Presentation on theme: "Terri M. Vaughan and Randi Woods Webber February 2015 Regulation and Risk Management for Cross-Border Insurance Groups."— Presentation transcript:
Terri M. Vaughan and Randi Woods Webber February 2015 Regulation and Risk Management for Cross-Border Insurance Groups
The Agenda: Current Issues for Cross-Border Insurance Groups Issues in regulation and supervision Risk management in cross-border insurance groups
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
Key Projects Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) Insurance Capital Standard (ICS) Global Systemically Important Insurers (G-SIIs)
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??
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
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
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
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
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
The Range of Possibilities Global markets Local markets Single regulator Local regulators Free movement of capital “Balkanized capital”
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???
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
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.
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.
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