Session 169 PD - IAIS Global Insurance Capital Standards Update. Moderator: David Sherwood

Transcription

1 Session 169 PD - IAIS Global Insurance Capital Standards Update Moderator: David Sherwood Presenters: Elizabeth K. Dietrich, FSA, CERA, MAAA David Sherwood SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

2 IAIS Global Insurance Capital Standards Update SOA Annual Meeting, Session 169 October 18, 2017 Boston, MA Liz Dietrich, FSA, CERA, MAAA Vice President & Actuary Retirement Valuation & Reporting Prudential Financial, Inc.

3 Group-wide Supervision U.S. Federal U.S. State Global Legal/political authority Dodd-Frank Act State Laws / NAIC standards G-20 mandate Systemic Risk Designation authority Financial Stability Oversight Council (FSOC) N/A Financial Stability Board (FSB) Supervisory body Federal Reserve Board (FRB) State insurance regulators (lead state) International Association of Insurance Supervisors (IAIS) 1 Impacted insurers Non-bank systemically Important Financial Institutions (SIFIs) Savings & Loan Holding Company (SLHC) insurers Large insurance groups domiciled in the U.S. Global Systemically Important Insurers (G-SIIs) Internationally Active Insurance Groups (IAIGs) Capital standards FRB group capital standard NAIC group capital calculation Insurance Capital Standard (ICS) Other group-wide supervisory measures Model risk management Counterparty risk management Risk limits Macro-Prudential Initiative (MPI) Own Risk & Solvency Assessment (ORSA) ComFrame (Common Framework for the Supervision of IAIGs) (not exhaustive) Capital planning and stress testing 1 The IAIS is a standard-setting body and does not have supervisory authority over any insurer. Global insurance regulatory standards must be adopted and implemented by jurisdictional insurance supervisors/regulators. 2

4 Capital standards design considerations The capital standard should appropriately reflect key elements of the insurance business model, including asset-liability management, loss absorbing margins in reserves, diversification, and the way risks associated with assets and liabilities are realized. Capital adequacy ratio = Qualifying Capital Resources Required Capital How much do I have? How much do I need? Requirement for unexpected losses Free assets Considerations for capital: Stress/shock based? High quality, mostly fixed income investments backing insurance liabilities and surplus Considerations for capital: Based on market valuation or book / amortized cost valuation? What is the purpose of the assets (i.e., liability-driven investing) Assets Required Capital Other Liabilities Insurance Liabilities Factor based? Standard approaches or internal models? Reserves for future obligations to policyholders Generally long term and illiquid Valued using assumptions for economic and actuarial factors Considerations for capital: Best estimate or conservative valuation? Present value of cash flows reflecting book or market-based discount rate? Based on a typical life insurer 3

5 Overview of the Insurance Capital Standard (ICS) Field testing underway through 2019 Public consultations in 2014 and 2016, with another scheduled for 2018 ICS version 1.0 released in 2017; ICS version 2.0 expected in 2019 Key elements of the ICS Valuation Basis Currently field testing two approaches: Market Adjusted Valuation (MAV) GAAP with Adjustments (GAAP Plus) Capital Requiremen t ICS Standard Method: stress-based approach Insurance, Market, Credit, and Operational Risk components Capital Resources Two tiers of qualifying capital resources Margin Over Current Estimates (MOCE) 4

6 ICS Valuation Basis Valuation Basis Market Adjusted Valuation (MAV) GAAP with Adjustments (GAAP Plus) MAV Intended to provide a common global basis for a market oriented balance sheet Market Value of assets Current Estimate liabilities o o GAAP Plus Valued using the currency specific risk free yield curve plus a prescribed credit spread adjustment Various options to apply a more representative credit spread, applicable to some or all insurance liabilities, were evaluated in Field Testing and included in ICS version1.0: Blended Approach, High Quality Assets (HQA) and Own Assets with Guardrails (OAG) Balances and any adjustments applied to them are anchored to local GAAP frameworks GAAP reported value of assets (considering AOCI adjustment for unrealized gains/losses associated with Available for Sale (AFS) assets for some jurisdictions) Current Estimate liabilities o o Benchmark Approach follows GAAP rules (e.g., Loss Recognition Testing best estimate valuation in U.S. GAAP) HQA was tested to provide data that may align with the FASB targeted improvements for long duration 5

