Why You Should Care
About International Issues
Amy S. Bouska
Glenn Meyers
Mary Frances Miller
May 9, 2006
Why You Should Care
About International Issues
Working across Boundaries
International Practice Guidelines
Amy S. Bouska
Working Parties and Committees

Most of our shared work to date is with
the Institute/Faculty of the UK
• The Loss Simulation Model Working Party has
seven non-CAS members
• In addition, three other CAS
committees/working parties have members
from other organizations
• At least five CAS members are working on
GIRO working parties
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In March, we were approached by the
Institute of Actuaries of Australia about
the development of joint research projects
Much of the work on reserve variability is
being driven overseas
International Actuarial Standards of
Practice (IASPs)

The IAA has issued eight IASPs:
• IASP 1: Guidelines of Actuarial Practice for Social Security
Programs
• IASP 2: Actuarial Practice
• IASP 3: Classification of Contracts
• IASP 4: Measurement
• IASP 5: Current Estimates
• IASP 6: Liability Adequacy Testing
• IASP 7: Discretionary Participation Features
• IASP 8: Changes in Accounting Policies
• Glossary

... And has four drafts out:
•
•
•
•
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Embedded Derivatives and Derivatives
Business Combinations
Accounting for Reinsurance Contracts
Disclosure of Information about Insurance Risk
IASPs are promulgated in the context of IFRS
IASPs

In spite of their name as “standards of practice,” the IASPs
issued to date are actually class 4 standards, or “practice
guidelines”
• These are considered to be “educational in nature, representing
a statement of good practice”

National organizations that are members of the IAA may
adopt the IASPs or develop their own standards that are
substantially similar
• The US has not taken any action
• The CAS has deferred to the Academy

