The Impact of International Issues on Insurance Compliance in the United States

Transcription

1 The Impact of International Issues on Insurance Compliance in the United States Fred E. Karlinsky Rubén N. Gely Rodríguez AICP Gulf States Chapter E-Day Atlanta, Georgia June 13,

2 Disclaimer The materials in this presentation are intended to provide a general overview of the issues contained herein and are not intended nor should they be construed to provide specific legal or regulatory guidance or advice. If you have any questions or issues of a specific nature, you should consult with appropriate legal or regulatory counsel to review the specific circumstances involved. 2

3 Agenda Background U.K. / IAIS / U.S. NAIC Solvency Modernization Initiative Holding Company Model Laws NAIC Own Risk and Solvency Assessment (ORSA) Global Systemically Important Financial Institutions (G- SIFIs) and Global Systemically Important Insurers (G- SIIs) Financial Stability Oversight Council and Systemically Important Financial Institutions (SIFIs) The Way Forward 3

4 Background U.K. Early 2000 s: UK s Financial Services Authority (FSA) developed new solvency framework Create greater transparency in the arrangements for setting regulatory capital levels, while at the same time promoting a strong culture of risk management 2005 The FSA adopted the Individual Capital Adequacy Standards (ICAS) Own Risk and Capital Assessment (ORCA) 4

5 Solvency II Fundamental review of the capital adequacy regime for the European insurance industry Implementation date is January 1, 2016 Establish revised EU-wide capital requirements and risk management standards Aims to increase policyholder protection Strengthened regime should reduce the possibility of consumer loss and market disruption 5

6 Solvency II Three Pillars Pillar 1: Quantitative Basis Covers capability of insurer to demonstrate adequate financial resources to meet liabilities Pillar 2: Qualitative Requirements Sets requirements for governance and risk management framework that identify and measure the risk against which capital must be held Pillar 3: Enhanced Reporting and Disclosure Disclosure, reporting and transparency requirements 6

7 Solvency II Includes the following key ideas: Market consistent balance sheets Risk-based capital Own risk and solvency assessment (ORSA) Senior management accountability Supervisory assessment 7

8 Background IAIS A voluntary organization of insurance supervisors and regulators from more than 200 jurisdictions in nearly 140 countries based in Basel, Switzerland Common Framework (ComFrame) for the Supervision of Internationally Active Insurance Groups (IAIGs) ComFrame is intended to address how insurance supervisors around the globe can work together regarding regulation of IAIGs 8

9 Background IAIS ORSA adopted as part of the IAIS Insurance Core Principals (ICPs) ICP 16 Enterprise Risk Management Part of ComFrame Requires insurer to conduct ORSA to regularly assess adequacy of risk management in supporting current and expected future solvency positions Applies to insurance legal entities and insurance groups with regard to the risks posed to them by noninsurance entities 9

10 Background U.S. AIG crisis brought to light: Well published concerns about unregulated entities affecting insurance companies in group Need for better global coordination and communication to address insurance group financial and systemic risk issues 10

11 Background U.S. NAIC s International Insurance Relations (G) Committee Federal Insurance Office (FIO) International Association of Insurance Supervisors 11

12 Background U.S. NAIC Solvency Modernization Initiative (SMI) Holding company model laws Risk Management Own Risk and Solvency Assessment (RMORSA) Corporate Governance White Paper 12

13 NAIC - Solvency Modernization Initiative Examine international developments and potential use in U.S. insurance regulation Comply with the IAIS ICPs to fullest extent appropriate in U.S. system Apply lessons learned from global financial crisis Group supervision Financial Solvency Framework 13

14 NAIC - Solvency Modernization Initiative Key Components of Financial Solvency Framework: Capital requirements Governance and Risk Management Group Supervision Statutory Accounting and Financial Reporting Reinsurance 14

15 NAIC - Solvency Modernization Initiative First Component Risk-based capital (RBC) is one method to monitor capital adequacy of insurers RBC focuses on measuring minimum regulatory capital required for individual insurers Consider insurer s size and risk profile 15

