The 2014 Summer National Meeting - National Association of ... · SUMMER 201420 1 4 The 2014 Summer National Meeting Louisville, KY August 16 – 19, 2014 International Insurance

SUMMER 20142014

The

2014

Summer

National

Meeting

Louisville, KY

August 16 – 19, 2014

International Insurance

Relations (G) Committee

Excerpt from the Proceedings of the NAIC

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INTERNATIONAL INSURANCE RELATIONS (G) COMMITTEE International Insurance Relations (G) Committee Aug. 16, 2014, Minutes ............................................................................ 12-2

Draft NAIC Comments on International Association of Insurance Supervisors (IAIS) Consultation Documents (Attachment One-A) ..................................................................................................................... 12-10 American Academy of Actuaries’ Aug. 4, 2014, Letter Regarding Comments on IAIS Consultation Document on the Basic Capital Requirements for Global Systemically Important Insurers (Attachment One-B) ........................................................................................................................................ 12-17 International Insurance Relations (G) Committee July 24, 2014, Minutes (Attachment Two) ..................................... 12-24 Draft NAIC Comments on IAIS Draft Application Paper on Supervisory Colleges (Attachment Two-A) ........... 12-25 International Insurance Relations (G) Committee July 25, 2014, Minutes (Attachment Two-B) .......................... 12-27 International Insurance Relations (G) Committee April 23, 2014, Minutes (Attachment Three).................................. 12-28 Draft NAIC Comments on IAIS Draft Issues Paper on Approaches to Group Corporate Governance – Impact on Control Functions (Attachment Three-A) ............................................................... 12-29 ComFrame Development and Analysis (G) Working Group Aug. 16, 2014, Minutes (Attachment Four) ................... 12-31 ComFrame Development and Analysis (G) Working Group June 5, 2014, Minutes (Attachment Four-A) .......... 12-34

12-1

International Insurance Relations (G) Committee Aug. 7, 2014, Minutes (Attachment One) ......................................... 12-8

NAIC Proceedings – Summer 2014

© 2014 National Association of Insurance Commissioners 1

Draft: 8/29/14

International Insurance Relations (G) Committee Louisville, Kentucky

August 16, 2014

Commissioner Lindeen said she presented during the OECD Roundtable on regulatory factors affecting insurer long-term investing, focusing on outputs from monitoring of investments in the U.S., changes in corporate governance and ensuring board awareness of investment strategies, and the interplay between an open market in investment and how that affects RBC. Updates were provided on various projects that are currently under way, including work on analytical tools and the insurance sector, a preliminary report related to variable annuity products and their guarantees, a draft report on practices in disaster risk financing, and a draft outline for a report on investment strategies of insurers and long-term investment. Commissioner Lindeen said that in mid-June, the OECD organized a seminar on Disaster Risk Financing in the Asia-Pacific Region. The conference was attended by officials and experts from the Asia-Pacific Economic Cooperation and other invited economies, regional and international organizations, and the private sector. Commissioner Donelon represented the NAIC at this meeting and discussed the following topics: the capacity of the insurance sector to cover disaster risks; the objectives, design and operation of key disaster insurance schemes; lessons learned and changes made to these schemes in light of recent disasters; effective approaches in regard to enhancing the availability and affordability of insurance; strengthening the capacities of the insurance sector to cover disaster risks; and how the U.S. has overcome implementation challenges. Commissioner Lindeen noted that the OECD is organizing a seminar on Terrorism Risk Insurance Sept. 10 in Washington, DC, at the Treasury Department. Commissioner Murphy will represent the NAIC at that meeting. 2. Adopted its Aug. 7, July 24 and April 23 Minutes Commissioner Kobylowski made a motion, seconded by Commissioner McCarty to adopt the Committee’s Aug. 7 (Attachment One), July 24 (Attachment Two) and April 23 (Attachment Three) minutes. 3. Discussed the Activities of the IAIS

a. Restructuring and Reorganization

Commissioner McCarty reported on the restructuring and reorganization taking place at the International Association of Insurance Supervisors (IAIS). He noted that in 2013, the IAIS began a review of its strategic goals, financial outlook and resources, with the goal of developing proposals to improve its structures, operations and the allocation of resources, including improving the process for obtaining and enhancing the quality of stakeholder input. He said that earlier this year, the IAIS Executive Committee approved several restructuring changes. In looking at the variety of workstreams taking place at the IAIS and considering its priorities and limited resources, reorganizational decisions resulted in existing groups being combined, refocused, dissolved or left the same. These changes are being rolled out mostly this summer, with some changes taking effect by the end of the year.

The International Insurance Relations (G) Committee met in Louisville, KY, Aug. 16, 2014. The following committee members participated: Michael F. Consedine, Chair (PA); Kevin M. McCarty, Vice Chair (FL); Thomas B. Leonardi, Immediate Past Chair (CT); Karen Weldin Stewart (DE), Gordon I. Ito (HI); James J. Donelon represented by Tom Travis (LA); Joseph G. Murphy represented by John Turchi (MA); John M. Huff (MO); Bruce R. Ramge represented by Christy Neighbors (NE); Kenneth E. Kobylowski (NJ); Benjamin M. Lawsky represented by Robert Easton (NY); Julia Rathgeber (TX); and Susan L. Donegan (VT). Also participating was: Monica J. Lindeen (MT). 1. Heard an Update on the OECD

Commissioner Lindeen reported that the Organisation for Economic Co-operation and Development (OECD) Insurance and Private Pensions Committee met in early June in Paris. She attended as part of the U.S. delegation, which is jointly led by the U.S. Department of Commerce and the Federal Insurance Office (FIO).

12-2 NAIC Proceedings – Summer 2014


Commissioner McCarty said that while the IAIS Executive Committee recognized that the IAIS has benefited greatly from the contributions of Observers and other interested stakeholders to its work, it was also recognized that the process of obtaining stakeholder input could be more effective and efficient. He said that to maximize the opportunity for timely, substantive and high-quality input from Observers and other stakeholders, the Executive Committee agreed to update relevant procedures. As part of these reforms, Commissioner McCarty said it is being proposed that Observers would no longer generally participate in meetings but rather be invited when necessary to provide targeted, technical input. The Executive Committee also agreed to increase the IAIS’ engagement with Observers and other stakeholders through special Executive Committee sessions, increased Committee-level hearings, greater publication of background documents and the use of conference calls at certain stages of policy development. Commissioner McCarty noted that the IAIS has released for consultation draft procedures for meeting participation and the development of supervisory and supporting material and a draft Policy for Consultation with Stakeholders. He said that comments are due on these procedures and policy by Sept. 2, and he encouraged interested parties to submit their comments to the IAIS on this proposal. He said that the NAIC and state regulators’ ideas of how to make stakeholder input more effective, consistent, transparent and predictable differ from many fellow IAIS members and that NAIC members participating at the IAIS have for years been trying to make the IAIS a more open and transparent organization. Commissioner McCarty said that some of the solutions being proposed are a step in the wrong direction, specifically Observer participation in meetings, and that some proposals need further clarification, which will hopefully come as a result of the current consultation. George Brady (IAIS) invited interested parties to submit their best ideas regarding how the IAIS takes input from stakeholders. He said there would be a change in the approaches to the IAIS’ current “pay to play” structure in addition to changing the automatic attendance policy by stakeholders at IAIS meetings. He said that IAIS field testing was an example of how the IAIS process involved targeted stakeholders. Commissioner Leonardi said that state regulators have been vocal in opposition to this change at the IAIS. He said the NAIC is much more open and transparent by comparison and is trying to be even more so, whereas the IAIS is going in the other direction. Tracey Laws (Reinsurance Association of America—RAA) said the IAIS field testing was not an ideal process as a few get the benefit of participating in something that will end up affecting many. She was not opposed to changes in the IAIS’ “pay to play” structure; however, she hopes to coordinate comments with the NAIC on the IAIS proposal to change stakeholder access to meetings. Robert Neill (American Council of Life Insurers—ACLI) noted that the ACLI has participated in meetings at the IAIS since its inception and that the ACLI wants to work with the NAIC to make changes to the IAIS proposal that make sense and to improve the procedures as currently drafted. David Snyder (Property Casualty Insurers Association of America—PCI) questioned how the IAIS would go about selecting stakeholders for targeted input and suggested that this change would create competition not of ideas, but rather competition for inside influence. Birny Birnbaum (NAIC Funded Consumer Representative and Center for Economic Justice—CEJ) encouraged the IAIS to create a more formal structure for consumer participation. He said the NAIC has been responsive in explaining reasons for closing a meeting, and the criteria for closing meetings or for inviting specific stakeholders need to be specified by the IAIS so that more diverse stakeholders, including consumers’ representatives, can be involved. He said this process should not be totally discretionary and subjective. Amanda Greenwold Wise (American Insurance Association—AIA) said that a change in stakeholder participation at this stage of the ongoing work with ComFrame will be detrimental and that field testing is not a proxy for transparency of process. Jeff Alton (CNA Financial) noted concerns about developing a common capital standard at the IAIS if access to meetings is only available to a select few and wondered whether the IAIS’ practice of holding closed-door meetings with think-tanks would continue. He asked how information would be disseminated to stakeholders during the standards-setting process. Other international standard setting bodies such as the International Accounting Standards Board (IASB) offer up to six months for the industry to comment on their proposed standards.

12-3NAIC Proceedings – Summer 2014


Mr. Brady responded that the purpose of the IAIS stakeholder proposals being out for consultation was to seek the best ideas on this topic and identify points that needed clarity, and he encouraged interested parties to submit comments. Sonja Larkin-Thorne (NAIC Funded Consumer Representative) said that the NAIC encourages people to engage in its processes and was critical of the IAIS proposal to close participation, noting that given the impact the IAIS’ work can have on U.S. consumers and stakeholders who have no say in electing the IAIS, it should be more transparent and open. Doug Barnert (Barnert Associates) noted that the IAIS has opened up its process over the past 15 years and that other international bodies had followed its lead, but the proposal to now close its sessions was an unfortunate reversal in direction. Commissioner Stewart said that as the largest delegation at the IAIS, the U.S. state regulators should have a loud voice at the table and be more proactive and assertive on this issue. Commissioner Consedine noted that National Conference of Insurance Legislators (NCOIL) has also expressed concerns about the lack of transparency at the IAIS.

b. Financial Stability Committee

Commissioner Kobylowski reported on the Financial Stability Committee at the IAIS. He explained that the IAIS Financial Stability Committee is in the process of its annual review to identify global systemically important insurers (G-SIIs), and that the assessment methodology involves both quantitative and qualitative elements. This annual review will also consider the systemic importance of some companies that have significant reinsurance operations. He added that it is expected that the Financial Stability Board (FSB) and national authorities, in consultation with the IAIS, will make determinations on the G-SII status of insurers and reinsurers in November. Commissioner Kobylowski said that the IAIS is working on higher loss absorbency (HLA) capital requirements for G-SIIs. The first step in the process has been the development of a basic capital requirements (BCR) that will serve as a base upon which the HLA requirements will build. He noted that in light of the limited time frame for delivering on the BCR, the requirement is intended to be a straightforward calculation and largely a factor-based approach to determining capital, with limited risk granularity. Early last month, the IAIS released its second consultation document on the BCR, which contained significantly greater detail on the calculation of the BCR than the first consultation document, but still left open several issues that require decision before the BCR design is finalized. He commented that the NAIC and several U.S. interested parties provided comments on the consultation document. He said it is expected that the IAIS will refine the proposal in the coming months based on the comments received and will deliver the BCR to the Group of Twenty in time for its November 2014 Summit. He added the IAIS hopes to have a first consultation on the HLA in December and is targeting a final proposal for the end of 2015. Both the BCR and HLA would not to apply to G-SIIs until 2019, so there is time for review and refinement. Commissioner Kobylowski said that last year, the IAIS committed to develop a risk-based global insurance capital standard (ICS) to be included in ComFrame, to be applicable to all internationally active insurance groups (IAIGs). The IAIS has begun initial development on the ICS, also on a tight time frame, with an ICS proposal expected by the end of 2016. He noted that implementation of ComFrame, including the ICS, is also scheduled to begin in 2019, and it is expected that the ICS will eventually replace the BCR as the base to which HLA is applied. Commissioner Kobylowski noted that besides the work on capital, the IAIS is progressing on other policy measures for G-SIIs as well, including guidance on liquidity management and planning for G-SIIs, which will be revised based on comments from a recent consultation period and up for approval by the IAIS this fall.

c. Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)

Commissioner McCarty said the ComFrame document was finalized in June after final edits were proposed by the ComFrame Draft Review Group and reviewed by the relevant IAIS subcommittees. He stated ComFrame is currently subject to field testing and reported the following: Module 1 has been completed; the quantitative aspect of Module 2 will continue through 2016; the qualitative aspect of Module 2, risk management and corporate governance, will commence field testing in October 2014; and Module 3, supervisory processes, including supervisory colleges, is scheduled for field testing commencing in 2015. As the ComFrame document itself is now revised for field testing purposes, Commissioner McCarty



said he will provide updates on this important workstream through reports of the ComFrame Development and Analysis Working Group.

4. Commissioner McCarty reported that the ComFrame Development and Analysis (G) Working Group met earlier in the day and received an update on the ComFrame field testing process and the various IAIS capital developments (Attachment Four). He noted that the Working Group heard a recap of the International Capital Standards Forum held on Aug. 15, the purpose of which was to have an interactive discussion on the development of the ICS, focusing on potential goals, benefits/consequences, realities and potential approaches for developing a global ICS. The forum had more than 200 participants, and views, comments and questions were heard from state regulators, federal colleagues, state legislators, consumer representatives and the industry. He added the forum highlighted several important issues, noting it was intended to be just the beginning of the discussions and of the work to be done. Commissioner Leonardi said there is a tremendous need for industry to coalesce around a proposal for a capital standard that can be moved forward with the help of the Federal Reserve and that works for the U.S. market and regulatory approach. 5. Heard an Update on International Regulatory Cooperation Activities Commissioner Ito reported on significant ongoing regulatory cooperation work, including various international training programs. Earlier this month, several commissioners, regulators and NAIC staff were in Bangkok for the 5th Annual U.S. Insurance Regulation and Supervision Seminar on Solvency Monitoring and Risk Governance hosted in conjunction with Thailand’s Office of Insurance Commission. Including the host country delegations, the forum welcomed more than 60 participants from Bhutan, Brunei, Cambodia, Indonesia, Japan, Laos, Malaysia, Philippines, Singapore, Sri Lanka and Vietnam. In late July, Commissioner Lindeen, Pam O’Connell (CA) and NAIC staff joined insurance regulators from Latin America at a seminar in Santiago, Chile, focusing on insurance regulation and supervision of market conduct in the U.S. The seminar was jointly organized by the NAIC, the Association of Latin American Insurance Supervisors, and the Chilean Securities and Insurance Supervisor. Commissioner Ito said the International Fellows program is celebrating its 10-year anniversary in 2014. In early October, the NAIC will welcome 13 International Fellows from seven countries, including China, India, Nigeria, Pakistan, Saudi Arabia, Taiwan and Thailand. Fellows will be hosted by California, the District of Columbia, Georgia, Hawaii, Iowa, Louisiana, Missouri, Nevada, New Jersey, Pennsylvania and Texas. He also noted that in September, the NAIC is organizing an invitation-only event in Hawaii, which will bring together insurance supervisors and insurance industry leaders from the Asia-Pacific region. The program will include speaker panels and small group discussions covering current and emerging topics, such as capital standards, group supervision, reinsurance and catastrophe events. 6. Heard an Update on U.S.-EU Insurance Dialogue Project Commissioner Consedine provided some background on the U.S.-EU Insurance Dialogue Project, which is a joint project between the NAIC, FIO, the European Commission, and European Insurance and Occupational Pensions Authority to enhance the mutual understanding of each other’s approach to solvency oversight and to explore ways to increase transatlantic cooperation. In December 2012, a joint report was issued along with a set of common objectives and initiatives, many of which are already under way or under consideration within the NAIC process at one or more committees or working groups. Commissioner Consedine noted that in July, the U.S.-EU Steering Committee agreed to a revised Way Forward document identifying key priority areas, including confidentiality, group supervision, reinsurance collateral and pathways forward. It also reflects recent developments and progress achieved to advance mutual understanding and recognition of the different regulatory tools and approaches used by the U.S. and Europe. Commissioner Consedine said the mechanisms for exchanging confidential information continue to be a major discussion point. While both the U.S. and European Union (EU) support the IAIS Multilateral Memorandum of Understanding (MMoU), some have indicated a preference for another MMoU or bilateral agreement in this area. According to the Way Forward document, it was agreed to “identify by the end of 2014 the merits of an additional trans-Atlantic bilateral

