Insurance Supervision in America
National, Regional and Global Financial Stability:
Perspective from México
JOSÉ GERARDO LÓPEZ HOYO
VICEPRESIDENT ANALYSIS AND SECTORAL STUDIES, INSURANCE AND SURETY NATIONAL COMMISSION (CNSF-MÉXICO)
September 9th, 2016
Contents
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2
3
BACKGROUND
THE NEVER ENDING STORY
ADAPTING THE FRAMEWORK
WORLDWIDE-NATIONAL EFFORTS
CLOSING REMARKS
FINAL COMMENTS
Financial Stability The Never Ending Story
Some History*…
Tulipmania
March, 1637
• During the Dutch Golden Age
• Contract prices for tulip bulbs reached extraordinary high prices and
suddenly collapsed.
• First recorded speculative bubble.
1720
Financial Crisis
• South Sea Bubble (Great Britain) and Mississippi Bubble (France)
• Bond and Stock emission in Europe on America Investments
• Stock bubble  burst after loosing investors confidence.
Crisis of 1772
• 20 Banks in London went bankrupt after one banking house defaulted
Panic of 1792
• Run on banks in US after credit expansion of the Bank of the United States
Panic of 1796-97
Mainly derived from insufficient
regulation/supervision
Mainly derived from other problems
• British and US credit crisis caused by land speculation bubble
*This Time is Different: Eight Centuries of Financial Folly (Reinhart & Rogoff 2009)
Financial Stability The Never Ending Story
19th Century
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Danish state bankruptcy of 1813
Panic of 1819
Panic of 1825
1836-185 – Railway Mania
Panic of 1847
Panic of 1866
Panic of 1873 – “Long Depression”
Panic of 1884
Panic of 1890
Panic of 1893 – Collapse of railroad overbuilding
Australian banking crisis of 1893
Panic of 1896 –drop in silver reserves
Mainly derived from insufficient
regulation/supervision
Mainly derived from other problems
20th Century
Panic of 1901
Panic of 1907
Panic of 1910–1911
1910 – Shanghai rubber stock market crisis
1921-1923 – Germany’s hyper-inflation
Crash of 1929 Black Tuesday  “Great Depression”
1973 – 1975 Oil crisis
1980s – Latin American debt crisis
Bank stock crisis (Israel 1983)
1987 – Black Monday
1989–91 – US Savings & Loan crisis
1990 – Japanese asset price bubble collapsed
early 1990s – Scandinavian banking crisis
1992–93 – Black Wednesday – speculative attacks on
currencies (Euro Exchange Rate Mechanism)
• 1994–95 Speculative attack and default on Mexican
debt (Tequila effect).
• 1997–98 Asian Financial Crisis
• 1998 Russian financial crisis
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Financial Stability The Never Ending Story
21st Century
• 2000–2001 Turkish economic crisis
• 1999-2002 Argentine economic crisis
• After U$-Arg$ parity, Currency run
“Corralito & Cacerolazo”
• 2001 – Bursting of dot-com bubble – speculations
concerning internet companies crashed
• 2008-2011 – Icelandic financial crisis
• 2007–08 – Global financial crisis after Real Statesubprime & Derivatives bubble.
• 2010 European sovereign debt crisis
• 2014 Russian financial crisis
Mainly derived from insufficient
regulation/supervision
Mainly derived from other problems
Financial Stability The Never Ending Story
Common causes….
Causes of financial
crisis
Volatility caused by
external factors
Microeconomic
issues on financial
systems
Asymmetric
Information
Inadequate
Regulation and
Supervision
Derived from high
leverage levels
 Asset quality
 Asset-Liability
Management
 Liquidity
 Solvency
Financial Stability  The Never Ending Story
2008 Aftermath – Mexico Perspectives on its supervisory scheme in 2009*
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As a result of the global financial crisis of 2008, the CNSF conducted in 2009 a comprehensive
review of the main challenges to face in the near future regarding insurance regulation and
supervision:
* CNSF President’s presentation at the
Conference of the Mexican Insurers Association,
2009.
Financial Stability  The Never Ending Story
2008 Aftermath – Mexico Perspectives on its supervisory scheme in 2009*
* CNSF President’s presentation at the
Conference of the Mexican Insurers Association,
2009.
Financial Stability  The Never Ending Story
2008 Aftermath – Mexico Perspectives on its supervisory scheme in 2009*
* CNSF President’s presentation at the
Conference of the Mexican Insurers Association,
2009.
Contents
1
2
3
BACKGROUND
THE NEVER ENDING STORY
ADAPTING THE FRAMEWORK
WORLDWIDE-NATIONAL EFFORTS
CLOSING REMARKS
FINAL COMMENTS
Worldwide Efforts  FSB foundation
The subprime crisis that erupted in August 2008 was transformed into a systemic financial crisis,
which epicenter was not only in the US, but moved to Europe and Japan and had a strong impact
on the growth in emerging markets.
