Transcript Canadian Institute of Actuaries L’Institut canadien des

Canadian
Institute
of
Actuaries
2007 General Meeting
Assemblée générale 2007
Montréal, Québec
L’Institut
canadien
des
actuaires
2007 General Meeting
Assemblée générale 2007
PD 15
OSFI Update
Stuart Wason
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2007 General Meeting
Assemblée générale 2007
Agenda
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OSFI first impressions
OSFI introduction
DCAT reviews
Insurer solvency frameworks
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OSFI First Impressions
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Language
Group dynamics
Controls
Rewards
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Language – No problem use
acronyms!
AA AAR ABM ACI ACL AFC AFID AFTR AG AICPA ALAE ALCO
ALM AML APB APD APM ASB ATF ATIA AuG-15 AuG 43 BA
BAA BAAC BAAT BCP BDN BID BoD BP BPS BRP BSII BTW BU
CAD CAG CALM CAMEL CAO CAPSA CAR CaR CAS CBA CBO
CBRS CCIR CCMD CCRA CD CDE CDIC CDO CDS CE CEO CFO
CFR CGAAP CIA CIAA CICA CID CIM CIO CIRC CLHIA CLIFR
CLO CMD CMHC CMO CMPF CMRAS CMS COB COO CPAB
CPC CRAD CRC CRD CRM CRO CROAS CRR CSIS CSV CSWS
CTE CVaR DAR DAT DCAT DEM DoF DPAC DPAE DPB DSO DSS
DST DTI DTIAAC DTIC EAG EAP EBIT EC EDF EDMS EDP EL
EM EMU EO EPM EPR EPS ETH EV FADM FAQ FAS FASB FBB
FBI FCAC FCG FIC FIFO FIG FIRP FIRS FIS FISC FMV FRA FRB
FRC FRDB FRFI FRIDB FRI FSA FSAP FSCO FSTD FTE FVO FX
FYE GA GAAP GAAS GATS GATT GBP GFI GIL GNAIE GNPL
GRS HKIA HKMA HL HRMS IAA IAASB IAG IAIS IAR IAS IASB
IBC IBG IBNR ICA ICAO IDA IFA IG IEM IFRS IIF IM IMF IMM
IPO IPU IRB IRR ISR IT IVaR JIT JPS JPY JUMP KOB LAD L&PI
LoC LCMS LDC LDF LE LIAAC LIBOR LIFO LIIC LLE LLP LOB
LRA LTP MAC MfAD MAS MASD MAT MBS MCCSR MCT MDB
MD&A MIRS MIS MOU MRV MTM
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2007 General Meeting
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OSFI First Impressions
• Group dynamics – Bumper to
bumper meetings!
• Controls – No worries, there is a
form for almost everything….
• Rewards – That’s easy, the people,
responsibilities, industry
relationships!
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OSFI Introduction
2007 General Meeting
Assemblée générale 2007
• Julie Dickson – Superintendent
– Ted Price – Assistant Superintendent,
Supervision Sector
– Bob Hanna – Assistant Superintendent,
Regulation Sector
– Coleen Volk – Assistant Superintendent,
Corporate Services Sector
– Jean-Claude Ménard – Chief Actuary
– JoAnne Bagnall – Senior Director, Audit &
Consulting Services
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2007 General Meeting
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OSFI Introduction
• Ted Price – Assistant
Superintendent, Supervision
– Kent Andrews – Senior Director,
Financial Conglomerates Group
– Karen Badgerow-Croteau – Senior
Director, Financial Institutions Group
– Other direct reports
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OSFI Introduction
2007 General Meeting
Assemblée générale 2007
• Bob Hanna – Assistant Superintendent,
Regulation
– Patty Evanoff – Senior Director, Legislation
& Approvals
– Gilbert Ménard – Senior Director, Capital
Division
– Nick Burbidge – Senior Director,
Compliance
– Kim Norris – Managing Director,
International Advisory Group
– Alain Prévost – General Counsel
– Stuart Wason – Senior Director, Actuarial
Division
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2007 General Meeting
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OSFI Introduction
• Stuart Wason – Senior Director,
Actuarial Division
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David Oakden – Managing Director
Helmut Engels – Director
Sheldon Selby – Actuarial Specialist
6 other Actuarial Division staff
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2007 General Meeting
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Actuarial Division Mandate
• Ensure appropriate actuarial
knowledge, advice and standards
are applied in OSFI’s regulatory
and supervision systems so
policyholders are safeguarded from
undue loss and public confidence is
enhanced
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Actuarial Division Roles
• Identify insurer specific risk in
conjunction with Supervision
• Review insurer AAR’s, DCAT’s,
external reviews
• Lead insurer model approval process
• Monitor & analyze emerging risks
• Share actuarial expertise within
Supervision and Regulation Sectors
• Active participant in relevant
committees of CIA, IAA and IAIS
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2007 General Meeting
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DCAT Reviews
• Actuarial Division will use common
template to review and score majority of
DCAT’s (both life and P&C) in coming
months
• Feedback to industry on nonconfidential findings via open forum
spring 2008
• Goal: Strengthen this valuable and
useful risk & capital management tool
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Insurer Solvency Frameworks
2007 General Meeting
Assemblée générale 2007
• Global developments
– IASB IFRS 4 Phase II January 1, 2011
(2012?)
