capital adequacy and solvency - oecdcapital adequacy and solvency keith weaver svp & cfo, asia...
TRANSCRIPT
CAPITAL ADEQUACY AND SOLVENCY
Keith WeaverSVP & CFO, AsiaManulife Financial
October 28, 2004
The views of a Multinational Life Insurer
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Manulife Financial• #2 Insurance company in North America based on
market capitalization
• Head Office – Toronto, Canada
• Direct selling operations in Canada, USA, Japan, Hong Kong, Philippines, Indonesia, PR China, Taiwan, Malaysia, Vietnam, Singapore, Thailand
• Merged with John Hancock in 2004
• Biggest impact on North America
• In Asia, biggest impact on Singapore with additional minority interests in Malaysia, Thailand, China
• Indonesia, Philippines were small and merge easily into Manulife’s local companies
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Solvency
#1 priority of regulators
is to ensure that
companies can meet their obligations
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Solvency
Appropriate reserves must be set up
AND
Suitable additional capital should be held to meet unforeseen circumstances
(Solvency Margin)
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Solvency Margin
• The size of the required solvency margin should be related to the risks inherent in the insurer’s balance sheet
• The size of the required solvency margin should take into account the conservatism included in the valuation basis
• Manulife supports regulatory approaches that define sensible reserves and a required solvency margin
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Shareholder Returns
• Overly conservative reserves or capital discourages investment
• Shareholders expect adequate returns on investment
• Investment is both strain on new business and regulatory capital
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Valuation / Capital Flaws
• Design can’t be perfect but….• Design flaws can increase risk• Flaws can create non-level playing field• Flaws can distort statutory income• Flaws can affect S&P Ratings
Valuation basis and capital requirements should be complementary
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CGAAP Valuation Overview• Gross premium reserves• Explicit assumptions • New CALM requires explicit asset modelling• All benefits are valued including policyholder
illustrated dividends• Assumptions: best estimates plus margins• Benefits: can monitor assumptions etc.• Benefits: reasonable earnings patterns • Requires extensive actuarial expertise
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Canadian Capital Overview• MCCSR: Minimum continuing capital
solvency requirement• Detail factor approach:
• Types of risk (asset default, mortality, etc.)• Covers negative reserves / CSV deficiencies
• Rules on forms of capital• Benefits to insurer: clear cut rules (altho’
complex).• Benefits to regulator:
• Can monitor ratio and take action• Can fine tune for new risks
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Risk Based Capital
• Manulife prefers Risk Based Capital• Detailed factor approach (e.g. MCCSR) is
better than Composite approach• Traditional simplified solvency ignores risk
and doesn’t require valuation of all benefits (e.g. Terminal Dividends)
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Necessary Conditions for RBC
• Regulator expertise• Professional body of actuaries• Developed capital markets• Stable practices in local insurance
market
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RBC Issues
• Actuarial work intensive - difficult for small life companies
• Precision is misleading• Creative tension on levels and factors
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Manulife supports
single international accounting and
valuation model for life insurance
plus
Standardized RBC approach
BUT
This will be difficult !
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Problems for Multinational Insurers
• Filings on multiple bases
• Some multinational insurers are impacted by double solvency standard (home country + local)
• Typically occurs when home jurisdiction looks at consolidated solvency (vs local regulatory focus on local solvency)
• This can create many anomalies in treatment of essentially similar products and risks
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Problems for Multinational Insurers
• Companies subject to double regulations are at competitive disadvantage since they are subject to additional constraints
• Uneven playing field is concern with no uniform approach to consolidated regulation
• RBC should be on local operations only at this time
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Holding Companies
• Companies establish legal structures for several reasons (limited liability, taxes, etc.)
• Global approach must distinguish between Holding Companies and Operating Companies
• RBC metrics should focus on operating companies
• Risk evaluation for holding companies should be based on risks at that level
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Perils of Global Approachto Regulation• Regulators in one jurisdiction often do not
understand other markets
• Products can be quite different
• Investment climate can be quite different
- - - - - - -
Regulators should focus on their own jurisdiction
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Two Tier Approach
• Simple RBC measure for small companies
• More sophisticated RBC methodology for those companies able to develop appropriate models
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Risk Diversification
• RBC formulas should recognize risk diversification
• Key way of controlling solvency risk
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Financial Reinsurance
• Regulators should be wary of giving too much credit for financial reinsurance
• Companies can reinsure the ‘safe’ risks and only retain the marginal risks
• Issue recognized by OECD
• Manulife supports regulation of FinRe in order to ensure industry soundness and consistency of regulation.
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RBC Must Have Teeth
• Objective is to avoid insolvencies
• RBC must be adequate and strongly enforced
• Exceptions should not be granted
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Manulife strongly prefers
a strong RBC regime to a reliance on
policyholder protection funds!
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Policyholder Protection Funds
• RBC must be in place before PPF is introduced
• RBC allows regulator to monitor financial condition of insurers
• Action can and should be taken before serious losses occur
• Result: minimal claims on PPF • Objection (strong companies
supporting weak companies) to PPF are minimized
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