tuesday 0900 global group capital standards group capital standards – basic capital requirement...

© 2016 National Association of Insurance Commissioners


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Global Group Capital StandardsGlobal Group Capital Standards

Ani Verma

NAIC


This presentation is pre-qualified for NAIC Designation Renewal Credits (DRCs). If you currently hold an NAIC APIR, PIR, or SPIR designation and are pursuing continuing education credit to maintain it, you may be awarded credits for your participation. To receive credit, you must be in attendance for the duration of the presentation.

Attention APIR, PIR, or SPIR Designees…



Learning Objectives

At the end of this presentation, you will be able to:

• Understand the methodology and developments in Global Group Capital Standards– Basic Capital Requirement (BCR)

– Higher Loss Absorbency (HLA)

– Risk-based Global Insurance Capital Standards (ICS)

Slide # 3


Moving Parts

• Work being driven by Capital Solvency and Field Testing Working Group

• IAIS implementation at country level subject to approval from home regulators

IAIS

• Staff of NAIC, Fed and FIO (Team USA) collaborate/ coordinate to identify areas of consensus

Triparty

• Active participation through IAIS and CDAWG

• Development of group capital calculation

State Regulators

• Dodd Frank mandate• Collins Amendment in Dec 2014. No exact

time frame

Federal Reserve Bank

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U.S. Regulators’ Views

• View group capital as additional regulatory tool, should it be implemented

• Assumption underlying a consolidated group capital is that monies are fungible within group

Group capital should not

undermine legal entity

requirements

• Stabilizing benefits to retaining diversity in regulatory approaches

• Single capital standard can increase systemic risk

Should result in comparable

outcomes, not necessarily the same capital

ratios

Slide # 5


IAIS Global Group Capital Standards: Background

G 20 FSB IAIS Mandate

• Basic Capital Requirement (BCR): 2014• Higher Loss Absorbency (HLA): 2015• Currently 9 insurers: 3 U.S. led groups

Globally Systemic Important

Insurers (G-SIIs)

• Insurance Capital Standards (ICS)• Expected about 50 to meet criteria: about 18 in US • Expected 2019

Internationally Active Insurance Groups (IAIGs)

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BCR+ HLA Overview

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Basic Capital Requirement(BCR)



Purpose and Scope of the BCR

• Qualified Capital ResourceCapital Requirement

BCR Solvency Ratio

• Core Capital• Additional Capital• 50% Capital or more: Core Capital

Capital Resource

• Insurance component (incl. Non Traditional activities)

• Non-Insurance Banking component : Basel III Leverage Ratio

• Other Financial component e.g. securities operation

Capital Requirement

(Full Consolidation)

Slide # 9


BCR Balance Sheet

Market Adjusted Valuation

• Potential volatility from year to yearAsset

• Current estimates without margins• Conservatism transferred to capital resources• Discount rates

Liability

Slide # 10



Calculation of BCR for Insurance (pre-uplift)

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BCR Observations

BCR level intended be at “PCR” or Prescribed Capital Requirement for G-SII• Average level of the BCR is 75% of their

reported jurisdictional PCR• To bring to PCR level, a 33% uplift will be

applied• On average, approximately 83% of G-SII

GAAP capital resources are classified as Core capital

Slide # 12



Higher Loss Absorbency(HLA)


HLA Overview

• Base for the HLA will be the BCR with a 33% uplift • Uplift will be phased in over three years• No uplift applied to regulated banking

BCR Uplift

• Depending on G-SII designation score• Mid bucket uses factors that are 50% higher than

low bucket• Highest bucket factors are 50% higher than mid

bucket

Bucketing

• Specific factors for each component of the BCR• Factors for NTNI component are higher than for

traditional components• Regulated Banking is capped based on limits set

by banking requirements

Factors

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BCR+HLA Computation

Slide # 15


BCR & HLA Status

• Confidential supervisory reporting of BCR began in 2015

• Oct 2015, HLA initial development completed. Confidential HLA supervisory reporting will begin in 2016

• Applies to designated GSIIs starting in 2019

• Both HLA and BCR subject to further refinement: Changes to GSII Assessment Methodology and NTNI definition

Slide # 16



Risk-based Global Insurance Capital Standards(ICS)


ICS: Criteria for IAIGs

• Total assets of over $50 billion• Gross written premium more

than $10 billionSize

• Premium written in three or more jurisdictions

• At least 10 percent of premium written outside the “home” jurisdiction

International Activity

Slide #18



What is ICS?

