Solvency Assessment and Management: Steering Committee Position Paper 85 1 (v 8)

Transcription

1 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 1 (v 8) TREATMENT OF INSURANCE OPERATIONS (IN NON-EQUIVALENT JURISDICTIONS) UNDER THE FINAL MEASURES TO REGULATE THE SOLVENCY OF SOUTH AFRICAN INSURANCE GROUPS ( GROUPS ) 1. PURPOSE, BACKGROUND AND SCOPE The purpse f this dcument is t suggest a pssible apprach twards the treatment f insurance peratins in nn-equivalent jurisdictins. This relates t the calculatin f grup slvency in the final measures under SAM. Fr the interim measures subsidiaries f SA Insurance Grups in nn-equivalent jurisdictins will be included based n the lcal slvency regimes. The apprach fr the final measures (due t cme int frce with effect frm 1 January 2015) is prpsed in this discussin dcument. This dcument prpses a pragmatic apprach (fr cmmercial and practical reasns) t prmte and facilitate cnducting insurance business elsewhere in Africa and the wrld. Scpe and definitins This discussin dcument nly deals with the Pillar I (i.e. slvency) cnsideratins f Slvency II/SAM. Reprting, risk management and gvernance fall utside f the scpe; This discussin dcument nly applies fr purpses f calculating grup slvency (i.e. nt sl level). It will therefre nt apply t subsidiaries r assciates f SA insurance cmpanies which are cnsidered as participatins in related strategic insurers in the sl supervisin; This discussin dcument nly cnsiders nn-equivalent jurisdictins utside SA. Nn-equivalent jurisdictins are defined as jurisdictins that have nt adpted the 1 Discussin Dcument 85 (v 8) was apprved as a Psitin Paper by the SAM Steering Cmmittee n 19 April 2013.

2 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) SAM regime; and Fr the purpses f this dcument, the term insurance peratins include shrtterm insurance and lng-term insurance cmpanies. 2. INTERNATIONAL STANDARDS 2.1 ICP23 ICP23 establishes the fundamental requirements fr supervisin n a grup-wide basis. The internatinal standards (abut whether an entity frms part f an insurance grup), includes the fllwing guiding principles: Where an insurer is part f a grup, the supervisr, in c-peratin with ther supervisrs as necessary, identifies the scpe f the grup t be subject t grupwide supervisin. The identified grup, regarded as an insurance grup fr the purpse f grup-wide supervisin by insurance supervisrs, cvers all relevant entities. In deciding which entities are relevant cnsideratin shuld be given t, at least: Operating and Nn-perating hlding cmpanies (including intermediate hlding cmpanies); Insurers (including sister r subsidiary insurers); Other regulated entities, such as banks and / r securities cmpanies; Nn-regulated entities (including parent cmpanies, their subsidiary cmpanies and cmpanies substantially cntrlled r managed by entities within the grup); and / r Special purpse entities. Taking int accunt at a minimum, the fllwing elements related t the insurance activities: (Direct r indirect) participatin, influence and / r ther cntractual bligatins; Intercnnectedness; Risk expsure; Risk Cncentratin; Page 2 f 13

3 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) Risk Transfer; and / r; Intra-grup transactins and expsures. The lack f legal authrity and / r supervisry pwer f a supervisr are nt a reasn fr narrwing the identified scpe f a grup. The scpe f the grup fr the purpse f grup-wide supervisin is flexible in rder t take accunt f any (ptential) material and relevant changes in / r utside f the grup, such as thse regarding the structure, activities r macr-ecnmic envirnment. 3. EU DIRECTIVE ON SOLVENCY II: CRITERIA FOR ASSESSING THIRD COUNTRY EQUIVALENCE Extract frm Sectin 4 f the draft directive that sets ut equivalence criteria: SECTION 4 INSURANCE AND REINSURANCE UNDERTAKINGS WITH THE PARENT UNDERTAKINGS OUTSIDE THE UNION Article 368 GSTCE1 (Article 260 f Directive 2009/138/EC) Criteria fr assessing third cuntry equivalence 1. In accrdance with Article 260(2) f Directive 2009/138/EC, the criteria t be taken int accunt in rder t assess whether the prudential regime in a third cuntry fr the supervisin f grups is equivalent t that laid dwn in Title III f Directive 2009/138/EC are the fllwing: (m) whether the assessment f the financial psitin f the grup relies n sund ecnmic principles and whether the assessment f slvency is based n an ecnmic valuatin f all assets and liabilities; (n) whether the prudential regime f that third cuntry requires the grup t hld adequate financial resurces including: (i) a requirement that the grup establishes technical prvisins with respect t all f its insurance and reinsurance bligatins twards plicyhlders and beneficiaries f insurance and reinsurance undertakings, which are part f the grup; Page 3 f 13

