Why You Should Care Why You Should Care About International IssuesAbout International Issues

Amy S. BouskaAmy S. BouskaGlenn MeyersGlenn Meyers

Mary Frances MillerMary Frances Miller

May 9, 2006May 9, 2006

Why You Should Care Why You Should Care About International IssuesAbout International Issues

Working across BoundariesWorking across BoundariesInternational Practice GuidelinesInternational Practice Guidelines

Amy S. BouskaAmy S. Bouska

Working Parties and CommitteesWorking Parties and Committees Most of our shared work to date is with the Most of our shared work to date is with the

Institute/Faculty of the UKInstitute/Faculty of the UK• The Loss Simulation Model Working Party has seven The Loss Simulation Model Working Party has seven

non-CAS membersnon-CAS members• In addition, three other CAS committees/working In addition, three other CAS committees/working

parties have members from other organizationsparties have members from other organizations• At least five CAS members are working on GIRO At least five CAS members are working on GIRO

working partiesworking parties In March, we were approached by the Institute In March, we were approached by the Institute

of Actuaries of Australia about the of Actuaries of Australia about the development of joint research projectsdevelopment of joint research projects

Much of the work on reserve variability is being Much of the work on reserve variability is being driven overseasdriven overseas

International Actuarial Standards of International Actuarial Standards of Practice (IASPs)Practice (IASPs)

The IAA has issued eight IASPs:The IAA has issued eight IASPs:• IASP 1: Guidelines of Actuarial Practice for Social Security ProgramsIASP 1: Guidelines of Actuarial Practice for Social Security Programs• IASP 2: Actuarial PracticeIASP 2: Actuarial Practice• IASP 3: Classification of ContractsIASP 3: Classification of Contracts• IASP 4: MeasurementIASP 4: Measurement• IASP 5: Current EstimatesIASP 5: Current Estimates• IASP 6: Liability Adequacy TestingIASP 6: Liability Adequacy Testing• IASP 7: Discretionary Participation FeaturesIASP 7: Discretionary Participation Features• IASP 8: Changes in Accounting PoliciesIASP 8: Changes in Accounting Policies• GlossaryGlossary

... And has four drafts out:... And has four drafts out:• Embedded Derivatives and DerivativesEmbedded Derivatives and Derivatives• Business CombinationsBusiness Combinations• Accounting for Reinsurance ContractsAccounting for Reinsurance Contracts• Disclosure of Information about Insurance RiskDisclosure of Information about Insurance Risk

IASPs are promulgated in the context of IFRSIASPs are promulgated in the context of IFRS

IASPsIASPs In spite of their name as “standards of practice,” the IASPs In spite of their name as “standards of practice,” the IASPs

issued to date are actually class 4 standards, or “practice issued to date are actually class 4 standards, or “practice guidelines”guidelines”• These are considered to be “educational in nature, These are considered to be “educational in nature,

representing a statement of good practice”representing a statement of good practice” National organizations that are members of the IAA may National organizations that are members of the IAA may

adopt the IASPs or develop their own standards that are adopt the IASPs or develop their own standards that are substantially similarsubstantially similar• The US has not taken any actionThe US has not taken any action• The CAS has deferred to the AcademyThe CAS has deferred to the Academy

Individual members of member organizations will ultimately Individual members of member organizations will ultimately be bound by the IASPs (or substantially similar documents)be bound by the IASPs (or substantially similar documents)

The IASPs can be found in the Library section of The IASPs can be found in the Library section of www.actuaries.orgwww.actuaries.org

International Issues

A Global Frameworkfor

Insurer Solvency Assessment and

Beyond

Glenn Meyers

Outline

Describe Scope of

• IAA Insurer Solvency Assessment Working Party

• IAA Solvency Subcommittee– Under IAA Insurance Regulation Committee

Other Committees

• Working Party on Risk Margins for Liabilities

Background

• 2002 – The IAA formed the a working party to support the International Association of Insurance Supervisors (IAIS) to assist in the development of Global Standards for Insurer Solvency Assessment (Risk Based Capital)

• 2004 – Published report – http://www.actuaries.org/LIBRARY/Papers/Global_Framework_Insurer_Solvency_Assessment-members.pdf

– Or follow link on IAA Website (www.actuaries.org)

• 2004 – Formed IAA Solvency Subcommittee

Summary of WP/SSC Work

• See CAS 2004 Spring Meeting Presentationhttp://www.casact.org/coneduc/spring/2004/handouts/

• Three Pillar Approach– 1. Minimum Capital Requirements– 2. Supervisory Review Process– 3. Measures to Foster Market Discipline

• 2004 report focuses on risk-based capital formulas in support of Pillar 1.

