U.S. Insurance SolvencyToday & Future Kris DeFrain, FCAS, MAAA, CPCU Senior Financial Regulatory Services Manager & Chief Property/Casualty Actuary NAIC June 16, 2008
U.S. Current Solvency RegulationCompared to Proposed EU Solvency • States • EU Commission & CEIOPS / NAIC • Uniformity is Difficult, but is Key – No “Race to the Bottom”
U.S. Uniform Financial Regulation • U.S. Financial Regulation is Uniform • Aided by Handbooks – Analysis, Examination, Troubled Company • Aided by Accreditation System • National Prioritization System • Financial Analysis Working Group • Nationally Significant Insurers and Groups • Aids Consistency in Analysis of Companies
U.S. Current Solvency RegulationCompared to Proposed EU Solvency • Principles or Rules • Public Disclosure vs. Supervisory Reporting • Economic Capital - Enterprise Risk Management • Accounting & Valuation • Capital Requirement Methodologies
Capital Requirements • US Risk-Based Capital (RBC) • 1990s … updated annually, but not as “modern” • Risk-Based, not all risks (operational, CAT) • Detailed Calculations, but still formula driven and uses industry averages • Early Warning / Intervention, Regulatory Requirements • EU – Standard Formula & Internal Models • Risk-Based, all quantifiable risks • Ladders of Intervention (SCR – first action, MCR – final action) • Economic Based – Target to BBB rating, 99.5% VaR • Question of MCR – will their method limit court fights?
Group Issues • US has group supervision through NAIC Holding Company Act and Analysis/Examination and there are Lead State Exams • BUT…what is “group supervision”? • US does not calculate an overall group capital requirement, but US insurance groups have a roll-up of the subsidiary RBCs, so there is group consideration • EU proposals – Being debated so still undecided. Small and new member states fear loss of power to larger member states
What Impacts the U.S.? Which was first? IAIS or SII? IAIS SII
Driving Forces - Solvency Regulation • IAIS • International Solvency Changes • EU (SII) • Canada • Australia • Basel II
U.S. Announces NewSolvency Modernization Initiative • Evaluation of International Initiatives, Including IAIS, Basel II, Solvency II, Canadian Solvency, Australian Solvency, and IASB • Work Plan – Focus on • Capital Requirements • International Accounting & Valuation Issues • Group Supervision • Reinsurance
Impact of International Accounting • Probably the largest potential change under consideration is adoption of International Accounting (IFRS) • There is a trend in the U.S. • U.S. SEC -- Foreign private issuers can use IFRS with no reconciliation to U.S. GAAP –effective March 2008 • U.S. FASB may adopt IFRS in 2013…bye-bye GAAP? • U.S. NAIC Statutory Accounting (SAP) – based on U.S. GAAP…what happens next?
U.S. Valuation Issues • P&C • Principles Based – Book “Management’s Best Estimate” • Not discounted, Implicit Risk Margin • Life • Principles-Based Reserving Initiative • From Prescribed Formulas to a Process of Identifying and Measuring All Risks • From Industry Expectations to Company Expectations • Discounted, Implicit Risk Margins
U.S. Reinsurance Initiative • Single State U.S. Regulator • Both US and non-US Reinsurers • Potential for A new NAIC entity, Reinsurance Supervision Review Dept. (RSRD), that would assess regulatory effectiveness of non-U.S. jurisdictions through an “outcomes-oriented” approach.
U.S. RBC Future?? • Use Company Specific Models, Have some modeling today & are researching P&C CAT Risk Modeling, but what else? • Determine Regulatory Review Process Major U.S. Concerns: Must maintain legal authority at predetermined and “non-arguable” action/control levels; What about “Fairness”?
Solvency in the U.S. • U.S. is the largest market in the world and has a solid financial solvency system as evidenced by experience, but we are operating in a global marketplace… • there will be change.