Insurance Core Principles and Global Financial Stability

1. Insurance Core Principles and Global Financial Stability Dave Finnis, IAIS San Jose 6 September 2011

2. Overview of the Insurance Core Principles (ICPs) Review of ICPs and introduction of new ICP on macroprudential supervision and market analysis San Jose 6 September 2011

3. Background • 2003 Insurance Core Principles (ICPs) are in the final stages of revision and IAIS supervisory material restructruction • Standards will form the observance criteria for the relevant ICPs • Guidance will be linked to specific standards • Establishes a compendium of supervisory material with clear hierarchy • Includes lessons learnt from the global financial crisis e.g. FSB and Joint Forum recommendations. • Most received extensive consultation during 2011 • October 2011 adoption of the large majority of ICPs Insurance Core Principles and Global Financial Stability

4. Global convergence Advanced criteria Essential criteria ICPs Principles paper Standards paper Guidance paper Guidance materials ICP review – a comprehensive and coherent framework Existing materials New ICP hierarchy Insurance Core Principles and Global Financial Stability

5. Proposed new ICP hierarchy • The essential elements that must be present in the supervisory regime • Should be adhered to by all insurance supervisors • Basis from which standards are developed Insurance Core Principles • High-level requirements that are fundamental to the implementation of the ICPs • Written as obligations of the supervisor • Linked to specific ICPs Standards • Supports the core principles and/or standards and provides detail regarding how to comply with or implement • Does not set out new requirements • Often provide examples of possible ways of implementing the requirements Guidance Insurance Core Principles and Global Financial Stability

6. ICP 1 Conditions for effective insurance supervision ICP 2 Supervisory objectives ICP 3 Supervisory authority ICP 4 Supervisory process ICP 5 Supervisory cooperation and information sharing ICP 6 Licensing ICP 7 Suitability of persons ICP 5 Suitability of persons Preconditions ICP 1 Objectives, powers and responsibilities of the supervisor ICP 2 Supervisor ICP 3 Supervisory Cooperation, Coordination and Information Sharing ICP 4 Licensing ICP 24 ICP 11 Market Analysis ICP 16 Winding-up and exit from the market ICP 8 Changes in control and portfolio transfers ICP 9 Corporate Governance ICP 10 Internal control ICP 12 Supervisory reporting and off-site monitoring ICP 13 On-site inspection ICP 14 Preventive and corrective measures ICP 15 Enforcement and sanctions ICP 18 & 19 ICP 10 Preventive and corrective measures ICP 12 Winding-up and exit from the market ICP 6 Changes in control and portfolio transfers ICP 7 Corporate Governance ICP 8 Internal governance and control ICP 9 Supervisory Review and Reporting ICP 11 Enforcement and sanctions Proposed new ICP structure Existing ICPs New ICPs Existing ICPs New ICPs Insurance Core Principles and Global Financial Stability

7. Proposed new ICP structure (2) ICP 17 Group-wide supervision Existing ICPs ICP 21 Investments ICP 22 Derivatives and similar commitments ICP 23 Capital adequacy and solvency ICP 18 Risk Assessment and Management ICP 19 Insurance activity ICP 20 Liabilities ICP 16 Enterprise risk management ICP 17 Capital Adequacy Proposed ICP 8 ICP 13 Reinsurance and other forms of risk transfer ICP 14 Valuation ICP 15 Investment New ICPs ICP 11 Existing ICPs ICP 24 Intermediaries ICP 25 Consumer protection ICP 26 Disclosure ICP 27 Fraud ICP 28 Anti-money laundering, combating the financing of terrorism ICP 24 Macro- prudential Supervision & Market analysis ICP 23 Group-wide supervision New ICPs ICP 18 Intermediaries ICP 19 Conduct of Business ICP 20 Disclosure ICP 21 Fraud ICP 22 Anti-money laundering, combating the financing of terrorism Insurance Core Principles and Global Financial Stability

8. ICP 24 – Macroprudential Surveillance and Insurance Supervision - a summary • The supervisor identifies, monitors and analyses market and financial developments and other environmental factors that may impact insurers and insurance markets and uses this information in the supervision of individual insurers. Such tasks should, where appropriate, utilise information from, and insights gained by, other national authorities. • Collection of market data • Quantitative and qualitative analysis • Focus on financial stability • Analysis of systemic importance of insurers • Development of supervisory response Insurance Core Principles and Global Financial Stability

9. Other key highlights • ICPs apply to the supervision of insurers at the both legal entity and insurance group level • Standards used as criteria to assess observance of the ICPs (e.g. FSAP). • The existing ICP on market analysis expanded to cover macroprudential supervision. • ICP 9 (Supervisory Review and Reporting) development of guidance follows on from other ICPs and is still being considered • IAIS glossary is also being updated Insurance Core Principles and Global Financial Stability

10. Lessons from the Financial Crisisandthe IAIS Response Dave Finnis – IAIS Secretariat Effects of the Crisis on the Insurance Industry and how Industry Supervision has reacted San Jose, 6 September 2011

