The Emergence of Solvency II – The GNAIE Perspective

1. Group of North American Insurance Enterprises The Emergence of Solvency II – The GNAIE Perspective Jerry M. de St. Paer • Senior Vice President, Finance, AIG • Executive Chairman, Group of North American Insurance Enterprises (GNAIE)

2. What is GNAIE? • GNAIE is an industry organization of US, Bermudian and Canadian based international insurance companies • The goals of GNAIE are to assist North American and global standard setters and regulators, in cooperation with the global insurance industry and with insurance and other financial services industry trade associations, to support high quality insurance accounting and solvency standards

3. Who are the Members?

4. Why does the North American Insurance Industry care about Solvency II? • GNAIE members are significant participants in European and world-wide insurance markets, so we care about Solvency II • US efforts to converge US GAAP with international accounting standards, and the emerging use of economic capital management in the insurance industry and by rating agencies, increase the influence of European solvency concepts

5. Third Country Insurance Issues • Level regulatory playing fields – competitive considerations • Group supervision issues • Regulatory equivalence • NAIC consideration • Relationship between Solvency II and IFRS

6. Level Regulatory Playing Fields – Competitive Considerations • Identical insurers writing exactly the same business, assuming same quality of management, should be treated identically from a solvency viewpoint, regardless of domicile • Solvency II group diversification benefits have been designed with EU groups in mind • EU groups are lobbying hard for recognition in the EU of realisable diversification benefits attributable to their third country operations • The ERM initiatives of Rating Agencies rightly do not discriminate on the basis of parent company domicile

7. Group Supervision Issues • Third country companies could be required by the supervisor to form a European Insurance Holding company • Solvency II may allow European supervisors the option of requiring regulation at the group level • Regulators could select the jurisdiction based on level of business

8. Regulatory Equivalence • There are no answers as to how equivalency is to be determined • Criteria • Legal structure • There are no answers as to how equivalency will work with a jurisdiction like the US with no group supervision • GNAIE members are being asked to pay the price of “non-equivalence”, yet provide the highest levels of European policyholder protection

9. NAIC Consideration • There is an urgent need for US Regulators to examine the impact of the group and third country issues of Solvency II on US companies • Attainment of Third Country Equivalence cannot be an “after-thought” • The current proposals have serious competitive implications and threaten to undermine the protection provided to policyholders by some of the world’s biggest and most financially secure insurers • Pragmatic solutions needed – insurers should not be forced to pay the price for variety of global supervisory structures • A wait and see approach is not an option!

10. Relationship between Solvency II and IFRS • Solvency II is based on an economic balance sheet approach • Assets at market value • Technical provisions - “current exit value” i.e. market consistent • Ignores unique settlement and service features of insurance liabilities • Which, is identical to the IFRS DP proposals • Without concern for accounting issues (e.g. profit recognition) • But, Solvency and Accounting objectives differ! • Current Solvency II proposals resulting in lower technical insurance liabilities than IFRS proposals • Arguably, it should be the other way round… • But, recognition of artificial profit margins on day one is not the answer just to lower accounting technical liabilities • More important to get the objective and measurement of Solvency II right!

11. Final Thoughts • Our support, as EU and global market participants, will greatly add weight to acceptance and convergence of the Solvency II standards • Our support at the IAIS will speed the development of a global standard equivalent to Solvency II • Our efforts in the US could support convergence to an equivalent standard in the US • For either to occur, North American constituents must feel that Solvency II, generally is consistent with their needs and circumstances, and that the process of development is open and receptive to their comments • Current treatment of third country insurers is very distant from this requirement • GNAIE’s desire is to continue to work closely with our European counterparts on global solvency principles, as we have done successfully on global accounting principles