Session 9: Panel on Assets
Jeffery Yong
IAIS Secretariat
Regional Training Seminar IAIS-ASSAL
San Salvador, 24 November 2010
Agenda
1. Introduction - lessons from the financial
crisis
2. International standards
3. Summary
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Lessons from the financial crisis – mainly on
asset side of the balance sheet
Note : This list is not exhaustive.
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Proposed structure of the new ICPs
EXISTING ICPS
NEW ICP STRUCTURE
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ICP 18
ICP 19
ICP 20
ICP 21
ICP 22
ICP 23
Risk Assessment
and Management
Insurance
activity
Liabilities
Investments
Derivatives and
similar commitments
Capital adequacy
and solvency
ICP 14
ICP 15
ICP 16
ICP 17
Valuation
Investment
Enterprise risk
management for
solvency purposes
Capital Adequacy
Standard on
valuation
Standard on
investments
Standard on ERM
for solvency
purposes
Standard on
capital
requirements
Standard
on internal
models
Guidance on
valuation
Guidance on
investments
Guidance on ERM
for solvency
purposes
Guidance on
capital
requirements
Guidance
on internal
models
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Total balance sheet approach to recognise
interdependencies
Supervisory assessment of
the financial position
Public financial reporting
Available
capital
Capital
Liabilities
Liabilities
Value of
assets for
supervisory
purposes
Assets
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Technical provisions
Capital
requirement
Risk margin
Best
estimate
policy
obligations
Liabilities
and capital
requirement
Financial
position
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Assets
Liabilities
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An example of asset composition
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Agenda
1. Introduction - lessons from the financial
crisis
2. International standards
3. Summary
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Basis for establishing regulatory investment
requirements
• The supervisory regime establishes requirements that are applicable to
the investment activities of the insurer.
• The supervisory regime is open and transparent as to the regulatory
requirements that apply and is explicit about the objectives of those
requirements.
 Financial requirements alone not sufficient – need to complement with
quantitative/qualitative requirements to limit investment risks by
insurer.
 Factors to consider when setting requirements:
• Quality of risk management and governance
• Quality of capital resources
• Disclosure framework
• Cost of compliance
• Risk sensitivity of solvency regime
 Transparency facilitates comparisons across jurisdictions – particularly
important for cross-border insurance groups
 Explicit objectives can help to identify consistency with other
requirements – regulatory capital requirements, determination of
capital resources and valuation of assets and liabilities.
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Rules-based vs. Principles-based
Rules-based
•
•
•
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Limits on asset types
Form - % of investments;
capital charges; deductions
from capital resources
Easy to enforce and explain
to court
Deter insurer from investing
in inappropriate assets
BUT – stifle innovation;
disincentivise risk
management; one-size does
not fit all
Principles-based
•
•
•
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Session 9: Panel on Assets
Principles on investment
strategy
More flexibility for insurer to
choose strategy that meets
its risk profile and objectives
Less frequent revisions in
response to market
developments
BUT – innovative instruments
riskier than originally
assessed; difficult to enforce
actions – open to
interpretations
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Minimum requirements - security, liquidity and
diversification
• Restrict investment exposure to high risk investments (default,
lost of value, custodianship)
Security
• Limits of using external credit ratings – conduct own due
diligence
• Derivatives – assess underlying assets and counterparty risk
• Able to realise/liquidate investments at any point in time
Liquidity
• Insurance groups – due regard to impediments to cross-border
transfer of assets particularly in winding up
• Diversify within risk category – pooling of same risks (e.g.
shares of different companies)
Diversification
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• Diversify between risk categories – uncorrelated investments
(e.g. different asset classes, geographical spread etc.)
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Investments should be appropriate to the nature
of liabilities
Unit-linked
policies
Currency of
liabilities
ASSETS
Timing of
liability
cashflows
Policy
guarantees
& options
Amount of
liability
cashflows
Mismatching risk  higher technical provisions and/or capital requirements
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Risk assessibility
• The solvency regime requires the insurer to invest only in assets
whose risks it can properly assess and manage.
• The solvency regime establishes quantitative and qualitative
requirements on the use of more complex/less transparent assets
and investments in lightly/non-regulated markets.
 Invest only in assets that the insurer can identify, measure, monitor,
control and report – including reliable valuation.
 Assess maximum loss possible – look through underlying assets.
 Particular attention on complex asset classes – implicit obligations of
support, increased correlation in times of stress.
 E.g.- pre-approval of an insurer’s derivative investment plan – describe
controls and test process.
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Requirements on specific financial instruments
• Consider whether should permit – circumventing requirements?
Off Balance
Sheet
Structures
Structured
Credit
Products
• Investment strategy of OBS may be different from the insurer’s
• May impact ability to meet policyholder obligations especially in
times of stress
• Difficult to assess inherent risk underlying the reference
instrument – e.g. subprime mortgages
• Impose quantitative/qualitative requirements on
investments/originator
• Consider treatment in other financial sector, “skin in the game”,
transparency of underlying asset, insurer’s control system
• Obtain information on insurer’s policies and procedures on the
use of derivatives – rationale for transactions
Derivatives
• Should be used for risk management and not speculative
investment – consider prohibition
• Suitable counterparties and tradability of the derivative
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Agenda
1. Introduction - lessons from the financial
crisis
2. International standards
3. Summary
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Summary of key points
• During the recent global financial crisis, insurers
were mainly affected due to their investment
activities.
• Regulatory and supervisory requirements on
investments need to incentivise insurers to have
sound investment policies without being too
restrictive.
• Sound asset-liability management policies has
proven to be a powerful tool to manage risk.
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Some final thoughts
• Need to avoid
insurers becoming
too-big-to-manage or
too-complex-tounderstand
• Insurers should have
better understanding
on risk
interdependencies
• Avoid mistakes in
other sectors
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Thank you for your attention.
Any questions/ comments?
jeffery.yong@bis.org
www.iaisweb.org
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