– Solvency II in Europe
– IAA & IAIS Guidance papers
• Canadian developments
– Life MCCSR II project underway
– P&C need for MCT II becoming important
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IASB Developments
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Move to IFRS
Importance to OSFI
Key Impacts
Overview of Proposed Accounting for
Insurance Contracts
What OSFI is doing
Implementation Challenges
Other IFRS to watch for
Further Questions
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2007 General Meeting
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The Move to International
Financial Reporting Standards
(IFRS)
Canada will adopt IFRS for “publicly
accountable enterprises” on January 1, 2011
- so all regulated financial institutions will
need to convert.
The move to IFRS will more than likely
include a new standard on accounting for
Insurance Contracts
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2007 General Meeting
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Importance of IFRS to OSFI
• Accounting measurement is important
as we try to meet our objectives of:
– Continued use of reliance framework on
auditors work and thus the financial
statements
– Understanding arbitrage possibilities
between banks and insurers due to
accounting differences
– Reliable financial statement values that can
be incorporated into regulatory capital
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International Accounting for
Insurance Contracts
2007 General Meeting
Assemblée générale 2007
“The IASB has been working on the insurance contracts project
with little respite for ten years. If it were easy, it would have
been completed ten years ago.”
Past:
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Issues Paper (1999)
Draft Statement of Principles (2001)
ED 5 (2003)
IFRS 4, Insurance Contracts (2004)
Current:
– Phase II Discussion Paper (comments due)
Future:
– Finalization of a new Insurance Accounting Standard
(2009/10)
– Implementation of a new Insurance Accounting
Standard (2011)
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Key Impacts for Non-Life Insurers
• Unearned Premium Reserve gone (but
may serve as a proxy for pre-claims
liabilities)
• Deferred policy acquisition costs gone –
include in future cash flows
• Impacts to key financial ratios
• Explicit margins
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2007 General Meeting
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Key Impacts for Life Insurers
• CALM gone (no linkage of assets to
liabilities; no ALM or asset credit risk in
liabilities; discount rate not tied to assets
on the book)
• Reinsurance presented gross
• Investment contracts accounted for as
financial instruments
• Investment components unbundled
• Devil is always in the details – there
could be more
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Insurance Contracts Accounting
• Same accounting principles apply to Life
and Non-Life Insurance Contracts – a
change
• Contracts without significant insurance
risk are accounted for as financial
instruments – i.e. non-life contingent
annuity – a change
• Measurement attribute is current exit
value – “the amount the insurer would
expect to pay at the reporting date to
transfer it’s remaining contractual rights
and obligations immediately to another
entity”
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2007 General Meeting
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Insurance Contracts Accounting
• The current exit value is not typically
observable, so three basic building blocks
serve as a proxy:
– An estimate of the future cash flows
– The effect of the time value of money
– A margin
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2007 General Meeting
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Insurance Contracts Accounting
Future Cash Flows
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Current estimates
Unbiased
Probability weighted (expected value)
Use observable market inputs, where
they exist
• Principles, not detailed guidance
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2007 General Meeting
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Insurance Contracts Accounting
Discount Rate
• Both Life and Non-Life discounted
• Current market interest rate - some
interpret as “risk-free” rate
• Expected returns on actual assets are not
relevant (no linkage) – unless they affect
liability cash flows
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Insurance Contracts Accounting
Margins
• Explicit
• Required by market participants for
bearing risk and providing service
• Not a shock-absorber
• Principles based – likely Cost of Capital
• Issue of calibration – profit at issue
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What OSFI is doing
• OSFI monitors developments in IFRS
and provides input to standard setters
mainly through the BCBS and IAIS
• OSFI’s solicits input from interested
parties – FI’s, other regulators, auditors,
industry associations
• OSFI has a priority project on the Move
to IFRS
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Implementation Challenges
for OSFI & Insurers
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Time is short – 3 years
Resources are limited
Standards are complicated
Competing priorities
Lessons learned from EU introduction
of IFRS 4 Phase I:
1.
