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financial services
Evolving
Insurance
Regulation
On the move...
March 2011
kpmg.com
Giles Williams Jim Low Simon Topping
Partner Partner Principal
financial services financial services financial services
regulatory centre regulatory centre regulatory centre
of excellence of excellence of excellence
eMa region americas region asPac region
KPMG in the UK KPMG in the Us KPMG in china
About this report
This report was developed by KPMG’s
network of regulatory experts. The insights
are based on discussions with our firms’
clients, our professionals’ assessment of
key regulatory developments and through
our links with policy bodies.
We would also like to thank members of
the editorial and project teams who have
helped us develop this report:
Editorial team
Rob Curtis David Sherwood Martin Noble
Director Us Head of insurance senior Manager
insurance regulatory insurance
financial services financial services financial services
regulatory centre regulatory centre regulatory centre
of excellence of excellence of excellence
eMa region americas region asPac region
KPMG in the UK KPMG in the Us KPMG in china
Project team
Giles Williams, KPMG in the UK
clive Briault, KPMG in the UK
amber stewart, KPMG in the UK
Patricia Wylie, KPMG in the Us
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
Contents
Foreword 2
Executive Summary 4
The International Association
of Insurance Supervisors (IAIS) 6
1. Capital adequacy including internal models 8
Perspectives: ASPAC
2. ORSA – ERM revisited 16
3. Accounting, valuation and disclosure 22
4. Investments and liquidity 26
Perspectives: Europe
5. Governance and internal controls 34
6. Customer treatment 36
7. Group-wide and cross-border supervision 40
Perspectives: Americas
8. Systemic risk 48
9. ComFrame 52
Acknowledgements 56
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
Foreword
Welcome to our first edition of Evolving Insurance Regulation. although the insurance sector is
sometimes described as having had a
This publication is part of a series which started with the Evolving
‘good crisis’, this masks two key issues.
Banking Regulation reports published in november 2009 and first, a small number of global insurers
november 2010. and reinsurers encountered substantial
difficulties through their participation in
Taking a fresh look at the various regulatory reform initiatives
non-insurance activities, such as their
in the insurance sector, this report explores what the future trading in structured credit products and
regulatory landscape looks like, and what implications this has credit default swaps. Monoline credit and
bond guarantee insurers, which have
for insurance firms.
a different business model to other
insurers, also experienced significant
losses from their exposures to residential
mortgage-backed securities. in the life
insurance sector, falls in the sale of unit-
linked and single premium life insurance
products were accompanied by significant
declines in share prices.
second, the financial crisis has
highlighted the need for more effective
corporate governance and risk
management in all types of financial
institutions. it has reinforced the moves
towards a more risk-based approach to
solvency in insurance firms. in addition
a number of inadequacies in supervision
and regulation have been exposed,
including:
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 3
• The focus of regulation being too The international association of insurance so, are we ready for the journey?
concentrated at the individual firm level supervisors (iais) will introduce a new We believe the industry is ready. There
and not enough attention on group risk, suite of insurance core Principles is considerable focus on the future of
and at the macro-level; from October 2011, which will have a business models, the nature of the
• a lack of oversight and monitoring of significant impact on the form and extent products, the asset allocation strategy
non-regulated subsidiaries/activities; of prudential regulation globally. These and changes to governance and systems.
• legal and legislative limitations changes – and their implications for Understanding the changing regulatory
on insurance group supervision; insurance firms – are the core focus landscape and linking to the strategic
• limitations in the quality and content of this report. We welcome these changes has never been more important.
of supervision; initiatives, particularly the moves by firms that embrace the regulatory changes
• a lack of coordination of responsibilities the iais to introduce greater regulatory and are actively involved in shaping the
and an absence of coordination convergence and consistency especially new reforms, stand to gain a competitive
mechanisms among supervisors; and for internationally active insurance advantage and will be best prepared to
• a lack of effective tools to identify groups, through the comframe project. meet the new challenges ahead.
and minimise regulatory arbitrage on We estimate that the additional cost of
a cross-sector and cross-border basis. regulation to the global insurance sector,
from having bespoke requirements
regulatory reform initiatives to address in each jurisdiction, is currently in the
these shortcomings are in development. region of Us$15bn–$25bn.
However, it is not the financial The regulatory initiatives currently
crisis alone that has inspired insurance underway build on the modernisation
regulators across the globe to review of solvency regimes that regulators
their regimes. The evolution of the had been implementing, to shift from
industry is also playing a key role in ‘tick-box’ regulatory measures towards Jeremy Anderson
influencing the outcome. for example, creating an environment where prudential Global chairman
in developed markets, the introduction standards reflect better the risks faced KPMG’s financial services practice
of more sophisticated products, by insurance firms on both sides of their
risk management techniques, and balance sheets; and where insurance
complex financing structures impacts firms have stronger incentives to
the regulators’ approach. improved understand and manage their risks and
accessibility to emerging markets, their financial resources.
and their gradual penetration by the Moreover, some of the largest insurance
international players is already shaping, firms may find themselves regarded by
and will continue to inform, local their regulators as being systemically
regulatory reform. further, while much important, and therefore subject to
focus has been on prudential regulation additional regulatory requirements on Frank Ellenbürger
and within this risk and capital their financial resources and on their Global Head of KPMG’s insurance practice
management, the conduct of business recovery and resolution plans.
agenda is also a key feature, with These issues are now the subject of
regulators needing to strike a balance significant debate and development by
between the two in satisfying the regulators and the industry. significant
overall consumer protection objective. changes to solvency regulation are very
as regulators of largely domestic-only likely to be the focus of much work going
markets move away from product forward. in this report, we discuss the
regulation and tariffs, then the need likely shape of reforms to come; what it
for more attention on risk-based will mean for prudential regulation world-
supervision and enhanced consumer wide; and the likely impact on the global
buying safeguards is self-evident. insurance sector.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
Executive Summary
The financial crisis has understandably sparked significant regulatory common themes emerging from the
international regulatory developments
action. The G20, financial stability Board (fsB) and Joint forum
include:
have been active in reviewing the regulatory framework for banks, • The move towards more risk-based
and such analysis has invariably flowed across to insurance. The approaches to capital and solvency
measurement;
international association of insurance supervisors (iais) has responded
• a greater focus on risk management
by accelerating its plans to promote common regulatory standards and governance;
and greater international cooperation. • increased use of stress and scenario
testing; and
at the regional and national level, the crisis continues to influence
• Group supervision.
the debate in parts of asia, europe and north america regarding
the appropriateness of local prudential regulatory requirements and insurance supervisors are seeking to
harmonise the approach to each of these
existing policyholder protection regimes. There is a diverse range
themes and to increase cooperation and
of regulatory approaches across the regions, reflecting for the most coordination through formal mechanisms.
part the maturity of the respective markets. for example in some These include memorandums of
countries, regulators’ focus has historically been on product, tariff understanding and the development
of a project within the iais to build a
and conduct of business regulation, whereas in others, greater common framework for the supervision
freedom has been given with the emphasis on risk and solvency of internationally active insurance groups.
regulation. as markets evolve and their uniformity gradually in our chapter on ComFrame, we outline
this framework and the significant
increases, regulatory regimes look set for greater convergence, efficiencies that could be gained by such
over time. reforms which should greatly reduce the
cost of regulation.
in October 2010 the iais endorsed a
new suite of solvency, governance and
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 5
group principles, standards and guidance, The Us has commenced its own reforms conduct of business regulation. These
covering capital adequacy and internal with the solvency Modernisation initiative developments will increasingly force
models, enterprise risk management, (sMi); such developments are more insurers to re-evaluate which parts of
investments, systems and controls and aligned to the iais’s new insurance core the value chain to focus on. furthermore,
group supervision. The impact of these Principles concerning solvency and group merger and acquisition activity looks set
will have profound consequences for supervision mechanisms outlined in the to increase as insurers seek to modify
both insurance supervisors and the Americas Perspective. in asia Pacific, their portfolios as well as acquire key skills.
insurance industry. The introduction of an area of significant focus for inward as group supervision gathers pace, it is
a revised version of the iais’s insurance investment by many international causing insurance groups to review their
core Principles in October 2011 heralds insurance groups, regulators are very operating models, to enable a consistent
a significant step towards achieving much aware of developments in risk and approach to risk and capital management
international convergence and consistency capital management in europe and by across the group and enhance the quality
in regulatory requirements. the iais; and as examined in our ASPAC and timeliness of business decision-making.
at a global level, insurance regulators Perspective, most have already effected approaches to the use of internal models
are moving towards ensuring that or are considering significant change. are evolving and this will continue for some
insurance firms are adequately capitalised Despite the iais developments of time, as will the need for cultural change
with risk-based capital requirements as general convergence and the current lack to enable insurers to optimise through
we discuss in our chapter on Capital of a formal global mandate in insurance effecting more dynamic approaches.
adequacy; requiring valuations of assets regulation, the diversity of local markets Many international groups (in europe
and liabilities to be on a consistent and means that regulators’ approaches will in particular, as a consequence of
economic basis discussed in Accounting, still be localised. Over time we expect to solvency ii) are already considering,
valuation and disclosure; and preparing see a greater uniformity in regulatory if not yet implementing, large scale
the way for insurance firms to use their approach to capital, risk and governance strategic structuring and organisational
own internal models to calculate capital arrangements in global markets, as change programmes. This is taking the
requirements. These internal models will internationally active insurance groups form of the creation of ‘supercarriers’
be subject to stringent standards and prior develop their presence in emerging (the use of branch structures) to realise
supervisory approval that should provide a markets. capital diversification benefits that may
better reflection of risks than a common This report highlights the major not be tangible at group level, reviewing
standard formula. as we argue in our changes already agreed in solvency capital structures and simplifying and ring-
chapter on Group and cross-border standards, governance and supervision – fencing regional sub-groups to manage
supervision, the introduction of group particularly group supervision. We also group risk to local entities. a key aim of
supervision through the application of examine the current debate concerning the current structural change is to mitigate
these initiatives at group level is a key step Systemic risk, the new regulatory the extent to which the global group
change in the overall regulatory approach. common framework now being created has to deal with multiple supervisors’
such initiatives at the international level for internationally active insurance groups requests for information as they introduce
complement the significant efforts by and the likely impact this may have for group supervision – this makes the iais’s
many jurisdictions in further strengthening insurance groups world-wide. proposals for a common framework for
their own local requirements. The regulatory developments set international groups particularly attractive.
in europe, solvency ii is driving further to take place across the global industry it is not only regulators who are setting
prudential regulatory harmonisation. This over the coming years represent an the agenda, rating agencies and analysts
could eventually be extended to non-eU unprecedented and fundamental change will inevitably also play a role in influencing
countries as a result of the increased in the approach to regulation. The impact the outcomes. This will be reinforced
emphasis on group supervision and the will extend beyond mere compliance through the increased emphasis on
concept of ‘equivalence’ which is part changes and will strike at the heart of transparency and disclosure that
of the debate in our Europe Perspective. the business agenda. The requirement fundamentally underpins the regulatory
in addition, europe plans to introduce for the creation of shareholder value change and puts regulation increasingly
greater harmonisation of conduct of will mean insurers have to revise their high on the competitive agenda.
business regulation which has a direct business models, reassessing where regulation is clearly on the move on
impact on Customer treatment. capital is deployed, in which geographic many levels and the challenge has been laid
Two new directives (Packaged retail markets and product lines to operate, and down to the sector as a whole. for many
investment Product services directive how best to redesign their products to insurers these changes are now beginning
and the insurance Mediation Directive 2) take account of new capital requirements. to rank more highly on the strategic agenda,
are in development with anticipated new risk transfer mechanisms and and those firms that embrace the change
implementation dates following the financing structures will emerge, as well within the business will inevitably reap
introduction of solvency ii in 2013. as new distribution models with evolving the rewards in years to come.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
The International
Association of Insurance
Supervisors (IAIS)
A new global framework
The iais was established in 1994 with the broad aim of harmonising
international insurance regulatory requirements. it acts as a forum
for insurance supervisors to discuss developments in the insurance
sector and topics affecting insurance regulation. The iais has now
grown to represent 190 insurance supervisory jurisdictions and is
the world standard setter for insurance.
since 1999, insurance professionals comprising industry
associations, insurers and reinsurers, consultants, professional
associations and international financial institutions have been able
to join the iais as observers. The iais currently has more than
120 observers.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 7
as an international standard setter, The significance of the IAIS and The new suite of IAIS solvency
the iais issues insurance principles, FSAP process standards essentially requires
standards and guidance papers, The iais principles, standards and
which apply to all member supervisory guidance apply to individual insurance supervisory regimes world-wide
authorities. The iais also works closely supervisors who are members of the to establish risk-based solvency
with other standard setters, notably: iais. national regulators are expected requirements.
• The Basel committee on Banking to implement the insurance core
supervision (BcBs) Principles (icPs) produced by the iais.
• european insurance and Occupational The new icPs, which become effective
Pensions authority (eiOPa) in October 2011, apply to insurance
• european commission, insurance area legal entities and insurance groups
• financial stability Board (fsB) unless otherwise stated. While they
• international accounting standards do not apply to non-insurance entities
Board (iasB) (regulated or unregulated) within an
• international actuarial association insurance group, they will apply to
• international Monetary fund (iMf) insurance legal entities and insurance
• international Organisation of securities groups with regard to the risks posed
commissions (iOscO) to them by non-insurance entities.