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Individual members of member organizations will ultimately
be bound by the IASPs (or substantially similar documents)
The IASPs can be found in the Library section of
www.actuaries.org
International Issues
A Global Framework
for
Insurer Solvency Assessment
and
Beyond
Glenn Meyers
Outline
Describe Scope of
• IAA Insurer Solvency Assessment Working
Party
• IAA Solvency Subcommittee
– Under IAA Insurance Regulation Committee
Other Committees
• Working Party on Risk Margins for Liabilities
Background
• 2002 – The IAA formed the a working party to
support the International Association of
Insurance Supervisors (IAIS) to assist in the
development of Global Standards for Insurer
Solvency Assessment (Risk Based Capital)
• 2004 – Published report
–
http://www.actuaries.org/LIBRARY/Papers/Global_Framework_Insurer_Solvency_Assessment-members.pdf
– Or follow link on IAA Website (www.actuaries.org)
• 2004 – Formed IAA Solvency Subcommittee
Summary of WP/SSC Work
• See CAS 2004 Spring Meeting Presentation
http://www.casact.org/coneduc/spring/2004/handouts/
• Three Pillar Approach
– 1. Minimum Capital Requirements
– 2. Supervisory Review Process
– 3. Measures to Foster Market Discipline
• 2004 report focuses on risk-based capital
formulas in support of Pillar 1.
Risk Based Capital Formulas
• Standard Formula
– Based on publicly available data
– Deliberately conservative
• Internal Models
– Built to reflect individual insurer situations
– Based on “state of the art” actuarial modeling
techniques.
• Standards and “best practices” for internal
models are evolving.
What Countries Are Doing
• Australia – Already implemented this approach
• Swiss Solvency Test
– Draft formula under evaluation by Swiss Insurers.
– One link under Google search
http://www.mathematik.uni-ulm.de/finmath/ws_0506/fe/papers/Luder.pdf
• United Kingdom FSA
– Requires insurers to build internal models to measure
risk-based capital.
– To demonstrate belief in models, insurers have to
make use of model in company operations.
GCIC Solvency II
On the way to Solvency II
Rolf Stölting
Stockholm June 2004
Meyers Comment
These slides highlight EEC activities
on Risk Based Capital
12
Overview over initiatives / working groups
(Europe)
Internal Market DG
Financial Institutions:
Insurance
CEIOPS Committee
28 countries: EU, Norway,
Iceland, Liechtenstein
Bureau
of European Insurance
and Occupational
Pensions Supervisors
Pillar I Life
Pillar I Life
Groupe Consultatif
Pillar I Non-life
Pillar I Non-life
Pillar II
Pillar II
founded 1978 as technical
advisory institution for the EU
Association of European
actuarial associations
Pillar III Account.
Pillar III Account.
Groups etc.
Groups etc.
Project team
Advisory Board
EU Commission
Institut des
Actuaires
DAV
Institute of
Actuaries
Ausschuss Rechnungsl./ Solvab.
Consultative Panel
appr. 15 named persons:
CEA
Mutuals,
Groupe Consultatif
etc.
Solva. Solvabilität IAS
Leben Nichtleben IFRS
Working Group
on Solvency II
CEA
(Comité Européen
des Assurances)
GDV
March 2004
GCIC Solvency II
FFSA
Solv. II Solvency II Solv. II
Life
Non-life
Assets
ABI
13
Overview over initiatives / working groups
(international)
DAV
CAS
Institute of
Actuaries
International
Association of Actuaries
(IAA)
AFIR
ASTIN
IASB
G-7
IAIS
Subcomm.
Solvency
Subcomm.
Reinsurance
GCIC Solvency II
IMF OECD
BIS (Basel II)
…..
Subcomm.
….
Insurance
Regulation
Committee
Reinsuran. Solvency
Subcomm. Subcomm.
14
March 2004
MARKT/2543/03 –
Issues regarding technical provisions
GCIC Solvency II
How to get an explicit level of prudence, e.g. by
using best estimate + explicit risk margin
What level of prudence should be set?
How to define a technical interest rate?
How to define books of contracts (or lines of business)?
How should equalization provisions be treated,
especially considering the classification of IFRS?
15
MARKT/2543/03 –
Issues regarding target capital
GCIC Solvency II
Spectrum of approaches –
European formula, standard formula, internal models
Which is the most suitable risk measure,
Value at Risk or Tail Value at Risk?
Which time horizon to choose?
What is a suitable level of confidence?
Should the Standard model be based on probability
distributions or scenarios?
How to take dependencies and correlations between
different lines of business into account?
16
MARKT/2502/04 –
Asset management & ALM
GCIC Solvency II
Investment risk as part of the target capital requirement
Prudent person approach for the future prudential system
(including ALM)
Requirement for an investment plan
Incorporation of ALM-risk both in standard formula
and in internal models
ALM relevant for life as well as for non-life business
17
Activity in USA
• NAIC Casualty Actuarial Task Force
– Include cat model in RBC
• Rating Agencies
– Moody’s - Has risk-based capital formula
– Fitch - RBC formula under development
– Standard and Poors - Wants insurers to
develop internal models.
Standard and Poors
• David Ingram article in Risk Management
Section newsletter
http://library.soa.org/library-pdf/RMN0603.pdf
• Quote from article
"Insurers that use regulatory or rating agency
risk-based capital formulas without modification
will be pressed to demonstrate that those
models appropriately capture the actual risk
of their specific business. Insurers that modify
those formulas in an appropriate manner to
reasonably approximate the capital needed to
support their risk positions are seen to have
adequate practice in this area."
Other Activity to Watch
Risk Margins Working Party
• Acting on request from IAIS
• Reported liabilities “should” include a risk
margin.
• Two general approaches being considered.
– Standard Actuarial
• e.g. Australian requirement to post reserves at 75%
level
– Cost of capital approach
• Fair Value accounting “mark to model” approach
• Diversification and insurer size effects reflected in
capital requirements
• This is where I think they are going. Stay tuned.
International Actuarial
Education
Standards & Process
Why Should I Care?
Mary Frances Miller
International Actuarial Association
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IAA is an organization of organizations
Umbrella group aims to include all
credentialed actuaries worldwide
55 full member associations + associate
members
• CAS, SoA, AAA, CIA, CCA are all full members

Aims
• Speak for the profession globally
• Gain recognition for the actuary as a
profession
• Promote professionalism & standards
Full Members of the IAA

Constitution & By-Laws that meet certain
criteria, e.g.
• Discipline process
• Method for setting standards (if the association
does so)

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“Fully Qualified Members” meet or exceed
minimum education criteria
All allow the IAA to “sell” actuaries who
belong to member Assns as recognized
professionals
The IAA Syllabus

Ten Topics
•
•
•
•
•
•
•
•
•
•
Financial Math
Prob & Stats
Economics
Accounting
Modelling
Statistical Methods
Actuarial Math
Investments & Assets
Actuarial Management
Professionalism

No requirements for
delivery method
• Independent exams
• University based

All topics at least on a
2 out of 3 scale
• Some should get more
emphasis than others
• Can be delivered in any
combination / order

Minimum standard
Why do we care?