Received the Report of the ComFrame Development and Analysis (E) Working Group



agreement, including the optimal structure(s) of such an agreement to further facilitate the exchange of confidential information through a covered agreement or other mechanisms identified by the Steering Committee.” He noted that at this stage, such work remains exploratory and is in no way a commitment to one approach or the other. Regarding group supervision, Commissioner Consedine said that while the NAIC has made no commitments in this area, the updated Way Forward document contemplates the potential use of a covered agreement to affirm the U.S. system of group supervision. Commissioner Consedine said the use of a covered agreement to address U.S. reinsurance collateral requirements has been incorporated into the Way Forward document, indicating that the EU, and Treasury/FIO with the consultation of state insurance regulators, will take initial steps toward a covered agreement by the end of 2014, which would be based on the NAIC Credit for Reinsurance Model Law and Regulation. He said it bears repeating, however, that the Way Forward document does not commit the NAIC to any one approach but calls for further exploration of all these issues. He said that in July, the NAIC leadership met with representatives of the United States Trade Representative (USTR) and the Treasury Department to discuss the concept of a covered agreement to address U.S. regulatory objectives with foreign jurisdictions. Although several important U.S. priorities were discussed, many unanswered questions remain, and more details are needed about the timing, scope and degree of state insurance regulator involvement in pursuing such an agreement. He added that the NAIC anticipates further discussions with the Treasury Department and the USTR as this concept develops to determine whether the pursuit of an agreement is in the best interest of U.S. policyholders and insurers. Commissioner Consedine said that while this U.S.-EU Insurance Dialogue Project has been constructive, it remains unclear how U.S. firms will be treated by the EU under Solvency II. Nevertheless, he noted the NAIC was looking forward to continuing this important dialogue and to further discussing the long-term objectives of this project and the potential impact on transatlantic insurance markets. He noted that on Oct. 25, the NAIC—along with FIO, EIOPA and others—is organizing a public event on the evolution of group supervision in Amsterdam at the end of the IAIS annual conference, which should be a useful and informative exchange among key regulatory and industry representatives from the U.S. and Europe. Senator Ben Nelson (NAIC) hoped the mutual recognition process will result in a positive result for the U.S. system from the EU, but he noted concerns that recognition limited to a period of five years would create challenges of needing continual work rather than providing a degree of certainty. He said the Way Forward represents mutual aspirations and that progress will not occur without a continuing dialogue, which he said had been frank and friendly. Mr. Easton asked if the EU had articulated why it is proposing mutual recognition to be limited to five years. Sen. Nelson replied that under Solvency II, there are a series of steps for a jurisdiction to go through and that the EU views the five-year time frame as a way for the U.S. to bypass a more onerous path to mutual recognition. Sen. Nelson said the NAIC would continue to insist that the U.S. insurance regulatory regime warrants permanent, not time-limited, recognition. Ms. Laws said the RAA is pleased with the revised Way Forward, which is important for U.S. companies, and she encouraged state regulators to continue to remain engaged in the process as the prudential regulators. 7. Heard an Update on the Joint Forum Mr. Easton reported that the Joint Forum Plenary met at the end of June and discussed a variety of topics. He said that while the IAIS and the International Organization of Securities Commissions (IOSCO) have already agreed to the continuance of the Joint Forum, the Basel Committee (BCBS) was less supportive and will be making a decision about endorsement in September. A note on the strategic direction of the Joint Forum will be prepared and presented to the BCBS in September; were they not to endorse, the Joint Forum would wind itself down by the end of 2015. Mr. Easton said that as a result of the BCBS failure to endorse prior to Plenary, the Joint Forum did not propose definitive new work pending the outcome of the BCBS meeting in September. A strategic group will write up thoughts on data, bail-in tools and the effects on other sectors, and financial innovation. It will also address internal governance of the Joint Forum, composition, extended membership and communication with parent committees. Mr. Easton said the reports on the pilot exercise on the implementation of the financial conglomerate principles, and on supervisory colleges, were agreed and have been sent to the parent committees for approval. There was much discussion about the current report on asset encumbrance, and it is being restructured this summer. However, there were calls for more data and analysis, which is likely to be challenging given that the report must be evidence-based.



Mr. Easton said the work on credit risk management is addressing some interesting points, including whether, and if so the degree to which, any failure of a centralized counter party may be systemic. The workstream also has cross-over work with the asset encumbrance workstream, as increased attention to derivatives has led to an increase in initial margin and, therefore, the need for high-quality liquid assets for collateral purposes. 8. Discussed Other Matters Commissioner Consedine reported on the International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP), which is a comprehensive assessment of all sectors of each country’s financial regulatory regimes. For the insurance sector, the IMF will assess U.S. compliance with the IAIS’ 26 Insurance Core Principles (ICPs). In 2010, the IMF assessed the U.S. financial regulatory system, and the insurance system was deemed “observed or largely observed”—the highest levels of evaluation— for 25 of the 28 ICPs. He said past performance on the FSAP demonstrated the overall strength of the U.S.’ state-based insurance regulatory system, especially during the global financial crisis. He added that the next IMF assessment of the U.S. system is currently under way, and state regulators and NAIC staff are working closely with federal counterparts in order to complete the process in 2015. Mr. Brady urged attendance at the upcoming IAIS annual conference in Amsterdam Oct. 22-24. Having no further business, the International Insurance Relations (G) Committee adjourned.

W:\National Meetings\2014\Summer\Cmte\G\08-Gmin.doc


Attachment One International Insurance Relations (G) Committee

8/16/14


Draft: 8/12/14

International Insurance Relations (G) Committee Conference Call August 7, 2014

The International Insurance Relations (G) Committee met via conference call Aug. 7, 2014. The following Committee members participated: Kevin M. McCarty, Vice Chair (FL); Karen Weldin Stewart (DE); James J. Donelon (LA); John M. Huff represented by John Rehagen (MO); Bruce R. Ramge (NE); Kenneth E. Kobylowski (NJ); Benjamin M. Lawsky represented by Martha Lees (NY); Julia Rathgeber represented by Doug Slape (TX); and Susan L. Donegan (VT). 1. Adopted NAIC Comments on IAIS Draft Consultation Documents Commissioner McCarty noted that he would chair the meeting in the place of Commissioner Michael F. Consedine (PA), and he introduced the four draft papers from the International Association of Insurance Supervisors (IAIS) out for consultation. He said relevant NAIC groups and NAIC staff had drafted comments on each paper, and these were sent to Committee members and interested parties in advance of the conference call (Attachment One-A).

a. Application Paper on Approaches to Conduct of Business Supervision Commissioner McCarty introduced the application paper on approaches to conduct of business supervision, which the IAIS Market Conduct Subcommittee drafted to identify approaches to conduct of business supervision that insurance supervisors may wish to consider when implementing the related components of Insurance Core Principle (ICP) 9 (Supervisory Review and Reporting) and supervising compliance with the requirements of ICP 19 (Conduct of Business). The paper aims to provide a useful source of ideas, examples and tools to supervisors in supervising conduct of insurance business. He noted that members of the Market Regulation and Consumer Affairs (D) Committee and NAIC staff reviewed and provided draft comments. He commented that the Committee seemed comfortable overall with the paper as the approaches and examples presented were relevant and beneficial to supervisors and added that the comments as drafted provide some minor editorial suggestions. David Snyder (Property Casualty Insurers Association of America—PCI) mentioned several comments PCI planned to submit, including how enforcement penalties should match the severity of the offense and how protections for consumers may vary by product line as appropriate.

b. Issues Paper on Anti-Bribery and Corruption Commissioner McCarty introduced the issues paper on anti-bribery and corruption, which the IAIS Financial Crime Working Group drafted to explore how bribery and corruption affects the insurance market, as well as how insurance supervision can help to ensure that insurers and insurance intermediaries manage such risks effectively. The paper discusses: 1) the relevance of bribery and corruption to the insurance sector; 2) the relationship between measures to combat bribery and corruption and frameworks for anti-money laundering/combating the financing of terrorism; and 3) the insurance supervisor’s role in combating bribery and corruption. He stated that members of the Market Regulation and Consumer Affairs (D) Committee, the Antifraud (D) Task Force and NAIC staff reviewed and provided draft comments. The two main comments were in response to questions included in the consultation: 1) to the extent the ICPs could better address financial crimes more broadly, it would be most appropriate by adding additional guidance to the relevant ICPs rather than expanding an existing ICP or creating a new one; and 2) the paper highlights warning signs and ways to manage risks of bribery and corruption, so deciding on whether more work by the IAIS is necessary should be reassessed later, sometime after the issues paper has been published.

c. Guidance on Liquidity Management and Planning

Commissioner Kobylowski presented the Guidance on liquidity management and planning, which the IAIS Financial Stability Committee prepared. He explained that the policy measures for global systemically important insurers (G-SIIs) that the IAIS released in July 2013 state that group-wide supervisors should require G-SIIs to have adequate arrangements in place to manage liquidity risk for the whole group, and that G-SIIs should develop liquidity risk management plans. The purpose of this document is to provide guidance to group-wide supervisors in the application of these requirements to G-SIIs.


Attachment One International Insurance Relations (G) Committee

8/16/14


He noted that members of the ComFrame Development and Analysis (G) Working Group and NAIC staff reviewed and provided draft comments highlighting the importance of liquidity plans being tailored to an insurer’s specific business operations and, thus, the appropriateness of the paper providing principles-based guidance on what would be expected from G-SIIs. A second comment identifies a potential contradiction within the paper related to liquidity sources and suggests a potential solution.

d. BCR Consultation Paper Commissioner Kobylowski introduced the basic capital requirements (BCR) consultation paper that the IAIS Technical and Financial Stability Committees jointly prepared to solicit input regarding the development of the BCR, requirements that are expected to apply to G-SIIs from 2015 or shortly thereafter. He noted that feedback was being solicited on this second consultation document to facilitate the design and calibration of the BCR proposal, which will be delivered to the G20 summit in November. Members of the ComFrame Development and Analysis (G) Working Group and NAIC staff reviewed and provided draft comments on the BCR document. He added that the American Academy of Actuaries (AAA) provided its comments on the BCR in advance of the call (Attachment One-B), but otherwise no additional comments were received. Lou Felice (NAIC) described the draft NAIC comments and noted that the level of the BCR is being targeted using two metrics: 1) the ratio of BCR to jurisdictional prescribed capital requirements (PCR), which has a regulatory focus; and 2) the capital held over the BCR, which has a financial strength focus. Rob Esson (NAIC) noted that while market adjusted valuation approach was used during the initial testing of the BCR, there are concerns about the use of this approach extending into the development of the global insurance capital standard (ICS), especially as such an approach is inappropriate for use for insurers with significant long-term business portfolios. Commissioner McCarty suggested the draft comment on valuation be amended to reinforce this concern. Jeff Alton (CNA Financial) noted concern over the timing of development of the BCR and that unlike normal IAIS papers, the BCR is being finalized with several important issues still undecided, such as the alpha ratio scaler and treatment of discount rates. Ryan Workman (NAIC) responded that the NAIC comments include the need for further refinement to the BCR and the potential need for additional consultations in the future. Mr. Snyder commented that Robert Litan (The Brookings Institution) had recently published a paper, “Worrisome Trends in Solvency Regulation of Insurance Groups in a Post-Crisis World,” which was relevant to the discussions taking on the BCR and other international developments. Steve Broadie (PCI) noted his concern with the BCR’s use of tiered capital, a concept that is also included in ComFrame, and asked whether that could be reexamined. Mr. Felice responded that the BCR is a ratio that will be used as a base for the higher loss absorbency (HLA) requirement for G-SIIs and that because a G-SII may pose a systemic risk, it is important that the HLA require the highest quality of capital. Ralph Blanchard (Travelers Companies) commented on the distinction between core and additional capital and expressed concern on how subordinate debt and surplus notes are classified. Ramon Calderon (NAIC) noted that there had been discussion at the IAIS on the need to give consideration to downstream payments within a group. He added that in the United States, there is a strong supervisory approval process, so subordinated debt treated as capital is available for the payment of policyholder and creditor obligations and should be treated accordingly. Commissioner McCarty suggested that the draft comments be amended to elaborate on this point. Commissioner Kobylowski made a motion, seconded by Commissioner Stewart, to submit the NAIC comments, including the two suggested amendments on the BCR comments, to the IAIS on its four papers out for consultation. The motion passed. 2. Discussed Other Matters Commissioner McCarty said there will be an International Capital Standards Forum at the Summer National Meeting to discuss the development of international capital standards in an open dialogue amongst regulators and interested parties. He also said the Committee will meet at the Summer National Meeting to continue work on its goals. Having no further business, the International Insurance Relations (G) Committee adjourned. W:\National Meetings\2014\Summer\Cmte\G\Gmin_Aug 7 2014.docx


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of d

escr

ibin

g va

rious

app

roac

hes

to c

ondu

ct o

f bus

ines

s in

the

cont

ext o

f IC

Ps 9

an

d 19

. The

exp

lana

tions

and

exa

mpl

es p

rovi

ded

are

rele

vant

and

ben

efic

ial t

o su

perv

isor

s an

d hi

ghlig

ht th

at th

ere

are

a va

riety

of w

ays

for s

uper

viso

rs to

ach

ieve

sim

ilar o

utco

mes

for s

ound

con

duct

pra

ctic

es a

nd p

olic

yhol

der p

rote

ctio

n.

Para

grap

h 37

A

wor

d an

d a

perio

d se

em to

be

mis

sing

in th

e fir

st s

ente

nce;

sug

gest

: “M

ater

ial a

nd p

ersi

sten

t fai

lure

to m

anag

e C

OB

ris

ks c

an m

ay in

crea

se a

n in

sure

r’s e

xpos

ure

to re

puta

tiona

l, le

gal a

nd re

gula

tory

risk

s an

d ul

timat

ely

thre

aten

an

insu

rer’s

so

undn

ess

and

sust

aina

bilit

y. A

s m

entio

ned

abov

e...”

Pa

ragr

aph

119

To b

e co

nsis

tent

with

IAIS

wor

ding

, the

sur

vey

resp

onse

box

at t

he e

nd o

f par

agra

ph 1

19 s

houl

d re

ad “…

a ra

nge

of

supe

rvis

ory

prac

tices

incl

udin

g of

f-site

mon

itorin

g an

d on

-site

exa

min

atio

ns in

spec

tions

.” Pa

ragr

aph

120

Third

bul

let,

need

a s

pace

in “…

reso

lutio

n.So

met

imes

…”

Nin

th b

ulle

t, IA

IS w

ordi

ng u

ses

off-s

ite m

onito

ring

and

on-s

ite in

spec

tions

so

sugg

est f

or c

onsi

sten

cy, “

Post

-inve

stig

atio

n or

fo

llow

-up

exam

inat

ions

” sho

uld

read

“Pos

t- or

follo

w-u

p in

spec

tions

” Pa

ragr

aph

180

In th

e se

cond

sen

tenc

e, “c

usto

mer

s” s

houl

d be

sin

gula

r: “…

info

rmat

ion

prov

ided

by

a cu

stom

er p

rior t

o th

e co

nclu

sion

…”

Para

grap

h 19

3 “in

sure

res"

sho

uld

be “i

nsur

ers”

1

Attachment One-A International Insurance Relations (G) Committee

8/16/14



IAIS

Issu

es p

aper

on

Ant

i-Brib

ery

and

Cor

rupt

ion

- NAI

C D

raft

Com

men

ts

July

25,

201

4 Se

ctio

n/Pa

ragr

aph

Com

men

t G

ener

al

This

Issu

es P

aper

doe

s a

good

job

in il

lust

ratin

g ho

w b

riber

y an

d co

rrup

tion

may

affe

ct in

sure

rs a

nd in

sura

nce

inte

rmed

iarie

s as

wel

l as

high

light

wha

t ins

uran

ce s

uper

visi

on c

an d

o to

hel

p to

ens

ure

that

insu

rers

and

insu

ranc

e in

term

edia

ries

man

age

such

risk

s ef

fect

ivel

y.

