Session 119 PD, Evolving Regulatory Landscape Around Capital and Risk
Management
Moderator:
Patricia E. Matson, FSA, MAAA
Presenters:
Richard H. Daillak, FSA, MAAA
Gaetano Geretto, FSA, CERA, FCIA
Patricia E. Matson, FSA, MAAA
Evolving regulatory landscape around capital and risk management US ORSA and Other Developments
September 25, 2014
Patricia E. Matson, FSA, MAAA
Overview of ORSA
Section I
Description of the Insurer’s Risk Management Framework
Section II
Insurer’s Assessment of Risk Exposure
Section III
Group Assessment of Risk Capital and Prospective Solvency Assessment
• ORSA provides a management view of risks and capital, which helps to “challenge” what is covered under traditional approaches to reserves and capital
• ORSA aggregates risks across all the activities of the insurance company to enable a comparison of required capital to available capital
• ORSA is not solely a quantitative representation of the risks but also requires a systematic identification, assessment and management of the risks
• A thorough evaluation of risk requires that an insurance company not only evaluates its current exposure to risk but also its future potential risk, in light of strategic objectives
• ORSA plays a key role in the communication between an insurance company and regulator
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
2
ORSA Model Act
• Adopted September 2012
• Responds to IAIS’s Insurance Core Principle 16, Enterprise Risk Management
• ORSA defined – “confidential internal assessment, appropriate to the nature, scale and complexity of an insurer or insurance group”
– “of the material and relevant risks associated with the insurer”
– “and the sufficiency of capital resources to support those risks”
• Confidential report(s) to be filed at most 1x/year w/lead state
• Exemption
However regulator can decide, – <$500M legal entity premium
– <$1B group premium
• Effective January 1, 2015
based on specific circumstances, to request anyway
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
3
ORSA Guidance Manual
• First issued in 2012; latest revision July 2014
• Provides further guidance on ORSA in support of Model Act
• ORSA Report should include:
– Section 1: Description of Risk Management Framework
– Section 2: Assessment of Risk Exposure
– Section 3: Group Assessment of Risk Capital and Prospective Solvency
• Should identify accounting basis, time period, legal entities covered
• Signed by CRO or similar
• Further details for each of the 3 sections on what to include
• Clear focus on OWN
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
4
Draft NAIC Guidance for Regulators
• Risk‐Focused Surveillance Working Group released detailed guidance on use of ORSA in financial analysis and exams in March, 2014; since that time, three exposure periods have been completed
• States that principle goals of ORSA, upon which regulatory guidance will be established, are:
– To foster an effective level of ERM at all insurers
– To provide a group‐level perspective on risk and capital, as a supplement to the existing legal entity view.
– To allow the regulator to obtain a high level understanding of the insurer’s ORSA, and to assist the commissioner in determining the scope, depth and minimum timing of risk‐focused analysis and examination procedures
• Summarizes the guidance as well as the RIMS ERM maturity model to provide education to the user on what to expect from “good ERM”
• Failure to demonstrate sufficient ERM is likely to result in increased supervision, “up to and including a hazardous financial condition determination”
• ERM assessed on a 1‐5 scale
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
5
Draft NAIC Guidance for Regulators
RIMS risk maturity as described in the guidance.
