Download Session 051 PD, Market Impact of International Regulation

 Session 51 PD, Market Impact of International Regulation Moderator: Marc Slutzky, FSA, CERA, MAAA Presenters: Stephen Broadie Bradley Kading, ARe, CPCU Michelle Rogers, JD SOA Antitrust Disclaimer SOA Presentation Disclaimer International Insurance Regulation
Regulatory Impacts
Since the Financial Crisis
SOA Annual Meeting 2016
Session 051 PD -- Market Impact of International Regulation
October 24, 2016 3:30pm
Michelle M. Rogers, JD
Director of Financial and Regulatory Policy
National Association of Mutual Insurance Companies
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2008 Financial Crisis
Insurance Impact
• AIG Non-insurance Activities
• Investment Losses Suffered by Insurers
• Insurers Engaged in Banking
• Significant International and Federal Pressure
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International “Regulatory” Structure
G-20 Countries
IMF
Financial Stability Board
FSAP
International Standard Setters
OECD
IAIS
Economic
Development
Insurance
Basel
Committee
Banking
IOSC
Securities
IASB
Accounting
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International Pressure on U.S.
• 28 Insurance Core Principles
• 2010/2015 FSAP Assessing U.S. Insurance
Regulation
• European Union – Third Country Equivalence
• GSII Designation
• Dodd-Frank Act - Covered Agreements
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Developing Regulatory Issues
NAIC/State Activity
• Revisions to Reinsurance Collateral Requirements
2011
• Group Supervision – Supervisory Colleges 2010;
Group Wide Supervisor 2014
• U.S. Own Risk Solvency Assessment Requirements
(ORSA) 2012
• Corporate Governance 2014
• Internal Audit Requirement 2014
• Capital Adequacy – operational risk, cat risk
additions 2014
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Developing Regulatory Issues
International Activity
▫ ComFrame
▫ Group Supervision
▫ Global Capital Requirements
▫ Resolution Requirements
▫ Corporate Governance
▫ Market Conduct
▫ Cyber Issues
▫ Accounting and Valuation changes
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International Standards
Difficulties in U.S. Implementation
• Legal Entity vs. Group Supervision
• Rules-based vs. Principle-based
• Nominal Value vs. Fair Value
• 50 State Laws vs. National Law
• Policyholder Focus vs. Creditor/Investor
Focus
• Regulation of Conduct vs. Regulation of
Capital
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Policyholder Impacts
Economist, Robert Shapiro, “Unnecessary Injury”
International Insurance Capital Impacts
▫ Higher premiums anticipated
▫ Product availability and innovation reduced
▫ Less insurance industry investment and/or
more investment in Treasury bills and bonds
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Market Impacts
Brookings Institute, Robert Litan, “Source of
Weakness”
Problems with Group Capital Concept
▫ Group capital concept is creditor-centric, not
policyholder-centric
▫ Regulators could use group capital to suppress
rates below actuarially appropriate levels
▫ A group approach will weaken companies and
harm consumers
10
Regulatory Impacts
• Academics, Vaughan and Calabria, “The Road to
Financial Instability?”
ICS Not a Reasonable Regulatory Solution
▫ Too many jurisdictional differences for a
specific global standard
▫ Capital is not the only tool in U.S. – limited
regulatory resources
▫ Capital focused regulation could limit focus on
policyholder protection
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Resources
• Litan, “Source of Weakness: Worrisome Trends in
Solvency Regulation of Insurance Groups in a Post-Crisis
World,” 2014. https://www.brookings.edu/wpcontent/uploads/2016/06/trends_insurance_group_solvency_regulation_litan.pdf
• Vaughan and Calabria, “International Developments in
the Insurance Sector: the Road to Financial Instability?”
2015. http://www.pciaa.net/docs/default-source/default-document-library/finalvaughan-calabria-international-insurance-developments-white-paper-amp-execsummary----april-27.pdf?sfvrsn=2
• Shapiro and Mathur, “Unnecessary Injury: The
Economic Costs of Imposing New Global Capital
Requirements on Large U.S. Property and Casualty
Insurers” 2014.
