European & International Developments – implications for regulation in Ireland Michael Culligan...

European & International Developments– implications for regulation in IrelandEuropean & International Developments– implications for regulation in Ireland

Michael CulliganDirector, Life Strategies Ltd.

“A new era for life assurance supervision”4 March 2003



Outline of presentation

Examine international developments

Review main projects

Concentrate on two– EU and UK

Identify common themes

Likely impact

Current Irish regime (1)

Creature of EU Directives– First Directive in 1979– Implemented in Ireland in mid 80s

Regime more or less unchanged since

External review by IMF in 2001– Benchmarked Irish regime against IAIS

“core principles”


IMF findings:

“Ireland observes the basic or necessary criteria…but may need to consider more stringent requirements to address the risks that could be inherent in a rapidly growing and increasingly complex sector”

“Ireland is strong in areas affecting statutory technical reserves, solvency and asset management. Ireland’s system…focuses on solvency rather than market control”


Probably fair characterisation by IMF– Strong on quantitative solvency supervision– Not so focused on other aspects

Reporting frequency “below best practice”

Limited resources for on-site inspections

Summary:

“Ireland has been dependent on annual returns, the whistle-blowing responsibilities of the actuary and auditor, informal information flows and strong solvency to identify and contain risk”


New guidelines from DETE in response– On-site visits– Strengthened Directors’ Cert.– Compliance Officers– Financial Condition Reports

Current system has worked well

But, now powerful forces for change– Advent of IFSRA– International developments

International developments (1)

Growing dissatisfaction amongst regulators

Shift in regulatory mindset– Recognition that quantitative measures

not sufficient

Especially true in the EU…

… and in the UK

Others too– But will concentrate on these two

International developments (2)

Other projects include– International Association of Insurance

Supervisors (IAIS)– International Actuarial Association (IAA)

Both will influence international standards

Also, others not directly related but very relevant– Basel Committee– International Accounting Standards Board

(IASB)

EU developments (1)

“Solvency II” project

Aim is to review EU supervisory framework

Two phases– Phase 1: Deciding on broad principles– Phase 2: Fleshing out details

Phase 1 now drawing to close

Interim report issued

EU developments (2)

Work to date– Consultations within EU– External consultations with interested

parties

Two key reports received for consideration– KPMG– Working group: lessons from the past

EU developments (3)

Preliminary ideas on shape of new system

Key principles have emerged– Basel approach to be adapted and

adopted– Must take account of companies’ risks– Must be adaptable

EU developments (4)

What are the Basel proposals?– And how can they be adapted for

insurance?

Basel has 3 strands (“pillars”)– Pillar 1: Quantitative requirements– Pillar 2: Supervisory review process– Pillar 3: Transparency/disclosure

Approach highlights defects of current system– Current system exclusively focused on

Pillar 1

EU developments (5)

Basel Pillar 1– Rules on technical provisions– Rules on investments– Rules on capital requirements

Concept of “target capital”– Likely to be determined by a risk model

The problem with modelling…

EU developments (5)

Basel Pillar 1 (contd.)– Rules on technical provisions– Rules on investments– Rules on capital requirements

Concept of “target capital”– Likely to be determined by a risk model– Breaches will result in dialogue with supervisor

Also lower “absolute minimum margin”– Easier to calculate– Breaches will result in intervention by

supervisor

EU developments (6)

Basel Pillar 2– Principles of “supervisory review process”

Principles (for banks) are:– Banks capital assessment procedures

should be linked to risk profile– Supervisors must evaluate quality of

those procedures– Supervisors need power to impose higher

capital requirements– Supervisors must intervene at early stage

EU developments (7)

Basel Pillar 2 (contd.)– Principles need to be adapted for insurance– Pillar 2 lays down principles of sound organisation,

internal control & risk management– Application of principles will be verified by

supervisors

Supervision requires common approach across EU– Need common framework for corporate governance– Need harmonised early-warning systems– Need common validation of internal risk

models etc.

EU developments (8)

Basel Pillar 3– “Market discipline”– Essentially means disclosure and transparency

Published financial information– IASB already proposing much disclosure– Not sure that prudential system could/should add

more

Disclosure to policyholders– Principle of “treating customers fairly”

in Pillar 2– Underpinned by disclosure rules in Pillar 3

EU developments (9)

Summary of EU developments– Solvency II now entering Phase 2– Broad approach now largely agreed following

Phase 1– Consensus emerging that Basel banking

approach be adapted for insurance– In other words, a “3 pillar” approach proposed– (Current approach purely focused on Pillar 1)– Likely implementation date – 2007 ??– Transitional arrangements likely

UK developments (1)

Brisk pace of change!

Reasons?– Creation of FSA – single regulator– Equitable– Effect of current market conditions

Tiner project– “major overhaul” of insurance regulation– Progress report in Oct 2002– Some changes already; many more over

next 18 months

UK developments (2)

All change!

“…fundamental change in the way that firms are regulated”

“…more proactive and challenging regulatory relationship”

“…risk based approach…”

“…increased contact from supervisors…”

“…explicit responsibility on senior management…”

“…change…in what we expect from insurance firms…”

UK developments (3)

Three key prudential aims– Improve basis of determining capital/solvency

requirements– Place more explicit responsibility on

management– Improve public and regulatory reporting

Clearly similar to EU’s vision for Solvency II– 3 pillar approach again

UK has shorter timescales though– “a lot done; more to do”– “we’re not there, but we’re getting there”

UK developments (4)

Aim #1: Improving determination of solvency– FSA clearly unhappy with current EU system

“…the European Directives no longer adequately capture the risks to which insurance business is subject…”

– Current approach to valuing assets & liabilities makes it difficult to assess firms’ realistic financial strength

– FSA now adopting its own “more realistic approach”– Requires firms to apply for waivers– Plan to introduce fully in early 2004

UK developments (5)

Aim #1: Improving determination of solvency (contd.)

In practical terms, this means– Moving away from the net premium valuation– Greater use of stochastic modelling– Capital requirement = realistic liabilities + margin– Use stress-testing techniques to arrive at required

margin

The difficulty with stress testing…

UK developments (6)

Aim #2: Sound management– Emphasis clearly on responsibilities of directors

and senior managers

They need to be clearly able to:– Demonstrate understanding of responsibilities– Articulate how systems & controls work– Identify/rectify any weaknesses

Lots happening under this heading…– With-profits governance– Role of Appointed Actuary

UK developments (7)

Aim #3: Improving public and regulatory reporting– Number of improvements proposed– Less volume; more focused– More forward-looking– More distinction between public info and info

given to FSA– Timeliness and frequency also under review

Summary and conclusions

Common themes are evident internationally– EU and UK in particular– Both unhappy with current system– Both moving towards Basel-style 3 pillar approach

Implications of new approach– Closer, more frequent contact with supervisor– Increased emphasis on risk– Increased use of models for determining capital– Improved public & regulatory reporting– In short, considerable change!

European & International Developments– implications for regulation in IrelandEuropean & International Developments– implications for regulation in Ireland





European & International Developments – implications for regulation in Ireland Michael Culligan...

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