Additional details are provided for each section
and subsection of the ORSA report
Initial
Processes in place, but not operating Ad‐Hoc
consistently No developed or and documented effectively. Non‐Existent
standard Certain risks No identification, processes; relies defined and monitoring, or on individual managed in efforts
management
silos
Repeatable
Processes in place; designed and operated in a timely, consistent, sustained way. Actions taken to address issues for high priority risks
Managed
Activities coordinated across business areas; tools and processes activities used. Enterprise‐
wide identification, monitoring, management, and reporting in place
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
Leading
Tools embedded in strategic planning, capital allocation, etc and used in daily decision making. Limits in place to identify breaches and require corrective action by Board and management
6
ERM Framework
ERM involves a control cycle, in which:
Risk
appetite
and limits
Identify
and
assess
risks
Link to
business
strategy
Capital
Manage ment
Risk Culture
and
Governance
Stress
and Scenario
testing
Risk
manage measure
ment
Monitoring and
reporting
Source: North American CRO Council
• The foundation is the risk culture and governance of the company
• An appetite for risk is established, linked to company strategy
• Risk limits are set
• Risks are identified, quantified, and prioritized
• Risks are monitored relative to limits, and risk mitigation actions are taken
• Risk capital is determined and allocated to business initiatives
• Risk analysis is communicated to leaders
• Results of risk analysis impact strategic objectives
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
Section I
Section II
Section III
7
Risk Management Framework
Section I
This section may include descriptions of items such as:
Risk culture and
governance
• Board and committee structure, roles and responsibilities
Risk identification
and prioritization
Risk appetite,
tolerance, and limits
Risk management
and controls
• Key risk exposures and limits; mitigations in place
• Company culture regarding risk, organization of risk function, risk charters/policies
• Strategy and associated risk appetite; risk appetite results
Risk reporting and
communication
• Summary of risk reports and sample recent results
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
8
Assessing Enterprise Risks
Tolerance
for Risk
Risks to
be Taken
• Section 2 will cover the identification,
quantification, prioritization, and mitigation of
top risks
Appetite
for Risk
• The process for determining top risks typically
involves both a top down and a bottom up
approach
Risk Assessments
Business Units
Corporate Functions
Strategic Partners
Stress Testing Exposures
Considering Outside Forces
Enterprise Top Risks
Top Risks
Aggregation
Process
Section II
• Top risks should be considered in light of the
organization’s strategy, risk appetite, and risk
tolerance
• Identification of risks should come from those
in the business and corporate functions, with
support from and aggregation by ERM
• Consideration should be given to emerging
risks and the impact of external factors such as
regulatory change and competitor actions
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
9
Assessing Solvency
Section III
Assessment of group solvency should describe approach used, methods,
assumptions. Examples provided in the ORSA Guidance Manual:
Considerations
Description of Methods/Assumptions
Examples
Definition of Solvency
How solvency is defined (capital and liquidity)
Cash flow basis, balance sheet basis
Accounting/Valuation Regime
Underlying accounting/valuation basis
GAAP, Stat, market consistent, IFRS, rating agency
Business Included
Subset of business included in capital analysis
Inforce as of a specific date, new business included
Time Horizon
Horizon over which risks are modeled
1 year, multi year, lifetime, runoff
Risks Modeled
Which risks included, are all relevant and material ones in?
Credit, market, insurance, liquidity, operational
Quantification Method
How risk exposure is quantified
Stresses, stochastic, factor‐based
Risk Capital Metric
Measurement metric for determining needed capital
VaR, TVaR, P(ruin), P(ruin) given capital available
Defined Security Standard
Std used to determine risk capital, incl link to strategy
AA solvency, %ile confidence, % of RBC
Aggregation/ Diversification
Method of aggregation and group diversification benefits considered/calculated
Correlation matrix, dependency structure, full/part/no diversification
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
10
Economic Capital
Section III
There is fairly wide variation in use of, and definition of, economic capital in the
US insurance industry. A summary of practices currently in place is as follows:
Component
Typical Practices
Comments
Underlying balance sheet
• Company‐defined market‐based
• Market‐consistent
• Statutory
• GAAP
Company defined market based most common for US companies, though smaller and P/C often use Statutory
Market‐consistent, based on Solvency II definition, more comment globally
Risk metric
• Absolute surplus loss
• Loss based on defined external criteria (ratings, RBC ratio)
Most typically defined as the absolute loss in surplus based on the balance sheet definition above
Time horizon
• Ranges from 1 year to runoff of business
