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Weekly Insights: Top Risk and Compliance News Shaping Our World

Stay updated with the top 10 risk and compliance management news stories that have influenced the week's agenda. From critical discussions on Credit Valuation Adjustment (CVA) regulations to insights from the European Central Bank, we highlight key developments in the financial landscape. Explore topics like the EU-U.S. insurance supervisory regimes, financial sustainability, and innovative funding solutions that drive local economies. Embrace knowledge sharing from the International Association of Risk and Compliance Professionals (IARCP) to navigate the evolving risk landscape.

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Weekly Insights: Top Risk and Compliance News Shaping Our World

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  1. P age |1 InternationalAssociationofRiskandComplianceProfessionals(IARCP) 1200GStreet NWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext DearMember, “Nothingispossiblewithoutmen,butnothingislastingwithoutinstitutions”. Whosaidthat? JeanMonnet. Whosaidthat…JeanMonnetsaidthat? JörgAsmussen,MemberoftheExecutiveBoardoftheEuropeanCentralBank JörgAsmussenalso said: “Ourlong-termgoalisasituationwheretheessentialfunctioningof theeuroareaisunaffectedbyeventsinindividualcountries,becausesovereigntyissharedandexercisedinstrongcommoninstitutions– and thoseinstitutionshavealongertimehorizonthanpolitics. ReadmoreatNumber2ofourlist. Anotherinterestingstory…youmustbeabletodothat,butyoudonotneed todothat… (Whereelse?intheBaseliiiframework…) InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  2. P age |2 Itis abouttheCreditValuationAdjustment(CVA-thedifferencebetweentherisk-freeportfoliovalueandthetrueportfoliovaluethattakesintoaccountthepossibilityofcounterparty’sdefault) TheBaseliiiexplanation: “Toreceiveregulatoryapprovaltousetheadvanced CVAapproach,banks aregenerallyexpectedtohavethesystemscapabilitytocalculatetheCVA capitalchargeonadailybasis,butwouldnotbeexpectedorrequiredtocalculateitonadailybasis.” Readmoreaboutwhatyoushouldbeabletodo(andnotnecessarilydoit)atNumber10. Also…anotherinterestingstory… TheStoryofaSausageBusinessbyClaireGreene,FederalReserveBankofBoston Bymixingtogetherfundingsources,afast-growingsmokehousetripleditsspace,creatingjobsandopportunityforVermontfarmers. VermontSmokeandCuremakessausage,bacon,andhamusingtraditionalmethodsandlocalingredients ReadmoreatNumber6.Welcome totheTop10list. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  3. P age |3 EU-U.S.DialogueProjectTechnicalCommitteeReports ComparingCertainAspectsoftheInsuranceSupervisoryandRegulatoryRegimesintheEuropeanUnionandtheUnitedStates Agenda2013–thenextstepsincompletingEMU SpeechbyMr.JörgAsmussen,MemberoftheExecutiveBoardoftheEuropeanCentralBank,atthe“InternationalerClubFrankfurterWirtschaftsjournalisten”,FrankfurtamMain TheQatarCentralBank,QFCRegulatoryAuthorityandQatarFinancialMarketsAuthority New lawregulatingfinancialinstitutions Doha,Qatar:TheQatarCentralBank(QCB),theQFCRegulatoryAuthority(QFCRA)andtheQatarFinancialMarketsAuthority(QFMA)havewelcomedtheenactmentofTheLawoftheQatarCentralBankandtheRegulationofFinancialInstitutions. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  4. P age |4 WIBC2012 InauguralKeynoteAddressbyH.E. Rasheed M.Al-Maraj,Governor CentralBankofBahrain,Manama,Bahrain Financeandtherealeconomy–fosteringsustainability SpeechbyDrZetiAkhtarAziz,GovernoroftheCentralBankofMalaysia AttheIslamicDevelopmentBank(IDB)RegionalLectureSeriesonIslamiceconomics,financeand banking:“Financeandtherealeconomy–fosteringsustainability”, Jakarta. TheStoryofaSausageBusiness ClaireGreene,FederalReserveBankofBoston Bymixingtogetherfundingsources,afast-growingsmokehousetripleditsspace,creatingjobsandopportunityforVermontfarmers. OCCHighlights RisksFacingNationalBanksandFederalSavingsAssociations InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  5. P age |5 TheLiikanenReporttakesaholisticapproach InterviewwithBaFin'sChief ExecutiveDirectorRaimundRöseler FinancialServicesAgency,TheJapaneseGovernment PressConferencebyIkkoNakatsuka,MinisterforFinancialService IsabankrequiredtocalculatetheCVAcapitalchargedaily? Banksshoulddiscuss thefrequencywithwhichtheCVA capitalchargeneedstobecomputedwiththeirnationalsupervisor. ToreceiveregulatoryapprovaltousetheadvancedCVAapproach,banks aregenerallyexpectedtohavethesystemscapabilitytocalculatetheCVA capital chargeonadailybasis,butwouldnotbeexpectedorrequiredtocalculateitonadailybasis. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  6. P age |6 EU-U.S.DialogueProjectTechnicalCommitteeReports ComparingCertainAspectsoftheInsuranceSupervisoryandRegulatoryRegimesintheEuropeanUnionandtheUnitedStates Importantparts TheSteeringCommitteeoftheEU-U.S.DialogueProjectpresentsherewiththefinalreportsofseventechnicalcommitteescomparingcertainaspectsoftheinsurancesupervisoryregimesintheEuropeanUnionandtheUnitedStates. AttachedisbackgroundinformationontheProjectandthereportsthemselves. ThereportsinformedtheSteeringCommitteeas to thekeycommonalitiesanddifferencesbetweentheEU’sinsuranceregulatoryandsupervisoryregimeandthestate-basedinsuranceandregulatoryregimeintheU.S. TheSteeringCommitteehasagreedtocommonobjectivesandinitiativestobepursuedoverthenextfiveyearswhicharesetoutintheWayForwarddocumentavailableat[https://eiopa.europa.eu/publications/reports/index.html]. TheSteeringCommitteeacknowledgesthevaluablecontributionsofthetechnicalcommitteemembersandthosewhoprovidedcommentsduringthepublicconsultationprocess. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  7. P age |7 IntroductiontotheEU-U.S.DialogueProject In theEU,theEuropeanParliament,theCounciloftheEuropeanUnionandtheEuropeanCommission(EC),technicallysupportedbytheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA),aremodernizingtheEU’sinsuranceregulatoryandsupervisoryregimethroughtheSolvencyIIDirective(Directive2009/138/EC),inplacesince2009. Thisso-calledFrameworkDirectivewastheculminationofworkbeguninthe1990s toupdateexistingsolvencystandardsintheEU. CurrentworkaimstofurtherspecifytheFrameworkDirectivewithtechnicalrulesandguidelines,whicharenecessaryforaconsistentapplicationbyinsurersandsupervisorsoftheframework. IntheUnitedStates,thestatesaretheprimaryregulatorsoftheinsuranceindustry. StateinsuranceregulatorsaremembersoftheNationalAssociationofInsuranceCommissioners(NAIC),astandard-settingandregulatorysupportorganizationcreatedandgovernedbythechiefinsuranceregulatorsfromthe50states,theDistrictofColumbiaandfiveU.S.territories. Aspartofanevolutionaryprocess,throughtheNAIC,stateinsuranceregulatorsintheU.S.arecurrentlyin theprocessofenhancingtheirsolvencyframeworkthroughtheSolvencyModernizationInitiative(SMI). SMIisanassessmentoftheU.S.insurancesolvencyregulationframeworkandincludesareviewofinternationaldevelopmentsregardinginsurancesupervision,bankingsupervision,andinternationalaccountingstandardsandtheirpotentialuseinU.S.insuranceregulation. Inearly2012,theEC,EIOPA,theNAICandtheFederalInsuranceOfficeoftheU.S.DepartmentoftheTreasury(FIO)agreedtoparticipatein dialogueandarelatedproject(Project)tocontribute to anincreased InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  8. P age |8 • mutualunderstandingandenhancedcooperationbetweentheEUandtheU.S.to promotebusinessopportunity,consumerprotectionandeffectivesupervision. • Theprojectisconsidered tobepartofandbuildsontheon-goingEUUSDialoguewhichhasbeeninplaceforover10years. • Theworkwascarriedoutin collaborationwithEIOPAandcompetentauthoritiesintheEUMemberStates,andwithstateinsuranceregulatorsandtheNAICintheUnitedStates. • The objectiveoftheProjectistodeepeninsightintotheoveralldesign,functionandobjectivesofthekeyaspectsofthetworegimes,andtoidentifyimportantcharacteristicsofbothregimes. • ProjectGovernanceandProcess:TheProjectisledbyasix-memberSteeringCommitteecomprisedofthreeEUandthreeU.S.officials,asfollows: • GabrielBernardino– ChairmanofEIOPA • EdwardForshaw–Manager inthePrudentialPolicydivision,UKFinancialServicesAuthority,andEIOPAEquivalenceCommitteeChair • KarelVanHulle– Head ofUnitforInsuranceandPensions,Directorate-GeneralInternalMarketandServices, EC • KevinM.McCarty–Commissioner,OfficeofInsuranceRegulation,StateofFlorida,andcurrentPresidentoftheNAIC • MichaelMcRaith–Director,FIO,UnitedStatesDepartmentoftheTreasury • Therese M.