Session 35 PD, IAIS Capital Standards Moderator: David Sherwood Presenters: Elizabeth K. Dietrich, FSA, CERA, MAAA David Sherwood SOA Antitrust Disclaimer SOA Presentation Disclaimer IAIS Global Capital Standards
Update
October 24th, 2016
IAIS Overview
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IAIS Background
Context
•
Established in 1994 – located in Basel Switzerland within the Bank of International Settlements - reports to the Financial
Stability Board (FSB)
•
Represents insurance regulators and supervisors of more than 200 jurisdictions in nearly 140 countries
•
Coverage constitutes 97% of the world’s insurance premiums
Mandate
•
Promote effective and globally consistent
supervision of the insurance industry in order to
develop and maintain fair, safe and stable
insurance markets for the benefit and protection of
policyholders and to contribute to global financial
stability
•
It is the international standard setting body for the
supervision of the insurance sector – covers both
prudential standards and market conduct
Operating Model
•
IAIS has a small staff and operates through the
support of regulators around the world
•
It conducts its work through a Committee System
led by an Executive Committee, supported by five
Committees as well as the Supervisory Forum.
(Sub committees and working forums can be
leveraged by the five Committees)
(Participation of US State Insurance Commissioners
has increased dramatically over the past ten years.
It is now very common for US commissioners to
travel globally to attend IAIS meetings … and not
just the “big” states.)
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IAIS Background (continued)
Initiatives
•
Insurance Core Principles (400 pages, 26 Core Principles) – led to US SMI developments such as ORSA and
governance standards:
– ICPs continue to be rolled-out by regulators across the world
•
Common Framework (ComFrame):
– Approximately 55 Internationally Active Insurance Groups (IAIG) may be designated as IAIGs
•
Globally Systemically Important Insurers (GSIIs):
– Nine insurers
Today’s Focus
Group
Globally Systemic
Important Insurers
Internationally
Active Insurance
Group
Acronym
Commentary
Requirements
GSII
Similar to SIFI designation by
the Fed, targeting regulation
around the moral hazard risk of
large institutions
• Basic Capital Requirement
(BCR)
• Higher Loss Absorbency
(HLA)
IAIG
Large groups with the goal of
establishing a globally
comparable consolidated groupwide capital standard and
regulatory framework
• Insurance Capital Standard
(ICS)
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Capital Standard
Development
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Group Capital Calcuations / Standards
International and Domestic group capital standards are being developed. This presents
challenges to insurance companies who may have to implement these new regulatory
capital requirements
Domestic Regulation
International
NAIC
IAIS
• The CDAWG is currently considering
proposals for the development of US
group capital calculation
• Standards developed by the IAIS and
FSB
The Fed
• Following the Collins ammendment, the
Fed is reviewing its own standards for
the assessment of insurance group
capital
FIO
• Is providing a point of liaison between
state and international regulators in the
development of group capital standards.
The FIO Director, Mike McRraith, chairs
the IAIS Technical Committee, which is
helping develop these standards
• Intention is that these capital standards
will apply to all GSII’s and those 55 or so
insurers caught by ComFrame
• BCR (end 2014)
• High Loss Absorbency (end 2016)
• Insuranace Capital Standard (end 2017)
• Private and ultimately public filings
staged between 2015 and 2019
Current developments point to a number
of US insurers being subject to a new
group capital requirement
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Capital Requirements and Timelines
IAIS published an updated ICS timeline in its ICS consultation document, published in July
