Global Solvency Standards, Among Others

1. Global Solvency Standards, Among Others CPCU Society International Section – Symposium: Solvency Standards Around the World Andy Giffin

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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)

12. 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

13. Implications for Insurers, Reinsurers • Reporting ala Sarbox • Monitor international accounting debates • Monitor insurance regulatory harmonization

14. 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

15. 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