Issues for Consideration in the Solvency Modernization Initiative

1. Issues for Consideration in theSolvency Modernization Initiative Ramon Calderon Deputy Commissioner, California Department of Insurance Chair, NAIC International Solvency and Accounting (EX) Working Group Solvency Modernization Initiative (EX) Task Force, June 15, 2009

2. Solvency Modernization Initiative • The NAIC’s Solvency Modernization Initiative (SMI) was announced in June 2008. • While we are always updating the U.S. regulatory solvency system (annually adjusting RBC formulas and factors, etc.), this initiative examines international developments and their potential use in U.S. insurance regulation. • The International Solvency and Accounting (EX) Working Group offers some initial ideas to consider in the SMI.

3. Framework, Principles, Roadmap • Create one cohesive document that will convey foundational concepts underlying the U.S. regulatory system. • Will provide a platform for continued development of our system. • Will assist us to dialogue with other countries. • E Committee has agreed to document our current framework and principles.

4. Study of Other Solvency and Accounting Initiatives • Study will assist us in identifying potential enhancements to our current system. • Study banking regulation as well as insurance regulation and proposed accounting changes: • The Basel II international capital framework for banks and implementation in the U.S.; • Solvency work by the International Association of Insurance Supervisors (IAIS); • Solvency proposals in place or under development in other jurisdictions, including Australia, Canada, Switzerland and the EU Solvency II; • International accounting standards being developed by the International Accounting Standards Board (IASB).

5. Ideas that Merit Consideration • Economic Capital • Benefit from knowing what enters the company’s calculation of their economic capital as well as how the company interprets and uses it. • Enterprise Risk Management • Just as the enhanced risk-focused financial examination process is implementing a prospective risk analysis, a company’s “Own Risk and Solvency Assessment” (ORSA) could be useful in assessing solvency positions. • Internal Models, Full or Partial Models • RBC is risk-focused and we have some modeling involved. • With prior approval and other safeguards, internal models could be a way for regulators to more accurately assess the capital needs of a company.

6. Ideas that Merit Consideration • RBC • Analysis of our ladder of supervisory intervention (Company Action, Regulatory Action, Authorized Control, Mandatory Control Levels) • What is the “safety level” of the U.S. system in statistical terms? • Extent of internal models within RBC • For regulators to evaluate and approve models some coordination amongst states is recommended, either through a nationwide office or development of a coordinated NAIC function

7. Ideas that Merit Consideration • Group Issues • Insurance Holding Company System Regulatory Act • Group Supervision – Model Law • Group Supervisory Colleges • Non-Regulated and Federally Regulated Entities within a Group • Group Capital Requirements

8. Ideas that Merit Consideration • Reinsurance Modernization • Insurance Valuation – PBR • Corporate Governance • Model Audit Rule and PBR • Broader governance framework • Systemic Risk • Impact of Accounting Changes

9. SMI Process – Next Steps • Articulate our Current Framework/Principles • Decide whether adjustments should be made to the Framework and/or Principles. • Continue studies & identify additional ideas. • Develop a Roadmap for the SMI implementation.