The Global Regulatory Environment? An update on a changing world (SESSION CODE LGL009)

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2 The Global Regulatory Environment? An update on a changing world (SESSION CODE LGL009) Speakers: Audrey Rudberg, Sr. Insurance Manager - Global Alternative Risk Transfer Cargill Scott Taber, VP & Sr Assistant General Counsel, Zurich North America

3 Disclaimer The informa,on in this presenta,on was compiled from sources believed to be reliable for informa,onal purposes only. Any and all informa,on contained herein is not intended to cons,tute advice (par,cularly not legal advice). Accordingly, persons requiring advice should consult independent advisors when developing programs and policies. We do not guarantee the accuracy of this informa,on or any results and further assume no liability in connec,on with this presenta,on. We undertake no obliga,on to publicly update or revise any of this informa,on, whether to reflect new informa,on, future developments, events or circumstances or otherwise.

4 Overview In the wake of the global financial crisis, new laws and regulatory regimes addressing financial services, including insurance, were proposed and implemented around the world. For companies with operations and exposures abroad, the changing nature of global insurance regulation could have implications for their own multinational insurance strategies. This session will focus on emerging trends in local country regulation, including protectionism, enforcement trends, the encroachment of financial regulators into insurance, the implications of some organizations being declared systemic risks, and an update on the activities of the International Association of Insurance Supervisors and the FIO s involvement.

5 Setting the Scene Global trade and foreign direct investments (FDI) have been key growth factors in recent decades For the past 30 years growth in global trade consistently outstripped growth in global GDP Since 1990, the share of developing countries in global trade increased from 20% to 40% In 2012, for the first time developing economies attracted more FDI than developed countries Multinational companies coordinate about 80% of global trade according to UNCTAD Supply chains have become increasingly global and interlinked The growing role of emerging economies in global trade provides a unique opportunity for economic development The growing global marketplace has increased the need for global insurance solutions for multi-national firms

6 Increasing Global Presence Expanded Scope And Services Global Exports of Goods and Servicers Growing Supply Chains Almost 50 percent of revenue from S&P 500 companies is now derived from operations abroad. Caterpillar: 40+ Countries GE: 136 Countries Ford: 29 Countries Source: World Bank Advantages Of Global Strategy Center of Expertise: Do you need a center of expertise? Ability to assess a complex risk landscape. Ability to assess the products and services you need. Where is your center of expertise? Centrally, regionally, or locally located. Sleep Easy Covers : A carrier that can provide coverage, limits and conditions worldwide. Master policy issuance with DIC/DIL capabilities. More Expansive Products: Financially secure global carrier; limits to cover risks, servicing capability, product availability. These benefits facilitate foreign direct investment, trade, and market expansion efforts by businesses, creating jobs and boosting economic growth.

7 GLOBALIZATION BRINGS BENEFITS INCREASED INTERCONNECTIVITY INCREASES RISKS Increased Global Risks Are Affecting Insurers Interconnected risks do not just impact multinational companies, but local businesses as well. Sellers of foreign goods and importers of intermediate supplies are directly impacted by global events. Below are two examples of interconnected risks. E.coli outbreak: In 2011, Spanish produce exports nearly shut down after Germany banned Spanish cucumbers, which it blamed for a deadly E.coli outbreak. Other countries followed suit, sometimes banning other vegetables from other countries as well. The outbreak was finally traced to German bean sprouts. Spanish growers lost about 200 million a week, and even Bulgarian producers nowhere near either Germany or Spain reported losses. Volcano eruption: In 2010, Eyjafjallajökull an Icelandic volcano erupted, disbursing ash into the sky for months. It had a direct impact on the airline community, costing more than $1 billion. However, the ripple affected other industries, especially perishable goods such as food and flowers, impacting communities as far flung as the Caribbean, Africa, South America, Japan, and the U.S. Advantages Of Global Insurers Law of large numbers: For centuries, insurers have used the law of large numbers to mitigate risks. The law of large numbers states that the larger the sample size, the more likely actual losses are closer to expected losses. Today, as risks increase, rigorous management of a large portfolio of uncorrelated risks allows global insurers to provide costeffective risk mitigation policies to all insureds. Expertise and captives: Interconnected risks are often hard to spot. However utilizing their global network, global insurers have the expertise to help companies set up reinsurance captives to optimize the breadth and depth of coverage and capacity limits to protect their operations around the globe.

8 Opportunities For Growth Trans-Pacific Partnership (TPP) Free Trade Agreement US and 11 Pacific Rim nations Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and Japan Help US businesses export goods; not jobs U.S. goods exports to TPP countries totaled $698 billion in 2013, representing 44 percent of total U.S. goods exports. U.S. exports of agricultural products to TPP countries totaled $58.8 billion in 2013, 85 percent of total U.S. agricultural exports. U.S. private services exports totaled $172 billion in 2012 (latest data available), 27 percent of total U.S. private services exports to the world.

9 Opportunities For Growth America s small- and medium-sized enterprises alone exported $247 billion to the Asia-Pacific in 2011 (latest data available). Transatlantic Trade & Investment Partnership (TTIP) Eliminate all tariffs and other duties and charges on trade in agricultural, industrial and consumer products between the United States and the EU Obtain fully reciprocal access to the EU market for U.S. textile and apparel products Strengthen U.S.-EU cooperation to enhance the participation of Small - Medium Enterprises (SMEs) in trade between the US/ EU.