1 year most common for market‐based balance sheet, and runoff most common for statutory balance sheet
Confidence level
• Ranges from 99% to 99.99%
99.5% common for global companies since it is the basis for Solvency II. Many align this with AA/AAA rating and therefore use 99.9x%
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
11
Section III
Internal Models
A variety of internal models may be used for various components of ERM. Key
considerations include link to strategy and risk appetite, data source,
reconciliations, and use of results in strategic decision making
Strategic Objectives, Risk Appetite, Risk Tolerance
Data
storage
Transformation
Market data
Data load
Policy data
Data Capture and Staging
Model Governance Framework
Asset data
Risk Modeling
Approach & Assumptions
Data Sources
ERM-Owned Models
Stress
Testing
Risk
Appetite
Economic
Capital
Other Corporate Models
Financial
planning
Cash flow
testing
ALM
Risk Monitoring & Management Risk reporting
Risk mitigation
Line of Business Models
Pricing
Reserving
Risk
assessment
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
Strategic decisions
12
Model Validation
Section III
Core Principle*
Considerations
Build for intended purpose
While the idea of a “single model” is nice in theory, it often fails in practice
Many ERM models are designed for full enterprise use, and therefore may be less granular than other company models
Model validation is independent
A separate functional area charged with validation
Establish model validation owner
Creates accountability
Should have authority to communicate and remediate
Appropriate model governance
Defined policies that cover roles, responsibilities, and
minimum requirements
Consider proportionality
Critical for validation to provide sufficient benefits for the cost
Validate model components
Data, methods, assumptions, calculations, and outputs
Address validation limitations
Including plans to address in the future
Document the validation
Can be used to improve and focus future validations
*8 core principles identified in the North American CRO Council’s paper “Model Validation Principles Applied to Risk and Capital Models in the
Insurance Industry
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
13
US ORSA Pilots
Two pilots completed, third in early stages
• First pilot: 13 reports submitted
•
•
•
•
8 complete: 3 full data; 5 redacted data
2 included framework but otherwise incomplete
3 more incomplete relative to others
Submissions ranged from 10‐100 pages
• Second pilot: 22 reports submitted
• None redacted; only 3 need material improvements
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
14
US ORSA Pilots – Key Observations
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Report on ACTUAL ERM, not just a regulatory exercise
Glossary of terms and acronyms used
Significant risk limit details
Risks include rankings (heatmaps preferred), mitigations, owners
Changes in limits, appetite, tolerance
Include ERM/Control flowchart Compensation/incentives to risk decisions/risks taken
Attach or summarize referenced documents
Include prospective/emerging risks (sections 2 and 3)
Explanation of tables/graphs
Comparison of multiple capital model approaches and results
Combined stress scenarios, in addition to single scenarios
Describe the capital model and its validation
Provide liquidity stress test results
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
15
Other US Regulatory Developments
• Corporate Governance Annual Disclosure Model Act and Model Regulation
Annual summary of the Corporate Governance structure
Describe Board and committees, duties of each
Senior management oversight
Business strategy and risk oversight
• Insurance Holding Company Act
Transactions within a holding company
Group supervision
• FIO Annual Report
SIFI designations
Terrorism insurance (TRIA expiration) and Nat’l Flood Ins Program
International supervision
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
16
Appendix
Sample ORSA Contents
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
17
Risk Culture and Governance Section I
• Involvement of Senior Management and the Board
• Structure and independence of risk management function
• Reporting and escalation procedures
• Consideration of risk in performance measurement and
compensation
• Tone at the Top
• Risk awareness policies, procedures, and training
• Roles and responsibilities of risk management functions
• Consideration of enterprise risk in decision making
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
18
Risk Policies & Procedures
Section I
• Good ERM should include policies and procedures for key risk-taking
and control activities, including activity descriptions, roles and
responsibilities, limits, approvals, escalation procedures, and change
controls.
• Examples of such policies include:
• Key function and committee charters
• Asset-liability management policy
• Underwriting policy/manuals
• Liquidity policy, including contingent funding plan
• Privacy and security policies
• Derivatives use plan
• Risk mitigation policies (ie reinsurance, hedging, etc)
• Data management policies
• Model governance framework
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
19
Section I
Establishing a Risk Appetite
• Risk appetite* is the total exposed amount that
an organization wishes to undertake on the
basis of risk-return trade-offs for one or more
desired and expected outcomes.