Para

grap

h 10

3 C

onsu

ltatio

n qu

estio

n on

whe

ther

the

ICPs

sho

uld

addr

ess

com

batin

g fin

anci

al c

rime

in in

sura

nce

from

a b

road

er p

ersp

ectiv

e:

The

Issu

es P

aper

hig

hlig

hts

that

brib

ery

and

corru

ptio

n is

an

issu

e th

at m

ay a

ffect

insu

rers

and

is s

omet

hing

sup

ervi

sors

sh

ould

be

awar

e of

to e

nsur

e th

at in

sure

rs m

anag

e su

ch ri

sks

effe

ctiv

ely;

how

ever

, we

do n

ot fe

el th

at th

e IA

IS n

eeds

to d

o m

uch

furth

er in

add

ress

ing

finan

cial

crim

e m

ore

broa

dly

in th

e IC

Ps. T

he IC

Ps a

ppro

pria

tely

add

ress

frau

d an

d A

ML/

CFT

be

caus

e, g

iven

thei

r nat

ure,

insu

ranc

e pr

oduc

ts a

re m

ore

susc

eptib

le to

thes

e pa

rticu

lar c

rimes

and

the

risks

they

pre

sent

. As

one

gets

into

fina

ncia

l crim

e m

ore

broa

dly,

the

impl

icat

ions

to in

sura

nce

beco

me

mor

e ge

nera

lized

and

the

dire

ct

role

/aut

horit

ies

of in

sura

nce

supe

rvis

ors

less

ens.

To

the

exte

nt th

e IC

Ps c

ould

bet

ter a

ddre

ss fi

nanc

ial c

rimes

mor

e br

oadl

y, it

w

ould

be

mos

t app

ropr

iate

by

addi

ng a

dditi

onal

gui

danc

e to

the

rele

vant

ICPs

rath

er th

an e

xpan

ding

ICP

21

or c

reat

ing

a ne

w IC

P.

Para

grap

h 10

4 C

onsu

ltatio

n qu

estio

n on

whe

ther

this

pap

er c

ould

be

expa

nded

into

an

Appl

icat

ion

Pape

r: To

som

e de

gree

, thi

s pa

per

alre

ady

high

light

s w

arni

ng s

igns

and

way

s to

man

age

risks

of b

riber

y an

d co

rrup

tion.

The

que

stio

n of

whe

ther

mor

e is

ne

cess

ary

at th

is p

oint

nee

ds to

take

into

con

side

ratio

n ot

her I

AIS

prio

ritie

s an

d th

e lim

ited

reso

urce

s as

wel

l as

the

exte

nt to

w

hich

oth

er re

leva

nt o

rgan

izat

ions

may

alre

ady

be d

oing

sim

ilar w

ork

so a

s to

avo

id d

uplic

atio

n. G

iven

thes

e po

ints

and

the

fact

that

the

IAIS

has

yet

to p

ublis

h th

is p

aper

, we

sugg

est i

t is

too

soon

to d

ecid

e on

whe

ther

mor

e is

nec

essa

ry a

nd s

ugge

st

reas

sess

ing

this

issu

e in

a y

ear o

r tw

o.

2


8/16/14



C

omm

ents

tem

plat

e fo

r: “

Gui

danc

e on

Liq

uidi

ty

Man

agem

ent a

nd P

lann

ing,

dra

ft, 2

6 Ju

ne 2

014”

Plea

se e

mai

l you

r res

pons

e to

ber

nhar

d.m

ayr@

bis.

org

no la

ter t

han

8 A

ugus

t 201

4 N

ame

of re

spon

dent

: O

rgan

isat

ion:

N

atio

nal A

ssoc

iatio

n of

Insu

ranc

e C

omm

issi

oner

s D

iscl

osur

e of

com

men

ts:

Yes

Sect

ion

in p

aper

C

omm

ent

Gen

eral

It

is cr

itica

lly im

port

ant t

hat l

iqui

dity

pla

ns b

e ta

ilore

d to

an

insu

rer’s

spec

ific

busin

ess o

pera

tions

and

that

an

insu

rer

‘ow

n’ it

s liq

uidi

ty p

lans

. As s

uch,

we

are

sens

itive

to se

ctio

ns o

f the

pap

er th

at p

rovi

de li

sts o

f spe

cific

item

s to

be

cons

ider

ed o

r sug

gest

ions

that

suc

h pl

ans

be p

rovi

ded

in a

spe

cific

form

to th

e su

perv

isors

. How

ever

, we

reco

gnize

that

th

e st

ated

pur

pose

of t

he d

ocum

ent i

s to

prov

ide

prin

cipl

es b

ased

gui

danc

e on

wha

t wou

ld b

e ex

pect

ed fr

om G

SIIs

, and

th

us w

e ar

e ge

nera

lly su

ppor

tive

of th

e co

nten

t in

that

con

text

. Se

ctio

n 3

Con

cept

s (a

lso

appl

ies

to S

ectio

n 4.

2 Pl

ans

for E

xecu

tion,

Liq

uidi

ty

Anal

ysis

)

Tow

ards

the

bott

om o

f pag

e 4,

a li

st o

f bul

lets

of l

iqui

dity

sour

ces i

nclu

des t

wo

at th

e en

d of

the

list:

“Rec

eipt

of l

iqui

d as

sets

as c

olla

tera

l for

der

ivat

ives

and

oth

er tr

ansa

ctio

ns”

and

“col

late

ral h

eld

unde

r rei

nsur

ance

agr

eem

ents

”. T

he

pape

r cor

rect

ly in

dica

tes t

hat t

he le

vel o

f liq

uidi

ty o

f the

sour

ces l

isted

(inc

ludi

ng th

e tw

o ab

ove)

var

ies a

nd c

an b

e ci

rcum

stan

ce-s

peci

fic. T

he p

aper

then

goe

s on

to sa

y, “A

lso, e

ncum

bere

d as

sets

can

not b

e co

unte

d as

liqu

idity

sour

ces”

. Gi

ven

that

the

last

2 b

ulle

ts u

nder

liqu

idity

sour

ces m

ight

be

cons

ider

ed ty

pes o

f enc

umbe

red

asse

ts, t

his s

tate

men

t may

be

con

trad

icto

ry to

thes

e bu

llets

. To

addr

ess t

his,

we

sugg

est a

ddin

g th

e fo

llow

ing

lang

uage

to th

e se

nten

ce “

Also

, en

cum

bere

d as

sets

cann

ot b

e co

unte

d as

liqu

idity

sour

ces u

nles

s the

ir liq

uidi

ty is

trig

gere

d by

con

trac

tual

term

s in

spec

ific

circ

umst

ance

s or s

tres

s con

ditio

ns b

eing

ass

umed

.”

3


8/16/14



IAIS

Bas

ic C

apita

l Req

uire

men

ts (B

CR

) - N

AIC

Dra

ft C

omm

ents

Ju

ly 2

5, 2

014

Sect

ion/

Para

grap

h C

omm

ent

Gen

eral

1.

Th

e 2n

d BC

R C

onsu

ltatio

n Pa

per c

onta

ins

muc

h m

ore

deta

il on

the

cons

truct

ion

of th

e BC

R th

an th

e fir

st. H

owev

er, a

nu

mbe

r of k

ey a

spec

ts a

nd re

late

d de

cisi

ons

still

need

to b

e ad

dres

sed

in o

rder

to a

llow

sup

ervi

sors

, des

igna

ted

G-S

IIs

and

othe

r obs

erve

rs to

ass

ess

the

impa

ct o

f the

BC

R (a

nd a

BC

R ra

tio).

In p

artic

ular

, the

ave

rage

ratio

s of

BC

R to

PC

R

and

Cap

ital R

esou

rces

to B

CR

requ

ire fu

rther

ana

lysi

s ov

er th

e su

mm

er a

nd p

ossi

ble

revi

sion

. In

orde

r to

prov

ide

info

rmed

com

men

ts o

n a

num

ber o

f rel

ated

dec

isio

n po

ints

rega

rdin

g di

ffere

nt p

arts

of t

he fo

rmul

a it

is s

ugge

sted

that

the

com

pone

nts

of th

e BC

R b

e ad

dres

sed

in th

e fo

llow

ing

orde

r:

a.

BCR

Fac

tors

and

resu

lts m

ust b

e fu

rther

ana

lyze

d to

est

ablis

h a

mea

ning

ful s

tarti

ng p

oint

for m

easu

rem

ent o

f the

BC

R re

quire

men

ts a

gain

st e

xist

ing

PCR

s an

d ag

ains

t qua

lifyi

ng c

apita

l res

ourc

es:

• D

ata

from

all

G-S

IIs s

houl

d be

incl

uded

•

Ref

inem

ents

may

be

requ

ired

to th

e BC

R fa

ctor

s ba

sed

on th

e fu

ll da

ta s

et; r

evie

w o

f vol

unte

er p

roxy

dat

a an

d se

gmen

tatio

n fo

r acc

urac

y an

d co

nsis

tenc

y; a

nd a

bet

ter u

nder

stan

ding

of t

he a

ccou

ntin

g di

ffere

nces

.

b.

Juris

dict

iona

l PC

Rs

mus

t be

norm

aliz

ed to

refle

ct c

onsi

sten

t mea

sure

of l

oss

abso

rben

cy:

• C

onsi

sten

cy in

whe

ther

juris

dict

iona

l PC

R is

pro

vide

d pr

e or

pos

t div

ersi

ficat

ion

bene

fits

mus

t be

esta

blis

hed.

•

In a

dditi

on to

mov

ing

rese

rve

cons

erva

tism

(e.g

. MO

CE)

to c

apita

l res

ourc

es, M

OC

E c

ould

als

o be

reco

gniz

ed

as a

n el

emen

t of j

uris

dict

iona

l PC

R in

ord

er to

ref

lect

the

exce

ss lo

ss a

bsor

benc

y th

at is

lock

ed in

insu

ranc

e lia

bilit

ies

prox

ies

(this

is r

elat

ed to

the

accu

racy

of t

he c

urre

nt e

stim

ate)

pre

sent

ed in

dev

elop

ing

and

appl

ying

th

e BC

R fa

ctor

s.

c.

C

ore

and

qual

ifyin

g ca

pita

l res

ourc

es n

umbe

rs m

ust b

e an

alyz

ed a

nd fu

rther

dev

elop

ed:

• Th

e da

ta a

nd v

alue

s fo

r qu

alify

ing

and

core

cap

ital

mus

t be

rev

iew

ed f

or r

easo

nabl

enes

s an

d co

nsis

tenc

y ac

ross

firm

s.

• Th

e le

vel o

f MO

CE

sho

uld

be v

erifi

ed fo

r fur

ther

dis

cuss

ion

of th

e im

pact

on

capi

tal r

esou

rces

and

any

rem

oval

or

tran

sfer

of M

OC

E fr

om c

apita

l res

ourc

es s

houl

d be

def

erre

d.

d.

Th

e Al

pha

shou

ld b

e de

term

ined

onl

y af

ter t

he o

ther

BC

R c

ompo

nent

s ar

e cl

ose

to b

eing

fina

lized

: •

Focu

sing

on

the

ratio

of c

apita

l res

ourc

es to

BC

R a

t the

beg

inni

ng o

f the

pro

cess

is n

ot a

suf

ficie

nt ra

tiona

le to

ad

just

the

alph

a at

this

poi

nt a

nd it

sho

uld

rem

ain

at 1

. •

The

alph

a sh

ould

be

the

last

com

pone

nt t

hat

is a

ddre

ssed

. C

alib

ratin

g vi

a us

e of

the

alp

ha c

an o

nly

be

inte

lligen

tly d

iscu

ssed

afte

r w

e kn

ow t

he im

pact

of

a re

fined

BC

R;

verif

y ju

risdi

ctio

nal P

CR

s; a

nd h

ave

a fu

ll pi

ctur

e of

wha

t co

mpr

ises

cap

ital r

esou

rces

. Th

at w

ill fo

ster

info

rmed

dis

cuss

ion

and

anal

ysis

by

firm

s an

d su

perv

isor

s as

to w

here

the

BCR

act

ually

sits

rela

tive

to b

oth

juris

dict

iona

l PC

R a

nd c

apita

l res

ourc

es.

Th

e co

nsul

tatio

n pa

per

refe

renc

es r

efin

emen

ts d

urin

g th

e in

itial

rep

ortin

g pe

riods

of 2

015

and

2016

. The

NAI

C s

uppo

rts

the

notio

n of

con

tinui

ng r

efin

emen

ts,

but

stro

ngly

sup

ports

usi

ng t

he m

axim

um o

ppor

tuni

ty f

or in

itial

ref

inem

ent

of t

he

4


8/16/14



BCR

and

BC

R r

atio

prio

r to

impl

emen

tatio

n of

sup

ervi

sory

rep

ortin

g. I

t is

impo

rtant

tha

t th

e BC

R g

o liv

e fo

r re

porti

ng

purp

oses

with

a t

horo

ughl

y de

velo

ped

and

unde

rsto

od b

asis

for

its

com

pone

nts.

If

initi

al r

evis

ions

res

ult

in m

ater

ially

di

ffere

nt re

sults

than

thos

e po

rtray

ed in

the

Pape

r, it

may

be

nece

ssar

y to

hav

e an

othe

r rou

nd o

f con

sulta

tion.

G

ener

al

2.

The

NAI

C s

trong

ly s

uppo

rts th

e po

sitio

n in

the

pape

r tha

t the

BC

R in

its

curr

ent f

orm

will

only

app

ly to

G-S

IIs a

nd s

olel

y as

the

base

for a

com

bine

d BC

R +

HLA

cap

ital s

tand

ard.

G

ener

al

3.

The

pape

r’s re

fere

nces

to c

alib

ratio

n ar

e no

t cle

ar a

s to

inte

nt. A

n ex

plic

it ta

rget

cal

ibra

tion

does

not

see

m p

ossi

ble

for t

he

BCR

so

calib

ratio

n se

ems

to b

e us

ed in

refe

renc

e to

a ta

rget

bas

ed o

n ei

ther

exi

stin

g ju

risdi

ctio

nal c

apita

l req

uire

men

ts o

r re

lativ

e to

cap

ital r

esou

rces

. Thu

s th

ese

refe

renc

es a

ll po

int b

ack

to th

e al

pha

(see

com

men

ts #

1d

and

#14

rega

rdin

g th

e al

pha

adju

stm

ent).

Tha

t poi

nt s

houl

d be

mad

e m

ore

expl

icit

in th

e do

cum

ent.

Sect

ion

2.1

Ove

rvie

w

Para

grap

h 12

Se

ctio

n 2.

2.3

Cap

ital R

esou

rces

Pa

ragr

aph

22

Sect

ion

4 Q

ualif

ying

Cap

ital

Res

ourc

es

Para

grap

h 46

Se

ctio

n 2.

2.3

Para

grap

h 23

Se

ctio

n 4.

1 Pa

ragr

aph

48

Sect

ion

4.2

Para

grap

h 49

Se

ctio

n 2.

3 Pa

ragr

aph

26

Sect

ion

3.1

Para

grap

hs 3

2 Se

ctio

n 6.

2 Pa

ragr

aph

66

Sect

ion

3.4

Para

grap

h 36

4.

Con

solid

ated

Cap

ital R

equi

rem

ents

: Th

e re

fere

nces

to

cons

olid

ated

cap

ital r

equi

rem

ents

vs.

gro

up w

ide

capi

tal r

equi

rem

ents

are

unc

lear

. Th

e pa

per

note

s th

at t

here

are

thr

ee c

ompo

nent

s th

at c

ompr

ise

the

BC

R (

insu

ranc

e, b

anki

ng a

nd o

ther

NIN

B).

Furth

er t

here

are

re

fere

nces

to

adju

stm

ents

to

alig

n ca

pita

l res

ourc

es w

ith t

he a

ppro

ach

follo

wed

for

the

con

stru

ctio

n of

the

BC

R c

apita

l re

quire

men

ts. W

hile

the

BCR

ratio

in th

e co

nsul

tatio

n pa

per a

ppea

rs to

mea

sure

con

solid

ated

cap

ital r

esou

rces

num

ber i

n th

e nu

mer

ator

div

ided

by

the

com

bina

tion

of th

e th

ree

BCR

com

pone

nts

in th

e de

nom

inat

or, t

here

are

stil

l que

stio

ns a

bout

w

heth

er c

erta

in n

on-fi

nanc

ial

NBN

I ac

tiviti

es w

ill be

sub

ject

to

spec

ified

cap

ital

requ

irem

ents

in

the

BCR

or

will

be

addr

esse

d th

roug

h a

“fram

ewor

k th

at in

clud

es a

qua

litat

ive

anal

ysis

” (se

e pa

ragr

aph

43).