Risk Based Capital Formulas

• Standard Formula– Based on publicly available data– Deliberately conservative

• Internal Models– Built to reflect individual insurer situations– Based on “state of the art” actuarial modeling

techniques.

• Standards and “best practices” for internal models are evolving.

What Countries Are Doing

• Australia – Already implemented this approach• Swiss Solvency Test

– Draft formula under evaluation by Swiss Insurers.– One link under Google search

http://www.mathematik.uni-ulm.de/finmath/ws_0506/fe/papers/Luder.pdf

• United Kingdom FSA– Requires insurers to build internal models to measure

risk-based capital.– To demonstrate belief in models, insurers have to

make use of model in company operations.

12

GCIC Solvency II

On the way to Solvency II

Rolf Stölting

Stockholm June 2004

Meyers Comment

These slides highlight EEC activitieson Risk Based Capital

13

GCIC Solvency II Overview over initiatives / working groups(Europe)

March 2004

Pillar I Life

Pillar I Non-life

Pillar II

Pillar III Account.

Groups etc.

EU Commission Internal Market DGFinancial Institutions: Insurance

CEIOPS Committee of European Insurance and Occupational Pensions Supervisors28 countries: EU, Norway, Iceland, Liechtenstein

Pillar I Life

Pillar I Non-life

Pillar II

Pillar III Account.

Groups etc.

Groupe Consultatiffounded 1978 as technical advisory institution for the EU Association of European actuarial associations

CEA (Comité Européen des Assurances)Working Group

on Solvency II

Consultative Panelappr. 15 named persons:CEAMutuals,Groupe Consultatifetc.

GDV FFSA ABI

Solvabilität Nichtleben

Institute of Actuaries

Advisory B

oard

Project team

Bu

reau

DAV

Solva. Leben

IASIFRS

Solvency II Non-life

Solv. II Life

Solv. II Assets

Ausschuss Rech-nungsl./ Solvab.

Institut des Actuaires

14

GCIC Solvency II Overview over initiatives / working groups (international)

G-7 IMF OECDInstitute of ActuariesDAV

ASTIN IASB

CAS

Insurance Regulation Committee

Solvency Subcomm.

Reinsuran. Subcomm.

BIS (Basel II) …..IAIS

Subcomm.Reinsurance

Subcomm.….

Subcomm.Solvency

AFIR

International Association of Actuaries (IAA)

March 2004

15

GCIC Solvency II MARKT/2543/03 – Issues regarding technical provisions

How to get an explicit level of prudence, e.g. by using best estimate + explicit risk margin

What level of prudence should be set?

How to define a technical interest rate?

How to define books of contracts (or lines of business)?

How should equalization provisions be treated, especially considering the classification of IFRS?

16

GCIC Solvency II MARKT/2543/03 – Issues regarding target capital

Spectrum of approaches – European formula, standard formula, internal models

Which is the most suitable risk measure, Value at Risk or Tail Value at Risk?

Which time horizon to choose?

What is a suitable level of confidence?

Should the Standard model be based on probability distributions or scenarios?

How to take dependencies and correlations between different lines of business into account?

17

GCIC Solvency II MARKT/2502/04 – Asset management & ALM

Investment risk as part of the target capital requirement

Prudent person approach for the future prudential system(including ALM)

Requirement for an investment plan

Incorporation of ALM-risk both in standard formula and in internal models

ALM relevant for life as well as for non-life business

Activity in USA

• NAIC Casualty Actuarial Task Force– Include cat model in RBC

• Rating Agencies– Moody’s - Has risk-based capital formula– Fitch - RBC formula under development– Standard and Poors - Wants insurers to

develop internal models.

Standard and Poors• David Ingram article in Risk Management

Section newsletterhttp://library.soa.org/library-pdf/RMN0603.pdf

• Quote from article "Insurers that use regulatory or rating agency

risk-based capital formulas without modification will be pressed to demonstrate that those models appropriately capture the actual risk of their specific business. Insurers that modify those formulas in an appropriate manner to reasonably approximate the capital needed to support their risk positions are seen to have adequate practice in this area."

Other Activity to WatchRisk Margins Working Party

• Acting on request from IAIS• Reported liabilities “should” include a risk

margin.• Two general approaches being considered.

– Standard Actuarial • e.g. Australian requirement to post reserves at 75%

level

– Cost of capital approach• Fair Value accounting “mark to model” approach• Diversification and insurer size effects reflected in

capital requirements• This is where I think they are going. Stay tuned.