Enterprise Strategy
Risk Appetite
Tolerance 1
Tolerance 3
Tolerance 2
Tolerance 4
Toler‐
ance
Limit
Early Warning
Current Exposure
1
100
110
175
2
15%
10%
12%
3
etc
• Risk tolerance* is the amount of uncertainty an
organization is prepared to accept in total or
more narrowly within a certain business unit, a
particular risk category or for a specific initiative.
• Risk limit** is a threshold used to monitor the
actual risk exposure of a specific risk or activity
unit of the organization to ensure that the level
of actual risk remains within the risk tolerance.
4
5
Source: *RIMS and **American Academy of Actuaries
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
20
Risk Appetite Example
Strategy Setting and Business Planning
• Strategic objective: stay
financially strong and
provide value to
shareholders
• 3-year financial plan for
8% growth target
Section I
Risk Appetite and Tolerance Definition
• Financial strength
component of risk appetite
defined based on RBC ratio
Scenario Definition and Limit Setting
• Limit: maintain RBC ratio of
at least 300% (325% early
warning signal)
• Risk tolerance is a minimum
300% RBC ratio
• 3 stress scenarios defined
Analyze, Communicate, and Manage
Scenario
RBC Ratio Year 1
RBC Ratio Year 3
Baseline
400%
400%
Severe recession
345%
315%
Reputational Event
385%
395%
Sharp rise in rates
345%
360%
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
Based on breach of
early warning,
mitigation plans
involve curtailing
growth in capital
intensive business
21
Section II
Risk Quantification
ERM should provide specific criteria for assessing the likelihood, severity,
and velocity of risks.
Sample Likelihood Scale
In addition, the
Somewhat Highly Unlikely
Likely
Likely
Likely
time period of the
assessment
0‐15%
15‐30%
30%‐50%
>50%
should be defined
(ie 1 year, 2 years,
Sample Severity Scale
etc)
Capital
Impact Earnings
On:
Liquidity
Immaterial
Moderate
Threatening
Severe
<550M
250‐500M
500M‐1B
>1B
<10% drop
10‐20% drop 20‐40% drop
>40% drop
<20%
outflow increase
20‐40% outflow increase
>60% outflow increase
40‐60% outflow increase
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
22
Risk Assessment Results
Section II
Heatmaps often used to show prioritization by frequency, severity, and
speed of onset (velocity)
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
23
Stress and Scenario Testing
Section II
Examples of stress/scenario tests currently being evaluated as part of ORSA include:
Business
Scenario
Definition
Use of Results
P&C
Cat Risk: Hurricane
Specific level of hurricane occurs in multiple cities in the same time period (e.g. 1 year)
Health
Regulatory Antiselection under new ACA Change Risk: requirements increases ACA
morbidity/claims by 10%
Health
Regulatory 30% increase and decrease in Change Risk: membership driven by ACA ACA
requirements
• Assess impact on capital, liquidity, and ratings to determine whether still within defined risk tolerance (and if not, determine necessary immediate mitigating actions)
Life
Market Risk: Interest rates drop 50% and Low Interest stay at that level for 10 years Rates
before a gradual recovery
• Understand level of exposure over time to influence strategic decisions on business mix, growth plans, and potential mitigation strategies
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
24
Section 3 – Assessing Solvency
Section III
Below is a sample of the type of information that may be included in Section 3 of
the ORSA, assuming the insurer has a prospective view on economic solvency
500
Current and 2 Year Prospective Solvency
450
Required risk
capital:
400
Operational
350
Expense
300
Behavior
250
Morbidity
Longevity
200
Mortality
150
Currency
100
Market
50
Credit
0
Regulatory
Economic
2014
Regulatory
Economic
2015
Available regulatory capital
Regulatory
Economic
Sample Commentary:
• International operations
sold in late 2014,
eliminating currency risk
• Planning entry into
disability income in 2015,
which will create exposure
to morbidity risk but also
drive diversification
benefits
2016
Available economic capital
©Risk & Regulatory Consulting LLC ‐ Not to be Duplicated Without Prior Consent
25
OSFI update
