4 November 2008 Limassol, Cyprus

Transcription

1 Final May 30, 2009 MINUTES OF THE JOINT MEETING OF THE INSURANCE ACCOUNTING COMMITTEE, INSURANCE REGULATION COMMITTEE, SOLVENCY SUBCOMMITTEE AND THE ENTERPRISE AND FINANCIAL RISK COMMITTEE 4 November 2008 Limassol, Cyprus Members Present Insurance Accounting Committee: Sam Gutterman (Chair), David Congram, (Vice-Chair), Gunn Albertson, Yutaka Amino, Ralph Blanchard, Guy Castagnoli, Mark J Freedman, Burton D. Jay, Thomas Ringsted, Dieter Silbernagel, Pentti Soininen, Derek Wright, Jana Zelinková. Enterprise & Financial Risk Committee: Tony Coleman (Chair), Seamus Creedon (Vice-Chair), Francois Chauvet. Insurance Regulation Committee: Rolf Stölting (Chair), Toshihiro Kawano (Vice-Chair), Gorakh Nath Agarwal, Allan Brender, Andrew Chamberlain, Mo Chambers, Marius Du Toit, Tom Karp, Glenn Meyers, Lutz Oehlenberg, Richard Roth, Arne Sandström Solvency Subcommittee: Henk Van Broekhoven (Vice-Chair), Philipp Keller (Vice-Chair), Dieter Köhnlein, Frank Rasmussen, Jim Rech, Richard Roth, Arne Sandström, Tim Sheldon Invited Guests Rob Curtis (IAIS), Rob Esson (IAIS), Paul Seymour (BAS) Observers Present Jean Berthon (AFIR), Ofer Brandt (Israel Association of Actuaries), Costas Constantinou (Cyprus Association of Actuaries), Barbara D Ambrogi-Ola (Suomen Aktuaariyhdistys), Jim Doherty (Canadian Institute of Actuaries), Michael Eves (Chair, Reinsurance), Jacqueline Friedland (Canadian Institute of Actuaries), Tina Getachew (American Academy of Actuaries), Paul Lewis (South Africa), Jim Milholland, Japp Plugge (Actuarial Association of Sri Lanka), Gottfried Rey (Association Suisse des Actuaries), Edward Robbins (Society of Actuaries), David Sandberg (American Academy of Actuaries), Henry Siegel (American Academy of Actuaries), Doug Van Dam (American Academy of Actuaries), Makoto Yasunaka (Institute of Actuaries of Japan) 1. Introductions and review of the agenda Sam Gutterman welcomed everyone and proposed a change in the order of the agenda to allow the Enterprise and Financial Risk Committee to present on the Global Financial Crisis. 2. Minutes The minutes of the meeting in Quebec City were approved.

2 3. Insurance Regulation Committee The chairperson, Rolf Stölting, summarized the current activity of the committee: The committee discussed the activities which have been completed for International Association of Insurance Supervisors (IAIS) by the Solvency Subcommittee. This had included responses to IAIS papers and drafting of the Internal Models paper. IAA, IAIS, Groupe Consultatif and CEA have begun the work of making a joint glossary of insurance terms based on existing glossaries. b. Latest developments of Solvency II in the European Union and Principle-based Reserving in the United States The chairperson proceeded briefly to summarize Solvency II developments: There is a political situation regarding group supervision. The European Commission drafted the Framework Directive and it is under consideration both by the European Council and the European Parliament. The Economic and Monetary Affairs Committee (ECON) of the European Parliament is positive on the directive. The political problem is in the Council of Economic and Financial Ministers (ECOFIN). The concern is the supervisory authorities of the subsidiary companies would have less power in the supervision of the companies in their territory. Although everybody wants to have Solvency II quickly, if the directive cannot pass the Parliament by the end of March 2009 the implementation of the Solvency II will be delayed two or three years because of the expected election of the European Parliament next June. No update was provided on principle-based reserving in the US. 4. Solvency Subcommittee The Vice-chairperson, Henk Van Broekhoven, summarized current activity as follows: The subcommittee was close to finishing the Internal Models paper. They will circulate the revised version to the Solvency Subcommittee and Insurance Accounting committee by mid-november to receive comments by the end of this year in order to finalize and publish it by mid-january The subcommittee has begun to develop a paper on stress testing. Other upcoming issues to be addressed would be responses to the further IAIS papers expected and setting up working groups on the Cost of Capital method and group diversification/fungibility. There was some discussion on the Internal Models paper as to whether it is a research paper or something else. Rolf Stölting explained the results of discussion at the Insurance Regulation Committee that the paper would not be a research paper but a public statement which should pass the IAA due process because the paper is an official response from IAA to the IAIS. It was identified that there is a need for clarification of the IAA publication policy and the due process given the Internal Models paper, Risk Margin paper and ERM paper.

