1Solvency Update2008 CAS Spring Meeting – Quebec City

U.S. Insurance SolvencyToday & Future

Kris DeFrain, FCAS, MAAA, CPCUSenior Financial Regulatory Services Manager

& Chief Property/Casualty ActuaryNAIC

June 16, 2008

2Solvency Update2008 CAS Spring Meeting – Quebec City

States EU Commission & CEIOPS / NAIC Uniformity is Difficult, but is Key

– No “Race to the Bottom”

U.S. Current Solvency RegulationCompared to Proposed EU Solvency

3Solvency Update2008 CAS Spring Meeting – Quebec City

U.S. Financial Regulation is Uniform• Aided by Handbooks – Analysis,

Examination, Troubled Company• Aided by Accreditation System

National Prioritization System Financial Analysis Working Group

• Nationally Significant Insurers and Groups

• Aids Consistency in Analysis of Companies

U.S. Uniform Financial Regulation

4Solvency Update2008 CAS Spring Meeting – Quebec City

Principles or Rules Public Disclosure vs. Supervisory

Reporting Economic Capital - Enterprise Risk

Management Accounting & Valuation Capital Requirement Methodologies

U.S. Current Solvency RegulationCompared to Proposed EU Solvency

5Solvency Update2008 CAS Spring Meeting – Quebec City

US Risk-Based Capital (RBC) 1990s … updated annually, but not as “modern” Risk-Based, not all risks (operational, CAT) Detailed Calculations, but still formula driven and uses

industry averages Early Warning / Intervention, Regulatory Requirements

EU – Standard Formula & Internal Models Risk-Based, all quantifiable risks Ladders of Intervention (SCR – first action, MCR – final

action) Economic Based – Target to BBB rating, 99.5% VaR Question of MCR – will their method limit court fights?

Capital Requirements

6Solvency Update2008 CAS Spring Meeting – Quebec City

US has group supervision through NAIC Holding Company Act and Analysis/Examination and there are Lead State ExamsBUT…what is “group supervision”?US does not calculate an overall group capital requirement, but US insurance groups have a roll-up of the subsidiary RBCs, so there is group consideration

EU proposals – Being debated so still undecided. Small and new member states fear loss of power to larger member states

Group Issues

7Solvency Update2008 CAS Spring Meeting – Quebec City

Which was first?

IAIS or SII?

SII

IAIS

What Impacts the U.S.?

8Solvency Update2008 CAS Spring Meeting – Quebec City

IAIS

International Solvency Changes

EU (SII)

Canada

Australia

Basel II

Driving Forces - Solvency Regulation

9Solvency Update2008 CAS Spring Meeting – Quebec City

U.S. Announces NewSolvency Modernization Initiative

Evaluation of International Initiatives, Including IAIS, Basel II, Solvency II, Canadian Solvency, Australian Solvency, and IASB

Work Plan – Focus on Capital Requirements International Accounting & Valuation IssuesGroup SupervisionReinsurance

10Solvency Update2008 CAS Spring Meeting – Quebec City

Impact of International Accounting

Probably the largest potential change under consideration is adoption of International Accounting (IFRS)

There is a trend in the U.S.U.S. SEC -- Foreign private issuers can use IFRS

with no reconciliation to U.S. GAAP –effective March 2008

U.S. FASB may adopt IFRS in 2013…bye-bye GAAP?

U.S. NAIC Statutory Accounting (SAP) – based on U.S. GAAP…what happens next?

11Solvency Update2008 CAS Spring Meeting – Quebec City

U.S. Valuation IssuesP&C

Principles Based – Book “Management’s Best Estimate”

Not discounted, Implicit Risk Margin

LifePrinciples-Based Reserving Initiative

From Prescribed Formulas to a Process of Identifying and Measuring All Risks

From Industry Expectations to Company Expectations

Discounted, Implicit Risk Margins

12Solvency Update2008 CAS Spring Meeting – Quebec City

U.S. Reinsurance Initiative

Single State U.S. Regulator• Both US and non-US Reinsurers

Potential for A new NAIC entity, Reinsurance Supervision Review Dept. (RSRD), that would assess regulatory effectiveness of non-U.S. jurisdictions through an “outcomes-oriented” approach.

13Solvency Update2008 CAS Spring Meeting – Quebec City

U.S. RBC Future??

Use Company Specific Models, Have some modeling today & are researching P&C CAT Risk Modeling, but what else?

Determine Regulatory Review Process

Major U.S. Concerns: Must maintain legal authority at predetermined and “non-arguable” action/control levels; What about “Fairness”?

14Solvency Update2008 CAS Spring Meeting – Quebec City

Solvency in the U.S.

U.S. is the largest market in the world and has a solid financial solvency system as evidenced by experience, but we are operating in a global marketplace…

there will be change.