(Terri)Vaughan– Chief ExecutiveOfficer,NAIC InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  9. P age |9 • SincetheProjectbegan,theSteeringCommitteeheldface-to-facemeetingsinBasel,Brussels,FrankfurtandWashingtonDC,aswellasnumerousconferencecalls. • In afirststep,thetopicstobediscussedwereagreeduponandaprocessforinformationexchangeunderconfidentialityobligationswasestablished. • TheSteeringCommitteeagreeduponseventopicsfundamentallyimportanttoasoundregulatoryregimeandtotheprotectionof policyholdersandfinancialstability. • Theseven topicsare: • Professionalsecrecy/confidentiality; • Groupsupervision; • Solvencyand capitalrequirements; • Reinsuranceandcollateralrequirements; • Supervisoryreporting,datacollectionandanalysis; • Supervisorypeerreviews;and • Independentthirdpartyreviewandsupervisoryon-siteinspections. • AseparateTechnicalCommittee(TC)wasassembledtoaddresseachtopic. • EachTCwascomprisedofexperiencedprofessionalsfromboththeEuropeanUnionaswellastheUnitedStates,specifically,fromFIO,theEC,theNAICandEIOPA,aswellasrepresentativesfromstateinsuranceregulatoryagenciesintheUnitedStatesandcompetentauthoritiesofEUMemberStates. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  10. P age |10 Thevariousprofessionalswhocomprisedthe technicalcommitteeswereselectedbecauseoftheirqualificationsandexperiencewithrespecttothesubjectmatterofeachtopic,includinginsuranceregulatorsandsupervisors,attorneys,accountants,examiners,and otherspecialists. The teamsworkedjointly to developobjective,fact-basedreportsintended to summarizethekeycommonalitiesanddifferencesbetweentheSolvencyIIregimeintheEU,andthestate-basedinsuranceregulatoryregimeintheUnitedStates. Supportingdocumentation,e.g.,regulations,directives,andsupervisoryguidance,wasexchangedasrequestedby eitherside. Theaccompanyingseventechnicalcommitteereportswerejointlydrafted to reflecttheconsensusviewsofeachrespectivetechnicalcommittee’smembers. Thedraftreportsweresubsequentlyreleasedforpublicconsultation. Thewrittenconsultationwascomplementedbytwo publichearingsheldinOctober2012,onein WashingtonDCandanotherinBrussels. Basedonoralandwrittencommentsreceivedthroughtheconsultationprocess,factualinaccuraciesnotedinthedraftreportswerecorrectedandlimitedclarificationsweremade. Thereportswerenotamendedfurtherdespiterecommendationstodosobysomecommenters,i.e.,thescopeoftheProjectwasnotexpandedasaresultoftheconsultationprocess. Notwithstandingthis,alloralandwrittencommentshavebeentakenintoconsiderationintheSteeringCommittee'sdeliberationsaspartofthesecondphaseoftheproject. NoactionhasbeentakenbythegoverningbodiesoftheorganizationsrepresentedontheSteeringCommitteetoformallyadoptthefactualreportsandthusthisdocumentshouldnotbeconsidered toexpressofficialviewsorpositionsofanyorganization. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  11. P age |11 ThereportsrepresenttheculminationofworkfromtheProject,andinformedtheworkoftheSteeringCommitteeinagreeingtotheaforementionedcommonobjectivesandinitiatives. Adetailedprojectplanwillbedevelopedinearly2013andwillbeupdated periodically. TheinformationthatisthesubjectoftheaccompanyingsevenreportspertainstotheinsuranceregulatoryandsupervisoryregimesinboththeEUandtheUnitedStates. ThestatebasedapproachintheU.S.asdescribedinthereportsisinsomerespectsbasedonNAIC Modellawsandregulationsthataregiveneffectonlythroughlegislativeenactmentin eachrespectivestate. Whilesomeofthesemodellawshaveyettobeadoptedandimplementedin certainstates,acoresetofcommonsolvencyregulatorystandardsareinplacein allstates. In thecaseoftheEU,theapproachdescribedinthereportsislargelybasedontheapproachsetoutintheSolvencyIIDirective. However,in ordertoensureacomprehensivecomparisonwiththeState-basedRegimeintheU.S.,referenceisalsomadeinsomecasestotheapproachenvisagedforthe technicalrulesthatwillimplementtheDirective. Itisimportant tonotethatthosetechnicalrulesarestillunderdevelopmentandhaveyettobeadoptedbytheEuropeanCommissionintheformofdelegatedacts. TheserulesandcertainNAICmodelsareinsomeinstancesreferredtointhepresent tenseintheTechnicalCommittees’reports,i.e.,asiftheyare currentlyinplace,eventhoughtheyhavenotyetbeen adoptedorimplemented,withrespecttotheserulesin theEUor,inthecaseofthemodellawsintheUnitedStates,byallstates. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  12. P age |12 Thereportdoesnotpurporttorepresentorpre-judgetheviewsand/ortheformalproposalsoftheCommission. Theapproachdescribedislargelybasedonwhatwastestedinthelastfullquantitativeimpactstudy(QIS5),the technicalspecificationsforwhicharepubliclyavailable. Insuranceisaspecializedandcomplexindustry,andinsuranceregulatoryandsupervisorymatterscanbejustasspecializedandcomplex. Terminologyusedinthereportsreflectsthebackgroundoftherespectivemembersofeachtechnicalcommittee,andthustheterminologyandwritingstylesmayvarysomewhatfromonecommitteereport to another. TheSteeringCommitteeexpectsthatinterestedpartieswhomayhaveaninterestintheProjectandinsubmittingcommentsarefamiliarwiththeinsuranceindustryanditsregulationintheEU,theU.S.,or both. Accordingly,thetechnicalcommitteeshaveendeavouredtopreparetheirreportsin amannerthatisappropriatefortheirownpurposesandthatoftheSteeringCommittee. Thereissometechnicalterminologythatisusedinthereportsand,whereconsideredappropriate,definitionshavebeenprovidedtherein. Some termsareunique totheU.S.andtheEUbuthavethesamemeaning,forexample,insurersandundertakings;andreservesandtechnicalprovisions. OthertermsexistinboththeU.S.andtheEU,e.g.,review,auditorORSA,butdiffer incontent/substance. Numerousabbreviationsandacronymshavebeenusedthroughoutthesevenreports,definitionsofwhichhavebeenincludedinaseparateappendixfortheconvenienceofreaders. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  13. P age |13 Thetextofthisreportcanbequotedbutonlywithadequateattributiontothesourcedocument. TheContributingParties TheFederalInsuranceOffice, U.S.DepartmentoftheTreasury TheFederalInsurance Office(FIO)oftheU.S.DepartmentoftheTreasurywasestablishedby theDodd-FrankWallStreetReformandConsumerProtectionAct. TheFIOmonitorsallaspectsoftheinsuranceindustry,includingidentifyingissuesorgapsin theregulationofinsurersthatcouldcontribute to asystemiccrisisintheinsuranceindustryortheUnitedStatesfinancialsystem. TheFIOservesontheU.S.FinancialStabilityOversightCouncil. TheFIOcoordinatesanddevelopsU.S.Federalpolicy onprudentialaspectsofinternationalinsurancematters,includingrepresentingtheUnitedStates,asappropriate,intheInternationalAssociationofInsuranceSupervisors. TheFIOassiststheSecretaryinnegotiatingcertaininternationalagreements,andservesastheprimarysourceforinsurancesectorexpertisewithintheFederalgovernment. TheFIOmonitorsaccess to affordableinsurancebytraditionallyunderservedcommunitiesandconsumers,minorities,andlow-andmoderate-incomepersons. TheFIOalsoassiststheSecretaryinadministeringtheTerrorismRiskInsuranceProgram. TheEuropeanCommission TheEuropeanCommission(EC)isoneofthemaininstitutionsoftheEuropeanUnion. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  14. P age |14 ItrepresentsandupholdstheinterestsoftheEUasawhole. TheECistheexecutivebranchoftheEUandisresponsibleforproposingnewEuropeanlawstoParliamentandtheCouncil. TheECoverseesandimplementsEUpoliciesbyenforcingEUlaw(togetherwiththeCourtofJustice),andrepresentstheEUinternationally,forexample,bynegotiatinginternationaltradeagreementsbetweentheEUand othercountries. ItalsomanagestheEU'sbudgetandallocatesfunding. The27Commissioners,onefromeachEUcountry,providetheCommission’spoliticalleadershipduringtheir5-yearterm. TheNationalAssociationofInsuranceCommissioners TheNationalAssociationofInsuranceCommissioners(NAIC)isthestandard-settingandregulatorysupportorganizationcreatedandgovernedbythechiefinsuranceregulatorsfromthe50states,theDistrictofColumbiaandfiveU.S.territories. ThroughtheNAIC,stateinsuranceregulatorsestablishstandardsand bestpractices,conductpeerreview,andcoordinatetheirregulatoryoversightthatisexercisedatthestatelevel. NAICstaffsupportstheseeffortsandrepresentsthecollectiveviewsofstateregulatorsdomesticallyand internationally. NAICmembers,togetherwiththecentralresourcesoftheNAIC,formthenationalregimeofstate-basedinsuranceregulationintheUnitedStates. EuropeanInsuranceandOccupationalPensionsAuthority TheEuropean InsuranceandOccupationalPensionsAuthority(EIOPA)wasestablishedasaresultofthereformstothestructureofsupervisionofthefinancialsectorintheEuropeanUnion. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  15. P age |15 ThereformwasinitiatedbytheEC, followingtherecommendationsofaCommitteeofWiseMen,chairedbyMr.deLarosière,andsupportedby theEuropeanCouncilandParliament. EIOPAtechnicallysupportstheEC,amongstothers,inthemodernizationoftheEU’sinsuranceregulatoryandsupervisoryregime. CurrentworkaimstofurtherspecifytheSolvencyIIFrameworkDirectivewith technicalrulesandguidelines,whichisnecessaryforaconsistentapplicationbyinsurersandsupervisorsoftheframework. In cross-bordersituations,EIOPAalsohasalegallybindingmediationrole to resolvedisputesbetweencompetentauthoritiesandmaymakesupervisorydecisionsdirectlyapplicabletotheinstitutionconcerned. EIOPAispartoftheEuropeanSystemofFinancialSupervisionconsistingofthreeEuropeansupervisoryauthorities,theothersbeingthenationalsupervisoryauthoritiesandtheEuropeanSystemicRisk Board. EIOPAisanindependentadvisorybodyto theEC,theEuropeanParliamentandtheCounciloftheEuropeanUnion. EIOPA’scoreresponsibilitiesaretosupportthestabilityofthefinancialsystem,transparencyofmarketsandfinancialproductsaswellastheprotectionofinsurancepolicyholders,pensionschememembersand beneficiaries. OtherContributingParties TheSteeringCommitteeofthisDialogueProjectgratefullyrecognizesthecontributionsoftheirorganization’sstaff,ofinsurancesupervisorsandregulatorsfromvariousEUMemberStatesaswellasfromvariousstateinsurancedepartmentsintheUnitedStateswhoservedonthevarioustechnicalcommittees. