Solvency & International Accounting: linkage to Solvency II

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1 Solvency & International Accounting: linkage to Solvency II Rob Esson, Chair, IAIS Insurance Contracts Subcommittee & member, IAIS Solvency Subcommitee

2 The coming changes in Solvency & Accounting They will change the way we regulate business Major international financial regulatory & standard setting organizations (FSF, Joint Forum, IASB, IAIS) are involved in either or both Solvency & International Accounting issues for insurers 2

3 International Accounting what s the big deal? Norwalk Agreement Sept The FASB & IASB agree to converge their standards and it is happening in practice! Insurance Contracts work is run as a Modified Joint Project. FASB expected to join with IASB upon issuance of discussion paper currently scheduled for end of 2006 Standard maybe 2009/2010 3

4 International Accounting what s the big Ideal? A joint IASB/FASB insurance contracts standard would be effectively a Global GAAP for insurance companies The ideal would be for this standard to be compatible with the solvency initiatives underway at the IAIS & the EU 4

5 IAIS Solvency The IAIS is evolving into an international standard setter The Solvency work is both the most ambitious project that the Association has undertaken, and the most important A global solvency system should help open markets and free capital flows 5

6 IAIS Solvency Taking a principles based approach Linking regulation, financial requirements, governance and disclosure Two papers adopted by the IAIS Framework Paper Cornerstones Paper Elaborated in draft Structure Paper out for comment 6

7 Solvency structure supervisory assessment supervisory assessment and intervention LEVEL 3 Common Solvency Structure and Standards regulatory requirements financial governance market conduct LEVEL 2 LEVEL 1 preconditions basic conditions for the effective functioning of the insurance supervisory authority the insurance sector and insurance supervision 7

8 Solvency framework Supervisory assessment of the financial position Public financial reporting capital requirement * available capital capital value of assets for supervisory purposes technical provisions risk margin best estimate policy obligations liabilities liabilities assets liabilities and capital requirement financial position assets liabilities 8

9 Solvency Cornerstones There are eight Cornerstones, which are principles for solvency evaluation Deliberate differentiation from the 3 Pillar structure adopted by the Basel II Accord, and indeed EU Solvency II 9

10 Solvency Cornerstones (summarized) I: Solvency regime addresses the robustness both short-term and over a longer time span II: The solvency regime is sensitive to risk, and explicit III: The solvency regime is explicit on how prudence is reflected in the requirements. 10

11 Solvency Cornerstones (summarized) IV: The solvency regime uses financial market data and generally available data on insurance technical risks V: The solvency regime defines technical provisions. Technical provisions include an explicit risk margin 11

12 Solvency Cornerstones VI: The solvency regime requires the determination of a discounted best estimate using risk free interest rates from the financial markets VII: The solvency regime establishes a range of solvency control levels and intervention levels VIII: The solvency regime allows standardized approaches and internal models 12

13 EU Solvency II Largely consistent with the IAIS directions in the IAIS Solvency Subcommittee Would expect that for convergence, the EU will ultimately need to move to Solvency 2.1 to converge with IAIS process (good) or Solvency 3 (bad) 13

14 EU Solvency II Timetable for Solvency II indicates that all being well it may be in place by 2009 and thereby may be in place before the IFRS [Framework directive by July 2007] May form a test case for both Phase II and the IAIS Solvency: Dulce et decorum est 14

15 International Accounting IAIS activities Insurance Contracts Subcommittee produces papers making recommendations to the IASB regarding the insurance contracts project and providing regulator views First paper issued May 31, 2005, and second paper issued May 31, for copies 15

16 International Accounting IAIS 2 nd Liabilities Paper Worked closely with IAA Key conclusions: Settlement vital in modeling Exit value, & similar obligations = similar liabilities Discretionary Participation Features should be liabilities NO adjustment for own credit standing 16

17 Conclusion We need to work together to achieve the ideal of an international solvency and accounting structure that minimizes costs and efforts 17