7 ICS Capital Requirement Capital Requiremen t Stresses for Insurance, Market, Credit, and Operational risks Insurance Market Risk Credit Risk Operational Risk Mortality (base rates) Longevity (base rates) Morbidity and disability (incidence and recovery rates) Lapse (level and trend, mass lapse) Expense (level and expense inflation) Catastrophe (terrorism, pandemic) Interest Rate (up, down, flattening, steepening, mean reversion) Equity (equity returns and volatility) Real Estate Currency Asset concentration Stresses to credit assets, evaluated with and without consideration of NAIC ratings Factor-based Correlation matrices applied in aggregation (intra- and cross-risk) 6

8 ICS Capital Resources Capital Resources Tier 1 and Tier 2 qualifying capital resources Margin Over Current Estimates (MOCE) treatment Tier 1 and Tier 2 considerations Loss absorbing capacity Level of subordination Permanence Availability Absence of both encumbrances and mandatory servicing costs Items for consultation include: Structural vs. contractual subordination Capital composition limits Treatment of AOCI Treatment of DTAs and other deductions from Tier 1 capital MOCE 2 options currently being tested: Cost of Capital MOCE and Prudence MOCE 7

9 How it all fits together Key considerations: Stakeholder perspectives and objectives (supervisors, industry, investors, etc.) Consistency/comparability across methods and firms Coherence within the framework Free assets Treatment of MOCE may impact availab Required Capital Required capital reflects the standard method stress scenarios Other Liabilities Assets Insurance Liabilities MAV: Assets at market value US GAAP Plus: Asset values based on GAAP reported values (HTM, AFS) Current Estimate liabilities based on best estimate actuarial assumptions MAV evaluated under 3 discounting approaches: Blended Approach, High Quality Assets (HQA), and Own Assets with Guardrails (OAG) US GAAP Plus evaluated under 2 approaches: Benchmark Approach (LRT) and HQA Approach 8

10 Observed concerns with the ICS 1) Volatility asymmetric treatment of assets and liabilities in the valuation basis creates artificial volatility and pro-cyclicality MV of Assets MAV Current Estimate Liabilities based on prescribed discount curve GAAP Value of Assets (mostly MV) Current Estimate Liabilities based on GAAP LRT rules (asset earned rate) GA The IAIS is considering discounting options to address asymmetry between the valuation of assets and liabilities The IAIS is asymmetry 2) Excessive conservatism improper design and calibration understates Available Capital and overstates Required Capital Available Capital Capital resources should include all tangible loss absorbing resources (including margins in reserves) Required Capital Intended as a 1-in-200 level of stress over one year (99.5% one-year VaR) MOCE do Improper design & overly punitive calibration overstates Required Capital The above issues are especially impactful for long term protection and retirement products. 9

11 Considerations for group-wide capital standards International and domestic group-wide capital standards will impact insurers either directly or indirectly. Capital standards must appropriately reflect the fundamentals of the insurance business model, including the long-term and illiquid nature of insurance liabilities, asset-liability management, and risk diversification. Poorly designed standards which produce artificial volatility and excessive conservatism in capital have the potential to hamper sound, socially necessary insurance products and product innovation, and deter the critical role of insurers in providing stable, long term capital investment to the economy. Active engagement with both domestic and international standards setters is important to ensure consideration of broad perspectives and impacts. 10

12 2017 SOA Annual Meeting & Exhibit DAVID SHERWOOD Session 169 PD - IAIS Global Insurance Capital Standards Update October 18, 2017

13 SOCIETY OF ACTUARIES Antitrust Compliance Guidelines Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants. The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding. There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures. While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines: Do not discuss prices for services or products or anything else that might affect prices Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers. Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so. Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs. Do alert SOA staff and/or legal counsel to any concerning discussions Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information. Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone s responsibility; however, please seek legal counsel if you have any questions or concerns. 2

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15 Industry Observations ICS Participation: Global United States

16 Industry Observations Field testing: Only one part of ComFrame Key themes Adoption of ICS Version 1.0 What is next - ICS Version 2.0 Adoption of ICS v1.0 ComFrame Consultation Adoption of ICS v Field Testing 2018 Field Testing 2019 Field Testing 2020 Abbreviated Timeline: (Source IAIS)

17 Industry Observations Unanswered questions: Field testing helps explore differing approaches only so much can be achieved in any one year Focus has been technical content not implementation Many other areas remain unknown Benefits of participation

18 Industry Observations Moving from project to process Current field testing allows for discretion Some considerations for reliable ICS production: Governance Process and controls Systems and data

19 Industry Observations Wider considerations: Linkage to other regulatory aspects e.g. ORSA Other emerging group capital calculations / standards Impact on business strategy

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