wstip presentation ready or not regulatory changes are on the horizon tom barnes, ceo & general...

WSTIP PresentationReady or Not Regulatory Changes are on the HorizonTom Barnes, CEO & General CounselMunicipal Insurance Association of British Columbia Canada

Drivers of Regulatory Changes

0Global desire for consistency.0 Industry consolidation is increasing multi-jurisdiction

players.0 IAIS protocols.0The financial meltdown.0European development.

0 IFRS0 Solvency II

0The financial crisis has highlighted the need for more effective corporate governance and risk management in all types of financial institutions.

0Prudential Regulation0 Risk Management0 Capital Management

0Balance0 Business agenda0 Consumer protocols

International Association of Insurance Supervisory (IAIS)

0190 jurisdictions (including Canada & US).0World standard setter for insurance supervisors.

IAIS Insurance Core Principles October 2011

0More risk-based approaches to capital and solvency measurement.

0Focus on risk management and governance.0 Increased use of stress and scenario testing.0Group supervision.

Capital Adequacy

0Risk-based capital (RBC) regimes differ greatly.0 Inconsistent capital requirements.0 Inconsistent approaches to capital adequacy.

Risk-Based Capital

0Typically measures asset, insurance and business risks.

0Scope is expanding to include credit, market and business risks.

0Management now adopting enhanced ERM.

IAIS Now Requires

0Target criteria for capital management.0Calibration of a standardized approach.

Internal Models

0 IAIS permits superintendents to allow internal models to determine regulatory capital requirements.

0 Insurer must document the design, construction and governance of the model.

0 Including the underlying rationale and assumptions.

ERMMost Significant Change

Own Risk and Solvency Assessments (ORSA)

0 Identify and quantify risk.0Policy outlining management of all relevant and

material risks.0Relationship between tolerance limits:

0 Capital requirements0 Economic capital

0Methods for monitoring risk.

0ORSA to be regularly conducted:0 Assess adequacy of risk management0 Current and future solvency positions

Governance

0Board and senior management responsibility.0 Includes:

0 Underwriting risks0 Credit risks0 Market risks0 Operational risks0 Liquidity risks

0 Relationship between risk management and quality of financial resources needed and available.

Financial Reporting - IFRS

0Replaces Generally Accepted Accounting Principles for public companies.

0Standardizing financial statement format. 0Accurate reflection of current liabilities and assets.0 “Fair Value”0Mandatory valuation principles.

Solvency II

Three Pillars

1. Demonstrate adequate financial resources.2. Demonstrate adequate system of governance3. Public disclosure and regulatory requirements.

0European driven reform intended to establish a new set of :0 Capital requirements0 Valuation 0 Governance standards0 Reporting requirements

0Effect on non-European Markets:0 European insurers operate globally.0 Equivalence – non- European insurers do business in

Europe.0 IAIS – cooperation and collaboration between

regulators.

0How Can this affect your pool?0 Reinsurance0 Actuaries0 Accountants0 Auditors

Why can you learn from the Canadian experience?0 Because we are already dealing with these changes.

Office of the Superintendent of Financial Institutions (OFSI)

0Federal regulator of all national financial institutions – banks, insurers etc.

0Moved off of rules-based regulation money years ago.0Principal-based regulation proved highly effective

during crises:0 No default0 Institutions emerged very strongly.

Global Finance Magazine

August 2011 world’s safest banks in North America1. Royal Bank of Canada (Canada)2. Toronto Dominion (Canada)3. Scotia Bank (Canada)4. Casse Centrale Desjardin (Canada)5. BNY Mellon (USA)6. BMO (Canada)7. CIBC (Canada)8. JP Morgan Choice (USA)9. Well Fargo (USA)10. U.S. Bancorp (USA)

50 Safest Banks in the World

0 7 American0 6 Canadian0 6 Germany0 6 FranceNo other country has more than 3.

0Enhanced global credibility has resulted in more rigorous evaluation.

0Provincial regulators follow OFSI’s lead.0Seeking Solvency II equivalence.

Results

0RBC (system has installed many years ago).0Minimum Capital Test (MCT) now a well established

industry standard. 0Stress testing – dynamic capital adequacy test (DCAT)

for a decade.

0 IFRS has been implemented.0ERM requirements are in place.0Reinsurance Risk Management Plans.0Chief Risk Officer.

U.S. Situation

0 In large part will depend on the state regulators.

General Indications

02008 National Association of Insurance Commissioners (NAIC) commenced the solvency modernization initiatives (SMI).

0No implementation of Solvency II but will aim for a “equivalent” platform.

0More of a standard formula approach to RBC.

0Many regulators are leery of internal models.0ORSA is on the immediate horizon.0ERM and capital management will undoubtedly be a

component of future regulations.

MIABC Experience

Financial Institutions Commission (FICOM)

0 “Recommended” we adopt OFSI’s ERM protocols.0Gave us a year to implement. 0Guidelines in handout.

Our Approach

0Manageable0Meaningful0Value for members

Key results

0Capital Management Plan.0ERM Policy.

Capital Management Plan

0Stochastic model0Stress test010,000 scenarios0Used MCT as metric

0Model Details0 The model is based on a series of 10,000 simulations

which generated full balance sheet projections as well as MCT calculations and other metrics.

0 Claims are generated based on theoretical distributions for each line of business from the 2011 rating study. Claims are generated for future years based on trending, growth and a frequency and a severity distribution.

0Model Details (cont’d)0 Additional shocks are included by generating

distributions for:0A 10% chance of generating a loss in excess of $2.5 million,

which could be not reflected in the past experience data.0A reserve deficiency mechanism which assumes with a 5%

chance that liabilities are 20% deficient, a 10% chance that liabilities are 10% deficient and a 10% chance that liabilities are excessive by 5%. Our model only assumes this shock in the year 2011.

0 That members’ assessments for all pools, including those finding the MIABC’s retention be set at the 75th percentile confidence level.

0 That the MIABC gradually reduce its reliance on reinsurance by increasing it’s retention level, insofar as it receives concurrence from its appointment actuary.

0 That investment income should not be credited to members’ assessments.

That if the MIABC ‘s capital falls below $250% MCT, the MIABC should consider replenishing it by retroassesing the membership if the MIABC’s capital is more than 250% MCT but less than 450% MCT, no dividends should be distributed. If the MIABC’s capital is between 450% MCT and 650% MCT, any dividends should be limited to 10% of the previous year pool assessment. If the MIABC’s capital exceeds 650% MCT, dividends should be limited to a maximum of 15% of the previous year’s pool assessment.

ERM Plan

0Engaged a consultant for the final phase.0Adopted policy.

Risk Categories

0 Insurance0 Investment0Business operations0Human Resources0Regulatory / Legal0Strategy / Reputational0 IT

ERM Implementation

Staff working groups0 Representation from each department. 0 Review consultant’s assessment.0 Assign owner and Board report.0 Set target tolerance.0 Mitigation options.0 Mitigation plan.0 Monitoring and reporting.

Conclusions

0Changes are coming.0Governance is critical.0ERM inevitable.0Onus on us to make it work.