Impact of the Financial Crisis and Lessons
Learnt
Rob Curtis
Regional Information Session, Cape Town
5 March 2010
Outline
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5 March 2010
General Observations
Group Supervision Framework
Macro-level Supervision
Group Risk Assessment
Group Governance Assessment
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General Observations
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The impacts of the financial crisis have been substantial
and accordingly there are many organisations and others
reflecting on the causes of the crisis and the lessons to be
learned.
Some of the main problems that were demonstrated
during 2008 and up to now, and which need to be
addressed by enhanced group-wide supervision, can be
summarised as follows:
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Cape Town
5 March 2010
Lack of oversight and monitoring of non-regulated
subsidiaries/activities
Legal and legislative limitations on insurance group
supervision
Quality and content of both regulatory structure and
supervisory practice
Lack of coordination of responsibilities / established
coordination mechanisms between supervisors
Lack of effective tools to minimise regulatory arbitrage on a
cross sector and cross border basis
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Group Supervision Framework
- The potential for a more robust legal framework to
facilitate supervision of groups on a holistic basis
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To enhance supervisory cooperation, convergence
and information exchange
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5 March 2010
Highly centralised groups make it almost impossible to
adequately address the risks at a solo level and to rely
on data/information received at that level.
The crisis demonstrated that in stressed conditions,
supervisory cooperation and information sharing are
crucial
Role of supervisory colleges in assessing the investment
policies of a particular group at the group level, as well
as the risk management and internal control
mechanisms of the group.
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Group Supervision Framework
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Supervisors need to share information and discuss crossborder threats to financial stability and the overall financial
soundness of the insurance industry.
Supervisors need to develop the same high minimum
standards, otherwise possibilities for regulatory arbitrage
may arise. This would strengthen mutual recognition of
supervisory practices and foster supervisory equivalence.
The quality of regulation and supervision across
jurisdictions needs to be aligned in order to close any
regulatory loopholes and to avoid regulatory arbitrage.
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Macro-level Supervision
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To strengthen macro-prudential capabilities
• One lesson learnt in this crisis is that a micro-prudential
view on individual entities alone is not sufficient and needs
to be supplemented by a macro-prudential risk
assessment.
• The FSF/FSB, IMF and other institutions are currently
working on possible approaches.
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Macro-level Supervision
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To consider aspects of procyclicality
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To consider issues of cross-sectoral consistency
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5 March 2010
Regulatory regimes may become procyclical especially in times
of stress and this needs to be addressed by insurance
supervisors e.g. credit risk. Capital requirements should be
modelled appropriately and can be supported by other
measures like stress testing exercises concerning, for example,
credit risk.
Procyclicality or remuneration might be issues where crosssectoral cooperation may be of relevance. Although the extent
of the relevance of those issues could be different between the
sectors, possibilities for regulatory arbitrage between insurance
and banking have to be addressed.
The Joint Forum has developed work streams where the IAIS is
involved in establishing cross-sectoral views (vis-à-vis just
insurance specific views) on issues such as the treatment of offbalance sheet vehicles, the differentiated nature of the scope of
supervision (including treatment of participations and oversight
over non-regulated entities) and the scope of financial
conglomerate supervision in general.
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Group Risk Assessment
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To provide a comprehensive framework for
solvency assessment and supervision
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National supervisors as well as international standardsetters need to work on their own capabilities in this
respect.
– To close any regulatory and supervisory gaps in
group-wide supervision and to eliminate contagion
risks
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5 March 2010
It became very clear that effective supervision needs to
look at all parts of a group that could have implications
for the financial soundness of it to achieve adequate
policyholder protection for the group entities.
Non-regulated entities within a group can otherwise have
serious implications towards other parts of it.
Supervisors need to recognise the possible contagion
lines between different parts of an insurance group as
well as reputational risks.
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Group Risk Assessment
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To adequately address
diversification/concentration risk at group level
(for both assets and liabilities) and
transferability/fungibility of asset/capital
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To adequately address intra-group liquidity risk
exposure
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5 March 2010
Supervisors should take a comprehensive approach in
evaluating any diversification and concentration of risks
at the group level and the ability of the group to transfer
capital while maintaining an adequate distribution of
capital within the group. This is valid for the asset side
as well as the liability side of the balance sheet.
Liquidity may also be transferred from different parts of a
group towards others. This can have difficult implications
especially in the case of financial conglomerates with
banking, insurance and non-regulated or underregulated business.
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Group Governance Assessment
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To address complexity and increase transparency and
disclosure
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To enhance corporate governance/risk management
frameworks to reflect the complex nature of large
international insurance groups
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5 March 2010
Overly complex legal or operating group structures in different
legal environments might hinder proper supervision.
Disclosure rules/requirements of groups may need to be
strengthened.
Corporate governance and responsibility need to be improved
overall and gaps need to be closed in this area as well. This
could include remuneration policies and incentive schemes.
Internal models remain important for proper enterprise risk
management, especially in comparison to standard models.
Internal models provide the company as well as the supervisors
with a better grasp of an individual group’s risks.
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International Association of Insurance
Supervisors (IAIS)
More information
www.iaisweb.org
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