• Organisation for economic The new suite of iais solvency
cooperation and Development (OecD) standards essentially requires
• The Joint forum supervisory regimes world-wide to
• The World Bank establish risk-based solvency
requirements. These standards reflect
The iais also provides its members with a total balance sheet approach on an
training and support on issues related to economic basis, which address all
insurance supervision, and organises reasonably foreseeable and relevant
meetings and seminars for insurance material risks.
supervisors. even though the iais standards,
through the icPs, currently take the
form of high-level principles-based
requirements, they nonetheless require
all supervisors to enact the requirements
into their local supervisory frameworks.
if they do not they risk receiving an
adverse finding from the iMf/World
Bank who conduct the financial sector
assessment Programme (fsaP)
reviews.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
01
Capital adequacy
including internal
models
Raising standards
risk-based solvency regimes for insurers have existed since the Capital adequacy
However, risk-based capital regimes
1990s, with examples currently found in north america, parts
differ greatly between countries.
of europe, australia, and several other asia Pacific countries. Historically they have been mostly
from 2013, the european Union (eU) will implement a harmonised factor-based, and factors often do not
vary by company, although some vary
risk-based capital framework (solvency ii) across the european
by volume of business or level of asset
economic area (eea), while switzerland, Bermuda, south africa concentration. When setting an insurer’s
and Mexico are also in the process of modernising their solvency solvency capital requirements, risk-
based capital regimes typically measure
frameworks along similar lines.
asset risk, insurance risk, and business
risk. recently, many risk-based capital
regimes have increased the scope of
risks considered when setting capital
to include credit risk, market risk and
operational risks.
in addition to these capital
requirements, many regulatory
frameworks are beginning to include an
enhanced enterprise risk Management
(erM) framework that considers the
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 9
organisational structure of risk The standard requires all solvency supervisor would invoke its strongest
management, governance, reporting, regimes to establish regulatory capital actions, in the absence of appropriate
disclosure and transparency requirements, requirements at a level sufficient to corrective actions by the insurance legal
as well as considerations for group risks. ensure that, in adversity, an insurer’s entity. This is referred to as the Mcr.
increasingly risk-based capital regimes obligations to policyholders will continue The Mcr is subject to a minimum bound,
are also employing scenario and stress to be met as they fall due. it requires that below which no insurer is regarded to be
testing requirements. insurers maintain capital resources to viable to operate effectively. The interplay
in europe, the solvency ii programme meet the regulatory capital requirements. between the new capital requirements
will fundamentally change the capital The standard also introduces solvency and supervisory ladder of intervention
adequacy requirements. insurers will control levels which are designed to can be seen in Diagram 1.
need to demonstrate that they have trigger different degrees of intervention significantly, the iais standard
adequate financial resources which by supervisors. now requires all jurisdictions to set
reflect key quantitative requirements, in the context of insurance legal entity out appropriate target criteria for
such as own funds (capital), technical capital adequacy assessment, the iais the calculation of regulatory capital
provisions and the methods for calculating advocates that regulatory authorities requirements which underlie the
the solvency capital requirement (scr) define regulatory capital requirements calibration of a standardised approach.
and the Minimum capital requirement that establish a solvency control level This means that major insurance
(Mcr). The most significant is the scr above which the supervisor does not markets such as the Us and Japan
which aims to be set at a level where intervene on capital adequacy grounds. are now moving to define such levels.
eligible own funds will enable insurers to The iais describes this intervention level solvency ii has determined its desired
absorb losses to a confidence level of as the Prescribed capital requirement confidence level as 99.5 percent over
99.5 percent over a one year period – (Pcr). This is analogous to the scr in a one year time horizon for the scr. The
equivalent to a one in a 200-year event. solvency ii. The Pcr is defined such that iais standard also requires jurisdictions
The estimated impact of solvency ii assets will exceed technical provisions to set criteria for the assessment of the
on european insurers ranges from and other liabilities with a specified level quality and suitability of capital resources,
€3.5–€4bn (Us$4.8bn–$5.5bn). This of safety over a defined time horizon. having regard to their ability to absorb
includes the cost to firms of undertaking The other intervention level is a solvency losses on both a going-concern and
substantial risk, capital and governance control level at which, if breached, the wind-up basis.
change programmes, and the need to
undertake capital remediation measures Diagram 1: Capital requirements and supervisory intervention
as a result of supervisory assessments.
However, at an international level,
unlike banking, there is no agreed capital Economic capital
adequacy standard amongst jurisdictions.
each regulator has created its own local Ladder of
Capital Prescribed capital
capital requirements. as many of these resources requirement Regulatory
requirements are historically based, there Intervention
is usually no confidence level or time
horizon on which the capital requirements Minimum capital
requirement
are based. it has also meant that there is
no consistency in the structure of capital
requirements or the view on the adequacy Technical
of capital resources for insurers at an provisions and
international level – until now. other liabilities
The new iais standard on capital
adequacy, which becomes effective in
October, begins to bring international
source: KPMG international, february 2011.
capital adequacy standards together.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
10 | evolving insurance regulation | March 2011
in the context of group-wide capital The australian regulator, the australian Regulators are also increasingly
adequacy assessment, the capital Prudential regulation authority (aPra) turning their attention to the
adequacy standard is less specific. has in many ways been at the forefront
rather than requiring a Pcr and Mcr, of change in the region with its aims quality of capital available to
as it does in the context of insurance of achieving a more risk-sensitive capital meet insurance liabilities and
legal entity capital adequacy assessment, framework that also aligns capital other commitments.
it requires that regulatory requirements requirements for general and life insurers.
establish solvency control levels that The collapse of HiH insurance in 2001,
are appropriate in the context of the the country’s second largest non-life
approach to group-wide capital adequacy (general) insurer, was the catalyst for
that is applied. prudential capital reform in the general
regulators are also increasingly insurance industry. The australian
turning their attention to the quality risk-based framework performed well
of capital available to meet insurance during the global financial crisis, although
liabilities and other commitments. The the capital base of some life insurers
capacity of insurers to absorb losses on was negatively impacted by falls in the
both a going-concern and wind-up basis equity markets.
will become more important, increasing
the need to have adequate scenario north america
modelling capabilities. in June 2008 prior to the global financial
crisis (Gfc) the Us launched the solvency
asPac Modernization initiative (sMi). This sought
even though insurers in asia generally to further enhance the existing risk-based
weathered the global financial crisis well, capital (rBc) regime. challenged by
the experience of the past two years has other global solvency reforms such as
demonstrated the need for regulation to solvency ii and Basel iii in banking, the
keep pace and anticipate innovation in naic (national association of insurance
financial services. commissioners) and the insurance
across asia there is a clear trend industry took the opportunity to consider
towards a more risk-based approach to a more risk-based approach to insurance
insurance supervision, with risk-based solvency regulation. it is understood that
capital frameworks in australia, Japan, these measures may lead to insurers
Taiwan, singapore, Malaysia and Korea. being required to hold different levels
notable developments also include of capital.
the china insurance regulatory The naic has stated that sMi is
commission (circ) risk management not a Us implementation of solvency ii.
circular, which was updated in 2008 to in many ways rBc is more akin to a
require the establishment of a risk-based standard formula approach. Where
solvency monitoring framework. china existing factors are inappropriate for a
also introduced regulation in October 2010, specific risk on some products, the naic
which is expected to significantly enhance may allow modelling approaches to
the alignment of the management of substitute the specific risk factors
insurance business in a much more concerned.
risk-centric way, and points to the use
of economic capital as the key risk
measurement tool.
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evolving insurance regulation | March 2011 | 11
Internal models The calibration test requires the insurer
What are the implications?
another major development is that the to demonstrate that the regulatory
iais capital adequacy standard includes capital requirement determined by the
• The introduction of solvency control general provisions on the use of an internal model satisfies the specified
levels will formalise the existing internal model to determine regulatory modelling criteria as established by the
practice in many countries by having capital requirements (where this is supervisory jurisdiction. importantly,
targeted regulatory capital levels. allowed by the supervisor). This is a the use test requires the insurer to
These will become a hard target, major step forward world-wide in the fully embed the internal model, its
over and above the stated regulatory supervisory arena.The iais has made methodologies and results, into the
minimum requirements. such clear that, where a solvency regime insurer’s risk strategy and operational
formalised arrangements could allows the use of internal models processes.
mean that the supervisors set a to determine regulatory capital The use test can require significant
new informal target above this new requirements, the solvency regime cultural and potentially organisational
higher minimum level. This could should establish appropriate modelling change and will be critical for insurers to
have capital management criteria to be used for the determination get right, as shown by the experience of
implications for many insurers. of regulatory capital requirements. banks. The Board and senior management
• By setting new Pcr, it is most likely for example, an insurer is required to must have overall control of, and
that insurers will want to set new adopt risk modelling techniques and responsibility for, the construction
minimum targets for themselves approaches appropriate to the nature, and use of the internal model for risk
above this new threshold level. This scale and complexity of its current risks management purposes, and ensure
will probably result in opportunity and those incorporated within its risk sufficient understanding of the model’s
cost implications for many insurers. strategy and business objectives in construction at appropriate levels within
• The introduction of specified levels constructing its internal models for the insurer’s organisational structure.
of safety over a defined time horizon regulatory capital purposes. further, in particular, the iais standard requires
means insurers will now need to insurers will need to validate their that the insurer’s Board and senior
begin contemplating whether to internal models by subjecting them to, management understand the
have a capital management as a minimum, the following three tests: consequences of the internal model’s
framework that can model economic a statistical quality test, a calibration test outputs and limitations for risk and
capital requirements. and a use test. capital management decisions. insurers
The statistical quality test requires will also be expected to have adequate
insurers to assess the base quantitative governance and internal controls in place
methodology of the internal model, with respect to the internal model.
to demonstrate the appropriateness of The iais standard further requires
this methodology, including the choice the insurer to document the design,
of model inputs and parameters, and construction, and governance of the
to justify the assumptions underlying internal model, including an outline of
the model. it also requires that the the rationale and assumptions underlying
determination of the regulatory capital its methodology. supervisors will be
requirement using an internal model expected to require documentation to
addresses the overall risk position of the be sufficient to demonstrate compliance
insurer and that the underlying data used with the three tests for internal models
in the model is accurate and complete. outlined above.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
12 | evolving insurance regulation | March 2011
The insurer will also be expected What are the implications? insurers will also be expected to
to properly document internal have in place ongoing validation and
supervisory approval of the internal
model changes and report • it is expected that many supervisory model. The insurer will be expected to
information necessary for regimes will begin to allow internal monitor the performance of its internal
models to be used to determine model and regularly review and validate
supervisory review and ongoing regulatory capital requirements, the ongoing appropriateness of the
approval of the internal model subject to rigorous criteria. These model’s specifications. importantly,
on a regular basis. changes are likely to present as the insurer will be required to
many challenges for insurers as they demonstrate that the model remains
do opportunities. initial preparatory fit for regulatory capital purposes in
work with local regulators will be key changing circumstances against the
in the roll-out of such reforms. criteria of the statistical quality test,
• The statistical quality test, calibration calibration test and use test. The insurer
test and use test are expected to be will be required to notify the supervisor
demanding. insurers should begin of material changes to the internal model
to examine whether their data set made by it for review. continued approval
and system capabilities are adequate of the use of the model for regulatory
and appropriate. capital purposes will also be required.
• Defining model parameters, inputs The insurer will also be expected to
and underlying assumptions are properly document internal model
usually very demanding for most changes and report information
insurers. early identification and necessary for supervisory review and
planning of such analysis will provide ongoing approval of the internal model
organisational benefits given the on a regular basis. The information
associated risk and governance expected will include details of how the
inputs required. model is embedded within the insurer’s
governance, operational processes and
risk management strategy, as well as
information on the risks assessed by
the model and the capital assessment
derived from its operation.
asPac
in general, we expect the asPac
insurance industry to see significant
development in the use of internal
economic capital models. This is not
to say that the region lags in the
development of models – because we
see a number of companies across asPac
with sophisticated risk quantification
frameworks. However this may be
challenging for certain domestic insurers
and for smaller players.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 13
europe
Issues to consider
european insurers under solvency ii
have much to gain from the internal
model use test requirements as While insurers do not have an • are your Board and senior
described above, where senior internationally recognised capital management sufficiently focused
management must essentially framework comparable to the Basel on the changing regulatory landscape
demonstrate the use of internal model accord, the changing regulatory to maximise competitive advantages
output in the decision-making process, landscape will begin to pose new that may be derived from utilising
such as to support M&a activity, challenges for many in the insurance advanced risk and capital
investment decisions and reinsurance industry: management techniques?
buying. regulation in asPac is expected • Have you thought about the impact • for subsidiaries of groups, the
to follow suit by making the internal capital management changes will interplay of capital adequacy at
or economic capital model the key have on your business, particularly the local level and how such
risk management tool. significant in regards to: arrangements can best be
investment is required however – – existing business incorporated at the group level to
particularly at senior management level – new business maximise economic efficiencies
and in developing risk reporting lines – – Pricing models will likely require greater focus.
to fully realise the benefits that additional – capital planning and management How well prepared are you to meet
risk information can provide, both in – Data and systems needed for robust these new demands?
setting strategy and in day-to-day real time measurement • early engagement with supervisors
management decisions. – Business to grow, divest, is critical in establishing and building
restructure relationships and establishing the
north america – Targets to meet new requirements? necessary awareness and
Due to the financial data collected and • Do you have the planning and project understanding of your needs.
the subsequent examination process management capabilities to bring How well does your supervisor
undertaken by Us supervisors, many together the necessary interactions understand your business?
remain to be convinced of the benefit and linkages between Pillar i
of internal models in setting regulatory (regulatory capital), Pillar ii (own
capital requirements. The move to a assessment) and Pillar iii (reporting)?
full internal model approach to solvency
is therefore receiving a much more
cautious approach. While some Significant investment is required
modelling is undertaken on certain however – particularly at senior
products, the Us is wary of over-reliance
on internal models and will most management level and in
likely wait until europe has fully developing risk reporting lines
operationalised solvency ii to gauge – to fully realise the benefits that
the success of such reforms.
additional risk information can
provide, both in setting strategy
and in day-to-day management
decisions.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
14 | evolving insurance regulation | March 2011
Perspectives:
ASPAC
Diversity and progress
insurance business in asia Pacific is The two key areas of significant Regulators in the region have
booming. life and non-life insurance development that are expected to shape been watching the IAIS and
penetration rates for the region as a the industry in the years to come are:
whole remain low and so there is risk and capital management, and the Solvency II developments with
significant room for ongoing growth. impact of global developments in much interest, and will continue
in fact, for much of the region in recent financial reporting by insurers. to do so before undertaking
decades, the story has been one of
growing the market rather than Risk and capital management major reforms to their own
competing for market share. coupled One of the lessons learned from the prudential frameworks.
with the relatively quick emergence Gfc is that prudential supervision in
of asian economies from the global some countries can be a blunt tool.
financial crisis (Gfc), this region is Because some solvency capital regimes
attracting significant attention from are not very sensitive to risk, they
local and global players alike. arguably compensate through excessive
similar to the banking industry as prudence. This can be a poor trade off,
discussed in Evolving Banking Regulation1, however – higher capital requirements
a common question is, is the focus are not the solution to all risks. for this
on developing more sophisticated reason, we are seeing a move to more
capital adequacy and enterprise risk risk-based capital regimes post Gfc.