In th

at v

ein

it m

ay b

e th

at to

the

exte

nt fe

asib

le e

ach

com

pone

nt o

f the

BC

R s

houl

d ha

ve it

s ow

n su

ffici

ency

ratio

to im

prov

e as

sess

men

t of e

ach

indu

stry

se

gmen

t’s c

apita

l ade

quac

y. N

AIC

sup

ports

furth

er d

iscu

ssio

n an

d cl

arity

on

this

poi

nt.

5.

BCR

Rat

io:

Sinc

e th

e BC

R b

y its

elf i

s no

t a c

apita

l sta

ndar

d w

ithou

t HLA

, the

BC

R ra

tio w

ithou

t HLA

is th

eref

ore

less

mea

ning

ful a

nd

poss

ibly

unn

eces

sary

. How

ever

if a

BC

R ra

tio a

lone

is to

be

repo

rted

it sh

ould

be

base

d on

a n

umer

ator

that

incl

udes

all

qual

ifyin

g ca

pita

l re

sour

ces

cons

iste

nt w

ith a

bas

e ca

pita

l re

quire

men

t an

d a

core

cap

ital

thre

shol

d (i.

e. 5

0%)

as

cont

empl

ated

in C

omFr

ame.

If d

esire

d, to

pre

pare

for H

LA a

sec

ond

ratio

bas

ed o

n ju

st c

ore

capi

tal r

atio

cou

ld b

e ad

ded

for i

nfor

mat

iona

l and

com

plia

nce

purp

oses

. W

hen

final

izin

g A

BC

R +

HLA

ratio

, the

NAI

C s

uppo

rts u

sing

a 5

0% th

resh

old

of c

ore

capi

tal f

or th

e BC

R p

ortio

n an

d a

100%

thre

shol

d fo

r the

HLA

por

tion

of th

e co

mbi

ned

capi

tal s

tand

ard

for G

-SIIs

. 6.

BC

R /

ICS

Tim

etab

le:

The

char

t on

page

10

does

not

incl

ude

a re

fere

nce

to fu

rther

con

sulta

tion

on H

LA b

eyon

d D

ecem

ber

2014

. NAI

C w

ould

su

ppor

t inc

ludi

ng th

e po

tent

ial f

or a

2nd

con

sulta

tion

pape

r in

2015

. 7.

R

epor

ting

of th

e BC

R R

atio

: C

onfid

entia

l rep

ortin

g of

the

BCR

ratio

sho

uld

cont

inue

unt

il H

LA is

add

ed. T

here

sho

uld

be s

trong

dis

ince

ntiv

es fo

r use

of

the

BCR

on

its o

wn

by G

-SIIs

as

an in

dica

tor o

f fin

anci

al s

treng

th a

t lea

st u

ntil

HLA

is re

quire

d in

201

9.

8.

Insu

ranc

e Fa

ctor

s:

As s

uppo

rted

in o

ur g

ener

al c

omm

ents

, the

re s

houl

d be

a s

trong

con

nect

ion

betw

een

this

sec

tion

and

the

data

refin

emen

t

5


8/16/14



Sect

ion

3.5

Para

grap

hs 4

0 an

d 41

Se

ctio

n 3.

5 Pa

ragr

aphs

42

and

43

Se

ctio

n 4.

3 Pa

ragr

aph

52

Sect

ion

5.1

Para

grap

h 57

effo

rt de

scrib

ed g

ener

ally

in t

he P

aper

and

tha

t th

ese

fact

ors

are

subj

ect

to r

evis

ion

befo

re a

fin

al r

ecom

men

datio

n is

ad

opte

d by

the

IAIS

. Th

ey a

re n

ot fi

nal a

t thi

s po

int.

9.

Base

l III

Ent

ities

and

Bas

el-L

ike

Activ

ities

of U

nreg

ulat

ed E

ntiti

es:

NAI

C w

ould

sup

port

the

mos

t app

ropr

iate

mea

sure

(e.

g. e

ither

the

Leve

rage

Rat

io o

r Ba

sel R

isk

Wei

ghte

d As

sets

) be

ing

appl

ied

to B

asel

III

subj

ect

activ

ities

. Th

at m

easu

re c

ould

be

diffe

rent

for

reg

ulat

ed B

asel

III

entit

ies

and

unre

gula

ted

entit

ies

cond

uctin

g th

e ac

tiviti

es,

but

shou

ld b

e co

nsis

tent

for

all

regu

late

d en

titie

s an

d co

nsis

tent

for

all

unre

gula

ted

entit

ies

rath

er th

an u

sing

a “g

reat

er o

f Lev

erag

e ra

tio o

f ful

l Bas

el II

I” op

tion.

10

. NIN

B F

inan

cial

and

non

-Fin

anci

al A

ctiv

ities

: R

egar

ding

par

agra

ph 4

2, t

he a

ltern

ativ

e ap

proa

ch o

f 25

bas

is p

oint

s on

off

bala

nce

shee

t as

sets

for

NIN

B f

inan

cial

ac

tiviti

es h

as n

ot b

een

adeq

uate

ly v

ette

d an

d its

rat

iona

l has

not

bee

n m

ade

clea

r. P

arag

raph

43

calls

for

app

lyin

g an

op

erat

iona

l ris

k ch

arge

in t

he B

CR

for

non

-fina

ncia

l act

iviti

es (

as a

n al

tern

ativ

e to

a q

ualit

ativ

e as

sess

men

t). T

his

also

ne

eds

to b

e co

nsid

ered

furth

er, a

s do

the

appr

opria

te p

roxi

es u

pon

whi

ch to

bas

e su

ch a

cha

rge.

N

AIC

sup

ports

furth

er

delib

erat

ion

of o

ptio

ns fo

r thi

s co

mpo

nent

of t

he B

CR

. (Se

e al

so o

ur c

omm

ent #

4 o

n co

nsol

idat

ed c

apita

l req

uire

men

ts)

11. M

argi

n O

ver C

urre

nt E

stim

ate

(MO

CE)

: In

clus

ion

of p

arag

raph

52a

) is

pre

mat

ure

and

NAI

C s

uppo

rts in

clus

ion

of 1

00%

of M

OC

E in

cap

ital r

esou

rces

(al

so n

ote

our c

omm

ent 1

b, a

bove

). W

e in

terp

ret p

arag

raph

60

to m

ean

that

bot

h G

AAP

and

IFR

S a

re p

rodu

cing

mor

e co

nser

vativ

e re

serv

es th

an a

mar

ket a

djus

ted

appr

oach

. The

leve

l of r

elat

ive

cons

erva

tism

bet

wee

n G

AAP

and

IFR

S is

not

cle

ar. T

he

NAI

C s

uppo

rts fu

rther

dis

cuss

ion

of p

oten

tial r

easo

nabl

e st

anda

rds

for

incl

usio

n of

MO

CE

in c

apita

l res

ourc

es, b

ut o

nly

afte

r th

e co

mpo

nent

s of

BC

R r

equi

rem

ents

hav

e be

en fi

naliz

ed a

nd a

rep

ortin

g tra

ck r

ecor

d es

tabl

ishe

d. T

here

are

ver

y fe

w ju

risdi

ctio

ns im

plem

entin

g a

full

MO

CE

at p

rese

nt (a

nd p

oten

tially

no

G-S

II ju

risdi

ctio

ns),

and

it sh

ould

be

reco

gniz

ed

that

the

prov

isio

ns in

ICP1

4 w

ere

pred

ictiv

e of

wha

t at t

hat t

ime

was

bel

ieve

d to

be

imm

inen

t glo

bal i

mpl

emen

tatio

n of

an

acco

untin

g re

gim

e ut

ilizin

g cu

rrent

est

imat

es a

nd M

OC

Es. T

he fa

ilure

of t

he IA

SB a

nd F

ASB

to fi

naliz

e (o

r con

verg

e) th

eir

insu

ranc

e ac

coun

ting

– m

uch

of w

hich

is d

ue to

the

com

plex

ity o

f cal

cula

ting

MO

CEs

– im

plie

s th

at c

are

is re

quire

d in

the

treat

men

t of M

OC

Es.

A

sub

stan

tial p

art o

f MO

CE,

whe

n ba

sed

on re

gula

tory

requ

irem

ents

, can

be

cons

ider

ed a

s ad

ditio

nal j

uris

dict

iona

l cap

ital

that

is

embe

dded

in

rese

rves

rat

her

than

as

expl

icit

capi

tal

requ

irem

ents

. Th

is i

s an

im

porta

nt c

onsi

dera

tion

whe

n co

mpa

ring

BCR

to th

e ju

risdi

ctio

nal P

CR

.

In a

dditi

on, M

OC

E is

in p

art r

efle

ctiv

e of

diff

eren

ces

in v

alua

tion

met

hods

acr

oss

juris

dict

ions

. Tho

se v

alua

tion

diffe

renc

es

are

part

of th

e ov

eral

l sol

venc

y fra

mew

ork

that

yie

lds

a ju

risdi

ctio

nal c

apita

l PC

R. A

s w

e tra

nsiti

on to

the

ICS

dis

cuss

ion,

N

AIC

sup

ports

reco

gniti

on o

f how

thes

e di

ffere

nces

con

tribu

te to

an

outc

ome

that

can

be

com

pare

d to

the

ICS

fram

ewor

k (a

lso

see

com

men

t #1

2, b

elow

) ra

ther

tha

n ne

cess

itatin

g po

tent

ially

cos

tly a

nd c

onfu

sing

cha

nges

to

arriv

e at

a s

ingl

e gl

obal

val

uatio

n ba

sis

unde

rlyin

g a

glob

al c

apita

l sta

ndar

d.

12. P

arag

raph

57

/ Ann

exes

C -

Valu

atio

n:

The

NAI

C u

nder

stan

ds u

sing

the

Mar

ket A

djus

ted

Valu

atio

n Ap

proa

ch fo

r exp

edie

ncy

durin

g th

e in

itial

test

ing

of th

e BC

R.

How

ever

, it

rem

ains

ext

rem

ely

uncl

ear

as t

o w

heth

er t

his

met

ric w

ill in

fac

t be

wid

ely

utiliz

ed g

loba

lly f

or i

nsur

ance

lia

bilit

ies;

at

pres

ent,

ther

e ar

e ve

ry f

ew c

ount

ries

usin

g it,

and

eve

n af

ter

the

impl

emen

tatio

n of

Eur

ope’

s S

olve

ncy

II,

grea

ter t

han

50%

of t

he w

orld

mar

ket (

by p

rem

ium

) is

not c

urre

ntly

sch

edul

ed to

use

it. C

onse

quen

tly, t

his

qual

ified

use

of

6


8/16/14



Sect

ion

6.1

Para

grap

h 62

and

64

Se

ctio

n 6.

2 Pa

ragr

aph

67

Anne

x C

Pa

ragr

aph

27

Para

grap

h 32

Pa

ragr

aph

34

Para

grap

hs 4

4-54

the

mar

ket a

djus

ted

appr

oach

sho

uld

not b

e as

sum

ed to

ext

end

to th

e IC

S, o

r in

deed

to a

ny lo

nger

term

impl

emen

tatio

n or

exp

ande

d ap

plic

atio

n of

the

BCR

. (S

ee re

late

d co

mm

ents

on

Anne

x C

bel

ow #

15)

13. B

CR

/ PC

R R

atio

s:

An

nex

F, P

arag

raph

13

incl

udes

the

follo

win

g go

al fo

r rou

gh c

alib

ratio

n of

the

BCR

:

“Cal

ibra

tion

was

then

car

ried

out c

onsi

sten

t with

the

obje

ctiv

e of

the

targ

etin

g th

e BC

R b

etw

een

the

uppe

r and

low

er

thre

shol

ds fo

r sup

ervi

sory

inte

rven

tion

(e.g

. typ

ical

ly b

etw

een

PCR

and

MC

R).”

This

is r

einf

orce

d in

the

ope

ning

to

para

grap

h 62

. G

iven

tha

t th

e go

al w

as a

BC

R th

at is

fre

quen

tly b

elow

juris

dict

iona

l PC

Rs,

it a

ppea

rs th

at th

e ro

ugh

initi

al B

CR

falls

exa

ctly

whe

re it

was

targ

eted

usi

ng a

n al

pha

of 1

. In

addi

tion,

the

aver

age

BCR

/ PC

R ra

tio is

not

indi

cativ

e of

the

rang

e of

resu

lts a

nd it

is s

ugge

sted

that

info

rmat

ion

on th

e ra

nge

be p

rovi

ded

afte

r al

l ini

tial r

efin

emen

ts a

re m

ade.

The

refo

re, N

AIC

rei

tera

tes

its s

uppo

rt fo

r m

aint

aini

ng th

e al

pha

at n

o m

ore

than

1 (

also

se

e ou

r com

men

t 1d,

abo

ve re

gard

ing

the

alph

a).

14. I

mpl

emen

tatio

n of

the

BCR

: It

seem

s un

likel

y th

at th

e BC

R a

lone

wou

ld re

quire

impl

emen

ting

sinc

e th

e N

AIC

doe

s no

t vie

w B

CR

as

a ca

pita

l sta

ndar

d on

its

own.

It

is o

nly

a st

anda

rd fo

r G

-SIIs

in c

ombi

natio

n w

ith H

LA.

This

par

agra

ph w

ill b

e m

ore

appr

opria

te w

hen

the

HLA

Pap

er is

issu

ed.

In a

ny c

ase,

it is

sug

gest

ed th

at th

e w

ord

“legi

slat

ive”

be

rem

oved

from

the

para

grap

h.

15. A

nnex

C (

Para

grap

h re

fere

nces

rela

te to

the

Anne

x C

con

tent

s):

Rec

omm

end

addi

ng “

Idea

lly,”

at t

he b

egin

ning

of

the

sent

ence

. W

hile

ide

ally

one

may

sug

gest

util

izin

g st

ocha

stic

m

etho

ds, t

he p

ract

ical

ity o

f doi

ng s

o is

not

cle

ar e

ven

othe

r tha

n fo

r ini

tial r

epor

ting.

Sugg

est c

hang

ing

“not

pur

ely

finan

cial

sel

f-int

eres

t” to

“not

in a

ccor

danc

e w

ith th

e ef

ficie

nt m

arke

ts h

ypot

hesi

s” (s

ince

this

hy

poth

esis

is d

emon

stra

bly

not v

alid

for p

rote

ctio

n pr

oduc

ts).

R

ecom

men

d ad

ding

“Ide

ally

, “at

the

begi

nnin

g fo

r the

sam

e re

ason

s as

for p

arag

raph

27.

For

expe

dien

cy f

or t

he in

itial

fie

ld t

estin

g, t

he N

AIC

is p

repa

red

to a

ccep

t th

e us

age

of I

AIS

pre

pare

d di

scou

nt c

urve

s.

How

ever

, th

e pr

esum

ptio

ns u

nder

lyin

g th

ese

curv

es,

espe

cial

ly a

ny e

mph

asis

on

risk

free

rate

s, a

re u

nlik

ely

to b

e ac

cept

able

long

er te

rm, a

nd w

ill n

eed

revi

sitin

g.

7


8/16/14



August 4, 2014

Mr. Ryan Workman International Insurance Program Counsel International Insurance Relations (G) Committee National Association of Insurance Commissioners

Re: Comments on the IAIS Public Consultation Document on the Basic Capital Requirements for Global Systemically Important Insurers

On behalf of the American Academy of Actuaries’1 Solvency Committee, I appreciate this opportunity to provide the attached comments on the International Association of Insurance Supervisors’ second public consultation document regarding the proposed Basic Capital Requirements for Global Systemically Important Insurers. The Academy will also be sending a copy of these comments to the International Actuarial Association.

If you have any questions or would like to discuss these comments further, please contact Lauren Sarper, the Academy’s senior policy analyst for risk management and financial reporting, at 202.223.8196 or [email protected].

Sincerely,

Elizabeth K. Brill, MAAA, FSA Chairperson, Solvency Committee American Academy of Actuaries

1 The American Academy of Actuaries is 18,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. The Academy assists public policy-makers on all levels by providing leadership, objective expertise and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice and professionalism standards for actuaries in the United States.