2016. ICS 1.0 adoption is set for 2017.
DATE
MILSTONE
May 2016
Launch of 2016 Quantitative Field Testing
July 2016
Publication of second ICS CD
August 2016
Phase 1 Field Testing submissions due
September/October 2016
Phase 2 Field Testing submissions due
October 2016
Comments due on second ICS CD
Mid - 2017
Adoption of ICS Version 1.0 for confidential reporting
Launch of 2017 confidential reporting process
September/October 2017
Data due for 2017 confidential reporting process
May/June 2018
Launch of 2018 confidential reporting process
Mid - 2018
Publication of comprehensive ComFrame consultation including ICS Version
2.0
September/October 2018
Data due for 2018 confidential reporting process
Comments due on ICS Version 2.0 and ComFrame consultation
April/May 2019
Launch of 2019 confidential reporting process
August/September 2019
Data due for 2019 confidential reporting process
IAIS 2019 General Meeting
Adoption of ComFrame, including ICS Version 2.0
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Field Testing and Timelines
Basic Capital Requirements (BCR)
•
•
•
The first step in the development of a group-wide global insurance capital standard
Factor based, consolidated global regulatory capital requirement.
Initially based upon a Market Adjusted Valuation
2014
2015
Endorsed by the FSB
2016
2015 was the first year of a private
submission of the BCR by the G-SIIs
Higher Loss Absorbency (HLA)
•
•
•
Second step in the development of a group-wide global insurance capital standard
Represents an additional level of capital required for risk not captured by the BCR reflecting a GSIIs
systemic importance
GSIIs will need to hold capital of no less than the BCR plus the HLA
2015
2016
Refinement in 2016 Field Test
HLA consultation document
issued in Oct 2015
Insurance Capital Standard (ICS)
•
•
Will in time replace the BCR and represents a risk sensitive, total balance sheet view of risk
Will apply to both GSIIs and IAIGs
2015
2016
Included in 2015 Field Test
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2016 FT – focus discounting
BCR – Basic Capital Requirements
BCR has limitations
The IAIS acknowledge that the BCR is a temporary development and that it will
ultimately be replaced by the ICS
Required capital
• BCR is a broad, blunt approach to required capital
• Liability segmentation is not straightforward
• Discount curve used to calculate MAV current estimate liabilities is not consistent with
insurance liabilities
Available Capital
• Financial instruments, or other items, that maybe excluded under IAIS, but have
potential to be available capital for example surplus notes
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BCR – Basic Capital Requirements
How to calculate the BCR ratio:
BCRRatio=BCRTotalQualifyingCapitalResources
BCRRequiredCapital
Available Capital
• Divided into core and additional capital
• Includes financial instruments and some items other than financial instruments
Required capital
• Calculated as factors applied to different exposure amounts:
− Factors vary by IAIS liability segmentation
− Exposures vary by IAIS liability segmentation, but are primarily market adjusted
valuation (MAV) current estimates
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HLA – Higher Loss Absorbency
• HLA calculated similarly to the BCR, with factors applied to exposure amounts
• Factors vary based on the overall risk of the entity and by insurance and non-insurance
• Attempt to calibrate BCR + HLA to Prescribed Capital Requirements (PCR)
• ICS will replace BCR as the foundation for HLA
Source: IAIS HLA Requirements for G-SIIs
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ICS – Insurance Capital Standards
How to calculate the ICS ratio:
ICS Ratio= ICS Total Qualifying Capital Resources
ICS Required Capital
ICS Qualifying Capital Resources:
• Include net value (assets less liabilities), with adjustments
• Net value is reduced by Consistent and Comparable Margin Over Current Estimate (CC-MOCE), which
represents an addition to best-estimate liability:
− Current application double counts cashflow uncertainty, because full capital requirements are
already reflected in the ICS ratio denominator
ICS Capital Requirement:
• ICS is a more risk sensitive measure than BCR
• Includes insurance and non-insurance capital requirements (group-wide)
• ICS ratio calculated on MAV basis, but additional analysis performed for GAAP+ stresses
• Insurance capital requirements are calculated by risk type via stress scenarios or factor-based
approach:
− Stress scenarios – requirement is based on change in net value between base and stress scenario
− Correlation matrices used to aggregate risks
Copyright © 2016 Deloitte Development LLC. All rights reserved.
Considerations for US
Insurers
Copyright © 2016 Deloitte Development LLC. All rights reserved.