• Includes non-insurance operations of the group• Comparability across jurisdictions

Consolidated quantitative capital standard

• Supervisors may set higher standards• Not intended to replace or affect capital standards for underlying legal entities

Establish Minimum Standard

• ICS will be foundation for HLA for GSIIs

Objective: Policyholder protection and to contribute to financial stability

• Implementation in 2019

Dec 2014: IAIS releases “Consultation Document” with detailed proposal

Slide # 19


Ultimate Goal

“The ultimate goal of a single ICS will include a common methodology by which one ICS achieves comparable, i.e. substantially the same, outcomes across jurisdictions. Ongoing work is intended to lead to improved convergence over time on the key elements of the ICS towards the ultimate goal. Not prejudging the substance, the key elements include valuation, capital resources and capital requirements.”

IN IN

TERI

M

CLAR

IFIC

ATIO

N

DECI

SIO

N

In February 2015, IAIS Executive Committee agreed, without specifying a date, on an ultimate goal for the ICS.(Full text in box; emphasis added)

Subsequent communications on ultimate goal indicate that the IAIS agreed on this ultimate goal of the ICS to “avoid regulatory and capital arbitrage”

IAIS will consider interim goals for year-end 2016 and 2018. Will balance need to be ambitious and what is realistically achievable.

Slide # 20



Current Proposal for ICS

Tier 1 Limit Tier 1 No Limit

Tier 2 Paid Up Tier 2 Non-Paid Up

Capital Resources

Insurance Market

Credit Operational

Capital Requirements

ValuationMarket Adjusted GAAP+ Approach

Qualifying Capital ResourcesCapital Requirement ICS Ratio

Slide # 21


Valuation: MAV vs GAAP+

IAIS ExCo decision in 2014

• The Market Adjusted Valuation (MAV) approach will be used as the initial basis to develop an example of a standard method in the ICS

Market Adjusted Valuation (MAV)

• GAAP valuation approach data will be collected. Reconciliation between Market-Adjusted valuation approach and GAAP valuation approach will be requested of the participating IAIGs

• This will be used to explore and, if possible, develop a GAAP with adjustment valuation approach

GAAP with Adjustment (GAAP+)

Slide # 22



GAAP with Adjustment Approach (GAAP+)

• Starting basis for adjustments: GAAP = US GAAP, SAP for mutual insurers, IFRS (local jurisdictional GAAP)

• Limited adjustmentsSimpler

• Starts with audited financial statements• Easy to map capital standards to public financialsAuditable

• Leverages established company processesLess costly

Slide # 23


Current Issues: Valuation: Margin Over Current Estimates (MOCE)

Current Estimate

• Entity specific assumptions• Also called “own fulfillment approach”

Prudence Margin

Approach

• “Hypothetical” Transfer to a third party• Market based assumptions• Use Cost of Capital Method

Transfer Value Margin

Approach

Slide # 24



Current Issues: Valuation

• MAV vs GAAP Plus

• Refinements to jurisdictional GAAP+

• Discounting: Several proposed discounting options being tested under MAV

• Scope of Consolidation

• Treatment of Accumulated Other Comprehensive Income (AOCI)

• Data Quality

Slide # 25


Definition of Capital Resources

• Capital Resources represent the difference between assets and liabilities. Capital Resources provide loss absorbency on a going concern, in adverse circumstances, and during a winding-up for the purposes of policyholder protection and financial stability

• Two capital tiers are being considered

Total Qualifying Capital Resources

Tier 1No Limit

Limited

Tier 2Paid Up

Non-Paid Up

Slide # 26



Principles for Categorization

• Extent to which and in what circumstances capital element is subordinated to rights of policyholders and non-subordinated creditors