The Financial Stability Board (FSB) was created in response to the international financial crisis of
2008-2009, under the decision of the Group of Twenty (G-20) in 2009, as a stronger and larger
successor of the Financial Stability Forum (FSF).
The FSB is an international organism which pursues the effectiveness and stability of the
international financial system, and is formed by the ministries of finance, central banks and
financial bodies of the member countries.
Worldwide Efforts  FSB objectives and mandate
Article 1. Objectives of the Financial Stability Board
The Financial Stability Board (FSB) is established to coordinate at the international level the work of
national financial authorities and international standard setting bodies (SSBs) in order to develop and
promote the implementation of effective regulatory, supervisory and other financial sector policies.
In collaboration with the international financial institutions, the FSB will address vulnerabilities
affecting financial systems in the interest of global financial stability.
Article 2. Mandate and tasks of the FSB
(1) As part of its mandate, the FSB will:
(a) assess vulnerabilities affecting the global financial system…
(b) promote coordination and information exchange among authorities…
(f) set guidelines for and support the establishment of supervisory colleges;
(g) support contingency planning for cross-border crisis management, particularly with respect
to systemically important firms;
(2) The FSB will promote and help coordinate the alignment of the activities of the SSBs to address
any overlaps or gaps … relating to prudential and systemic risk, market integrity and investor and
consumer protection, infrastructure, as well as accounting and auditing.
Worldwide Efforts  FSB Framework
International Financial Institutions
Bank for International Settlements (BIS)
International Monetary Fund (IMF)
Organization for Economic Co-operation and Development
(OECD)
The World Bank
International Standard-Setting and Other Bodies
Basel Committee on Banking Supervision (BCBS)
Committee on the Global Financial System (CGFS)
Committee on Payments and Market Infrastructures (CPMI)
International Association of Insurance Supervisors (IAIS)
International Accounting Standards Board (IASB)
International Organization of Securities Commissions (IOSCO)
Worldwide Efforts  FSB Recent Work
Recent FSB Press Releases:
02/09/16:
01/09/16:
31/08/16:
26/08/16:
25/08/16:
18/08/16:
17/08/16:
16/08/16:
08/08/16:
19/07/16:
22/06/16:
Implementation Issues
Policy Issues
FSB and IMF publish progress report on second phase of G20 Data Gaps Initiative
FSB publishes second progress report on measures to reduce misconduct risk
FSB reports to G20 Leaders on financial regulatory reforms
IMF, FSB and BIS publish Elements of Effective Macroprudential Policies
FSB publishes progress reports on implementation of reforms to the OTC derivatives market and on
removal of barriers to trade reporting
FSB publishes progress report to G20 on action plan to assess and address the decline in
correspondent banking
FSB publishes further guidance on resolution planning and fifth report to the G20 on progress in
resolution
FSB completes peer review of India
FSB publishes discussion note on Essential Aspects of CCP Resolution Planning and progress report
on CCP workplan
FSB launches peer review of the G20/OECD Principles of Corporate Governance and invites
feedback from stakeholders
FSB publishes progress report on implementation of recommendations to reform major interest
rate benchmarks
FSB publishes Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset
Management Activities
Worldwide Efforts  FSB Recent Work
Recent FSB Press Releases:
06/06/16:
27/05/16:
25/05/16:
25/04/16:
18/03/16:
23/02/16:
7/12/15:
4/12/15:
19/11/15:
18/11/15:
12/11/15:
10/11/15:
Implementation Issues
Policy Issues
FSB releases guidance on resolution planning for systemically important insurers
FSB Americas RCG discusses FSB priorities, financial reforms, correspondent banking and asset
management activities
FSB publishes Thematic Review on the Implementation of the FSB Policy Framework for Shadow
Banking Entities
FSB Regional Consultative Group for Sub-Saharan Africa discusses implementation and effects of
regulatory reforms
FSB Regional Consultative Group for the Middle East and North Africa discusses regulatory reforms
FSB publishes Second Thematic Peer Review on Resolution Regimes
FSB releases report on possible measures of non-cash collateral re-use
FSB publishes fourth EDTF report on bank risk disclosures
FSB RCG for the Americas discusses financial stability reforms and reductions in correspondent
banking
FSB completes Peer Review of Turkey
FSB publishes Standards and Processes for Global Securities Financing Data Collection and
Aggregation
FSB publishes reports on transforming shadow banking into resilient market-based finance
FSB publishes fourth progress report on compensation practices
Worldwide Efforts  FSB Recent Work
Recent FSB Press Releases:
09/11/15:
06/11/15:
05/11/15:
04/11/15:
03/11/15:
01/10/15
22/09/15
13/08/15
30/07/15
24/07/15
09/07/15
02/07/15
Implementation Issues
Policy Issues
FSB issues final Total Loss-Absorbing Capacity standard for global systemically important banks
FSB publishes report on implementation and effects of the G20 financial regulatory reforms
FSB proposes creation of disclosure task force on climate-related risks
FSB releases report to G20 on the decline in correspondent banking
FSB releases progress report on reducing misconduct risk in the finance industry
FSB completes Peer Review of Saudi Arabia
FSB reports describe progress in implementing OTC derivatives market reforms…
November 2015 New measures to promote resolvability, including effective cross-border resolution
FSB publishes the 2015 update of the G-SIB list
FSB publishes the 2015 update of the G-SII list
FSB releases progress report on FX benchmark reforms
Progress report on work to enhance CCP resilience
Recent FSB reports to G20 Finance Ministers and Central Bank Governors
FSB completes Peer Review of China
Next Steps on the NBNI G-SIFI Assessment Methodologies
Progress in Implementing OTC Derivatives Market Reforms
FSB publishes an interim report on Progress in Reforming Major Interest Rate Benchmarks
FSB launches and invites feedback on its Peer Review on implementation of the FSB policy framework
for shadow banking entities
National Efforts  The Case of Mexico
Mexico’s regulatory framework is part of the international efforts towards the standardization of
financial regulation and supervision, as the basis for preserving the stability of the global financial
system.
