Transcript IAIS Insurance Core Principles and Effective Supervision

Panel 6
IAIS Framework for Prudential Regulation
IAIS-ASSAL Training Seminar
24 November 2009, Lima Peru
Jason Park – Principal Administrator
International Association of Insurance Supervisors (IAIS)
Presentation Overview
November 2009
Jason Park
•
IAIS Framework for Insurance Supervision
•
Adopted standards and guidance papers
– Structure of regulatory capital requirements(2008)
– Use of internal models for regulatory capital purposes(2008)
– Enterprise risk management for capital adequacy and
solvency purposes(2008)
– Structure of capital resources for solvency purposes(2009)
•
Current work in progress
– Valuation of assets and liabilities for solvency purposes(2010)
– Investments(2010)
•
Future work
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Basic concept (1)
• Insurer solvency is central to risk management by
insurers and to the supervision of insurers
• Regulatory capital requirements are a
fundamental part of a solvency regime
• Capital functions as a shock absorber against
unforeseen losses
• Sufficient capital is critical to ensure the fulfilment
of insurers’ obligations to policyholders
• A solvency regime comprises interdependent
quantitative (financial) and qualitative
(governance and market conduct) components
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Basic concept (2)
• Assessment of an insurer’s financial position for
supervision purposes addresses the insurer’s
technical provisions, regulatory capital
requirements and available capital resources
– Technical provisions represent the amount that an
insurer requires to settle all commitments to
policyholders arising over the lifetime of the portfolio
– Regulatory capital requirements refers to the financial
requirements set as part of the solvency regime that
determine the amounts of capital that an insurer must
hold in addition to its technical provisions
– Technical provisions and regulatory capital requirements
should be covered by adequate and appropriate assets
– need to consider asset quality
– Capital resources may be very broadly regarded as the
amount of the amount of assets in excess of the amount
of liabilities
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Solvency requirements are integral in the
Framework for insurance supervision
LEVEL 3
LEVEL 2
Supervisory
assessment
Supervisory assessment and intervention
Common Solvency
Structure and Standards
Regulatory
requirements
Financial
LEVEL 1
Preconditions
Governance
Market conduct
the insurance supervisory authority
Basic conditions for the
effective functioning of the insurance sector and insurance
supervision
Framework for Insurance Supervision
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ISRs: a comprehensive and cohesive set of
solvency assessment documentation
International Solvency Requirements (ISRs)
STANDARDS
GUIDANCE
PAPER
November 2009
Jason Park
ISR 1
ISR 2
ISR 3
ISR 4
ISR 5
ISR 6
Capital
requirements
Capital
resources
Investments
(adopted in
2009)
Enterprise
risk
management
Internal
models
(adopted)
Valuation
of assets
& liabilities
(due Oct
2010)
(due Oct
2010)
(adopted)
(adopted)
ISR 1
ISR 2
ISR 3
ISR 4
ISR 5
ISR 6
Capital
requirements
Capital
resources
Investments
(adopted in
2009)
Enterprise
risk
management
Internal
models
(adopted)
Valuation
of assets
& liabilities
(due Oct
2010)
(due Oct
2010)
IAIS Framework for Prudential Regulation
(adopted)
(adopted)
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Presentation Overview
November 2009
Jason Park
•
IAIS Framework for Insurance Supervision
•
Adopted standards and guidance papers
– Structure of regulatory capital requirements(2008)
– Use of internal models for regulatory capital purposes(2008)
– Enterprise risk management for capital adequacy and
solvency purposes(2008)
– Structure of capital resources for solvency purposes(2009)
•
Current work in progress
– Valuation of assets and liabilities for solvency purposes(2010)
– Investments(2010)
•
Future work
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Standard and Guidance on the structure of
regulatory capital requirements (1)
•
Standard on the Structure of Regulatory
Capital Requirements
– outlines 15 principles-based requirements
for a solvency regime in relation to
regulatory capital requirements
•
Guidance Paper on the Structure of
Regulatory Capital Requirements
– provides additional guidance on these
principles-based requirements
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Standard on the structure of regulatory capital
requirements (2)
Requirement 1
A total balance sheet should be used to recognise interdependence between
assets, liabilities, regulatory capital requirements and capital resources.
Requirement 2
Regulatory capital requirements should be at a level such that policyholders
obligations continue to be met as they fall due.
