Transcript Canadian Institute of Actuaries L’Institut canadien des

Canadian
Institute
of
Actuaries
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois
L’Institut
canadien
des
actuaires
IP – 11
International Capital
Standards
Stuart Wason
Terri Vaughan
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois
Current Developments
•
Insurance regulators & actuarial
profession working together
2006 General Meeting
Assemblée générale 2006
•
•
•
•
•
International Association of Insurance
Supervisors (IAIS) & International Actuarial
Association (IAA)
US (NAIC and American Academy of
Actuaries)
Europe (European Commission, CEIOPS &
Groupe Consultatif)
Switzerland (FOPI & Swiss Association of
Actuaries)
Canada (OSFI, AMF & CIA)
IAA Developments
•
Solvency Sub-Committee
2006 General Meeting
Assemblée générale 2006
•
•
•
•
“Blue Book” on “Towards a Global
Framework for Insurer Solvency Assessment
Internal Model Best Practices paper
Work in support of IAIS Solvency SubCommittee
Risk Margin Working Group
•
Draft paper on risk margins
European Developments
•
EC and CEIOPS
2006 General Meeting
Assemblée générale 2006
•
•
•
•
Developing Solvency II framework
New insurance directive expected fall 2007 –
full implementation by 2011
Solvency II framework based on principles
in IAA “Blue Book”
Groupe Consultatif
•
Working together with CEIOPS to address
practical and theoretical issues of Solvency
II
Swiss Developments
•
Federal Office of Pensions and Insurance
(FOPI)
2006 General Meeting
Assemblée générale 2006
•
•
•
Introduced first comprehensive framework
(called Swiss Solvency Test or SST) in line
with IAA “Blue Book” in 2004
Extensive period of implementation and
testing is underway – final implementation
will likely be integrated with European
Solvency II
Swiss Actuarial Association
•
Worked together with FOPI to address
practical and theoretical issues of SST
2006 General Meeting
Assemblée générale 2006
Key Initiatives
• IASB/IFRS
• EU Solvency II
• IAIS Solvency Subcommittee
2006 General Meeting
Assemblée générale 2006
International Accounting
Standards Board
• Developing International Financial
Reporting Standards (IFRS)
• Discussion document for insurance
contracts will be issued next year
– Market consistent valuation of
liabilities
– Trading price/settlement values
– Loss reserve discounting
– Risk margin
• Numerous unresolved issues
Solvency II
2006 General Meeting
Assemblée générale 2006
• Three pillars
– I: Quantitative requirements to ensure capital
adequacy
– II: Internal risk management processes and
supervisory review
– III: Increased transparency
• Total balance sheet approach – broad set of
risks
• Technical provisions with risk margin (Cost of
capital vs. percentile approach)
• Standard approach and internal models
• Solvency control levels
• Focus on qualitative aspects of risk
management in pillar II
IAIS Papers
2006 General Meeting
Assemblée générale 2006
1.
A New Framework for Insurance
Supervision: Towards a common structure and
common standards for the assessment of insurer
solvency
2.
Toward a Common Structure and Common
Standards for the Assessment of Insurer
Solvency: Cornerstones for the formulation of
regulatory financial requirements
3.
4.
Roadmap for a Common Structure and
Common Standards for the Assessment of
Insurer Solvency
The Common Structure for the Assessment
of Insurer Solvency
IAIS Framework Paper
2006 General Meeting
Assemblée générale 2006
Outline of the Framework for insurance supervision
supervisory
Supervisory
Supervisory
assessment
Assessment
Action
supervisory
assessment
and intervention
supervisory
assessment
and
intervention
Common Solvency
Structure and Standards
LEVEL 3
Regulatory
regulatory
Requirements
requirements
financial
financial
governance
governance
market
conduct
market
conduct
LEVEL 2
the insurance supervisory authority
basic conditions for the
preconditions
Preconditions
LEVEL 1
basic conditions for
effective functioning of
the
effective functioning
of
the insurance supervisory
authority
the insurance sector and insurance supervision
the insurance sector and insurance
supervision
IAIS Cornerstones Paper
2006 General Meeting
Assemblée générale 2006
The supervisory assessment of the financial position of
an insurer and the public financial reporting of an
insurer
Supervisory Assessment of the financial
position of the insurer
capital
requirement
value of
admissible
assets
capitall
available
capital
liabilities
risk margin
best estimate
policy
obligations
assets
Public financial reporting
liabilities and
capital
requirement
liabilities
financial
position
assets
liabilities
Roadmap and Structure papers
2006 General Meeting
Assemblée générale 2006
• Roadmap Paper outlines a work plan.