16 NAIC - Solvency Modernization Initiative RBC formula endeavors to capture the following material risks: Asset risk Insurance/underwriting risk Credit risk Interest rate risk Business risk 16

17 NAIC - Solvency Modernization Initiative Second Component 2013: NAIC adopted Proposed Response to a Comparative Analysis of Existing U.S. Corporate Governance Requirements Goal is to require insurers to submit corporate governance information annually and maintain effective audit function 17

18 NAIC - Solvency Modernization Initiative Third Component September 2012: NAIC adopted newly created RMORSA Model Act Provides statutory basis for requiring: Risk management framework Filing of ORSA Summary Report 18

19 NAIC - Solvency Modernization Initiative Third Component Insurance Holding Company System Regulatory Act Insurance Holding Company System Model Regulation 19

20 NAIC - Solvency Modernization Initiative Fourth Component Interface between statutory accounting principles (SAP) and generally accepted accounting principles (GAAP) Utilization of Principle-Based Reserving (PBR) 20

21 NAIC - Solvency Modernization Initiative Fifth Component Regulatory modernization of reinsurance collateral requirements Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) Prohibits states from denying credit for reinsurance if NAIC-accredited domiciliary state of ceding insurer recognizes such credit 21

22 NAIC - Solvency Modernization Initiative 2011: NAIC adopted revisions to Credit for Reinsurance Model Law and Regulation NAIC maintains list of qualified jurisdictions NAIC conditionally qualified: Bermuda Germany Switzerland United Kingdom 22

23 NAIC - Solvency Modernization Initiative Possible next step in international convergence: U.S. government enters covered agreements with other countries on reduced reinsurance collateral FIO recommended U.S. government enter covered agreements 23

24 Holding Company Model Laws Prior Authority General statutory authority Conduct investigations and collect information Examine insurer s affairs and assets of controlling/controlled persons Examine MGAs and authority to examine their books, accounts, and records NAIC Financial Examiner s Handbook provides for review of insurer s risk analysis of parent or holding company insolvency and liquidity issues 24

25 Holding Company Model Laws Holding Company Model Laws and Regulations were revised in 2010 Provide for enhanced authority over insurance holding company system NAIC recently identified provisions of amended models that must be adopted for accreditation purposes Many states have adopted the required amendments 25

26 Holding Company Model Laws Revisions include: Expansion of regulator s ability to look at any entity within insurance holding company system Enhancements of regulators rights to access information Introduction and funding of supervisory colleges Enhancement of corporate governance and management responsibilities Guidance on disclaimer of affiliation filings Additional standards for reviewing affiliate agreements Filling of the new Form F 26

27 Holding Company Model Laws Form F Meant to evaluate enterprise risk: Any activity, circumstance, event, or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole, including anything that would cause the insurer s RBC to fall into company action level or would cause the insurer to be in hazardous financial condition 27

28 Holding Company Model Laws Form F filings should contain: Form F Information on strategy, internal audit findings, compliance, or risk management Any changes of 10% shareholders in system 12 month business plan and strategies of the system System capital resources and material distribution patterns Discussions with rating agencies that may cause negative movement in system s credit ratings Material activity or developments in the system that, in the opinion of senior management, could adversely affect system 28

29 Holding Company Model Laws Industry Concerns with Form F Control and disclosure based on 10% ownership anywhere within holding company system Accurate information may be unavailable Some information is very sensitive, trade secret, or involves subjective internal assessments Rating agency discussions could be very expansive Senior management must make forward-looking, subjective assessments Possibly subject to personal liability or sanctions 29

30 NAIC - Own Risk and Solvency Assessment (ORSA) Risk Management and Own Risk and Solvency Assessment Model Act Requires confidential internal assessment appropriate to nature, scale, and complexity of insurer Evaluates: Material risks identified by the insurer and associated with its current business plan Sufficiency of capital resources to support risks 30

31 NAIC - Own Risk and Solvency Assessment (ORSA) Key ORSA components or requirements: Insurer must periodically, no less than annually, conduct ORSA to assess adequacy of risk management framework and current and estimated projected future solvency position Internally document the process and results of the assessment Provide confidential high-level ORSA Summary Report annually to lead state commissioner if insurer is a member of an insurance group and, upon request, to domiciliary state regulator 31