1850 M Street NW Suite 300 Washington, DC 20036 Telephone 202 223 8196 Facsimile 202 872 1948 www.actuary.org

1

Attachment One-B International Insurance Relations (G) Committee

8/16/14



A

mer

ican

Aca

dem

y of

Act

uari

es’ S

olve

ncy

Com

mitt

ee

Com

men

ts o

n Ju

ly 9

, 201

4 IA

IS C

onsu

ltatio

n D

raft

on

the

Bas

ic C

apita

l Req

uire

men

ts fo

r G

loba

l Sys

tem

ical

ly Im

port

ant I

nsur

ers

Item

Pa

ragr

aph

Ref

eren

ce

Com

men

t A

ltern

ativ

e A

ppro

ach

1 G

ener

al

The

cons

ulta

tion

draf

t in

dica

tes t

hat a

Mar

ket

Adj

uste

d V

alua

tion

App

roac

h w

ill b

e ta

ken

to

deve

lop

the

bala

nce

shee

t.

A m

arke

t-bas

ed a

ppro

ach

wou

ld n

ot b

e ap

prop

riate

for m

any

insu

ranc

e pr

oduc

ts—

su

ch a

s lon

g te

rm li

fe a

nd a

nnui

ty

prod

ucts

—an

d co

uld

have

adv

erse

co

nseq

uenc

es fo

r ins

urer

s in

man

y ju

risdi

ctio

ns, i

nclu

ding

the

U.S

. Fu

ndam

enta

lly, b

oth

mar

ket v

alue

and

am

ortiz

ed c

ost a

ppro

ache

s are

wel

l sui

ted

to

certa

in p

rodu

cts a

nd e

nviro

nmen

ts, b

ut n

ot

in o

ther

s. F

or lo

ng-d

urat

ion,

illiq

uid

insu

ranc

e, a

mar

ket v

alue

app

roac

h do

es n

ot

wor

k. E

vide

nce

of th

is c

an b

e se

en in

the

hist

ory

of U

.S. i

nsur

ance

acc

ount

ing.

Prio

r to

the

grea

t dep

ress

ion,

the

U.S

. use

d a

mar

ket-b

ased

app

roac

h to

val

uing

life

in

sura

nce.

How

ever

, dur

ing

the

Gre

at

Dep

ress

ion

regu

lato

rs d

ecid

ed m

arke

t-bas

ed

valu

atio

n re

quire

men

ts sh

ould

not

app

ly to

in

sure

rs w

ith il

liqui

d lia

bilit

ies,

whi

ch

allo

wed

insu

rers

to c

ontin

ue to

inve

st in

the

econ

omy

and

stab

ilize

mar

kets

.

An

appr

oach

that

eith

er a

llow

s lon

g-du

ratio

n,

illiq

uid

prod

ucts

to b

e va

lued

on

an a

mor

tized

co

st b

asis

or a

n ap

proa

ch th

at d

oes n

ot re

ly o

n a

bala

nce

shee

t val

uatio

n is

nec

essa

ry fo

r an

effe

ctiv

e ca

pita

l req

uire

men

t.

2 G

ener

al

The

draf

t doe

s not

refle

ct a

ll m

ajor

risk

fact

ors.

Ther

e do

es n

ot a

ppea

r to

be a

ny c

harg

e fo

r ca

tast

roph

ic ri

sk.

Add

a c

harg

e fo

r cat

astro

phic

risk

.

2


8/16/14



Item

Pa

ragr

aph

Ref

eren

ce

Com

men

t A

ltern

ativ

e A

ppro

ach

3 G

ener

al

Fiel

d te

stin

g ca

ptur

es a

po

int-i

n-tim

e st

ate.

Vol

atili

ty is

not

cap

ture

d w

hen

exam

inin

g a

stat

ic st

ate

and

can

only

be

capt

ured

whe

n ex

amin

ing

seve

ral p

oint

s in

time,

with

pa

rticu

lar n

eed

for s

tress

ed p

erio

ds.

Fiel

d te

stin

g sh

ould

look

at m

ultip

le p

oint

s in

time

and

real

stre

sses

—su

ch a

s the

200

8 fin

anci

al c

risis

—w

ith re

gard

to a

sset

risk

, sev

eral

un

derw

ritin

g cy

cles

with

rega

rd to

pr

oper

ty/c

asua

lty p

ricin

g ris

k, a

nd y

ears

with

la

rge

natu

ral d

isast

ers—

like

Hur

rican

e Sa

ndy

in

2012

—w

ith re

gard

to c

atas

troph

e ris

k.

4 1.

1, p

ar

2

Ann

ex

C, p

ar

44

The

deve

lopm

ent o

f the

in

tern

atio

nal c

apita

l st

anda

rds (

ICS)

will

be

info

rmed

by

the

wor

k on

the

basi

c ca

pita

l req

uire

men

ts

(BC

R).

The

initi

al a

ppro

ach

for B

CR

does

not

pre

-em

pt fu

ture

de

velo

pmen

t of a

ltern

ativ

e ap

proa

ches

to d

iscou

ntin

g.

The

cons

ulta

tion

docu

men

t cle

arly

stat

es

that

the

deve

lopm

ent o

f the

ICS

will

be

info

rmed

by

the

BC

R a

nd im

plie

s (vi

a th

e re

fere

nce

in A

nnex

C to

alte

rnat

ive

disc

ount

ing

appr

oach

es) t

hat f

utur

e w

ork

also

will

use

a c

urre

nt e

stim

ate

appr

oach

. Th

e cu

rren

t est

imat

e/fa

ctor

-bas

ed a

ppro

ach

to th

e B

CR

shou

ld n

ot fo

rm th

e ba

sis o

f the

IC

S. F

or th

e re

ason

s des

crib

ed in

Item

1

abov

e, th

e cu

rren

t fac

tor-b

ased

app

roac

h is

no

t eff

ectiv

e an

d do

es n

ot a

ppro

pria

tely

re

flect

loca

l diff

eren

ces.

In a

dditi

on, t

he

focu

s on

Glo

bal S

yste

mic

ally

Impo

rtant

In

sure

rs (G

-SIIs

) has

not

allo

wed

for

suff

icie

nt in

vest

igat

ion

of ri

sks i

n ar

eas

othe

r tha

n lif

e in

sura

nce,

incl

udin

g he

alth

an

d pr

oper

ty a

nd c

asua

lty (P

&C

). Su

ch

risks

gen

eral

ly a

re n

ot a

con

cern

for t

he G

- SI

Is, w

hich

are

the

focu

s of t

he B

CR

.

In c

onne

ctio

n w

ith th

e IC

S, th

e In

tern

atio

nal

Ass

ocia

tion

of In

sura

nce

Supe

rvis

ors (

IAIS

) sh

ould

eva

luat

e m

etho

ds o

f ass

essi

ng c

apita

l ad

equa

cy th

at d

o no

t rel

y on

a b

alan

ce sh

eet

valu

atio

n. T

here

are

two

appr

oach

es th

at h

ave

been

dis

cuss

ed—

usin

g in

tern

al m

odel

s and

le

vera

ging

loca

l req

uire

men

ts. S

tress

test

ing

is a

pr

ime

exam

ple

of a

n ap

proa

ch th

at u

ses i

nter

nal

mod

els r

athe

r tha

n re

lyin

g on

a b

alan

ce sh

eet

valu

atio

n. S

uch

an a

ppro

ach

can

be c

onst

ruct

ed

in a

way

that

doe

s not

requ

ire a

sing

le

inte

rnat

iona

l val

uatio

n ba

sis,

yet a

llow

s the

re

gula

tor t

o un

ders

tand

und

er w

hat

circ

umst

ance

s eac

h gr

oup

mig

ht c

ome

unde

r st

ress

and

pot

entia

lly b

e un

able

to m

eet i

ts

oblig

atio

ns.

We

susp

ect t

hat s

ome

com

bina

tion

of lo

cal

requ

irem

ents

and

mod

els u

sing

inte

rnal

risk

ex

posu

re d

ata

will

be

requ

ired

to su

ffic

ient

ly

refle

ct lo

cal d

iffer

ence

s in

risk.

3


8/16/14



It

em

Para

grap

h R

efer

ence

C

omm

ent

Alte

rnat

ive

App

roac

h

5

2.2.

2,

par 2

0

The

calc

ulat

ion

of c

urre

nt

estim

ates

requ

ires t

akin

g th

e pr

esen

t val

ue o

f all

rele

vant

fu

ture

cas

h flo

ws.

Sinc

e ca

sh fl

ows m

ust b

e ca

lcul

ated

an

yway

, we

ques

tion

why

it is

nec

essa

ry to

th

en o

verla

y an

acc

ount

ing

basi

s in

dete

rmin

ing

the

BC

R.

Take

a m

ore

stre

amlin

ed, s

traig

htfo

rwar

d, a

nd

com

para

ble

appr

oach

by

stre

ss te

stin

g th

e ca

sh

flow

s dire

ctly

rath

er th

an c

reat

ing

a m

arke

t- ad

just

ed b

alan

ce sh

eet a

nd th

en st

ress

test

ing.

(N

ote

that

sim

pler

app

roac

hes m

ay b

e su

ffic

ient

fo

r sho

rter t

ail l

ines

for w

hich

the

timin

g of

the

flow

s has

less

of a

n ec

onom

ic im

pact

. In

such

ca

ses,

stre

ss te

stin

g th

e no

min

al a

mou

nts m

ay b

e su

ffic

ient

.)

6

2.2.

4,

The

calib

ratio

n le

velo

fthe

This

impl

icit

refle

ctio

n of

div

ersif

icat

ion

byIf

the

desi

reis

to k

eep

the

over

allf

orm

ula

pa

r 24

BC

Rw

illac

coun

tim

plic

itly

adju

sting

the

fact

orsc

reat

es a

n un

leve

lsi

mpl

e, th

en u

se a

sim

ple

form

ulai

cw

ayof

fors

ome

degr

eeof

play

ing

field

. It

redu

ces t

he o

ther

wis

ere

flect

ing

dive

rsifi

catio

n,su

ch a

sthr

ough

a

di

vers

ifica

tion.

calc

ulat

edfa

ctor

sfor

all c

ompa

nies

rath

ersi

mpl

esq

uare

root

ofth

esu

mof

the

squa

res

th

an d

irect

ing

the

cred

itto

thos

e th

atco

varia

nce

form

ula.

ac

hiev

ed th

edi

vers

ifica

tion.

Hen

ce,t

hose

co

mpa

nies

with

no

orle

ss d

iver

sific

atio

n

gain

abe

nefit

atth

eex

pens

e of

thos

ew

ith

high

erle

vels

ofdi

vers

ifica

tion.

7

2.2.

5,

The

calib

ratio

n le

velo

fthe

Sim

ilart

o th

edi

vers

ifica

tion

argu

men

tfor

Inve

stig

ate

sim

ple

way

sto

refle

ctA

LMris

k, a

ta

par 2

5 B

CR

will

acco

unti

mpl

icitl

ypa

ragr

aph

24,t

hisi

mpl

icit

appr

oach

cre

ates

min

imum

, in

orde

rto

crea

teap

prop

riate

fort

heab

senc

eof

anas

sets

an u

nlev

elpl

ayin

gfie

ld b

y re

duci

ngth

ein

cent

ives

.

an

d lia

bilit

ym

anag

emen

tch

arge

fort

hose

with

ALM

risk

and

(ALM

)fac

tor.

over

stat

ing

the

char

gefo

r tho

se w

ithou

tthi

s

risk.

8

3.4,

par

BC

Rse

gmen

t: “A

nnui

ties”

Are

thes

ede

ferr

ed o

rinc

ome-

payi

ng?

Add

cla

rific

atio

n.

36

D

efer

red

and

inco

me-

payi

ng a

nnui

tiesh

ave

en

tirel

ydi

ffer

entr

isk

prof

iles.

4


8/16/14



Item

Pa

ragr

aph

Ref

eren

ce

Com

men

t A

ltern

ativ

e A

ppro

ach

9 3.

4, p

ar

36

10

3.4,

par

36

Prox

y m

easu

re fo

r ris

k ex

posu

re: c

urre

nt e

stim

ate

for n

on-li

fe n

on-p

rope

rty

The

risk

fact

or a

pplie

d to

“o

ther

non

-trad

ition

al”

curr

ent e

stim

ates

is 1

.29

perc

ent.

This

com

pare

s to

the

low

est r

isk

fact

or a

pplie

d to

tra

ditio

nal n

on-li

fe c

urre

nt

estim

ates

of 6

.25

perc

ent.

It is

not

cle

ar if

this

is m

eant

to b

e a

valu

e ne

t or g

ross

of r

eins

uran

ce. S

ubse

quen

t di

scus

sion

of “

curr

ent e

stim

ate”

ver

sus

rein

sura

nce

reco

vera

ble

impl

ies t

hat

“cur

rent

esti

mat

e” is

gro

ss o

f rei

nsur

ance

, ye

t the

cha

rges

in th

e sa

me

para

grap

h fo

r re

insu

ranc

e re

cove

rabl

es im

ply

low

co

llect

ion

risk,

and

the

prox

y fo

r pro

perty

ris

k is

a v

alue

net

of r

eins

uran

ce.

The

use

of a

low

er ri

sk fa

ctor

for “

othe

r no

n-tra

ditio

nal”

P&

C li

nes t

han

for

“tra

ditio

nal”

P&

C li

nes i

mpl

ies t

hat n

on-

tradi

tiona

l risk

s are

not

a ri

sk is

sue

for t

he

BC

R. A

dditi

onal

ly, t

his c

reat

es a

n in

cent

ive

to c

all e

very

thin

g “n

on-tr

aditi

onal

” fo

r a

P&C

com

pany

.

Cla

rify

that

the

prox

y m

easu

re fo

r non

-pro

perty

, no

n-lif

e is

cur

rent

est

imat

es n

et o

f rei

nsur

ance

. If

the

“oth

er”

non-

tradi

tiona

l lin

es fo

r non

-life

re

ceiv

e a

low

er ri

sk c

harg

e th

an tr

aditi

onal

line

s, th

en th

e no

n-tra

ditio

nal/t

radi

tiona

l dis

tinct

ion

shou

ld b

e el

imin

ated

for n

on-li

fe.

11

4, p

ar

46

Cap

ital r

esou

rces

are

de

term

ined

on

a co

nsol

idat

ed

basi

s.

Ther

e is

no

disc

ussi

on re

gard

ing

trans

ferr

ing

need

ed c

apita

l acr

oss

juris

dict

ions

.

Add

a se

nten

ce th

at st

ates

fung

ibili

ty is

not

ad

dres

sed

by th

is do

cum

ent.

12

5.1,

par

60

K

ey d

iffer

ence

bet

wee

n th

e In

tern

atio

nal F

inan

cial

R

epor

ting

Stan

dard

s (IF

RS)

an

d th

e G

ener

ally

Acc

epte

d A

ccou

ntin

g Pr

inci

ples

(G

AA

P) is

mar

gin

over

cu

rren

t est

imat

e (M

OC

E).

This

stat

emen

t ign

ores

that

the

diff

eren

ces

in d

isco

unt r

ates

are

sign

ifica

nt fo

r U.S

. G

AA

P re

porte

rs.

Add

a se

nten

ce n

otin

g th

e im

porta

nce

of d

isco

unt

rate

s for

life

/ann

uity

insu

ranc

e.

5


8/16/14



It

em

Para

grap

h R

efer

ence

C

omm

ent

Alte

rnat

ive

App

roac

h

13

Ann

ex

C

Leng

th a

nd p

resc

riptiv

e le

vel

of th

e gu

idan

ce.

The

leng

th a

nd p

resc

riptiv

e na

ture

of t

his

Ann

ex a

ppea

rs to

cre

ate

both

a se

para

te

acco

untin

g st

anda

rd a

nd n

ew a

ctua

rial

guid

ance

. We

have

sign

ifica

nt c

once

rns

with

cre

atin

g a

new

acc

ount

ing

stan

dard

and

cr

eatin

g su

ch d

etai

led

actu

aria

l gui

danc

e in

a

“prin

cipl

e-ba

sed”

fram

ewor

k. In

pa

rticu

lar,

the

exte

nt to

whi

ch th

is w

ould

be

appl

ied

(giv

en th

e lo

w n

umbe

r and

ge

ogra

phic

spre

ad o

f G-S

IIs) i

s unl

ikel

y to

re

sult

in a

leve

l of “

gene

rally

acc

epta

ble”

an

d co

mm

on p

ract

ice

in a

pplic

atio

n.

It is

bet

ter t

o le

vera

ge e

xist

ing

acco

untin

g fr

amew

orks

or u

se a

n ap

proa

ch th

at d

oes n

ot re

ly

on a

bal

ance

shee

t val

uatio

n, a

nd p

rovi

de th

e ge

nera

l obj

ectiv

es fo

r the

act

uaria

l est

imat

es,

rath

er th

an p

rovi

ding

pre

scrip

tive

stat

emen

ts o

n es

timat

ion

met

hodo

logy

.

