Regional Information Session Cape Town, 5 March 2010

Regional Information SessionRegional Information SessionCape Town, 5 March 2010Cape Town, 5 March 2010

Developments in the IAIS Solvency and Actuarial Issues Subcommittee

Rob Curtis - Chair

2Cape Town5 March 2010

OutlineOutline

• Introduction of the IAIS and its approach to risk-based supervision

• Insurance Core Principles for effective supervision

• Update on standard setting work across the IAIS• ComFrame (Common Framework for the

supervision of Internationally Active Insurance Groups)


Introduction of the IAIS and its approach to Introduction of the IAIS and its approach to risk-based supervisionrisk-based supervision

• Founded in 1994• Represents insurance regulators and supervisors• World wide membership• 204 Members (including 56 US Members) • 131 Observers (including 10 international

organisations)• Observers participate actively• Secretariat based in Basel, Switzerland



Improved supervision

Well-regulated and well-supervised insurance markets

Global financial stability

Efficient, fair, safe and stable insurance markets

Policyholder protection



Develop standards, principles, guidance

Encourage implementation of

principles and standards

Develop assessment

methodologies

Encourage co-operation amongst

insurance supervisors

Represent the field of

insurance supervision

Identify potential risks that may affect

insurance supervision

Cooperate with other

international organisations



General Meeting

Executive CommitteePeter Braumüller

Technical CommitteeAlfred Gross

Implementation Committee Hari Narayan

Budget CommitteeVictor Rod

Pension Coordination GroupMihály Erdos

Accounting SubcommitteeHenning Göbel

Governance and ComplianceMaarten Hage

Implementation Activities Approval Committee

Hari Narayan

Insurance Laws, Regulation,Practices & Standards Subcommittee

Francois Tempé

Regional Coordination SubcommitteeMichael Oliver

Task Force on InformationGathering & Analysis

Norma Rosas

Insurance Groups SubcommitteeAxel Oster

Insurance Contracts SubcommitteeRob Esson

ICP Task ForceKwok Mun Low

Market Conduct SubcommitteeDiane Colton

Reinsurance and other forms of Risk Transfer Subcommittee

Solvency & Actuarial Issues SubcommitteeRob Curtis


OutlineOutline

• Introduction of the IAIS and its recent activities• Insurance Core Principles for effective

supervision• Update on standard setting work across the IAIS• ComFrame (Common Framework for the



Insurance Core PrinciplesInsurance Core Principles

Insurance Core Principles for effective supervision

• Is the foundation on which all standard setting activities of the IAIS build

• Provide a globally accepted framework for the regulation and supervision of the insurance sector

• Serves as a benchmark for insurance supervisors in all jurisdictions



• Can be used – when establishing a supervisory regime or – for identifying areas in existing regimes that

need to be improved

• Self assessments• Compliance assessed by the IMF and the

World Bank (FSAPs)



• Benchmark for insurance supervisors

• Used to establish new regimes

• Used to improve existing regimes

• Used in evaluation of supervisory regimes – FSAPs

• Applies to all insurers and reinsurers, but not intermediaries, unless indicated

Essential Principles

Assessment criteria

Explanatory notes

Essential criteria

Advanced criteria



Essential criteria• Elements necessary in the

implementation of ICPs

• Assessment criteria

Advanced criteria• Components which

improve essential criteria and enhance supervisory regime

• Not used in assessing ICPs observance

• BUT may be used to comment or make recommendations on supervisory framework

Observed All essential criteria observed

Largely observed

Only minor shortcomings exist

Partly observed

Despite progress, shortcomings sufficient to raise doubts

Not observed No substantive progress

Not applicable Not applicable due to structural/legal/ institutional features or responsibility with other authorities


Currently being revised (with a completion date of 2011) to ensure they remain appropriate, comprehensive and current (subject to final approval)



Mapping with existing ICPs to proposed ICPs (subject to final approval)



OutlineOutline


supervision• Update on standard setting work across the

IAIS• ComFrame (Common Framework for the



Update on standard setting work across the Update on standard setting work across the IAISIAIS

Preconditions

Regulatory requirements

Supervisory assessment

LEVEL 1

LEVEL 2

LEVEL 3 Supervisory assessment and intervention

Basic conditions for the effective functioning of

the insurance supervisory authority

the insurance sector and insurance supervision

Financial Governance Market conduct

Common Solvency Structure and Standards

Framework for Insurance Supervision



• Current issues in standard setting– A comprehensive and coherent set of supervisory

papers on insurance supervision– Appropriate balance between principles based

standards and adequate supporting guidance– Group-wide supervision– Proportionality– Financial stability– Promoting appropriate convergence towards

globally accepted, improved standard of supervisory practice

– Multilateral Memorandum of Understanding– Mutual recognition



• Solvency

– Structure of regulatory capital requirements (adopted in October 2008)

– ERM for capital adequacy and solvency purposes (adopted in October 2008)

– The use of internal models for regulatory capital purposes (adopted in October 2008)