PD 119 “Evolving regulatory landscape
around capital and risk management”
Presentation to the SOA Annual Meeting
Orlando, FL, USA
October 28, 2014
Gaetano Geretto
Senior Director
Insurance Risk Management and Strategy
Possible topics of interest
•
•
•
•
•
•
ORSA progress
Assessing the actuarial function
Advisory on new directors
Cyber-risk self assessments
OSFI P&C Capital Updates
OSFI Life Insurance Regulatory Framework
2
ORSA
• Objective
– Insurers perform self-assessments to determine
if their capital position is adequate and is likely to
remain so in the future;
• Benefits
– Promotes better understanding of the
interrelationships between the risk profile and
capital needs of an insurer;
– Links with other processes (e.g. enterprise-wide
risk management) builds consistency; and
– Potential to enhance existing balance between
business development and risk management
practices
3
ORSA
• The ORSA “Report” or “Document”
– Narrative without standard format or
structure
– Minimum content and expectations
– Filing / reporting / review
– Standard filing template: “Key Metrics
Report”
ORSA is not a box-checking exercise and the
exercise should better position the insurer to
ask questions of itself regarding what can be
done better or more consistently
4
Assessing the Actuarial
Function
• Actuarial Function was added to OSFI’s
revised Supervisory Framework (2010)
• There are 7 oversight functions that may
exist in a FRFI, including Compliance
• The organization of the Actuarial Function
varies considerably across the industry and
is a function of the insurer’s nature, size,
and complexity.
5
Advisory on New Directors
• International regulatory movement toward
increased involvement in due diligence on
new Board and senior management
members (though some go much further)
• OSFI Advisory not intended to supersede
independent decisions by FIs, but rather
formalize existing process for OSFI to
express any specific concerns regarding
the appropriateness of a candidate
6
Cyber Risk Self-Assessments
•
Set out OSFI’s expectations in 6 areas of selfassessment with detailed criteria
•
Deliver a standard assessment tool to the sector
•
Assist a financial institution to carry out a point-intime self-assessment of maturity of its cyber security
function and capabilities
•
Encourage a financial institution’s management to
develop an action plan setting out initiatives or work
needed to achieve a rating of "Fully Implemented”
7
OSFI P&C Capital Updates
New MCT Standard Approach
• More risk sensitive capital requirements
• Final guideline & returns publication – Fall 2014
• Implementation effective January 1, 2015
MCT Internal Models Approach
• Criteria and guidance under development
• Insurance risk – Target completion 2016
• Non-insurance risks – Target 2016/18
8
OSFI Life Insurance
Regulatory Framework
New MCCSR Standard Approach
• QIS6 Publication October 2014 / responses due
January 2015
• QIS6 Additional tests
• Final guideline & reporting forms 2016
• Implementation target of January 2018
Internal Models Approach
• Work on hold until new standard approach
finalized
9
Insurance Capital Frameworks
• Major areas of change
–
–
–
–
–
–
Definition of available capital
Interest rate risk
Credit for Diversification
Credit for Par Policies (Life only)
Mortality (Life only)
Segregated Funds Guarantees (Life only)
10
Questions?
11
International Insurance
Capital Developments
SOA Annual Meeting, 28 October 2014, Session 119 PD
Richard Daillak
G20 member states, working through their Financial
Stability Board, have sought to strengthen global financial
resilience
Members: Argentina, Australia, Brazil, Canada,
China, France, Germany, India, Indonesia, Italy,
Japan, Republic of Korea, Mexico, Russia, Saudi
Arabia, South Africa, Turkey, United Kingdom,
United States and the European Union.
2
The FSB has directed sectoral standard-setters to
enhance solvency standards and to help it identify
globally important financial institutions
G-SIBs
Basel III
G-SIIs
BCR/HLA
ICS
3
Insurance solvency modernization is also
happening locally around the globe
Europe:
Solvency II legislation 2016
China:
C-ROSS project 2015
C-ROSS II ahead?