14

Ann

ex

C, p

ar

25

Dis

coun

ting…

occ

urs w

ith a

yi

eld

curv

e re

leva

nt to

the

parti

cula

r cur

renc

y.

Bot

h G

reec

e an

d G

erm

any

use

the

sam

e cu

rren

cy, b

ut it

doe

s no

t mak

e se

nse

that

th

ey w

ould

use

the

sam

e di

scou

nt ra

tes.

Add

“an

d ju

risdi

ctio

n” to

the

sent

ence

in

ques

tion.

15

Ann

ex

C, p

ar

49

Onl

y 40

per

cent

of t

he a

ctua

l co

rpor

ate

bond

spre

ad is

us

ed fo

r the

adj

ustm

ent.

This

seem

s lik

e it

is a

ddin

g a

MO

CE

to th

e cu

rren

t est

imat

e. If

the

inve

stm

ents

are

at

mar

ket,

they

will

alre

ady

refle

ct c

redi

t- w

orth

ines

s.

6


8/16/14



It

em

Para

grap

h R

efer

ence

C

omm

ent

Alte

rnat

ive

App

roac

h

16

Ann

ex

D, p

ar 3

Fina

ncia

l ins

trum

ents

will

be

clas

sifie

d as

Cor

e Ca

pita

l on

ly if

they

do

not h

ave

a fix

ed m

atur

ity a

nd h

ave

dist

ribut

ions

that

can

be

canc

elle

d.

Will

surp

lus n

otes

be

clas

sifie

d as

Cor

e C

apita

l pur

suan

t to

Ann

ex D

, par

6?

Will

se

nior

deb

t hel

d at

the

insu

ranc

e ho

ldin

g co

mpa

ny b

e cl

assi

fied

as C

ore

Cap

ital,

if ca

sh c

anno

t be

upst

ream

ed fr

om th

e op

erat

ing

com

pany

to th

e ho

ldin

g co

mpa

ny

to p

ay su

ch d

ebt w

ithou

t sup

ervi

sory

ap

prov

al?

Spec

ify th

at su

rplu

s not

es (a

s wel

l as d

ebt a

t the

ho

ldin

g co

mpa

ny le

vel)

will

be

clas

sifie

d as

Cor

e C

apita

l whe

neve

r reg

ulat

ory

appr

oval

is re

quire

d to

rem

ove

fund

s fro

m in

sura

nce

entit

ies t

o pa

y su

ch d

ebt i

n a

dist

ress

ed si

tuat

ion.

A

nnex

D

, par

6

Cor

eC

apita

linc

lude

ssur

plus

fund

s and

con

tribu

ted

surp

lus.

We

belie

ve th

at su

rplu

s not

es (a

nd p

roce

eds

from

hol

ding

com

pany

deb

t con

tribu

ted

to

the

oper

atin

g in

sure

r) a

re c

ateg

oriz

ed

appr

opria

tely

as s

urpl

us u

nder

the

U.S

. st

atut

ory

acco

untin

g fr

amew

ork

and

belie

ve

they

shou

ld b

e si

mila

rly c

lass

ified

as C

ore

Cap

ital f

or p

urpo

ses o

f the

BC

R (a

nd u

nder

C

omFr

ame

gene

rally

).

17

Ann

ex

F, p

ar

26

Net

Am

ount

at R

isk

(NA

AR

) is

equ

al to

sum

of t

he in

sure

d m

inus

cur

rent

est

imat

e, n

et

of re

insu

ranc

e re

cove

rabl

es.

All

the

curr

ent e

stim

ates

are

gro

ss o

f re

insu

ranc

e (p

age

25, p

ar 1

0).

Rei

nsur

ance

re

cove

rabl

es a

re c

alcu

late

d an

d re

cogn

ized

se

para

tely

. So,

the

prep

arer

will

hav

e to

pul

l ou

t any

pro

tect

ion

rein

sura

nce

reco

vera

bles

fr

om th

is c

alcu

latio

n. T

hat m

ay n

ot b

e ea

sily

don

e.

Hav

e N

AA

R b

e gr

oss o

f rei

nsur

ance

.

7


8/16/14



Attachment Two International Insurance Relations (G) Committee

8/16/14


Draft: 10/7/14

International Insurance Relations (G) Committee Conference Call

July 24, 2014 The International Insurance Relations (G) Committee met via conference call July 24, 2014. The following Committee members participated: Kevin M. McCarty, Vice Chair (FL); John M. Huff represented by John Rehagen (MO); Bruce R. Ramge (NE); Kenneth E. Kobylowski (NJ); and Benjamin M. Lawsky represented by Martha Lees (NY). 1. Discussed Draft NAIC Comments on IAIS Draft Application Paper on Supervisory Colleges Commissioner McCarty noted that he would chair the meeting in the place of Commissioner Michael F. Consedine (PA), and he introduced the International Association of Insurance Supervisors (IAIS) draft Application Paper on Supervisory Colleges. He mentioned that the paper recognizes that insurance supervisors have different perspectives on and roles within supervisory colleges. He said that an effective college acknowledges these differences and tries to achieve the optimal form of cooperation considering the different perspectives. Commissioner McCarty stated that this will help supervisors learn from each other by explaining relevant experiences in and with colleges and presents good practices and examples that will help promote a common understanding for participants of supervisory colleges. Commissioner McCarty commented that the Group Solvency Issues (E) Working Group and NAIC staff reviewed the paper and provided draft comments (Attachment Two-A). He expressed a general comfort with the paper, which will be helpful to supervisors in the college context as it recognizes different approaches can result in similar outcomes. These draft comments were sent to Committee members and interested parties the previous week, but no additional comments were received. Ryan Workman (NAIC) stated the NAIC comments provide general support for the paper and include some specific editorial suggestions, in particular on the use of terms and descriptions in the paper to ensure they are accurate and reflect what is intended. Director Ramge suggested that the paper should emphasize the importance of receiving regulator feedback after each supervisory college meeting, which can then help improve relevant processes. Commissioner McCarty agreed and suggested this be added to the comments. Having no quorum, Commissioner McCarty noted that the revised comments would be circulated to Committee members for consideration of approval via e-vote so that the comments may be submitted to the IAIS by its July 25 deadline (Attachment Two-B). 2. Discussed Other Matters Commissioner McCarty noted that the Committee will meet Aug. 7 to discuss and review comments on four other IAIS draft papers out for consultation. Additionally, Commissioner McCarty commented that there would be an International Capital Standards Forum at the Summer National Meeting to discuss the development of international capital standards in an open dialogue amongst regulators and interested parties. Having no further business, the International Insurance Relations (G) Committee adjourned. W:\National Meetings\2014\Summer\Cmte\G\Gmin_July 24 2014.docx


IAIS

App

licat

ion

pape

r on

Supe

rvis

ory

Col

lege

s - N

AIC

Dra

ft C

omm

ents

J

uly

24, 2

014

Sect

ion/

Para

grap

h C

omm

ent

Gen

eral

Th

e ge

nera

l tho

ught

s an

d ex

ampl

es p

rese

nted

in th

e pa

per a

re re

leva

nt a

nd b

enef

icia

l to

supe

rvis

ors

and

parti

cula

rly h

elpf

ul

in il

lust

ratin

g ho

w th

ere

can

be c

omm

on e

xpec

tatio

ns fo

r sup

ervi

sory

col

lege

s bu

t diff

eren

t per

spec

tives

and

app

roac

hes

whi

ch c

an b

e eq

ually

effe

ctiv

e.

Ther

e ar

e so

me

cons

iste

ncy

and

min

or e

dito

rial c

hang

es th

roug

hout

the

pape

r tha

t sho

uld

be m

ade

as p

art o

f the

fina

l rev

iew

pr

oces

s (s

ee ty

pos

in p

arag

raph

20

for e

xam

ple)

and

cap

italiz

atio

n is

sues

. A

dditi

onal

ly, s

ugge

st re

view

ing

that

the

term

s in

the

defin

ition

sec

tions

are

use

d in

the

docu

men

t as

defin

ed a

nd th

at th

e re

fere

nces

to th

e IC

Ps

and

the

Com

Fram

e dr

aft s

peci

ficat

ions

are

up-

to-d

ate.

Sec

tion

1 Th

is s

ectio

n is

ver

y w

ell d

one,

put

ting

supe

rvis

ory

colle

ges,

as

wel

l as

the

appl

icat

ion

guid

ance

into

per

spec

tive.

Par

ticul

arly

he

lpfu

l is

para

grap

h 7

whi

ch re

cogn

izes

that

bes

t pra

ctic

es w

ill ev

olve

, and

that

is p

art o

f why

the

appl

icab

le g

uida

nce

as

poin

ted

out i

n pa

ragr

aph

1 sh

ould

not

be

cons

trued

as

prov

idin

g fo

rmal

gui

danc

e or

exp

ecta

tions

.

Par

agra

ph 2

Ther

e is

a re

fere

nce

to M

MoU

s bu

t thi

s sh

ould

be

chan

ged

to M

oUs

as th

is is

refe

rring

to M

emor

anda

of U

nder

stan

ding

and

no

t Mul

tilat

eral

Mem

oran

dum

of U

nder

stan

ding

.

Par

agra

ph 5

Sug

gest

cha

ngin

g th

e fo

llow

ing

sent

ence

from

“In

real

ity m

any

of c

olle

ge p

artic

ipan

ts –

but

rare

ly a

ll of

them

- ar

e al

so

sign

ator

ies

to th

e IA

IS M

MoU

for i

nfor

mat

ion

Exc

hang

e” to

“but

rare

ly a

ll of

them

pre

sent

ly”

Par

agra

ph 1

2 C

hang

e “th

e cr

eatio

n of

any

add

ition

al b

urde

n” to

“the

cre

atio

n of

any

unn

eces

sary

add

ition

al b

urde

n”

Sec

tion

2 Te

rms

and

Des

crip

tions

U

nder

the

expl

anat

ion

of “C

olle

ge p

artic

ipan

t” su

gges

t add

ing:

“Col

lege

par

ticip

ants

may

sig

n th

e co

ordi

natio

n ag

reem

ent/c

oope

ratio

n ar

rang

emen

t as

deem

ed a

ppro

pria

te”.

Und

er th

e ex

plan

atio

n of

“Coo

rdin

atio

n ag

reem

ent/c

oope

ratio

n ag

reem

ent”

repl

ace

“Lik

e a

MoU

/MM

oU, i

t is

lega

lly n

on-

bind

ing”

with

“Gen

eral

ly it

is le

gally

non

-bin

ding

in th

e se

nse

that

it d

oes

not c

reat

e en

forc

eabl

e ob

ligat

ions

from

one

su

perv

isor

to a

noth

er”

Par

agra

ph 4

5 In

ligh

t of t

he In

trodu

ctio

n se

ctio

n la

ngua

ge, i

t wou

ld b

e m

ore

appr

opria

te fo

r thi

s fir

st s

ente

nce

to n

ot b

e so

pre

scrip

tive

– su

gges

t cha

ngin

g, “…

the

GW

S w

ill ne

ed to

par

ticip

ate

in e

very

mem

bers

hip

stru

ctur

e of

the

grou

p…” t

o “…

the

GW

S m

ay

wan

t to

parti

cipa

te in

eve

ry m

embe

rshi

p st

ruct

ure

of th

e gr

oup…

”

Par

agra

ph 4

8

Sug

gest

add

ing

the

wor

ds “o

r vol

unte

ers”

to th

e fir

st s

ente

nce

to re

ad: “

if a

colle

ge m

embe

r, as

hos

t sup

ervi

sor i

s ta

sked

, or

volu

ntee

rs, t

o or

gani

ze…

”

1

Attachment Two-A International Insurance Relations (G) Committee

8/16/14



Sect

ion/

Para

grap

h C

omm

ent

Par

agra

phs

113

and

114

We

have

som

e co

ncer

n w

ith th

is s

ectio

n be

caus

e ev

en a

s ex

ampl

es, i

t may

est

ablis

h a

perc

eive

d st

anda

rd th

at m

ay b

e co

unte

rpro

duct

ive

to th

e co

llege

sin

ce it

may

ove

rem

phas

ize

solo

ent

ity in

form

atio

n an

d m

ay s

ugge

st a

ll of

thes

e ite

ms

shou

ld b

e pr

ovid

ed, w

hich

cou

ld d

iver

t atte

ntio

n aw

ay fr

om g

roup

info

rmat

ion.

It m

ay b

e ap

prop

riate

if a

spe

cific

sol

o en

tity

is

the

prim

ary

sour

ce o

f ris

k, b

ut w

e ha

ve s

ome

conc

ern

this

cou

ld b

e m

isin

terp

rete

d w

ithou

t som

e ad

ditio

nal l

angu

age

to

prov

ide

bette

r con

text

. Sug

gest

add

ing

a ne

w in

trodu

ctor

y se

nten

ce u

nder

this

sec

tion

befo

re p

arag

raph

113

to a

void

suc

h co

nfus

ion:

“Ris

k ca

n co

me

from

var

ious

asp

ect o

f the

org

aniz

atio

n an

d th

eref

ore

it m

ay b

e he

lpfu

l to

shar

e qu

antit

ativ

e an

d/or

qu

alita

tive

data

whi

ch m

ay b

e he

lpfu

l in

pinp

oint

ing

the

risks

of t

he g

roup

.” A

dditi

onal

ly, p

arag

raph

s 11

3 an

d 11

4 sh

ould

be

amen

ded

to re

info

rce

that

thes

e ar

e ex

ampl

es a

nd re

ad re

spec

tivel

y: “1

13. Q

uant

itativ

e da

ta m

ay in

clud

e on

e or

mor

e of

the

follo

win

g:” a

nd “1

14. Q

ualit

ativ

e da

ta m

ay in

clud

e on

e or

mor

e of

the

follo

win

g:”

Par

agra

phs

133

Sug

gest

add

ing

to th

e en

d of

this

par

agra

ph, “

Follo

win

g fa

ce-to

-face

col

lege

mee

tings

, sup

ervi

sors

sho

uld

cons

ider

ask

ing

parti

cipa

nts

to c

ompl

ete

an e

valu

atio

n/fe

edba

ck s

heet

. Thi

s w

ould

allo

w fo

cus

on w

hat p

artic

ular

nee

ds e

ach

colle

ge m

embe

r ex

pect

s to

take

aw

ay fr

om th

e m

eetin

gs a

nd fa

cilit

ate

impr

ovem

ents

to th

e co

llege

pro

cess

.”

Par

agra

ph 1

68

As

not a

ll re

ader

s m

ay b

e fa

mili

ar w

ith T

akaf

ul, i

t may

be

help

ful t

o pr

ovid

e a

very

brie

f foo

tnot

e ex

plan

atio

n or

def

initi

on.