Management (erM) warranted, given in my experience, regulators in the
that players in the region emerged from region have been watching the iais and
the Gfc with stronger balance sheets solvency ii developments with much
compared to their peers in europe interest, and will continue to do so before
and the Us? i believe that it would be undertaking major reforms to their own
very short-sighted to take such a view, prudential frameworks. However, risk-
because there are many lessons that based solvency capital (rBc) regimes
asPac insurers can learn from their for insurers have existed in the region
counterparts in europe and the Us – for many years. The australian regulator
perhaps most importantly that recently has been very active, and is
enhancements in risk management currently reviewing its capital standards;
can assist profitable growth, rather the Japanese, Korean and Taiwanese
than acting as a barrier to growth as solvency capital rBc regimes are not
is sometimes perceived. dissimilar to the current Us rBc solvency
Of course, the region is diverse. There capital model; and the singaporean and
are significant differences in both the Malaysian rBc regimes are, in fact,
characteristics of the insurance sector, considerably more granular than rBc
and the sophistication of regulation in regimes of other jurisdictions.
each jurisdiction. The jurisdiction-specific now that erM and solvency capital
model of insurance regulation – which standards have been approved in europe
we expect to endure in asPac for the for solvency ii and internationally via
foreseeable future – has implications for the iais, i believe that many jurisdictions
group-wide financial reporting and capital will pick up the pace of change. This is
management. in the twenty-first century particularly relevant when considering
of increasing connectivity, regulation and the financial sector assessment
management of systemically important Program (fsaP) reviews conducted
financial institutions (sifis) is, in many by the iMf and World Bank.
ways, constrained by a country-by- Being able to study solvency ii
country approach. implementation developments and
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
challenges in europe is clearly an is to navigate a path through these One of the key activities for
advantage to the industry in asPac, and forthcoming accounting measurement ASPAC insurers over the coming
lessons can be learned both in terms of changes, while continuing to meet the
what to do, as well as what not to do. challenges of a fast moving business 12 months is to navigate a path
environment. How insurers respond through these forthcoming
Financial reporting will help to shape the future of business accounting measurement
The second area attracting a lot of reporting, as it evolves beyond compliance
attention is the ongoing developments to communicate the value that they are changes, while continuing to
in financial reporting, which we discuss generating for their stakeholders. meet the challenges of a fast
in detail in chapter 3 (Accounting, i believe that the regulatory changes in moving business environment.
valuation and disclosure). in asPac, financial reporting and capital management
unlike europe, where ifrs is frequently – which i expect to result in greater
only adopted at Group level, local standardisation and harmonisation of how
statutory reporting is often ifrs-based insurers manage their business and
and already impacts small and large communicate to their various stakeholders
insurers alike. australia, Hong Kong, – may well begin to standardise products
singapore and Malaysia for example and will result in greater consolidation in the
have already adopted models that at region. The region is set for exciting and
the very least closely model ifrs, with challenging times ahead.
changes made to suit country-specific
legislation or contexts. ifrs adoption
in Korea from 2011, and for some
international Japanese companies
from 2010 onwards, will increase the
significance of ifrs in the region.
existing statutory liability
measurement rules in jurisdictions
including australia, Hong Kong, singapore
and Malaysia already allow or even Martin Noble
mandate discounting for non-life regulatory centre of excellence
business and the application of risk asPac region
margins. a key step for regulators and KPMG in china
the industry at large in these jurisdictions
will be in harmonizing (or otherwise) the
existing statutory measurement rules
with those of the iasB’s insurance
contracts standard when it is issued.
One of the key activities for asPac
insurers over the coming 12 months
1. Evolving Banking Regulation: A marathon or a sprint?
KPMG international, november 2010.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
02
ORSA-ERM revisited
Increasing protection
across all sectors, risk management has received significant
attention. industry efforts in this regard have been, and continue to
be, considerable. Of all the new iais standards, erM is the most
significant. The standard now requires supervisors to seek high
standards of risk management and governance from insurers and,
critically, supervisors are being encouraged to challenge the insurers
they regulate on risk management issues. in particular, the iais
standard requires an Own risk and solvency assessment (Orsa)
under which an insurer undertakes its own forward looking self
assessment of its risks, corresponding capital requirements and
adequacy of capital resources.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 17
for the first time, world-wide supervisory development; they will be responsible for In delivering the ORSA, firms
regimes will now be expected to require developing content, reviewing the inputs will need to go further than
from insurers an erM framework that of others and considering outputs related
provides for the identification and to their areas as shown in Diagram 2. current practice to deliver a
quantification of risk. it must be under specifically, the insurer will be process fit for the business
a sufficiently wide range of outcomes required to have a risk management and regulatory purposes.
using techniques that are appropriate to policy which outlines how all relevant
the nature, scale and complexity of the and material categories of risk are
risks the insurer bears and adequate for managed, both in the insurer’s business
risk and capital management for solvency strategy and in its day-to-day operations.
purposes. The insurer’s measurement of The risk management policy will be
risk will need to be supported by accurate expected to describe the relationship
documentation providing appropriately between the insurer’s tolerance limits,
detailed descriptions and explanations regulatory capital requirements,
of the risks covered, the measurement economic capital and the processes
approaches used and the key and methods for monitoring risk. The
assumptions made. risk management policy will also need
in delivering the Orsa, firms will to include an explicit asset-liability
need to go further than current practice Management (alM) policy which clearly
to deliver a process fit for the business specifies the nature, role and extent of
and regulatory purposes. The functions alM activities and their relationship with
involved in the process will feed into product development, pricing functions
the Orsa at different stages of its and investment management.
Diagram 2: The ORSA Process
ORSA process
Board driven process – understanding and challenging results
Areas involved Key output
Material risk assessment
Risk management Dynamic reporting
Business planning Economic capital Regulatory
and strategy assessment reporting
Corporate and
Risk appetite risk strategy
Economic capital Documentation
model Business planning
Standard formula/
regulatory capital
Stress and scenario testing
Regulators
source: KPMG international, february 2011.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
18 | evolving insurance regulation | March 2011
insurers will be required to have a risk Diagram 3: ORSA Design
management policy that is reflected in
an explicit investment policy, which
specifies the nature, role and extent of Evaluating past Looking towards future
the insurer’s investment activities and and present solvency requirements
solvency required
outlines how the insurer complies with Risk profile
Technical provisions Solvency projections
the regulatory investment requirements Decision-making Strategy link
established by its regulator. further, the Overall solvency needs Stress tests
insurer will need to demonstrate how it SCR deviations
has established explicit risk management
procedures within its investment policy; Own assessment
particularly relating to more complex and ORSA design Application across
less transparent classes of assets, its the business
Standard formula/Internal
investment in markets or instruments model Proportionality
that are subject to lighter governance or Integration – multi- Valuation
regulation, including explicit policies in disciplinary requirement Independent challenge
Frequency – metrics Documentation/ORSA report
relation to underwriting risk.
Decision-making
The iais erM standard will also
require insurers to establish and maintain
source: KPMG international, february 2011.
a risk tolerance statement which sets
out its overall quantitative and qualitative
risk tolerance levels. it defines tolerance an Orsa is a bespoke strategic analysis There is currently no single
limits that take into account all relevant process which links together the outputs approach to designing an ORSA
and material categories of risk and the of risk, capital and strategic planning,
relationship between them; to make use to determine the current and future and this reflects the intent by
of its risk tolerance levels in its business capital requirements of the firm, based regulators who have been
strategy; and embed its defined risk on the business strategy and external deliberate in not providing
tolerance limits in its day-to-day environment.
operations via its risk management in essence the Orsa should outline prescription.
policies and procedures. the clear relationship between a number
There is also a requirement that of key business processes as illustrated
the insurer’s erM framework is in Diagram 3.
responsive to changes in its risk profile.
By incorporating a feedback loop, based ORSA Design
on good quality information, management There is currently no single approach
processes and objective assessment, to to designing an Orsa and this reflects
enable the insurer to take the necessary the intent by regulators who have been
action in a timely manner in response to deliberate in not providing prescription,
changes in its risk profile. in order to keep this very much a firm’s
‘own’ assessment. That in itself provides
ORSA significant implementation challenges
Perhaps the most significant feature of for insurers.
the iais erM standard is the requirement an Orsa must demonstrate how the
for an insurer to regularly perform an insurer’s strategy and risk management
Orsa to assess the adequacy of its risk links with its management of capital
management and current, and likely future, (economic and regulatory) and the
solvency position. relationship between the insurer’s
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 19
tolerance limits and processes and
What are the implications?
methods for monitoring risk. Key to this
process is demonstrating the linkages
between corporate governance and • The Board and senior management amongst business units and
Board responsibilities, economic capital, will need to demonstrate that they group entities is a considerable
erM and business and strategic planning have conducted their own review of weakness of many large Orsa
processes. the risks to which they are exposed programmes.
at its heart, the Orsa will require and to assess their own solvency • identification of key resources and
input from key stakeholders, which will needs. They will need to demonstrate specific skill sets across all relevant
require multidisciplinary teams working that the Orsa is an integral part business units will be required in
closely together to deliver the Orsa. as of managing the business against the order to ensure successful delivery of
a minimum, this should include: risk, finance, company’s chosen strategy and that the technical necessary input
strategy, actuarial, audit, compliance, and it is used in assisting strategic and that appropriate personnel are
human resource and treasury operations. decision-making. The ultimate fully engaged.
success of an Orsa is in being able • Given the Orsa inputs will come
increased Board and senior to demonstrate a thorough integration from a multitude of stakeholders
management responsibilities of the process and outputs within and the outputs will be in varied
The insurer’s Board and senior business as usual activities such as formats, ensuring appropriate and
management must be responsible for Board oversight and responsibilities, timely management information is
the Orsa and encompass all reasonably strategic planning, risk and capital critical in providing a firm with the
foreseeable and relevant material risks. management, governance and ability to report adequately on its
The minimum requirements include internal controls and reporting and current status.
underwriting, credit, market, operational disclosure elements. • The requirement to evidence the
and liquidity risks and additional risks arising • Data and system issues are likely to Orsa will make documentation
due to membership of a group. Where a present significant challenges. The extremely important particularly
risk is not readily quantifiable, for instance Orsa will need to rely on robust risk for external reporting purposes.
some operational risks, or where there metrics and information particularly • it is expected that the rating agency
is an impact on the insurer’s reputation, for performing capital (Pillar 1) community will utilise the Orsa
an insurer should make a qualitative calculations. This will become even report to provide them with a single
assessment that is appropriate to that more important where no internal source of information conveying the
risk and sufficiently detailed to be useful model exists. Bringing together these regulatory and internal management
for risk management. The assessment inputs will require a clear and well view as to the financial strengths of
is required to identify the relationship articulated programme plan the firm and the sophistication of its
between risk management and the level in order to obtain key stakeholder risk management. it is therefore
and quality of financial resources needed buy-in and support. essential that insurers aim to capture
and available. • failing to appropriately manage all the risk management processes
the various cultural perspectives within their organisation in order to
or appreciate the differences in convey the most compelling evidence
approach, input and emphasis for external purposes.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
20 | evolving insurance regulation | March 2011
The insurer will be expected capital considerations increased modelling capabilities and
importantly, with regard to economic sophistication required
to apply reverse stress testing
and regulatory capital, an insurer will The insurer will be required, as part
to identify scenarios that would be required to determine, the overall of its Orsa, to analyse its ability to
be the likely cause of business financial resources it needs to manage continue in business, and the risk
failure... and the actions its business given its own risk tolerance management and financial resources
and business plans, and to demonstrate required to do so over a longer time
necessary to manage this risk. that supervisory requirements are met. horizon than has previously typically
it must base its risk management actions been used to determine regulatory
on consideration of its economic capital, capital requirements. in carrying out its
regulatory capital requirements and continuity analysis, the insurer will be
financial resources, including its Orsa expected to apply reverse stress testing
and assess the quality and adequacy of to identify scenarios that would be the
its capital resources to meet regulatory likely cause of business failure (e.g.
capital requirements and any additional where business would become unviable
capital needs. or the market would lose confidence
in it) and the actions necessary to
manage this risk.
Diagram 4: Board driven process
Board driven process
Business planning
and strategy
Standard formula/ Economic capital
regulatory capital
Risk management
source: KPMG international, february 2011.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 21
an insurer’s continuity analysis will be asPac
Issues to consider
expected to address a combination of none of the above will be surprising to
quantitative and qualitative elements in regulators or insurers in the asPac
the medium and longer-term business region, where the principles of erM are • Will your Orsa be a real business
strategy and include projections of its well understood, if not yet embedded tool that can be used to drive
business strategy and decision
future financial position and analysis of in current regulations. There is clear
making at both a Group and
its ability to meet future regulatory capital appreciation amongst regulators across
solo level?
requirements. The insurer’s continuity the region that sound risk management
• is your organisation able to bring
analysis may, for example, include is fundamental to healthy development
together all aspects of the business
projections over three to five years (or and growth of the industry, and this is an
and the activities it undertakes so
another period appropriate to the insurer’s area of focus for many.
the risk and capital implications can
business) even where regulatory capital
be assessed in the aggregate?
requirements are typically determined north america
• are your processes consistently
over a one year time horizon. Despite the risk-focused examination
embedded and managed across the
process undertaken in the Us, the
business or Group to ensure delivery
strengthened supervisory oversight adoption of an Orsa tool to complement
and integration of the Orsa?
supervisors will be expected to these reviews is under consideration
• The Orsa is required to be forward-
undertake reviews of an insurer’s risk by a task force supporting the naic’s
looking considering future capital
management processes and its financial solvency Modernization initiative. The
needs, while taking into account
condition, including the Orsa. Where use of an Orsa and its contents need
past performance and lessons
necessary, the supervisor will be able to be defined together with a clear
learnt. How capable would your firm
to require strengthening of the insurer’s understanding of its purpose and how be in undertaking an Orsa now?
risk management, solvency assessment it fits alongside other tools that may be • is your organisation able to
and capital management processes. in place such as an erM framework. a demonstrate continuous compliance
in undertaking its Orsa, the insurer key challenge will be the principle-based with the regulatory capital and
will be required to consider the extent to nature of an Orsa – that its form will technical provisions requirements?
which the regulatory capital requirements be different for each insurer, and there • are your stress and scenario analysis
(in particular, any standardised formula) is a need to for regulators and insurers capabilities able to fully capture and
adequately reflect its particular risk alike to understand how an Orsa can evidence adequate capital and risk
profile. in this regard, the Orsa be implemented in a proportional way. understanding?
undertaken by an insurer will be a key There are industry concerns about the
source of information to the supervisor confidential information that is contained
in reviewing the adequacy of the within an Orsa. at the naic conference
regulatory capital requirements of the in October 2010, after a period of
insurer and in assessing the need for consultation, it was decided to push ahead
variation in those requirements. with the development of an Orsa tool.
Where necessary, the supervisor
will be able to require
strengthening of the insurer’s
risk management, solvency
assessment and capital
management processes.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
03
Accounting, valuation
and disclosure
Aiming for convergence…
There has been considerable debate world-wide concerning
international financial reporting standards (ifrs) developments
by the international accounting standards Board (iasB), particularly
in regards to the valuation and measurement of insurance contracts.
comments on the iasB exposure draft (eD) on insurance
contracts closed 30 november 2010, and the responses are
discussed in the January 2011 ifrs insurance newsletter2. While
the iasB is still striving for a final standard for this year, this heralds
a potential step-change in international insurance accounting –
holding out the encouraging prospect of converged world-wide
accounting and reporting requirements for insurance contracts. The
aim is to improve comparability, provide for greater transparency of
insurers’ financial statements (which are often criticised for being
opaque) and reduce inconsistencies in insurance financial reporting.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 23
The eD’s approach to measuring asPac a single composite margin. ifrs
insurance contracts is based on four as Martin noble discusses in the ASPAC adoption in the Us is still being
‘building blocks’. Perspective on page 14, local statutory considered but it is clear that any such
The first building block is an explicit, reporting in asPac is often ifrs-based decisions will have significant
unbiased and probability-weighted and already impacts small and large implications for Us insurers.
estimate (i.e. expected value) of future insurers alike. aPra in australia is
cash flows that will arise as the insurer considering changes to the recognition, A source of contention for many
fulfils the insurance contract. valuation and measurement of insurance insurers is the term structure
The second building block proposed contracts following the iasB’s eD, as
is an adjustment of the future cash flows part of the ifrs project. china has also to be used to discount future
for the time value of money, using recently introduced significant changes cash flows.
discount rates that: to insurance financial reporting which
• are consistent with observable current pre-dated the eD, but are generally
market prices for instruments whose consistent with it.
characteristics reflect those of the a source of contention for many
insurance contract liability, in terms insurers is the term structure to be used
of, for example, timing, currency and to discount future cash flows. asPac
liquidity; and insurers may find calibrating assumptions
• exclude any factors that influence the relating to the risk free rate and liquidity
observed rates but are not relevant to premium proposed by the eD challenging
the insurance contract liability. in markets where local debt markets
are not deep and liquid and swap
The third building block is an explicit risk markets limited.
adjustment representing the maximum
amount the insurer would rationally pay north america
to be relieved of the risk that the ultimate in the Us, statutory accounting
fulfilment cash flows exceed those Principles (saP), via statutory reporting,
expected, determined using one of remains the main focus for many insurers
three calculation techniques permitted even with the joint project now underway
by the eD. between the iasB and fasB regarding
finally, the fourth building block is a insurance contracts. The iasB has issued
residual margin, which eliminates any an exposure draft and fasB a discussion
gain at inception and is ‘locked-in’ (i.e. paper on this subject. The timeline for
not re-measured) and amortised over completion of the exposure draft and
the coverage period on the basis of the discussion paper is not known. There are
passage of time, or the expected timing divergences in a number of areas, but
of incurred claims and benefits, if that also similarity, a debate highlighted from
pattern differs significantly from the the G20 summit in seoul3. The principal
passage of time. if blocks one to three area where there is a divergence is in the
would result in a loss at inception, number of the building blocks, with the
that loss is recognised in the income fasB using three building blocks, 2. “analysis of responses to the insurance proposals”, IFRS Insurance
Newsletter, KPMG ifrG limited, January 2011.
statement immediately and no residual combining the concepts underpinning 3. Convergence on the agenda, but divergence on the cards?