4 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) (ii) a requirement that assets held t cver technical prvisins are invested in the best interests f all plicy hlders and beneficiaries taking int accunt any disclsed plicy bjective; (iii) a requirement that the grup nly invests in assets and instruments whse risks it can prperly identify, measure, mnitr, manage, cntrl and reprt; (iv) whether the supervisry authrities f the third cuntry require that the grup meet capital requirements set at a level which ensures that in the event f significant lsses plicy hlders and beneficiaries are adequately prtected and cntinue t receive payments as they fall due t a level f cnfidence equivalent t that achieved by Article 101 f Directive 2009/138/EC; (v) a requirement that insurance r reinsurance undertakings which are part f the grup maintain a minimum level f capital, nn-cmpliance with which triggers immediate and ultimate supervisry interventin; (vi) a requirement that the grup capital requirement is met with wn funds that are f a sufficient quality and which are able t absrb significant lsses, and that wn-fund items cnsidered by the supervisry authrities t be f a high quality shall absrb lsses bth in a ging cncern and in case f a winding up; () (p) (q) (r) whether the capital requirements f the prudential regime f that third cuntry are risk-based with the bjective f capturing quantifiable risks and that where a significant risk is nt quantifiable and can nt be captured in the capital requirements, then that risk is addressed thrugh anther supervisry mechanism; whether the prudential regime f that third cuntry ensures timely interventin by supervisry authrities f the third cuntry in the event that the capital requirement referred t in pint (n)(iv) is nt cmplied with; whether the supervisry authrities f the third cuntry restrict the use f wnfund items f a related insurance r reinsurance undertaking where they cnsider that they cannt effectively be made available t cver the capital requirement f the participating undertaking fr which the grup slvency is calculated; whether the calculatin f grup slvency in the third cuntry's prudential regime prduces a result that is at least equivalent t the result achieved by either ne f the calculatin methds set ut in Articles 230 and 233 f Directive 2009/138/EC, r a cmbinatin f them, and that calculatin ensures that there is n duble use f wn funds t meet the grup capital requirement and that the intra-grup creatin f capital thrugh reciprcal financing is eliminated; 4. MAPPING PRINCIPLE DIFFERENCES BETWEEN IAIS ICPs AND THE EU SOLVENCY II DIRECTIVE This aspect has nt been cnsidered. 5. ISSUES TO BE CONSIDERED Page 4 f 13

5 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) The fllwing cnsideratins must be brne in mind when the suggested apprach twards the treatment f relevant peratins in nn-equivalent jurisdictins is evaluated: 5.1 When shuld an insurance peratin in a nn-equivalent jurisdictin be regarded as part f an Insurance Grup fr purpses f grup slvency assessment? As mentined abve, ICP 23 lists the fllwing elements that must be taken int accunt when cnsidering whether a subsidiary frms part f an insurance grup: (Direct r indirect) participatin, influence and / r ther cntractual bligatins; Intercnnectedness; Risk expsure; Risk Cncentratin; Risk Transfer; and / r; Intra-grup transactins and expsures. It is therefre clear that cnsideratins like: Sharehlding, bard representatin/cntrl, the prprtinality principle and lcalizatin rules will all be relevant when cnsidering the apprach twards the treatment f peratins in nn-equivalent jurisdictins under the final SAM measures. It has been pinted ut t the SAM Insurance Grups task-grup that sme SA parent grups are structured in such a manner that several different entities (f the same parent grup) have small participatins in the same peratin in a nn-equivalent jurisdictin. It has been suggested that the apprach, used t determine the slvency f a SA insurance grup, shuld address this practical matter. 5.2 Principles applied by credit rating agencies t evaluate parental supprt One useful reference pint is the apprach taken by credit rating agencies t evaluate whether subsidiaries enjy parental supprt. The credit rating agencies need t establish when the credit rating f a parent r subsidiary can be used fr the ther entity and have therefre develped systematic framewrks t evaluate the strength f parental supprt. The key cnsideratins include the fllwing: Des a parent/subsidiary relatinship exist? FitchRatings distinguish between the fllwing tw types f relatinships: Page 5 f 13

