Drivers of Regulatory Changes
0 Global desire for consistency.
0 Industry consolidation is increasing multi-jurisdiction
players.
0 IAIS protocols.
0 The financial meltdown.
0 European development.
0 IFRS
0 Solvency II
0 The financial crisis has highlighted the need for more
effective corporate governance and risk management in
all types of financial institutions.
0 Prudential Regulation
0 Risk Management
0 Capital Management
0 Balance
0 Business agenda
0 Consumer protocols
International Association of
Insurance Supervisory (IAIS)
0 190 jurisdictions (including Canada & US).
0 World standard setter for insurance supervisors.
IAIS Insurance Core Principles
October 2011
0 More risk-based approaches to capital and solvency
measurement.
0 Focus on risk management and governance.
0 Increased use of stress and scenario testing.
0 Group supervision.
Capital Adequacy
0 Risk-based capital (RBC) regimes differ greatly.
0 Inconsistent capital requirements.
0 Inconsistent approaches to capital adequacy.
Risk-Based Capital
0 Typically measures asset, insurance and business
risks.
0 Scope is expanding to include credit, market and
business risks.
0 Management now adopting enhanced ERM.
IAIS Now Requires
0 Target criteria for capital management.
0 Calibration of a standardized approach.
Internal Models
0 IAIS permits superintendents to allow internal
models to determine regulatory capital requirements.
0 Insurer must document the design, construction and
governance of the model.
0 Including the underlying rationale and assumptions.
Own Risk and Solvency
Assessments (ORSA)
0 Identify and quantify risk.
0 Policy outlining management of all relevant and
material risks.
0 Relationship between tolerance limits:
0 Capital requirements
0 Economic capital
0 Methods for monitoring risk.
0 ORSA to be regularly conducted:
0 Assess adequacy of risk management
0 Current and future solvency positions
Governance
0 Board and senior management responsibility.
0 Includes:
0 Underwriting risks
0 Credit risks
0 Market risks
0 Operational risks
0 Liquidity risks
0 Relationship between risk management and quality of
financial resources needed and available.
Financial Reporting - IFRS
0 Replaces Generally Accepted Accounting Principles
for public companies.
0 Standardizing financial statement format.
0 Accurate reflection of current liabilities and assets.
0 “Fair Value”
0 Mandatory valuation principles.
Three Pillars
1. Demonstrate adequate financial resources.
2. Demonstrate adequate system of governance
3. Public disclosure and regulatory requirements.
0 European driven reform intended to establish a new
set of :
0 Capital requirements
0 Valuation
0 Governance standards
0 Reporting requirements
0 Effect on non-European Markets:
0 European insurers operate globally.
0 Equivalence – non- European insurers do business in
Europe.
0 IAIS – cooperation and collaboration between
regulators.
0 How Can this affect your pool?
0 Reinsurance
0 Actuaries
0 Accountants
0 Auditors
Why can you learn from the Canadian experience?
0 Because we are already dealing with these changes.
Office of the Superintendent of
Financial Institutions (OFSI)
0 Federal regulator of all national financial institutions –
banks, insurers etc.
0 Moved off of rules-based regulation money years ago.
0 Principal-based regulation proved highly effective
during crises:
0 No default
0 Institutions emerged very strongly.
Global Finance Magazine
August 2011 world’s safest banks in North America
1. Royal Bank of Canada (Canada)
2. Toronto Dominion (Canada)
3. Scotia Bank (Canada)
4. Casse Centrale Desjardin (Canada)
5. BNY Mellon (USA)
6. BMO (Canada)
7. CIBC (Canada)
8. JP Morgan Choice (USA)
9. Well Fargo (USA)
10. U.S. Bancorp (USA)
50 Safest Banks in the World
0 7 American
0 6 Canadian
0 6 Germany
0 6 France
No other country has more than 3.
0 Enhanced global credibility has resulted in more
rigorous evaluation.
0 Provincial regulators follow OFSI’s lead.
0 Seeking Solvency II equivalence.
Results
0 RBC (system has installed many years ago).
0 Minimum Capital Test (MCT) now a well established
industry standard.
0 Stress testing – dynamic capital adequacy test (DCAT)
for a decade.
0 IFRS has been implemented.
0 ERM requirements are in place.
0 Reinsurance Risk Management Plans.
0 Chief Risk Officer.
U.S. Situation
0 In large part will depend on the state regulators.
General Indications
0 2008 National Association of Insurance
Commissioners (NAIC) commenced the solvency
modernization initiatives (SMI).
0 No implementation of Solvency II but will aim for a
“equivalent” platform.
0 More of a standard formula approach to RBC.
0 Many regulators are leery of internal models.
0 ORSA is on the immediate horizon.
0 ERM and capital management will undoubtedly be a
component of future regulations.
Financial Institutions
Commission (FICOM)
0 “Recommended” we adopt OFSI’s ERM protocols.
0 Gave us a year to implement.
0 Guidelines in handout.
Our Approach
0 Manageable
0 Meaningful
0 Value for members
Key results
0 Capital Management Plan.
0 ERM Policy.
Capital Management Plan
0 Stochastic model
0 Stress test
0 10,000 scenarios
0 Used MCT as metric
0 Model Details
0 The model is based on a series of 10,000 simulations
which generated full balance sheet projections as well
as MCT calculations and other metrics.
0 Claims are generated based on theoretical distributions
for each line of business from the 2011 rating study.
Claims are generated for future years based on trending,
growth and a frequency and a severity distribution.
0 Model Details (cont’d)
0 Additional shocks are
distributions for:
included
by
generating
0 A 10% chance of generating a loss in excess of $2.5 million,
which could be not reflected in the past experience data.
0 A reserve deficiency mechanism which assumes with a 5%
chance that liabilities are 20% deficient, a 10% chance that
liabilities are 10% deficient and a 10% chance that
liabilities are excessive by 5%. Our model only assumes
this shock in the year 2011.
0 That members’ assessments for all pools, including those
finding the MIABC’s retention be set at the 75th percentile
confidence level.
0 That the MIABC gradually reduce its reliance on
reinsurance by increasing it’s retention level, insofar as it
receives concurrence from its appointment actuary.
0 That investment income should not be credited to
members’ assessments.
That if the MIABC ‘s capital falls below $250% MCT, the
MIABC should consider replenishing it by retroassesing
the membership if the MIABC’s capital is more than
250% MCT but less than 450% MCT, no dividends
should be distributed. If the MIABC’s capital is between
450% MCT and 650% MCT, any dividends should be
limited to 10% of the previous year pool assessment. If
the MIABC’s capital exceeds 650% MCT, dividends
should be limited to a maximum of 15% of the previous
year’s pool assessment.
ERM Plan
0 Engaged a consultant for the final phase.
0 Adopted policy.
Risk Categories
0 Insurance
0 Investment
0 Business operations
0 Human Resources
0 Regulatory / Legal
0 Strategy / Reputational
0 IT
ERM Implementation
Staff working groups
0 Representation from each department.
0 Review consultant’s assessment.
0 Assign owner and Board report.
0 Set target tolerance.
0 Mitigation options.
0 Mitigation plan.
0 Monitoring and reporting.
Conclusions
0 Changes are coming.
0 Governance is critical.
0 ERM inevitable.
0 Onus on us to make it work.