Japan:
QIS in preparation of the
economic risk based
solvency regime
Canada:
United
States:
SMI, USGCS?
Mexico:
LISF 2015
Switzerland:
Singapore/ Malaysia:
RBC 2 (currently postponed)
SST legislation in place since 2008,
revision in 2015 to adapt to SII
Indonesia:
Australia:
PCR in
place
Chile:
Starts to work
on ICPs with
IAIS
South Africa:
SAM as part of Twin peaks
In addition to the global standards developed by the IAIS, local solvency
standards are being strengthened in many insurance markets
4
IAIS: Supervision, Capital
and Risk Management
5
IAIS Projects
ICPs
Insurance Core Principles
• For all insurers
•
•
•
•
Standards for supervision
Requirements for the insurer
Requirements for the supervisor
Used by World Bank/IMF to
assess national regimes (FSAP)
ComFrame
Project in Progress
• For Internationally Active
Insurance Groups (IAIGs)
• Common framework for
supervision
• Consistent with the ICPs but
elaborated and extended
• Modules: Scope, IAIG (including
capital requirements), Supervisor
• Targeted completion: end 2018
Globally Systemically Important Insurers
• For G-SIIs
• At FSB direction, IAIS created a project to identify globally systemically important
insurers (G-SIIs) and to devise additional policy measures to apply to them
6
Initial outcomes of the G-SII project
Initial list of G-SIIs
designated by FSB July 2013
•
•
•
•
•
•
•
•
•
Allianz
AIG
Assicurazioni Generali
Aviva
Axa
MetLife
Ping An Insurance (Group)
Prudential Financial (US)
Prudential plc (UK)
GSII list redetermined
annually by FSB
Policy Measures, designed by IAIS
Enhanced supervision
Effective recovery
and resolution
Higher loss absorbency (HLA)
•First: BCR- a straightforward, "basic capital requirement" to
serve as foundation for HLA
•Apply to all group activities
•Balance simplicity and risk sensitivity
•Provide more comparable foundation than local capital
requirements
•Then: HLA- which will focus on systemic risks and
nontraditional, noninsurance activities
7
Work begins on new capital standards
BCR, HLA and ICS
All Insurers
All IAIGs
ComFrame
ICPs
All G-SIIs
Identify
FSB
designates
BCR
HLA
Enhanced Supervision
Effective Recovery & Resolution
8
ICS bridges between the G-SII and ComFrame efforts
• The IAIS has committed to develop a risk-based insurance capital standard
(ICS) for all IAIGs, including all G-SIIs.
• FSB supports the development of the ICS.
• Intended to be more risk-sensitive than the BCR, and therefore expected to
be more complex than BCR.
• For G-SIIs, the ICS is expected to replace the BCR as the foundation for
HLA.
• For IAIGs generally, the ICS will replace ComFrame Module 2, Element 5,
Capital Adequacy Assessment, a long-debated component of ComFrame.
Expected timeline for Insurance Capital Standard
2013
2014
2015
2016
First ICS test
Second ICS test
Dec: Consultation on design of ICS
2017
ICS reporting
to supervisors
(all IAIGs)
2018
ICS reporting to
supervisors +
public disclosure
(?)