2

Attachment Two-A International Insurance Relations (G) Committee

8/16/14



Attachment Two-B International Insurance Relations (G) Committee

8/16/14


Draft: 10/7/14

International Insurance Relations (G) Committee E-Vote

July 25, 2014 The International Insurance Relations (G) Committee conducted an e-vote that concluded July 25, 2014. The following Committee members participated: Michael F. Consedine, Chair (PA); Kevin M. McCarty, Vice Chair (FL); Thomas B. Leonardi, Immediate Past Chair (CT); Karen Weldin Stewart (DE); James J. Donelon (LA); Joseph G. Murphy (MA); John M. Huff (MO); Bruce R. Ramge (NE); Kenneth E. Kobylowski (NJ); Benjamin M. Lawsky (NY); Julia Rathgeber (TX); and Susan L. Donegan (VT). 1. Adopted NAIC Comments on IAIS Draft Application Paper on Supervisory Colleges The Committee conducted an e-vote to approve submission of NAIC comments to the International Association of Insurance Supervisors’ on its draft application paper on supervisory colleges (Attachment Two-A). A majority of the Committee members voted to approve submission of the comments. The motion passed. Having no further business, the International Insurance Relations (G) Committee adjourned. W:\National Meetings\2014\Summer\Cmte\G\Gmin_July 25 2014 e-vote.docx


Attachment Three International Insurance Relations (G) Committee

8/16/14


Draft: 4/30/14 International Insurance Relations (G) Committee

Conference Call April 23, 2014

The International Insurance Relations (G) Committee met via conference call April 23, 2014. The following Committee members participated: Michael F. Consedine, Chair (PA); Kevin M. McCarty, Vice Chair (FL); Joseph G. Murphy (MA); John M. Huff represented by John Rehagen (MO); Bruce R. Ramge (NE); Kenneth E. Kobylowski (NJ); Benjamin M. Lawsky represented by Michael Sheiowitz (NY); Julia Rathgeber represented by Danny Saenz (TX); and Susan L. Donegan (VT). 1. Adopted NAIC Comments on the IAIS Draft Issues Paper on Approaches to Group Corporate Governance – Impact on

Control Functions Commissioner Donegan reported that the International Association of Insurance Supervisors (IAIS) released its draft Issues Paper on Approaches to Group Corporate Governance – Impact on Control Functions for consultation on March 21. The paper was drafted by the IAIS Governance and Compliance Subcommittee (GCS) with the purpose of providing insights into the implications that arise for insurance groups and their approaches to governance, including in the context of the IAIS Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). She said the paper illustrates that there is not a “one-size-fits-all” approach to group-wide corporate governance and that insurers within groups may perform corporate governance differently, depending on how the group is structured, along a continuum of centralized versus decentralized approaches. Commissioner Donegan stated that the paper is intended to be useful to the IAIS as it continues work on ComFrame and informative for supervisors when reviewing insurance groups in their jurisdiction. Additionally, it is intended to create awareness and illustrate practices for good governance to insurance groups on issues they need to consider and address when setting up and assessing the effectiveness of the corporate governance framework of their group. Commissioner Donegan noted that, per the usual process, members of the relevant NAIC working group, in this case the Corporate Governance (E) Working Group, and NAIC staff reviewed and provided draft comments (Attachment Three-A), which were sent to the Committee members and interested parties. She stated that one Committee member sent a comment supporting the draft NAIC comments, but no other comments were received. Commissioner Donegan explained that while a number of the comments on the paper were editorial in nature, the NAIC had some general and a few more specific comments about the tone of the paper, which sometimes suggests a level of prescriptiveness that should not be used in an IAIS issues paper. She noted that this was not the intent of the GCS and instead likely a result of drafting style and word choice that should be resolvable as the paper is finalized. Commissioner Consedine asked whether the IAIS issues paper provides help and whether it relates to the current work at the state level on supervisory aspects of corporate governance. Commissioner Donegan responded that both recognize the need to not be overly prescriptive and that supervisors need certain information in order to better understand the corporate governance of insurers, but it is not the role of supervisors to tell companies how to run and organize their business because there is no one-size-fits-all approach. Commissioner Murphy made a motion, seconded by Commissioner Kobylowski, to submit the NAIC comments to the IAIS on its draft issues paper. The motion passed. 2. Discussed Other Matters Commissioner Consedine noted that there are a number of other international activities, with updates to be provided at future Committee meetings. He said the issues of mutual recognition and equivalence would be discussed at upcoming U.S./European Union (EU) events in Washington, DC. He also noted that the NAIC International Insurance Forum would take place May 13–14 in Washington, DC, and would feature panels and speakers on a variety of topics. Having no further business, the International Insurance Relations (G) Committee adjourned. W:\National Meetings\2014\Summer\Cmte\G\Gmin_April 23 2014.docx


Issu

es P

aper

on

App

roac

hes

to G

roup

Cor

pora

te G

over

nanc

e: Im

pact

on

Con

trol

Fun

ctio

ns –

Dra

ft N

AIC

Com

men

ts

0

4/15

/201

4 Se

ctio

n / p

arag

raph

C

omm

ent

Gen

eral

com

men

ts

The

gene

ral

thou

ghts

and

iss

ues

pres

ente

d in

the

pap

er a

re r

elev

ant

and

bene

ficia

l to

ins

urer

s an

d su

perv

isor

s an

d pa

rticu

larly

hel

pful

in il

lust

ratin

g ho

w a

one

-siz

e-fit

s-al

l app

roac

h do

es n

ot w

ork

with

in C

omFr

ame.

In

som

e pa

rts o

f the

pap

er, t

here

is a

tone

of d

efin

itive

ness

or c

erta

inty

(for

exa

mpl

e: to

ens

ure

x do

y; t

o ac

hiev

e x

do y

) w

hich

in s

ome

case

s ru

ns c

ontra

ry to

the

purp

oses

of t

he p

aper

to h

ighl

ight

issu

es a

nd il

lust

rate

diff

eren

t app

roac

hes.

As

the

pape

r con

tain

s a

num

ber o

f gro

up g

over

nanc

e ch

alle

nges

and

sub

sequ

ent p

ract

ices

, it i

s im

porta

nt th

at th

ese

are

seen

as

sug

gest

ive

or a

s ex

ampl

es; o

ther

wis

e on

e co

uld

com

e aw

ay w

ith th

e im

pres

sion

that

thes

e ar

e th

e on

ly c

halle

nges

and

th

e on

ly s

olut

ions

. As

the

pape

r was

not

writ

ten

with

this

inte

nt, t

his

is m

ostly

a d

rafti

ng s

tyle

issu

e th

at c

ould

be

reso

lved

in

the

final

edi

toria

l rev

isio

n of

the

pape

r. A

dditi

onal

ly, t

here

are

som

e co

nsis

tenc

y an

d m

inor

edi

toria

l cha

nges

that

sho

uld

be m

ade

as p

art o

f fin

aliz

ing

the

pape

r.

Sec

tion

1.1,

par

agra

ph

3 c

The

prac

tices

pro

vide

d in

the

pap

er m

ay b

e in

sigh

tful

to i

nsur

ers

and

supe

rvis

ors

but

they

can

not

ensu

re t

hat

good

go

vern

ance

is

achi

eved

thr

ough

fol

low

ing

them

. In

stea

d, t

he o

bjec

tives

of

high

light

ing

certa

in p

ract

ices

sho

uld

be t

o pr

ovid

e su

gges

tions

and

tho

ught

s re

gard

ing

how

cer

tain

ris

ks a

ssoc

iate

d w

ith v

ario

us g

over

nanc

e st

ruct

ures

mig

ht b

e re

duce

d. T

he u

se o

f “en

sure

” thr

ough

out t

he p

aper

sho

uld

be c

heck

ed s

o th

at a

ppro

pria

te e

xpec

tatio

ns a

re b

eing

set

. S

ectio

n 1.

2, p

arag

raph

7

As

the

expl

anat

ion

of th

e ce

ntra

lized

app

roac

h an

d th

e de

cent

raliz

ed a

ppro

ach

are

key

to th

is p

aper

, sug

gest

thes

e be

set

of

f in

sepa

rate

bul

lets

so

they

hav

e m

ore

prom

inen

ce. A

dditi

onal

ly, s

ome

of th

e m

ater

ial i

n th

is p

arag

raph

is r

epea

ted

in

para

grap

hs 3

6 an

d 39

. To

avoi

d du

plic

atio

n, s

ugge

st d

elet

ing

para

grap

hs 3

6 an

d 39

but

mov

e th

e no

n-re

petit

ive

text

in

thos

e pa

ragr

aphs

to th

e re

leva

nt p

arts

of p

arag

raph

7.

Sec

tion

3.1,

gen

eral

A

s th

is s

ectio

n hi

ghlig

hts

rele

vant

mat

eria

l fro

m th

e IC

Ps,

the

pres

enta

tion

of IC

P m

ater

ial s

houl

d be

don

e in

a c

onsi

sten

t m

anne

r – s

uch

as p

rovi

ding

dire

ct q

uote

s an

d/or

hig

h-le

vel s

umm

arie

s w

ith re

leva

nt fo

otno

tes

citin

g th

e or

igin

. Oth

erw

ise,

pa

raph

rasi

ng c

ould

uni

nten

tiona

lly l

ead

to m

isin

terp

reta

tion.

Pro

per

cita

tions

inf

orm

the

rea

der

as t

o w

heth

er t

he I

CP

mat

eria

l bei

ng m

entio

ned

is a

t the

prin

cipl

e, s

tand

ard

or g

uida

nce

leve

l, w

hich

mak

es a

diff

eren

ce.

Sec

tion

3.1,

pa

ragr

aphs

19

and

20

Sug

gest

del

etin

g th

ese

para

grap

hs.

ICP

23 i

s cu

rrent

ly u

nder

rev

iew

and

it

is u

ncle

ar w

heth

er t

he I

CP

23

mat

eria

l re

fere

nced

in

para

grap

h 19

will

be

incl

uded

in

the

revi

sed

vers

ion;

add

ition

ally

the

las

t se

nten

ce r

epea

ts w

hat

is i

n pa

ragr

aph

18 a

nd e

lsew

here

. The

mat

eria

l on

ICP

25 in

par

agra

ph 2

0 is

not

spe

cific

to g

roup

gov

erna

nce

and

the

need

for

supe

rvis

ory

coop

erat

ion

as re

quire

d by

ICP

25

is m

entio

ned

late

r in

para

grap

h 71

. S

ectio

n 4.

1, g

ener

al

Whi

le th

is s

ectio

n ap

pear

s ge

nera

lly c

onsi

sten

t with

ICP

7, t

he e

xpec

ted

role

s an

d re

spon

sibi

litie

s of

the

Boa

rd m

ay s

eem

ov

erly

asp

iratio

nal,

whe

reas

the

exp

ecte

d ro

les

and

resp

onsi

bilit

ies

of S

enio

r M

anag

emen

t m

ay s

eem

ove

rly s

impl

ified

. Fo

r exa

mpl

e, w

hile

U.S

. sta

te in

sura

nce

supe

rvis

ors

typi

cally

exp

ect t

he B

oard

to re

view

and

app

rove

the

over

all s

trate

gy

of th

e or

gani

zatio

n, s

trate

gy fo

rmul

atio

n an

d de

velo

pmen

t is

typi

cally

the

resp

onsi

bilit

y of

the

CE

O a

nd o

ther

mem

bers

of

Sen

ior

Man

agem

ent.

Ther

efor

e, e

xpec

tatio

ns l

imiti

ng S

enio

r M

anag

emen

t’s r

ole

to d

ay-to

-day

man

agem

ent

with

no

resp

onsi

bilit

ies

for s

trate

gic

plan

ning

and

vis

ion

may

be

som

ewha

t mis

lead

ing.

The

refo

re, w

e su

gges

t tha

t thi

s se

ctio

n an

d th

e di

agra

m b

e m

odifi

ed to

refle

ct a

mor

e pr

actic

al e

xpec

tatio

n re

gard

ing

the

role

s of

the

Boa

rd a

nd S

enio

r Man

agem

ent.

1

Attachment Three-AInternational Insurance Relations (G) Committee

8/16/14



Sect

ion

/ par

agra

ph

Com

men

t S

ectio

n 4.

2,

para

grap

hs 3

0 an

d 31

S

ome

of th

e m

ater

ial i

n th

ese

para

grap

hs r

epea

ts w

hat w

as a

lread

y st

ated

in p

arag

raph

6. S

ugge

st c

ombi

ning

thes

e tw

o pa

ragr

aphs

but

del

ete

the

last

sen

tenc

e in

30

and

the

first

sen

tenc

e in

31.

S

ectio

n 4.

3, p

arag

raph

23

S

ugge

st m

akin

g th

e lis

t of

key

cha

ract

eris

tics

mor

e co

nsis

tent

with

how

the

y ar

e de

scrib

ed l

ater

in

the

pape

r in

su

bsec

tions

of S

ectio

n 5

and

para

grap

h 76

. In

the

form

er, r

isk

man

agem

ent a

nd c

ompl

ianc

e ar

e lis

ted

sepa

rate

ly (d

and

e)

and

in t

he l

atte

r th

ese

have

bee

n co

mbi

ned.

Add

ition

ally

, th

e la

st k

ey c

hara

cter

istic

on

cont

rol

func

tions

inc

lude

s co

mpl

ianc

e so

it is

som

ewha

t con

fusi

ng to

hav

e co

mpl

ianc

e as

a s

epar

ate

key

char

acte

ristic

.

Sec

tion

4.3,

par

agra

ph

33

Sug

gest

this

par

agra

ph m

ove

unde

r the

Sec

tion

4.4

head

ing

as it

intro

duce

s th

e in

dust

ry e

xam

ples

.

Sec

tion

4.4,

gen

eral

W

hile

the

var

ious

exa

mpl

es/m

odel

s pr

esen

ted

in t

his

sect

ion

are

illust

rativ

e, t

he g

over

nanc

e in

form

atio

n ea

ch e

xam

ple

cont

ains

var

ies,

whi

ch m

ay li

mit

the

ultim

ate

valu

e th

ey p

rovi

de.

For

exam

ple,

the

firs

t m

odel

dis

cuss

es h

ow a

ctua

rial

prac

tices

are

con

duct

ed th

roug

hout

the

orga

niza

tion,

whi

ch is

not

dis

cuss

ed fo

r an

y of

the

othe

r m

odel

s. A

s th

e m

odel

s ar

e in

tend

ed to

pre

sent

exa

mpl

es o

f the

var

ious

type

s of

gov

erna

nce

appr

oach

es th

at e

xist

, the

diff

eren

ces

betw

een

the

vario

us a

ppro

ache

s m

ay b

e ea

sier

to

unde

rsta

nd if

con

sist

ent

elem

ents

of

gove

rnan

ce in

form

atio

n w

ere

disc

usse

d fo

r ea

ch m

odel

. S

ectio

n 4.

4, E

xam

ple

1 E

xam

ple

1 st

ates

that

“the

re is

no

grou

p-w

ide

unde

rwrit

ing

polic

y, a

s th

e di

vers

ity o

f pro

duct

s th

e gr

oup

offe

rs m

akes

suc

h a

polic

y un

war

rant

ed a

nd im

prac

tical

. How

ever

, und

erw

ritin

g po

licie

s ar

e se

t by

busi

ness

uni

ts.”

Whi

le th

e N

AIC

agr

ees

that

a g

roup

-wid

e un

derw

ritin

g po

licy

may

not

alw

ays

be a

ppro

pria

te, p

artic

ular

ly u

nder

thes

e ci

rcum

stan

ces,

suc

h a

polic

y ap

pear

s to

be

requ

ired

unde

r M

2E4-

4 in

the

curr

ent d

raft

of C

omFr

ame.

Is th

is e

xam

ple

a si

tuat

ion

whe

reby

the

“gro

up-

wid

e un

derw

ritin

g po

licy”

is th

at th

e in

divi

dual

bus

ines

s un

its w

ithin

the

grou

p se

t the

ir ow

n un

derw

ritin

g po

licie

s? If

so,

the

text

in th

is e

xam

ple

shou

ld b

e re

vise

d ac

cord

ingl

y. O

ther

wis

e, th

is s

ugge

sts

that

wha

t may

qua

lify

as a

gro

up-w

ide

polic

y un

der C

omFr

ame

is m

uch

mor

e pr

escr

iptiv

e, w

hich

is c

ontra

ry to

the

findi

ngs

of th

is Is

sues

pap

er.

Sec

tion

5 –

gene

ral

Var

ious

par

agra

phs

with

in S

ectio

n 5

sugg

est

prac

tices

to

addr

ess

the

chal

leng

es li

kely

to

aris

e in

est

ablis

hing

a m

ore

cent

raliz

ed o

r dec

entra

lized

app

roac

h to

cor

pora

te g

over

nanc

e. W

hile

a n

umbe

r of t

he s

ugge

sted

pra

ctic

es a

ppea

r hel

pful

to

insu

rers

and

sup

ervi

sors

, oth

er p

ract

ices

app

ear

to b

e so

mew

hat p

resc

riptiv

e in

nat

ure

and

pote

ntia

lly li

mite

d in

thei

r ap

plic

abili

ty t

o va

rious

org

aniz

atio

ns.

Thus

it s

houl

d be

cle

ar t

hat

thes

e ar

e su

gges

tions

and

just

a f

ew o

f th

e po

ssib

le

solu

tions

giv

en th

e va

riety

of a

ppro

ache

s to

gov

erna

nce

IAIG

s m

ay ta

ke a

nd th

e re

sulti

ng c

halle

nges

. S

econ

dly,

the

pape

r m

akes

it c

lear

that

reg

ardl

ess

of w

heth

er a

gro

up fo

llow

s a

mor

e ce

ntra

lized

or

mor

e de

cent

raliz

ed

appr

oach

to c

orpo

rate

gov

erna

nce

ther

e w

ill b

e ch

alle

nges

in e

ffect

ivel

y ov

erse

eing

its

oper

atio

ns a

nd s

olve

ncy

posi

tion.