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  16. P age |16 TheTechnicalCommittee Reports Indevelopingtheirreports,theTechnicalCommitteesacknowledgedtheoverall policy objectiveof insuranceregulation,theprotectionof policyholders. Bothregimesaimtoensuretheongoingsolvencyofdomesticinsuranceandreinsurancecompanies. Additionalregulatoryobjectivesincludefacilitatinganeffectiveandefficientmarketplacefor insuranceproducts,andensuringfinancialstability. Theseoverarchingpolicy objectives– whicharecommontoboththestate-basedregimeintheU.S.aswellastheEUregime–provideafoundationforeachofthe accompanyingsevenreports. In addition,theSteeringCommitteeacknowledgesthateachsolvencyregimemustbeconsideredfromaholisticperspectiveandisalsomindfulthatdifferencesbetweentherespectiveregulatoryframeworks areinsomecasesattributable to differentphilosophicalapproachesandlegalfoundations. Forexample,thedifferentsolvencytoolsoutlinedintheTechnicalReportsareusedtovaryingdegreesbyeachregime. SuchdifferenceswillbeconsideredasappropriateinthesecondphaseoftheProject,but,apartfromtheinclusionof cross-referencesbetweenthetopics,itwasdeemed tobebeyondthescopeoftheProjecttomakefurtheramendmentsto theindividualTechnicalCommitteereportsinthisregard. Thereportgivesnonethelessacomprehensiveoverviewofthekeypartsofbothregimesevenifdepictedseparately. Thestate-basedsolvencyregimeintheU.S.isbasedon7coreprinciples,asfollows: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  17. P age |17 • Principle1:Regulatoryreporting, disclosureandtransparency • Principle2:Off-siteMonitoringandAnalysis • Principle3:On-siteRisk-focusedExaminations • Principle4:Reserves,CapitalAdequacyandSolvency • Principle5:RegulatoryControlofSignificant,Broad-basedRisk-relatedTransactions/Activities • Principle6:PreventiveandCorrectiveMeasures,includingenforcement • Principle7:ExitingtheMarketandReceivershipTheEUSolvencyIIfollowsathreepillarapproach. • PillarI:Quantitativerequirementsrelatingto valuationofassetsandliabilities, includingtechnicalprovisions,thequalityofownfundsandMinimumandSolvencyCapitalRequirements • PillarII:SystemofGovernanceandriskmanagementrequirements • PillarIII:Supervisoryreportingandpublicdisclosure • TherearecommonalitiesaswellasdifferencesbetweentheCorePrinciplesidentifiedin theU.S.state-basedregime’sInsurance FinancialSolvencyFrameworkandthethreepillarapproachofSolvencyII. • ThereportsoftheTechnicalCommitteeswhichfollow highlightthekeycommonalitiesanddifferencesforeachoftheseven topicalareasselectedforthembytheSteeringCommittee to review. • Eachtechnicalcommitteefocusedononlyoneoftheaforementionedtopics. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  18. P age |18 In practice,theregulatoryaspectsthatarethetopicofeachrespectivetechnicalcommitteereportoperateonanintegratedbasis,aswellaswithotherregulatorytoolsandpowersthatarenotcoveredbytheaccompanyingreports. Whereappropriate,thereportofatechnicalcommitteemakesreferencetothereportsofoneormore othertechnicalcommittees. Forexample,areferenceinanyoneoftheaccompanyingreportsto“TC3”meansthereportofTechnicalCommittee3,whichislistedintheTableofContentsofthiscombineddocumentas“3.SolvencyandCapitalRequirements.” ThereportsofthetechnicalcommitteesrefertovariousEUdirectivesandregulations,aswellas to variousNAICmodellawsandregulations. In theEU,adirectiveisalegalactthatlaysdowncertainendresultsthatmustbe achievedineveryMemberState. Nationalauthoritieshave to adapttheirlawstomeetthesegoals,butarefreetodecidehowtodoso. In caseofmaximumharmonizationdirectives,MemberStatesmaynotforeseerequirements otherthanthoselaiddownbytheDirective. EUregulationsarethemostdirectformoflaw;assoonastheyarepassed,theyhavebindinglegalforcethroughouteveryMemberState,onaparwithnationallaws. NationalgovernmentsdonothavetotakeactionthemselvestoimplementEUregulations. RegulationsarepassedeitherjointlybytheCounciloftheEuropeanUnionandEuropeanParliament,or insomespecific areas,bytheCommissionalone. Thestate-basedregimeintheU.S.,throughtheNAIC,utilizesmodellawsandregulationsdevelopedbystateinsuranceregulators. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  19. P age |19 Althoughthesemodellawsandregulationsrequirestatelegislativeenactmenttobecomeeffective,acoresetofsolvencyregulationstandardsareeffectivelyobligatorybyoperationoftheNAICAccreditationProgram. AlthoughthestatesareprimarilyresponsiblefortheregulationofinsuranceintheU.S.,certainfederallawsreferencedhereinmayalsoapplytoinsurersorspecificinsuranceactivities. 1.ProfessionalSecrecyandConfidentialityExecutivesummary - TC1organiseditsanalysisofthekeycommonalitiesanddifferencesbyfocusingontheanalysisofthefollowingsubjects: policy objectivesofconfidentialitylaws; therelationshipbetweenfreedomofinformationlawsandinsuranceconfidentialitylawsintheU.S.andtheEU; theroleoftheNationalAssociationofInsuranceCommissioners(NAIC),theEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)andtheFederalInsuranceOffice(FIO)asdistinctfrominsuranceregulators/supervisorsintheU.S.statesandEUMemberStates; authority toshareinformationacrossbordersandthelawsassociatedwithinformationexchanges,methodsforexchanginginformation,suchasMemorandaofUnderstanding(MoUs)andconfidentialityagreements,andtheconfidentialityofnon-publicsupervisoryinformationreceivedbytheFIO. - Bothregimesseektobalancetheobjectiveofmaintainingprofessionalsecrecywithappropriateflexibility to shareinformationwith othersupervisoryauthoritieswithalegitimateandmaterialinterestintheinformation. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  20. P age |20 • Againstthiskeycommonality,keydifferencesin structuralapproachcan beobserved. • In theEU,thebasicpresumptionincorporatedin insurancelegislationisthatvirtuallyallinformation acquiredbythesupervisoryauthoritiesinthecourseoftheiractivitiesisboundbytheobligationofprofessionalsecrecy. • Aseriesof“gateways”thenfacilitatesinformationexchangewithotherrelevantauthorities. • In theU.S.,statelawsgenerallyprovidefortheconfidentialityofcertaininformationsubmittedto,obtainedby,orotherwiseinthepossessionofaninsurancedepartment. • Theapproachismoreoftenfocusedonprotectingspecificinformationfrombeingavailableforpublicinspection. • Freedomofinformation(FOI)lawsconcerninggovernmentrecordsandactionsarepremisedonpublicaccesstoofficialactions. • In boththeEUregimeandthestatebasedregimeintheU.S.,lawsexpressthegeneralpolicy ofpublicaccesstogovernmentinformation,butthispublicpolicyisqualifiedbyspecificprotectionsfromdisclosureforcertaincategoriesofinformation. • Theresultisthatbothregimesprovideforbroadconfidentialityprotectionsforsensitiveinformationwhileallowingforthesharingofthatinformationamongregulatorsin appropriatecircumstances. • In bothregimes,primaryregulatoryresponsibilityrestswiththevariousstateinsurancedepartmentsintheU.S.andwiththeEUMemberStatesupervisoryauthorities,respectively. • ThefunctionsofbothsetsofsupervisorsaresupplementedbytheNAICintheU.S.andEIOPAintheEU. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  21. P age |21 TheNAICandEIOPA, invaryingways,assistthesupervisoryauthoritiesintheirregulatoryrolesand, in doingso,mayreceivecertainconfidentialinformationpursuantto thelawsoftherelevantjurisdictions. - Thenewly-createdFIOestablishesacenterofinsuranceexpertisewithintheU.S.federalgovernment. In carryingoutcertainofitsfunctions,FIOwillcontinuetointeractwithinsuranceand otherregulatorsintheU.S.andtheEU,andmayparticipateinexchangesofconfidentialinformation. TheDodd-FrankActrequirestheFSOC,theFIO,andtheOfficeofFinancialResearch(OFR),whichisanofficewithintheU.S.DepartmentoftheTreasurythatwasalsoestablishedbythe Dodd-FrankAct,tomaintaintheconfidentialityofanydata,information,andreportssubmittedunderthatFederallaw. AllFSOCmembersenteredintoaMoUthatsetsouttheunderstandingofallFSOCmembersregardingthetreatmentof non-publicinformation. TheMoUpresumesthatnon-publicinformationexchangedunderitstermsisconfidential. - Bothregimesincludegeneralauthorizationstoshareconfidentialinformationwithotherfinancialregulators,lawenforcementofficialsandothergovernmentalbodiesinneedofsuchinformationtoperformtheirduties. Confidentialinformationmayonlybedisclosed to suchpersonsifthey canmaintainconfidentialityand/ordemonstratetheirability toprotectsuchinformationfromdisclosurewhentheinformationisintheirpossession. Bothregimesacknowledgethepossibilityofutilizinganddisclosinginformationin receivershipandbankruptcy actions,prosecutingregulatoryandcriminalactions,andpursuanttocertaincourtactions. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  22. P age |22 - Bothregimesallow forregulatorstoenter intoagreementsorMoUswithcounterpartsinotherjurisdictionstofacilitatethesharingofconfidentialinformation. Bothregimesprovidebroaddiscretiontoregulatorstoestablishthetermsofsuchagreements,includingtheverificationofeachregulator’sabilitytomaintaintheconfidentialityofinformation receivedfromanotherjurisdiction. Bothregimesaddress theissueofpotentialsharingofinformationwiththirdparties,but achievesimilaroutcomesindifferentways. EU MemberStaterequirementsthattherecipientofconfidentialinformationobtainexplicitpermissionfromtheoriginatingsourcebeforesharingwithanotherregulatorareoftendevelopedasaresultoflegalconstraintsundertheEUdirectives,whilestateinsuranceregulatorsintheU.S.areboundbygenerallegalrequirements torespecttheconfidentialityofinformationunderthelawsoftheprovidingjurisdictionandthememorializationofthisrespectinwrittenconfidentialityagreements. - Thesimilaritiesbetweenthetworegimesaregreaterthananticipated priortothebeginningofthisdialogue. Whiletheremaybedifferencesintheformandapplicationof professionalsecrecyandconfidentialitylawsbetweenthetworegimes,theyaresubstantiallysimilarinthesubjectmatteraddressedandtheoutcome tobeachieved. Itisacknowledgedonbothsidesthatthereislittleevidenceof practicalproblemsrelatedtotheexchangeofconfidentialinformationbetweenstateinsuranceregulatorsintheU.S.andEUregulators,althoughtheflow ofinformationhasnotbeensubstantialsofarandmayhavebeeninhibitedbytheinteractionofEUdirectiveconstraintsandconcernsoverprofessionalsecrecy. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  23. P age |23 • Topic1:Policyobjectivesinrelationtoprofessionalsecrecyand theexchangeof information • KeyCommonalities: • Neitherregimeincludesasingle,all-encompassingdefinitionoftheterm“confidentialinformation.” • Howeverbothregimesidentifygeneralorspecificcategoriesofinformationthatwillbeconsideredconfidentialbylawandnotsubjecttodisclosureexceptunderspecificdefinedcircumstances. • Legalsources,asprimarilyexpressedthroughstatutesanddirectives,providethefoundationfortheconfidentialityofcertaincategoriesofinformationandthecircumstancesunderwhichconfidentialinformationmaybeusedanddisclosed. • Whilestatutesanddirectivesprovidethefoundation,bothregimesrecognizethatconfidentialityrequirementsmaybecomplementedthroughadministrativeregulations,judicialopinionsandMoUs. • Bothregimesprovidearangeofpenaltiesthatmaybeleviedagainstpersonswhobreachprofessionalsecrecyobligations. • Underbothregimes,thepenalties can includelossofemployment,civilandadministrativefines,imprisonmentoracombinationofthesepenalties. • Thedefinitionofthepenalties,aswellastheirenforcement,ishandledattheU.S.stateorEUMemberStatelevel. • KeyDifferences: • - Thestructuralapproachtoconfidentialityisverydifferent. • TheEUapproachstartsfromthepresumptionofconfidentialityandidentifiesexceptions. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  24. P age |24 WithintheU.S.,theprovisionsonprofessionalsecrecyvaryfromstatetostateasthereisacleareremphasisonaccess topublicrecords. Thepresumptioninmostcasesisthatinformationispubliclyavailableunlessitisdesignatedconfidentialthroughstatelawsorstatutes. However,bothregimestend towardthesameoutcomesintermsof protectinginformationidentifiedasconfidentialwhilefacilitatinginformationexchange amongsupervisoryauthoritiesacrossjurisdictions. Discussion/DescriptionoftheTwoRegimes:TheEUApproach: TheSolvencyIIDirectiveprovisionsonprofessionalsecrecyreflectsimilarprovisionsintheEUinsurancedirectivescurrentlyinforce. Theseoperateonthebasisthatanyconfidentialinformationreceivedinthecourseoftheperformanceitsdutiesbythesupervisoryauthorityshallnotbedivulgedtoanypersonorauthoritywhatsoever,exceptinsummaryoraggregateform,suchthatindividualinsuranceandreinsuranceundertakingscannotbeidentified. Therearelimitedexceptionstothegeneralrule,coveringcasescovered bycriminallawanddisclosurewhereafirmhasbeendeclaredbankruptorisbeingcompulsorilywoundup. Theprofessionalsecrecyobligationcontinues to applyafteremployeeshaveleftthesupervisoryauthority,andtheobligationalsoappliesequally toauditorsandexpertsactingonbehalfofthesupervisoryauthority. WhilethereisnodefinitionincorporatedineithertheexistingEUdirectivesorSolvencyIIofwhatconstitutesconfidentialinformation,theinterpretationofthescopeoftheprofessionalsecrecyprovisionhasbeenwideranging. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  25. P age |25 Itisgenerallytakentoencompassallfirmspecific informationreceived bysupervisoryauthoritiesunlessitisalreadyinthepublicdomainand notjustinformationthatmightbeexplicitlylabeledconfidential. Supervisoryassessmentsoffirmsundertakenbynationalsupervisoryauthoritiesarenotdisclosed,andthepublicavailabilityofinformationontheperformanceofinsurersundertheexistingdirectiveswillvaryfromEU MemberState toMemberStatedependingonprovisionsinnationallegislation. Bycontrast,theSolvencyIIregimewillincorporateprovisionsrequiringahigherlevelofpublicdisclosureoffinancialinformationacrosstheEU,includingtherequirementonfirmstoreportannuallyontheirsolvencyandfinancialcondition. Acommonprofessionalsecrecyprovisionmeansthatthereisnolegalblock totheexchangeofconfidentialinformationbetweennationalsupervisoryauthoritieswithintheEU,andfacilitatestheparticipationinEU colleges. Nofurthercooperationagreementsarerequired,butinpracticecollegesoftendeveloptheirownMoUtoformalisetheexpectedinformationexchangein respectoftheparticulargroup. TheApproachintheState-basedRegimeintheU.S.: Stateinsurancelawsincludemanyspecificreferencestothetypesofinformationthatwillbeconsideredconfidential,andnotablystatelawsgenerallyprovidethatexaminationworkpapersandrelatedinformation,risk-based capital informationandholdingcompany actfilingsandexaminationinformationareconfidential. Nevertheless theextentoftheavailabilityoffirmspecificinformationinthepublicdomaincanhelpreinforcemarketdiscipline. Theobligationofprofessionalsecrecyontheemployeesofstatesupervisoryauthoritiesisappliedthroughvariousmeans. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  26. P age |26 Statelawsgenerallydeclarethatconfidentialinformationshallbemaintainedasconfidential,andconfidentialinformationshall notbedisclosedexceptasauthorisedbystatelaw. However,theprofessionalsecrecyobligationontheemployeesof statesupervisors canalsobeapplied,orsupplemented,byemploymentlawprovisions,contractualobligationsortheinternalrulesofthestatesupervisor. In manystates,publicemployeeobligationsandpenaltiesparticularlyfocusonthedisclosureofconfidentialinformationforpersonalgain. In someU.S.states,thelawclearlystatesthat confidentialityobligationsfollow publicemployeesupondeparturefrompublicservices. In otherU.S.states,thestatutoryobligationislessexplicitlyexpressedalthoughgeneralrequirementstomaintainconfidentialityand professionalobligationsappearto achievethesameoutcome. Auditorsandexpertsactingonbehalfofthestatesupervisoryauthorityareequally coveredbytheobligationofprofessionalsecrecyasdirectemployeesoftheauthority. Moregenerally,boththeEUandU.S.regimesrecognizethatprofessionalssuchaslawyers,actuaries,accountantsandauditorsaresubjecttoprofessionalandethicalcodesindependentofthoselawsandregulationsspecificallyconcerningtheregulationofinsurance. Professionalsmaybesubjecttoarangeofprofessionalsanctions,includingthelossoflicensure,forbreachingconfidentialityobligationsapplicabletotheirpositions. Whilethevariationinthestructureofstatelawsdealingwithconfidentialinformationandprofessionalsecrecycouldbeperceivedpotentially toinhibitinformationexchangeamongstatesupervisoryauthoritiesin theU.S.,thisissuehasbeenaddressedwiththeMasterInformationSharingandConfidentialityAgreementdevelopedunderNAICauspices. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  27. P age |27 Oneofthestandardclausesoftheagreementstatesthatthestateinsuranceregulatorrequestingorobtainingconfidentialinformationfromanotherisobligedtoprotecttheinformationfromdisclosure“atleasttothesameextenttheConfidentialInformationisprotectedfromdisclosureunderthelawsapplicabletotheRespondingDepartment,andfurtheragreestotakeallactionsreasonablynecessarytopreserve,protectandmaintainallprivilegesorotherprotectionsfromdisclosurerelatedtosuchConfidentialInformation.” Topic2:Theinter-relationshipofFOIprovisionswithprofessionalsecrecyprovisions KeyCommonalities: TherelationshipbetweenEUMemberStateFOIprovisionsandSolvencyII,aswellastherelationshipbetweenstateFOIlawsandconfidentialityprotectionsintheU.S.,resultsinsimilarenvironmentsfor informationidentifiedandmaintainedasconfidential. TheFOIprincipleisanessentialelementofappropriatepublicaccesstogovernmentinformationbutgeneralgrantsofconfidentialityexemptfromdisclosureconfidentialinformationacquiredbythesupervisoryauthority. KeyDifferences: Undertopic1thestrongeremphasisonaccess to informationin theUS wasnoted. Forthestate-basedregimeintheU.S.,FOIprovisions(withvariationsfromstate tostate)potentiallyprovidebroaderaccess to supervisoryinformation,butthosesamelawsalsoprovidegeneralandspecificconfidentialityprotectionsforcertainsupervisoryinformation. OnenotabledifferencefromthisapproachisthatEUlawdoesnotenumeratethespecific typesofinformationthatwillbeexemptedfromdisclosurebutexpressesitin amoregeneralway. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  28. P age |28 WhilestatelawsintheU.S.maycategorizecertainitemsofinformationasconfidential,suchas examinationwork-papers,EUlawimposesageneralobligationofprofessionalsecrecyonpublicemployeesandbroadlyexemptsconfidentialinformationfromdisclosure. Discussion: TheApproachintheState-basedRegimeintheU.S.: Statefreedomofinformation(FOI)lawsintheU.S.generallyprovidethatthepublicpolicyofthestateisforaccessto publicrecordsand otherinformationconcerningtheofficial activitiesofpublicemployeesandofficials. Statelawsprovideforarangeofexceptions tothedisclosurerequirementscontainedwithinthestateFOIlaw. TheseexceptionsmaybeexpressedasspecificexceptionswithintheFOIlaw,specificexceptionswithinanothersectionofthestatutorycode(e.g.,thestate’sinsurancecode)thatdirectlycrossreferencethestateFOIlaw,orspecific declarationsinthestateinsurancecodethatcertaininformationshallbeconsideredconfidentialbylawtherebyindirectlyexceptingtheinformationfromthescopeoftheFOIlaw. Stateinsurancelawsincludemanyspecificreferencestothetypesofinformationthatwillbeconsideredconfidential. Ithas alreadybeennotedthatstatelawsgenerallyprovidethatexaminationworkpapersandrelatedinformation,risk-basedcapitalinformation,andholdingcompanyactfilingsandexaminationinformationareconfidential. In additiontospecificreferences,stateFOIlawsandinsurancelawsincludegeneralreferences to categoriesofinformationthataretobeconsideredconfidentialbylawandnotsubject tosubpoena. Thesegeneralreferencesincludetradesecrets,competitiveinformation,andinformationprovidedordisclosedunderanexpectationoragreementofconfidentiality. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  29. P age |29 Stateinsurancelawsgenerallyprovideforthecommissionertoshareconfidentialinformationpursuant to statutoryauthorization. Thegatewaysforsharingconfidentialinformationwillbedetailedinanothersectionofthispaper. Stateinsurancelawsgenerallyprovidethat,asacondition tosharingconfidentialinformationwithothergovernmentalentities,thecommissionermayberequiredtoenterintoawrittenagreementforthatpurposeandthereceivingpartymusthavetheauthority tomaintaintheconfidentialityoftheinformationprovided. Similarly,stateinsurancelawsgenerallyprovidethatthecommissionermayreceiveconfidentialinformationfrom othersources,includingotherregulators,andthatsuchinformationwillbemaintainedasconfidential(andthusbeyondthescopeofthestateFOIlaws)ifitisprovidedwiththenoticeorunderstandingthattheinformationisconfidentialunderthelawsoftheprovidingjurisdiction. In somecases,theabilitytoreceiveandmaintainconfidentialinformationfromanothersourcewillbestatedgenerally,either intheFOIlawortheinsurancecode;inothercases,statesreceivethisauthority throughspecific insurancecodereferencessuchasthosecontainedwithintheexaminationor holdingcompanylaw. ThereisnosinglestatutoryframeworktoinformationsharingandconfidentialityamongU.S.states,butthisdoesnotcreateabarrier toconfidentialinformationsharing. Somestatesrelyonagenerallegalauthority toshareandmaintainconfidentialinformation,whileotherstatesmayderivesuchauthorityfrommorespecific (includingsubject-matterspecific)provisionsintheirstatutes. Manystatelawsprovideforacombinationofgeneralandspecificconfidentialityprotections. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  30. P age |30 Althoughtheremaybesomevarianceinspecificlegalprovisions,stateFOIlawsandstateinsurancelawsoperatetogethertopreservethepublicpolicy ofopengovernmentandprotectsensitiveinformationfrominappropriatedisclosure. TheEUapproach: FOIlawsandconfidentialityprotectionsoperatesimilarlyintheEU. MemberStatelawsgenerallyprovideforaccessforinformationrelated tothepublicadministrationoflaws, butanalogousprovisionsprovidingfortheconfidentialityofsensitiveinformationoftenarestatedinmoregeneralterms. MemberStatelawstypicallystatethatvirtuallyallinformationacquired bytheregulator incourseofitssupervisoryworkwillbedeemedconfidentialbylaw. ThisgeneralgrantofconfidentialityisembeddedintheexistingEUcoreinsurancelegislation– the ReinsuranceDirective,ConsolidatedLifeDirectiveandThirdNon-LifeInsuranceDirective. TheprofessionalsecrecyandinformationsharingprovisionsinSolvencyIIaresubstantiallysimilar,andrequiresthatinformation acquiredbyasupervisoryauthorityanditsemployeeswillbeconsideredconfidentialandmaynotbedisclosedexceptasspecificallyprovided. SolvencyIIprovidesforthecircumstancesandwhereapplicableproceduralrequirementsfordisclosingconfidentialinformationwithwhatitidentifiesaspermittedrecipients. Thesearetheexceptionstotheobligationofprofessionalsecrecy. Thedetailsofspecificgatewaysfor informationsharingarecovered underTopic4inthispaper,butSolvencyIIstatesthattheobligationof professionalsecrecydoesnotpreclude thesharingofinformationwithsupervisorsin otherEU MemberStates. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  31. P age |31 Informationsharingagreements,suchasMoUs,maybeconcludedwithsupervisorsinnon-EUcountriesprovidedtheinformationtobedisclosedis subject to equivalentguaranteesofprofessionalsecrecyandtheinformationisintendedforuseintheperformanceofsupervisorydutiesinthatcountry. Thiswouldincludeevidenceand/orcommitmentsthatconfidentialinformationwouldnotbecomesubjecttodisclosurethroughoperationofaFOIlawin anon-EUcountry. Topic3:Relationshipswithnational/regionalbodies(i.e.,EIOPA,NAIC,FIO) KeyCommonalities: IntheU.S.andintheEU,primaryregulatoryresponsibilityrestswiththe U.S.state insurancedepartmentsandtheEUMemberStatesupervisoryauthorities,respectively. ThefunctionsofbothsetsofsupervisorsaresupplementedbytheNAICintheU.S.andEIOPAintheEU. TheNAICandEIOPA,invaryingways,assistthesupervisoryauthoritiesintheirregulatoryrolesand,indoingso,mayreceivecertainconfidentialinformationpursuant to thelawsoftherelevantjurisdictions. TheFIOmonitorsallaspectsoftheinsuranceindustry,servesontheFinancialStabilityOversightCouncilandcoordinatesanddevelopsU.S.Federalpolicy onprudential aspectsofinternationalinsurancematters. In carryingoutcertainofitsfunctions,FIOwillcontinuetointeractwithregulatorsintheU.S.andintheEUandwillparticipateinexchangesofconfidentialinformation. KeyDifferences: UndertheEUregime,EIOPAhasthetask ofcontributingtoacommonsupervisoryculturebyensuringconsistent,efficientandeffective InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  32. P age |32 applicationofrelevantlegislation,andhasaparticularroleinEUcollegeswhereitparticipatesasacompetentauthorityin itsownright. In theU.S.,theNAICisnotconsideredasupervisoryauthorityalthoughitcoordinatescertainactivities amongstatesupervisorsandprovidesaseriesofanalyticalandsupportservices. In bothregimes,EIOPAandtheNAICmayhaveaccess to firm-specificinformationthroughtherespectivesupervisoryauthoritiesorothergrantsoflegalauthority;however,theEUregimeisdifferentinthatitallowsEIOPAtorequestinformationdirectlyfrom(re)insuranceundertakingsincertaininstances. Discussion: TheEUApproach: TheRegulationthatestablishedEIOPAappliesthesameprofessionalsecrecyobligationstoEIOPAanditsemployeesthatapplytothesupervisoryauthoritiesinEUMemberStatesbutdoesnotincludethesamegatewaysfordisclosurethatareavailablefornationalsupervisoryauthorities. EIOPAmanagementandstaff,aswellasconsultantsengagedbyEIOPA,aresubjecttoEUlawsconcerningprofessionalsecrecy. EIOPA’s internalprofessionalsecrecyrulesdefineconfidentialmaterialasincludinganyinformationobtainedfromanationalsupervisoryauthoritythatisconsideredconfidentialunderthelawsoftheprovidingjurisdiction. EIOPAhasaccesstofirmspecificinformationthroughanumberofavenues,includingEIOPA’sengagementinsupervisorycolleges,risk identification,crisismanagementandstresstesting. Accordingly,EIOPAisrequiredtoobserveabsoluteconfidentialitywithrespecttosuchinformation,andconfidentialinformationmaybeusedonlyforthepurposesofcarryingoutEIOPA’sdutiesasstatedinEIOPA’sfoundingregulation(“EIOPARegulation”). InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  33. P age |33 SpecificsregardingthefuturenatureofregulatoryreportingunderSolvencyIIandtheextentofEIOPA’saccessinthisrespectwillbeunderdiscussioninthenearfuture. EIOPAprovidesaggregatedinformationontheEUinsurancemarket totheEuropeanSystemicRiskBoard(ESRB)toassistitinachievingitskeytaskofpreventingormitigatingsystemicrisks,andavoidingepisodesofwidespread financialdistress. TheESRB canmakeareasonedrequestto EIOPAfordatathatisnotinsummaryoraggregateformwhereitappearsnecessaryforachievingtheBoard'stasks,buthasnotexercisedthisoptiontodate. EIOPAisrequiredtocooperatewiththeESRBinhaving inplaceadequateinternalprocedures forthetransmissionofconfidentialinformation, inparticularinformationregardingindividualfinancialinstitutions. Thereisnogatewaythatwouldallow nationalsupervisoryauthoritiesorEIOPAtosharefirmspecific confidentialinformationwiththeEUinstitutions(EuropeanCommission;EuropeanCouncil;EuropeanParliament). Anyinformationprovidedontheinsurers'activityinthemarketwould need tobeinsummaryoraggregateformsothatindividualfirm'sactivitiescannotbeidentified. TheApproachintheState-basedRegimeintheU.S.: IntheU.S.,thestates–ratherthanthefederalgovernment–haveprimaryregulatoryresponsibilityforregulatingthebusinessofinsurance,includingforlawsrelatedtoprofessionalsecrecy. TheDodd-FrankActestablishedtheFederalReserveBoardofGovernors(FRB)astheprimaryconsolidatedregulatorforsavingsandloan holdingcompanies,manyofwhicharefirmsengagedprimarilyinthebusinessoflife insurance. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  34. P age |34 TheFRBhasenteredintomemorandaofunderstandingwithstateinsuranceregulatorsregardinginsuranceentities. Federalgovernmentknowledgeandinvolvementin insurancemattersisenhancedbytheestablishmentoftheFIO,whichhasauthoritytomonitorallaspectsoftheinsuranceindustryandcoordinateanddevelop U.S.Federalpolicyonprudentialaspectsofinternationalinsurancematters. Whilethereisnofederalbodymandatinguniformity,stateinsuranceregulatorsintheU.S.operatecollectivelyto establishuniformstandardsinavarietyofareas,includingprofessionalsecrecy. StatelawsauthorizethefilingofcertaininformationwiththeNAICand declarethatcertaincategoriesofinformationdisclosedtotheNAICwillbeconsideredconfidentialinthepossessionoftheNAIC. AlthoughstatesareauthorizedtoshareconfidentialinformationwiththeNAICincertaincircumstances,theNAICdoesnotsupersedetheregulatoryauthorityofthestateinsurancedepartments. Accordingly,theNAICmaynotindependentlydiscloseconfidentialinformationprovided to itbystateinsurancedepartmentstoothersupervisoryauthorities,buttheNAICmayfacilitatesuchinformationexchangesamongregulatorsaspermittedunderrelevantlaw. BecausetheNAICisnotadepartmentoragencyofstateorfederalgovernment,theNAICdoesnotfallwithinthetypesof governmententitiestowhichfreedomofinformationlawsmayapply. TheNAICoccasionallyentersintospecificinformationsharingandconfidentialityagreementswithindividualstates. Thescopeoftheagreementmayvarydependingonthesubjectmatteroftheprojectforwhichanagreementisrequired,theconfidentialinformation tobeprovidedtotheNAIC,andthemannerinwhichsuchinformationistobeusedand/orstoredbytheNAIC. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  35. P age |35 TheNAICmaintainsconfidentialitypoliciestoprotectconfidentialinformationfromdisclosure. Asaconditionofemployment,allNAICemployeesagreetobeboundbysuchpoliciesduring– andfollowing–theirtermofemployment. NAICmodellawsandthefinancialregulatoryaccreditationprogramprovidemeansforestablishingstandardsagainstwhichstateregulatorshold eachotheraccountable. SeveralNAICmodellawsprovidealegaltemplateforenhancingconfidentialityprotectionsaswellasauthorizingthecommissionertodiscloseandreceiveconfidentialinformationwithotherregulators,including internationalregulators. ExemplarymodellawsincludetheModelLawonExaminations,theRisk-BasedCapitalModelAct,theInsuranceRegulatoryInformationSystemModelAct,theInsuranceHoldingCompanySystemRegulatoryAct,andtheProducerLicensingModelAct. Asillustratedbelow,manyofthesemodellawsprovidekeylegalelementsassociatedwiththeNAICaccreditationprogram. Itisimportanttonote,however,thatstateshavenotnecessarilyamendedtheir insurancestatutesexactlyasthemodellawsmaypropose. Forexample,manystateconfidentialitystatutespre-datetheamendmentstotheNAICmodellaws. Statesmayhavedeterminedtheirexistingstatutessufficientlyprovidedfortheconfidentialityandinformationsharing intendedtobeauthorized bythemodellawsandasrequiredforpurposesoftheNAICaccreditation program. TheNAICFinancialRegulationStandardsandAccreditationProgram,in part,requiresstatestohavecertainstatutesinplacethatevidencethelegalauthoritytoregulateforfinancialsolvency. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  36. P age |36 Inordertoachieveaccreditation,statesmusthavespecificlawsrelatedtoinformationsharing. Accreditationstandardsandguidelinesrequiretheinsurancedepartment todemonstrateithas theauthoritytoshareconfidentialinformationwithstate,federalandinternationalregulators;thatthedepartmenthastheauthoritytokeepconfidentialinformationobtainedthosesameregulatorsfromdisclosure;andthatthedepartmenthas awrittenpolicyconcerninginformationexchangeswith otherregulators. Additionally,statesalso mustdemonstratetheyhavestatutesrelatedtoinformationsharingonthespecific topicsofexaminationauthority,risk-based capitalandholdingcompanysystems. 2.GroupSupervisionIntroduction In generalterms,a“group”referstomorethanonecompanythatcoexistsaspartofacorporatefamilybyvirtueofownershiporaffiliation. Generallyspeaking,aninsurancegroupiscomprisedoftwo ormoreinsurers,buttherecouldbe otherlegalentitiesinvolvedaswell– holdingcompanies;subsidiariesoraffiliatessuchasagencies,serviceprovidersorthirdpartyadministratorswhosebusinessistangentialtothatofthememberinsurers;and otherentitieswhosebusinessisunrelatedtotheinsuranceoperationsofthegroup. Againingeneralterms,groupsupervisionistheapplicationofregulatoryoversighttoagroup. Groupsupervisionhasbecomeanimportantaspectoftheoverallsupervisoryprocessbecausegroupmembershipcanposeuniquerisks(e.g.reputationalrisk)aswellasbenefits(e.g.capitaloptions,riskdiversification)to oneormoreinsuranceundertakingsthataremembersofthegroup. Groupsupervisionthereforeisanimportantcomplement tosolosupervisioninensuringpolicyholderprotection. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  37. P age |37 • InthisTC2reportthestate-basedinsuranceregulatoryregimeintheU.S.andtheSolvencyIIregimeintheEUarecomparedas to theirrespectiverequirementsandprocessesforgroupsupervision. • ForcertainU.S.insurancegroups,withabankorthrift,consolidated supervisionisconductedbytheFederalReserveBoardwithanemphasisonprotectingthedepositoryinstitution. • In theEU,financialconglomeratesareregulatedundertheFinancialConglomeratesDirective(FICOD). • ExecutiveSummary: • PolicyObjectives:Theover-archingobjectivesareessentiallythesamei.e.,toprotectpolicyholdersand toenhancefinancialstability. • Thatsaid,therearevariousdifferencesbetweentheEUand • state-basedU.S.regimesinthemannerinwhichthoseobjectivesareachievedwithrespectto groupsupervision. • ScopeofGroupSupervision:Inbothregimes,variouslegalentitieswithinthegroupcanbeincludedinthescopeofgroupsupervision. • ThescopeofgroupsupervisionintheEUaccordingtotheSolvencyIIDirectiveistheentiregroup,i.e.,allentitieswithinthegroup,regulatedorotherwise,onaglobalbasis. • However,thegroupsupervisorhasauthority tonarrowthatscopesubjecttoprescribedcriteria. • In theU.S.,traditionalapplicationofgroupsupervisionhasfocusedontheholdingcompanyanditsinsurancesubsidiariesintheU.S. • - SupervisoryColleges:Bothregimesaregenerallysimilarin termsoftheoperationsofsupervisorycolleges;howevertherole,tasks,powersandcontentofthegroup-widesupervisordifferbetweenthetworegimes. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  38. P age |38 Moreover,theEU’sSolvencyIIregimeprovidesforalegallybindingregime,whereastheU.S.operatesalessformal,nonbindingone. Nonetheless,bothapproachesareintendedtodrivejoint /collaborativedecisionsastoanysupervisoryactionsintheEUatthesoloandgrouplevelandintheU.S.atsololevelaswellasactionsaimingto achieveoutcomesatthegrouplevel. - SupervisoryPowersatthegrouplevel:UnderSolvencyIIintheEU,thereisasinglegroupsupervisorwithexplicitdutiesandpowersthatareapplicabletolegalentitiesandaswellas to insuranceholdingcompanieswhicharelocatedintheEuropeanEconomicArea(EEA). GroupsupervisorsintheEUcanrequestinsuranceholdingcompaniesintheEU to holdmorecapitalto coverexcessiverisk inotherjurisdictions. However,in the caseofaninsuranceholdingcompanylocatedinaMemberStateotherthanthatofthegroupsupervisor,thegroupsupervisorneedstoinformthecompetentsupervisororjurisdictionwheretheholdingcompanyislocatedwiththeaimtohavethatsupervisortakethenecessaryaction. TheU.S.state-basedregimefocusesontheapplicationofpowersatthelegalentitylevelandwithregardtoinsuranceholdingcompanysystemsoninformationgatheringandexamination. Insuranceregulatorshavelimitedextra-territorialpowersandrelyoncommunicationsandcooperationwithotherregulatorsin otherjurisdictionswhohavetheauthority totake necessaryactions. - Reportingatthegrouplevel:IntheEU,reportingisstandardizedandrequiredforallgroupsonaconsolidatedbasis. Groupshavetomakesimilarsubmissionstothatofsoloundertakings(SolvencyandFinancialConditionReport(SFCR),RegularSupervisoryReport,Quantitative