Supervisors and the IAA Working Party’s Report

1. Supervisors and the IAA Working Party’s Report CAS Spring Meeting @ The Broadmoor May 18, 2004 Allan Brender

2. Insurance Supervisors • IAIS is an organization of over 110 members • The countries represented have a wide variety of regulatory, actuarial and financial reporting systems • The various supervisory authorities have widely varying levels of sophistication and available technical resources

3. Insurance Supervisors • Some jurisdictions require actuarial certification of policy liabilities • Others require no actuarial input to financial reporting, particularly with respect to P&C companies • Some jurisdictions have sophisticated risk-based capital requirements • Others have virtually none at all

4. Insurance Supervisors • Some supervisors are prudential supervisors and regulators • Others also oversee consumer and market conduct issues • Some supervisors are integrated supervisors • They supervise several different types of financial institutions (e.g. banks, insurers, stock brokers and markets, mutual funds, pension plans)

5. Reactions to the WP Report • Consistent with Basel II • Insurance should not necessarily follow banking • Conceptual • Not sufficiently specific; want a formula that can be implemented directly • Leading edge • Too sophisticated to implement

6. An Approach to Solvency • Capital Requirement • Supervision – including additional institution-specific capital requirements • Market discipline and disclosure • Risk management underlies everything

7. An Approach to Solvency • The Basel II framework was not adopted because it is used in banking • It is a good description of a program for prudential supervisors • It makes particularly good sense to integrated supervisors

8. Conceptual or Specific • The WP wanted to provide an approach to required capital that could be adapted by all jurisdictions • Since international accounting and actuarial standards are not in place, WP could not suggest a single universal requirement

9. Total Balance Sheet Approach • Set target for the sum of liabilities and required capital • Easily adjusts to varying valuation rules and methods • Practically, this suggests we have a probability distribution of costs • Technically difficult in many situations

10. Distribution of Costs • Risk measure: CTE(x) = TVaR(x) = E{Y | Y > x } • Need a reliable method to determine the appropriate distribution • Fit loss distributions • Company-specific models

11. Company-specific Models • What conditions will supervisors place on the use of these models? • Degree of supervisor’s technical sophistication will likely be the determining factor • Basel imposes conditions on model approvals; integrated supervisors likely to adopt this approach • A. Brender The Use of internal models for determining Liabilities and Capital Requirements, NAAJ, vol.6 no.2, April 2002, pp.1-10

12. Company-specific Models • What conditions will supervisors place on the use of these models? • Some supervisors may not allow the use of these models • Others may allow use with no or minimal conditions • For P&C business, see www.apra.gov.au

13. Conceptual or Specific • WP report provides various techniques to determine capital requirements for specific risks • International consistency is with respect to methodology and level of requirements • Factors for a specific risk will vary from country to country to reflect differences in local conditions

14. Leading Edge • WP report does reflect the most current thinking about insurers’ capital • Many jurisdictions will not be able to adopt all suggestions at once • Nevertheless, the WP’s approach is a reasonable target for all jurisdictions

15. Leading Edge • A reasonable strategy is to aim for maximal adoption in technically advanced jurisdictions • The immediate target: Europe • Solvency II

16. Thank you www.osfi-bsif.gc.ca