Capital Regimes What s appropriate for the Caribbean. Marcia Tam-Marks, FSA Caribbean Actuarial Association December 2-4, 2015 Trinidad and Tobago

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1 Capital Regimes What s appropriate for the Caribbean Marcia Tam-Marks, FSA Caribbean Actuarial Association December 2-4, 2015 Trinidad and Tobago

2 Outline IAIS ICP 17 Current capital regimes Valuation Methods Statutory Funds Considerations for Capital Models 2

3 IAIS ICP 17 3

4 ICP 17 Capital Adequacy The supervisor establishes capital adequacy requirements for solvency purposes so that insurers can absorb significant unforeseen losses and to provide for degrees of supervisory intervention. Total Balance Sheet approach 4

5 ICP 17 Capital Adequacy The supervisor establishes regulatory capital requirements at a sufficient level so that, in adversity, an insurer s obligations to policyholders will continue to be met as they fall due and requires that insurers maintain capital resources to meet the regulatory capital requirements. In adversity, an insurer s obligations to policyholders will continue to be met 5

6 ICP 17- Capital Adequacy Purpose and role of regulatory capital requirements and resources Board capital to support risks Regulator - ensure that, in adversity, an insurer s obligations to policyholders will continue to be met ORSA Understand own risks; Going concern or run off Macroeconomic safety and soundness of industry and financial system; reasonable cost 6

7 Current Capital Regimes in the Caribbean 7

8 Regional Insurance Space Made of many countries, each with its own legislation Large insurance companies registered to do business in several countries Subject to each country s legislation and requirements How would they fare if domiciled in each jurisdiction? 8

9 Solvency Select Caribbean Countries Country Year Solvency Anguilla 2004 Assets Liabilities >??? Antigua 2007 Admissible Assets > Liabilities Bahamas 2010 Admissible Assets - Liabilities>=Max(BAH$500,000,20% NPI y-1 )+Capital Barbados 2011 Admissible Assets Liabilities>??? Belize 2004 Admissible Assets Liabilities>BZ$200,000 British Virgin Islands 2009 Allowable Assets Liabilities>US$250,000 Cayman Islands 2010 Assets Liabilities>CI$200,000 Dominica 1978 Assets > Liabilities Grenada 2010 Admissible Assets Liabilities>5% Liabilities Guyana 1998 Admissible Assets > Liabilities Jamaica 2001 Minimum Continuing Capital Surplus Requirement St. Kitts / Nevis 2009 Admissible Assets > Liabilities Trinidad and Tobago 2015 d Capital Adequacy requirement Turks and Caicos Islands 2011 d Admissible Assets Liabilities>max(US$1,000,000, 20% NPI y-1) 9

10 Paid-up Capital Select Caribbean Countries Country Yr. of legislation Paid up Capital / Deposit Anguilla 2004 EC$200,000 Antigua 2007 EC$2,000,000 Bahamas 2010 BAH$3,000,000 Barbados 2011 BD$3,000,000 Belize 2004 BZ$1,000,000 British Virgin Islands 2009 US$200,000 Cayman Islands 2010 CI$200,000 Dominica 1978 EC$50,000 Grenada 2010 EC$2,000,000 Guyana 1998 GUY$5,000,000 + infl d Jamaica 2001 JA$150,000,000 St. Kitts / Nevis 2009 EC$2,000,000 Trinidad and Tobago 2011 d TT$3,000,00 Turks and Caicos Islands 2011 d US$1,000,000 10

11 Solvency and Paid Up Capital Sample Companies Sample Company A Assets: US$1,000,000 Liabilities: US$ 985,000 Net premium y-1 : US$ 300,000 11

12 Solvency and Paid Up Capital US$ Company A $3,500,000 Anguilla $3,000,000 $2,500,000 Antigua Dominica Grenada $2,000,000 $1,500,000 St. Kitts / Nevis Turks and Caicos Islands British Virgin Islands $1,000,000 Bahamas Cayman Islands $500,000 $0 Solvency US$ (Company A) Capital US$ Barbados Belize Guyana Jamaica Trinidad and Tobago 12

13 Solvency and Paid Up Capital Company B Sample Company B Assets: US$100,000,000 Liabilities: US$ 98,500,000 Net premium y-1 : US$ 30,000,000 13