http://www.sonecon.com/docs/studies/Report_on_Capital_Standards_for_PC_Ins
urers-Shapiro-Mathur-Sonecon-Final-November-15-2014.pdf
Lessons from Bermuda’s Navigation of
International Regulatory Standards
SOA, Annual Meeting, October 2016
051 PD Market Impact of International Regulation [10/24/2016 03:30 PM]
Bradley Kading
Association of Bermuda Insurers and Reinsurers
About ABIR …
• 23 Bermuda domiciled insurers and reinsurers
• 97% of GWP by companies traded on New
York or London stock exchanges (86% of
premium written by US SEC registrants)
• Wrote $72 B in GWP (CY 2015)
• Aggregate global capital $96 B (CY 2015)
• Employ nearly 19,000 in US, over 1,500 in
Bermuda, more than 9,800 in Europe and
nearly 44,500 worldwide (CY 2015)
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Outline
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Regulation Standard Setters
The Influence They Have Already Had
Bi-Lateral Standard Setters
Bermuda: Compliance with US and EU Standards
Pathway to a Global Prudential Standard
Regulatory Protectionism
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G7
G8
UNO
UNEP Financial Initiative
FATF ( Financial Action Task Force on
Money Laundering)
OECD
World Bank
GHOS (Group of Governors and
Heads of Supervision)
BIS (Bank for International
Settlement)
The Web of Global Regulation
WTO
G20
IMF
FSB (Financial Stability Board)
IAIS (International Association of
Insurance Supervisors)
UN Principles for Ethical Investments
Sustainable Banking
Sustainable Insurance
Sustainable Management and Reporting
Finance and Conflict
Human Rights and Finance
Water and Finance
IADI (International Association of
Deposit Insurers)
Basel Committee on Banking Supervision
Joint Forum
JFRAC
Committee on the Global Financial System
IOSCO Int. Organization of
Securities Commissions
JFFCC
Committee on Payment and Settlement Systems
Markets Committee
Irving Fisher Committee
Financial Stability Institute
Treasury
TFFC
FIO
FSOC
OFR
OTS
CFPB
OFAC
OCC
SEC
FED
FDIC
FINRA
ESFS
EBA
ESRB
ESMA
EIOPA
DoJ
NCUA
FAFH
NAIC
ECB
State Regulators
National Regulators
SNB
BSV
FINMA
BAG
RAB
Accounting Firms
Rating Agencies
Banks
Analysts
Insurers
Treuhandkammer
SBA Swiss Bankers Association
Pensions
SVV Swiss Insurance Association
SAV Swiss Actuarial
Association
IIA Institute of Internal
Auditors
ASIP Schweizerischer
Pensionskassenverband
BoD
Die Kammer
CEO
Internal
Audit
CRO Risk
Management
CFO Finance
Compliance
Business
Source: Philip Keller, Deloitte
Chief Actuary
4
So why care about international regulatory
standards?
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Because…
Bermuda’s (re)insurers cover the globe
Of reported claims from this decade’s catastrophes,
Bermuda (re)insurers covered:
• 29% of the reported liabilities for the international
reinsured share of the Japanese earthquake
• 25% from the Gulf of Mexico oil spill
• 37% from Europe’s Windstorm Xynthia
• 51% from New Zealand’s earthquakes
The Association of Bermuda Insurers &
Reinsurers represents Bermuda’s major
• 38% from Chile’s earthquake
property and casualty insurers and
• 16% from the United States’ Hurricane
reinsurers, protecting consumers around the
world. These groups reported 2015 global
Sandy.
gross written premium of $72 billion on a
capital base of over $96 billion.
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Bermuda’s $35B U.S. Contribution
From 2001 to 2015, Bermuda’s (re)insurers
estimated contribution to U.S. catastrophe losses:
Disaster
2001, Terrorism 9/11
2004, Florida Hurricane Quartet
2005, Katrina, Rita and Wilma
2008, Hurricanes Ike, Gustav
2010, BP Deepwater Horizon
2011, 2012, US Tornadoes + Irene
2012, Hurricane Sandy
Estimated Contribution
$ 2.5 B
$ 3.5 B
$18.0 B
$ 4.0 B
$ 1.0 B
$ 3.0 B
$ 3.0 B
Source: Cummins IDC Study, Dowling, Insurance Insider, Trade Press
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The EU and the IAIS Have Already Shaped
US State Regulation
• ORSA
• Corporate governance changes
• Changes in reinsurance regulation:
– Qualifying a jurisdiction
– Qualifying a reinsurer
• Group supervision concept, from lead supervisor
• Group capital requirement, from group capital
calculation
• What’s next?
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Why contribute to these current IAIS
initiatives?
