Office of the SuperintendentBureau du surintendant of Financial Institutions Canadades institutions financières Canada Supervisors and the IAA Working Party’s Report CAS Spring The Broadmoor May 18, 2004 Allan Brender

2 Insurance Supervisors IAIS is an organization of over 110 members The countries represented have a wide variety of regulatory, actuarial and financial reporting systems The various supervisory authorities have widely varying levels of sophistication and available technical resources

3 Insurance Supervisors Some jurisdictions require actuarial certification of policy liabilities –Others require no actuarial input to financial reporting, particularly with respect to P&C companies Some jurisdictions have sophisticated risk- based capital requirements –Others have virtually none at all

4 Insurance Supervisors Some supervisors are prudential supervisors and regulators –Others also oversee consumer and market conduct issues Some supervisors are integrated supervisors –They supervise several different types of financial institutions (e.g. banks, insurers, stock brokers and markets, mutual funds, pension plans)

5 Reactions to the WP Report Consistent with Basel II –Insurance should not necessarily follow banking Conceptual –Not sufficiently specific; want a formula that can be implemented directly Leading edge –Too sophisticated to implement

6 An Approach to Solvency Capital Requirement Supervision – including additional institution-specific capital requirements Market discipline and disclosure Risk management underlies everything

7 An Approach to Solvency The Basel II framework was not adopted because it is used in banking –It is a good description of a program for prudential supervisors –It makes particularly good sense to integrated supervisors

8 Conceptual or Specific The WP wanted to provide an approach to required capital that could be adapted by all jurisdictions Since international accounting and actuarial standards are not in place, WP could not suggest a single universal requirement

9 Total Balance Sheet Approach Set target for the sum of liabilities and required capital –Easily adjusts to varying valuation rules and methods Practically, this suggests we have a probability distribution of costs –Technically difficult in many situations

10 Distribution of Costs Risk measure: CTE(x) = TVaR(x) = E{Y | Y > x } Need a reliable method to determine the appropriate distribution –Fit loss distributions –Company-specific models

11 Company-specific Models What conditions will supervisors place on the use of these models? –Degree of supervisor’s technical sophistication will likely be the determining factor –Basel imposes conditions on model approvals; integrated supervisors likely to adopt this approach A. Brender The Use of internal models for determining Liabilities and Capital Requirements, NAAJ, vol.6 no.2, April 2002, pp.1-10

12 Company-specific Models What conditions will supervisors place on the use of these models? –Some supervisors may not allow the use of these models –Others may allow use with no or minimal conditions –For P&C business, see

13 Conceptual or Specific WP report provides various techniques to determine capital requirements for specific risks International consistency is with respect to methodology and level of requirements Factors for a specific risk will vary from country to country to reflect differences in local conditions

14 Leading Edge WP report does reflect the most current thinking about insurers’ capital Many jurisdictions will not be able to adopt all suggestions at once Nevertheless, the WP’s approach is a reasonable target for all jurisdictions

15 Leading Edge A reasonable strategy is to aim for maximal adoption in technically advanced jurisdictions The immediate target: Europe –Solvency II

Office of the SuperintendentBureau du surintendant of Financial Institutions Canadades institutions financières Canada Thank you