Developments from the G20 Summit in Seoul, KPMG international,
margin is required. the risk margin and residual margin into november 2010.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
24 | evolving insurance regulation | March 2011
IAIS valuation The iais valuation standard is expected Underlying the IAIS solvency
The iais has been undertaking its own to cover both measurement and standards is a desire to achieve
work on the valuation of assets and reporting requirements:
liabilities, including technical provisions, • The valuation addresses recognition, greater levels of transparency
for solvency purposes. Development derecognition and measurement of to their supervisors and the
of this standard and guidance paper has assets and liabilities; public, so that insurers are more
proven to be one of the most difficult • The valuation of assets and of liabilities
for iais members given the regional is undertaken on consistent bases; disciplined in their actions.
differences that apply to regulatory • The valuation of assets and liabilities
accounting and reporting requirements. is undertaken in a reliable, decision
Despite these issues, the iais useful and transparent manner;
standard will be constructed such that it • The valuation of assets and liabilities
is very aligned with the iasB’s proposals; is an economic valuation;
a key over-riding aim of the iais is to • an economic valuation of assets and
ensure that the methodologies used liabilities reflects the risk-adjusted
in calculating items for general purpose present values of their cash flows;
financial reports can be used for • The value of technical provisions and
regulatory reporting purposes as far as other liabilities does not reflect the
possible. This will limit changes to a insurer’s own credit standing;
minimum, so that regulatory reporting • The valuation of technical provisions
does not diverge unless absolutely exceed the current estimate by a
necessary. margin (Margin Over the current
a key feature of the iais deliberations estimate or MOce);
has been around how the valuation of • The current estimate reflects the
assets and liabilities for solvency purposes expected present value of all relevant
needs to take account of a total balance future cash flows that arise in fulfilling
sheet approach to solvency assessment insurance obligations, using unbiased,
and the interplay between available current assumptions;
capital resources and required regulatory • The MOce reflects the inherent
capital. at the same time, it is recognised uncertainty related to all relevant
that there may be differences between future cash flows that arise in fulfilling
accounting and regulatory standards insurance obligations over the full time
regarding the valuation of assets and horizon thereof;
liabilities for general purpose financial • The valuation of technical provisions
reporting. allows for the time value of money.
The solvency regime establishes
criteria for the determination of
appropriate interest rates to be used in
the discounting of technical provisions;
and
• The solvency regime requires the
valuation of technical provisions
to make appropriate allowance for
embedded options and guarantees.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 25
These requirements will herald a
What are the implications?
significant change in many jurisdictions
regarding how insurance contracts
are measured and reported and the • The iasB and iais changes to resources and costs. early budgetary
impact of this change should not be valuation measurement, recognition preparations and contingency
underestimated. and reporting of insurance contracts plans should now be undertaken.
further amendments to the iais – especially the move to a market- • Pro-active action taken now should
valuation standard are expected as a consistent and economic balance lead to insurers being able to gain
result of the formal consultation process, sheet complemented by risk-based competitive benefits by aligning
which is expected to commence in Q1 capital requirements from regulators data and systems with liaison and
2011. The iais is scheduled to formally – will prove extremely challenging for coordination activities.
adopt the valuation standard and for it to many insurers. • The new valuation rules are likely
become effective as applying to all • such changes are likely to require to require transitional arrangements
jurisdictions world-wide from Q4 2011. insurers to re-engineer their existing particularly concerning changes to
processes to facilitate and possess financial information. This will require
Disclosure timely and robust measurement clear and concise communications
closely aligned with the valuation and reporting capabilities – applying with external stakeholders such as
developments are the supervisory increased pressure on both analysts, shareholders and supervisors.
review and reporting requirements,
now beginning to be discussed at
Issues to consider
an international level. The aim is to
harmonise and converge reporting and
disclosure requirements particularly • Have you fully considered the extent • How prepared is your organisation
given the ifrs changes. of changes to valuation measurement, for meeting the new disclosure and
Underlying the iais solvency recognition and reporting of insurance reporting requirements, particularly
standards is a desire to achieve greater contracts and what impact these with regard to risk and capital
levels of transparency to their changes may have on your business? management information?
supervisors and the public, so that • Will the move to a market-consistent • Will your firm be able to meet the
insurers are more disciplined in their and economic balance sheet increasing technical demands
actions. While the iais does not yet complement your internal risk-based expected? Do you have the right
specify reporting requirements such as a capital capabilities? capabilities and skill sets of staff
public solvency and financial condition • Have you undertaken impact especially in regards to actuarial,
report (sfcr) under solvency ii, it is assessments to identify changes risk and finance operations to fully
very likely that most supervisors will to data and technology to meet implement the new demands and
establish a similar framework, which new calculations? changes expected?
requires a private regular (typically • Have you commenced high level • How will you prepare yourself to
annual) supervisory report (which may modelling to understand impact understand and explain differences
also take the form of simplified quarterly on returns of proposed changes? arising under different reporting
reports) and a public sfcr that increases • Do you know the impact on back systems?
the level of disclosure required of office and risk management processes
insurers. at present, the Us financial of changes in insurance contracts?
reporting requirements, data collection
and system analysis is considered by
many as the most comprehensive.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
04
Investments and liquidity
Improving cash flow and flexibility
insurers remained relatively stable during the financial crisis because
their business model is fundamentally different from that of banks.
Unlike banks, they are funded by upfront premiums, so they do not
generally rely on wholesale market funding for liquidity. insurance
policies are also generally long-term, with controlled outflows, and
investments are generally matched to liabilities.
another factor which assisted insurers cope well with the crisis is
that under many rBc solvency capital regimes, insurers are required
to hold capital for asset risks. This meant that many insurers were
holding significant capital reserves to meet those risks (such as
exposure to falling equity markets or lower quality investments).
in australia, for example, such capital is required against valuation
risk, concentration risk, mis-matching risk and credit risk.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 27
Investments a specific issue for regulators, which Such focus will continue to apply
However, the Gfc highlighted across arose during the Gfc, was whether pressure on the robustness of
the world that there are no uniform off-balance sheet vehicles truly were
investment requirements or asset class off balance sheet, or whether in stress the systems and controls used
restrictions from supervisors. each scenarios losses should be recognised in the insurer’s risk management
jurisdiction essentially has bespoke due to implicit obligations of support, and Asset Liability Management
requirements on the investments unhedged derivatives or from structured
permitted to be held by insurers. The credit products. increased scrutiny of (ALM) practices.
absence of such a standard raised such investments can now be expected
particular issues regarding how the by regulators world-wide.
iais responded to concerns being similarly, the issue of whether an
addressed by the fsB, such as liquidity insurer’s assets are sufficiently secure
given the impact of this risk on the has received increased attention,
banking sector. particularly concerning whether undue
in response, the iais standard on reliance is placed on credit rating
investments addressed many of the agencies. The Gfc has prompted
issues which arose immediately many supervisors to require insurers
following the crisis. recognising the to become more aware of the limitations
diverse positions held by regulatory in relying on credit ratings and to require
authorities to investments, the iais insurers to undertake more due diligence
standard allows either a principles-based in assessing their counterparty credit
or a rules-based approach, or a mixture of risk exposure. such focus will continue
the two, in setting regulatory investment to apply pressure on the robustness
requirements. The standard allows the of the systems and controls used in the
solvency ii approach of the prudent insurer’s risk management and asset
person principle particularly in relation liability Management (alM) practices.
to the requirements regarding the
asset portfolio, where, at a minimum, Insurance groups
regulatory investment requirements for insurance groups, the significant
will be expected to address the security, focus of regulators is now turning to the
liquidity and diversification of an insurer’s degree of transferability and fungibility
portfolio of investments as a whole. of capital, the inherent investment risk
insurers will be expected to invest at the insurance legal entity level and the
in a manner that is appropriate to the overall risk exposures at an aggregated
nature of their liabilities and invest only level across the group. Of particular
in assets whose risks they can properly concern is whether investments
assess and manage. in relation to undertaken by certain legal entities can
specific financial instruments, solvency weaken the group and whether intra-
regimes will be expected to establish group investments pose additional risks
quantitative and qualitative requirements, given any explicit or implicit support
where appropriate, on the use of more arrangements.
complex and less transparent classes The Gfc highlighted situations
of assets and investment in markets where supervisors were concerned both
or instruments that are subject to less at their lack of power to prevent capital
governance or regulation. solvency ii flight across national borders in stress
has outlined such measures already conditions, and insurers’ inability to
for innovative arrangements such as mobilise capital at short notice in stress
special purpose vehicles. circumstances. This is particularly
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
28 | evolving insurance regulation | March 2011
significant given that many regimes This position reflects the inherent In many countries, insurers are
focus on regulating legal entities rather difference between the banking and typically required to hold assets
than on groups and supervisors in many insurance models. Primarily the
countries do not yet have the full legal difference is between deposits and substantially in excess of their
power or capability to undertake group wholesale funding in banking compared liabilities at a local subsidiary
supervision. This has led to supervisors to the insurance model where premiums, level, and these are sometimes
questioning whether diversification are received and invested ahead of the
benefits are real, if they cannot be crystallisation of claims and benefits ring fenced from the insurer’s
achieved with certainty in stress payments. This results in a fundamental other operations.
conditions. difference between the balance sheets
all of these concerns mean that of the two sectors. While insurers need
investments, particularly those held at a liquidity to pay claims, the pattern of
group level, must be monitored to ensure claims payments, especially for most
that they are sound, appropriate and able life firms is usually reasonably stable and
to be accessed when needed to support predictable. Product designs typically
capital or liquidity requirements in stress contain safety mechanisms, such as
conditions. in our view, insurance groups surrender charges, to protect against
that fail to adequately address these spikes in liquidity. Generally, while the
issues by being able to verify benefits claims payments for general insurers
such as diversification will find their may be less predictable, peak risks
supervisors increasingly likely to question associated with natural catastrophes are
the group’s overall financial resources not generally correlated with periods of
and capital requirements. economic distress. However in stress
conditions insurers may ‘gamble for
Liquidity survival’ by writing unprofitable new
The Gfc resulted in a number of business in order to generate cash to
initiatives by banking regulators satisfy claims payments expected in
concerning liquidity requirements and the near term.
these actions continue. in insurance, However, liquidity risk is generally
despite pressure from the fsB to the considered to be lower in insurance,
iais to examine potential reform of with most supervisors focusing on
liquidity requirements, there has to date asset-liability matching principles and
been no changes. even though some general risk management requirements
industry participants acknowledge that as a means to addressing any potential
certain activities, such as commercial liquidity issues. recently, this has been
paper borrowing and stock lending reinforced by increased demands from
activities, may theoretically pose liquidity supervisors to stress test investment
issues, the general consensus has portfolios and even to apply reverse
been that an insurer’s asset-liability stress tests to better assess liquidity
management is likely to protect against positions of insurers, particularly in
significant liquidity problems. regards to the risk of a sudden
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 29
withdrawal of policyholders with
What are the implications?
guaranteed surrender values.
in addition, in many countries, insurers
are typically required to hold assets • The liquidity issues are clearly their investment portfolios and
substantially in excess of their liabilities different for insurers compared to allow greater use of innovative
at a local subsidiary level, and these banks, however regulators have investments. relaxation of permitted
are sometimes ring fenced from the still increased their attention and asset rules will be offset by
insurer’s other operations. for example, enquiries regarding insurers’ increasing oversight of insurers’
all carriers in singapore must hold their cash flows. asset-liability processes,
local and foreign insurance business in • The use of risk measurement management oversight, governance
separate funds, with surplus assets held techniques such as stress and and related systems and controls.
in each fund which are in excess of their reverse stress tests and scenario • increased reliance on supervisory
domestic and foreign liabilities. analysis tools requires insurers to oversight of the insurer’s own
invest properly in ensuring that investment strategies will require
asPac their short and long term liquidity greater focus on clear articulation of
cash flow and liquidity risks are a positions are clearly understood risk appetite, the insurer’s risk profile,
particular area of focus for regulators and managed. risk tolerance and overall financial
across much of the asPac region, in • changes to permitted asset objectives. insurers will need to
particular in jurisdictions where local admissibility criteria in jurisdictions ensure that their controls over
debt markets are less deep and liquid. embracing a prudent person investments held to cover technical
Duration matching may not be achievable approach are likely to provide insurers provisions and capital requirements
because there are insufficient assets of a with greater flexibility in managing are fit for purpose.
duration to match insurers’ longer term
liabilities, giving rise to reinvestment risk.
Issues to consider
• How robust is your liquidity planning, • Do you appreciate the implications
governance and modelling? for pricing, funding and regulatory
• How adequate and robust is your ratios in your firm?
cash-flow analysis? • Do you have sufficient awareness
• Do you understand the risk profiles of of investment guarantees and
different investments currently held? embedded options contained in
are you sufficiently aware of the policies?
extent of investment guarantees and • are you sufficiently aware of the
embedded options contained in impact of changes on your
policies and the potential impacts investment strategy given increased
these may have on your financial regulatory attention to off-balance
resources? sheet and ‘non-regulated’ activities?
• are systems, data and management • Do you have a clear picture of
reporting adequate to meet your portfolio management strategies
needs in stress conditions? required to properly take account of
• Have you considered your approach changes in risk profile and capital?
to stress testing and the data • are your systems and data capable
required? of satisfying the new reporting
• What are your communication plans and supervisory information
for new requirements? requirements?
