International Regulations by Shaun Tarbuck Chief Executive ICMIF

1. International RegulationsbyShaun TarbuckChief ExecutiveICMIF

2. Agenda • International regulation and accounting and the players • Solvency II • Discussion forums

3. World Bank - Washington • Regulates national supervisors • Supervisors receive seal of approval • Possible role to play in regulating the multinational financial organisations! • ICMIF connections • mostly development • Insurance division

4. International Association of Insurance Supervisors (IAIS) - Basle • Started in 1994 now has 192 supervisor members and 120 observer members (ICMIF since 2002) • ASSAL regional group for Latin America and Caribbean • Aim to produce best practices guidelines in regulation for members to use. • Three core areas • Solvency (linked to Solvency II) • Corporate Governance (first draft done) • Market conduct (not started yet) • ICMIF engagement • CEO Yoshi Kawai spoken at ICMIF events and annually to JCIA • Led the joint IAIS/CGAP working group for microinsurance regulation • Leading a follow up committee on mutuals/coops in microinsurance • Strong links with the OECD and Geneva Association

5. International Accounting Standards Board (IASB) – London • IASB and FASB convergence program to produce global accounting standards • IASB produces IFRS standards then used by 90+ countries as their GAAP • IFRS 4 – Insurance standard • Started in 1997 • Phase 1 insurance contracts completed in 2005 gradually being adopted eg UK 2005/06 Japan 2010 • Key changes accounting treatment of savings products with no insurance element • Phase 2 Exposure draft late 2009 final IFRS 2011 • Phase 2 hotly debated may never see the light of day

6. Solvency II - agenda Background and overview Key players and timelines The framework Pillar 1 – market value balance sheet Pillar 2 – requirements Pillar 3 – disclosure and market discipline Implications

7. Solvency II – Who is Involved • European Institutions: Commission, Parliament & Council • CEIOPS - Committee of European Insurance and Occupational Pensions Supervisors • CEA - Committee European des Assurances • AMICE – European association of Mutuals & Cooperative insurers • CRO – Chief Risk Officers forum • CFO – CFO forum • IAIS – International Association of Insurance Supervisors • Groupe Consultatif Actuariel European

8. Solvency II - background • New European-wide framework for supervisors of insurance • Problems with Solvency I • Outdated 1970s • Not risk sensitive • No longer best practice • Not focused on supervision of multinationals • Risk issues not addressed • Feasibility study into reasons for insurance company failures in Europe (2002 Sharma report) • Showed Management failure to be sole reason

9. Solvency II - Overview • Aim is to achieve 99.5% certainty of insurance company success • Principle based approach to supervision • Capital linked to all risks • Convergence of economic capital and regulatory capital • Recognises benefits of diversification of groups • Lead supervisor for groups??? • Better disclosure requirements • Links to other reporting measures (IFRS 4) • Contribution to a world-wide standard (IAIS)

10. Process and timeline • First directive to use the Lamfalussy process • Means full engagement with all stakeholders in the process • Level 1 – Framework directive (2003-2009) • Full testing in market with Quantitative Impact Studies (QIS) • Level 2 – Implementing measures (2008-2010) • Level 3 – Supervisory guidance (2010-2011) • Level 4 – Enforcement and Compliance (from 2012)

11. Pillar 1 – Market Value Balance Sheet • Market value of assets • Technical provisions • Best estimate liabilities • Risk margin • Capital requirement • Minimum capital requirement (MCR) • Solvency capital requirement (SCR) • Free surplus

12. Standard risk chart Source: PWC

13. Solvency Capital Requirement • Framework • VaR (Value at Risk) subject to ruin probability of 0.5% over 1 year • Option to use an Internal model but needs approval • Total balance sheet approach • Standard formula • Mostly based on change in net asset value • Combination of stress tests • Very few will use • Internal model • All large companies are likely to use • Advantageous for mono-line and specialised risk insurers – but cost/benefit • All models require approval by regulator

14. Pillar 2 - Requirements Requires a step change in risk culture and governance • Supervisory review – Governance, ORSA, Balance sheet, internal models • ORSA – Own Risk and Solvency assessment • Capital requirements – additional • Governance requirements – robust and documented • Risk management requirements • Internal control requirements

15. Pillar 3 – Disclosure & Market Discipline • Information to submit to regulator • Public disclosures • Disclosures by regulators

16. Implications • Capital – more or less? • Senior Management require greater understanding of risk • NED’s/Boards require greater understanding of risk • Increased awareness by all staff of risk implications on all business decisions • Will drive greater business efficiency • More efficient use of capital • Transparency • Accountability • Increased costs • Better risk modelling eg Disaster recovery, business continuity, succession planning, strategic changes.

17. Danke Thank You Merci ありがとう Gracias