H

owev

er,

som

e pa

rts o

f th

is s

ectio

n se

em t

o ov

ersi

mpl

ify is

sues

by

reco

mm

endi

ng t

hat

grou

ps f

ollo

win

g a

cent

raliz

ed

gove

rnan

ce a

ppro

ach

inco

rpor

ate

certa

in d

ecen

traliz

ed p

ract

ices

and

vic

e-ve

rsa.

Add

ition

ally

, so

me

of t

he s

ugge

sted

pr

actic

es id

entif

ied

may

be

help

ful r

egar

dles

s of

whi

ch a

ppro

ach

is ta

ken.

Thu

s a

revi

ew o

f the

sug

gest

ed p

ract

ices

may

he

lp im

prov

e th

is s

ectio

n.

Sec

tion

6, p

arag

raph

71

S

ugge

st d

elet

ing

a) a

nd b

) as

the

mat

eria

l con

tain

ed th

erei

n is

not

gro

up-g

over

nanc

e sp

ecifi

c, n

or n

eces

sary

to m

ake

the

poin

t of t

he o

vera

ll pa

ragr

aph.

2

Attachment Three-AInternational Insurance Relations (G) Committee

8/16/14



Attachment Four

International Insurance Relations (G) Committee 8/16/14


Draft: 8/29/14

ComFrame Development and Analysis (G) Working Group Louisville, Kentucky

August 16, 2014 The ComFrame Development and Analysis (G) Working Group of the International Insurance Relations (G) Committee met in Louisville, KY, Aug. 16, 2014. The following Working Group members participated: Kevin M. McCarty, Chair (FL); John Loughran (CT); Cindy Donovan (IN); John Turchi (MA); John Rehagen (MO); Bruce R. Ramge (NE); Kenneth E. Kobylowski (NJ); Benjamin M. Lawsky (NY); Steve Johnson (PA); Julie Mix McPeak (TN); Doug Slape (TX); and David Smith (VA). Also participating was: Susan Donegan (VT). 1. Adopted its June 5 Minutes Commissioner Kobylowski made a motion, seconded by Commissioner McPeak, to adopt the Working Group’s June 5 minutes (Attachment Four-A). The motion passed. The ComFrame Development and Analysis (G) Working met in regulator-to-regulator session July 23, June 26, June 10 and May 19 pursuant to paragraph 8 (consideration of strategic planning issues relating to federal legislative and regulatory matters or international regulatory matters) of the NAIC Policy Statement on Open Meetings. 2. Heard an Update on the Field Testing Process of the IAIS ComFrame

Ramon Calderon (NAIC) said the International Association of Insurance Supervisors’ (IAIS) Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) document was finalized earlier this year and is now subject to field testing over a period of three years. He commented that Module 1 of ComFrame was field tested earlier in the year, which included a review of the criteria for defining an IAIS and a survey of member jurisdictions’ authority over holding companies. Most recently, field testing has focused on quantitative testing of 33 volunteers, which includes the submission of a quantitative questionnaire and a related data template, largely to assist in the development of a basic capital requirements (BCR) for global systemically important insurers (G-SIIs) and to understand the impact of capital resources based on the definitions in ComFrame. He added the quantitative testing will continue over the three-year field testing period and that the next data submission will include an evaluation of how simple stresses affect the balance sheet under specified valuation bases. Mr. Calderon stated that as the development of the IAIS global insurance capital standard (ICS) begins, the next iteration of quantitative testing will be tailored to obtain information to support the development of the ICS. He added that field testing also includes qualitative aspects, with testing of those aspects of Module 2 beginning in October, and that testing of the supervisory processes in Module 3 will begin in 2015. Commissioner McCarty asked whether field testing of Module 2 had resulted in any changes as to how capital resources are currently defined in ComFrame. Mr. Calderon replied that initial field testing results do not indicate any adverse findings related to the definitions of capital resources but that further analysis continues by the IAIS Field Testing Task Force. 3. Discussed IAIS Capital Developments Commissioner McCarty noted that in addition to ComFrame, the IAIS is also working on development of global group-wide capital standards on two separate but related fronts: 1) the BCR and higher loss absorbency (HLA) for G-SIIs; and 2) the ICS for all internationally active insurance groups. Commissioner Kobylowski reported that the BCR is the main priority of the IAIS at the moment and that several NAIC staff members are directly involved in this work, which is expected to deliver a comparable base capital upon which to add HLA capital requirements for G-SIIs. On July 9, the IAIS released its second consultation document on BCR, which sought input on a specific proposal to facilitate the final design and calibration of the BCR and a proposal that BCR required capital will be calculated on a consolidated group-wide basis, with all holding companies, insurance legal entities, banking legal entities and any other service companies included in the consolidation. The proposal is for the BCR to be constructed in three basic


Attachment Four



components: 1) an insurance component; 2) a banking component; and 3) a component for other non-insurance, non-banking activities not currently subject to regulatory capital requirements. The initial factors and general level of the BCR for the insurance component were established using data provided by 33 volunteers from various jurisdictions, including eight from the U.S., and through use of supervisory judgment. Commissioner Kobylowski said members of the Working Group and NAIC staff developed comments on this consultation paper, which were discussed and approved for submission by the International Insurance Relations (G) Committee. The proposed BCR, with any modifications made as a result of comments received during the consultation process, is expected to be approved by the IAIS and go to the Financial Stability Board (FSB) this fall for its review before going to G20 Leaders Summit for endorsement in November. He noted that it is expected that data coverage and quality will be improved over time, and the BCR will be refined over the next few years. In addition, given the potential for future refinement, one of the NAIC comments in the consultation highlighted that if initial revisions result in materially different results than those portrayed in the consultation paper, it may be necessary for the IAIS to have another round of consultation. Commissioner Kobylowski said the BCR is a capital standard only in combination with HLA and that the combined BCR + HLA is scheduled to start applying to G-SIIs in 2019. He noted initial drafting discussions have begun on the HLA, and a preliminary consultation paper is expected to be released in December 2014, with a final HLA proposal expected in the fall of 2015. Discussion so far at the IAIS has centered on whether HLA uplift will be broad-based on the entire BCR or focused on nontraditional, non-insurance activities measured in the BCR that generate systemic risk. He added it is yet to be determined whether the IAIS will target an overall calibration level for the combined BCR + HLA or have separate targets for each component. The suggestion that the BCR will be refined over time while a final proposal on HLA will be completed next year leaves open some questions of timing and coordination of these two elements. He said HLA also continues to be a topic of discussion in terms of how it will transition from using the BCR as its base to using the ICS as its base. Commissioner McPeak reported that the IAIS has started developing initial thoughts on the ICS earlier this year, with the IAIS holding an observer hearing on the ICS at its June meetings in Québec. She noted the ICS is on a tight timeline, with testing of the proposed ICS construct scheduled from 2015 to 2016 and the development of the ICS to be completed by the end of 2016. The IAIS is drafting an initial public ICS consultation document to be released by the end of 2014. She added that following further testing and refinement, a final ICS is expected by the end of 2018, and implementation of ComFrame, which includes the ICS, by the various IAIS members is expected to start thereafter. Commissioner McCarty commented that the NAIC had held an International Capital Standards Forum the previous day, with the purpose of having an interactive discussion on the development of an ICS, focusing on three main topics: 1) the goals and the benefits, costs and consequences of an ICS; 2) the realities of developing a global ICS, including the hurdles that need addressing in order to develop a global ICS and whether these can be overcome; and 3) approaches for developing a global ICS, looking at feasible and practical versions of a global ICS that would complement the national system of state-based insurance regulation in the U.S. He noted there were more than 200 attendees, including state insurance regulators, federal colleagues, state legislators, consumer representatives and industry representatives. Commissioner McCarty said the forum was just the beginning of these important discussions and summarized the comments and issues raised, including: 1) there is a need for greater clarity on the objectives of a global ICS; 2) views on resolution and fungibility of capital will be important in considering where group capital should be located; 3) valuation is a key consideration, and forcing one approach over another could affect the ability to offer certain products and contribute to systemic risk; 4) the use of internal models has its place, but a one-size-fits-all approach would not allow insurers to reflect their own unique risks; 5) an ICS is just part of a capital adequacy assessment tool that could be particularly helpful in the supervisory college context; 6) U.S. regulators and interested parties need to look at potential approaches for developing a group capital standard that is appropriate for the U.S. market and regulatory system. Steve Broadie (Property Casualty Insurers Association of America—PCI) asked how revisions to ComFrame would be handled as field testing and the development of the ICS moves forward and whether there would be the same level of transparency as was provided in the document development phase. Mr. Calderon explained that there would be draft revisions made to ComFrame as a result of the field testing process, but two additional consultations were already planned before the final draft would be adopted in 2018. Thus, there would be opportunity for interested party review and input.


Attachment Four



Wally Givler (Northwestern Mutual) commented that during the International Capital Standards Forum, several different suggested approaches were referenced, and he asked what the next steps would be in moving proposals forward. Commissioner McCarty responded that the process had begun to assess where this project would fit within the NAIC structure and what the related charge would be. He added that the NAIC needs to move quickly on this project and asked interested parties to submit any proposals to NAIC staff for review. Michelle Rogers (National Association of Mutual Insurance Companies—NAMIC) noted concerns on proposed changes to the IAIS policies and procedures on stakeholder input, which would affect interested parties’ abilities to follow and contribute to these developments. She also questioned whether the timing of the development of the ICS was appropriate given the challenges it presents. Commissioner McCarty noted that the IAIS stakeholder procedures would be discussed at the International Insurance Relations (G) Committee and that the IAIS had committed to a deadline on the ICS. Having no further business, the ComFrame Development and Analysis (G) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\G\CDAWG\08-CFDAWGmin.docx


Attachment Four-A International Insurance Relations (G) Committee

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Draft: 8/12/14

ComFrame Development and Analysis (G) Working Group Conference Call

June 5, 2014 The ComFrame Development and Analysis (G) Working Group of the International Insurance Relations (G) Committee met via conference call June 5, 2014. The following Working Group members participated: Kevin M. McCarty, Chair (FL); John Loughran (CT); Pam Walters (IN); John Turchi (MA); John Rehagen (MO); Christy Neighbors (NE); Kenneth E. Kobylowski (NJ); Michael Sheiowitz (NY); Teresa Saldana (TX); and David Smith (VA). 1. Discussed the IAIS Memorandum to Observers on Global Insurance Capital Standard Commissioner McCarty said the purpose of the call was to discuss and hear comments from interested parties on the development of the International Association of Insurance Supervisors’ (IAIS) global international capital standard (ICS), in particular focusing on the memorandum to IAIS observers that will the basis for a hearing at the IAIS meeting later in June. He noted that the memo was a prelude to further IAIS discussions that will culminate in a full consultation paper that is expected to be released in December. Commissioner McCarty said the overall approach to developing and implementing the ICS currently includes group scope, underlying financial data and the components of an ICS ratio, and it will be part of the IAIS Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). In the discussions at the IAIS, the NAIC has favored an approach that has minimum impact on current group-wide financial reporting for internationally active insurance groups (IAIGs) and has supported narrowing the scope of the group from the full consolidated level used for the basic capital requirements (BCR) to as low as the insurance holding company level for the ICS. He noted that continued support for maximum use of supervisory colleges has also been expressed. Steve Broadie (Property Casualty Insurers Association of America—PCI) expressed several concerns on the overall approach such as how qualified capital resources are being defined, including subordinated debt, and that definitions are not clear, the aims seem contradictory and more focus should be on policyholder protection. Jeff Alton (CNA Financial) commented that the memo raises several questions and suggested that a benchmark would be helpful for jurisdictions that need to develop a group-wide capital assessment. He questioned whether the U.S. could develop such a group-wide assessment while maintaining existing supervisory structures. Pooja Rahman (New York Life) commented that with the overall approach to an ICS, valuation and the lack of fungibility of capital are still issues that need to be addressed. Michelle Rogers (National Association of Mutual Insurance Companies—NAMIC) asked whether the ICS is intended to be a baseline standard, and, if so, the IAIS should be looking at it as a minimum capital requirement (MCR), not a prescribed capital requirement (PCR). She questioned whether the ICS was intended to be on top of existing jurisdictional capital requirements or intended to be part of them. Commissioner McCarty said the memo generally describes the aims of the ICS by itself, which include establishment of a globally comparable risk-based measure of capital adequacy, support of financial stability and policyholder protection, and replacing the BCR as a base for higher loss absorbency (HLA). Mr. Broadie commented that the stated aims are laudable but questioned whether they were practical, noting that the overriding aim of policyholder protection seems to get lost. Mr. Alton questioned the need for a separate balance sheet and suggested that the IAIS should start with consolidated balance sheets to develop the ICS. Ralph Blanchard (Travelers Companies) commented that valuation has not been an issue for the property/casualty industry worldwide and that one valuation approach for one product does not work for all insurance products; thus, the ICS should not use a broad brush approach to valuation.



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Commissioner McCarty said the memo relates to the issue of balance sheet valuation for the exposure proxies that will be used to establish the ICS requirement and the capital resources that will be used to meet the requirement. He added that the NAIC has not supported a single accounting or valuation basis that disproportionately requires U.S. groups to maintain an additional set of books besides the company-based statutory accounting principles (SAP) valuations and group-based U.S. generally accepted accounting principles (GAAP). Mr. Alton raised concerns about the treatment of senior debt due to the amount held by the typical U.S. stock company and of deferred taxes, which may make up a large portion of a company’s balance sheet. Commissioner McCarty said the memo addresses qualifying capital resources and the tiering approach taken in ComFrame. He noted that a core capital component of 50% appears reasonable in line with the definitions the IAIS Solvency Subcommittee developed as part of ComFrame; however, the importance of core capital in displaying a ratio that applies to systemically important groups, along with how that ratio would evolve when HLA is added to the equation, are topics of current discussion at the HLA Drafting Group. Mr. Broadie commented that the tiering approach is a banking concept that did not necessarily make sense or seem appropriate for an ICS. Commissioner McCarty said there are several questions in the memo relating to the issue of whether full or partial group internal models should be allowed in the ICS calculation. There is concern that use of group-specific internal capital models can actually work against comparability across jurisdictions, which would be contrary to the ICS’ main objective. He noted that the NAIC believes that discussion of internal models at this juncture is an unnecessary distraction to the other tasks of developing the BCR and HLA, and that the NAIC would generally favor concentrating on a standard approach before any discussion of potential use of internal models. Mr. Broadie saw the use of partial models but had concerns about using full models; in order to reach the goal of comparability, models would have to be dictated to insurers, which would not be appropriate. Mr. Blanchard commented that is was important to distinguish between the use of internal models versus external models, which are used for catastrophe risk. Joseph Sieverling (Reinsurance Association of America—RAA) added that, for reinsurers, there are several risks for which there are no third-party models, so reinsurers cannot rely only on such third-party models. Commissioner McCarty said the memo sets out a brief rationale for two target criteria that will be tested for the ICS. From the NAIC perspective, it is not clear that any single target criteria will produce rational capital requirements across jurisdictions and that it does not recognize other compensating features such as those used within the U.S. insurance solvency framework. He added that the memo addresses the calibration of the PCR, which is the level above which no regulatory action is required, similar to the company action level and trend test in the RBC formula. Mr. Alton noted that, while it could make sense for the ICS to be linked to a PCR, there needs to be more explanation about what this would mean for companies and for supervisors, as well as potential expense in adding a new layer of capital requirements. Commissioner McCarty said the memo touches on other aspects of the supervisory capital adequacy assessment process that would work in tandem with an ICS. There is a question about whether the framework should result in clearly defined and enforceable actions for breach of the ICS requirement or a more flexible approach. He added that the U.S. solvency framework has always focused on the importance of other regulatory elements in addition to capital requirements; however, state insurance supervisors do have clearly defined enforceable actions for breach of RBC action levels, which would seem appropriate for an ICS calibrated to recognize the other elements of a supervisory framework. So the level of the ICS and flexibility to recognize other solvency protections both above and below action level triggers areas is where the NAIC will be interested in monitoring and in shaping developments. Mr. Broadie supported using a flexible approach and added that using flexibility would be consistent with the NAIC’s approach to ComFrame. He added that an insurer’s supervisory colleges would be an appropriate place to determine what the action should be.



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Commissioner McCarty thanked the interested parties for their input and noted that discussions on the development of the ICS would continue. He noted that the other major IAIS capital development currently being discussed is the BCR, which would be out for consultation over the summer. Having no further business, the ComFrame Development and Analysis (G) Working Group adjourned. W:\National Meetings\2014\Summer\Cmte\G\CDAWG\G_CDAWGmin_June 5 2014.docx
