Presentation on theme: "0 RESOLUTION PLANNING: NEW DEVELOPMENTS AND INSURANCE PERSPECTIVES ON LIVING WILLS IAIR & AIRROC JOINT ISSUES FORUM FALL 2014."— Presentation transcript:
0 RESOLUTION PLANNING: NEW DEVELOPMENTS AND INSURANCE PERSPECTIVES ON LIVING WILLS IAIR & AIRROC JOINT ISSUES FORUM FALL 2014
1 Under the Dodd-Frank Act in the United States, designated SIFIs are required to submit resolution plans to the FRB and FDIC The designated insurer SIFIs, AIG and Prudential, submitted their first resolution plans on July 1, 2014 The FRB and FDIC are currently reviewing the plans and learning about insurance in the process U.S. Regulators and Insurance Resolution Plans
2 RESOLUTION PLAN CREDIBILITY 2013 guidance to focus on 5 key obstacles: Multiple competing Insolvencies Requirements for Global Regulatory cooperation Operations and interconnectedness Counterparty Actions Funding and liquidity 2014 “Not Credible” - Too big to fail, too complex to survive? Complex and irrational legal entity structure Entity structure does not take account of the resolvability Absence of an effective holding company structure hinders bail in No access to DIP financing Inability to ensure continuity of shared services in resolution Lack of operational capabilities for resolution preparedness No entity resilience to cross border failures Unrealistic assumptions about counterparty behavior Inadequate resolution plan In 2013 the first round filers were told to focus on 5 obstacles. In 2014 the FDIC (Not Fed) deems all first round filers 2013 plans “Non-credible”.
3 ISSUES AND POSSIBLE ACTIONS TO RESPOND BY FIRST ROUND FILERS IssuePossible ActionsY/N Complex and irrational legal entity structurea.“White Sheet” entity design for to-be target b.Establish multi year migration path c.Institutionalize Legal Entity Rationalization Entity structure does not take account of the resolvability a.Inventory Services, Assets, Liabilities to execute resolution b.Entity re-alignment Services, Assets, Liabilities c.Break up plan Absence of an effective holding company structure hinders bail in a.Hold Co. design & migration path b.SPOE Assessment Absence of a stay on QFCsa.Convert to ISDA protocol No access to DIP financinga.DIP sources and uses analysis Inability to ensure continuity of shared services a.Stand alone bankruptcy resilient Shared Service Entities b.Transfer to Bank of critical functions c.Create redundant functions Lack of operational capabilities for resolution preparedness a.Resolution Data Inventory b.Simulation & desk top test c.Resolution Operating Model d.Resolution playbooks No entity resilience to cross-border failuresa.Jurisdictional Analysis b.Ring fencing of assets from liabilities c.Resolution control analysis Unrealistic assumptions about counterparty and customer behavior a.Counterparty Segmentation b.Precedent and behavior analysis Inadequate Resolution Plana.Entity level liquidity plan b.Stress period extension
4 OPERATIONS AND INTERCONNECTEDNESS – “A HUGE CHALLENGE” “Organizations live as businesses but die as entities” Operational Identification & retention of critical personnel for wind-down is imperative Formal SLAs that can transition to TSAs Laser like focus on identifying interdependencies Functional Operational Technology Demonstrate Entity Resilience to cross failures Identify impact on Payment Systems, Market Utilities, Clearing organizations Cross Entity Issues Liquidity pools Inter group guarantees Credit Provisions Cross collateral/ default Cross Border Interdependencies Cross liens Shared Operations Third party contracts Brand, IP etc. The BAU operating model will almost certainly hinder resolution
5 DODD-FRANK RESOLUTION PLANNING FOR INSURANCE The die is partially cast Insurance resolution plan follows a systemic designation (unlike the bank holding companies) Public statements from federal regulators Many critics; few apologists (and critics include readers of the plan) State receivership system on trial State commissioner as actor and decision-maker Multiple resolution & guaranty systems –Multiple resolution regimes inside of insurance… –In addition to the multiple regimes outside of insurance State court is in charge (either Title I or Title II) – generally non-specialized and precedent may be out of scale with experience Regulatory contagion – multiple regulators in play risks speed over wisdom “Systemic” challenges may outmatch jurisdictional reach and authority – national and international issues Patchwork of derivative rules Insurance resolution planning asks companies to solve problems they did not create…
6 DODD-FRANK RESOLUTION PLANNING FOR INSURANCE Plan must describe the actions of others State commissioner as actor and decision-maker –Type of receivership – rehabilitation or liquidation –Timing, decisions Guaranty fund system –Portfolio transfer –Administrative decisions Other substantive challenges Assumptions regarding capacity and availability of the guaranty fund system –Is it “public financing”? –How much stress will regulators want to see? Separate accounts Cross-border operations and interconnectedness Single point of entry harder to envision … and that do not exist for bank holding companies.
7 In reviewing insurer resolution plans, FRB and FDIC particularly focused on: Reporting requirements and measurements Features of the insurance industry and business model (e.g., reinsurance, property/casualty vs. life insurance, and asset management) Features and consequences of insurance receiverships (e.g., process, multistate coordination, affiliated company coordination, guaranty funds) U.S. Regulators and Insurance Resolution Plans
8 Differences in state regulatory frameworks To understand the nature of state oversight over insurers Difference in reporting obligations To understand capital monitoring Differences in regulatory capital treatment To understand FRB and FDIC approaches to risk weightings of assets and liabilities Differences in receivership processes To understand the processes surrounding rehabilitation, differences in state to state treatment of receivership and guaranty funds Features of the insurance industry and business model To understand actuarial issues and risks associated with reinsurance and captive reinsurers FRB and FDIC Topics of Interest
9 Patrick Hughes (312) Samuel E. Proctor (212) Contact Information