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Terri M. Vaughan and Randi Woods Webber February 2015 Regulation and Risk Management for Cross-Border Insurance Groups.

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Presentation on theme: "Terri M. Vaughan and Randi Woods Webber February 2015 Regulation and Risk Management for Cross-Border Insurance Groups."— Presentation transcript:

1 Terri M. Vaughan and Randi Woods Webber February 2015 Regulation and Risk Management for Cross-Border Insurance Groups

2 The Agenda: Current Issues for Cross-Border Insurance Groups  Issues in regulation and supervision  Risk management in cross-border insurance groups

3 International Developments  Industry cross-border activity  Cross-border insurance groups  Reinsurance transactions  Capital management  Regulator cross-border activity  IAIS (1994)  Financial Sector Assessment Program (FSAP)  Financial Stability Board

4 Key Projects  Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)  Insurance Capital Standard (ICS)  Global Systemically Important Insurers (G-SIIs)

5 The Problem: Challenges in Supervising Internationally Active Insurance Groups (IAIGs)  Diversity in organizational structures  Complexity/transparency  Centralized functions  Diversity in markets  Insurance markets (products, concentration, capital markets, interconnectedness with banks, etc.)  Regulation/supervision: risk tolerance, regulatory culture and approach (principles-based vs. rules-based, relative emphasis on different tools)  Transparency in financial reporting  Concerns of regulators  Regulatory arbitrage/cross-border risks-shifting  Cross-border resolution  Level playing field??

6 FSB Membership Argentina: Central Bank of Argentina Australia: Department of Treasury, Reserve Bank of Australia Brazil: Ministry of Finance, Central Bank, Securities & Exchange Commission Canada: Department of Finance, Bank of Canada, OSFI China: Ministry of Finance, People’s Bank of China, CBRC (bank regulator) France: Ministry of Economy, Finance and Foreign Trade; Bank of France, Autorité des Marchés Financiers (AMF) Germany: Ministry of Finance, Deutsche Bundesbank, Bafin Hong Kong SAR: Hong Kong Monetary Authority India: Ministry of Finance, Reserve Bank of India, Securities & Exchange Board Indonesia: Bank Indonesia Italy: Ministry of the Economy and Finance, Bank of Italy, CONSOB (securities) Japan: Ministry of Finance, Bank of Japan, Financial Services Agency Korea: Bank of Korea, Financial Services Commission

7 FSB Membership (cont.) Mexico: Ministry of Finance & Public Credit, Bank of Mexico Netherlands: Ministry of Finance, Netherlands Bank Russia: Ministry of Finance, Central Bank, Federal Financial Markets Service Saudi Arabia: Saudi Arabian Monetary Agency Singapore: Monetary Authority of Singapore South Africa: Ministry of Finance Spain: Ministry of Economy and Finance, Bank of Spain Switzerland: Swiss Federal Department of Finance, Swiss National Bank Turkey: Central Bank of the Republic of Turkey United Kingdom: HM Treasury, Bank of England, Financial Services Authority United States: Department of the Treasury, Federal Reserve, SEC European Union: European Central Bank, European Commission International Financial Institutions: BIS, IMF, OECD, World Bank International Standard-Setting, Regulatory, Supervisory and Central Bank Bodies: BCBS, IOSCO, IAIS, IASB, CPSS, CGFS

8 International capital models in banking and for European insurance markets  The Basel Capital Accord  Basel I  Basel II  Basel III  Basel IV???  European Solvency Regulation  Solvency I and the European Common Market  Solvency II

9 Issues  Basel II and Solvency II (pre-crisis)  Relative emphasis on consolidated capital requirements  Fungibility of capital: "Source of strength", "Group support"  Role of group supervisor  Valuation basis  Internal models vs. standard model  Reassessment following the financial crisis  Home vs. host conflict  Market consistent valuation  Internal models

10 ComFrame and the ICS: The debate  Emphasis on centralized processes, policies, risk management  Role of group-wide supervisor  Consolidated capital requirements  Reflecting local differences?  Standard vs. internal models  Valuation basis

11 The Range of Possibilities Global markets Local markets Single regulator Local regulators Free movement of capital “Balkanized capital”

12 Other considerations  Solvency II and equivalence  Impact on US firms doing business in Europe  Reinsurance collateral (A covered agreement?)  The effectiveness of the U.S. voice in international discussions  FSOC-designated firms  Prudential, AIG, MetLife  Others???

13 Principal International – A Real-World Example of Cross-Border Risk Management  Nine Business in Ten Countries  Types of Financial Services Businesses  Life Insurance  Annuities  Mandatory Pension  Voluntary Pension  Mutual Funds  Asset Management All have very different Risk Characteristics and Capital Needs

14 From a Risk Perspective, Looking at Capital without Reserves just Doesn’t Make Sense  Life Insurance typically has high reserves  Pension business usually holds Account Values  Mutual Funds and Asset Management hold zero reserves  A better measure would be the Total Assets Required to provide the level of solvency that the regulatory expects.

15 In Pictures…

16 The Application is More Challenging than the Theory  Capital is NOT Fungible  Dividends are taxable  Often, they require regulatory approval  Most regulators want “their” capital residing in “their” country  Solvency Requirements are not Consistent Across Jurisdictions  Supervisory Colleges raise local capital requirements instead of lowering them  Regulator demanded guarantees (separate accounts, ring-fencing of assets, etc.) can result in significant trapped capital.

17 How Does PFG Try to Influence Change?  Local Industry Groups  Conversations tend to be more technical  Local Regulators  Tend to be less educated  “Xerox” copy approach to regulation  If you’re a hammer, everything looks like a nail  US Industry Groups and Government Influence  International Groups


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