ReportingTemplates(QRTs),Own InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  39. P age |39 • Risk andSolvencyAssessment(ORSA))butwithadditionalinformationanddatawhicharegroup-specific. • In thestate-basedregimeintheU.S.,reportingatthegrouplevelisfocusedonextensiveintra-groupreportingrequirementstosupportrequiredpriorapprovalprocessesbasedonlegalstandardsandfinancialanalysis;consolidatedfinancialinformationisusedinthe • U.S. whereavailable,i.e.,forlistedcompanies,thosethatotherwisevoluntarilyprovidesuchinformation,andwherestateinsuranceregulatorsotherwiserequireitthroughfiling,analysisorexamination • processes. • GroupCapital:TheEUhasanexplicitgroupcapitalrequirement,whereasthestatebasedregimeintheU.S.doesnot. • GroupORSA:BothregimeshaveanORSArequirementthatissimilarinconcept,buttheEUsetsinlawtheprocessandkeycomponentsoftheassessmentandhasguidelinesthataremoreprescriptive,whereasintheU.S.,moremanagementdiscretionisallowedastotheuseofmethodologies,withdisclosureandjustification. • GroupGovernance:In bothregimes,companieshavetocomplywithcorporategovernancerequirementsassetforthinfederalandstatelaws. • Publicly-listedcompaniesalsomustabidebyrulessetbythevariousstockexchanges. • U.S.insurersaresubjecttostatecorporatelaws,inadditiontovariousgovernancerequirementsembeddedinstateinsurancelawsandregulations. • In additiontocorporategovernancerequirements,EUSolvencyIIinternalgovernancerequirementsalsoexist,e.g.,withrespecttointernalcontrolsandrisk managementsystemsaswellaskeyfunctions. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  40. P age |40 In theU.S.,supervisorsassessthoseaspectsduringon-siteexaminationsforthepurposeofdesigningexaminationprocedures. - RegulationofFinancialConglomerates:ForthoseinsurancegroupswhichareBankHoldingCompanies(BHCs)orSavings&LoanHoldingCompanies(SLHCs),theFederalReservehasexplicit capitalrequirements. In theEUrequirementsforconglomeratesaresetin FICOD. 3.SolvencyandCapitalRequirements Theprimaryobjectiveofbothregulatoryregimesistoprotectthepolicyholders. Forthispurpose,thetwo regimeshavetwo differentapproaches eachofwhichmustbeconsideredfromaholisticperspective. Therespectiveregulatoryframeworksarein some casesattributabletothedifferentphilosophicalapproachesandlegalfoundationsofthoseregimes. Underthestate-basedregime’srisk-based capital(RBC)systemintheU.S.,theCompanyActionLevel(CAL)setsaminimumamountofcapitalbeforecorrective actionisprompted. Thatamountofregulatorycapitalislikely tobelowerthantheEUSolvencyCapitalRequirement(SCR). TheCALRBClevel(andthethree otherlevels)forregulatoryinterventionisnotcalibrated to anoverarchingconfidencelevelortimehorizon(calibrationofriskcategoriesarealsonotderivedfromexplicit targetcriteria). UndertheEUSolvencyIIregime,thesupervisoryladderofinterventionisbasedontheSCRandtheMinimumCapitalRequirement(MCR)whicharecalibratedto 99.5%and85%confidencelevelsrespectively, InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  41. P age |41 usingavalue-at-riskmeasureoftheBasic Own Fundsderivedfromatotalbalancesheetapproach. TheMandatoryControlLevelRBCismostlikelylowerthantheSolvencyIIMCR. The term“internalmodels”indicatesadifferentmeaningunderthestate-basedregimeintheU.S.thanitdoesunderSolvencyII,andthe scopeofapplicationofmodelsismorelimitedundertheRBCsystemintheU.S.thanitisunderSolvencyII. Specifically,RBClimits theapplicationofmodelsintheU.S.tospecificproductsandriskmodules,usingprescribedparametersandtimehorizonsandthemodelsarenotsubject toapriorapprovalbythesupervisor,thoughtheyaresubjecttoregulatoryminimum/floorscenarios. UnderSolvencyII,asawaytomorepreciselyreflecttheriskprofileoftheregulatedentity,internalmodelscanbeusedforthecalculationoftheSCRforallorsomeoftherisks. Theuseof internalmodelsissubjecttopriorsupervisoryapproval,ongoingmonitoringandcompliancewithspecific requirementsincludingtheintegrationofthemodelinrisk managementanddecisionmakingprocesses. Bothregimeshaveasimilarconceptofthe ownrisk andsolvencyassessment(ORSA),buttheEUsetsin law theprocessandprescribesthatthequalitativeandquantitativeassessmentsareperformedagainstasetstandard. TheEUalsoprovidesguidelinesthataremoreprescriptive. In theU.S.,moremanagementdiscretionisallowedastotheuseofmethodologies,withdisclosureandjustification. Thestate-basedStatutoryAccountingPrinciples(SAP)regimeintheU.S.andthevaluationapproachusedinSolvencyIIdeviatefromthebases InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  42. P age |42 usedforgeneralpurposereportinginthosejurisdictions(respectively, U.S.GAAP andIFRS)invaluingcertainassetsandliabilities. SAP looks to establishmoreofawinding-upvaluebasedonthestatutoryaccountsandtheuseofamortizedcostmethodologies,whereastheEUregimeassessesacompanyonagoing-concernbasisbasedonamarketconsistentbalancesheet. ThisdifferenceisconsistentwiththeSCRpotentiallybeinganearlierinterventionpointthantheRBCCALandexplainswhyavailable capitalislikelytobemoresubjecttovariationovertimein responsetochangingmarketconditionsundertheEuropeanregime. Technicalprovisionsarevaluedonamarket-consistentbasisunderSolvencyII. Technicalprovisionscomprisethesumofthebestestimateandariskmargin. Thebestestimaterepresentstheprobabilityweightedaverageofallfuturecashflowsdiscountedusingariskfreerate termstructure. Theriskmarginrepresentsthecostofcapitaltosupporttheproductuntilliabilitiesarefullyrun-off. TheRBCregimebycontrastusesadiscountratebasedoncorporatebondyieldsforlife insurancereservesandabestestimate(forwhich discountingisrestricted to certainlinesofbusiness)forproperty&casualtyinsurancereserves. WhilsttheUSregimecontainsexplicitorimplicitreservemarginsindifferentplaces,theEUregimehasnosuchmargins,butdoescontaintherisk marginasdefined above. Itis tobehighlightedthatthesetwo conceptsarenotdirectlycomparable;theirunderlyingpurposesaredifferent. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  43. P age |43 ThereservingbasesaredifferentandanassessmentoftherelativestrengthoftheEUandU.S.baseswilldependonthespecificproductunderconsideration. UnderRBCrequirements,capitalisdefinedasstatutorycapitalandsurpluswithprudentialadjustments(includingonesmadefor non-admittedandlimitedadmissibilityassets). In theEU,capitalresourcesaregenerallyequalto thenetassetvalueofthefirmplussubordinatedliabilities(basic ownfunds)andancillaryownfunds. SolvencyIIincludesathree-tierclassificationofcapitalandprovidesspecificprovisionsfortheclassificationofhybridandsubordinatedcapitalinstruments. Totheextentthatinstrumentsdonotprovidethebestformoflossabsorbency,theyarerestrictedin countingtowardscoveringcapitalrequirements. InvestmentrestrictionsareconsistentwiththeprudentpersonprincipleunderSolvencyII. In thestate-basedregimeintheU.S.,investmentrestrictionsarebased upondefinedlimitsoraprudentpersonapproach(orsomecombination)dependingonthestate. ForRBCresults,corrective actionsaretriggeredwhenthe capitalresourcesofacompanyarelessthantheCompanyActionLevelRBC,while,underSolvencyIIcapitalrequirements,correctiveactionsaretriggeredwhenacompanybreachesitsSCR. Topic1:PolicyObjectivesOverall PolicyObjectives Theprimaryobjectiveofboththestate-basedregulatoryregimeinthe U.S.andtheEU’sSolvencyIIis toprotectpolicyholders. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  44. P age |44 Theprotectionofpolicyholderspresupposesthatcompaniesaresubjecttoeffectivesolvencyrequirementsthatresultinthemaintenanceofadequatecapitalresourcesthatcoveralloftheriskstowhichaninsurerisorcouldbeexposed. Accordingly,capitalrequirementsareakeytoolforaccomplishingtheobjectiveofpolicyholderprotectionunderbothregimes. Financialstabilityandfairandstablemarketsareotherobjectivesofinsuranceregulationandsupervisionthatshouldalsobetakenintoaccountbutthatshouldnotunderminethemainobjective. Overall PolicyFramework&SupervisorySystem Underthestate-basedregimeintheU.S.,RBCrequirementsareatoolforlegallyauthorizedanddefinedcompanyorregulatoryactionatspecifiedlevels. StateregulatorsalsohaveregulatoryauthorityforCompaniesDeemed tobeinHazardous FinancialCondition(NAICModel385)toimposetailoredtimelyintervention(pursuantto othersolvencytools)priorto anRBCaction-leveltrigger. RBCsetsoutaminimum capitalrequirementanddoesnotaimtobeanevaluationofeconomicortarget capitallevel. Therefore,itisnotusedtoestablishorcomparewell-capitalized companies. RBCrequirementstargetmaterialrisksforeachoftheprimary insurertypes (life,property&casualtyandhealth). In additiontoRBCrequirementsandotherfinancialtoolsused toimplementcorrectiveaction,theoverallstate-basedsolvencyframeworkintheU.S.alsoincludesthefollowing: - restrictionsoninsurers’activitiestomitigateoreliminatesomerisksintheinsurancebusiness; InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  45. P age |45 • prudentialaccountingfilterswhichresultin