2019+
ICS full
implementation
Adoption of
ComFrame by IAIS
including ICS
9
Current focus of the IAIS is to complete the BCR for G-SIIs
in order to achieve comparability and apply HLA
Basic
Requirements
(BCR)
G-SIIs
Basic Capital
Capital Requirement
(BCR)
for for
G-SIIs
Planned outcome
– BCR to apply to all group activities (including noninsurance) of G-SIIs
– BCR as initial foundation for HLA requirements for G-SIIs
– BCR to be finalized by November 2014 and reported, to
supervisors only, from 2015
– IAIS using a factor based approach for the BCR
HLA
Higher Loss
Absorbency,
for G-SII
Higher
AbsorptionCapacity
Capacity
(HLA)
G-SIIs
Higher Loss
Loss Absorption
(HLA)
forfor
G-SIIs
– HLA implementation details by end of 2015; will apply to
then designated G-SIIs starting from January 2019
– HLA requirements to be met by the highest quality capital
fully available to cover losses at all times
– Location of HLA undecided
Insurance
Capital Standard
Standard(ICS)
(ICS)for
forG-SIIs
G-SIIs+IAIGs
Insurance Capital
& IAIGs
– Global standard to apply to all IAIGs including G-SIIs
– Framework completed in 2016; public disclosure from
beginning of 2018; enforcement expected 1 January 2019
– Development of BCR will inform the ICS
 BCR to be reassessed once ICS is developed
 HLA to be redetermined on ICS, once available
Insurance
Capital
Standard, for
IAIG
ICS
BCR
Basic Capital
Requirements,
for G-SII
ICS replaces BCR as the foundation
for HLA
10
Status of ICS Development
• On 28 May the IAIS published a memorandum on the ICS, including an overview of
the approach the IAIS plans to apply for the ICS
– ICS will define a consolidated, group-wide, globally comparable risk-based measure of capital
adequacy addressing all material risks and financial activities
– The valuations of assets and liabilities must respond to stresses over a specified time horizon
– The amount of qualifying capital resources is to be compared to the capital requirement to
determine the ICS ratio
• IAIS states that the ICS will enhance supervisory cooperation and coordination groupwide, support financial stability, enable policyholder protection, facilitate cross-border
insurance activities and contribute to a level playing field.
• On 12 September, IAIS also issued principles for ICS development. See appendix.
• Thus far, work on ICS has taken a back seat to work on BCR.
11
NAIC response to ICS
 While NAIC has strongly questioned the need for a global ICS, it remains
engaged at IAIS to help influence the standard.
 NAIC has just begun work toward a U.S. group capital standard (USGCS).
• NAIC ICS Forum, August 2014, Louisville; follow-up meeting, September 2014.
• USGCS likely would apply to U.S.-parented insurance groups.
• Intended to complement but not replace U.S. RBC. Fills a clear gap left by the legal
entity approach taken by RBC.
• Once USGCS is developed, NAIC says it plans to argue that the U.S. solvency
regime is at least as robust as that provided by the ICS. The possibility of making
such an argument is suggested by paragraph 30 of IAIS's May 2014 consultation.
30. Within the ICS, the IAIS will consider what other risk-based methods of implementation
jurisdictions may introduce to address additional risk coverage and/or
– maintain higher prudential targets than the standard, as long as these methods
– produce outcomes at least as robust as the ICS standard method.
• NAIC appears open to separate USGCS approaches or models for P&C and Life.
12
Industry response to ICS
 Many are engaged. For example, non-IAIGs are active because they believe that ICS
would ultimately affect them, through competition and consumer pressure to report.
 Industry has been divided. Some argue the U.S. should "just say no." Others, believe
ICS is coming and industry needs to help make it work.
 Groups with significant life and annuity spread business are concerned if a marketconsistent economic approach is pursued. Many of the same issues are raised as
were raised in European Solvency II.
– Volatility
– Disincentives to long-term business
 Some U.S. companies are exploring what they describe as a valuation-agnostic
approach based on projection of asset and liability cash flows under stressed
scenarios.
– Scenarios might be prescribed by the supervisors, for comparability, rather than determined
from internal models.
– Being addressed: Translating pass-fail results to a solvency ratio that can be reported.
Determining how to create the scenario set, and how to combine results from scenarios for
distinct types of business.
– A cash flow projection approach to P&C has been opposed by a number of companies.
