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©Towers Perrin June 11, 2005 Andy Giffin Global Solvency Standards, Among Others CPCU Society International Section – Symposium: Solvency Standards Around the World
©Towers Perrin 2 For Today... The old days – for regulators The old days – for regulatees Global demand for change – the Asian Crisis Geographical crossovers – AIG Financial service crossovers Accounting fundamentals Response: the IAIS Insurance Core Principles Solvency: the core of the core The “Other” regulators and public pressure Global implications Implications for insurers, reinsurers Implications for regulators Implications for solvency
©Towers Perrin 3 The Old Days – For Regulators Most issues local Most insurance laws provide little on overall purpose or priorities Agenda set by reaction to industry, public demands Limited opportunity for authority interaction – NAIC in U.S., AIDA, shared financial examination, insolvencies, ad-hoc seminars Little historic interaction among banking, securities and insurance regulation
©Towers Perrin 4 The Old Days – For Regulatees Regulatory problems, mostly, a nuisance For multinationals, local variations an added expense but mostly solvable National crises in U.S. dealt with via NAIC Financial services comglomerates dealt with regulators by traditional separations – banking, securities, insurance
©Towers Perrin 5 Global Demand for Change – the Asian Crisis Mid-1990’s economic crises in Asia spread worldwide IMF, other inter-governmentals – Financial Stability Forum Financial regulation to curb future crises – not just banking IAIS for insurance: The Insurance Core Principles Guidance papers in progress Fundamentals usable in various political systems Bias toward open, transparent markets
©Towers Perrin 6 Geographical Crossovers - AIG 90s/00s – multinational to global companies Transnational leverage – strategic, financial, operational EU harmonization Multinationals benefit from global regulatory harmonization AIG – largest global insurer by market cap Broke down regulatory barriers to entry Transnational arbitrage, including regulation Regulatory crossover: finite reinsurance, financial reporting, governance AIG’s architect ousted
©Towers Perrin 7 Financial Service Crossovers Insurers as large investors Global financial stability – Insurance Core Principles Private pensions – banking, insurance, securities Bancassurance – risk and retail Reinsurance – risk spread and finance
©Towers Perrin 8 Accounting Fundamentals Multiple national statutory and GAAP approaches Scandals encourage global harmonization, controls: Pensions Enron, Worldcom Post 90s reinsurance failures Insurance failures – Mutual Benefit, Equitable AIG IAS, U.S. GAAP, “ Fair Value” Solvency II (Basel II) – need accounting basis
©Towers Perrin 9 Response: IAIS Insurance Core Principles Most insurance laws are a historical dog’s breakfast Application constrained by regulator resources Insurance Core Principles provides integrated elements with a rationale Guidance papers amplify, offer alternatives Bias toward private, open, transparent market Trend from prescription to oversight of self- assessment Coordinate with Basel Committee and IOSCO
©Towers Perrin 10 Solvency: The Core of the Core Approach: % of premiums, reserves – easy to administer – but, enough? Too much? Approach: Risk based capital formula – more dynamic, dynamic enough? Approach: Risk management, stress testing – requires expertise, quality risk assessment Investments, reserves, other risks Creativity, obscuration, fraud Global consistency – multinationals, reinsurance, multi-financials
©Towers Perrin 11 The “Other” Regulators and Public Pressure Eliot Spitzer – mutual funds to broker deals to finite reinsurance to Warren Buffett and the Greenbergs to the Governor’s Mansion? Investor suits – large pension funds, class actions Arthur Anderson – reversing the conviction of a ghost SEC – fair and accurate disclosure Sarbanes-Oxley – governance, accounting oversight IAS WTO, World Bank, IMF, OECD (Pension)
©Towers Perrin 12 Global Implications Multinationals will leverage harmony or arbitrage Variation breeds confusion and inefficiency Regulators can leverage harmony and implementation methods; need to upgrade skills Local, national companies face demand for upgrades
©Towers Perrin 13 Implications for Insurers, Reinsurers Reporting ala Sarbox Monitor international accounting debates Monitor insurance regulatory harmonization
©Towers Perrin 14 Implications for Regulators Most in general compliance with the IAIS Insurance Core Principles Tendency to be reactive to industry and public pressures Need to revisit purposes and global trends Need to reassess skills and realign with today’s priorities, e.g., dynamic solvency Pressure for financial services regulator consolidation IIF a useful resource
©Towers Perrin 15 Implications for Solvency Move toward dynamic analysis Companies improve understanding of risk dynamics Companies leverage risk – new challenges Regulators get better picture of exposure Regulators need stronger skills to keep pace
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