Regional Information Session Cape Town, 5 March 2010

1. Regional Information SessionCape Town, 5 March 2010 Developments in the IAIS Solvency and Actuarial Issues Subcommittee Rob Curtis - Chair

2. Outline • Introduction of the IAIS and its approach to risk-based supervision • Insurance Core Principles for effective supervision • Update on standard setting work across the IAIS • ComFrame (Common Framework for the supervision of Internationally Active Insurance Groups)

3. Introduction of the IAIS and its approach to risk-based supervision • Founded in 1994 • Represents insurance regulators and supervisors • World wide membership • 204 Members (including 56 US Members) • 131 Observers (including 10 international organisations) • Observers participate actively • Secretariat based in Basel, Switzerland

4. Introduction of the IAIS and its approach to risk-based supervision Global financial stability Efficient, fair, safe and stable insurance markets Policyholder protection Well-regulated and well-supervised insurance markets Improved supervision

5. Introduction of the IAIS and its approach to risk-based supervision Encourage implementation of principles and standards Develop assessment methodologies Develop standards, principles, guidance Identify potential risks that may affect insurance supervision Encourage co-operation amongst insurance supervisors Represent the field of insurance supervision Cooperate with other international organisations

6. Introduction of the IAIS and its approach to risk-based supervision

7. Introduction of the IAIS and its approach to risk-based supervision

8. Outline • Introduction of the IAIS and its recent activities • Insurance Core Principles for effective supervision • Update on standard setting work across the IAIS • ComFrame (Common Framework for the supervision of Internationally Active Insurance Groups)

9. Insurance Core Principles Insurance Core Principles for effective supervision • Is the foundation on which all standard setting activities of the IAIS build • Provide a globally accepted framework for the regulation and supervision of the insurance sector • Serves as a benchmark for insurance supervisors in all jurisdictions

10. Insurance Core Principles • Can be used • when establishing a supervisory regime or • for identifying areas in existing regimes that need to be improved • Self assessments • Compliance assessed by the IMF and the World Bank (FSAPs)

11. Insurance Core Principles • Benchmark for insurance supervisors • Used to establish new regimes • Used to improve existing regimes • Used in evaluation of supervisory regimes – FSAPs • Applies to all insurers and reinsurers, but not intermediaries, unless indicated Insurance Core Principles and Methodology Essential Principles Assessment criteria Explanatory notes Essential criteria Advanced criteria

12. Insurance Core Principles

13. Essential criteria Elements necessary in the implementation of ICPs Assessment criteria Advanced criteria Components which improve essential criteria and enhance supervisory regime Not used in assessing ICPs observance BUT may be used to comment or make recommendations on supervisory framework Insurance Core Principles

14. Insurance Core Principles Currently being revised (with a completion date of 2011) to ensure they remain appropriate, comprehensive and current (subject to final approval)

15. Insurance Core Principles Mapping with existing ICPs to proposed ICPs (subject to final approval)

16. Insurance Core Principles Mapping with existing ICPs to proposed ICPs (subject to final approval)

17. Outline • Introduction of the IAIS and its recent activities • Insurance Core Principles for effective supervision • Update on standard setting work across the IAIS • ComFrame (Common Framework for the supervision of Internationally Active Insurance Groups)

18. Update on standard setting work across the IAIS Supervisory assessment LEVEL 3 Supervisory assessment and intervention Common Solvency Structure and Standards Regulatory requirements LEVEL 2 Market conduct Financial Governance the insurance supervisory authority Basic conditions for the effective functioning of Preconditions LEVEL 1 the insurance sector and insurance supervision Framework for Insurance Supervision

19. Update on standard setting work across the IAIS • Current issues in standard setting • A comprehensive and coherent set of supervisory papers on insurance supervision • Appropriate balance between principles based standards and adequate supporting guidance • Group-wide supervision • Proportionality • Financial stability • Promoting appropriate convergence towards globally accepted, improved standard of supervisory practice • Multilateral Memorandum of Understanding • Mutual recognition

20. Update on standard setting work across the IAIS • Solvency • Structure of regulatory capital requirements (adopted in October 2008) • ERM for capital adequacy and solvency purposes (adopted in October 2008) • The use of internal models for regulatory capital purposes (adopted in October 2008) • Issues paper on group solvency assessment (adopted in February 2009) • Structure of capital resources for solvency purposes (to be adopted in October 2009)

21. Update on standard setting work across the IAIS • Solvency • Draft Standard and Guidance papers on Capital Adequacy • Combining Standard on capital requirements with Standard on capital resources • Further addressing group-level supervisions • Solvency control level: • PCR: the level above which the supervisor would not require action to increase the capital resources held or reduce the risks undertaken by the insurer • MCR: defines the supervisory intervention point at which the supervisor would invoke its strongest actions, if further capital is not made available

22. Update on standard setting work across the IAIS • Solvency • Draft Guidance paper on Enterprise Risk Management for Solvency Purposes (to be approved in Oct 2010) • ORSA: The insurer should have risk and capital management processes in place to monitor and manage the overall adequacy of its financial resources relative to its economic capital and the regulatory capital requirements set by the solvency regime and clearly distinguish between current capital needs and its projected future financial position. • Taking into account post-crisis findings on ALM, cash flow analysis and stress testing • Liquidity management and asset liability management, with particular regard to complex investment activities • Strategies including derivatives, and applying both on solo and group basis

23. Update on standard setting work across the IAIS • Solvency • Draft Standard and Guidance paper on Internal Models for regulatory capital purposes • Standard will now apply to both solo and groups. • Focussing predominantly on the supervisory approval mechanisms and considerations and related interplay of the different modelling components of an overall group model • Further, the balance to satisfy the needs and requirements of both home and host supervisors, particularly regarding:the approval process of the group internal model and differences in the level and structure of local capital requirements

24. Update on standard setting work across the IAIS • Solvency • Draft Standard and Guidance paper on the regulatory requirements for Investments for solvency purposes (to be approved in Oct 2010) • Requirement 1: The solvency regime establishes requirements that are applicable to the investment activities of the insurer • Requirement 2: The solvency regime is open and transparent as to the regulatory investment requirements that apply and is explicit about the objectives of those requirements. • Requirement 3: The regulatory investment requirements address at a minimum, the: - Security; - Liquidity; and - Diversification; of an insurer’s portfolio of investments as a whole

25. Update on standard setting work across the IAIS • Solvency • Draft Standard and Guidance paper on the regulatory requirements for Investments for solvency purposes (to be approved in Oct 2010) • Requirement 4: The solvency regime requires the insurer to invest assets in a manner which is appropriate to the nature of its liabilities • Requirement 5: The solvency regime requires the insurer to invest only in assets whose risks it can properly assess and manage. • Requirement 6: The solvency regime establishes quantitative and qualitative requirements, where appropriate, on the use of more complex and less transparent classes of assets and investment in markets or instruments that are subject to less governance or regulation.

26. Update on standard setting work across the IAIS • Solvency • Draft Standard on valuation of assets and liabilities for solvency purposes • Undertaken by a joint working group (“Joint Valuation Working Group”) between the SSC and ICSC • The valuation of assets and of liabilities is undertaken on consistent basesand in a reliable and transparent manner • The valuation of assets and liabilities is an economic valuation and an economic valuation of assets and liabilities reflects the risk-adjusted present values of their cash flows. • The value of technical provisions and other liabilities do not reflect the insurer’s own credit standing • Margin over the Current Estimate (MOCE) • Requires the valuation of technical provisions to make appropriate allowance for embedded options and guarantees.

27. Update on Solvency Standards and Guidance ISRs: a comprehensive and cohesive set of solvency assessment documentation

28. Update on standard setting work across the IAIS • Groups • Guidance paper on use of supervisory colleges (adopted in 2009) • Guidance paper on the treatment of non-regulated entities in group-wide supervision (to be adopted in 2010) • Draft standard on cross-border cooperation on crisis management(to be adopted in 2010) • Issues paper for resolution of cross-border entities (targeting 2011) • Draft definition of insurance group - a preliminary proposed in 2010 • Guidance paper on Group-wide Supervision Framework (to be adopted in 2010) • Guidance paper on Criteria for equivalence assessment/Supervisory recognition in group-wide supervision (to be adopted in 2011) • Questionnaire for issues paper on supervisory resolution of cross-border entities (Target to release to all members in 2010) • Follow-up survey on supervisory colleges (Target to release to all members and observers in 2010)

29. Update on standard setting work across the IAIS • Governance • ICP, standard and guidance on Licensing (to be adopted in 2010) • Draft standards and guidance on remuneration (to be adopted in 2010) • Issues paper on the regulation and supervision of mutuals, cooperatives and other community-based organisations in increasing access to insurance markets (to be adopted in 2010) • Work closely with the OECD Insurance and Private Pensions Committee and its Corporate Governance Task Force to avoid duplication of effort and to ensure consistency • Coordinating with the Basel Committee on Banking Supervision to ensure consistent messages are communicated for the banking and insurance industries.

30. Update on standard setting work across the IAIS • Reinsurance • IAIS Global Reinsurance Market Report (GRMR), • Planning macroprudential surveillance and potential steps towards an expansion of the Reinsurance Transparency Subgroup (RTG) • Draft Guidance Paper on Reinsurance and other forms of risk transfer (targeting 2010) • Mutual Recognition (Guidance October 2008  Standard possibly 2010)

31. Outline • Introduction of the IAIS and its recent activities • Insurance Core Principles for effective supervision • Update on standard setting work across the IAIS • Lessons learned from the recent financial crisis • ComFrame (Common Framework for the supervision of Internationally Active Insurance Groups)

32. What is ComFrame? • ComFrame is intended to provide supervisors with a supervisory framework for internationally active insurance groups • ComFrame will be multilateral in nature because it will set out common parameters for insurance group supervision for multiple jurisdictions, thus going beyond individual national or regional regulatory approaches • It will provide a basis of operation for both home and host supervisors • Substantively, it will set out parameters for assessing the group structure and the group business from a risk management perspective as well as quantitative and qualitative requirements that are specific and focused but not rules-based • It will also cover the area of necessary cooperation among supervisors

33. General principles of ComFrame 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

34. General principles of ComFrame (Cont.) • 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

35. Timeline

36. Organisational overview 36

37. The Five Modules of ComFrame

38. Module 1 ComFrame should look at internationally active insurance groups as a whole and assess their group-wide risks

39. Module 1 Module 1: Scope of application

40. Module 2 ComFrame should provide better approaches to monitor and, if needed, administer or control group structure and business from the perspective of identifying risks and implementing safeguards where necessary, taking into account normal, stress and resolution situations

41. Module 2 Module 2: Group structure and business in normal, stress and resolution situations

42. Module 3 ComFrame should set out both quantitative and qualitative requirements that are specific and focused but not rules-based

43. Module 3 Module 3: Quantitative and qualitative requirements

44. Module 4 ComFrame should be made effective by utilising supervisory cooperation mechanisms

45. Module 4 Module 4: Supervisory cooperation and interaction

46. Module 5 ComFrame should be operated in a transparent way

47. Module 5 Module 5: Jurisdictional matters

48. International Association of Insurance Supervisors (IAIS) More information www.iaisweb.org