Minutes of the Insurance Regulation Committee Meeting 1 October 2011 Zagreb, Croatia

Transcription

1 Draft October 10, 2011 Minutes of the Insurance Regulation Committee Meeting 1 October 2011 Zagreb, Croatia Members present Toshihiro Kawano Chairperson Lutz Oehlenberg Co-Vice-Chairperson James E Rech Co-Vice-Chairperson Maja Benko Slovensko Aktuarsko Drustvo Andrew Chamberlain Institute and Faculty of Actuaries Marius Du Toit Actuarial Society of South Africa Shinsuke Hashizume Institute of Actuaries of Japan Philipp Keller Association Suisse des Actuaires Gennaro Olivieri Istituto Italiano degli Attuari Godfrey Perrott Society of Actuaries Frank Rasmussen Den Danske Aktuarforening H.W.M. Van Broekhoven Het Actuarieel Genootschap Ex-officio Michael Eves Guest Timothy Bishop Observers present Peter Boller Dmitry Denisov Jim Doherty Gábor Hanák Tom Herget Luc Kaiser Dieter Köhnlein Alan Joynes Nikola Masic Glenn Meyers Nino Savelli Hideyuki Yoshida Chairperson, Reinsurance Subcommittee OECD Chair, ASTIN Russian Guild of Actuaries Canadian Institute of Actuaries Magyar Aktuárius Társaság American Academy of Actuaries Institut des Actuaires en Belgique Deutsche Aktuarvereinigung e.v. Institute and Faculty of Actuaries Hrvatsko Aktuarsko Drustvo Casualty Actuarial Society Istituto Italiano degli Attuari Institute of Actuaries of Japan 1. Welcome The Chair welcomed those present, especially the new member from Japan (Shinsuke Hashizume) and Tim Bishop from the OECD Secretariat. Everyone introduced themselves and the attendance register was circulated. The agenda for the meeting was approved without change.

2 2. Approval of minutes The minutes from the Sydney meeting were approved. 3. Draft paper on the Role of the Actuary in Systemic Risk Regulation The chair briefly introduced the paper, whereafter he handed over to Jim Rech to discuss. Jim gave an outline of where the paper was and its background. The retrospective view of systemic risk in insurance was that there was little systemic risk in traditional insurance. If that were the case, we were pretty much done and we did not need the report. We could assume a defensive posture, and assume that markets were stable and in balance, that insurance products remained constant, and that insurers use derivatives only as hedges, and that swaps were not an insurance activity. The prospective view was that markets were evolving, and that the status quo will not exist in future. Reasons for this view were financial modernisation, trends towards globalisation, product innovation and systematic market risks (being large can lead to systemic issues). If we assumed that insurers never caused any systemic issues, and we were wrong, it could have serious downside reputational risk for the profession should something happen. It was asked whether we were saying that there were areas where insurance would cause systemic risk, or if we were saying that there might be issues that could in future cause systemic risk (more the latter!). The second part of the paper dealt with actuaries as quants of insurance. Actuaries were applying micro-economist skills. Since our educational evolution had gone beyond underwriting issues, actuaries were involved in global insurance markets. The paper was broken down into three broad areas, namely, systemic risk and regulation, market view macro and not micro (have to understand how markets work) and the actuaries role. Jim noted that we would like written comments back. The question was also posed what did we want from this paper and how did we wish to publish and brand the paper. A lively discussion followed. Some of the main points raised were: Slow developing items could often lead to systemic risk. Must understand new products and react more quickly. Must deal with bubbles before they break. Systemic risk did flow over to the general economy in line with definition as generally understood. Needed to distinguish between various markets (insurance, investment) and how they operated. Should be careful not to say because insurance was not available because risk was too high that insurance was causing insurance risk. Not convinced that barriers to entry were sufficiently high to cause a breakdown in systems. 2