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
30 | evolving insurance regulation | March 2011
Perspectives:
Europe
Implementing the new regime
Due to be implemented in 2013, are focussed upon are the outcomes Such proposals can only succeed
solvency ii will herald a new era of that such regulation provides – which is if there is true international
prudential regulation across europe. ultimately better policyholder protection.
although the development of solvency ii solvency ii will also focus on group agreement around prudential
was well underway before the global supervision and group solvency of requirements. This is why the
financial crisis (Gfc) of 2008/09, its international insurers operating in the IAIS ComFrame work is so
risk-based approach and focus on eU, and include provisions that will
governance, group supervision and allow greater cooperation with overseas important.
regulatory cooperation has been widely regulators.
accepted as the best way to mitigate The new regime will also pay more
future crises. attention to:
solvency ii will, for the first time, • Group supervision and to assessing
require insurers to identify, measure group risk;
and proactively manage risk, as well as • strengthening the powers of group
consider future developments, such as supervisors;
new business plans or catastrophic • fostering greater cooperation
events that might affect their financial between regulators; and
standing. The new rules also require far • furthering supervisory convergence.
greater levels of public and regulatory
disclosure. The crisis did, however, influence the
Under the new regime, insurers will development of solvency ii and the
be able to use approved internal models ongoing calibration of the regime.
to calculate their capital requirements, an earlier version of the framework
in consultation with supervisors. proposed a group support regime,
alternatively, insurers can use a standard enabling insurers to pool capital
formula and in both cases will be required resources across the group, rather
to hold capital against all risks to the than hold funds at a member state
balance sheet, including operational, level. against the backdrop of the Gfc,
credit and market risks, which are some eU states opposed the concept
currently not considered by solvency i. and group support was consequently
in recognition that one-size may not dropped from the final framework
fit all, solvency ii also recognises the directive, with a review planned for
need for flexibility under the framework, the end of 2015. in my view such
depending on the nature, scale and proposals can only succeed if there is
complexity of the company. The principle true international agreement around
of proportionality is intended to reflect prudential requirements. This is why the
the range of insurance entities operating iais comframe work is so important.
in europe, from small specialist carriers
and mutual insurers up to complex So what are the main features of
international financial services groups. Solvency II?
The regime will allow for the principle of in essence, solvency ii is constructed
proportionality to apply to the calculation using a three pillar approach as outlined
of capital requirements, to the review of in Diagram 4.
the risk management and governance Pillar 1 outlines the financial
processes as well as to the disclosure requirements. This pillar aims to ensure
requirements. i believe this is good news firms are adequately capitalised with
for all insurers as it demonstrates that risk-based capital. all valuations of assets
what european insurance supervisors and liabilities in this pillar are to be done
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
in a market consistent manner. This pillar Equivalence Equivalent reinsurance to receive
also includes the potential use of internal solvency ii also recognises the international equal treatment
models, which, subject to stringent dimension of insurance and the ties The Directive allows for the conclusion
standards and prior supervisory approval, that exist between insurers operating of mutual recognition agreements
enables a firm to calculate regulatory in europe and certain other markets. with third countries concerning the
capital requirements using its own in order to assess the risks to european supervision of reinsurance entities that
internal model which is more tailored to policyholders, eU supervisors will need conduct business in member states.
its risks than the standard formula. to consider factors at a group level, reinsurers that are covered by an
Pillar 2 is concerned with imposing potentially including group entities and equivalent regime will be treated the
standards of risk management and subsidiaries outside the eea. This has led same as eU reinsurers, but those that
governance within a firm’s organisation. the eU in its development of solvency ii, are based in non-equivalent regimes
This pillar requires supervisors to to consider recognising the supervisory may be required to pledge assets to
challenge their firms on risk management work of overseas insurance entities cover unearned premiums and claims
issues. The Orsa requires a firm to through the concept of ‘equivalence.’ provisions, or localised assets for risks
undertake its own forward looking self The provision of equivalence in situated in the eU.
assessment of its risks, corresponding solvency ii recognises the potential to Unrated equivalent reinsurers will
capital requirements and adequacy of reduce the duplication of supervision be treated as having a 10 percent
capital resources. between regulators and compliance for probability of default, or a B/ccc credit
Pillar 3 aims to achieve greater levels of insurers with operations outside the eU. rating, while equivalent non-rated
transparency to their supervisors and the The provisions allow the eU and reinsurers will be considered BBB under
public so that firms are more disciplined member state regulators to assess the the standard formula for assessing
in their actions. There is a private annual supervisory regimes of countries outside capital requirements.
regular supervisory report and a public the eea-known as ‘third countries,’ in
solvency and financial condition report particular where an eU insurer transacts
that increase the level of disclosure business with non-eU reinsurers; where
required by firms. it operates on a global level; or where it
may be part of a non-european group.
Diagram 4: Three Pillar Approach
Three Pillar Approach
Pillar 1 Pillar 2 Pillar 3
Quantitative capital requirements Qualitative requirements and Reporting, disclosure and
• Balance sheet (including technical supervisory review market discipline
provisions) • Governance, risk management and • sfcr and rsr
• Minimum capital requirement (Mcr) required functions • Disclosure
• solvency capital requirement (scr) • Own risk and solvency assessment • Transparency
• investment principles • supervisory review process • support of risk-based supervision
through market mechanisms
Market-consistent valuation Business governance risk-based Disclosure transparent markets
risk-based requirements supervision
source: KPMG international, february 2011.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
32 | evolving insurance regulation | March 2011
Regulator can use discretion when The eU will assess the equivalence of Equivalence would make EU
considering group supervision third-country regimes in waves of supervision more effective,
solvency ii also allows for supervisory assessments. in prioritising assessment
equivalence when calculating group the eU will consider which countries reducing the compliance burden
solvency and group supervision of are most relevant in terms of providing for insurers and making for
non-eU headquartered groups. The eU reinsurance to eea insurers, where eU more effective regulation of
regulator may require a group-wide insurers have substantial amounts of
solvency assessment, risk management business, and where groups operating international groups.
and an Orsa, even if the entity is based in the eU have foreign ownership.
outside the eU. switzerland, Bermuda and Japan
However, the eU regulator may (for reinsurance) are to be assessed in
take account of a third country capital the first wave, under the advice from
requirement in its solvency assessment, european insurance and Occupational
and can use its discretion when assessing Pensions authority (eiOPa). a noticeable
group solvency, it can also use alternative omission from this list is the Us, where
approaches to determine the most the state by state approach to insurance
effective means of supervision. regulation poses challenges in assessing
in its consultation paper on assessing equivalence. The implication of the Us
third countries for equivalence, ceiOPs not gaining equivalence could have a
says that third country regimes would significant impact on Us insurers caught
be expected to provide a similar level of by solvency ii.
policyholder protection as that provided
by solvency ii. However, when
assessing each principle and objective
not every ‘indicator’ would need to be
met, and proper consideration would be
given to the concept of proportionality.
Which countries are likely to seek
equivalence with Europe?
The inclusion of provisions for equivalence Rob Curtis
reflect the eU’s recognition of the regulatory centre of excellence
international nature of the european eMa region
insurance market and its close ties with KPMG in the UK
other markets. equivalence would make
eU supervision more effective, reducing
the compliance burden for insurers and
making for more effective regulation of
international groups.
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 33
What can others learn from
the Solvency II experience?
While solvency ii has just under two • Boards and senior management found it more difficult to manage
more years before becoming effective, have needed clear strategic plans the competing priorities that
there are already clear lessons to be and purpose regarding programme invariably arise between business-
learned from the experiences of many sponsorship and to set clear as-usual activity and meeting project
insurers which have a read-across to accountabilities and establish agreed deliverables.
the nature of change that will be deliverables. Most solvency ii • ensuring timely and effective
required for non-european insurers programmes have needed a strong management information is absolutely
in implementing Orsa and internal project team to provide a clear and essential to most solvency ii projects.
model programmes. some of these well articulated programme plan Too often reporting lines have
key lessons are: creating the necessary road-map been opaque for meeting delivery
• Don’t under-estimate the time and for stakeholder input and continued schedules and information flows
resources required to implement involvement. have suffered.
the changes needed. solvency ii is • a major challenge for all european • Documentation requirements are
an enormous change programme insurers has been in setting risk extremely important for solvency ii,
affecting every part of the business appetite and risk limits. ensuring the especially as the review of any work
from risk and capital management, integration of these elements into the performed will need to be supplied
to governance and internal controls, insurer’s economic capital, Orsa and invariably to external audiences
Board oversight and responsibilities to internal model framework has proven namely supervisors, credit rating
reporting and disclosure. effectively to be both complex and involved. agencies and analysts. The quality
every facet of an insurer’s business careful planning and analysis has and cohesiveness of this material
requires some form of enhancement. been essential. must be of a high order and this
• Good planning and project management • regular feedback and open ultimately places resource constraints
is essential. Key resources and staff communication channels have been on insurers.
with specific skill sets suddenly key to most successful european
become a scarce commodity. early solvency ii programmes across the
preparation and awareness by the business. solvency ii projects have Insurers that have not
Board and senior management are required the collective input from a appropriately appreciated or
needed to fully appreciate the scale wide cast of stakeholders, and this
and complexities involved. has become even more important managed the different cultural
• Data and system issues presented for groups with subsidiaries and perspectives and inputs and
significant challenges for most branches in non-eea countries. communicated the benefits
european insurers. While solvency achieving the right balance between
ii expects reliable and robust local and group requirements and of involvement, have found it
information to calculate Pillar 1 and input has been difficult. more difficult to manage the
technical provision requirements, • for many european insurers, the competing priorities that
in addition to meeting Orsa and solvency ii work has required
reporting purposes, there has also input from many business units invariably arise.
been a fair degree of uncertainty and stakeholders from across the
regarding the veracity of information. business. insurers that have not
One of the issues encountered appropriately appreciated or managed
has been the extent and use of the different cultural perspectives
management actions – particularly and inputs and communicated the
where there are data issues. benefits of involvement, have
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
05
Governance and
internal controls
Changing gears
a number of new initiatives concerning governance and internal in response, a number of jurisdictions,
controls which will impact insurers are being pursued by such as the eU, either have or are in
the process of regulating remuneration.
supervisors. all of these changes are designed to instil the right a key focus for insurance supervisors
behaviours in insurers and establish new skill sets across key will be whether remuneration schemes
functional business areas of risk, finance and strategy. increasingly may increase risk taking within firms
or unduly influence management
supervisors are beginning to examine issues concerning behaviours/ decision making. companies will need
ethics and culture. regulators are considering playing a greater role to review their performance and reward
in assessing behaviour and even ethics; in effect, an insurer’s culture strategies to ensure alignment with
their organisation’s overall risk strategy
is not beyond the remit of regulation. and culture.
insurers will need to be aware of their culture and ‘tone at the top’, Many supervisors also have strict
as this influences behaviour throughout the organisation. The recent ‘fit and proper’ criteria on the suitability
of key persons whether owners or
furore over bankers’ bonuses is an example where regulators are management, namely Board members,
under immense pressure to respond to a financial sector perceived senior management and key persons
as lacking an appropriate ethical framework within which actions and in control functions. a key criterion
for holders of these roles is possession
decisions were grounded, or if such a framework was promulgated of sufficient competence and integrity in
it was not adhered to. the fulfilment of their duties. fit and
proper requirements are likely to extend
to most outsourcing arrangements.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 35
increasingly supervisors want to see
What are the implications?
operational independence of the
main governance functions of risk
management, compliance and actuarial • Through on-site visits, supervisors will be assessed as much as the
with approved persons being responsible are increasingly examining the function. insurers therefore need
for the management of such functions. alignment of strategy, the insurer’s to ensure high quality candidates
The likely trend is that this may even own risk operating model and risk capable of managing these functions
extend to the supervisor requiring that function capabilities and making are selected.
they pre-approve the appointment of judgements about the governance • new areas of regulatory interest are
such function holders. and internal control environment of ethics and culture. Organisations
similarly, supervisors are now the organisations they supervise. it that ignore these important
beginning to expand their expectations of is therefore critical that insurers are considerations may encounter
the risk governance framework employed sufficiently aware of these increased more intrusive supervision.
by insurers, progressively moving to a expectations and are properly • remuneration considerations are
‘three lines of defence’ model. Under this prepared to address any weaknesses. currently very topical and may
approach, functions and business units • above all else, supervisors are become a heightened area of
form the first line of defence, with the moving towards an operating model supervisory inquiry. roles between
oversight functions of risk and control that requires strong accountability by key function holders should be clear
forming a second line of defence, with key function holders. Key individuals and areas of duplication eliminated.
internal audit providing the third line of
defence, through independent assurance
Issues to consider
over the first two lines of the model.
as such, the expectation is that internal
audit is fully independent. sitting above • Do you operate a ‘three lines of • Does your organisation have an
these functions are various governance defence’ model? appropriate ethical framework and
committees – such as the Board risk • Do you regularly review your culture for a regulated entity?
committee, remuneration committee governance structure for • are you ready to demonstrate and
and other executive committees with effectiveness? attest to effective internal controls,
the Board presiding over each. sitting • are roles and responsibilities clear e.g. over risk and capital integration?
independently to the other committees between key function holders? • is your management information
would be the audit committee. clear • can you fulfil requirements to up-skill sufficient to meet the requirements
lines of responsibility, delegated the Board and senior management of the Board and effective risk
authorities and accountability for and demonstrate capability? management?
reporting are fundamental to sound
risk management and insurers will need
to ensure good governance in order to material weakness in the company’s To complement these changes in
fulfil their Orsa commitments. overall governance and risk management regulatory focus, the role of chief risk
supervisors are also beginning to framework and could impact upon the Officer (crO) is increasingly viewed by
assess the risk operating model of the insurer’s capital requirements. supervisors as a necessary function
insurers they supervise. at the centre While risk management is the holder role within insurance companies.
of these considerations are the risk responsibility of the Board as a whole, The challenge for most firms will be to
function’s mandate and the extent to some supervisors are beginning to clearly articulate the responsibilities of
which controls and behaviours are designate at least one member of the the crO, the chief financial Officer,
embedded. supervisors are now Board to oversee the risk management the Head of actuarial and even
assessing the quality of risk advice strategy (rMs). reinforcing the that of a chief compliance Officer.
provided, the risk coordination activities responsibility of the Board, most Demonstrating that these structures
that are undertaken and how they are supervisors will soon be assessing are working effectively will be a major
performed in practice, the extent and the Board’s effectiveness in setting focus for many supervisors going
quality of risk monitoring undertaken strategy, risk appetite, tolerance limits forward and appropriately documenting
and the challenge given to the business and policy. supervisors will also expect such arrangements will be an ongoing
units. This scrutiny may require insurers that the Board is kept fully informed challenge for many insurers.
to strengthen second line functions. of reputational risk exposures and
failure to establish a ‘three lines of the correlation this may have to other
defence’ model may be seen as a key risks.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
06
Customer treatment
Changing conduct of business
it is not only in prudential regulation that significant changes are
occurring. in many markets, substantial changes are being made
to the conduct of business requirements and the fair treatment
of customers.
an example of this is in the UK, where in June 2010 signifant
changes were announced concerning the regulatory tripartite
regime involving the financial services authority (fsa), the Bank
of england and the Treasury, by effectively breaking up the fsa.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 37
it is planned that the fsa‘s responsibilities • selling practices must be focused on The new regulations have the
will be handled by three new agencies: the fair treatment of the investor; potential to create a ripple effect
• reporting to the Bank of england the • investment advisers should ensure
Prudential regulatory authority will be products sold correspond to the profile of change, which will run right
responsible for prudential regulation of and needs of the investor, and that the across organisational structures
all financial firms; investor understands the nature of the and individual corporate
• The financial conduct authority (fca) service being provided by the adviser;
will regulate the conduct of every • if a product is sold without advice, commercial models.
authorised financial firm providing the limits to the service provided and
services to consumers; and risks for the investor must be clear.