Impacts are Both Domestic and Global
• Global insurers are caught by domestic and global initiatives; in addition to ComFrame and Systemic issues, they
need to navigate the various international regulators where they do business each of whom are adopting these
requirements in different ways and to different timelines
• US Domestic-only insurers are impacted by IAIS initiatives indirectly through items like the insurance core
principles. IAIS initiatives are now making the way into US regulatory requirements; ORSA is an example of this
Domestic Regulation
Insurance Core Principles
NAIC - State Regulators - Fed - FIO
26 Insurance Core Principles adopted by
superviors around the world; many
regulators are changing their frameworks
just like within the US:
• Development of model laws
• Insurance Group Solvency Calculation
• Domestic SIFIs and those insuers
subjuect to holding company
supervision
• 26 ICPs issues include: capital adequacy,
use of models, risk management,
suitability of individuals, governance,
valuation, investments, market conduct,
AML, Group Supervision and Reinsurance
• Implementation of ICPs
Insurer
Systemically Important
In the US we have both D-SIFI and GSII
designations. We have systemic risk
insurance parent companies based in the
US and subsidiaries of GSIIs. Enhanced
supervision includes:
• BCR / HLA
• Recovery and Resolution Planning
• ComFrame
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ComFrame
A common framework for internationally
active insurers:
• IAIG designation criteria
• Group-wide supervision
• Risk management
• Insurance Capital Standards (current
field testing)
• Superivisory cooperation (colleges)
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presentation.
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36 USC 220506
Enhanced Supervision and
Group-wide Capital Standards
Society of Actuaries Annual Meeting
October 24, 2016
Liz Dietrich, FSA, CERA, MAAA
Vice President & Actuary
Regulatory Coordination Office
Prudential Financial, Inc.
Prudential Financial, Inc.
 Headquartered in Newark, NJ
 140-year history
 Operations in U.S., Asia, Latin America, and Europe
 Over 49,000 employees, more than half outside the U.S.
 $1.184 trillion in assets under management as of
December 31, 2015
 Offering a variety of products and services, including life insurance, annuities, retirement-related
services, mutual funds and investment management
 Organizational structure comprised primarily of domestic regulated insurance entities, international
regulated insurance entities and non-insurance entities
Adjusted Operating Income
Total Assets
Individual Annuities
23.8%
24.9%
25.7%
Retirement
Asset Management
42.8%
12.3%
Individual Life
5.8%
10.5%
25.1%
10.3%
8.4%
8.0%
Group Insurance
International Insurance
2.3%
Amounts as of December 31, 2015
2
The financial crisis changed the game for financial services regulation...
Issues:
• Group-wide oversight
• Risk management
• Liquidity strain
New Designations
Global Financial
Stability Measures
New Supervisors
New Rules
broad financial stability measures impacting firms
beyond the actors in the financial crisis
3
Enhanced Supervision in the U.S. context
Financial Stability Oversight
Council (FSOC)
Systemically Important Financial
Institution (SIFI) Designation
New Designations
Dodd-Frank
Act
Federal Reserve Board (FRB)
authority to supervise SIFIs
Federal Group-wide Supervisor
•Examinations and reviews
•Continuous monitoring
•Frequent interaction with management
New Supervisors
Rules for SIFIs
•Capital Requirements
•Stress Testing
•Liquidity Risk Management
•Recovery and Resolution Plans…
New Rules
4
Enhanced Supervision in the global context
The Group of Twenty (G20)
 G20 – political authority
Financial Stability Board (FSB)
 FSB – financial regulatory policy makers
International Association of Insurance Supervisors (IAIS)  IAIS – insurance sector translation
New Designations
Jurisdictional Authorities / IAIS Members include:
• Global Systemically Important Insurer
(G-SII) designation
NAIC and states
Federal Reserve Board (FRB);
Federal Insurance Office (FIO)
New Supervisors
• Implementation through Group-wide
Supervisor
European Insurance and Occupational
Pensions Authority (EIOPA)
• Supervisory Colleges
…
(140 countries in total)
New Rules
• Group supervision standards for
internationally active insurance groups
(IAIG)
• Global capital standards
5
Impacted insurers
A small number of insurers are directly impacted by systemic designations and policies, but
a significant number of insurers will be impacted by group-wide supervision.