6 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) a) Assciate r Jint Venture Relatinship: An example f this type f a relatinship is when a parent cmpany (r investr) hlds a passive equity stake in anther cmpany (vehicle r investee) perhaps nt cnslidating the investee in its financials, nr des it have cntrl ver strategic decisins made by the investee. In additin, the investee s existence wuld nt be cnsidered t be particularly imprtant t the parent. b) Parent and Subsidiary Relatinship: Cnversely, a parent that has majrity wnership and/r an influential cntrl f the entity shuld be cnsidered a parent/subsidiary relatinship. This wuld als include entities whse existence is f strategic imprtance t the parent, even thugh the cmpany s financials may nt be frmally cnslidated. Fr example, this culd include a subsidiary that may nt be financially material t its parent but whse slvency is imprtant (i.e. default by the subsidiary pses reputatinal risk t the parent) r represents an entry pint int an imprtant freign territry fr the parent. Des the particular peratin bear the Suth African parent s name? This is relevant because a SA parent grup will be mre cmmitted t supprt a subsidiary if its brand and reputatin is at stake; The extent f management, financial, technical and R&D supprt prvided by the parent. FitchRatings refer t these as peratinal ties and list the fllwing examples: Management cntrl and cmmnality, centralised treasury and peratinal verlap and/r integratin. Des the Suth African parent have sharehlding in excess f 50% and effective management cntrl? Des the African peratin have a prfitable histry and reasnable expectatin f being prfitable and have a psitin where it can reasnably cmpete in its dmestic market? Are there frmal r public cmments, acknwledgement r cmmitment frm the SA parent that it will supprt the particular peratin? FitchRatings refer t these as legal ties and list the fllwing examples: Guarantees, dividend and/r intercmpany lan restrictins, crss-defaults and different jurisdictins. Page 6 f 13

7 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) FitchRatings describe the cncept f Strategic Imprtance as fllws: A... subsidiary is deemed t be highly imprtant t its... parent if the latter s wn perfrmance is cntingent upn the success f the subsidiary. 5.3 Practical and cmputatinal demands It is necessary t take the level f sphisticatin f internatinal insurance industries (and especially thse in Africa), int accunt when frmulating the requirements (impsed in SA) fr insurance peratins in nn-equivalent jurisdictins (that frm part f SA parent grups). The cmputatinal demands f the SA SAM Pillar I Technical Prvisins and standardfrmulae calculatins may place a strain n the resurces f sme African subsidiaries. The practical and cmputatinal demands t perfrm the technical prvisins and standardfrmulae Pillar I calculatins shuld nt be underestimated. In this regard the fllwing issues will have t be addressed (the list gives an indicatin f the extent f the practical challenges): The data and cmputatins required fr SAM will typically be mre demanding and nerus than fr a banking peratin given that the calculatin f technical prvisins in respect f life-insurance cntracts ften require prspective prjectins and stchastic mdelling; The treatment f participatins in SCR and Own Funds shuld nt be cnsidered in islatin; Wh will set the risk free rates t use in the calculatin f technical prvisins? Hw will the Standard Frmula stresses be calibrated fr each jurisdictin t ensure 1/200 VAR ver 1 year? Defining what is Market cnsistent fr less sphisticated markets; and The absence f sufficient and reliable prprietary and industry data. Unduly nerus (financial and cmputatinal) requirements may cause certain SA parents t decide that it is nt cmmercially viable t maintain a presence elsewhere in Africa, which culd place Suth African insurers at a disadvantage in cmpeting and expanding int the brader African market. Fr nn-whlly wned insurance peratins the lcal management (ther sharehlders) may als be reluctant t allcate additinal resurces t perfrm the calculatins. 5.4 Cmparisn with the banking industry Page 7 f 13