14 Solvency and Paid Up Capital US$ Company B $9,000,000 $8,000,000 Anguilla Antigua $7,000,000 $6,000,000 $5,000,000 $4,000,000 Dominica Grenada St. Kitts / Nevis Turks and Caicos Islands British Virgin Islands $3,000,000 $2,000,000 $1,000,000 $0 Solvency US$ (Company B) Capital US$ Bahamas Cayman Islands Barbados Belize Guyana Jamaica Trinidad and Tobago 14

15 Solvency Results Country Solvency (Company A) Solvency (Company B) Anguilla Solvent Solvent Antigua Solvent Solvent Dominica Solvent Solvent Grenada Insolvent Insolvent St. Kitts / Nevis Solvent Solvent Turks and Caicos Islands Insolvent Insolvent British Virgin Islands Insolvent Solvent Bahamas Insolvent Insolvent Cayman Islands Insolvent Solvent Barbados Solvent Solvent Belize Insolvent Solvent Guyana Solvent Solvent Jamaica MCCSR MCCSR Trinidad and Tobago RCRR d RCRR d 15

16 Assumptions All assets are admissible / allowable Consistent asset valuation method Consistent liability valuation method and assumptions Sample Company A Assets: US$1,000,000 Liabilities: US$ 985,000 Net premium y-1 : US$ 300,000 Assets Liabilities = US$15,000 Sample Company B Assets: US$100,000,000 Liabilities: US$98,500,000 Net premium y-1 : US$ 30,000,000 Assets Liabilities = US$1,500,000 16

17 Observations Company A 3,000,000 Anguilla Antigua 2,000,000 1,000,000 0 Dominica Grenada St. Kitts / Nevis Turks and Caicos Islands British Virgin Islands -1,000,000 Bahamas Cayman Islands -2,000,000 Barbados Belize -3,000,000 Paid Up Capital US$ Retained Earnings US$ Guyana Jamaica Trinidad and Tobago 17

18 Observations Company B 3,000,000 2,500,000 2,000,000 Anguilla Antigua Dominica Grenada 1,500,000 1,000, ,000 St. Kitts / Nevis Turks and Caicos Islands British Virgin Islands Bahamas 0-500,000-1,000,000-1,500,000 Paid Up Capital US$ Retained Earnings US$ Cayman Islands Barbados Belize Guyana Jamaica Trinidad and Tobago 18

19 Observations Company A Small company Assets > Liabilities by US$15,000 (1.5% of Assets) For all countries, net retained earnings are negative to varying degrees Bahamas stands out, Barbados and BVI to a lesser extent Insolvent in Grenada, TCI, BVI, Bahamas, Cayman Islands and Belize (Jamaica and Trinidad excluded for now) Solvent in other countries Company B Larger company (Company A x 100) Assets > Liabilities by US$ 1.5m (1.5% of assets) Net retained earnings positive for all except Bahamas Result is statutory insolvency in Grenada, TCI and Bahamas (exclude Jamaica and Trinidad for now) Solvent in all other countries 19

20 Observations Companies A and B insolvent in Grenada, Bahamas and TCI These 3, have solvency requirements that change with size of liabilities / premiums - outcome appears to be consistent Where solvency requirement is fixed dollar amount, results change once threshold attained (BVI, Cayman, Belize) Other countries where both companies are solvent, the thresholds are low For Company A, net retained earnings negative in all countries and significantly so for most countries, given the small size of the company should all indicate insolvent? For Company B, where retained earnings are positive, should they all be solvent? What is an appropriate threshold and should it capture the company size and risk exposure? 20

21 Observations Solvency threshold as a % of Assets, Liabilities and Premiums Country Company A Company B % of Assets % of liabs % of premiums % of Assets % of liabs % of premiums Anguilla 0% 0% 0% 0% 0% 0% Antigua 0% 0% 0% 0% 0% 0% Dominica 0% 0% 0% 0% 0% 0% Grenada 5% 5% 16% 5% 5% 16% St. Kitts / Nevis 0% 0% 0% 0% 0% 0% Turks and Caicos Islands 100% 102% 333% 6% 6% 20% British Virgin Islands 25% 25% 83% 0% 0% 1% Bahamas 350% 355% 1167% 9% 9% 30% Cayman Islands 25% 25% 83% 0% 0% 1% Barbados 0% 0% 0% 0% 0% 0% Belize 10% 10% 33% 0% 0% 0% Guyana 0% 0% 0% 0% 0% 0% 21

