Session 51 PD, Market Impact of International Regulation. Moderator: Marc Slutzky, FSA, CERA, MAAA

Transcription

1 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

2 International Insurance Regulation Regulatory Impacts Since the Financial Crisis SOA Annual Meeting 2016 Session 051 PD -- Market Impact of International Regulation October 24, :30pm Michelle M. Rogers, JD Director of Financial and Regulatory Policy National Association of Mutual Insurance Companies

3 Financial Crisis Insurance Impact AIG Non-insurance Activities Investment Losses Suffered by Insurers Insurers Engaged in Banking Significant International and Federal Pressure

4 3 International Regulatory Structure G-20 Countries IMF FSAP Financial Stability Board International Standard Setters OECD IAIS Basel Committee Economic Development Insurance Banking IOSC Securities IASB Accounting

5 4 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

6 5 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

7 6 Developing Regulatory Issues International Activity ComFrame Group Supervision Global Capital Requirements Resolution Requirements Corporate Governance Market Conduct Cyber Issues Accounting and Valuation changes

8 7 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

9 8 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

10 9 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

11 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

12 11 Resources Litan, Source of Weakness: Worrisome Trends in Solvency Regulation of Insurance Groups in a Post-Crisis World, Vaughan and Calabria, International Developments in the Insurance Sector: the Road to Financial Instability? Shapiro and Mathur, Unnecessary Injury: The Economic Costs of Imposing New Global Capital Requirements on Large U.S. Property and Casualty Insurers urers-shapiro-mathur-sonecon-final-november pdf

13 Lessons from Bermuda s Navigation of International Regulatory Standards SOA, Annual Meeting, October PD Market Impact of International Regulation [10/24/ :30 PM] Bradley Kading Association of Bermuda Insurers and Reinsurers

14 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) 2

15 Outline 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 3

16 FATF ( Financial Action Task Force on Money Laundering) OECD GHOS (Group of Governors and Heads of Supervision) World Bank G7 G8 UNO G20 FSB (Financial Stability Board) WTO The Web of Global Regulation UNEP Financial Initiative IMF UN Principles for Ethical Investments Sustainable Banking Sustainable Insurance Sustainable Management and Reporting Finance and Conflict Human Rights and Finance Water and Finance BIS (Bank for International Settlement) IAIS (International Association of Insurance Supervisors) IADI (International Association of Deposit Insurers) Joint Forum IOSCO Int. Organization of Securities Commissions Basel Committee on Banking Supervision Committee on the Global Financial System Committee on Payment and Settlement Systems Markets Committee Irving Fisher Committee Financial Stability Institute JFRAC JFFCC Treasury TFFC FIO FSOC OFR OTS CFPB OFAC OCC SEC FINRA FED FDIC NCUA FAFH NAIC State Regulators DoJ ESFS EBA ESRB ESMA EIOPA ECB National Regulators SNB BSV FINMA BAG RAB Accounting Firms Rating Agencies Banks Insurers Analysts Treuhandkammer SAV Swiss Actuarial Association IIA Institute of Internal Auditors Die Kammer Pensions BoD CEO SBA Swiss Bankers Association SVV Swiss Insurance Association ASIP Schweizerischer Pensionskassenverband Internal Audit CRO Risk Management CFO Finance Compliance Chief Actuary Source: Philip Keller, Deloitte Business 4

17 So why care about international regulatory standards? 5

18 Because Bermuda s (re)insurers cover the globe The Association of Bermuda Insurers & Reinsurers represents Bermuda s major property and casualty insurers and reinsurers, protecting consumers around the world. These groups reported 2015 global gross written premium of $72 billion on a capital base of over $96 billion. 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 38% from Chile s earthquake 16% from the United States Hurricane Sandy. 6

19 Bermuda s $35B U.S. Contribution From 2001 to 2015, Bermuda s (re)insurers estimated contribution to U.S. catastrophe losses: Disaster Estimated Contribution 2001, Terrorism 9/11 $ 2.5 B 2004, Florida Hurricane Quartet $ 3.5 B 2005, Katrina, Rita and Wilma $18.0 B 2008, Hurricanes Ike, Gustav $ 4.0 B 2010, BP Deepwater Horizon $ 1.0 B 2011, 2012, US Tornadoes + Irene $ 3.0 B 2012, Hurricane Sandy $ 3.0 B Source: Cummins IDC Study, Dowling, Insurance Insider, Trade Press 7

20 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? 8

21 Why contribute to these current IAIS initiatives? 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 9

22 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) 10

23 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? 11

24 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 Benefits: 14 ABIR members have subsidiaries in US jurisdictions Collateral reduced tied to sliding scale based on financial standing Reputational gain 12

25 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 13

26 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. 14

27 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 15

28 Reinsurance Regulatory Protectionism 16

29 Conclusion 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 17

30 ABIR s 23 Members Allied World MS Amlin Bermuda Arch Argo Group Aspen Assured Guaranty Axis Chubb Fidelis Hamilton Re Hiscox Ironshore Lancashire Maiden Holdings MS Frontier Partner Re Qatar Re Renaissance Re Third Point Re Tokio Millennium Re Validus Re Watford Re XL Catlin 18

31 Bradley Kading Association of Bermuda Insurers and Reinsurers

32 QUESTIONS? 12

33 International Regulatory Risk and Market Impact Stephen W. Broadie, Vice President, Financial Policy Property Casualty Insurers Association of America (PCI) SOA Annual Meeting PD: Market Impact of International Regulation October 24,

34 Who is PCI? Roughly 1,000 member U.S. property/casualty insurance 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

35 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 3

36 International regulation why do we care? Tremendous increase in international insurance standard-making 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 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

37 Government Entities Intruding in Insurance FTC DOC DOJ OSHA Treasury HUD DOT FEMA USTR FASB FTC 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 FTC Traditional Pre-Crisis Post-DFA 5

38 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 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

39 How may changing standards affect markets? New supervisory schemes Comprehensive international standards Trade issues and market effects Effects of regulatory uncertainty 7

40 New (or upgraded) supervisory schemes 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 8

41 Comprehensive international standards 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? 9

42 Trade issues and market effects Trans-Pacific Partnership has helpful insurance market access 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) 10

43 Number of New Bank Charters Source: FDIC 42

44 New P-C Companies Source: SNL Financial 12

45 Regulatory Convergence in Banking 44

46 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 14

47 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 15

48 Questions Thank you! 16

49 Glossary of Abbreviations BCBS Basel Committee on Banking Supervision (also Basel Committee) BIS Bank for International Settlements CDS Credit Default Swap FSB Financial Stability Board G-SIBs Global Systemically Important Banks G-SIFIs Global Systemically Important Financial Institutions G-SIIs Global Systemically Important Insurers G20 Group of Twenty Countries HLA Higher Loss Absorbency IAIGs Internationally Active Insurance Groups IAIS International Association of Insurance Supervisors ICS Insurance Capital Standard ICPs Insurance Core Principles NTNI Non-traditional Non-insurance Activities SIFIs Systemically Important Financial Institutions 1