• The financial Policy committee, led an assessment of the adequacy of
by the Bank of england, will be the product may still be required in
responsible for addressing macro- some circumstances;
prudential issues. • for both advised and non-advised
sales, conflicts of interest must be
The establishment of the fca as a body avoided where possible, or be
dedicated to consumer issues reflects identified, managed and disclosed in
the thinking behind the fsa’s retail a way that investors can understand;
Distribution review (rDr), due for • for both advised and non-advised
implementation in January 2013, along sales, investors must receive clear and
with the current european commission’s effective disclosures of remuneration
Packaged retail investment Products arrangements and all charges,
(PriPs) consultations. in undertaking commissions or fees paid, in a form
the rDr and planning its subsequent they can use; and
wide-ranging associated regulations the • Those assessing the suitability of
fsa set out their objective as: products must fully understand those
• improving the clarity with which products and their features.
regulated firms describe their services
to consumers; What do these changes mean for
• addressing the potential for financial insurers?
adviser remuneration to distort The increasingly consumer centric
consumer outcomes; and regulatory drive has potentially significant
• increasing the professional standards implications for insurers. The rDr
of advisers. regulations in the UK will outlaw
commission and demand that advice is
This was driven by a belief that adviser paid for from customer fees. it will ensure
remuneration and a lack of transparency that the consumer is clear on the type of
had acted against consumers’ best advice they are receiving and that advisers
financial interests. are significantly more highly trained. The
Meanwhile, the european impacts of such changes are likely to
commission states its objective is to be significant as the changes re-define
create a framework that will provide some of the commercial fundamentals
effective standards for the protection of that underpin the whole pensions and
investors as “they do not understand investment market. as such, the new
products because they are complex and regulations have the potential to create
the accompanying literature is hard to a ripple effect of change, which will run
understand”. Thus the PriP looks to right across organisational structures and
ensure complete clarity on disclosure, individual corporate commercial models.
such that the information is clear, simple compliance with rDr will not be
concise, timely and appropriate, while the end for organisations, because the
the principles on which the selling regulations will demand a more strategic
requirements will be designed include: and pan-organisational response.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
38 | evolving insurance regulation | March 2011
so what are these fundamental market Operational of insurance producers and consumer
shifting changes? They can be This re-shaping naturally leads into the information and consumer assistance
characterised in three areas; consumer, extensive operational impact. alongside services.
markets and operational. the potential requirement for revised Over the last decade progress has
strategies, operating models and been made by Us regulators toward
Consumer innovative customer engagement modernising many of the market
currently consumers can be segmented approaches, are the core requirements regulatory processes. for example, in
and targeted by providers and for product re-design, re-thinking on the area of product filing and review,
intermediaries in a proactive manner, capital requirements, increased regulators and legislators have enacted
since the perception of the vast majority demands on iT and the need for an interstate compact for certain life,
of consumers is that the advice (or sales) improved data quality. annuity, disability income and long-term
process is ‘free’. Thus the customer in many markets, the seeming shift care products. The compact is a system
engagement process is simple and in regulatory focus, from a balanced that seeks to enhance the efficiency and
based upon capturing the consumer’s approach of protecting the consumer effectiveness of the way insurance
attention and advising/‘selling’ to them. within commercially reasonable products are filed, reviewed and
With the new consumer centric boundaries to a purely consumer approved allowing consumers to have
regulation the balance shifts as the protection role, will have major faster access to competitive insurance
consumer now needs to be persuaded implications for the whole market. products in an ever-changing global
to pay for something that they previously marketplace. The compact promotes
perceived to be free i.e. the engagement north america uniformity through application of national
process (and which in many cases they Us regulators have always been heavily product standards embedded with
attached no value to). so advice becomes focused on consumer protection, but strong consumer protections. insurers
the product but will the consumer want the Gfc has added additional pace and now have access to a single point of
to buy it? pressure to modernise and reshape filing and uniform national standards for
market conduct requirements. eligible products. currently 38 states
Markets Within the Us each state is representing over 60 percent of the
The impact on the market is currently responsible for legislating and enforcing eligible premium volume are members
characterised by imponderables: insurance regulation – historically driven of the compact.
• How many independent financial by consumer considerations and the Traditional market conduct
advisors (ifa) will survive by 2015? safety and soundness of the insurance examinations have also been evolving in
• Will product providers and fund industry. However, the financial crisis the Us. The Us regulators are moving
managers create direct distribution has reignited the debate over federal toward increased use of market analysis
offerings to protect their route to regulation and added an international tools to replace the traditional on-site
market? dimension to potential changes in market conduct examination. as part of
• How will platforms re-shape the fee domestic regulation. it should be noted that evolution, regulators have developed
distribution model? that Us insurers generally performed the Market conduct annual statement
• Will new entrants cherry pick much better than their banking (Mcas) to collect pertinent statistical
consumer segments? counterparts during the crisis with information from insurers to evaluate
• Will ifas gravitate to High net Worth 297 Us banks failing in 2009 and 2010, and monitor certain areas of market
clients? compared to only 30 Us insurers over performance. The Mcas submissions
• What will be the impact of consumer the same time period. have been centralized at the naic
use of comparison and on-line peer The Us market regulatory framework with 45 Us jurisdictions participating
advice sites? is broad with resources being devoted in the effort.
to market regulatory issues. areas within a number of Us life insurers were
in this market of moving parts, the broad category of market regulation hit particularly hard by the financial crisis.
organisations need to identify where consist of oversight of insurers’ product variable-annuity policies are a popular
they can succeed and re-shape their development and pricing, monitoring savings product in the Us, and a number
models accordingly. insurer market practices, monitoring of writers of this business offered
competition, statistical reporting, guaranteed minimum death and living
residual market administration, licensing benefits. Us regulators have been
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 39
monitoring the variable annuity writers,
What are the implications?
particularly those with the guaranteed
minimums. it is possible the Us regulators
will encourage more conservatism in the • significant conduct of business • fundamental changes to strategy
offering of guarantees. regulatory changes are occurring and existing business operating
as a result of the challenges in the Us which will have important implications models are likely to be needed for
life industry, there has been a ‘flight to for product development and some markets.
quality’ resulting in a shift in consumer distribution processes. • The capital impact could be
demands. annuity sales in the Us are • increased regulatory focus on significant and will require careful
depressed and more traditional life pushing simplicity and transparency analysis.
products, particularly whole life, are for consumer products will have • There is also likely to be a need
experiencing a resurgence. However, implications for innovation and choice for better iT, data and system
it is uncertain how this recent trend will in consumer products. requirements by insurers.
pan out in the long-term as the needs of • The eU and UK are issuing major • increased reporting and disclosure
the ‘baby boomer’ generation play an changes to distribution of retail requirements will most likely be
increasingly dominant role in the industry. products (PriPs and rDr introduced.
from a regulatory perspective, there respectively) and will be a major
has also been enhanced scrutiny around focus for many insurers.
the suitability of products in the Us,
which historically has always been high
on the regulatory radar. The regulatory Issues to consider
focus has increased and expanded to
look deeper into products such as fixed • How will product strategy evolve • How aware are you of the potential
annuities. to meet and take advantage of risk and capital impacts such changes
The Dodd-frank act established new rules? may have on your business?
the consumer financial Protection • How will the sales process and • increased regulatory focus will
Bureau (cfPB) in July 2010 and as collateral need to change? require many insurers to devote more
yet it remains unclear what insurance • What are the opportunities for resources to conduct of business
products, if any, will be caught under services to customers? issues – are you prepared?
this federal watch dog. additionally, • Will systems, data and reporting be
further insurance reform is slated on in place to meet new requirements?
capitol Hill for 2011.
asPac The financial crisis has reignited
Models of consumer protection vary the debate over federal
significantly in asPac but generally have
not yet embraced the principles based regulation and added an
customer-centricity seen in the eU and international dimension to
UK developments discussed above. potential changes in domestic
instead, many countries still focus on
achieving consumer protection through regulation.
regulatory pre- approval of product
designs and pricing. current areas of
regulatory focus include increasingly
stringent controls over data privacy,
impacting direct marketing and cross-
selling, controls over who may sell
insurance in bank branches and increased
control of selling practices in respect of
investment linked products.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
07
Group-wide and cross-
border supervision
Driving global consistency
considerable efforts continue at an international level to harmonise Group supervision
The Gfc has highlighted the need for
prudential insurance regulations, promoting common standards
effective group supervision and
and approaches, as well as encouraging cooperation between reinforced calls for common principles
supervisors. solvency ii will harmonise regulation in europe, and standards, and greater cooperation
between regulators, in particular for
and potentially open the way to greater cooperation and mutual
cross- border groups and to manage
recognition with other markets. systemic risks. last year, the G20 agreed
Globalisation and the growth of multi-national insurance groups, actions to promote financial regulatory
reform, including greater consistency
coupled with more sophisticated products and financial markets,
and cooperation between countries,
has led to calls for better supervision of cross-border and global and a framework of internationally
insurance and reinsurance groups. agreed high standards.
One of the key findings from the Gfc,
and the role of systemically important
financial institutions (sifis), has
highlighted that monitoring an insurer
only at the legal entity level is not
sufficient. supervisors involved in
group-wide supervision need to be able
to assess all relevant information on all
risks to which the insurance group is
exposed. However, complex and highly
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 41
centralised groups make it almost requirements have been demonstrated However, at present, there are
impossible to rely solely on solo level not only to contribute to enhanced no globally consistent solvency
data to adequately address the risks at market confidence and stability but also
the solo level. indeed, the global size and to facilitate effective banking supervision reporting or measurement tools
complexity of many iaiGs evidences the by providing common understanding and for assessing insurer solvency
need for formal supervisory cooperation, consistent data among the supervisors. amongst supervisors.
including the timely exchange of relevant
information and the need for supervisors So what is changing and what impact
to close any regulatory and supervisory might this have for insurers?
gaps in group-wide supervision. a key Given the scale and complexity of large
issue identified during the Gfc is the insurance groups, the extent of cross-
extent of supervision applied to non- border activities and the importance of
regulated subsidiaries and off-balance such institutions to local and international
sheet items. financial systems, inconsistent
implementation of regulatory and
Comparability and convergence supervisory requirements among iais
The Gfc also highlighted strong members means that the effectiveness
arguments in favour of greater of international supervision is limited. in
convergence of supervisory practice. turn this limits the effective protection of
Despite current changes in many policyholders, the promotion of financial
jurisdictions, the global insurance sector stability and, moreover, may permit
is still subject to different accounting, regulatory arbitrage. inconsistent
capital adequacy and legal regimes standards around the world, could
around the world. This has resulted in allow the relocation of headquarters and
a low level of regulatory harmonisation the transfer of significant risks within a
and convergence of supervisory practice group to a less sophisticated and under-
when compared to the banking sector. regulated jurisdictions, which could
One pertinent issue to arise from G20 result in a greater concentration of risks in
and the fsB driven discussions, has certain jurisdictions. naturally this is of
been the frequent requests to particular concern to supervisors. The lack
supervisors for hard data on insurance of common supervisory standards could
activities. However, at present, there are even trigger a ‘race to the bottom’ by
no globally consistent solvency reporting insurers seeking less sophisticated
or measurement tools for assessing regulation.
insurer solvency amongst supervisors. furthermore, it can be complex,
This is in marked contrast to the banking resource intensive, and at times
sector where the Basel committee for impractical, for supervisors to fully
Banking supervision (BcBs) established understand and assess the supervisory
common capital requirements for all frameworks and practices of other
internationally active banks in 1988. jurisdictions, because there is so much
These were substantially improved under variation in practice. Thus, it can be
Basel ii in 2004 and will now undergo difficult for supervisors to share
further reform as a result of Basel iii. information and consolidate such
similarly, the international Organization information to reach a common
of securities commissions (iOscO) understanding of the financial and risk
apply a common capital requirement positions of large insurance groups. This
for the trading book, on the same basis can impact the efficient and effective
as the BcBs. such common benchmark supervision of complex insurance groups.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
42 | evolving insurance regulation | March 2011
The role of supervisory colleges only iais supervisory principles, standards Establishing a global solvency
serves to underline this point. Without a and guidance. specific criteria measures framework is very likely to mean
common solvency language among (in the form of parameters and
supervisors and insurers, the effectiveness specifications) will be developed. the introduction of consistent
of such colleges is hampered. for coupled with the generation of new risk-based requirements in
example, the assessment of the financial reporting and supervisory review addition to new governance
condition and risk management of a large requirements, the comframe will
multi-national insurance group will be certainly be a key solvency development (risk management) requirements.
complex if each jurisdiction imposes for many years to come.
different requirements for risk The following summary sets out some
measurement and capital determination. of the key areas of development now
if a specific risk is valued using a risk being actively pursued by supervisors in
sensitive capital requirement in one the establishment of enhanced global
jurisdiction (such as using an internal mechanisms to achieve a common
model), a rule-based capital requirement framework. early awareness by insurers
in another (such as a standardised or rBc of such developments will provide a
approach), and other supplementing competitive advantage to improve their
measures (such as investment limits) risk management practices, governance
or qualitative requirements (such as and capital allocation methods and
controls over governance) in another generally improve their business models
jurisdiction, the scope for consolidating world-wide.
each jurisdiction’s assessment of the
risks and financial positions will be Quantitative aspects of solvency
limited. Hence it may be difficult for assessment and supervision
supervisors to establish a comprehensive • a common approach on valuation is
view of the risks to which a specific a necessary precondition of effective
insurance group is subject. added to common rBc requirements (valuation
this scenario is the fact that a college is an integral part of solvency
for a large international group is almost assessment) and it is expected that
certain to involve supervisors from ifrs developments will assist in
different jurisdictions meaning a providing such a common platform;
common language becomes even more • establishing a global solvency
important. all of these inconsistencies framework is very likely to mean
greatly add to the costs of insurers in the introduction of consistent risk-
meeting multiple requirements. based requirements such as risk-
sensitive capital requirements and/
Greater commonality or complementary investment
Therefore it is very encouraging that the requirements in addition to new
iais has commenced its comframe governance (risk management)
project (see chapter 9), for which one requirements. such changes will be
of the principal aims is to explore the necessary to facilitate comparability or
extent to which a common supervisory consolidation of financial assessment
framework can be achieved, with and avoid potential for regulatory
solvency assessment being at the core arbitrage. common requirements
of such requirements. similar to the also facilitate the coordinated
Basel accord for banking, this project consideration of any pro-cyclical
will aim to go further than the existing effects of regulation; and
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 43
• reporting: requirements will need
What are the implications?
to be constructed to establish the
collection of data and information
• complex group structures, including • supervisors are increasingly worried
based on consistent definitions and
holding company structures, will that complex structures may lead
calibrated at common levels, so as to
come under particular regulatory to inappropriate decisions and
promote consolidated and aggregated
focus. supervisors may have ineffective implementation of
data that is useful for the supervisors
difficulty in clearly understanding strategies in relation to individual
in analysing the financial condition
the structure of complex groups and entities resulting potentially in
of groups.
the linkages between different parts duplication, inefficiencies and
of the business which could have additional costs.