In this context, three are the most relevant experiences that serve as reference for Mexico’s
Regulatory Framework:
1. Principles and standards developed by the International Association of Insurance
Supervisors (IAIS).
2. Recent developments regarding solvency models, which included an analysis, among
others, of the European Project of Solvency II, the Solvency Modernization Initiative of
the United States and the Swiss Solvency Test.
3. The key lessons derived from the international financial crisis of 2008 in terms of risk
management, corporate governance, transparency and market discipline, which, despite
not having generated significant adverse effects on the Mexican financial system, offered
the opportunity to prevent similar situations in the future of our financial market.
National Efforts  The Case of Mexico
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In addition to the adjustments made in the regulation and supervision of Mexican insurance
and surety sectors, in 2014 was created the Mexican Council for Financial System Stability
(Consejo de Estabilidad del Sistema Financiero Mexicano, CESF).
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The CESF is the permanent authority in charge of the coordination, evaluation and risk
analysis regarding financial stability among the authorities that comprise it, and its objective
is to avoid interruptions or substantial alterations in the functioning of the financial system
and, if necessary, to minimize their impact if they have place.
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The CESF must always respect the powers and duties that the legal framework gives to each
of the authorities that are represented in this council.
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Composed by:
Ministry of Finance and Public Credit (SHCP)
Central Bank (Bank of Mexico, BM)
Banking and Securities National Commission (CNBV)
Insurance and Surety National Commission (CNSF)
Retirement Savings System National Commission (CONSAR)
Bank Savings Protection Institute (IPAB)
National Efforts  The Case of Mexico; Implementing ORSA
As an example of the adoption of international standards, the regulation in Mexico establishes
that insurance companies must perform a Own Risk and Solvency Assessment (ORSA), which is a
tool for decision-making and strategic analysis.
ORSA’s objective is to assess, in a continuous and prospectively manner, the overall solvency of
the company, according to the needs related to the risk profile of each insurance institution.
The ORSA includes, amongst other elements, the evaluation of:
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the global solvency needs of the institution in accordance with its specific risk profile;
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the risk tolerance limits approved by the board of directors ; and
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the business strategy, including the monitoring of the possible future impacts over the
solvency, based on the dynamic solvency test.
In Mexico, the ORSA must be delivered in an annual basis to the CNSF.
Contents
1
2
3
BACKGROUND
THE NEVER ENDING STORY
ADAPTING THE FRAMEWORK
WORLDWIDE-NATIONAL EFFORTS
CLOSING REMARKS
FINAL COMMENTS
Final Comments
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The CNSF has been seeking a higher level of compliance to international standards that
contribute to international financial stability, among which are the Insurance Core Principles
(ICP) of the IAIS.
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Among the basic principles related to financial stability are those who consider relevant the
exchange of information. In this sense, the CNSF has become signatory of a significant
number of Memoranda of Understanding with several countries including the IAIS MoU as
well as the ASSAL.
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Additionally, the CNSF has actively participated in various supervisory groups of global
insurance groups, through the Colleges of Supervisors and multinational organizations.
Final Comments
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Episodes of financial instability are basically due to the lack of information therefore:
PILAR I
PILAR 2
PILAR 3
QUANTITATIVE ELEMENTS
REVISION AND CONTROL
MARKET DISCIPLINE
Quantitative Information on
risk
Assets & Liabilities
Information between
Management &
Shareholders
Corporate Governance
Information and
Transparency to
Stakeholders and Third
Parties
Regulators and Supervisors must deal with such information and if the case, share it with other
regulators and supervisors.
Insurance Supervision in America
National, Regional and Global Financial Stability:
Perspective from México
JOSÉ GERARDO LÓPEZ HOYO
VICEPRESIDENT ANALYSIS AND SECTORAL STUDIES, INSURANCE AND SURETY NATIONAL COMMISSION (CNSF-MÉXICO)
September 9th, 2016