Transcript The impact of future solvency standards in Japan

April 20, 2009
Solvency reform and regional
development
Nobu Sugimoto
Deputy Director (Insurance)
Office of International Affairs
Financial Services Agency, Japan
1
Agenda
1.
2.
3.
4.
5.
6.
Features of insurance market in Japan
Impact of the financial crisis
JFSA views toward future solvency standards
JFSA Approach toward More Risk Sensitive
Solvency Regime
Current status of solvency reform
Issues to be improved
2
1.Features of insurance market in Japan






2nd-3rd Largest market with
high penetration rates
Lowest interest rate
Fixed return insurance
product
Long maturity of life
insurance liability ⇒
limited hedging
instruments
The expose to significant
catastrophe risks
Japanese insurers need
– sophisticated risk
management,
– capitals for underwriting
unhedgeable risks,
– proactive reaction to the
policyholders’ needs
Significant shift of the
insurance needs from
death to medical and
pension
3
2.Impact of the financial crisis
Exposure of Japanese Deposit-taking
Institutions to Securitized Products
Total Exposure to Securitized Products
(end-Dec 2008)
Exposure to Subprime-related
Products
Book
Value
5.65
Valuation
Losses
1.34
Realized
Losses
9.19
Book
Value
Valuation
Losses
Realized
Losses
10.71
21.67
194.08
Operating
Profits from
Core
Businesses
(end-March
2008)
Decrlared Losses
on U.S.-originated
Loans and
Securitized
Assets estimated
by IMF GFSR (Jan
2009)
60.93
2,200.00
32.38
(Billion : 1USD=100JPY)
4
Economic Trends
GDP and Stock price
20,000 (Y）
(trillion JPY） 800
18,934
18,000
750
17,225
16,111
16,000
15,257
700
13,842
14,000
13,785
650
10,542
600
8,578
10,000
552.3
541.723
526.93
509.16
550
500
12,000
11,488
10,676
507.907
492.577 499.116
521.388
8859
8,000
6,000
562.8560
450
4,000
2,000
491.496
0
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
400
GDP
Stock price
5
Japan's Economy : Major Index
（％）
FY 2006
FY
2007
1Q, 2008
2Q,
2008
3Q,
2008
4Q,
2008
2.3%
1.9%
0.3%
▲ 1.2%
▲ 0.4%
▲ 3.2%
FY 2006
FY
2007
Nov,
2008
Dec,
2008
Jan,
2009
Feb,
2009
Export
13.4%
9.9%
▲ 26.8%
▲
35.0%
▲
45.7%
▲
49.4%
Industrial
Production
4.6%
2.6%
▲ 8.5%
▲ 9.8%
▲
10.2%
▲ 9.4%
Unemployment
Rate
4.1%
3.8%
4.0%
4.3%
4.1%
4.4%
▲ 0.1%
0.5%
▲ 0.2%
▲ 1.7%
▲ 0.1%
▲ 0.3%
Real GDP
(Cabinet Office)
Retail Sales
6
20
07
/
20 1/4
07
/
20 2/2
07
/
20 3/5
07
/
20 4/3
07
/
20 5/2
07
20 /6
07 /1
/
20 6/2
07 9
/
20 7/3
07 0
/
20 8/2
07 7
20 /9/
07 26
/
20 10/
07 25
/
20 11/
07 22
/1
20 2/2
08 1
/
20 1/2
08 8
/
20 2/2
08 6
/
20 3/2
08 6
/
20 4/2
08 3
/
20 5/2
08 6
/
20 6/2
08 3
/
20 7/2
08 2
/
20 8/1
08 9
20 /9/
08 17
/
20 10/
08 17
/
20 11/
08 17
/1
20 2/1
09 6
/
20 1/2
09 0
/
20 2/1
09 8
/3
/1
8
Nikkei Average
19000
18000
16000
15000
115
14000
110
13000
12000
9000
8000
105
11000
100
10000
95
Nikkei
USD/JPY
7000
6000
USD/JP
USD/JPY and Nikkei average
130
125
17000
120
90
85
80
Date
7
Balance
Sheets(Life
insurance)
Balance
Sheet
(4
Major Life) (March 31, 2008)
ASSETS
Liabilitis an d Equ itie s
Fisc al 2 0 0 8
Fisc al 2 0 0 8
Ite m
Ite m
A mount
( mi l l i on)
A mount
( mi l l i on)
Sh are
Cash an d de posits
1,191,932
0.9% Polic y re se rve s an d oth e rs
Call loan s, e tc
4,508,005
3.5% （Reserve for outstanding claims）
In ve stme n ts in se c u ritie s
（National government bonds）
（Local government bonds）
90,885,365
70.7% （Policy reserve）
(32,669,426)
25.4% Oth e r liabilitie s
(3,249,113)
2.5% De fe rre d tax liabilitie s
（Corporate bonds）
(10,930,260)
8.5% Total liabilitie s
（Domestic stocks）
(20,225,094)
15.7% Capital
（Foreigin securities）
(22,585,139)
17.6%
Su spe n se Re c e ipts on Capital
Su bc ription s
（stocks）
(5,286,439)
4.1% Addition al Paid in Capital
（Other securities）
(1,226,327)
1.0% Tre su ary stoc k
Loan s
24,509,914
Re in su ran c e re c e ivable s
3,490
19.1% Un re alize d gain on Se c u ritie s
0.0%
De fe rre d gain on de rivative s
u n de r h e dge ac c ou n tin g
Tan gible fixe d assse ts
5,000,566
3.9% Lan d re valu c tion diffe re n c e
Oth e r asse ts
1,988,979
1.5% Ne w sh are su bsc ription righ t
De fe rre d tax asse ts
Total asse ts
496,927
128,585,194
0.4% Total e qu ity
100.0 Total liabilitie s an d e qu itie s
Sh are
112,854,386
87.8%
(667,559)
0.5%
(109,827,448)
85.4%
7,521,637
5.8%
603,923