Qualitative aspects of solvency
significant impacts in terms of • financial, reputational or operational
assessment and supervision
solvency, intra-group transactions risks at the centre may expose other
• legal framework: the scope of
and tax treatment for different group entities. conversely, some
regulation will all be reviewed
group entities may not be clear for risks may crystallise at entity level
including, treatment of non-regulated
them to understand. and could flow through to other
holding companies/entities; the
• Overly complex group structures entities and/or the wider insurance
extent of supervisory powers and
may also make the management of group (contagion risks). insurance
authority; information exchange and groups need to be fully aware of
the group more difficult which could
confidentiality requirements, including hamper effective communication such risks and ensure they are
insolvency laws; and coordination of activities. adequately prepared.
• risk management: it is very likely that Group management will need to • at legal entity level, some
risk management functions will receive demonstrate that they have a full subsidiaries may be insignificant
even greater attention particularly for understanding of all risks occurring within a group context, yet could be
large groups, which tend to be more in each entity as well as across significant entitities in their own right
centralised. common requirements the group. within their local markets. Potential
for the supervisory assessment of conflicts of interest could arise.
such centralised functions, which
encourage the improvement in those
risk management functions rather than
impose differential (and sometimes
conflicting) requirements in individual
solo entity, are likely to be required.
formalising the role of a chief risk
Officer may also be contemplated
to accompany other similar function
holders such as those applying to
actuaries;
• Governance requirements: it is
possible that requirements for fit
and proper persons, outsourcing
arrangements, internal auditor,
external auditor and actuarial functions
will be strengthened. requirements in
respect of the relationship between,
and necessary independence of,
directors between entities within
a group, are also likely to receive
increased attention;
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
44 | evolving insurance regulation | March 2011
• cooperation/information exchange: awareness and action by insurers should Early awareness and action by
supervisors will strengthen enable adequate opportunity to engage insurers should enable adequate
cooperative mechanisms such as and influence the likely direction of
Memoranda of Understanding, insurance regulation that is adequate opportunity to engage and
establishment of supervisory colleges and proportionate to the needs of influence the likely direction of
and group-wide assessments; and insurers, thus enabling forward-thinking insurance regulation.
• non-regulated entities: requirements and proactive insurers to gain a
are likely to ensure that all relevant competitive advantage.
entities are monitored and supervised
in an appropriate way, proportionate european Union
to the risks they are facing and/or solvency ii will also encourage
that can be transmitted to entities cooperation between regulators within
within the group and to avoid potential europe, the eea, the iais and directly
for regulatory arbitrage between with third party countries through the The group supervisor will work with
jurisdictions. such considerations supervision of cross-border groups. other supervisors to set the capital
will need to be given to both One of the most significant elements requirement, authorise any group internal
quantitative (including intra-group of solvency ii is the mandatory creation model; and effectively act as the lead
transactions) and qualitative (such of supervisory colleges, whereby the supervisor of the group.
as reputation) risks. various national supervisors responsible
for a group and its subsidiaries can north america
it is therefore evident that insurance cooperate and exchange information. The Us risk-based solvency regime,
regulation is facing enormous change Groups will have a dedicated ‘group’ post the solvency Modernisation
and will present significant challenges to or ‘lead’ supervisor, with powers and initiative (sMi) reforms currently
both supervisors and insurers. However, responsibilities to organise the underway, is likely to provide the Us with
like most regulatory changes, early supervision of a multi-national group. a good platform for seeking equivalence
with solvency ii. it is early days for Us
solvency reform, but Us authorities are
keen to reduce regulatory arbitrage and
the financial crisis has increased the
focus on international standards and
cooperation – evidenced by proposals
to create the federal insurance Office
(fiO) that can more easily interface with
international bodies like the iais.
To what extent Us solvency
requirements become harmonised with
international standards and regimes such
as europe’s solvency ii framework, will
depend largely on the outcomes of the
sMi programme. There are also
questions over how the eU would
negotiate and assess the equivalence of
each of the 50 states. it is possible that
certain state regulators could agree
equivalence with the eU, or individual
member states, although this is not
currently believed to be an option for the
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 45
eU. The fiO is more likely to be used as
Issues to consider
the primary gateway.
The naic has indicated that Us
supervisors would be prepared to it is clear the Gfc has caused and • is the group able to achieve the
explore harmonisation with regimes like will continue to apply pressure on benefits of enhanced risk and capital
europe’s solvency ii, but they are not yet supervisors in their assessment of management expertise across the
convinced that replicating solvency ii insurance groups and their operations. group?
would be in the best interests of Us This increased scrutiny and focus • Does the group structure provide
policyholders. means insurers and insurance groups enhanced services to customers,
following its spring 2010 meeting, need to be actively considering the such as enhanced risk management
the naic reaffirmed Us state supervisors’ shape of their business: coverage for products and services,
desire to converge solvency systems that avoid coverage gaps?
internationally, ‘where practicable.’ • Does the Board understand the • Do you have an adequate and
However, the naic also recognised that implications of changes in appropriate relationship with your
business cultures are different around supervisory tone and approach? supervisor – do they really
the world, which might result in different • How well is the group able to ‘wall understand your business?
regulatory systems. The naic are off’ exposure to certain volatile risks • is management information and data
therefore keen to pursue convergence from other parts of the group or to sufficiently comprehensive and
where the regulatory measures are maximise fiscal positions? flexible to meet multiple supervisory
outcomes-based rather than rules-based. • can the group centre provide group requirements?
Us state regulators also recognise entities with better sources of • Have you up-scaled staff and
the need to improve group solvency, and financing and increase their financial compliance capability to monitor
agree that a group capital assessment security? and respond to changing rules and
should be performed, although not • How well is the group able to relationships?
necessarily a group solvency calculation transfer risks between entities • are you sufficiently engaged in
such as a rBc. within the group? developments to ensure appropriate
The risk sensitive solvency • is the group able to capitalise on frameworks are established?
frameworks of canada and Bermuda making group-wide technical
also make them potential candidates resources, including enhanced skills
to seek equivalence with europe, and expertise at the corporate centre,
although they would most likely have such as asset management, pricing,
to either make or finalise adjustments erM and the management of
to their regimes. complex or major risks available to
group entities?
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
46 | evolving insurance regulation | March 2011
Perspectives:
Americas
Advancing transparency
and supervision
US Orsa, whereby insurers will have to It is expected that the US ORSA
europe is certainly not alone in undertaking perform their own assessment of risk will also require an examination
major regulatory reform. The national and capital in addition to new mandatory
association of insurance commissioners stress tests. it is expected that the Us of how risks are managed across
(naic) is currently looking at ways to Orsa will also require an examination of the group and include insurance
improve solvency regulation. how risks are managed across the group and non-insurance entities within
The naic, which is not a regulator, and include insurance and non-insurance
acts as a forum for the insurance entities within the assessment. the assessment.
supervisors of 50 Us states. it has a another significant feature of the
process to develop model insurance sMi project is the life and Health
regulation and provide guidance on best principles-based reserving initiative,
practices, however, it remains for each which will include a new principles-based
state to decide whether to pass each framework to value insurance liabilities.
model law or regulation, and each state This will allow insurers more flexibility, similar to the solvency ii ‘transparency’
may make changes in the enactment based on their own internal model inputs, principle, the canadian regime has for
process. The naic assists implementation than that allowed under the required several years required insurers to
of minimum standards by assisting state reserve methology. publically disclose their risk-based
regulators harmonise requirements The sMi changes are also likely to regulatory capital levels. insurers are
across the Us. include enhancements to the present also required to run future scenario
The naic has established a solvency rBc requirements, by introducing a testing of capital adequacy for a range
Modernization initiative Task force specific confidence level and time of adverse underwriting and financial
(sMi) which will recommend areas of horizon (most likely to be a tail value-at- markets developments, such as
improvement for the Us solvency risk (Tvar) measure. such reforms will catastrophic losses, rapid or slow growth
framework, and in doing so is looking at complement the extensive financial in premiums, and variations in interest
risk-based capital requirements, group disclosure requirements already in rates and equity market prices.
solvency regulation, Orsa, corporate existence. One regulatory reaction to the
governance, risk management, statutory accompanying these new proposals financial crisis has been to expand the
accounting and financial reporting and is a greater focus on group solvency requirements for stress testing from an
reinsurance. requirements, where the naic refer to annual formal report to a program of
following the naic spring 2010 a ‘windows and walls’ approach – using regular and continuous stress testing
meeting in Phoenix, arizona, the sMi a ‘wall’ to ensure policyholder protection throughout the year.
reported that the rBc requirements is maintained around legal entities and a The canadian regime has also allowed
implemented in the 1990s were still ‘window’ to look at how intra-group limited use of an insurer’s own capital
held to be a necessary component of needs are accommodated across model as an alternative to the standard
Us solvency regulation, but refinements the group. model, with regulatory approval, for
would be considered to the formula. the risk of certain investment return
More advanced methods such as Canada guarantees for segregated funds. This
modelling would continue to be canada’s insurance industry held up option is expected to be expanded in
introduced for risks where factor-based well in the financial crisis, with no failures future years to apply to overall regulatory
methods were not sufficient. or government-funded rescues for any capital, similar to the approach under
The sMi is the largest reform of financial institutions. in response to the solvency ii.
the Us regulatory system since the increasing complexity of insurance While there were no insolvencies
introduction of rBc. in response to products and a more dynamic economic as a result of the financial crisis, the
international developments, primarily environment, the country was a relatively near failure of some overseas insurers
the solvency and group changes is within early adopter of a risk-based approach to with significant canadian operations
the iais and in europe with solvency ii. solvency, overhauling its framework for has heightened the canadian regulator’s
One of the most significant changes life insurers in the 1990s and then again interest in international regulatory
being examined is the introduction of an for non-life insurers in 2003. standards and cooperation. The canadian
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
regulator already participates in the iais transparency and group supervision. for any changes in market developments
and is likely to consider developing its all key elements of the new risk-based and/or strategy. appropriate oversight
regime to be more in line with solvency ii solvency regime are due to be processes must also be in place to
in the future. implemented this year. monitor any material deficiencies and
as for Pillar 2, since 1990 the Office ensure they are being reported on a
of the superintendent of financial so what are the main changes? timely basis with suitable actions being
institutions (Osfi) has required insurers While the present BMa capital adequacy taken. fit and proper tests of key
to undertake prospective scenario testing requirements are broadly consistent individuals overseeing and performing
now known as Dynamic capital adequacy with iais requirements, the BMa is the assessment also apply which
Testing (DcaT). However the DcaT does considering adoption of a market includes third-party service providers
not have to be incorporated into the consistent balance sheet for solvency assisting with assessment procedures.
insurer’s risk management process. it is purposes. it is yet to be determined
expected that Osfi will need to review whether the final position will be one
their requirements given the adoption of that is based on general purpose financial
the new solvency iais standards, in statements, with prudential filters and
particular the Orsa requirements. in disclosure of market consistent values
regards to Pillar 3 type measures, Osfi (where such statements do not include
has for the past six years required life fair values) for analytical purposes,
insurers to publicly disclose analysis of or whether the entire balance sheet
gains and losses (earnings) by source. The will comprise economic values.
new ifrs income statement is proposed Meanwhile the Bermuda solvency David Sherwood
to be similar in orientation. in addition, capital requirements/approved internal regulatory centre of excellence
new disclosures under ifrs would further models are designed to establish a level americas region
strengthen the canadian requirements. of safety of 99 percent Tvar over a one KPMG in the Us
year time horizon with full run-off of
Bermuda insurance liabilities.
as the home to one of the world’s largest in addition, the insurance code of
international insurance and reinsurance conduct 2010 (pertaining to all insurers)
markets, Bermuda has been revamping and the insurance Groups code of
its solvency framework and will be one of conduct require many similar features
the first to seek regulatory equivalence to solvency ii and the iais Orsa. for
with solvency ii. example, insurers are required annually
The Bermuda Monetary authority to develop policies, processes, and
(BMa) has also embarked on a procedures to assess their material Bermuda has been revamping its
modernisation plan, with a particular risks and self-determine the capital solvency framework and will be
focus on regulatory harmonisation. in its requirement they need to support
‘roadmap’ published in april 2009, the their insurance activities. risk and one of the first to seek regulatory
regulator set out plans to achieve mutual solvency assessments (contained in equivalence with Solvency ll
recognition or equivalence with key the commercial insurer’s solvency
international markets, in particular with self-assessment) must be an integral
europe’s forthcoming solvency ii regime. part of the group’s risk management
framework, including active liquidity
seeking equivalence with europe management and stress and scenario
The BMa has set out plans for a new tests. results must be clearly
risk-based solvency regime with all documented, reviewed, and evaluated
the hallmarks of solvency ii, including regularly by the Board and senior
recognition of internal models, own risk management to ensure appropriateness
and solvency assessments, increased of the risk management framework and
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
08
Systemic risk
The impact of global coordination
Much discussion about systemic risk all too often has been
dominated by developments in the banking sector. The global
financial crisis raised serious concerns internationally about financial
regulation, exposing failings in systemic risk management, a lack
of coordination between supervisors and insufficient regulation of
complex financial services groups. it also raised awareness among
politicians of the need for international regulatory convergence and
cooperation on financial market regulation.
following the G20 summit in london in april 2009, and the
Pittsburgh summit in september 2009, leaders of the world’s
20 largest economies publically acknowledged the need for
greater consistency and cooperation between countries. They
also confirmed the need for a framework of internationally agreed
high standards of financial regulation.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 49
The G20 members determined a
What are the implications?
blueprint for reforming the regulatory
framework of the financial sector, and
requested that the financial stability • considerable debate is still occurring • increased focus on stress and
Board (fsB) embark on a major program within the insurance industry scenario tests. reverse stress tests
of financial reforms. Much of the G20 regarding the extent that insurers likely to prevail as the main supervisory
agreement is focussed on the banking may pose systemic risks. tools that will be used by insurance
sector; however many of the initiatives • contagion effect is perhaps the supervisors to monitor the extent of
also apply to insurance. insurance biggest differentiator between the systemic risk within the system.
supervisors have been asked by the fsB banking and insurance sectors, and • enhanced reinsurance analysis will
to consider whether insurers, or insurance why many insurers believe measures be undertaken by the iais to monitor
business itself, poses a systemic risk to being contemplated for banking are counterparty exposures.
the financial stability of markets. not appropriate to insurers, such as • lack of harmonised rules across
all G20 members agreed to the need to prepare ‘living Wills’. global insurance supervisors as
implement international financial • Prudential supervision, now clearly regards to capital will continue to
standards and enhance the openness defined with a macro and micro apply pressure for further reforms
and transparency of the financial sector. focus, is dominating the creation of such as the iais’s comframe
among the immediate actions called new supervisory structures. initiative.
for by the G20 was the establishment
of supervisory colleges for ‘significant’
cross-border firms, and tasking the fsB regulation and oversight to all • interconnectedness: “linkages with
to tackle the ‘too big to fail’ problems “systemically important financial other components of the system”
associated with systemically important institutions, instruments and markets.” • substitutability: “The extent to which
financial institutions (sifis). since the summit, the fsB has been other components of the system can
The G20 also asked the appropriate working with the iais, the BcBs and the provide the same services in the event
bodies – the iais for insurance – to review iOscO to identify weaknesses in the of a failure”.