11. Agenda • Impact of the crisis on the insurance sector – some examples • Response to the recommendations of the G20 and FSB • Systemic relevance of insurers and an introduction to macroprudential surveillance • Internationally active insurance groups – developing a common framework (ComFrame) Insurance Core Principles and Global Financial Stability

12. Impact of the crisis on the insurance sector • Much less impact than for banks • Insurers credit losses < US $300 billion (mainly AIG) • Banks credit losses > US $1,700 billion • Some (minor) liquidity issues • A small number of cases of state capital support of insurers • Impact of low interest rates likely to continue for some years • How much greater could the impact have been without government support of banks? Insurance Core Principles and Global Financial Stability

13. More on Examples of Insurance Impacts • AIG’s idiosyncratic behaviour • Failure of CDS business • Securities lending activity • Asian liquidity issues • Mainly AIG-related • Belgian insurance business model peculiarities • Ethias’ “bank account” pension plan • Dutch state intervention • Banking-related liquidity problems for ING • Swiss Re’s CDS experience • Related to severe credit rating downgrades • Common theme: “Non-traditional” activity Insurance Core Principles and Global Financial Stability

14. Response to the recommendations of the G20 and FSB • Lessons: • 1) Extent of interconnectedness of financial markets and linkage of insurance to overall financial stability • 2) Need for a “bird’s eye” (macroprudential?) view • 3) Need for a better understaning of non-traditional business • Many recommendations will need to be implemented over next few years • Need for consistency in response around the world • Most recommendations are included in the IAIS strategic plan • Some actions are already having effect • Details included of more activity in the IAIS Roadmap for 2012 & 2013 Insurance Core Principles and Global Financial Stability

15. IAIS strategic plan for 2011 to 2015 • Contribute to global financial stability and foster stable insurance markets (one of top 5 activities) • Strategy 1: Identify the role of insurance within the context of global financial stability. • Action plans: • 1.1 Identify insurance supervisory concerns related to financial stability. • 1.2 Contribute to FSB discussions about systemic risks and financial stability from the insurance perspective. • 1.3 Assess the exposure and/or contribution of the insurance sector to systemic risk and/or threats to financial stability. • 1.4 Assist members to develop suitable methodologies to identify systemic risks or threats to financial stability in the context of insurance. Insurance Core Principles and Global Financial Stability

16. IAIS strategic plan for 2011 to 2015 • Strategy 2:Promote macroprudential surveillance • Action plans: • 2.1 Build appropriate economic expertise within the IAIS including a network of experts on macroprudential surveillance. • 2.2 Identify components of macroprudential surveillance of relevance to insurance supervision. • 2.3 Contribute to the development of a global macroprudential surveillance framework, including by building on and expanding existing Reinsurance Transparency Group (RTG) work beyond reinsurance, and by leveraging information from other sources, such as individual and regional supervisory groups and the IMF. • 2.4 Contribute a global insurance perspective to FSB macroprudential surveillance considerations. Insurance Core Principles and Global Financial Stability

17. IAIS strategic plan for 2011 to 2015 • Strategy 3: Assess and mitigate risks and vulnerabilities • Action plans: • 3.1 Develop macroprudential tools of relevance to the global insurance sector by: • identifying and developing tools specific to the insurance sector as needed and • analysing other tools developed and determining their relevance for the insurance sector • 3.2 Assist in the application of macroprudential tools for use by insurance supervisors on a local and regional basis, where appropriate. • 3.3 Contribute an insurance perspective to the FSB’s guidance on macroprudential tools. • 3.4 Take measures to mitigate regulatory arbitrage. Insurance Core Principles and Global Financial Stability

18. IAIS Roadmap – response to G20/FSB recommendations (standard setting) • FSB Supervisory Intensity and Effectiveness Recommendations • Review the FSB recommendations and determine if further enhancements to the ICPs are required • Review changes to business practices • Revise supervisory material beyond 2011 to reflect lessons from the financial crisis and reflect changes to business practices. Insurance Core Principles and Global Financial Stability

19. IAIS Roadmap – other G20/FSB recommendations • Assess exposure and/or contribution to systemic risk • Undertake further research with IAIS specialists, selected academics, actuaries and other professionals to develop a more extensive assessment of systemic risk in the insurance sector • Assist members to develop suitable methodologies to identify systemic risks or threats • Further develop the provisional methodology for measures of systemic importance and risk • Stress testing • Examine the possibility of developing financial system-wide stress testing specific to insurance Insurance Core Principles and Global Financial Stability

20. IAIS Roadmap – other G20/FSB recommendations • Financial stability & reinsurance • Monitor and analyse the specific role of reinsurance in the context of global financial stability and its role for the wider economy. Develop topic specific issues papers. • Economic expertise • Build internal and external resources, including a network of experts on macroprudential surveillance Insurance Core Principles and Global Financial Stability

21. IAIS Roadmap – other G20/FSB recommendations • Contribute an insurance perspective to the FSB’s guidance • Monitor relevant FSB workstreams, brief relevant IAIS working parties and proactively contribute to FSB discussions and influence FSB positions adopted that have implications for the insurance sector with particular focus on macroprudential tools • Measures to mitigate regulatory arbitrage • Encourage IAIS working parties to consider and/or adopt relevant Joint Forum and FSB reports and recommendations (e.g. BCBS reforms to liquidity and capital requirements) Insurance Core Principles and Global Financial Stability