CAS education far exceeds the IAA
syllabus
• IAA standards a potential issue only for life
contingencies and assets

CAS members are recognized worldwide
• Or are they?
• Statutory roles often require local membership

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IAA lobbies International Assn of Ins
Supervisors to set the standard as full
member organizations & their members
IAA working cooperatively with
International Accounting Standards Board
Growing Urgent Need for Actuaries

Emerging economies seeing a surge
in spending power & the need for
insurance
• Central & Eastern Europe
• Latin America
• Central Asia

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Primarily property & auto
Explosion of local & regional
companies
Little or no actuarial expertise or
association
World Bank

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Supports strong economic systems,
especially in financial services
Growing recognition that insurance is
critical to a healthy economy
Growing concern that insurance failures
are over the horizon
• Unsophisticated regulatory systems
• Little/no actuarial role
• Corruption – cash flow temptation

Critical need to grow the profession in
underserved areas
CAS Support
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Exam sites in 21 countries
Heavily subsidized exam fees
Library materials provided to
associations
Most syllabus material available on
the web
Professionalism course offered in
Asia
Issues
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Even the subsidized exam price is steep
CAS membership doesn’t automatically
lead to local qualification
Perceived colonialism
Natural conflict for resources with North
American candidate and member needs
Competition(?) with other international
associations: I&FoA, IAAust, SoA
Depends on the generosity of our members
Proposed IAA Education
Programme
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Series of modules to meet at least the IAA
syllabus
Multiple languages
Multiple delivery options
Consistent quality
Available to any association that chooses
to use part or all
Available in areas with no association (yet)
To be viewed as yet another program in a
world that currently has 50+ programs
Advantages

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Most associations are quite small
Need about 1000 members for an
effective exam-based system
• Fewer if universities are used, but still resource
intensive
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International program avoids duplication
of effort
Allows smaller associations to concentrate
on other issues
•
•
•
•
Qualification standards
Standards of practice
Nation- or practice-specific education
Continuing education
Who is expected to use it?
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Brand new associations
Candidates in areas without an
association
Smaller societies without a wellestablished program (e.g. Eastern
Europe)
Institute & Faculty of Actuaries (!)
Design Plans
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Tap into best of existing systems and
materials
Likely to use Australian
university/association system as a
model
Exam option
Recognizes that IAA syllabus is not at
“fellowship” level
• Specializations
• Local accounting & regulatory needs
Funding
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Associating the program with the international
association rather than a particular society opens
up funding from outside the profession
Pilot program funding to be coordinated by World
Bank
• Expect multiple donors, e.g. USAID, IADB in the US
• Will seek corporate sponsors as well
• Volunteer support, but to a lesser extent

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Associations (x emerging economies) that adopt
will charge fees to cover their candidates’ costs
Continuing outside donor support for emerging
economies
Rollout

Identified pilot countries
•
•
•
•
Growing insurance market
Potential for effective regulatory cooperation
Funding (e.g. IADB  Latin America)
Local support
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University, actuarial association or both
2-4 pilots to be tested
• 5 year plan
• Significant, measurable outcomes
• No expectation that process will be complete in
5 years
CAS Participation

Mary Frances Miller & Cynthia Ziegler on IAA Task
Force
• Significant staff support for budget & business plan
(note that CAS is recognized as master at budgetary
efficiency)

CAS objectives in the design phase
• Keep IAA program modular
• Try to steer construction to feed into CAS advanced
education (5 or 6 exam level?)
• Try to steer construction to provide p/c focused modules
earlier rather than later in the process

Meets World Bank objective to get people trained faster
• Insist on dual path – allows for working people to
become qualified as well as university-age candidates