U.S. Insurance Solvency
Today & Future
Kris DeFrain, FCAS, MAAA, CPCU
Senior Financial Regulatory Services Manager
& Chief Property/Casualty Actuary
NAIC
June 16, 2008
2008 CAS Spring Meeting – Quebec City
Solvency Update
1
U.S. Current Solvency Regulation
Compared to Proposed EU Solvency
 States
 EU Commission & CEIOPS / NAIC
 Uniformity is Difficult, but is Key
– No “Race to the Bottom”
2008 CAS Spring Meeting – Quebec City
Solvency Update
2
U.S. Uniform Financial Regulation
 U.S. Financial Regulation is Uniform
• Aided by Handbooks – Analysis,
Examination, Troubled Company
• Aided by Accreditation System
 National Prioritization System
 Financial Analysis Working Group
• Nationally Significant Insurers and
Groups
• Aids Consistency in Analysis of
Companies
2008 CAS Spring Meeting – Quebec City
Solvency Update
3
U.S. Current Solvency Regulation
Compared to Proposed EU Solvency
 Principles or Rules
 Public Disclosure vs. Supervisory
Reporting
 Economic Capital - Enterprise Risk
Management
 Accounting & Valuation
 Capital Requirement Methodologies
2008 CAS Spring Meeting – Quebec City
Solvency Update
4
Capital Requirements
US Risk-Based Capital (RBC)
 1990s … updated annually, but not as “modern”
 Risk-Based, not all risks (operational, CAT)
 Detailed Calculations, but still formula driven and uses
industry averages
 Early Warning / Intervention, Regulatory Requirements
EU – Standard Formula & Internal Models
 Risk-Based, all quantifiable risks
 Ladders of Intervention (SCR – first action, MCR – final
action)
 Economic Based – Target to BBB rating, 99.5% VaR
 Question of MCR – will their method limit court fights?
2008 CAS Spring Meeting – Quebec City
Solvency Update
5
Group Issues
 US has group supervision through NAIC Holding
Company Act and Analysis/Examination and there are
Lead State Exams
BUT…what is “group supervision”?
US does not calculate an overall group capital
requirement, but US insurance groups have a roll-up
of the subsidiary RBCs, so there is group
consideration
 EU proposals – Being debated so still undecided. Small
and new member states fear loss of power to larger
member states
2008 CAS Spring Meeting – Quebec City
Solvency Update
6
What Impacts the U.S.?
Which was
first?
IAIS or SII?
IAIS
SII
2008 CAS Spring Meeting – Quebec City
Solvency Update
7
Driving Forces - Solvency Regulation
IAIS
International Solvency Changes
EU
(SII)
Canada
Australia
Basel II
2008 CAS Spring Meeting – Quebec City
Solvency Update
8
U.S. Announces New
Solvency Modernization Initiative
 Evaluation of International Initiatives, Including
IAIS, Basel II, Solvency II, Canadian Solvency,
Australian Solvency, and IASB
 Work Plan – Focus on
 Capital Requirements
 International Accounting & Valuation Issues
 Group Supervision
 Reinsurance
2008 CAS Spring Meeting – Quebec City
Solvency Update
9
Impact of International Accounting
 Probably the largest potential change under
consideration is adoption of International
Accounting (IFRS)
 There is a trend in the U.S.
 U.S. SEC -- Foreign private issuers can use IFRS
with no reconciliation to U.S. GAAP –effective
March 2008
 U.S. FASB may adopt IFRS in 2013…bye-bye
GAAP?
 U.S. NAIC Statutory Accounting (SAP) –
based on U.S. GAAP…what happens next?
2008 CAS Spring Meeting – Quebec City
Solvency Update
10
U.S. Valuation Issues
P&C
Principles Based – Book “Management’s
Best Estimate”
Not discounted, Implicit Risk Margin
Life
Principles-Based Reserving Initiative
 From Prescribed Formulas to a Process of Identifying and
Measuring All Risks
 From Industry Expectations to Company Expectations
Discounted, Implicit Risk Margins
2008 CAS Spring Meeting – Quebec City
Solvency Update
11
U.S. Reinsurance Initiative
Single State U.S. Regulator
• Both US and non-US Reinsurers
Potential for A new NAIC entity,
Reinsurance Supervision Review Dept.
(RSRD), that would assess regulatory
effectiveness of non-U.S. jurisdictions
through an “outcomes-oriented” approach.
2008 CAS Spring Meeting – Quebec City
Solvency Update
12
U.S. RBC Future??
 Use Company Specific Models, Have
some modeling today & are researching
P&C CAT Risk Modeling, but what else?
 Determine Regulatory Review Process
Major U.S. Concerns: Must maintain legal
authority at predetermined and “nonarguable” action/control levels; What about
“Fairness”?
2008 CAS Spring Meeting – Quebec City
Solvency Update
13
Solvency in the U.S.
U.S. is the largest market in
the world and has a solid
financial solvency system as
evidenced by experience, but
we are operating in a global
marketplace…
there will be change.
2008 CAS Spring Meeting – Quebec City
Solvency Update
14