International Actuarial International Actuarial EducationEducation

Standards & ProcessStandards & Process

Why Should I Care?Why Should I Care?

Mary Frances MillerMary Frances Miller

International Actuarial AssociationInternational Actuarial Association

IAA is an organization of organizationsIAA is an organization of organizations Umbrella group aims to include all Umbrella group aims to include all

credentialed actuaries worldwidecredentialed actuaries worldwide 55 full member associations + associate 55 full member associations + associate

membersmembers• CAS, SoA, AAA, CIA, CCA are all full membersCAS, SoA, AAA, CIA, CCA are all full members

AimsAims• Speak for the profession globallySpeak for the profession globally• Gain recognition for the actuary as a professionGain recognition for the actuary as a profession• Promote professionalism & standardsPromote professionalism & standards

Full Members of the IAAFull Members of the IAA

Constitution & By-Laws that meet certain Constitution & By-Laws that meet certain criteria, e.g.criteria, e.g.• Discipline processDiscipline process• Method for setting standards (if the association Method for setting standards (if the association

does so)does so) ““Fully Qualified Members” meet or exceed Fully Qualified Members” meet or exceed

minimum education criteriaminimum education criteria All allow the IAA to “sell” actuaries who All allow the IAA to “sell” actuaries who

belong to member Assns as recognized belong to member Assns as recognized professionalsprofessionals

The IAA SyllabusThe IAA Syllabus

Ten TopicsTen Topics• Financial MathFinancial Math• Prob & StatsProb & Stats• EconomicsEconomics• AccountingAccounting• ModellingModelling• Statistical MethodsStatistical Methods• Actuarial MathActuarial Math• Investments & AssetsInvestments & Assets• Actuarial ManagementActuarial Management• ProfessionalismProfessionalism

No requirements for No requirements for delivery methoddelivery method• Independent examsIndependent exams• University basedUniversity based

All topics at least on a All topics at least on a 2 out of 3 scale2 out of 3 scale• Some should get more Some should get more

emphasis than othersemphasis than others• Can be delivered in any Can be delivered in any

combination / ordercombination / order Minimum standardMinimum standard

Why do we care?Why do we care? CAS education far exceeds the IAA CAS education far exceeds the IAA

syllabussyllabus• IAA standards a potential issue only for life IAA standards a potential issue only for life

contingencies and assetscontingencies and assets CAS members are recognized worldwideCAS members are recognized worldwide

• Or are they?Or are they?• Statutory roles often require local membershipStatutory roles often require local membership

IAA lobbies International Assn of Ins IAA lobbies International Assn of Ins Supervisors to set the standard as full Supervisors to set the standard as full member organizations & their membersmember organizations & their members

IAA working cooperatively with IAA working cooperatively with International Accounting Standards BoardInternational Accounting Standards Board

Growing Urgent Need for ActuariesGrowing Urgent Need for Actuaries

Emerging economies seeing a surge in Emerging economies seeing a surge in spending power & the need for spending power & the need for insuranceinsurance• Central & Eastern EuropeCentral & Eastern Europe• Latin AmericaLatin America• Central AsiaCentral Asia

Primarily property & autoPrimarily property & auto Explosion of local & regional companiesExplosion of local & regional companies Little or no actuarial expertise or Little or no actuarial expertise or

associationassociation

World BankWorld Bank Supports strong economic systems, Supports strong economic systems,

especially in financial servicesespecially in financial services Growing recognition that insurance is Growing recognition that insurance is

critical to a healthy economycritical to a healthy economy Growing concern that insurance failures Growing concern that insurance failures

are over the horizonare over the horizon• Unsophisticated regulatory systemsUnsophisticated regulatory systems• Little/no actuarial roleLittle/no actuarial role• Corruption – cash flow temptationCorruption – cash flow temptation

Critical need to grow the profession in Critical need to grow the profession in underserved areasunderserved areas

CAS SupportCAS Support

Exam sites in 21 countriesExam sites in 21 countries Heavily subsidized exam feesHeavily subsidized exam fees Library materials provided to Library materials provided to

associationsassociations Most syllabus material available on Most syllabus material available on

the webthe web Professionalism course offered in Professionalism course offered in

AsiaAsia

IssuesIssues

Even the subsidized exam price is steepEven the subsidized exam price is steep CAS membership doesn’t automatically CAS membership doesn’t automatically

lead to local qualificationlead to local qualification Perceived colonialismPerceived colonialism Natural conflict for resources with North Natural conflict for resources with North