3 The paper must be clearer when talking about the insurance market place, and insurers participating in the investment market place. All insurers depended on the investment markets. There was a concern that we were mixing up different markets. Failure of even many insurers cannot lead to systemic risk, such as when the banking system collapses. Must be clear as to whether we were victims, or merely exposed to the risk. Some insurers did provide products that could be systemic, e.g., companies providing mortgage insurance. If such companies were to fail, some banks would not lend money. The question was whether that was systemic locally or globally. There was an opposing view as to whether the withdrawal of mortgage market was sufficient to cause systemic events. It was merely a discontinuity. IAIS was in process of collecting data from large companies. This would be applied against 18 criteria to determine whether companies were globally significant. The IAA should try and be involved in the IAIS, to give input into whether the 18 criteria were reasonable. Being globally significant and whether they cause systemic risk were different issues. Their failure would not bring down the economy/system. We could not eliminate all systemic risk, but needed to establish rules and the transparency of system to stay functioning. Which system? Not all systems fall within the definition of systemic risk. It was noted that we were talking past each other, and that it might well be because systemic risk was not properly defined. The paper would be enhanced significantly if it was properly defined. It was noted that the definition of the FSB/IMF was used. There was no common agreement on what systemic risk was. We could agree on tendencies and/or aspects that we could concentrate on a forward looking perspective. It was noted that we should be careful and sensitive in expressing the role of the actuary given the involvement of others, e.g., economists. We needed some good stories to get people motivated, since there was a feeling that not many people in the room believed that systemic risk was caused by insurers. The topic of the paper was not adequately answered in paper. Everyone needed to set down what they did not agree with, and should point out how it should be improved; or even, whether we should go ahead with publishing the paper. Not to say anything regarding systemic risk would be a risk in itself for the IAA. Certain activities in insurance companies might cause systemic issues; whereas insurance companies as such do not. Did insurers amplify or dampen systemic risk? In most cases insurers were beneficial to the system, and not amplifying systemic risks. In conclusion, written comments were requested by the end of October The Chair asked for volunteers to assist in drafting, which should be done by the end of the year. Andrew Chamberlain and Philipp Keller volunteered, but could only be involved in 3

4 November/December. A revised draft will be distributed to committee members as well as interested parties and discussed at the Los Angeles meeting. Status of the report was expected to be a committee paper for information purposes. 4. IAA activities relating to IAIS a. Consultation on Insurance Core Principles (ICPs) The Chair thanked all for the contributions to IAIS ICPs. The IAIS had now approved the ICPs at their meeting in South Korea, but had not published it yet. b. Financial Stability Committee (FSC) The IAA Insurance Regulation Committee (IRC) had made written comment to the IAIS observer hearing held in May The IAIS was developing methodology to assess the systemic importance of insurers. They used the definition size, interconnectedness, substitutability, global activity, non-traditional business. A conclusion was expected by the end of this year. The IAIS established the Supervisory Forum in June 2011, looking at the strengthening of the effectiveness of supervision. c. Macro-prudential Policy and Surveillance Working Group This was a working group established under the FSC. From the IAA side, the Enterprise and Financial Risk Committee (EFRC) and IRC were following the work of this working group. The working group would develop analytical measures to identify gaps leading to regulatory arbitrage. The IAA had volunteered to be part of a panel of experts to support the IAIS. 5. CRO and Actuarial Function in ComFrame The Chair led the discussion by posing three questions. i) Was the role of the CRO essential for IAIGs risk management function? o It was an essential role, and should report directly to CEO (not CFO); else there could be a conflict of interest. o In many companies internal models were CFO driven. There was a problem with separation of functions. o There were a number of ways that companies could organise themselves to dispose of various functions. o The danger came in when you consider where to place people rather than how you should discharge the duties. o It was noted that not one model fits every single organisation. o The CRO was not the important person, but the function was important. o The oversight of the risk management function should report to the CEO to the Board. o One could compare the role of the actuarial function with that of the risk management function separate from that see ComFrame document M3E1a in p62. 4

