insurers Assessment of Risk Exposures

v Section 3 Group risk Capital and Prospective Solvency Assessment


Reinsurance:

DFA includes the Non-admitted and Reinsurance Reform Act(NRRA)

NRRA preempts the extraterritorial application of state creditfor reinsurance laws and permits states of domicile to proceedforward with reinsurance collateral reforms on an individualbasis if they are accredited or state has financial solvencyrequirements substantially similar to NAIC accreditation

requirements



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Reinsurance:

Current NAIC Credit for Reinsurance Model Law and Regulation: For a U.S.ceding company to receive reinsurance credit, the reinsurance must eitherbe:

v Ceded to U.S. licensed reinsurers or

v In the case of non-U.S. licensed reinsurers, secured by collateralrepresenting 100% of U.S. liabilities for which the credit is recorded

NRRA paved the way for revisions to the Credit for Reinsurance Model Lawand Regulation and

On November 6, 2011, Executive Committee/Plenary adopted revisions to

the Credit for Reinsurance Model Law and Regulation recommended by theReinsurance Task Force and adopted by E-Committee


Major revis ions to Credit for Reinsurance Model Law and Regulat ion

Each state has authority to certify reinsurers, or commissioner hasauthority to recognize the certification issued by another NAIC-accredited state

Each state may evaluate a non-U.S. jurisdiction in order to determineif it is a qualified jurisdiction. A list of qualified jurisdictions will bepublished through the NAIC Committee Process. If state approves ajurisdiction not on list, the state must thoroughly document thejustifications for approval according to standards in model

Reinsurers subject to criteria to be eligible for certification as well asongoing requirements in order to maintain certification (domiciledand licensed in qualified jurisdiction, timely claims payment history,financial strength etc.)



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Certified reinsurer eligible for collateral reduction with respect to contractsentered into or renewed subsequent to certification. State will evaluatereinsurer that applies for certification and assign a rating. Certified reinsurerwill post collateral in amount that corresponds to assigned rating and U.S.ceding insurer allowed full creditv Secure 1 - 0% collateral

v Secure 2 - 10% collateral




v Vulnerable 6 - 100% collateral

Proportional credit permitted if there is insufficient security provided bycertified reinsurer



U.S. ceding insurer must notify domiciliary commissioner within 30 days if:

v Reinsurance recoverable from any single assuming insurer, or group ofaffiliated assuming insurers, exceed 50% of the ceding insurers capitaland surplus or

v More than 20% of the ceding insurers gross written premium is ceded toa single assuming insurer, or group of affiliated assuming insurers

NAIC will consider a proposal to form new group (supported by NAIC staff)to provide high quality review of reinsurance applications for reinsurancecollateral reduction

NAIC will undertake a re-examination of the collateral amounts within 2years from the effective date of the revisions to the models.


Documents

Society of Actuaries:SOA 2012 Life