us solvency modernization and regulatory process joe fritsch, deputy superintendent

US Solvency Modernization and Regulatory Process

Joe Fritsch, Deputy Superintendent

New York Insurance Department, U.S.A.

Agenda

The NAIC

U.S. Regulatory Process

U.S. Solvency Modernization Initiative

New York

What Does the NAIC Do?

What’s the U.S. Regulatory Process?

NAIC

Created in 1871 by state insurance regulators to address the need to coordinate regulation of multi-state insurers.

NAIC members are the state insurance commissioners. NAIC members have regulatory authority, but the NAIC

organization does not. NAIC staff provide immense support to the U.S. insurance regulators who execute state-based insurance regulation.

The NAIC provides a forum for the development of uniform policy, including model laws and regulations, financial reporting and RBC requirements.

Membership: Strength in Numbers

56 Members Strong 50 States, the District of Columbia 5 U.S. territories

– American Samoa, Guam, Northern Mariana Islands,Puerto Rico, the Virgin Islands

NAIC Offices

KANSAS CITY – Executive HeadquartersNAIC’s service and support offices assist state insurance regulators providing: financial, actuarial, legal, computer, research, market conduct and economic expertise.

NEW YORK CITY – Securities Valuation OfficeThe Securities Valuation Office (SVO) examines the credit quality and value of insurer’s investment portfolios for the benefit of the regulatory community.

WASHINGTON, D.C. – Government Affairs OfficeThis office advises state regulators on policy implications of federal legislation and other federal and international actions affecting their authority over the business of insurance.

The NAIC at Work

Committee Structure Financial Solvency Initiatives Model Laws and Regulation Development Regulator and Consumer Education State Accreditation Program Regulatory Insurance Databases & Computer

Systems IT Systems (data filing, licensing, rate/form

filings, & more)

The NAIC at Work

Provide state insurance departments services and support in the areas of:

- financial, actuarial, legal, technology, research, market conduct and economic expertise.

NAIC maintains a Technology Center that houses ten years of history for over 5,200 insurance companies, and 4,000,000 insurance agents accessible by over 13,000 state insurance regulators via the internet or a high speed, dedicated frame relay network.

Also provide information via the internet to consumers, insurance industry and federal regulators.

Outside of the NAIC

State legislatures and state insurance departments create and implement state laws and regulations.

State insurance departments are charged with the insurance regulatory functions.

Deviations from NAIC

Accreditation Program

Financial Regulation Standards & Accreditation Program

• Ensures baseline financial regulatory processes and practices in each accredited state

• Generates savings to the states and industry, through regulatory reliance placed on accredited states

• Reduces duplication of financial regulatory processes by setting baseline expectations

• Without the program, financial solvency regulatory processes and costs would increase exponentially– States might not rely on each other to regulate licensed companies

domiciled in other states– Would result in millions of dollars in examination costs to the industry

U.S. Solvency Modernization

Evolution of the U.S. Solvency System

We have developed a detailed and uniform financial regulatory system in the U.S.

In the 1990s we created risk-based capital requirements and have continued to improve the formula over time, including adding stochastic modeling and trend tests.

SAP was codified in 2001 into a comprehensive guide and has continued to be updated & improved since.

We are placing greater emphasis on Governance through a Model Audit Rule.

We are proposing to modernize Reinsurance & Principles-Based Reserving

Evolution of the U.S. Solvency System

What is clear is that we have been continuously improving U.S. insurance regulation for many years.

What we have on our plates now is an investigation of new ideas and an opportunity to create the Gold Standard of Solvency Systems through the Solvency Modernization Initiative (SMI)!

Long-term work plan – continuous evolution

SMI Work Plan

Analyze other financial supervisory modernization initiatives, to the extent appropriate. Analysis should include

• the Basel II international capital framework for banks and implementation in the U.S.;

•solvency work by the International Association of Insurance Supervisors (IAIS);

•solvency proposals under consideration in other jurisdictions, including Australia, Canada, Japan and the EU;

•accounting standards being developed by the International Accounting Standards Board (IASB).

As an on-going process, and as details emerge from the EU, complete the analysis of EU/S2.

Identify areas for U.S. regulators to consider including in the current NAIC programs.

SMI Work Plan – 5 Focus Areas

Capital RequirementsInternational AccountingInsurance ValuationReinsuranceGroup Regulation

SMI Work Plan –

Articulation of US solvency framework and principles

Study other sectors and solvency and accounting initiatives

Improve our risk focused examsCreation of new reinsurance frameworkPrinciple based reserving life productsChanges to group supervision Implementation of new ideas to incorporate in

US solvency system

US Group Wide Supervision

• Role of the NAIC in US group wide supervision– Overview of US Supervision of Insurers– Coordinated Oversight Among State Insurance

Regulators– Communication Among Insurance Regulators– Communication with Other Regulators

US Supervision of Insurers

• Supervision: Entity Level– State regulators’ legal authority and responsibility exist

at the individual entity level• Direct responsibility for the state’s consumers/citizens• Perform domiciliary entity (& holding company system as needed)

analysis quarterly; conduct exams a minimum of once every 5 years

• Supervision: Holding Company System– Requires coordinated oversight with:

• Other US state insurance regulators• Other US state and federal regulators

– Banking, Thrift, SEC, USDA, FEMA, FBIIC

• Non-US insurance regulators

Coordinated Oversight• Coordination among State Insurance Regulators

– Financial statement disclosure of affiliated activities(NAIC uniform format and electronic data capture)

• Holding Company Organization Chart; material affiliated transactions • Investments in holding company entities

– Coordinated Analysis and Monitoring• Domiciliary states perform holding company analysis and coordinate with other

states as needed– Coordinated Examination Option

• Lead state(s) run the exam; other states rely upon this work and/or participate• NAIC Exam Tracking Tool posts coordinated exam schedule and staff and NAIC

server hosts the online examination– Independent Function of Financial Analysis Working Group (FAWG):

• Entity level analysis for “Nationally Significant Insurers”; advice to states• Group level analysis for large holding company systems• Analysis of events/situations that will materially impact the industry

Ins. Regulator Communication• State-to-State Communication:

– Sharing of exam/analysis reports & findings– Ad hoc discussions

• NAIC Supported Avenues of Communication:– FAWG presentation by domiciliary regulator– NAIC database displays state decisions on change of control

requests (e.g., purchases of insurers)– NAIC hosts interim meetings and conference calls between

states to discuss solvency or other concerns with individual entities or groups (FAWG recommends)

Other Communication

• Communication with Other US Regulators:– Miscellaneous calls and meetings– NAIC-hosted quarterly conference calls with federal

banking & thrift regulators

• Communication with Non-US Ins. Regulators:– Individual state Memoranda of Understanding– NAIC Multilateral Memoranda of Understanding– Ad hoc discussions, e.g., FAWG chair discussion

with EU regulator regarding mortgage guaranty ins.

NAIC Reinsurance Regulatory Modernization Proposal

• Flexible to accommodate the rapidly changing reinsurance environment while providing for appropriate levels of financial stability, and solvency

• Facilitate cross-border transactions and enhance competition within the U.S. market while ensuring that U.S. insurers and policyholders are adequately protected


• Mutual Recognition– Assessing regulatory effectiveness through an

“outcomes-oriented” approach, it would determine which non-U.S. jurisdictions are entitled to enter into mutual recognition agreements

Facilitate cross-border transactions and enhance competition within the U.S. market while ensuring that U.S. insurers and policyholders are adequately protected


• National Reinsurer Single State U.S. Regulator – U.S. Reinsurers

• Reinsurers would be licensed in one jurisdiction in order to access the U.S. market (minimum criteria established to qualify for single state regulatory approach done by RSRD)


• Port of Entry – Non-U.S. Reinsurers• Non-U.S. reinsurers would be certified to access the U.S.

market through one jurisdiction.• Become certified through a Port of Entry State

• Post reduced collateral for appropriately rated reinsurers


• Develops overarching principles to govern the regulatory equivalence of non-U.S. jurisdictions

• Moves the U.S. towards international standards


• Must have minimum surplus or equivalent equity of $ 250 million

• Establish appropriate collateral levels from zero to 100% based on rating and other criteria on a prospective basis. – Business practice of reinsurer– Slow pay reinsurers (file sched F or S)– Review audited financial statements– Any regulatory action against reinsurer


– Ratings Collateral Required– Secure – 1 0%– Secure – 2 10%– Secure – 3 20%– Secure – 4 75%– Vulnerable – 5 100%


• Reinsurance is a Financial Services Business that is Global

• Current Model Cannot be Justified from a Risk Perspective

• Adds Costs to the System that Exceed the Benefit Provided

• Information Systems and Regulatory Oversight Has Been Enhanced Since the Current Rules Were Put in Place in NY

• Reinsurance is a Business to Business Transaction• Collateral Rules Intended to Address Solvency – We

Can Do This w/o 100% Collateral


Regulators concerns• Solvency of Ceding Insurer• Recognition of Regulatory Equivalence• Enforceability of Judgments Against

Reinsurers in Non-U.S. Jurisdictions


Objections• Not Geographically Agnostic – Cessions to

Licensed/Accredited Reinsurers Get Automatic Pass• Response

– Department Has Regulatory Oversight over Licensed/Accredited Reinsurers

– Proposal is Giving a Substantial Benefit for Cessions to Qualified Unauthorized Reinsurers (i.e. Reduction in Required Collateral up to 90%)

– Proposal Adds Principle Based Standards for Cessions to ALL Reinsurers

Solvency Modernization Working Group

The SMI Working Group will meet march 11 and 12 phoenix Arizona

The agenda is to discuss to papers that are out for consultation

• Capital requirements

• Governance and risk management


The SMI issues• The US solvency regime is comprehensive and

well tested however we are always looking to improve based on international standards and lessons learned from the financials crisis

Capital requirements • what should safety level for solvency• Should we introduce internal models


Other issuesOrsa own risk solvency assessment should U.S.

require itGroup capital and group supervision

QUESTIONS?QUESTIONS?