5 o There should be a separation of duties how you organize and what you call it were not important. ii) iii) What should be the requirements for actuaries of IAIGs? What should be the responsibilities for the group actuary? o Again depended on the model you used in the company. There was no one model that had to apply to all. o Comforting the Board was part of the whole ERM framework. o In the narrowest role actuaries perform purely technical calculations, and in wider role it included risk management functions. o A view was expressed that the chief actuary cannot also be the chief risk officer. o It was very common for the chief actuary to have various functions, but then below that there would be separation of duties. o Decision on price was a board decision. But this was not common worldwide. If the board was not involved, then they were not doing their job. There were some examples of companies failing because the Board was not involved. o There were different views and methods of how organisations set themselves up. One should not try and prescribe exact methods, but assess efficacy. Also, it must fit in with local legislation. Must look at all the controls in the system and whether they are effective. What should the actuarial function provide advice and opinion on? o It depended on what one was talking about. o Some aspects included adequacy of local reserves, looking for consistency across groups. One wanted all across the group to do things the same way. o The actuary could also run internal performance management, using that for incentives, management, etc. o Must provide opinion on ORSA (or at least on parts thereof), but not on stress tests the regulator required. But it could also be the function of the CRO. He should also express an opinion on stress scenarios that the company did themselves. o It was noted that the OECD paper on Governance of earlier this year was very informative. 6. Report of Subcommittees a. ComFrame Task Force The IAIS was developing the ComFrame paper setting out the skeleton. It provided an interpretation of existing ICPs, and also added new aspects where necessary. The IAA compiled its responses during July/August. The IAIS consolidated all the responses and discussed the results of their exposure in Seoul. It was noted that the work could be pushed to various technical IAIS groups. The IAA focused mainly on risk management and governance issues. The role of the supervisor could be likened to that of a risk officer. There was an IAIS meeting scheduled for late November, 5

6 where Dave Sandberg is scheduled to present. They would develop 6 to12 questions a regulator should ask when considering ORSAs. b. Solvency Subcommittee The meeting was split into two parts Solvency and ORSA Working Group. The ORSA WG was a combined working group between IRC and EFRC. How ORSA fit in Solvency II as well as in the United States was discussed. There are plans for a web page on the IAA website for ORSA information. It was noted that they would work closely with the ComFrame Task Force since there were many links. The first goal was to come up with a general description of ORSA, defining its scope. With respect to solvency, the stress/scenario paper was close to being finished. Comments were awaited, whereafter it would be amended and finalised. It would then be submitted to this meeting for approval, and thereafter to the IRC for approval to publish as an educational committee paper. There were also suggestions for the revision of the paper on Global Framework for Insurer Solvency Assessment (Blue Book). Two new papers were being considered, namely concentration and dependency of risk, and the risk of solvency rules. What rules and regulations can lead to build up of exposures in insurance companies (unintended consequences of regulation)? c. Reinsurance Subcommittee The Reinsurance Subcommittee provided input into ComFrame with respect to reinsurance issues. They discussed the paper on the Role of Actuary in Systemic Risk Regulation from a reinsurance perspective. They received a presentation on IFRS and reinsurance, and gave input to the Insurance Accounting Committee. Further work identified was the issue of non-proportional reinsurance, which did not fit well in the standard model of Solvency II. d. OECD activities Thierry Poincelin and Tim Bishop gave feedback on OECD activities. There was a meeting in Mexico dealing with annuities and issues such as longevity risk. There was some emphasis on the decumulation phase. The OECD did a survey of Pension Protection Schemes looking at advantages and disadvantages and some of the moral hazard issues. It was noted that Chile sought help on input regarding their risk-based regime. e. IAA regulated professions task force The IAA prepared recommendations to go to the G20. It also aimed to provide analysis of financial policy to promote stability. One of the most prominent area of focus was global regulatory convergence. The interim report was sent to the G20 in June 2011, and the final report was sent at the end of September The final report would be published later the year (6 October). (Secretariat note.- see final report here). 6

7 7. Update on developments in the US Solvency Modernization Initiative (SMI) Jim responded on behalf of Kris DeFrain. There were five different areas they were addressing: capital requirements, group supervision, principle-based reserving in life companies, corporate governance and reinsurance. They did not plan to convert risk-based capital to any economic capital system. Their solvency requirements had to take account of the legal system. There was serious pushback to having more rules and regulations. 8. Work Plan The Chair briefly discussed the work plan as distributed. The work plan would also be discussed at the Los Angeles meeting. With reference to the survey that members completed, there needed to be improvement in three areas: communication, effectiveness of meetings regarding terms of reference and Secretariat support. It was noted that minutes and documents from task forces and subcommittees should be tabled at this meeting, so that people could report back properly. 9. Any other business Allianz invited the IAA to take part and attend a seminar in Germany, together with Bafin, academics and international insurance groups. It was to be an informal information exchange. Neither the topics nor the dates had been fixed yet. The next meeting was scheduled for May 2012 in Los Angeles. 7