22 Observations Fixed dollar amount does not adequately address size and risk Results from Grenada most consistent as threshold expressed as a percentage of liabilities TCI and Bahamas threshold related to fixed dollar amount and premiums results more volatile as size of company and risk change If using a % of liabilities what is an appropriate / adequate percentage? May need to do impact studies on various companies Economic environment may vary from country to country Product profile may vary Size of the market place Availability of assets % of liability does not address risks on the asset side 22

23 Considerations Does the solvency measure address company scale? Does the measure give the comfort that policyholders are adequately protected in adverse situations? What is an appropriate and adequate benchmark? Market players product profile, economic environment, valuation methodology, branch vs. domiciled Model Complexity Resources available to regulator Fixed dollar benchmark not directly related to risk % of liability gives some consistency but may be too simplistic % of premium some inconsistency - for a mature portfolio, premium income may not adequately reflect risk exposure 23

24 Valuation Methods 24

25 Valuation Methods Used CALM PPM CRVM Net Premium Need for consistent valuation method if capital model is based on risk exposure 25

26 Valuation Method - Legislation Country Method Negative Reserves Anguilla Int, Exp, Comm, proper Not Allowed Antigua Int, Exp, Comm, proper Not Allowed Bahamas GAAP, appropriate Allowed Barbados Adequate Not stated Belize Int, Exp, Comm, proper Not Allowed British Virgin Islands Accounting Standards Allowed Cayman Islands None specified n/a Dominica Int, Exp, Comm, proper Not Allowed Grenada Int, Exp, Comm, proper Not Allowed Guyana Int, Exp, Comm, proper Not Allowed Jamaica PPM Allowed St. Kitts / Nevis Int, Exp, Comm, proper Not Allowed Trinidad and Tobago CPPM (proposed) Allowed Turks & Caicos Islands Prospective; approval Not Specified 26

27 Assumptions Mortality Expenses Morbidity Lapses Interest Rates Generally based on experience Industry experience?? for smaller companies Expense assumption usually pose the biggest challenge when valuing liabilities for branch operations Most volatile assumption 27

28 Case Study Year Stat Solvency Ratio RBC Ratio Own method Negative Reserves $m Note Y1 (70%) 157% (A) $13 RBC Neg Res impact Y2 55% 195% (A) $14 Capital Injected Y4 33% 95% (B) $15 RBC Negative Reserves removed Y5 105% $20 Expense Assumption reduced 28

29 Observations Volatile solvency and risk based ratios Different factor based RBC methods give different results Varying valuation methods used Significant changes in assumptions (expenses) Need for standard valuation methodology Need for guidance on assumption setting 29

30 Statutory Funds 30

31 Statutory Funds Assets pledged to Regulator Usually by line of business Policyholder protection Policy Liabilities major component Valuation method is therefore significant In adverse situations, statutory fund is critical to Branch regulators 31

32 Case Study Branch in Country A Liabilities: $40 m Neg Res: $8 m Statutory Fund: $40 m Company Capital Adequacy Ratio: 192% Liabs take credit for Neg Res Act A does not allow Neg Res Company domiciled in Country B; Val method not specified; no limits; Neg Res used Branch Stat Liabs understated by $8m or 20% Statutory Fund understated by 16% Stat Fund should be $58m 32

33 Case Study Branch operation Liabilities $100m Expense $50 per pol True Expense $100 per pol Exp. sensitivity: 2% inc. in liabs for 10% change in exp Liability Inc: 20% New Liabilities: $120m Initial Statutory Fund: $120m New Statutory Fund: $140m Statutory Fund 20% deficient 33

34 Considerations for Capital Models 34

35 What s appropriate Simple factor based RBC model - already practiced Consistent valuation methodology is critical Guidance on assumption setting; how to treat branch operations Impacts statutory funds Focus on risks specific to the region interest; real estate; expenses Consider regional risks when determining value of factors to be used (assets) Larger companies may be ready for ORSA However, many regulators not equipped to deal with ORSA or complex RBC model 35

36 Thank you Marcia Tam-Marks, FSA Principal Visit us: morneaushepell.com Follow 36