• First step is the development of a “Structure
Paper”:
– Draft paper issued in June. Revised draft issued October
9. comments due by November 1. Intent is to have it
ready for IAIS Technical Committee adoption in January.
– Elaborates on main elements of the structure, including
total balance sheet approach
• Identifies respective roles of capital and technical
provisions
• Market consistent valuation of assets and liabilities
• Technical provisions include risk margin based on
settlement value/transfer pricing; ideally consistent
with IFRS
– Executive Summary ties together the Framework,
Cornerstones, and Structure papers
Structure paper
• Framework Level 1: preconditions for
solvency assessment
2006 General Meeting
Assemblée générale 2006
– The supervisor must have adequate powers
• Framework Level 2: regulatory requirements
(financial, governance, market conduct)
• Framework Level 3: Supervisory assessment
and intervention
– There should be a number of solvency control levels
triggering different levels of intervention
• Disclosure
– The supervisory regime should specify which
solvency information should be made public to
enhance market discipline
2006 General Meeting
Assemblée générale 2006
Level 2
Supporting Principles
• Provide the basis and incentives for optimal
alignment of risk management by the insurer
and regulation
• Address all relevant potentially material risks
– Quantifiable
– Non-quantifiable
• Market consistent models used where no deep
liquid secondary markets
• Market consistent valuation of technical
provisions based on the risk characteristics of
the portfolio
• Total balance sheet approach
• Technical provisions include a risk margin
2006 General Meeting
Assemblée générale 2006
Level 2
Supporting Principles (cont.)
• Purpose of capital: to ensure that obligations will
be covered over a predefined period, to a required
level of safety
• Technical provisions should be calibrated based on
the assumption of a market level of diversification
of the relevant risk factors.
• Mismatch risk exposure assumed voluntarily by the
insurer should be reflected in required capital
• Risk margin reflects risk related to all liability cash
flows and thus to the full time horizon
• Require insurers to maintain corporate governance
policies, practices and structures and undertake
sound risk management.
• Require insurers to have sound market conduct
policies and procedures.
2006 General Meeting
Assemblée générale 2006
Common Themes of All Efforts
• More risk sensitive measures
• Encouraging effective risk management
• Encompassing a broader set of risks (credit, market,
underwriting, and operational)
• Relevance of internal models (Stochastic modeling,
scenario testing)
• Market consistent valuation of assets and liabilities
Consistency with IFRS
Risk Margin in liabilities
• Total Balance Sheet Approach
• Issues
–
–
–
–
Measures of variability/risk margins
Risk aggregation; group vs. individual company
Role of the actuary
Regulatory oversight processes
2006 General Meeting
Assemblée générale 2006
Issues and Questions
• No deep, liquid market for insurance
liabilities
• Consistency of rules vs. consistent
implementation
• Implications for cost of capital, product
design, investment strategy and capital
markets
• Costs to implement
• Regulatory oversight
– Expertise
– Need for new oversight processes
– Model validation?
2006 General Meeting
Assemblée générale 2006
U.S. Developments
• Increased product complexity,
international trends, changing
competitive landscape
• Limitations of formula-based
reserving; traditional US RBC
measures
Principles*
2006 General Meeting
Assemblée générale 2006
• Principles-Based Approach (PBA) means an approach to
calculate statutory reserves and capital requirements for
insurance companies that incorporate the following
concepts
– Captures all identifiable, quantifiable and material risks,
benefits, and guarantees associated with the contracts
– Utilizes risk analysis and risk management techniques to
quantify the risk
– Incorporates assumptions and methods that are consistent
with, but not necessarily identical to, those utilized within
the company’s overall risk assessment process
– Permits use of company experience
– Provides for use of assumptions, set on a prudent best
estimate basis, that contain an appropriate level of
conservatism when viewed in the aggregate.
* Prepared by the Consistency Work Group of the Life Financial Soundness/Risk
Management Committee, American Academy of Actuaries. This is a summary of
the principles.
Evolution in the U.S.
2006 General Meeting
Assemblée générale 2006
• RBC C-3 Phase 1 (2000)
– Single premium interest-sensitive life and annuity
business
• RBC C-3 Phase II (effective December 31, 2005)
– Variable annuity products with guarantees
– Capital charge based on greater of
• CTE 90 ( average of worst 10% scenarios) under
stochastic modeling
• Regulator-defined deterministic scenario
• Under development
– VACARVM: variable annuity reserves; expected to
become effective Dec. 2007.
