Case Study on Group-wide Supervision

1. Case Study on Group-wide Supervision Financial Stability Institute Regional Seminar for Insurance Supervisors in Latin America Panama City, Panama May 24-26, 2016 Stephen Manly Director, Life Insurance Group

2. Legal Structure of Group

3. Holdco • Located in Panama. • Life Co 1 is subject to Panamanian laws and regulations. • Life Co 2 is not subject to Panamanian insurance laws and regulations but is subject to US insurance laws and regulations.

4. Life Co 1 has the following subsidiaries • A Panamanian Life Co which in turn has: • A P&C subsidiary • A subsidiary in Brazil that markets life insurance and P&C insurance • A subsidiary in the UK that sells life insurance and pension business. • A Panamanian investment Co which in turn has: • A capital management company that markets mutual funds • A Reinsurance subsidiary that is located in Barbados.

5. Life Co 2 has the following: • A US life insurance subsidiary; and, • A US investment company.

6. A desk review was conducted on the Holdco and revealed the following: • Both Life Co 1 and Life Co 2 have aggressive mandates to grow their business and improve profitability. • Business from both companies is reinsured in the Barbados subsidiary. The company makes extensive use of reinsurance for both companies but reinsures an immaterial amount outside of the group. • The reinsurance arrangements are constantly changing. A recent treaty change made a capital deficiency in a large block of business disappear.

7. Desk review results for Life Co 1 • The Panamanian Life Co has large blocks of term and permanent life insurance. • Interest rates have been declining and the company has used a high long term interest rate in valuing its liabilities. • The permanent life insurance has a minimum interest rate guarantee that is now very close to its earned rate.

8. Desk review results for Life Co 1 • The Panamanian P&C company is the largest automobile insurer in the country. • Overall it has been profitable but the government is contemplating establishing maximum premium rates that are 15% below the company’s current rates. • It also has a substantial block of home insurance which experience shows is well priced but the company has not done any earthquake stress testing.

9. Desk review results for Life Co 1 • The Brazilian Assurance company has a large block of long term life insurance and pension business. • It has completed a mortality study and noted that the mortality of people receiving an annuity under their pension business is improving faster than priced for. • The Brazilian regulator has mentioned the possibility of requiring the Panamanian Life Co to assign additional locked-in capital to back the pension business.

10. Desk review results for Life Co 1 • The UK company is in run-off. • It has a large block of business it acquired from another company that had convinced policyholders with employer sponsored defined benefit plans to switch to their product and had provided illustrations showing much better benefits. • The block is subject to a class action suit for having mislead the policyholders who are finding they would have been better off to have kept their old policies.

11. Desk review results for company 2 • Life Co 2 is not subject to Panamanian insurance laws and regulations but there is an undertaking in place giving certain privileges to the supervisors. • Life Co 2 is a holding company for US Life Co and US Invest Co. • US Life Co has a large block of universal life policy with interest rate guarantees. The product offers an equity fund as an investment option and has guaranteed the policy will not lapse if the equity value declines below a certain level. Many policies are now operative under the guarantee.

12. Desk review results for company 2 • US Invest Co is a mutual fund investment company and is among the top 10 in the US. • Though products are priced well, an expense gap has developed due to poor equity markets. The gap is expected decline as markets improve and business growth resumes. • The company wants to become one of the top 5 in the US and is on an acquisition trail but little information is available about their plans and strategy. The company has had a mixed history in selecting candidates for acquisition.

13. Objective/Process • To encourage participants to think about the issues and how they would deal with them from a supervisory perspective. • Each team will be asked to have a speaker to talk to the findings of the team. • Sample questions are attached. One team will be asked to speak to a question and other teams will be asked to provide further thoughts on the issues. • The 1st responders will be rotated so each team has a an opportunity to lead the discussion on a question.

14. For discussion • What are the key issues associated with the structure of the group? • What are the main supervisory issues in the company subject to Panamanian insurance laws and regulations? • What are the main supervisory issues associated with the company not subject to Panamanian insurance laws and regulations? • Which supervisors would you contact and describe the issues you would raise and information you would seek? • Describe how you would structure a College for this Group. • Describe what you would ask company management to present. • Describe how you would conduct the supervisors meeting to share information.