8 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) The SARB has indicated that its banking supervisin divisin requires SA banking parent grups t include their banking peratins utside SA based n the SA banking capital adequacy requirements. It is, hwever, imprtant t cnsider and understand the differences between banks and insurance cmpanies. As mentined in the sectin abut cmputatinal demands, the data and cmputatins required fr SAM will typically be mre demanding and nerus than fr a banking peratin. 5.5 Usefulness f the lcal capital adequacy requirements The FSB and the SARB have indicated that they wuld prefer nt t intrduce an apprach whereby 3 rd cuntry equivalence t SA SAM is accrded t certain jurisdictins. Fr the cmmercial and practical reasns described in this discussin dcument, it might ptentially be sensible t recgnise the lcal capital adequacy regimes (perhaps fr an initial perid), especially if these are risk-based. Mst SA insurance grups (with significant peratins utside SA) are supprtive f a pragmatic apprach that will prmte and facilitate cnducting insurance business elsewhere in Africa and the wrld and addresses the grup aspects f capital adequacy in a practical manner. It is suggested that regulatins t gvern the slvency f SA insurance grups be principles based (rather than rules-based), due t the cmplexity f grups and the multitude f unique structures and scenaris applicable. 5.6 Suth African apprach twards ecnmic develpment in SADC A study entitled Reginal Integratin in Suthern Africa, Vlume 6 Deepening in Integratin SADC, Suth Africa SADC s Ecnmic Engine indicates that The Suthern African Develpment Cmmunity ( SADC ) is cmmitted t deepening the integratin prcesses amngst its members The pinin has been expressed that the FSB s SAM prject culd be used as an pprtunity and catalyst t harmnise and imprve standards acrss the African cntinent. Such harmnisatin shuld, hwever, perhaps be phased in ver a realistic time hrizn nce SA has irned ut the new SAM regime. Chris Landsberg cmments as fllws in a paper ( Building a reginal sciety in suthern Africa: The institutinal gvernance dimensin. Plicy: Issues and Actrs. Centre fr Plicy Studies, Vl. 15, N.1.): Page 8 f 13

9 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) As such, a cmmitment t achieving reginal ecnmic develpment and building SADC, frm key pillars f Suth Africa s African agenda. Suth Africa s visin fr SADC is ne f the highest pssible degree f ecnmic cperatin, mutual assistance where necessary and jint planning f reginal develpment initiatives, leading t integratin cnsistent with sci-ecnmic, envirnmental and plitical realities. It wuld therefre make sense fr the SA regulatry envirnment t facilitate and prmte the prvisin f financial services in Africa and especially SADC. 5.7 Level playing fields vis-à-vis lcal peratins It has been pinted ut that additinal capital requirements (impsed by an SA parent grup) might place its internatinal peratins at a cmmercial disadvantage vis-à-vis the lcal peratins (if the lcal capital requirements are less nerus than the SA SAM requirements). T (partly) alleviate this ptential cnstraint, it has been suggested that any additinal capital required fr nn-equivalent peratins (required under SA SAM) culd be held in Suth Africa as ppsed t in the particular jurisdictin. It has, hwever, been pinted ut that the lcatin f such additinal capital is irrelevant frm the SA parent s perspective in ecnmic terms. Additinal capital requirements wuld, namely, put SA parent grups with peratins in such cuntries at a disadvantage wherever the additinal capital is hused. If the prpsal (t hld the additinal capital in SA) is accepted, it must be made clear that the additinal capital shuld be calculated based n the prprtinal sharehlding held by the SA parent in the particular insurance peratin. 6. PROPOSED APPROACH The apprach prpsed in this discussin dcument nly applies t grup slvency calculatins fr SA insurance grups. Fr the sl slvency calculatins f insurance cmpanies (within a grup), their participatins in related strategic insurers are incrprated in accrdance with the relevant prescriptins fr testing slvency at a sl-entity level. 6.1 SA SAM calculatins will nt be required fr insurance peratins f SA Insurance Grups in nn-equivalent jurisdictins in the fllwing cases: Page 9 f 13