the ‘differentiated nature of regulation’ financial system, and consider changes
in the banking, securities and insurance to prudential regulation and corporate When providing feedback to the fsB,
sectors and recommend improvements. governance principles in an effort to the iais recommended adding a fourth
in response, the Joint forum of the iais, address systemic risk. criterion, that of time. according to the
the Basel committee on Banking as part of this work, G20 finance iais, the speed of loss transmitted to
supervision (BcBs) and the international ministers and central bank governors third parties is of particular relevance to
Organization of securities commissioners have endorsed a definition of systemic insurance, as insurance claims, unlike
(iOscO) concluded that it is necessary to risk developed by the fsB and banking obligations, do not immediately
address inconsistencies in supervisory international Monetary fund: generate cash outflows.
frameworks across the banking, securities “The risk of disruption to the flow of The iais also notes that the distinct
and insurance sectors in order to ensure financial services that is (i) caused by an business model of insurance means that
a sounder financial system in the future. impairment of all or parts of the financial the policy solutions for systemically risky
Major systemic risks and failures in system; and (ii) has the potential to have activities will likely differ between sectors,
the financial sector were exposed when serious negative consequences for the and that it will work with the fsB to develop
problems in a section of the Us housing real economy.” an appropriate policy response that is
market quickly spread to financial The fsB uses three criteria to assess applicable to insurers.
institutions around the world, triggering the systemic risk presented by an a recent study by the Geneva
the Gfc. institution: association, a think tank supported by
The G20 committed to take steps to • size: “The volume of financial services 80 insurance industry chief executive
“ensure the soundness of systemically provided by the individual component Officers, concluded that when applying
important institutions” and to extend of the financial system” the fsB criteria to the main activities of
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
50 | evolving insurance regulation | March 2011
insurers and reinsurers, the activities of • effective regulation and supervision The traditional insurance business
insurers – namely investment management, can mitigate instances where insurers model is unlikely to give rise to
providing protection and guarantees, risk could amplify instances of systemic
transfer and capital management – do not risk, such as de-risking of equity insurers posing a systemic risk.
pose a systemic risk. portfolios in unfavourable economic
conditions or instances where capacity
The association argued that the activities has been withdrawn after an event
of insurers do not pose a relevant systemic such as 9/11;
risk because of: • non-insurance activities, particularly
• Their limited size; by non-regulated entities of financial
• The slow speed of their impact, which conglomerates could give rise or
allows insurers to absorb them; and heighten systemic risk. in addition,
• features of their interconnectedness certain insurance business such as
mean that contagion risk would be financial guarantee insurance could
limited. also amplify risks and may even
contribute to contagion risk across
“Principle-based group supervision sectors or for conglomerates; and
applied to all entities within an insurance • Between sectors, greater
group, supported by sound industry risk independencies may result in the
management practices, will mitigate future and therefore increased
potential systemic risk related to these efforts will be given to resolvable
activities. solvency ii represents such a issues through a greater focus on
comprehensive and economic based group-wide supervision, improving
regulatory framework.”4 risk management within insurers
insurers are also concerned that they and undertaking macro-prudential
could be included in iMf proposals to tax surveillance to ascertain the likelihood
banks and pay for future bailouts. and potential for systemic risk to build
up across jurisdictions globally.
Views of the IAIS
after much consideration and european Union
consultation, the iais considers that: following the Gfc, the eU announced
• The traditional insurance business plans to reform the regulatory framework
model is unlikely to give rise to at a european level and create a new
insurers posing a systemic risk. systemic risk body.
However, other parts of the financial in response to ‘uneven and often
sector may cause the insurance sector uncoordinated’ european regulation, the
to be susceptible – although impact to european commission (ec) proposed to
the real economy is most unlikely; replace the existing three supervisory
4. source: special report of The Geneva association systemic risk
Working Group.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 51
committees for insurance, banking, and consulting with the industry on The impact of being deemed
securities with new macro and micro the criteria for assessing non-bank systemically significant is not
regulatory bodies. The proposals have institutions, such as insurers, as
now created a macro-prudential systemically important. The fiO can yet fully known. However, such
supervisor, the european systemic risk make recommendations to the fsOc an assessment is likely to lead
Board (esrB), and a micro-prudential as to which insurers may be included. to, increased regulatory scrutiny,
supervisory framework, the european The impact of being deemed
system of financial supervisors (esfs). systemically significant is not yet fully increased capital requirements,
The esfs will consist of a network of known. However, such an assessment the prospect of having to produce
national financial supervisors working is likely to lead to increased regulatory a living will and increased
alongside three new european scrutiny, increased capital requirements,
supervisory authorities, created by the the prospect of having to produce a living reporting requirements.
transformation of existing committees will and increased reporting
for the banking securities and insurance requirements.
and occupational pensions sectors. insurance companies may feel the
for the insurance sector, this has seen impact of the fiO through its coordination
ceiOPs evolve into the european with the Us on insurance matters of
insurance and Occupational Pensions national and international importance,
authority (eiOPa). its systemic risk focus, and through
The creation of eiOPa is expected legislation and/or regulation that results
to bring about further convergence of from the fiO’s recommendations.
regulations and consistency of insurance
supervision in the eea. The body will asPac
have greater powers than ceiOPs when While both insurers and insurance
drafting technical proposals and will supervisors acknowledge the need for
be able to ensure agreement and greater cooperation between regulators,
coordination between national regulators we do not yet see significant impetus
when supervising cross-border groups. in the region for the development of
‘super-regulators’ and supra-national
north america standards of regulation.
Title v of the Dodd-frank act establishes
a federal insurance Office (fiO) within
the Department of the Treasury that is
intended to function in an advisory
capacity to the financial stability
Oversight council (fsOc) with regard to
systemic risks in the insurance industry
(firms and products). The fsOc is
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
09
ComFrame
Moving forward
in 2008 the iais embarked on an ambitious and, at the time,
controversial project to explore medium to longer term options for
the development of a supervisory framework for internationally
active insurance Groups (iaiGs) – known as comframe.
although the genesis of comframe preceded the Gfc of
september 2008, the financial crisis nonetheless brought into sharp
focus the global prudential requirements of systemically important
insurance groups. as developments have progressed, it is now
considered that comframe will form the substantive response by
the iais to the G20, fsB and other international fora which are
seeking responses to the macro-prudential and financial stability
issues currently being sought from financial market supervisors.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 53
1 scope of application common world-wide risk and capital
Objectives of ComFrame
2 Group structure and business platforms. such an environment
3 Quantitative and qualitative should go a long way to answering
in constructing the parameters for requirements many of the financial stability issues
comframe, the iais articulated the 4 supervisory cooperation and currently being debated.
following objectives: interaction • consistent measurement of solvency
5 Jurisdictional matters measures such as valuation, capital
• Operationalise group-wide adequacy, erM, investment and
supervision for iaiGs in order to each module is then divided down into internal model criteria should reduce
better align supervisory practices further elements. for example, module 3 costs significantly. a common platform
with the (good practice) trans- will address elements related to quantitative of requirements will provide insurance
national approaches iaiGs actually and qualitative requirements including groups with enhanced capabilities
apply in doing business; quantitative methodologies such as for managing and measuring the
• comprehensively address group- valuation and capital adequacy (including insurance group’s capital, solvency
wide risks and establish better internal models), qualitative methodologies and risk positions (particularly in
supervisory cooperation in order including corporate governance and regards to technical provisions, risk
to allow for an integrated approach internal controls and methodologies that margins and internal models). it will
amongst supervisors; and may include both qualitative and also avoid having duplicative systems
• foster global convergence of quantitative aspects including erM and and requirements at the local level.
regulatory and supervisory regulatory investment requirements. This should facilitate better investor
measures and approaches. a concept paper is due by July this and analyst communication and
year and depending on developments, enhance shareholder value.
it is then envisaged that a formal • Better supervisory understanding
development phase over the next three of the operations of insurance groups
The founding principles for comframe years thereafter will develop the actual should reduce the inefficiencies and
are to: requirements of the new framework. frictional costs for iaiGs arising from
• Become the multilateral tool of a calibration and quantitative impact supervisors being unable to fully
preference for assessing iaiGs; assessment stage is not expected to comprehend the complexities of large
• Provide meaningful value to both occur until year three of the project. multi-national insurance groups and
home and host supervisors for groups being able to better explain the
undertaking group supervision; What are the benefits for industry? risks and opportunities provided by
• Be specific, but not rules-based; comframe should, in time, provide a group structures. Boards and senior
• Be ever-evolving (and further look range of benefits for insurers by: management will be able to have
into case experiences); • Becoming the multilateral framework confidence in integrating the full suite
• Be developed in close collaboration for assessing internationally active of modelling techniques to their risk
with interested stakeholders; and insurance groups, enhanced management framework.
• lead to more consistency and better cooperation and recognition amongst
comparability and alignment regarding insurance supervisors. This should a common set of requirements should
the supervision of internationally active result in consistent outcomes for provide iaiGs with the ability to:
insurance groups being undertaken the measurement of solvency and • Demonstrate the quality of senior
by each jurisdiction. related requirements including capital management and oversight of risk
determinations. such measures should management by outlining: how
comframe will cover not only allow supervisors to gain increased current and possible future risks
quantitative aspects, such as a common confidence in the supervisory methods are managed and contained in the
solvency assessment, but also qualitative applied, allowing a lead supervisor of particular business model; how risk
and legal aspects, including investment, the group to make informed decisions. appetite measures are incorporated;
erM and other risk management issues. in turn, this should reduce the amount and the subsequent impact on capital
The comframe is split into five modules: of duplication and allow groups to have resources available;
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
54 | evolving insurance regulation | March 2011
• Maximise efficiencies: by applying • cost of undertaking different risk,
consistent methodologies to capital capital and governance change
Issues to consider
management; possibly providing programmes
for the consistent application of • Different admissibility/asset and • How aware are you of the
diversification benefits; and allowing investment restrictions relating comframe developments?
enterprise risk management to capital requirements early involvement and participation
frameworks to be fully integrated • Differences in reinsurance now during the policy formulation
with economic capital models; arrangements to accommodate stage is needed by all industry
• Outline the robustness and different jurisdictional requirements participants to ensure an effective
appropriateness of their group-wide • statutory form filings and related and appropriate framework that is
Orsa; reporting and disclosure requirements outcomes focussed.
• Better implement a consistent fit- • internal management, senior • Does your business have the
for-purpose governance and internal management and Board engagement technical skills that will be required
control framework; spent on compliance and regulatory from industry to provide support
• streamline reporting across the group issues and assist supervisors in their
– both public and private reporting • external auditor requirements deliberations?
including audited and non-audited • additional technical input (such as • even though comframe is in the
information; and accounting, risk and actuarial advice) early development phase, what data
• Develop robust business analysis • Peer reviews and system changes would be likely
and information tools for world-wide • collateral requirements for your group in order to capitalise
application. • cost of supervisory colleges and upon the envisaged framework?
regulatory compliance more generally
Current costs of regulation and • Different compensation scheme
supervision requirements The cost of having different
The cost of having different regulations • consultancy, rating agencies, trade regulations poses significant
poses significant detriment to shareholder associations and other service providers
value, creates competitive distortions used to input, support, or involved with detriment to shareholder value,
and inefficiencies and gives rise to global and local insurance activities. creates competitive distortions
regulatory arbitrage issues. These costs and inefficiencies and gives rise
of sovereign and reputational risks in These costs do not include future cost
the marketplace are ultimately borne by impositions on iaiGs in the form of to regulatory arbitrage issues.
consumers and policyholders generally. living wills and recovery and resolution
The additional cost in meeting schemes currently being examined
these requirements for iaiGs, in the by supervisors.
absence of harmonised and converged We have had a number of discussions
requirements, both as measured by with our clients and estimate that
direct and indirect costs, are significant. such costs to the sector globally are
The additional costs associated with considerable – and could range from
both prudential and market conduct Us$15bn–$25bn. By any measure such
requirements arise via the opportunity costs are significant. in our view, the
cost of capital from having to meet industry needs to insist that the regulatory
different jurisdictional needs and changes result in a predictable, stable
subsequent costs incurred to group and well defined architecture; that there
models, structures and functions. is consistency in application across the
such costs comprise: different jurisdictions; and the outcomes
• Direct compliance personnel and will serve stakeholders interests – both
administrative costs investors and customers – well.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
evolving insurance regulation | March 2011 | 55
A global
perspective
KPMG’s network of regulatory centres of excellence at the heart
of the major financial markets – Us, europe and asPac – delivers
cross-border insights in response to the unprecedented scale and
impact of regulatory change.
Our firms’ leading global regulatory experts can provide insight
into the implications of the raft of regulatory changes and the
direction of developments around the world from the G20, Basel iii,
solvency ii, eU initiatives and the Dodd-frank act.
Providing your business with…
• insight into regulatory issues, market developments, supervisory
approaches and implementation issues.
• access to a global team which understands regulation and its
implications
• experienced advisers who deliver pragmatic solutions to complex
regulatory issues
• regular updates on key developments
visit www.kpmg.com/regulatorychallenges for more discussions
on the regulatory issues facing the financial services industry.
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member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
56 | evolving insurance regulation | March 2011
Acknowledgements
We would like to acknowledge the contribution of our colleagues
from across our global network who helped develop this report:
lead editors
Rob Curtis David Sherwood Martin Noble
Director, Insurance US Head of Insurance Regulatory Senior Manager, Insurance
Regulatory Centre of Excellence, Regulatory Centre of Excellence, Regulatory Centre of Excellence,
EMA region Americas region ASPAC region
KPMG in the UK KPMG in the Us KPMG in china
T: +44 20 7694 8818 T: +1 212 954 5861 T: + 852 2685 7817
E: rob.curtis@kpmg.co.uk E: davidsherwood@kpmg.com E: martin.noble@kpmg.com
asPac
Bruce Le Bransky Elisabeth Imelda Frank Dubois
Principal Adviser Partner Director
KPMG in australia KPMG in indonesia KPMG in singapore
T: +61 3 9838 4188 T: +62 21 574 2333 T: +65 6411 8187
E: blebransky@kpmg.com.au E: elisabeth.imelda@kpmg.co.id E: fdubois@kpmg.com.sg
David Torrance Novi Liong Jeremy Hoon
Partner Director Partner
KPMG in australia KPMG in indonesia KPMG in singapore
T: +61 2 9335 8931 T: +62 21 574 2333 T: +65 6213 2608
E: dtorrance@kpmg.com.au E: novi.liong@kpmg.co.id E: jeremyhoon@kpmg.com.sg
Simon Donowho Takanobu Miwa Kam Yuen Lau
Partner Partner Partner
KPMG in china KPMG in Japan KPMG in singapore
T: +852 2826 7105 T: +81 3 3548 5103 T: +65 6213 2550
E: simon.donowho@kpmg.com E: takanobu.miwa@jp.kpmg.com E: kamyuenlau@kpmg.com.sg
Douglas Lecocq Ryuji Takahashi Albert Gau
Principal Associate Partner Partner
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Produced by KPMG’s Global financial services Practice in the UK.
Designed by Mytton Williams
Publication name: evolving insurance regulation
Publication number: 314617
Publication date: March 2011
© 2011 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No
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