22. IAIS Position Statement on Key Financial Stability Issues (2010) • Based on pooling and diversification of risks. Residual risks managed through reinsurance, hedging, securitisation, ALM etc. • Financial distress plays out over long time horizon – liquidation takes place over many months/years. Hence, longer time to intervene. • Unlike banks, insurers are not part of payment and settlements system; and do not rely on short term borrowed money. Insurance business model • Insurance sector susceptible to systemic risks generated in other parts of the financial sector. • For most classes of insurance business, little evidence of insurance generating /amplifying risk except with regards to non-regulated entities (contagion risk), specific insurance products (e.g. FGIs) or through capital markets linkages (fire sale). • G20/IMF/BIS definition • size - but need size for greater diversification • interconnectedness – reinsurance spiral; links with other firms • substitutability – market disruption due to capacity withdrawal Systemic relevance & systemic risk Resolvability • “Life after death” – orderly run-off Proposed supervisory enhancements • ComFrame and group-wide supervision • Macroprudential monitoring • Enhancements to supervision and supervisory processes, stronger risk management, enhancements to resolvability approaches Insurance Core Principles and Global Financial Stability

23. New Financial Stability Initiatives Identification of systemically important insurers and the ComFrame project San Jose, 6 September 2011

24. IAIS Roadmap - Systemically Important Financial Institutions (SIFI) project • We have developed a methodology comprising of both quantitative and qualitative indicators to assess the systemic importance of insurers at a global level and provide broad guidance on how to identify global SIFIs (“G-SIFIs”) - Focusing indicators: - Size of group; and - Extent of global activity - Measurement indicators: - Extent of non-traditional business, - “Interconnectedness”; and - “Substitutability” - Approx. 50 insurance groups targeted for data collection Insurance Core Principles and Global Financial Stability

25. IAIS Roadmap - Systemically Important Financial Institutions (SIFI) project Going forward: • Develop an evaluation framework for the application and review of G-SIFI targets in close collaboration with the FSB and BCBS by December 2011. • Domestic, or D-SIFIs, to be targeted in 2012 • Monitor all relevant FSB workstreams, brief relevant IAIS working parties and proactively contribute to FSB discussions and influence FSB positions that may have implications for the insurance sector (ongoing) with particular focus on the SIFI project and any implications for insurers Insurance Core Principles and Global Financial Stability

26. ComFrame : Objectives Insurance Core Principles and Global Financial Stability ComFrame aims to: • Develop methods of operating group-wide supervision of Internationally Active Insurance Groups (IAIGs) in order to make group-wide supervision more effective and more reflective of actual business practices; • Establish a comprehensive framework for supervisors to address group-wide activities and risksand also setgrounds forbetter supervisory cooperation in order to allow for a more integrated and international approach; • Foster global convergence of regulatory and supervisory measures and approaches.

27. ComFrameprinciples Insurance Core Principles and Global Financial Stability ComFrame should • become the multilateral tool of preference for assessing internationally active insurance groups • provide meaningful value to both home and host supervisors for undertaking group supervision • be developed through the use of existing Working Parties, complemented were needed by ad-hoc groups, under the steering of the ComFrame Task Force and the policy oversight of the Executive Committee, in consultation with the Technical Committee • be made up of Modules each including a specific group of Elements

28. ComFrame principles II Insurance Core Principles and Global Financial Stability ComFrame should: • be specific, but not rules-based • be ever-evolving (and further look into case experiences) • be developed in close collaboration with interested stakeholders • lead to more consistency and better comparability and alignment regarding the supervision of internationally active insurance groups being undertaken by each jurisdiction 28 28

29. Next steps Insurance Core Principles and Global Financial Stability 29

30. ComFrame Concept Paper Product of a one year conceptual development process since launch on 1 July 2010, to be followed by another two years’ building phase and then a calibration phase ComFrame Concept Paper serves to crystallise thoughts on direction taken to date and open questions in a transparent process Demonstrates the commitment of the IAIS membership to developing an international framework for group-wide supervision of IAIGs Provides a focused opportunity for feedback from members and observers Insurance Core Principles and Global Financial Stability 30

31. Common Framework for the Supervision Of Internationally Active Insurance Groups (ComFrame) OBJECTIVES OF COMFRAME Effective supervision of IAIGs Comprehensive framework Global convergence Multilateral tool; specific but not rules-based Module 1 Scope of application Module 2 Group structure and business Module 3 Quantitative & qualitative requirements Module 4 Supervisory cooperation and interaction Module 5 Jurisdictional matters Insurance Core Principles and Global Financial Stability

32. Questions and discussion dave.finnis@bis.org www.iaisweb.org Insurance Core Principles and Global Financial Stability

33. Insurance Core Principles and Global Financial Stability Dave Finnis, IAIS Thank you for contributing! San Jose 6 September 2011