Subordination

• Extent to which capital element is fully paid and available to absorb loss

Availability

• Period for which the capital element is available

Permanence

• Extent capital element absorbs losses and in which circumstances

Loss Absorbing Capacity

• Extent to which the capital element is free from mandatory payments or encumbrances

Absence of Encumbrances

Slide # 27


Capital Resources: Adjustments

Adjustments, Exclusions and Deductions from Tier 1 Capital Resources

• Goodwill

• Intangible assets, including computer software intangibles

• DTAs that rely on the future profitability of the IAIG

• Net defined benefit pension plan asset

Slide # 28



Current Issues: Capital Resources• Inventory of various instruments for

categorization

• Surplus Notes/Senior Debt

• Allowable limits for Tier 2– Non Paid Up Capital

– Encumbrances

– Deferred Tax Assets

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• To extent risk not quantified addressed in ComFrame

ICS reflects all material risks

• Risk Measure: 90% TVaR or 99.5% VaR• One year time horizon

Key aspects of quantifying risk in ICS

Slide # 30



ICS Covered RisksINSURANCE RISK

LIFE RISK

Mortality LongevityMorb/

DisabilityLapse Expense

NON-LIFE RISK

Premium Claim Reserve Cat*

MARKET RISK

EquityReal

EstateInterest Rate Currency Asset

Concentration

CREDIT RISK Credit RiskOPERATIONAL RISK

Except to extent (implicitly) included above, following are excluded:

Group Liquidity Reputational Strategic

Aggregation of requirements will reflect diversification

31 Slide # 31


Risk Measurement


Deterministic

Factor Based Stress Based

StochasticStochastic Modeling

Structural Modeling

• ICS will involve a combination of risk measurement approaches, particularly:− Factor Based Approach: Factors applied to exposure measure

(approach in most of RBC)− Stress Based Approach: Capital requirement is determined as the

decrease between capital resources on unstressed balance sheet and those on stressed balance sheet

• Example ‘Standard Method’ proposed though there is possibility (in future) of alternatives− Alternate factors; partial/full internal models; etc.

Slide # 32



Standard Method vs NAIC RBCRisk ICS RBC (Life) RBC (P&C)

Mortality Stress Factor (2) --Longevity Stress -- --

Morbidity / Disability Stress Factor (2) --

Lapse Stress .. --Expense Stress .. --Premium Factor -- Factor

Claims reserves Factor -- FactorCatastrophe Model -- Model(1)Interest Rate Stress Factor(2) --

Equity Stress Factor(3) FactorReal Estate Stress Factor FactorCurrency Stress -- --

Asset concentration Factor Factor FactorCredit Factor Factor Factor

Operational Factor Factor(4) Factor(4)

Notes on Comparison of ICS to NAIC Risk Based Capital(1) Currently factor but models used in near future(2) Model used for fixed annuities and single premium life plans(3) Factor applies to all common stock & Model is used for variable annuities with guarantees(4) Currently excluded but plans underway to include

Slide # 33


Current Issues: Capital Requirements• Calibration

• Health as separate module

Slide # 34



IAIS Process

Slide # 35


ICS and ComFrame Delivery Time-linesThe following table summarizes key activities leading to the IAIS’s adoption of the ICS, after which Members would begin implementation of the ICS as part of ComFrame:

Slide # 36



Additional Resources

• ICPs– http://iaisweb.org/page/supervisory-material/insurance-core-principles

• IAIS BCR for GSIIs, October 23, 2014– http://iaisweb.org/page/news/consultations/closed-consultations/basic-capital-requirements-bcr-for-

g-siis

• IAIS HLA for GSIIs, June 25, 2015– http://iaisweb.org/page/news/consultations/closed-consultations/higher-loss-absorbency-hla-

requirements-for-g-siis//file/52814/hla-consultation-document-25-june-final-clean

• IAIS ICS Consultation Document (CD), December 17, 2014

– http://iaisweb.org/page/news/consultations/closed-consultations/insurance-capital-standard-ics

• NAIC Comments on ICS (CD)– http://www.naic.org/documents/committees_g_related_naic_comments_iais_ics_draft.pdf

Slide # 37


Questions

?

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