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To avoid duplicative regulation
To avoid gold plating
To win deference to local group capital
requirement
To gain acceptance of an equivalence test
If done right, global standards can create
efficiencies for global groups
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EU-Solvency II Equivalence
• EU Equivalency/Group Supervision/Market
Access
• Bermuda and Switzerland; only two fully
equivalent on three elements of equivalency
• Bermuda: applies to commercial market
(captives exempted)
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Benefits of Equivalence
• Recognition of Group Supervisor:
– 19 ABIR members have subsidiaries spread over 18 EU
jurisdictions
– Deferral to BMA as group supervisor
– Exemption from EU duplicative group supervision
• UK PRA example
• Avoid capital add ons
• Cross Border Reinsurance Market Access:
– Market access
– Elimination of collateral
– Examples of barriers: Austria, Germany, Italy,
Netherlands, Poland, more?
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Benefits of US Qualified Jurisdiction Status
• NAIC Re Regulatory Framework:
– Assess the jurisdiction: 7 qualified
• Bermuda, France, Germany, Ireland, Japan, Switzerland,
United Kingdom
– Assess the reinsurer: More than two dozen qualified
• 14 ABIR members have subsidiaries in US jurisdictions
• Benefits:
– Collateral reduced tied to sliding scale based on
financial standing
– Reputational gain
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Coming Your Way:
International Group Capital Standards
• The logical pathway to implementation of an ICS:
– Setting an ICS after a trial run with consultation
– Setting the regulatory requirement at an insolvency
level
– Establishing principles for qualifying existing
jurisdictional group capital standards
– Observing experience in trial period
– Adjusting the ICS
– Establishing time line to implement global program
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Protectionism
• The GRF identifies 26 countries which have or are
implementing, barriers such as:
– compulsory cessions, domestic right of first refusal
rules, or other trade barriers affecting foreign
reinsurers;
– discriminatory requirements on cross-border
foreign reinsurers for collateralization or localization
of assets;
– discriminatory barriers affecting the establishment
of branches or subsidiaries.
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Freedom of Reinsurance
• Global diversification of risk is vital for
reinsurance markets to operate efficiently
• Market concerns:
– Barriers to trade lead to higher reinsurance costs
and less capacity in local markets.
• Prudential concerns:
– Barriers increase concentration risks for cedents
by limiting choice of counterparty;
– They increase concentration risks for local
reinsurers by compelling acceptance of domestic
risk
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Reinsurance Regulatory Protectionism
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Conclusion
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International standards are in effect now
The US itself enforces such standards
There will be more to come
How can we shape that outcome?
– Engagement
– Experience
– Mutual recognition
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ABIR’s 23 Members
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Allied World
MS Amlin Bermuda
Arch
Argo Group
Aspen
Assured Guaranty
Axis
Chubb
Fidelis
Hamilton Re
Hiscox
Ironshore
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Lancashire
Maiden Holdings
MS Frontier
Partner Re
Qatar Re
Renaissance Re
Third Point Re
Tokio Millennium Re
Validus Re
Watford Re
XL Catlin
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Bradley Kading
Association of Bermuda Insurers and Reinsurers
[email protected] www.ABIR.bm
@ABIR_Bermuda
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QUESTIONS?
International Regulatory Risk and
Market Impact
Stephen W. Broadie, Vice President, Financial Policy
Property Casualty Insurers Association of America
(PCI)
[email protected]
SOA Annual Meeting 2016
051PD: Market Impact of International Regulation
October 24, 2016
1
Who is PCI?
• Roughly 1,000 member U.S. property/casualty insurance
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companies
– $202 billion in annual premium
– 35% of U.S. P/C market
From largest international and national carriers to singlecounty writers – stock, mutual, reciprocal
Many members have life insurer affiliates – some are owned
by life companies
Mission – Promote and protect the vitality of a competitive
private insurance market for the benefit of consumers and
insurers
2
Regulatory risk
Regulatory risk is the risk that a change in laws and
regulations will materially impact a security, business,
sector or market. A change in laws or regulations made by
the government or a regulatory body can increase the costs
of operating a business, reduce the attractiveness of
investment and/or change the competitive landscape.
Source: Investopedia
http://www.investopedia.com/terms/r/regulatory_risk.asp
3
International regulation – why do we
care?