2.
3.
4.
Start early
Devil is in the details
Don’t underestimate the time and effort
Educate users of financial information
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Other IFRS to watch for
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Fair Value Measurements
Revenue Recognition
Derecognition/Consolidation
Financial Statement Presentation
Conceptual Framework
Liabilities & Equity
Improvements to Financial Instruments
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2007 General Meeting
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Solvency II in Europe
• Proposal for Framework Directive on
Solvency II to the European Parliament
and European Council on July 10, 2007
• Provides for target & minimum capital
requirements for insurers
• Target can use internal model approach
(subject to supervisor approval)
• Applies to life & non-life in 2011
(2012?)
• Quantitative Impact Studies
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IAIS Solvency Developments
2007 General Meeting
Assemblée générale 2007
• Recent Guidance Papers
– ERM for capital adequacy and solvency
purposes
– Use of internal models for risk and capital
management by insurers
– Structure of regulatory capital requirements
• Expected Guidance Papers
– Group issues
– Valuation of assets and liabilities, including
technical provisions for solvency purposes
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– Capital resources, the forms of capital
IAA Solvency Developments
2007 General Meeting
Assemblée générale 2007
• Recent Guidance Papers
– Use of internal models for risk and capital
management by insurers
– Risk margins
– Enterprise risk management
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2007 General Meeting
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Canadian Insurer Solvency
Framework - Forces of change
• Emergence of IASB standards for
insurance accounting means that CICA
will cease to be an accounting standards
setter for insurers
• Advanced probabilistic models,
– Now used by larger insurers for internal
risk & capital management
– Solvency II
– Existing framework not capable of
reflecting advanced products and risk
mitigation
– Allowed by Basel II
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Canadian Insurer Solvency
Framework - Forces of change
2007 General Meeting
Assemblée générale 2007
• Current standard approach
– Originally designed and calibrated many
years ago before market values used
– Market risk component uses simple factor
– No allowance for diversification or
concentration
– Increasingly includes fairly complex to
calculate elements (i.e. no longer a
“standard” approach?)
– Not suitable for IASB insurance liabilities
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Work completed/underway
2007 General Meeting
Assemblée générale 2007
2006
 Life insurer stakeholder working group formed
(MAC)
 Agreement on solvency framework principles
 Agreement on working framework for “technical”
aspects of the capital model
2007
 Agreement on advanced modeling best practice
guidelines
 Agreement on “Vision” for structure of future
regulatory solvency regime
 Initiate work on new standard approach
? Finalize market risk advanced approach
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2007 General Meeting
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Key milestones
2008
- Work on non-life (P&C) issues commences
- Finalize credit risk advanced approach
- Finalize framework for risk aggregation for advanced
approach
- Draft standard approach ready for QIS
2009
- Further QIS on revised standard approach
- Standard approach finalized
2010
- Implementation measures necessary for new standard
approach put in place
2011
- New standard approach takes effect January 1, 2011
- Approval of new advanced approach for large insurers?
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MAC Vision concepts
2007 General Meeting
Assemblée générale 2007
Future solvency financial requirements should:
– take into account all credit, market, underwriting &
operational risks
– recognize all cash flows from all of the assets and
liabilities
– value the cash flows consistently and realistically
– reflect the risk mitigation strategies used by the insurer
– consider the dependencies within risks and between risks
and recognize when appropriate and measurable
– ensure that insurer assets are sufficient, with high degree
of confidence, to withstand adversity emerging over a
defined regulatory control time horizon (e.g. might be
one year)
– ensure that there are sufficient assets at the end of the
defined time horizon to provide for the:
• transfer of the remaining obligations to another
insurer or
• run-off of the remaining obligations
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2007 General Meeting
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MAC Vision
Minimum
Asset
Requirement
Regulatory control
level
Determined using
“standard” approach
Target Asset
Requirement
Threshold investment grade
security level – regulator
going concern level
Determined using “advanced”
or “standard” approach
Target 1 year CTE(99) sufficiency
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MAC Vision
2007 General Meeting
Assemblée générale 2007
Advanced Approach
• Uses company models
• Sophisticated scenario
modeling integrated with ERM
• Measures all risks & risk
mitigation
• Risk dependencies modeled
• Requires regulatory approval
• Encouraged for large insurers,
technically able insurers &
those with complex risks
• Selection of advanced approach
separate for credit, market,
insurance and operational risk
Standard Approach
• Industry formulaic,
factor based or stress
scenario
• Not as advanced but
developed to be
consistent & reflect key
risks & mitigation of
advanced approach
• Risk dependencies
partially recognized
• Designed to produce an
appropriate requirement
across the industry
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Key Discussion Points
2007 General Meeting
Assemblée générale 2007
 Risk horizon will be one year (working hypothesis)
 Risk measure will be CTE (working hypothesis:
CTE99)
 Hedgeable risks at post-stress market consistent
valuations
 Non-hedgeable risks at post-stress BEL + poststress risk margin (working hypothesis: CTE
based)
 How will standard approach differ from advanced
approach?