conservativesurplusrecognitionandprovidecounter-cyclicaleffects;and • aback-stopoffinancialprotectionwheninsurerrehabilitationorliquidationisrequiredviatheStateGuarantyFundSystem. • Assuch,RBCis calculatedfromvaluationsthatareusuallymoreconservative(e.g.,non-admittedassets,deferred acquisitioncostsareexpensedratherthan capitalized)andlessvolatile(e.g.,manyfixedincomeinstrumentsarevaluedatamortizedcost)thanvaluationsunderfinancialaccountingstandardssuchasGAAP. • Insurerrisk managementissuesareaddressedinmultipleareasoutsideofRBC,mostheavilyin theon-siteexaminationprocess(seeTC7)butalsoinreportingandanalysis(seeTC5). • Asdiscussedfurtherbelow,stateregulatorsmayalsoimposeadditionalcapitalrequirements(forexample,fordeficienciesinriskmanagementandotherareas)outsideoftheRBCcalculation. • In theEU,SolvencyIIfollowsa“TotalBalanceSheetApproach”wherethedeterminationofan insurer’scapitalthatisavailableandneededforsolvencypurposesisbaseduponamarketconsistentoreconomicvaluationapproach. • SolvencyIIcapitalrequirementstargetallquantifiablerisksandaredeterminedonthebasisoftheriskprofileofthecompanyandthemanagementofthoserisks(e.g.theuseofriskmitigations). • SolvencyIIcapitalrequirementsthereforeprovideincentivesforsoundriskmanagementpracticesandenhancedtransparency(e.g.,in thecaseofgovernancedeficiencies,supervisorsmayimpose capitaladd-on– see Capitaladd-onbelow). InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  46. P age |46 • KeyCommonalities: • RBC inthestate-basedregulatoryregimein theU.S.,andSolvencyIIcapitalrequirementsin theEU,playa keyrolein meetingthegoalof policyholderprotection,whichiscentraltobothregimes. • Bothregimesprovidethresholdsforregulatoryactions. • Forbothregimes,the capitalrequirementsaresupportedbyrequirementsongovernance,supervisoryreview,reportingtosupervisors. • In addition,bothrelyonmarketdisciplinethroughpublicdisclosure. • Keydifferences: • TheSolvencyIImarket-consistentbalancesheetprovidesagoing-concernviewofaninsurer’ssolvencyposition,whileRBC • represents capitalmoreonawinding-upbasis,therebyinfluencingtheparttheyplayintherespectiveregimes. • TheSCRunderSolvencyIIincludesallquantifiablerisks oftheinsurerwhileRBCincludesrisksconsideredmaterialtotheindustrywithsomemoduleslookingatcompanyspecificassumptions. • TheSolvencyIIframework,includingtheSCR,isdesignedtoprovideincentivesforriskmanagement,whereastheRBCprimarilyreliesonsupervisorytoolsotherthancapitalrequirementstoaddressriskmanagementconcerns. • Topic2:AssessmentofRiskandCapitalAdequacyScopeofregulatorycapitalcalculation • TheRBCcalculationunderthestate-basedregimeintheU.S.ismainlyastandardizedapproachtiedtoannualstatementdatawithincreasinguseofinternally-generatedcompanyinformationformodelapproaches. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  47. P age |47 RBCassessesriskbyapplyingriskweights(called“factors”)withineachriskmodule,although,certainlinesofbusinessandrisks(e.g.interestraterisk)areassessedusingmodels. Eachoftheprimaryinsurancetypes(life,property& casualty,andhealth) has aseparateRBCformula,witheachcontainingitsownsetoffactorscoveringthematerialrisksidentifiedineachformula. Thecomponentsofthelifeinsuranceformulaincludethefollowing:riskrelatedtocertainaffiliatedinvestments;riskonotherfinancialassets(e.g.riskofdefault,changein marketvalue);insurancerisk;interestrate,healthcreditrisk,andmarketrisk;andgeneralbusinessrisk. Thecomponentsoftheproperty&casualtyinsuranceformulainclude: riskrelated to affiliatedcompanyinvestments;riskonfixedincomeassets;riskonequities;creditrisk (related to reinsurancerecoverables);underwritingrisk(relatedtoreserves);andunderwritingrisk (relatedtonetwrittenpremium). ThecomponentsofthehealthinsuranceRBCformulaincludethefollowing:risk related tocertainaffiliatedinvestments;riskonotherfinancialassets;underwritingrisk;creditrisk;andbusinessrisk. Assetconcentrationsarealsoassessedviarisk chargestoreflecttheadditionalrisk ofhighconcentrationsinsingleissuers. However,currencyriskisnottakenintoaccountandcatastropheriskisnotaddresseddirectlyandcompletely,althoughacatastropheriskchargecurrentlyisbeingdevelopedaspartofSolvencyModernizationInitiative. AstandardfactorforoperationalriskisincludedintheLifeRBCformula,butnotintheP&Cformula. TheRBCformulaincludesacovariancecalculation(thatalsovariesdependingonlineofbusiness)thatisdesigned tomeasurecorrelation betweenrisks. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  48. P age |48 Investmentsinaffiliated insurancecompaniesareexcludedfromthecovariancecalculationbasedupontheassumptionthatdiversificationdisappearswhentheentityexperiencesfinancialdistress. FourRBCactionandcontrollevelsestablishrisk-basedrequirementsthatprovideabaselinetomorediscretionaryregulatoryinterventionresultingfromanalysisandexaminationoversightactivities(seeTopic4foradditionaldiscussionoftheRBCactionandcontrol levels). IntheEU,theSolvencyIIframeworksetsouttwodifferentlevelsofcapitalrequirements,anupperlevel,theSCR,andalowerbound,theMCR. TheSCRisdesignedtotakeintoaccountallquantifiableriskstowhichafirmisexposed,toincludeatleastthefollowing:(life,non-lifeandhealth)underwritingrisks;marketrisk;creditrisk;operationalrisk. Eachoftheserisksincludesvarioussub-risks. Forinstance,marketriskincludesinterestraterisk,equityrisk,propertyrisk,spreadrisk,currencyrisk,andmarketriskconcentration. TheSCRtakesintoaccountriskmitigation techniques(e.g.reinsurance)providedthatcreditriskandotherriskarisingfromtheriskmitigationarealsoreflectedintheSCR. TheSCRisarisk-sensitiverequirementusedfortimelysupervisoryintervention(topromptcorrectiveactionbythecompany). TheMCRisdesigned to correspond to aminimumsolvencylevel,belowwhichpolicyholdersandbeneficiariesareexposed to anunacceptablelevelofrisk,iftheinsurerwereallowedtocontinueitsoperations. TheMCRisasimplelinearformula,calculatedindependentlyfromtheSCRcalculation,comprisingasetofriskfactorsapplied totheindividualcompanyliabilities. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  49. P age |49 TheMCRmustbewithin25%and45%oftheSCRandissubject toabsoluteminimumamounts. Asanalternative tousingtheSCRstandardformula,acompanymay,subjecttoregulatoryapproval,replacesomeparametersoftheunderwritingrisksmoduleswithsomeotherparametersbasedonthecompany’s owndata. In accordancewiththerisk-orientedapproachtotheSCR,companiescan,subject to supervisoryapproval,useeitherpartialorfullinternalmodelsforthecalculationofthatrequirement(thisisreflectedin aseparatesection). Theframeworkiscompletedwiththeexistenceofdampeners, bothquantitative(e.g.thesymmetricadjustmentmechanismforequityriskunderthestandardformula)andqualitative(e.g.provisionfortakingduecare to avoidpro-cyclicaleffect whenrequiringplan to restorecompliancewiththeSCR),thataimtoaddresspotentialpro-cyclicaleffectsoftheregime. Calibrationofregulatorycapital ThereisnooverallformulacalibrationunderRBC. Instead,stateregulatorsrefineindividualriskweightsthroughanalysisof historicaldataandprobabilitiesusingexpertjudgment. Aseparatecalibrationprocessisapplicable to partialmodelsused toassessinterestrateandotherrisks. Inshort,RBCfactorsweredevelopedbasedonindustrynormswithsomefactorsadjustedbycompanyspecificexperience. Riskweights,partialmodelcalibration,andanyotherformulachangeareaccomplishedviaatransparentprocessincorporating inputfrominsurancemarketrepresentatives. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  50. P age |50 UnderSolvencyII,theMCRusesastandardizedapproachbaseduponValueatRisk calibratedtoan85%confidencelevelovera1-yeartimehorizon; Thatcalibrationisflooredandcappedat25%and45%respectivelyoftheundertaking’sSolvencyCapitalRequirementandissubjecttoanabsolutefloor,whichdependsonthenatureoftheundertaking,thattheMCRcannotgobelow. TheSCRisbaseduponValueatRiskcalibratedto99.5%confidencelevelovera1-yearhorizonforallrisk modulesandfortheoverallformula. Theoutputsofthemodules(andsubmodules)ofthestandardformulaarecalibratedtothe99.5%ValueatRiskovera1-yearhorizonandthenaggregatedusingaprescribedvariance/covariancematrixbaseduponfixedcorrelationfactorsbetweenriskmodules. Thishasbeencalibratedusingacombinationofdataandregulatoryjudgment. Thecalibrationwasdevelopedthroughatransparentprocessinvolvinginsurancemarketrepresentativesviapublicconsultationsandwastestedthroughquantitativeimpactstudies. Frequencyofcalculationoftheregulatorycapital RBCisanannualfilingto theNAIC. However,supervisorsmayrequiremorefrequentfilingsdirectly to thestateforundertakingsofconcern(typicallyquarterly). UnderSolvencyII,acompanyisrequired to calculatetheSCRatleastonceayear,butmayberequired todosomorefrequentlyiftheriskprofileofthefirmdeviates(orthereisevidencetosuggestthatithasdeviated)significantlyfromtheassumptionsunderlyingthelastreportedSCR.ThefrequencyofcalculationoftheMCRisatleastquarterly. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

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