Dodd-Frank
Act
FRB rules
(other supervised insurers)
NON-BANK SIFIs
G-SIIs
Prudential
Prudential
AIG
MetLife
Prudential Plc. (U.K.)
Aviva (U.K.)
Allianz (Germany)
AXA (France)
AEGON (Netherlands)
Ping An (China)
AIG
Savings & Loan Holding Companies
(SLHCs)
NAIC rules
U.S. based insurers
Internationally active insurance
groups (IAIGs)
G-SII Policy
Measures
ComFrame
standards
Enhanced Supervision impacts include…


Board of Directors / Board
Committees
Governance, Policies &
Standards

Model Risk Management

Capital Requirements

Liquidity Risk Management

Stress Testing

Own Risk Solvency Assessment (ORSA)

Recovery & Resolution Plans
6
Capital standards in focus
Defining the group-wide capital requirements for insurers is a key area of focus for
regulators and industry.
 Building Block
Approach (BBA)
 Consolidated
Approach (CA)
United States
Global
Non-bank SIFIs
and SLHCs
G-SIIs and
IAIGs
The Federal Reserve
FSB & IAIS
 BCR + HLA for
G-SIIs*
 ICS for IAIGs
Standards are currently being developed through Consultation and Field Testing
Key questions include:
 What constitutes Available Capital?
 How is Required Capital defined?
 What assumptions and methodologies underlie the regulatory balance sheet?
 What is the relationship between group-wide and entity-level capital requirements?
*The IAIS intends to replace the BCR with the ICS as the basis of HLA for G-SIIs.
7
Overview of the Insurance Capital Standard (ICS)
•
Field testing and development underway through 2019
•
Second public consultation took place in 2016
Key elements of the ICS
• Currently field testing two approaches:
Valuation
Basis
• Market Adjusted Valuation (MAV)
• GAAP with Adjustments (GAAP Plus)
Capital
Requirement
Capital
Resources
• ICS Standard Method: stress-based approach
• Insurance, Market, Credit, and Operational Risk components
• Two tiers of qualifying capital resources
• Margin Over Current Estimates (CC-MOCE) deducted from Available Capital
8
Prudential’s key concerns with the ICS
1) Volatility – asymmetric treatment of assets and liabilities in the valuation basis creates artificial volatility and
pro-cyclicality
GAAP Plus
MAV
MV of Assets
Current Estimate Liabilities based on
prescribed discount curve
The IAIS is considering discounting options to address
asymmetry between the valuation of assets and liabilities
GAAP Value of
Assets (mostly MV)
Current Estimate Liabilities based on
GAAP LRT rules (asset earned rate)
The IAIS is considering an AOCI adjustment to address
asymmetry between the valuation of assets and liabilities
2) Excessive conservatism – improper design and calibration understates Available Capital and overstates
Required Capital
Available Capital
Capital resources should include all tangible loss absorbing resources (including margins in reserves)
Margin Over Current Estimate (MOCE) double counts risk already captured in Required Capital
Required Capital
Intended as a 1-in-200 level of stress over one year (99.5% one-year VaR)
Improper design & overly punitive calibration overstates Required Capital
 The above issues are especially impactful for long term protection and retirement products.
9
Federal Reserve Board (FRB) capital standards
•
The FRB issued an Advanced Notice of Proposed Rulemaking (ANPR) on capital standards for
supervised insurers (nonbank SIFIs and SLHCs).
•
A bifurcated approach is proposed:
Building Block Approach (BBA)
•
Consolidated Approach (CA)
Proposed as the FRB standard for
non-SIFIs supervised by the FRB
Proposed as the FRB standard for
SIFIs
Aggregation of existing statutory legal
entity capital
Anchored in GAAP
Adjustments for intra-group
transactions
Adjustments to GAAP valuation as
appropriate for solvency purposes
Scaling of different regimes to a
common basis for aggregation
Factor-based capital requirement
Prudential supports a single standard for all FRB-supervised insurers and prefers the BBA due to its
practical advantages over the CA.