– Issues paper on group solvency assessment (adopted in February 2009)

– Structure of capital resources for solvency purposes (to be adopted in October 2009)



• Solvency– Draft Standard and Guidance papers on

Capital Adequacy

• Combining Standard on capital requirements with

Standard on capital resources

• Further addressing group-level supervisions

• Solvency control level:

– PCR: the level above which the supervisor would not require action to increase the capital resources held or reduce the risks undertaken by the insurer

– MCR: defines the supervisory intervention point at which the supervisor would invoke its strongest actions, if further capital is not made available



• Solvency

– Draft Guidance paper on Enterprise Risk Management for Solvency Purposes (to be approved in Oct 2010)

• ORSA: The insurer should have risk and capital management

processes in place to monitor and manage the overall adequacy

of its financial resources relative to its economic capital and the

regulatory capital requirements set by the solvency regime and

clearly distinguish between current capital needs and its

projected future financial position.

• Taking into account post-crisis findings on ALM, cash flow

analysis and stress testing

• Liquidity management and asset liability management, with

particular regard to complex investment activities

• Strategies including derivatives, and applying both on solo and

group basis



• Solvency– Draft Standard and Guidance paper on Internal

Models for regulatory capital purposes

• Standard will now apply to both solo and groups.

• Focussing predominantly on the supervisory approval mechanisms and considerations and related interplay of the different modelling components of an overall group model

• Further, the balance to satisfy the needs and requirements of both home and host supervisors, particularly regarding: the approval process of the group internal model and differences in the level and structure of local capital requirements



• Solvency

– Draft Standard and Guidance paper on the regulatory requirements for Investments for solvency purposes (to be approved in Oct 2010)

• Requirement 1:

The solvency regime establishes requirements that are applicable to the investment activities of the insurer

• Requirement 2:

The solvency regime is open and transparent as to the regulatory investment requirements that apply and is explicit about the objectives of those requirements.

• Requirement 3:

The regulatory investment requirements address at a minimum, the: - Security; - Liquidity; and - Diversification; of an insurer’s portfolio of

investments as a whole



• Solvency– Draft Standard and Guidance paper on the

regulatory requirements for Investments for solvency purposes (to be approved in Oct 2010)

• Requirement 4:

The solvency regime requires the insurer to invest assets in a

manner which is appropriate to the nature of its liabilities

• Requirement 5:

The solvency regime requires the insurer to invest only in assets whose risks it can properly assess and manage.

• Requirement 6:

The solvency regime establishes quantitative and qualitative requirements, where appropriate, on the use of more complex and less transparent classes of assets and investment in markets or instruments that are subject to less governance or regulation.



• Solvency– Draft Standard on valuation of assets and

liabilities for solvency purposes • Undertaken by a joint working group (“Joint Valuation Working

Group”) between the SSC and ICSC

• The valuation of assets and of liabilities is undertaken on consistent bases and in a reliable and transparent manner

• The valuation of assets and liabilities is an economic valuation and an economic valuation of assets and liabilities reflects the risk-adjusted present values of their cash flows.

• The value of technical provisions and other liabilities do not reflect the insurer’s own credit standing

• Margin over the Current Estimate (MOCE)

• Requires the valuation of technical provisions to make appropriate allowance for embedded options and guarantees.


Update on Solvency Standards and Update on Solvency Standards and GuidanceGuidance

ISRs: a comprehensive and cohesive set of solvency ISRs: a comprehensive and cohesive set of solvency assessment documentationassessment documentation



• Groups– Guidance paper on use of supervisory colleges (adopted in 2009)

– Guidance paper on the treatment of non-regulated entities in group-wide supervision (to be adopted in 2010)

– Draft standard on cross-border cooperation on crisis management (to be adopted in 2010)

– Issues paper for resolution of cross-border entities (targeting 2011)

– Draft definition of insurance group - a preliminary proposed in 2010

– Guidance paper on Group-wide Supervision Framework (to be adopted in 2010)

– Guidance paper on Criteria for equivalence assessment/Supervisory recognition in group-wide supervision (to be adopted in 2011)

– Questionnaire for issues paper on supervisory resolution of cross-border entities (Target to release to all members in 2010)

– Follow-up survey on supervisory colleges (Target to release to all members and observers in 2010)



• Governance

– ICP, standard and guidance on Licensing (to be adopted in 2010)

– Draft standards and guidance on remuneration (to be adopted in 2010)

– Issues paper on the regulation and supervision of mutuals, cooperatives and other community-based organisations in increasing access to insurance markets (to be adopted in 2010)

– Work closely with the OECD Insurance and Private Pensions Committee and its Corporate Governance Task Force to avoid duplication of effort and to ensure consistency

– Coordinating with the Basel Committee on Banking Supervision to ensure consistent messages are communicated for the banking and insurance industries.