Requirement 3 & 4
The solvency regime should include a range of solvency control levels which
should be coherent with the associated corrective actions.
Requirement 5 & 6
Prescribed capital requirement (PCR) is the solvency control level above
which no action to increase capital or reduce risk will be required. PCR should
exceed technical provisions and other liabilities at a specified safety level over
a defined time horizon.
November 2009
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Standard on the structure of regulatory capital
requirements (3)
Requirement 7 & 8
Minimum capital requirement (MCR) is the solvency control level at which the
strongest action is invoked if no further capital is made available. The MCR
should have a minimum bound below which no insurer is regarded to be viable.
Requirement 9
The solvency regime should be open and transparent on the objectives of the
regulatory capital requirements and the bases on which they are determined.
Requirement 10
The solvency regime should allow a set of standardised and if appropriate other
approved more tailored approaches such as the use of partial or full internal
models.
Requirement 11
The solvency regime should be explicit as to where risks are addressed (split
between technical provisions and regulatory capital requirements) as well as how
risks and their aggregation are reflected.
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Standard on the structure of regulatory capital
requirements (4)
Requirement 12
The solvency regime should set appropriate target criteria for the calculation
of regulatory capital requirements which should underlie the calibration of the
standardised approach.
Requirement 13
For more tailored approaches, the target criteria should also apply to ensure
broad consistency among insurers.
Requirement 14
Any variations to the regulatory capital requirements imposed by the
supervisors should be transparent and proportionate according to the target
criteria.
Requirement 15
The solvency regime should be supported by appropriate public disclosure
and additional confidential reporting to the supervisor.
November 2009
Jason Park
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Total balance sheet approach to recognise
interdependencies
Supervisory assessment of
the financial position
Public financial reporting
Available
capital
Capital
Liabilities
Liabilities
Value of
assets for
supervisory
purposes
Assets
November 2009
Jason Park
Technical provisions
Capital
requirement
Risk margin
Best
estimate
policy
obligations
Liabilities
and capital
requirement
Financial
position
IAIS Framework for Prudential Regulation
Assets
Liabilities
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Solvency control levels to trigger timely
supervisory interventions
Prescribed capital
requirement (PCR)
Capital
resources
Required
capital
Minimum capital
requirement (MCR)
Risk
margin
Technical
provisions
& other
liabilities
Insurer’s
financial
position
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Current
estimate
Regulatory
capital
requirements
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Progressive intervention levels to ensure timely
corrective measures – an example
Capital Adequacy Ratio
= Capital Available
Capital Required
190%
• Prescribed capital requirement (PCR) level
• Supervisory intervention not required
160%
• Submission of business plan to improve capital buffers
• Increased on-site supervision
• Additional stress and scenario testing
130%
• Limit shareholder dividends
• Restrict new business acquisition
• Delay approval of new products
100%
• Minimum capital requirement (MCR) level
• Winding-up of operation
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Internal models: a more tailored approach to
determine regulatory capital
• What are internal models?
– A risk management system developed by an insurer to
analyse and quantify its risk position and to determine the
commensurate economic capital
• The internal model approach is suitable only if certain
preconditions are met
– Level of sophistication of insurers / markets
– Corporate governance structures
– Competent / accountable insurance professionals and
management
– Supervisory resources and expertise
• Standards and guidance paper apply only in jurisdictions
where internal models are recognised for regulatory capital
purposes
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General provisions on the use of internal
models for regulatory capital requirements
Roles of supervisors
• Establish modelling criteria – ensure consistency among all
insurers.
• Set eligible levels of regulatory capital requirements
(including MCR and PCR) for which IM are accepted – extra
care if this includes MCR.
• Review and approve the use of IM.
Roles of insurers
• Ensure risk modelling techniques are appropriate to the
nature, scale and complexity of risks.
• Demonstrate ongoing compliance with the three tests –
statistical quality, calibration and use (next slide).
• Notify supervisor of any material changes to the IM.
• Ensure proper documentation of the IM.
• Provide supervisory reporting and public disclosure.