American candidate and member needsAmerican candidate and member needs Competition(?) with other international Competition(?) with other international

associations: I&FoA, IAAust, SoAassociations: I&FoA, IAAust, SoA Depends on the generosity of our membersDepends on the generosity of our members

Proposed IAA Education Proposed IAA Education ProgrammeProgramme

Series of modules to meet at least the IAA Series of modules to meet at least the IAA syllabussyllabus

Multiple languagesMultiple languages Multiple delivery optionsMultiple delivery options Consistent qualityConsistent quality Available to any association that chooses Available to any association that chooses

to use part or allto use part or all Available in areas with no association (yet)Available in areas with no association (yet) To be viewed as yet another program in a To be viewed as yet another program in a

world that currently has 50+ programsworld that currently has 50+ programs

AdvantagesAdvantages Most associations are quite smallMost associations are quite small Need about 1000 members for an effective Need about 1000 members for an effective

exam-based systemexam-based system• Fewer if universities are used, but still resource Fewer if universities are used, but still resource

intensiveintensive International program avoids duplication of International program avoids duplication of

efforteffort Allows smaller associations to concentrate Allows smaller associations to concentrate

on other issueson other issues• Qualification standardsQualification standards• Standards of practiceStandards of practice• Nation- or practice-specific educationNation- or practice-specific education• Continuing educationContinuing education

Who is expected to use it?Who is expected to use it?

Brand new associationsBrand new associations Candidates in areas without an Candidates in areas without an

associationassociation Smaller societies without a well-Smaller societies without a well-

established program (e.g. Eastern established program (e.g. Eastern Europe)Europe)

Institute & Faculty of Actuaries (!)Institute & Faculty of Actuaries (!)

Design PlansDesign Plans

Tap into best of existing systems and Tap into best of existing systems and materialsmaterials

Likely to use Australian Likely to use Australian university/association system as a university/association system as a modelmodel

Exam optionExam option Recognizes that IAA syllabus is not at Recognizes that IAA syllabus is not at

“fellowship” level“fellowship” level• SpecializationsSpecializations• Local accounting & regulatory needsLocal accounting & regulatory needs

FundingFunding Associating the program with the international Associating the program with the international

association rather than a particular society opens association rather than a particular society opens up funding from outside the professionup funding from outside the profession

Pilot program funding to be coordinated by World Pilot program funding to be coordinated by World BankBank• Expect multiple donors, e.g. USAID, IADB in the USExpect multiple donors, e.g. USAID, IADB in the US• Will seek corporate sponsors as wellWill seek corporate sponsors as well• Volunteer support, but to a lesser extentVolunteer support, but to a lesser extent

Associations (x emerging economies) that adopt Associations (x emerging economies) that adopt will charge fees to cover their candidates’ costswill charge fees to cover their candidates’ costs

Continuing outside donor support for emerging Continuing outside donor support for emerging economieseconomies

RolloutRollout

Identified pilot countriesIdentified pilot countries• Growing insurance marketGrowing insurance market• Potential for effective regulatory cooperationPotential for effective regulatory cooperation• Funding (e.g. IADB Funding (e.g. IADB Latin America) Latin America)• Local supportLocal support

University, actuarial association or bothUniversity, actuarial association or both 2-4 pilots to be tested2-4 pilots to be tested

• 5 year plan5 year plan• Significant, measurable outcomesSignificant, measurable outcomes• No expectation that process will be complete in No expectation that process will be complete in

5 years5 years

CAS ParticipationCAS Participation Mary Frances Miller & Cynthia Ziegler on IAA Task Mary Frances Miller & Cynthia Ziegler on IAA Task

ForceForce• Significant staff support for budget & business plan Significant staff support for budget & business plan

(note that CAS is recognized as master at budgetary (note that CAS is recognized as master at budgetary efficiency)efficiency)

CAS objectives in the design phaseCAS objectives in the design phase• Keep IAA program modularKeep IAA program modular• Try to steer construction to feed into CAS advanced Try to steer construction to feed into CAS advanced

education (5 or 6 exam level?)education (5 or 6 exam level?)• Try to steer construction to provide p/c focused modules Try to steer construction to provide p/c focused modules

earlier rather than later in the processearlier rather than later in the process Meets World Bank objective to get people trained fasterMeets World Bank objective to get people trained faster

• Insist on dual path – allows for working people to Insist on dual path – allows for working people to become qualified as well as university-age candidatesbecome qualified as well as university-age candidates