E.2 Modernization of Ins Solvency Regulation

Question 1

How solvency regulation is structured in the US

Answer 1

• regulation primarily at the state level
• solvency is the paramount objective of insurance regulation
• levels of oversight:
  a. insurers domicile state
  b. other states the insurer does business in

sets of tripwires resulting from the regulation process:

• regulatory requirements, such as RBC level
• further regulatory investigation based on quantitative and qualitative assessments

Question 2

Federal Insurance office role and authority (FIO)

Answer 2

• advises the secretary of the treasury on insurance issues
• consults with states on national issues and international insurance matters
• monitors all aspects of the insurance industry
• has the authority to recommend to the Financial Stability Oversight Council that a specific insurer be subject to Fed Supervision
• represents the US in various international forums

Question 3

Capital standards in the US vs EU

Answer 3

US capital standards:

• rbc is based on the c0 - c4 risks
• covariance adjustment is performed to reflect correlations of certain risks
• The RBC ratio will determine any regulatory actions required

EU Capital standards:

1. min capital requirement = absolute minimum level of capital
   - calculated by a VaR 85
2. Solvency capital requirement = target capital level based on an economic capital approach = 1 year VaR 99.5

Question 4

SMI recommendations for US capital standards

Answer 4

• an explicit P&C catastrophe risk charge
• increased granularity in C1 factors
• refinement of the credit risk charge for reins recoverables
• liquidity risk is not addressed by the RBC formula

Question 5

Functions of the supervisory review process

Answer 5

1. risk management - UW, reserving, ALM, investments, liquidity, risk diversification
2. actuarial analysis - methods and procedures to assess the sufficiency and uncertainty of technical reserves
3. internal audits - independent, objective consulting activity to evaluate the effectiveness risk management, control, and governance
4. internal controls - designed to ensure the effectiveness of a firms operations, availability, reliability, and regulatory compliance

Question 6

Own Solvency and risk assessment ORSA

Answer 6

• regular assessment of an insurers own solvency needs and how they are being addressed
• requires implementation of processes for quantifying risks in a coherent framework
• assessments must be integrated in a strategic decision making process

Primary goals of ORSA:

1. foster an effective level of ERM at all insurers
2. provide a group level perspective on risk and capital as supplement to existing legal entity view

insurers are required to file ORSA report with the following:

• description of risk mgmt policy
• quantitative measurements of risk exposure in normal and stressed envirnments
• prospective solvency assessments

Question 7

Group supervision in the US vs EU

Answer 7

US:

• if an insurer s domiciled in different states:
• a lead state is designated as the primary regulator for solvency regulation
• coordinating state is designated for financial examinations
• peer reviews also help monitor multiple insurers within a group for nationally significant companies

EU:
- view insurance groups as a collection of separate legal entities but also views the group as an integrated whole diversified risk

Question 8

Group solvency issues working group recommendations

Answer 8

General recommendation - “windows and walls” approach

• regulators have windows to access into group operations
• walls of solvency protection are strengthened within a company

additional recommendations:

1. establish effective comms between regulators and entities associated within a group
2. establish supervisory colleges in the review of internationally active groups
3. enhance collection of information regarding all holding companies
4. increase penalties for insurers who do not provide required info