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Initial and ongoing validation and approval essential
to ensure model remains fit for purpose
November 2009
Jason Park
Statistical
quality test
Appropriateness of quantitative methodologymodel inputs, parameters, assumptions
Model addresses overall risk position
Data accurate and complete
Calibration
test
Demonstrate that the regulatory capital computed
using the model satisfies the specified modelling
criteria
Use test
The internal model is fully embedded into the risk
strategy and operational processes
Board and management have control over
construction and use of the internal model
Adequate governance and internal controls
(documentation and disclosure)
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ERM framework underpins robust solvency
assessment (1)
– What is Enterprise Risk Management ?
• Process of identifying, assessing, measuring,
controlling and mitigating risk in respect of the
insurance enterprise as a whole
– Sound governance is a pre-requisite for
solvency regime to operate effectively
– Enterprise risk management underpins effective
solvency assessment and capital management
November 2009
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ERM framework underpins robust solvency
assessment (2)
Key Requirements
• The overall governance structure should include an
Enterprise Risk Management (ERM) framework which is
integrated with business operations and culture.
• Appropriate to the nature, scale and complexity of the
business and risks.
• Addresses all reasonably foreseeable and relevant
material risks.
• Led and overseen by board and senior management.
• Supported by accurate and appropriately detailed
documentation of risks.
• Risk management policy, risk tolerance statement, and
own risk and solvency assessment (ORSA) including
continuity analysis.
November 2009
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Draft standard and guidance on capital
resources for solvency purposes
Key Requirements
• Capital resources should exceed capital requirements.
• Capital resources should be defined and should be consistent
with total balance sheet approach with due regard to quality of
capital resources.
• Solvency regime should establish criteria for assessing
suitability of capital resources – due regard to loss absorbency
on going-concern and wind-up basis.
• Solvency regime should require the insurer to assess the
quality and adequacy of its capital resources to meet
regulatory capital requirements and any additional capital
needs.
- Adopted in Oct 2009
November 2009
Jason Park
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Presentation Overview
November 2009
Jason Park
•
IAIS Framework for Insurance Supervision
•
Adopted standards and guidance papers
– Structure of regulatory capital requirements
– Use of internal models for regulatory capital purposes
– Enterprise risk management for capital adequacy and
solvency purposes
– Structure of capital resources for solvency purposes
•
Current work in progress
– Valuation of assets and liabilities for solvency purposes
– Investments
•
Future work
IAIS Framework for Prudential Regulation
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Draft standard and guidance on valuation of
assets and liabilities for solvency purposes
• Joint working group between Solvency & Actuarial
Issues Subcommittee and Insurance Contracts
Subcommittee developing draft paper.
• Work will take into account developments in the IASB
Phase II Insurance Contracts project.
• Key principle is:
The IAIS believes that it is most desirable that the
methodologies for calculating items in general purpose
financial reports can be used for, or are substantially
consistent with, the methodologies used for regulatory
reporting purposes, with as few changes as possible to
satisfy regulatory requirements.
• Due for adoption in October 2010.
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IAIS Framework for Prudential Regulation
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Draft standard and guidance on investments
• Review of current standard on ALM and guidance on
investment risk management.
• Adoption delayed to October 2010 to incorporate
observations from the financial crisis such as:
– Liquidity risk, concentration risk, SPVs, structured
products.
• Some concepts currently being considered:
– Regulatory investment requirements to ensure
sufficiency, liquidity and security of investments
– Role of ALM under the broader ERM and IM
frameworks
– Diversification of investment portfolios
– Risk measurement
– Role of stress/scenario testing
November 2009
Jason Park
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Presentation Overview
November 2009
Jason Park
•
IAIS Framework for Insurance Supervision
•
Adopted standards and guidance papers
– Structure of regulatory capital requirements
– Use of internal models for regulatory capital purposes
– Enterprise risk management for capital adequacy and
solvency purposes
– Structure of capital resources for solvency purposes
•
Current work in progress
– Valuation of assets and liabilities for solvency purposes
– Investments
•
Future work
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Further work
•
•
•
•
Establishing a Group Supervisory Framework
Reform of the ICPs by 2011
Extending the solo level ISRs to groups
Updating the existing Standards and Guidance to
take account of the Global Financial Crisis
• New Standards and Guidance on Supervisory
Review and Reporting
• Common Assessment Framework
– New working group formed to take forward
research
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Thank you for your attention.
Any questions/ comments?
[email protected]
Note : The adopted standards and guidance papers can be
downloaded from www.iaisweb.org.
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