13
Appendix
Additional details on BCR, HLA, ICS
14
Key features of BCR according to the IAIS






Major risk categories considered
Comparability of outcomes across jurisdictions
Resilience of BCR to stress
Simple design and presentation
Internal consistency
Optimise transparency and use of public data
Balance Sheet valuations


Liabilities: Current estimates (best estimate) as proxy
Assets: Local GAAP with adjustments
Operational and Liquidity risk

Operational risk and liquidity risk not included in BCR
Group balance sheet

Consolidated group balance sheet as starting point
3 substantive principles
3 constructive principles
BCR Adequacy Ratio
= Qualifying Capital Resources / Required Capital
Required Capital = Σ (Liability factors x Liability measures)
+ Σ (Asset factors x Asset measures)
+ Σ (NI factors x NI measures)
Qualifying Capital Resources = Capital Resources +/– Adjustments
15
BCR update, based on July consultation
• The IAIS issued its second and final consultation on BCR in July 2014
• The IAIS consultation has clarified certain elements of the BCR:
– calculation on a consolidated group level
– three basic risk components (insurance/banking/non-insurance) and 15 factors
applied to specific segments
– simple and comparable basis as foundation for HLA
– diversification and ALM not explicitly factored
• However open items remain:
–
–
–
–
–
–
–
overall calibration has not yet been fixed
treatment of margin over current estimate, MOCE (cost of holding capital)
segmentation of assets and liabilities
determination of current estimates (i.e. best estimates) for certain products
treatment of non-qualifying reinsurance
calibration of risk factors
tiering of available capital
• The FSB is expected to review and approve the BCR proposal in October
2014 in order for the G20 to endorse it in November 2014.
16
BCR required capital - Formula
17
IAIS principles for HLA development
Comparability
• Outcomes should be comparable across jurisdictions
G-SII risks
• HLA should reflect the drivers of the assessment of G-SII status
Internalise costs
• HLA should internalise some of the costs that the G-SII's failure or distress would
cause the financial system and economy
Resilient
• HLA should work and remain valid in a wide variety of economic conditions
Going concern
• HLA should assume G-SIIs are"going concerns"
18
IAIS principles for HLA development (continued)
Quality of Capital
• HLA capital requirement is to be met by the highest quality capital
Pragmatic
• Design needs to be pragmatic and practical, with an appropriate balance between granularity
and simplicity
Consistent
• Structure should be consistent and applicable over the range of insurance and non-insurance
entities it will need to cover
Transparent
• Level of transparency, esp. with regard to results and use of public data, should be optimized
Refinement
• HLA will be refined over time in the course of field testing
19
IAIS principles for ICS development
Consolidated group-wide standard; globally comparable risk
measure
• Consistent valuation principles for assets and liabilities, definition of qualifying capital
resources, and a risk based capital requirement
Main objectives: protect policyholders; contribute to financial
stability
ICS becomes the foundation for HLA
• Replacing BCR as that foundation
Reflects all material risks to which an IAIG is exposed
• Taking into account- assets, liabilities, non-insurance risks, off-balance sheet activities
Aims at comparability of outcomes across jurisdictions,
enhances supervisor understanding and cross-border analysis
• Can contribute to a level playing field and reduce capital arbitrage
20
IAIS principles for ICS development (continued)
Promotes sound risk management
• By IAIGs and G-SIIs
Promotes prudentially sound behavior while minimising
inappropriate pro-cyclical behavior by supervisors and IAIGs
• Does not encourage the IAIG to take actions that exacerbate a stress event
Balances risk-sensitivity and simplicity appropriately
• Sufficient granularity and complexity, but sensitive to tradeoff in benefit
Transparent
• Particularly with regard to the disclosure of the final results
Requirement based on appropriate target criteria
underlying the calibration
• Reflects the level of solvency protection deemed appropriate by the IAIS
21
Legal notice
©2014 Swiss Re. All rights reserved. You are not permitted to create any modifications
or derivative works of this presentation or to use it for commercial or other public purposes
without the prior written permission of Swiss Re.
The information and opinions contained in the presentation are provided as at the date of
the presentation and are subject to change without notice. Although the information used
was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy
or comprehensiveness of the details given. All liability for the accuracy and completeness
thereof or for any damage or loss resulting from the use of the information contained in this
presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group
companies be liable for any financial or consequential loss relating to this presentation.
22