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Focus on Target Asset Requirement
Required capital to be determined indirectly:
2007 General Meeting
Assemblée générale 2007
Required
Capital
=
Target Asset
Requirement
Assets
-
Reported IFRS
Liabilities
Liabilities
& Capital
required capital
solvency
buffer
margins
target asset
requirement
expected
asset
requirement
best
estimate
policy
liability
IFRS liabilities
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2007 General Meeting
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Risk Horizon
• Working Hypothesis: One year extreme
risk horizon (but coupled with Terminal
Provision that reflects lifetime risk
horizon)
• Focuses extreme event risk analysis and
management on actionable time frame
• When coupled with appropriate
Terminal Provision at end of One Year
that reflects full distribution of poststress risk events, also incorporates long
term risk horizon
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Risk Measure
• Working Hypothesis: CTE99 over one year
90%
2007 General Meeting
Assemblée générale 2007
95%
CTE90
• Considered Percentile (VaR/CL) but CTE (TailVaR
or Exp Shortfall) chosen as theoretically superior:
• CTE more robustly reflects the “fatness” of the tail.
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Risk Margins
2007 General Meeting
Assemblée générale 2007
• Working hypothesis: Risk margins are implicit in
post-stress market consistent values for hedgeable
risks, and to be CTE based for non-hedgeable risks
Hedgeable: if robust market
and prices available and
intent to close
Risks closed out/hedged at poststress market consistent prices;
risk margin implicit in MV
Non-hedgeable: if lack of
robust market and prices or
no intent to close
Risks retained for lifetime with
Terminal Provision set at poststress BEL plus risk margin
based on conservative CTE
using post-stress “real world”
scenario projections
• Reflect 1st yr stress scenario fully for Hedgeable
and Non-hedgeable risks & full lifetime post-stress
risk distribution for Non-hedgeable risks
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2007 General Meeting
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Frameworks Compared
Canadian Framework:
Assets required today to ensure that assets at end of 1 year are
sufficient to support obligations under CTE99 stress scenarios,
where sufficiency means:
• MVA exceeds MV obligations for Hedgeable risks AND
• Assets exceed BEL + post-stress CTE risk margin for Nonhedgeable risks
Solvency II: (Technical Provisions + SII Capital Required)
MVA required today to ensure that MVA at end of 1 year exceeds
MVL with 99.5% confidence, where:
• MVL = BEL + MVM for Non-hedgeable risks, with MVM assumed
to be unchanged (?) post-stress
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2007 General Meeting
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Key Elements of Frameworks
Solvency II
Canada
Cover All Risks
P
P
Company Risk Profile
P
P
Two Tiers
 SCR and MCR
 TAR and MAR
Standard vs Advanced
P
P
Use of Approximations
P
Significant implementing assumptions
and approximations being
contemplated
Total Asset Requirement
P
Defines both technical provisions and
capital required
P
Defines total asset requirement
directly
Risk Horizon
P
P
P
Extent of approximations unclear
Risk Measure
 VAR 99.5%
 CTE99%
Risk Margins
 Implicit in MV if Hedgeable, with
ability criteria only
 CoC MVM if Non-Hedgeable
 Does NOT reflect post-stress
distribution
 Implicit in MV if Hedgeable; with
ability and intent criteria
 RW CTE if Non-Hedgeable
 Reflects post-stress risk
distribution

Frameworks align
 Frameworks differ
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Assessment of progress
2007 General Meeting
Assemblée générale 2007
• Progress has been slow
– Advanced frameworks taking time to
develop
– Resource crunch (a few companies
providing most resources)
– Standard approach is just getting started
• Much to be done but ability of insurers
to perform many of the calculations
already exists
• 2011 and the move to IASB standards is
a “hard” date for changes to Canadian
solvency framework
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2007 General Meeting
Assemblée générale 2007
Key issues
• Who will provide the guidance needed to
supplement the IASB insurance accounting
standard?
• What will Solvency II and other frameworks
look like?
• How to decide the issue of allowances for risk
diversification & concentration?
• Since the standard approach must be ready by
2011, what is the relative priority for the
advanced approach?
• How best should the work requiring the
cooperation and participation of the entire
industry be organized?
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Questions and
Discussion