10 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) a) The particular peratin is nt regarded as strategically imprtant (as defined in Appendix A), r b) The SA parent is prepared t include the particular peratin at nil value in the calculatin f the SA parent s grup wn funds (and SCR) and the particular peratin is slvent based n the lcal statutry slvency rules 2, r c) The particular peratin is subject t a lcal risk-based regulatry capital adequacy regime. Shuld this regime nt be deemed t have third cuntry equivalence with either SAM r Slvency II, the SA Grup can apply t the FSB t use the lcal capital requirement fr grup purpses by demnstrating that the risk based capital requirements f the particular regime are sund cmpared t that f SA SAM. It has therefre been suggested that the new act shuld give the SA insurance-regulatr the pwer t exempt certain jurisdictins frm having t perfrm SA SAM calculatins (ptentially as a transitinal arrangement). Such exemptin culd be given n a blanket basis (e.g. Namibia and Mauritius, say) r n a case-by-case basis as and when the SA regulatr receives applicatins. The prprtinality principle will be applied by the FSB when evaluating applicatins t use the lcal risk-based regulatry capital adequacy regime as ppsed t SAM calculatins. 6.2 SA SAM calculatins will be required fr all ther insurance peratins f SA Insurance Grups in nn-equivalent jurisdictins. Fr the sake f clarity and the avidance f dubt it is nted explicitly that SA SAM calculatins will be required in the fllwing cases (nte that this list nly pints ut specific relevant cases and is nt exhaustive, the primary test is described under pint 6.1): a) The SA parent wants t include excess capital held by the relevant peratin in its wn funds, r 2 This alternative applies the Prprtinality principle by prviding the ptin t nt perfrm SAM Pillar I calculatins by excluding the particular participatin even if the participatin cntributes twards the grup s slvency. Page 10 f 13

11 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) b) The particular peratin is in financial distress and there is a cntagin risk. The definitin f cntagin risk is taken frm the IAIS glssary as fllws: As part f a grup r cnglmerate, and aside frm intragrup expsures f a financial nature, there may be a risk that the supprt f the insurer by internal r external parties may suffer if there is a cncern abut anther part f the grup f which it is a part. Fr this requirement t take effect the particular participatin must therefre be in financial distress and there must be a cntagin risk t the financial sundness f the SA-based parent grup. When evaluating whether cntagin risk is present, the tests t establish whether an peratin is regarded as strategically imprtant (Appendix A f DD85) must be taken int accunt. T test whether a particular participatin is in financial distress, the lcal regulatry slvency requirements will be used as the primary test. After careful cnsideratin, the SAM Insurance Grups Task Grup agreed t nt define r describe financial distress in mre detail because the circumstances will vary frm case t case. The test described in this sectin 6.2 b) will be perfrmed and applied by the SA Grup but the treatment must be explicitly disclsed and explained with a crss-reference t that particular participatin in the returns submitted by the SA Grup t the SA insurance-regulatr. 7. IMPACT OF FINAL MEASURES ON EU 3RD COUNTRY EQUIVALENCE The criteria t assess third cuntry equivalence (f SA SAM t Slvency II) are set ut in sectin 3 f this psitin paper. The SAM Insurance Grups Task Grup evaluated the prpsed SA SAM apprach (suggested in this PP85 V7.2) against these criteria and is f the pinin that PP85 V7.2 cmplies with these criteria. In the pinin f the IGTG, the apprach prpsed n PP85 V7.2 will therefre be acceptable when the equivalence f SA SAM t Slvency II is tested Page 11 f 13

12 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) Page 12 f 13

13 Slvency Assessment and Management: Steering Cmmittee Psitin Paper 85 (v 8) Treatment f insurance peratins (in nn-equivalent jurisdictins) under the final measures t regulate the slvency f Suth African Insurance Grups ( Grups ) APPENDIX A Tests t establish whether an peratin is regarded as strategically imprtant An peratin in a nn-equivalent jurisdictin will be regarded as strategically imprtant if: a) The particular peratin uses the brand/name f the SA parent r a brand/name that is clsely assciated with the SA parent, r b) The SA parent has prvided explicit guarantees, cmmitments, letters f cmfrt r crss-default cmmitments t the particular peratin, r c) The SA parent has management and/r bard cntrl ver the particular peratin; r d) The SA parent cnslidates the financial results f the particular peratin in its accunts. Page 13 f 13