• Reinsurance

– IAIS Global Reinsurance Market Report (GRMR),

– Planning macroprudential surveillance and potential steps towards an expansion of the Reinsurance Transparency Subgroup (RTG)

– Draft Guidance Paper on Reinsurance and other forms of risk transfer (targeting 2010)

– Mutual Recognition (Guidance October 2008 Standard possibly 2010)


OutlineOutline


supervision• Update on standard setting work across the IAIS• Lessons learned from the recent financial crisis• ComFrame (Common Framework for the



What is ComFrame?What is ComFrame?

• ComFrame is intended to provide supervisors with a supervisory framework for internationally active insurance groups

• ComFrame will be multilateral in nature because it will set out common parameters for insurance group supervision for multiple jurisdictions, thus going beyond individual national or regional regulatory approaches

• It will provide a basis of operation for both home and host supervisors

• Substantively, it will set out parameters for assessing the group structure and the group business from a risk management perspective as well as quantitative and qualitative requirements that are specific and focused but not rules-based

• It will also cover the area of necessary cooperation among supervisors


General principles of ComFrameGeneral principles of ComFrame

ComFrame should:

become the multilateral tool of preference for assessing internationally active insurance groups

provide meaningful value to both home and host supervisors for undertaking group supervision

be developed through the use of existing Working Parties, complemented were needed by ad-hoc groups, under the steering of the ComFrame Task Force and the policy oversight of the Executive Committee, in consultation with the Technical Committee

be made up of Modules each including a specific group of Elements


General principles of ComFrame (Cont.)General principles of ComFrame (Cont.)

be specific, but not rules-based

be ever-evolving (and further look into case experiences)

be developed in close collaboration with interested stakeholders

lead to more consistency and better comparability and alignment regarding the supervision of internationally active insurance groups being undertaken by each jurisdiction


TimelineTimeline

36Cape Town5 March 2010 36

Organisational overviewOrganisational overview


The Five Modules of ComFrameThe Five Modules of ComFrame


Module 1Module 1

ComFrame should look at internationally active insurance groups as a whole and assess their group-wide risks


Module 1Module 1

Module 1: Scope of application

Module 1 Contents Priorities

Basics Definition of a “group”

Element 1 Application to internationally active insurance groups A

Element 2 Scope of internationally active insurance groups A

Element 3 Conglomerate ramifications Cross-sectoral cooperation protocols and rules

B

Element 4 Conglomerate ramifications Cross-sectoral harmonisation regarding certain substantive rules and requirements

B

Element 5 Conglomerate ramifications Criteria for determining the cross-sectoral “group-wide supervisor”

B


Module 2Module 2

ComFrame should provide better approaches to monitor and, if needed, administer or control group structure and business from the perspective of identifying risks and implementing safeguards where necessary, taking into account normal, stress and resolution situations


Module 2Module 2

Module 2: Group structure and business in normal, stress and resolution situations


Basics N.A.

Preventive Mode (Normal Mode)

Element 1 Monitoring and assessing group structures B

Element 2 Assessment of the group’s business mix from the perspective of reducing risk and enhancing transparency

B

Element 3 Assessment of changes to a group’s business and its structure resulting from business decisions and transactions

B

Element 4 Assessment of intra-group transactions B

Stress Mode

Element 5 Contingency planning for stress conditions (Flexibility in changing the group’s structure and business)

B

Element 6 Protocol and/or rules on crisis management by groups B

Resolution Mode

Element 7 Resolution mechanisms from a group structure and business perspective

C

Element 8 Approaches regarding policyholder protection schemes and tied assets

C


Module 3Module 3

ComFrame should set out both quantitative and qualitative requirements that are specific and focused but not rules-based


Module 3Module 3

Module 3: Quantitative and qualitative requirements


Basics Quantitative and qualitative recommendations for groups

Element 1 Quantitative framework/methodologies B

Element 2 Qualitative framework /methodologies B

Element 3 Calibrations and specific measurements regarding quantitative elements

After 36 months

Element 4 Approaches to utilise these benchmarks/parameters for supervisory recognition

C


Module 4Module 4

ComFrame should be made effective by utilising supervisory cooperation mechanisms


Module 4Module 4

Module 4: Supervisory cooperation and interaction


Basics Basic definition of supervisory cooperation including information exchange

Element 1 Approaches regarding supervisory cooperation between group-wide supervisor and host supervisors

B

Element 2 Approaches on the use of supervisory colleges B

Element 3 Protocol on the reliance on supervisory actions/decisions of supervisors of other jurisdictions

B

Element 4 Crisis management among supervisors B

Element 5 List of supervisory reporting items B

Element 6 List of public disclosure items B


Module 5Module 5

ComFrame should be operated in a transparent way


Module 5Module 5

Module 5: Jurisdictional matters


Basics Use of ICPs and effectiveness of FSAPs

Element 1a Applicability of ComFrame to all IAIS jurisdictions B to C

Element 1b Opt-in mechanism B to C

Element 2 Peer review and peer assistance mechanism B to C

Element 3 ComFrame data compilation platform (or mechanism) for macroprudential surveillance purposes


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