0.5%
120,979,959
94.1%
579,000
0.5%
1,521,353
1.2%
1,198,920
0.9%
－
0.0%
4,495,408
3.5%
189
0.0%
△ 189,643
-0.1%
－
0.0%
7,605,231
5.9%
128,585,194
100.0
8
Situation of Japanese Financial Institutions
As of end-December 2008
Performance of 4 Major Life
(billion yen)
4 Major Life
Core
Operating
profits
Ordinary
Profits
Net
Income
Unrealized
Gain/Loss
Solvency
Margin
for the year ended
March 31, 2006
1,867
1,092
674
8,530
1120.8%
for the 6 months
ended
September 30, 2006
928
509
357
8,351
1133.4%
for the year ended
March 31, 2007
1,988
1,004
796
9,569
1227.6%
for the 6 months
ended
September 30, 2007
922
421
348
8,273
1203.7%
for the year ended
March 31, 2008
1,746
811
669
4,495
1128.1%
for the 6 months
ended
September 30, 2008
674
289
224
3,371
1079.4%
for the 9 months
ended
December 31, 2008
942
210
316
900
908.9%
9
Causes of the recent global financial crisis with regard to insurance
Problems
①
Inappropriate regulation for non-insurance subsidiaries of
the internationally active insurance groups (IAIGs)
Unregulated subsidiaries and unregulated holding companies
are not required to set aside appropriate level of capital to
absorb the loss from their business. Therefore Insurance
regulation does not have robust mechanisms to avoid for the
IAIGs to conduct risky business in the group wide basis.
②
Insufficient risk capture of CDS and similar financial
guarantee
The risks associated with CDS and similar financial guarantee
were not captured well in the current capital requirement both
in Banking and Insurance capital regime.
10
3.JFSA views toward future solvency standards
Economic based solvency regime (both solo and group basis)
More incentive for ALM & ERM
Capture the complex risks (e.g. subsidiaries’ CDS underwritings)
appropriately
Introduce economic valuation for asset and liability simultaneously
Careful consideration should be paid to revenue recognition, tax
treatment and other transitional issues, etc.
Group solvency
International common assessments for internationally active
insurance groups (IAIGs) is needed for the comparability among the
insurers, credibility and transparency of the insurance market
Qualitative assessment, supervisory review and public disclosure
International common assessment should be supported by qualitative
assessment, enhanced supervisory review, supervisory cooperation
and disclosure to make sure appropriate risk and capital assessment.
11
4.JFSA approach toward new solvency regime
Issues to be improved
Credibility of current regime
Prompt actions can be taken in a appropriate timing
Ensure the market credibility both of supervisor and industry
Reflect Material risks (e.g. ALM mismatch) appropriately
Incentive for better risk and capital managements
Introduction of incentive structure in required capital for better risk and
capital management
Supervisory review and disclosure of risk management practice
Directions that we should take
Higher confidence level would enhance the market confidence
Economic based solvency regime would allow better alliance with
their own risk and capital management
12
5.Current status of solvency reform
Short term review
 Higher confidential level from 90% to 95%
 Review of risk factors based on the recent financial market data
 Reflecting diversification according to own asset allocation
Mid-term review
On the basis of international trends,
 Introduce economic valuation to the insurance liability
 Sophisticate the risk measurement, such as interest rate risks to
reflect the insurer’s ALM mismatches and risk mitigations
⇒ Continue review, due regard to the international trends
Field testing of insurance liability based on economic value
Trials of new measurement method for interest risk, etc
13
6.Issues to be improved
Integration of risk managements into the decision making
 Statue without spirit??
Data quality & quantity
 Field tests to cover industry wide
Modeling techniques
 Modeling policyholder behaviors / valuation of embedded options
Risk management for complex structured products
 Lessons from the current crisis
 High priority to ERM implementation (supervisory policy)
 Field tests would improve the data and modeling issues
 Coordination with IAJ (the Institute of Actuary, Japan)
14