Global Solvency Standards, Among
Others
CPCU Society International Section – Symposium:
Solvency Standards Around the World
Andy Giffin
June 11, 2005
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For Today . . .
 The old days – for regulators
 The old days – for regulatees
 Global demand for change – the Asian Crisis
 Geographical crossovers – AIG
 Financial service crossovers
 Accounting fundamentals
 Response: the IAIS Insurance Core Principles
 Solvency: the core of the core
 The “Other” regulators and public pressure
 Global implications
 Implications for insurers, reinsurers
 Implications for regulators
 Implications for solvency
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The Old Days – For Regulators
 Most issues local
 Most insurance laws provide little on overall purpose or
priorities
 Agenda set by reaction to industry, public demands
 Limited opportunity for authority interaction – NAIC in
U.S., AIDA, shared financial examination, insolvencies,
ad-hoc seminars
 Little historic interaction among banking, securities and
insurance regulation
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The Old Days – For Regulatees
 Regulatory problems, mostly, a nuisance
 For multinationals, local variations an added expense
but mostly solvable
 National crises in U.S. dealt with via NAIC
 Financial services comglomerates dealt with regulators
by traditional separations – banking, securities,
insurance
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Global Demand for Change – the Asian Crisis
 Mid-1990’s economic crises in Asia spread worldwide
 IMF, other inter-governmentals – Financial Stability
Forum
 Financial regulation to curb future crises – not just
banking
 IAIS for insurance: The Insurance Core Principles
 Guidance papers in progress
 Fundamentals usable in various political systems
 Bias toward open, transparent markets
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Geographical Crossovers - AIG
 90s/00s – multinational to global companies
 Transnational leverage – strategic, financial, operational
 EU harmonization
 Multinationals benefit from global regulatory harmonization
 AIG – largest global insurer by market cap
 Broke down regulatory barriers to entry
 Transnational arbitrage, including regulation
 Regulatory crossover: finite reinsurance, financial reporting,
governance
 AIG’s architect ousted
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Financial Service Crossovers
 Insurers as large investors
 Global financial stability – Insurance Core Principles
 Private pensions – banking, insurance, securities
 Bancassurance – risk and retail
 Reinsurance – risk spread and finance
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Accounting Fundamentals
 Multiple national statutory and GAAP approaches
 Scandals encourage global harmonization, controls:
 Pensions
 Enron, Worldcom
 Post 90s reinsurance failures
 Insurance failures – Mutual Benefit, Equitable
 AIG
 IAS, U.S. GAAP, “ Fair Value”
 Solvency II (Basel II) – need accounting basis
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Response: IAIS Insurance Core Principles
 Most insurance laws are a historical dog’s breakfast
 Application constrained by regulator resources
 Insurance Core Principles provides integrated
elements with a rationale
 Guidance papers amplify, offer alternatives
 Bias toward private, open, transparent market
 Trend from prescription to oversight of self-assessment
 Coordinate with Basel Committee and IOSCO
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Solvency: The Core of the Core
 Approach: % of premiums, reserves – easy to
administer – but, enough? Too much?
 Approach: Risk based capital formula – more dynamic,
dynamic enough?
 Approach: Risk management, stress testing – requires
expertise, quality risk assessment
 Investments, reserves, other risks
 Creativity, obscuration, fraud
 Global consistency – multinationals, reinsurance,
multi-financials
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The “Other” Regulators and Public Pressure
 Eliot Spitzer – mutual funds to broker deals to finite
reinsurance to Warren Buffett and the Greenbergs to
the Governor’s Mansion?
 Investor suits – large pension funds, class actions
 Arthur Anderson – reversing the conviction of a ghost
 SEC – fair and accurate disclosure
 Sarbanes-Oxley – governance, accounting oversight
 IAS
 WTO, World Bank, IMF, OECD (Pension)
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Global Implications
 Multinationals will leverage harmony or arbitrage
 Variation breeds confusion and inefficiency
 Regulators can leverage harmony and implementation
methods; need to upgrade skills
 Local, national companies face demand for upgrades
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Implications for Insurers, Reinsurers
 Reporting ala Sarbox
 Monitor international accounting debates
 Monitor insurance regulatory harmonization
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Implications for Regulators
 Most in general compliance with the IAIS Insurance
Core Principles
 Tendency to be reactive to industry and public
pressures
 Need to revisit purposes and global trends
 Need to reassess skills and realign with today’s
priorities, e.g., dynamic solvency
 Pressure for financial services regulator consolidation
 IIF a useful resource
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Implications for Solvency
 Move toward dynamic analysis
 Companies improve understanding of risk dynamics
 Companies leverage risk – new challenges
 Regulators get better picture of exposure
 Regulators need stronger skills to keep pace
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