U'S' Insurance Solvency Today

1
U.S. Insurance SolvencyToday Future

• Kris DeFrain, FCAS, MAAA, CPCU
• Senior Financial Regulatory Services Manager
• Chief Property/Casualty Actuary
• NAIC
• June 16, 2008

2
U.S. Current Solvency RegulationCompared to
Proposed EU Solvency

• States
• EU Commission CEIOPS / NAIC
• Uniformity is Difficult, but is Key
• No Race to the Bottom

3
U.S. Uniform Financial Regulation

• U.S. Financial Regulation is Uniform
• Aided by Handbooks Analysis, Examination,
  Troubled Company
• Aided by Accreditation System
• National Prioritization System
• Financial Analysis Working Group
• Nationally Significant Insurers and Groups
• Aids Consistency in Analysis of Companies

4
U.S. Current Solvency RegulationCompared to
Proposed EU Solvency

• Principles or Rules
• Public Disclosure vs. Supervisory Reporting
• Economic Capital - Enterprise Risk Management
• Accounting Valuation
• Capital Requirement Methodologies

5
Capital Requirements

• US Risk-Based Capital (RBC)
• 1990s updated annually, but not as modern
• Risk-Based, not all risks (operational, CAT)
• Detailed Calculations, but still formula driven
  and uses industry averages
• Early Warning / Intervention, Regulatory
  Requirements
• EU Standard Formula Internal Models
• Risk-Based, all quantifiable risks
• Ladders of Intervention (SCR first action, MCR
  final action)
• Economic Based Target to BBB rating, 99.5 VaR
• Question of MCR will their method limit court
  fights?

6
Group Issues

• US has group supervision through NAIC Holding
  Company Act and Analysis/Examination and there
  are Lead State Exams
• BUTwhat is group supervision?
• US does not calculate an overall group capital
  requirement, but US insurance groups have a
  roll-up of the subsidiary RBCs, so there is group
  consideration
• EU proposals Being debated so still undecided.
  Small and new member states fear loss of power
  to larger member states

7
What Impacts the U.S.?
Which was first? IAIS or SII?
IAIS
SII
8
Driving Forces - Solvency Regulation

• IAIS
• International Solvency Changes
• EU (SII)
• Canada
• Australia
• Basel II

9
U.S. Announces NewSolvency Modernization
Initiative

• Evaluation of International Initiatives,
  Including IAIS, Basel II, Solvency II, Canadian
  Solvency, Australian Solvency, and IASB
• Work Plan Focus on
• Capital Requirements
• International Accounting Valuation Issues
• Group Supervision
• Reinsurance

10
Impact of International Accounting

• Probably the largest potential change under
  consideration is adoption of International
  Accounting (IFRS)
• There is a trend in the U.S.
• U.S. SEC -- Foreign private issuers can use IFRS
  with no reconciliation to U.S. GAAP effective
  March 2008
• U.S. FASB may adopt IFRS in 2013bye-bye GAAP?
• U.S. NAIC Statutory Accounting (SAP) based on
  U.S. GAAPwhat happens next?

11
U.S. Valuation Issues

• PC
• Principles Based Book Managements Best
  Estimate
• Not discounted, Implicit Risk Margin
• Life
• Principles-Based Reserving Initiative
• From Prescribed Formulas to a Process of
  Identifying and Measuring All Risks
• From Industry Expectations to Company
  Expectations
• Discounted, Implicit Risk Margins

12
U.S. Reinsurance Initiative

• Single State U.S. Regulator
• Both US and non-US Reinsurers
• Potential for A new NAIC entity, Reinsurance
  Supervision Review Dept. (RSRD), that would
  assess regulatory effectiveness of non-U.S.
  jurisdictions through an outcomes-oriented
  approach.

13
U.S. RBC Future??

• Use Company Specific Models, Have some modeling
  today are researching PC CAT Risk Modeling,
  but what else?
• Determine Regulatory Review Process
• Major U.S. Concerns Must maintain legal
  authority at predetermined and non-arguable
  action/control levels What about Fairness?

14
Solvency in the U.S.

• U.S. is the largest market in the world and has a
  solid financial solvency system as evidenced by
  experience, but we are operating in a global
  marketplace
• there will be change.