– SVL 2: life and fixed annuity reserves
– C-3 Phase 3: life and fixed annuity capital
2006 General Meeting
Assemblée générale 2006
Related Developments/Issues
• Governance (Corporate Governance for Risk
Management Act - Draft 9/28/06; Corporate
Governance for Risk Management Model
Regulation - Draft 9/28/06)
– Role of Board and Management
– Risk Management policies and procedures
– Certifying Actuary
• PBA Review Actuary (Principles-Based
Valuation Review Opinion Draft Model
Regulation - Draft September 8, 2006)
• Development of preferred mortality tables
• Centralized review?
• Taxes
Canadian Developments
•
OSFI & AMF
2006 General Meeting
Assemblée générale 2006
•
•
•
•
Currently working with key stakeholders on
a new vision for solvency assessment of life
insurers in Canada through an MCCSR
Advisory Committee (MAC)
Work of MAC supported by Solvency
Framework Sub-Committee (SFSC)
Expect 2011 implementation
Canadian Institute of Actuaries
•
Working as part of MAC and SFSC to
address practical and theoretical issues of a
new Canadian approach
Canadian Developments
•
MAC accomplishments to date
•
2006 General Meeting
Assemblée générale 2006
•
•
•
•
Forum for all Canadian stakeholders
Agreement on key principles for new
solvency framework
Directs work of SFSC
Currently drafting a “Vision” paper for the
new framework
SFSC accomplishments to date
•
•
•
Time Horizon paper
Terminal Provision paper
Internal Model best practices paper
Canadian Developments
•
Draft Vision
2006 General Meeting
Assemblée générale 2006
–
–
–
Future Canadian life insurer capital
requirements determined using “total balance
sheet” (TBS) approach
Insurer’s true financial strength for solvency
purposes requires appraisal of all its assets &
liabilities on integrated basis under a system
that depends on realistic values, consistent
treatment of both assets & liabilities
TBS approach delivers realistic view of
financial position of insurer independent of
any financial reporting requirements
2006 General Meeting
Assemblée générale 2006
Assets
TBS Expected
Best
estimate
policy
obligations
GAAP Policy Liability
TBS Solvency Margin
TBS Regulatory Requirement
Total Balance Sheet Approach
Excess capital
Required capital
Margins
Canadian Developments
•
Why change?
2006 General Meeting
Assemblée générale 2006
–
–
Leading insurers are moving toward
advanced capital models for internal risk
management, capital management,
regulatory reporting requirements, and rating
agency assessments.
MAC believes it is important to support
these developments in risk management as
all stakeholders benefit from a better
determination and allocation of capital to
risk.
MAC Key Principles
2006 General Meeting
Assemblée générale 2006
–
–
–
–
–
–
Consider all risks
Determine assets and liabilities on a
consistent basis.
Be practical, but technically sound.
Reflect existing risks on going concern
basis and consider winding-up and
restructuring.
Use risk measures that are comparable
across risks and products.
Ensure that capital is prudent.
MAC Key Principles
2006 General Meeting
Assemblée générale 2006
–
–
–
–
–
–
Encourage good risk management.
Adapt international principles and best
practices.
Allow comparison of similar risks across
financial institutions.
Be transparent, validated and based on
credible data.
Use reliable processes with assumptions
sustainable in times of stress.
Be part of intervention levels for
supervisory action.
2006 General Meeting
Assemblée générale 2006
Additional Criteria
• Current risk-based multi-level supervisory approach
retained
• Time horizon of one year; after one year remaining
funds must enable insurer to fulfill its policyholder
obligations or pass the risks on to a succeeding insurer
• Assets must be adequate to provide for obligations of
insurer with a high degree of confidence.
• Recognition of risk diversification and concentration
• Advanced approaches using internal models will be
encouraged for large insurers and for certain complex
risks
• Standardized approaches derived from industry
experience according to the preceding principles
available for all insurers
• Regulatory target capital requirement & lower
minimum capital requirement
International Developments
2006 General Meeting
Assemblée générale 2006
•
Challenges and opportunities – exciting
times ahead!
–
–
–
–
–
–
ERM
Stochastic modelling expertise
Risk aggregation
Advanced & standardized approaches
Model calibration and validation
Communication
IP – 11
International Capital
Standards
Stuart Wason
Terri Vaughan
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois