Terri M. Vaughan and Randi Woods Webber

February 2015

Regulation and Risk

Management for Cross-Border

Insurance Groups

The Agenda: Current Issues for Cross-Border Insurance Groups

Issues in regulation and supervision

Risk management in cross-border insurance groups

International Developments Industry cross-border activity

Cross-border insurance groups Reinsurance transactions Capital management

Regulator cross-border activity IAIS (1994) Financial Sector Assessment

Program (FSAP) Financial Stability Board

Key Projects

Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)

Insurance Capital Standard (ICS)

Global Systemically Important Insurers (G-SIIs)

The Problem: Challenges in Supervising Internationally Active Insurance Groups (IAIGs) Diversity in organizational structures

Complexity/transparency Centralized functions

Diversity in markets Insurance markets (products, concentration, capital markets,

interconnectedness with banks, etc.) Regulation/supervision: risk tolerance, regulatory culture and

approach (principles-based vs. rules-based, relative emphasis on different tools)

Transparency in financial reporting Concerns of regulators

Regulatory arbitrage/cross-border risks-shifting Cross-border resolution Level playing field??

FSB MembershipArgentina: Central Bank of Argentina

Australia: Department of Treasury, Reserve Bank of Australia

Brazil: Ministry of Finance, Central Bank, Securities & Exchange Commission

Canada: Department of Finance, Bank of Canada, OSFI

China: Ministry of Finance, People’s Bank of China, CBRC (bank regulator)

France: Ministry of Economy, Finance and Foreign Trade;

Bank of France, Autorité des Marchés Financiers (AMF)

Germany: Ministry of Finance, Deutsche Bundesbank, Bafin

Hong Kong SAR: Hong Kong Monetary Authority

India: Ministry of Finance, Reserve Bank of India, Securities & Exchange Board

Indonesia: Bank Indonesia

Italy: Ministry of the Economy and Finance, Bank of Italy, CONSOB (securities)

Japan: Ministry of Finance, Bank of Japan, Financial Services Agency

Korea: Bank of Korea, Financial Services Commission 

FSB Membership (cont.)Mexico: Ministry of Finance & Public Credit, Bank of Mexico

Netherlands: Ministry of Finance, Netherlands Bank

Russia: Ministry of Finance, Central Bank, Federal Financial Markets Service

Saudi Arabia: Saudi Arabian Monetary Agency

Singapore: Monetary Authority of Singapore

South Africa: Ministry of Finance

Spain: Ministry of Economy and Finance, Bank of Spain

Switzerland: Swiss Federal Department of Finance, Swiss National Bank

Turkey: Central Bank of the Republic of Turkey

United Kingdom: HM Treasury, Bank of England, Financial Services Authority

United States: Department of the Treasury, Federal Reserve, SEC 

European Union: European Central Bank, European Commission

International Financial Institutions: BIS, IMF, OECD, World Bank

International Standard-Setting, Regulatory, Supervisory and Central Bank Bodies: BCBS, IOSCO, IAIS, IASB, CPSS, CGFS

International capital models in banking and for European insurance markets The Basel Capital Accord

Basel I

Basel II

Basel III

Basel IV???

European Solvency Regulation

Solvency I and the European Common Market

Solvency II

Issues Basel II and Solvency II (pre-crisis)

Relative emphasis on consolidated capital requirements

Fungibility of capital: "Source of strength", "Group support"

Role of group supervisor

Valuation basis

Internal models vs. standard model

Reassessment following the financial crisis

Home vs. host conflict

Market consistent valuation

Internal models

ComFrame and the ICS: The debate

Emphasis on centralized processes, policies, risk management

Role of group-wide supervisor

Consolidated capital requirements

Reflecting local differences?

Standard vs. internal models

Valuation basis

The Range of Possibilities

Global markets Local marketsSingle regulator Local regulatorsFree movement of capital “Balkanized

capital”

Other considerations

Solvency II and equivalence

Impact on US firms doing business in Europe

Reinsurance collateral (A covered agreement?)

The effectiveness of the U.S. voice in international discussions

FSOC-designated firms Prudential, AIG, MetLife

Others???

Principal International – A Real-World Example of Cross-Border Risk Management

Nine Business in Ten Countries

Types of Financial Services Businesses

Life Insurance

Annuities

Mandatory Pension

Voluntary Pension

Mutual Funds

Asset Management

All have very different Risk Characteristics and Capital Needs

From a Risk Perspective, Looking at Capital without Reserves just Doesn’t Make Sense

Life Insurance typically has high reserves

Pension business usually holds Account Values

Mutual Funds and Asset Management hold zero reserves

A better measure would be the Total Assets Required to provide the level of solvency that the regulatory expects.

In Pictures…

The Application is More Challenging than the Theory Capital is NOT Fungible

Dividends are taxable

Often, they require regulatory approval

Most regulators want “their” capital residing in “their” country

Solvency Requirements are not Consistent Across Jurisdictions

Supervisory Colleges raise local capital requirements instead of lowering them

Regulator demanded guarantees (separate accounts, ring-fencing of assets, etc.) can result in significant trapped capital.

How Does PFG Try to Influence Change?

Local Industry Groups

Conversations tend to be more technical

Local Regulators

Tend to be less educated

“Xerox” copy approach to regulation

If you’re a hammer, everything looks like a nail

US Industry Groups and Government Influence

International Groups