10
Views on group-wide capital standards
 International and domestic group-wide capital standards will impact insurers either directly
or indirectly.
 Capital standards must appropriately reflect the fundamentals of the insurance business
model, including the long-term and illiquid nature of insurance liabilities, asset-liability
management, and risk diversification.
 Poorly designed standards which produce artificial volatility and excessive conservatism in
capital have the potential to hamper sound, socially necessary insurance products and
product innovation, and deter the critical role of insurers in providing stable, long term
capital investment to the economy.
 Active engagement with both domestic and international standards setters is important to
ensure consideration of broad perspectives and impacts.
11
Appendix
Considerations for group-wide capital standards
The capital standard must appropriately reflect key elements of the insurance business model, including asset-liability
management, loss absorbing margins in reserves, diversification, and the way risks associated with assets and
liabilities are realized.
• Requirement for unexpected
losses
Considerations for capital:
Free assets
• Stress/shock based?
• High quality, mostly fixed
income investments backing
insurance liabilities and
surplus
Required Capital
Considerations for capital:
Other Liabilities
• Based on market valuation or
book / amortized cost valuation?
• Factor based?
• Standard approaches or
“internal models”?
• Reserves for future
obligations to policyholders
Assets
• Generally long term and illiquid
• What is the purpose of the
assets (i.e., liability-driven
investing)
• Valued using assumptions for
economic and actuarial factors
Insurance Liabilities
Considerations for capital:
• Best estimate or conservative
valuation?
• Present value of cash flows
reflecting book or market-based
discount rate?
Based on a typical life insurer
Qualifying Capital Resources
How much do I have?
Required Capital
How much do I need?
Capital adequacy ratio =
13
ICS Valuation Basis
Valuation
Basis
•
Market Adjusted Valuation (MAV)
•
GAAP with Adjustments (GAAP Plus)
MAV
•
Intended to provide a common global basis for a market oriented balance sheet
•
Market Value of assets
•
Current Estimate liabilities
o
Valued using the currency specific risk free yield curve plus a prescribed credit spread
adjustment (40% of AA corporate bond spread index)
o
Various options to apply a more representative credit spread, applicable to some or all
insurance liabilities, are being evaluated in 2016 Field Testing and ICS consultation.
GAAP Plus
•
Balances and any adjustments applied to them are anchored to local GAAP frameworks
•
GAAP reported value of assets (considering AOCI adjustment for unrealized gains/losses associated
with Available for Sale (AFS) assets)
•
Current Estimate liabilities
o
Valuation defined by GAAP rules (e.g., Loss Recognition Testing best estimate valuation in
U.S. GAAP)
14
ICS Capital Requirement
Capital
Requirement
Stresses for Insurance, Market, Credit, and Operational risks
Insurance
Market Risk
Credit Risk
Operational Risk
• Mortality (base rates, calamity)
• Longevity (level and trend)
• Interest Rate (up,
down, flattening)
• Morbidity risk / health products
module (currently testing 2
approaches)
• Equity (equity returns
and volatility)
• Lapse (level and trend, mass
lapse)
• Real Estate
• Stresses to credit
assets, evaluated
with and without
consideration of
NAIC ratings
• Factor-based
• Asset concentration
• Expense (level and expense
inflation)
Correlation matrices applied in aggregation (intra- and cross-risk)
15
ICS Capital Resources
Capital
Resources
•
Tier 1 and Tier 2
•
CC-MOCE
Tier 1 and Tier 2 considerations
•
Loss absorbing capacity
•
Level of subordination
•
Permanence
•
Availability
•
Absence of both encumbrances and mandatory servicing costs
Items for consultation include:
•
Structural vs. contractual subordination
•
Capital composition limits
•
Treatment of AOCI
•
Treatment of DTAs and other deductions from Tier 1 capital
CC-MOCE reduction to available capital
•
2 options currently being tested: Transfer value MOCE and Prudence MOCE
16