32 NAIC - Own Risk and Solvency Assessment (ORSA) The ORSA has two primary goals: Foster effective level of ERM for all insurers in group Provide group-level perspective on risk and capital to supplement existing legal entity view 32

33 NAIC - Own Risk and Solvency Assessment (ORSA) NAIC ORSA (E) Subgroup reviewed ORSA progress in ongoing pilot project in late 2013 Examined 22 ORSA reports: Reports generally met the expectations of the ORSA Guidance Manual Subgroup reported that only minor changes needed for the Guidance Manual Developing enterprise risk management education program for regulators 33

34 NAIC - Own Risk and Solvency Assessment (ORSA) As of April, 2014, twelve states had adopted the ORSA Model Act: California Pennsylvania Illinois Rhode Island Iowa Tennessee Kentucky Virginia Maine Vermont New Hampshire Wyoming 34

35 Global Systemically Important Financial Institutions (G-SIFIs) G-SIFIs are financial institutions whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity Initiative of the Financial Stability Board and IAIS Life and property/casualty industries concerned that global standards will be too bank-centric 35

36 Global Systemically Important Insurers (G-SIIs) 2013: IAIS published its Final Initial Assessment Methodology to assess systemic importance of insurers The Initial Assessment Methodology involves three steps: Data collection Data Assessment Supervisory judgment and validation process 36

37 Global Systemically Important Insurers (G-SIIs) Assessment methodology identifies five categories to measure systemic importance: Non-traditional insurance and non-insurance activities Interconnectedness Substitutability Size Global activity 37

38 Global Systemically Important Insurers (G-SIIs) IAIS also published policy measures for G-SIIs Policy measures include: Recovery and resolution planning requirements Enhanced group-wide supervision Higher loss absorbency requirements for noninsurance activities 38

39 Global Systemically Important Insurers (G-SIIs) July 18, 2013: IAIS and FSB announced that they had identified nine G-SIIs: Allianz SE American International Group, Inc. Assicurazioni Generali S.p.A. Aviva plc Axa S.A. MetLife, Inc. Ping An Insurance (Group) Company of China, Ltd. Prudential Financial, Inc. Prudential plc 39

40 Systemically Important Financial Institutions (SIFIs) The Financial Stability Oversight Council (FSOC) A collaborative body chaired by the Secretary of the Treasury Brings together federal financial regulators, an independent insurance expert appointed by the President, and state regulators One of FSOC s key functions is to designate SIFIs 40

41 Systemically Important Financial Institutions (SIFIs) SIFIs are subject to enhanced regulation by the Federal Reserve Consolidated federal supervision Enhanced prudential standards Former Connecticut Insurance Commissioner Thomas Sullivan will oversee development of capital standards for insurance firms 41

42 Systemically Important Financial Institutions (SIFIs) September, 2013: Prudential, AIG and G.E. Capital designated SIFIs by FSOC Prudential, which has over $1 trillion in assets and less than half its business outside the life insurance industry, challenged this designation FSOC denied the appeal Prudential did not appeal to the federal courts 42

43 Systemically Important Financial Institutions (SIFIs) Prudential s designation drew criticism from some insurance regulators Former NAIC President and current Louisiana Insurance Commissioner Jim Donelon criticized designation John Huff, Missouri Insurance Director and state insurance commissioner representative to FSOC, dissented from the decision to designate Prudential 43

44 THE WAY FORWARD US-EU Joint Draft Report The Way Forward project for greater collaboration. Seven topics subject to ongoing dialogue and collaboration: Professional Secrecy/Confidentiality Group Supervision Solvency & Capital Requirements Reinsurance and Collateral Requirements Supervisory Reporting & Data Analysis Peer reviews Independent Third Party Review 44

45 Questions? 45

46 Contact Information Fred E. Karlinsky, Esq. Direct: (954) South Florida Office: One Financial Plaza, 23rd Floor 100 Southeast 3rd Avenue Ft. Lauderdale, FL Tallahassee Office: 215 S. Monroe Street Suite 701 Tallahassee, FL