• Tremendous increase in international insurance standard-making
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activity in last 10 years
– Much of this is highly bank-centric and inappropriate to
insurance business model
Significant effect already on U.S. insurance regulation, especially
since 2007-8 financial crisis
PCI strongly supports U.S. state-based regulatory system – best for
consumers and insurers
System is under both international and federal pressure
Standards developed in Basel may come home to Springfield
While U.S. insurers/reinsurers are discriminated against abroad
4
Government Entities Intruding in Insurance
FSB
IAIS
OECD
IASB
IMF
World Bank
JF
FDIC
CMS
FRB
CFTC
FIO
CFPB
DHHS
SEC
FHA
DOC
DOJ
OSHA
Treasury
HUD
DOT
FEMA
USTR
FASB
DOC
DOJ
OSHA
Treasury
HUD
DOT
FEMA
USTR
FASB
FTC
FTC
FTC
FTC
Traditional
Pre-Crisis
Post-DFA
5
Impact on Insurers
• 2009 switch from supporting harmonized international
regulations to global standards
• Costly layers of Solvency II/bank-like regulation
• More intrusive regulation and focus on the group
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“Group” supervision/capital
Source of strength
ICS = (IFRS, M2M, target capital, 99.5%VaR)
Danger of new governance, market conduct,
resolution/recovery and compensation rules
6
How may changing standards affect
markets?
• New supervisory schemes
• Comprehensive international standards
• Trade issues and market effects
• Effects of regulatory uncertainty
7
New (or upgraded) supervisory schemes
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Solvency II (European Union), C-ROSS (China), Mexico, Japan,
Bermuda, many others – everyone’s upping their game
– Including the US, with the NAIC’s Solvency Modernization Initiative
How will insurers from “third countries” be treated?
Solvency II equivalence – harmful consequences if your home
jurisdiction isn’t considered equivalent
– UK, Germany, Poland, Netherlands have already imposed various
onerous provisions – could have significant effects on reinsurance
markets
– US seeking to address “mutual recognition” in Dodd-Frank Act
covered agreement negotiations with EU
US analogue – “qualified jurisdictions” and “certified reinsurers”
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Comprehensive international standards
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Systemic risk – G-SIIs and SIFIs
– Do companies alter their activities to escape G-SII/SIFI status?
• Restructurings of GE Capital, Generali, MetLife
– Or, conversely, seek perceived “too-big-to-fail” status and taxpayer
backup?
– How will 2016 revisions to IAIS determination method affect insurer
behavior?
IAIS – ComFrame and global Insurance Capital Standard
– Potential benefits of uniform global supervision, maybe increased
efficiencies
– Potential downsides of “one-size-fits-all”, including bank-centric
supervision that ignores differences in local markets
– “Spill-over” effects on other insurers?
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Trade issues and market effects
• Trans-Pacific Partnership has helpful insurance market access
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provisions
– But will US ratify it?
Transatlantic Trade and Investment Partnership negotiations
with EU
– Moving slowly
– Unclear whether/how financial services will be addressed
Many trade access barriers (particularly for reinsurance)
Free trade appears to be on the political retreat (especially in
US)
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1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Number of New Bank Charters
250
200
150
100
50
0
Source: FDIC
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New P-C Companies
100
80
80
60
71
48
40
42
26
20
0
90
33
42
30
19
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: SNL Financial
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Regulatory Convergence in Banking
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What does it all mean for insurance
markets?
• Waters are murky
– In US increasing bank regulation has led to
consolidation – fewer players, bigger players
– But size is penalized in current G-SII calculation
– Global capital standard could lead to easier market
access
– But increased costs of regulation are passed on to
consumers, investors and can limit product availability
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Regulatory uncertainty
• Can create opportunities
• Also limits innovation and makes it more difficult to
plan and to attract capital
• Can a multi-lateral regulatory structure based on
mutual recognition work?
– Toleration for different approaches as long as outcomes
are achieved (policyholder protection, free market
operation and access, product choice and innovation)
• Rather than one-size-fits-all
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Questions
• Thank you!
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Glossary of Abbreviations
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BCBS Basel Committee on Banking Supervision (also Basel Committee)
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BIS Bank for International Settlements
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CDS Credit Default Swap
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FSB Financial Stability Board
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G-SIBs Global Systemically Important Banks
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G-SIFIs Global Systemically Important Financial Institutions
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G-SIIs Global Systemically Important Insurers
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G20 Group of Twenty Countries
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HLA Higher Loss Absorbency
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IAIGs Internationally Active Insurance Groups
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IAIS International Association of Insurance Supervisors
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ICS Insurance Capital Standard
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ICPs Insurance Core Principles
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NTNI Non-traditional Non-insurance Activities
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SIFIs Systemically Important Financial Institutions
1