10 Key Trends Impact risks and ability of mul,na,onal companies to deliver and for Risk Managers to design and execute Tension between new global and na,onal regula,ons Protec,on of na,onal interests and new insurance taxes Consumer regula,on and its impact on products and services Data privacy and data management Reshaping of corporate governance and remunera,on Market Opera,onal Strategic

11 Challenges Globalization vs. re-nationalization trends Milestones in the international regulatory reform agenda

12 Fragmented RegulaCons Globally Raises Costs/Adds Complexity United States The U.S. is working to modernize existing regulation across states through the NAIC and FIO. Switzerland The NAIC s risk-based capital standards to incorporate both size and risk profile into the determination of capital adequacy. European Union After working for over a decade the EU member countries will transition from Solvency I to Solvency II in Other Solvency II employs a rules-based approach, centered around capital requirements calculated by applying fixed ratios to measure for risk. The Swiss Solvency Test is a multi-level approach, taking market risk, insurance risk, and credit risk into consideration. Canada, Mexico, Japan, Australia, Singapore and China all utilize differentiated regulatory regimes. Current regulatory fragmentation adds unnecessary costs and complexity for insurance groups attempting to meet cross border needs, limits market expansion opportunities, and adds further complexity to regulatory compliance.

13 Zurich s Risk Management Framework Through processes, responsibilities and policies, Zurich embeds a culture of disciplined risk taking across the business. Risk Types Strategic Insurance Market Credit Liquidity Operational Reputation

14 Multinational Insured Complex, interconnected demands Financial strength Fast cash flow between countries Rapid issuance of policies and certificates Seamless claims service Global reach Experienced teams worldwide Local presence and capabilities Support from one global service platform Covers for multiple lines Local Compliance Compliance across borders

15 Multinational and Global Organizations Numerous and complex interconnections between risks can create consequences that are disproportionate and difficult to predict. Impact can be systemic and potentially have second and third knock 'on effects.

16 Challenges for Globally Positioned Insurers & Business High- level challenges due to current regulatory landscape & trends Diverse requirements for the same business model due to (nationally) fragmented supervision Contradictory permission requirements for out of territory insurance business both on a direct as well as re-insurance basis Regulation and respective requirements are normally geared and looking at domestic carriers and retail business Implications Insurance carrier level Reduced risk/claims and capital fungibility incl. use of re-insurance Lower diversification / more capital cost Increased management complexity Customer / Market level Impaired supply of insurance Insurance does not match global business needs Local policy does not match master policy Impaired economic risk bearing and loss of economic growth momentum

17 Holistic Program View Master Policy Producing Country Local Policy Local Policy DIL Local Policy DIC Ground up Explanatory Note: DIC = Difference in Conditions DIL = Difference in Limits Integrated Local Policy Country A Country B Country C Country D

18 Global Programs: Need to Balance Five Elements 1. Control 2. Cost 3. Coverage 4. Compliance 5. Service

19 Criteria for Selecting a Global insurance Carrier Global reach - comparable footprint Record-keeping and reporting resources - service monitoring (policy issuance, invoicing, Technological capability communication tools Ability to provide well-reasoned alternative program designs Pragmatic, practical approach Local claims administration/ability to pay in local currencies Knowledgeable/expertise in local regulations and requirements knowledge partner. Network capabilities Consistency in policy wording Contract certainty Ability to execute and provide the services (claim adjusting, engineering, invoicing)

20 Appendix

21 International Association of Insurance Supervisors - IAIS Key highlights include: Founded by the NAIC, the IAIS is a standard-setting body with representatives from 200 jurisdictions, including all 56 U.S. states & territories, Treasury, and the Federal Reserve. The IAIS only creates standards, it has no authority to enforce implementation. All jurisdictions retain the authority to implement IAIS standards. Over the next five years, the IAIS is working to develop a basic capital and higher loss absorbency requirement for G-SIIs, along with a common regulatory framework through ComFrame including capital rules for IAIG s. The ComFrame is expected to apply to roughly insurance groups in the world. Domestic firms 99% of insurance companies in the U.S. will not be impacted. Two trends the increasingly global client base and the globalization of risk increase the importance of global insurers in the marketplace. With global expertise and rigorous management of a large portfolio of uncorrelated risks, global insurers can provide small and large companies with tailored, cost-effective risk mitigation policies to deal with interconnected risks.

22 International Association of Insurance Supervisors - IAIS Key highlights include: However, today s fragmented global regulatory environment unnecessarily raises costs, adds complexity, and limits market expansion. These costs reduce foreign direct investment, trade, and growth in the global economy, which is especially detrimental to emerging markets, and growth opportunities for U.S. businesses. Insurance regulation should recognize the reality of globalization, the needs of customers, and the regulatory regime required to best diversify risk, efficiently deploy capital, and lower costs for customers. Specifically, Zurich advocates for a global capital standard assessed at the group level, as well as the need for only one group supervisor and the need to streamline regulations to avoid redundancy.