3 There was also discussion on the circulation of the Internal Models paper. Suggestions were made to expand the scope to include the Pensions & Employee Benefits Committee and Reinsurance Subcommittee for their inputs. Some concerns were raised because the paper was originally intended for Solvency. If we extend the scope of the paper it would cause further delay. 5. Insurance Accounting Committee The chairperson, Sam Gutterman, summarized relevant committee activities as follows: The motion to adopt the new due process of International Actuarial Standards of Practice is expected to come before the IAA Council meeting. The new process was separated into two parts, Model Actuarial Standards and Actuarial Notes. Assuming approval by Council, the review of the eleven International Actuarial Standards of Practice in existence would be necessary. The categorization and due process for the IAA papers would be addressed in the near future. The Risk Margin paper. It is proposed to form a joint working group of the Insurance Accounting Committee and Solvency Subcommittee to examine the Cost of Capital method that may be applicable to regulatory or other accounting approaches. We are considering a joint working group on discount rates and would invite other interested committees to assign members to the group. IASB was challenging us to determine appropriate discount rates for applicability to at least insurance contracts and the topic would be coming up to pensions in the next two or three years. The committee has a project developing an educational monograph on stochastic modelling. The project is large and we have contracted out the work with an IAA oversight group. The first draft is 350 pages. We would welcome other committees joining in the review of the document in particularly the Solvency Subcommittee and/or Enterprise and Financial Risk Committee. Accounting Standard Board has started discussion on the ongoing issues for the IASB Phase II insurance contract project. There was a discussion on the importance of a consistent glossary for the terminology of the various documents being developed. Regarding the discount rate it was mentioned that in the UK illiquidity to set the discount rates for valuation was a hot issue. The IASB has asked the Insurance Working Group questions on the initial loss issue when some products, such as payout annuities, are valued using risk-free rates. Mortality and discount rate were the important issues for actuaries and both of them were addressed by the IAA. b. ad hoc Risk Margin Working Group wrap-up Sam Gutterman reported on the status of the Risk Margin Working Group, which reports to the Insurance Accounting and Insurance Regulation Committees and the Solvency Subcommittee. The group planned to have final comments from everyone by November 15 and the target date of final completion was December 15, 2008.

4 6. Enterprise and Financial Risk Committee The chairperson, Tony Coleman, summarized relevant committee activities as follows: A draft ERM practice paper was circulated to relevant committees nine months ago and would be finalized soon as an Actuarial Note under the new IAA due process. The committee had worked on a global accreditation for the actuaries working as risk managers which was an initiative of a number of IAA associations. The committee has also worked on the new syllabus and a draft treaty between associations. The committee planned second ERM webinar (on-line seminar delivered over the internet) on 10 and 11 December 2008, which is a joint initiative with the Society of Actuaries and a number of other actuarial associations around the world. IAIS has approached the committee on the possibility of preparing another guidance paper on Asset-Liability Investment Management. The committee is considering forming a group to develop it. b. A Note on Financial Economics The note has been published. 7. Global Financial Crisis a. Summary of discussions Tony Coleman summarized the discussions of the last few days as follows: The objective is to develop a response to the credit crisis on behalf of IAA. Two groups were set up with the Risk and Credit Crisis Task Force, a working group of the Enterprise and Financial Risk Committee, and second an advisory group chaired by Dave Hartman to provide guidance and feedback. Members of the task force include Tony Coleman, David Ingram, Dave Sandberg, Tom Karp, Masaaki Yoshimura, and Seamus Creedon. The task force would prepare a PowerPoint presentation before Christmas, as a first priority, to show how actuaries could assist. It would then be used by the IAA s member associations to discuss with their own regulators, given the international nature of the problem. The second priority was publicity and the task force would prepare a detailed paper within six months targeted to international bodies such as the Joint Forum, Financial Stability Forum and perhaps the IASB. Some of the ideas to be involved were categorized as follows: i. Macro financial regulations to deal with systemic risk and liquidity risk ii. Short term incentives for compensation with no regard to long term consequent risks iii. Value at risk measures that are not transparent. Transfer of some of these risks to an unregulated market invites no accountability iv. Anti-cyclic behaviour rather than pro-cyclic behaviour to be more stable in stressed cases v. Further advancement of the concept of the actuarial control cycle.

5 b. Impacts on the future global financial regulatory structure Tony Coleman asked for other ideas or comments from the attendees. Points made in the discussion included: Securitization of insurance risk was growing. The danger is that such an approach if inappropriately characterized will turn the perception of insurance risk to credit risk. This needs to be transparent. Lessons learnt from insurance regulation would be applicable to the problem on Credit Default Swaps. An often asked question is whether the pricing is being performed properly. IAA needed to act quickly because the G20 would be held in mid-november. Systemic risks were important topics and needed to be addressed proactively. It was necessary to reassess the degree of security and risks that policyholders were expecting. High security would cause high cost. In relation to the compensation issue 100% of guarantee might cause moral hazard. It was introduced that the American Academy of Actuaries issued a statement on the credit crisis and indicated (1) managing the financial risk was one of the key stones for the actuarial profession; (2) balance between regulatory involvements and managing the solvency risks was needed; and (3) actuaries provided experienced resources to the issue. Regulations were changing rapidly so the IAA needed to respond more quickly than six months. Corporate governance was important so that management cannot avoid the issue after many warnings that have been given. It is important that there be appropriate recognition of the limits of modelling. It was introduced that National Association of Insurance Commissioners (NAIC) released a comment sent to the EU that questioned the reliance by an institution s on internal models to set capital requirements. The note indicated that in the current environment there have been some obvious lessons to be learned about the use of models. It was explained that the intent was to focus on the need for greater care and analysis in using models. A question was raised on the transparency of internal models in comparison to the standard model. It was noted that relying upon the future availability of financial instruments such as dynamic hedging has some significant risk vis-à-vis systemic risk. The real issue was to better understand and elucidate what was the systemic risk, how to define, how to measure, and to address. 8. Future meeting There being no other business, the chairpersons thanked all who had attended and contributed to the meeting. The next meeting would be on the occasion of the IAA meetings in Tallinn.