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1Solvency Update2008 CAS Spring Meeting – Quebec City
U.S. Insurance SolvencyToday & Future
Kris DeFrain, FCAS, MAAA, CPCUSenior Financial Regulatory Services Manager
& Chief Property/Casualty ActuaryNAIC
June 16, 2008
2Solvency Update2008 CAS Spring Meeting – Quebec City
States EU Commission & CEIOPS / NAIC Uniformity is Difficult, but is Key
– No “Race to the Bottom”
U.S. Current Solvency RegulationCompared to Proposed EU Solvency
3Solvency Update2008 CAS Spring Meeting – Quebec City
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. Uniform Financial Regulation
4Solvency Update2008 CAS Spring Meeting – Quebec City
Principles or Rules Public Disclosure vs. Supervisory
Reporting Economic Capital - Enterprise Risk
Management Accounting & Valuation Capital Requirement Methodologies
U.S. Current Solvency RegulationCompared to Proposed EU Solvency
5Solvency Update2008 CAS Spring Meeting – Quebec City
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?
Capital Requirements
6Solvency Update2008 CAS Spring Meeting – Quebec City
US has group supervision through NAIC Holding Company Act and Analysis/Examination and there are Lead State ExamsBUT…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
Group Issues
7Solvency Update2008 CAS Spring Meeting – Quebec City
Which was first?
IAIS or SII?
SII
IAIS
What Impacts the U.S.?
8Solvency Update2008 CAS Spring Meeting – Quebec City
IAIS
International Solvency Changes
EU (SII)
Canada
Australia
Basel II
Driving Forces - Solvency Regulation
9Solvency Update2008 CAS Spring Meeting – Quebec City
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 IssuesGroup SupervisionReinsurance
10Solvency Update2008 CAS Spring Meeting – Quebec City
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?
11Solvency Update2008 CAS Spring Meeting – Quebec City
U.S. Valuation IssuesP&C
Principles Based – Book “Management’s Best Estimate”
Not discounted, Implicit Risk Margin
LifePrinciples-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
12Solvency Update2008 CAS Spring Meeting – Quebec City
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.
13Solvency Update2008 CAS Spring Meeting – Quebec City
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”?
14Solvency Update2008 CAS Spring Meeting – Quebec City
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.