Presentation on theme: "Regulation and Risk Management for Cross-Border Insurance Groups"— Presentation transcript:
1Regulation and Risk Management for Cross-Border Insurance Groups Terri M. Vaughan and Randi Woods WebberFebruary 2015
2The Agenda: Current Issues for Cross-Border Insurance Groups Issues in regulation and supervisionRisk management in cross-border insurance groups
3International Developments Industry cross-border activityCross-border insurance groupsReinsurance transactionsCapital managementRegulator cross-border activityIAIS (1994)Financial Sector Assessment Program (FSAP)Financial Stability Board
4Key ProjectsCommon Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)Insurance Capital Standard (ICS)Global Systemically Important Insurers (G-SIIs)
5The Problem: Challenges in Supervising Internationally Active Insurance Groups (IAIGs) Diversity in organizational structuresComplexity/transparencyCentralized functionsDiversity in marketsInsurance 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 reportingConcerns of regulatorsRegulatory arbitrage/cross-border risks-shiftingCross-border resolutionLevel playing field??
6FSB MembershipArgentina: 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
7FSB Membership (cont.)Mexico: Ministry of Finance & Public Credit, Bank of MexicoNetherlands: Ministry of Finance, Netherlands BankRussia: Ministry of Finance, Central Bank, Federal Financial Markets ServiceSaudi Arabia: Saudi Arabian Monetary AgencySingapore: Monetary Authority of SingaporeSouth Africa: Ministry of FinanceSpain: Ministry of Economy and Finance, Bank of SpainSwitzerland: Swiss Federal Department of Finance, Swiss National BankTurkey: Central Bank of the Republic of TurkeyUnited Kingdom: HM Treasury, Bank of England, Financial Services AuthorityUnited States: Department of the Treasury, Federal Reserve, SEC European Union: European Central Bank, European CommissionInternational Financial Institutions: BIS, IMF, OECD, World BankInternational Standard-Setting, Regulatory, Supervisory and Central Bank Bodies: BCBS, IOSCO, IAIS, IASB, CPSS, CGFS
8International capital models in banking and for European insurance markets The Basel Capital AccordBasel IBasel IIBasel IIIBasel IV???European Solvency RegulationSolvency I and the European Common MarketSolvency II
9Issues Basel II and Solvency II (pre-crisis) Relative emphasis on consolidated capital requirementsFungibility of capital: "Source of strength", "Group support"Role of group supervisorValuation basisInternal models vs. standard modelReassessment following the financial crisisHome vs. host conflictMarket consistent valuationInternal models
10ComFrame and the ICS: The debate Emphasis on centralized processes, policies, risk managementRole of group-wide supervisorConsolidated capital requirementsReflecting local differences?Standard vs. internal modelsValuation basis
11The Range of Possibilities Global markets Local marketsSingle regulator Local regulatorsFree movement of capital “Balkanized capital”
12Other considerations Solvency II and equivalence Impact on US firms doing business in EuropeReinsurance collateral (A covered agreement?)The effectiveness of the U.S. voice in international discussionsFSOC-designated firmsPrudential, AIG, MetLifeOthers???
13Principal International – A Real-World Example of Cross-Border Risk Management Nine Business in Ten CountriesTypes of Financial Services BusinessesLife InsuranceAnnuitiesMandatory PensionVoluntary PensionMutual FundsAsset ManagementAll have very different Risk Characteristics and Capital Needs
14From a Risk Perspective, Looking at Capital without Reserves just Doesn’t Make Sense Life Insurance typically has high reservesPension business usually holds Account ValuesMutual Funds and Asset Management hold zero reservesA better measure would be the Total Assets Required to provide the level of solvency that the regulatory expects.
16The Application is More Challenging than the Theory Capital is NOT FungibleDividends are taxableOften, they require regulatory approvalMost regulators want “their” capital residing in “their” countrySolvency Requirements are not Consistent Across JurisdictionsSupervisory Colleges raise local capital requirements instead of lowering themRegulator demanded guarantees (separate accounts, ring-fencing of assets, etc.) can result in significant trapped capital.
17How Does PFG Try to Influence Change? Local Industry GroupsConversations tend to be more technicalLocal RegulatorsTend to be less educated“Xerox” copy approach to regulationIf you’re a hammer, everything looks like a nailUS Industry Groups and Government InfluenceInternational Groups