Issues Concerning the Supervision of G-SIIs From the Host Supervisor s Perspective

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1 Issues Concerning the Supervision of G-SIIs From the Host Supervisor s Perspective Takashi Hamano 31 st Regulation and Supervision (PROGRES) Seminar 19 February 2015, Basel, Switzerland info@genevaassociation.org

2 February 2015 Issues concerning the supervision of G-SIIs - From the host supervisor s perspective - Takashi HAMANO Assistant Commissioner for International Affairs Financial Services Agency, Japan 1

3 1. Business operations of G-SIIs in Japan Half of licensed insurers in Japan are subsidiaries or branches of major non-japanese insurers. While large majority of non-japanese life insurers are operating in the subsidiary form, the branch form is prevalent for non-japanese non-life insurers. The number of licensed insurance companies and branches (As of end-dec. 2014) Life Insurers (42) Non-life Insurers (52) Domestically incorporated insurers Subsidiaries of non-japanese insurers Branches of non-japanese insurers * Including the Society of Llyod s

4 Six (6) out of nine (9) G-SIIs are operating in Japan and five (5) of them are operating in the subsidiary form. AIG and US Prudential have an intermediate insurance holding company in Japan to manage two or more subsidiaries G-SII s establishments in Japan (As of Feb 5, 2015) Insurance Holding Subsidiary form Branch form Life AIG (AIG Japan Holding) AIG (1) - Prudential US (Prudential Allianz (1) Holding of Japan) Axa (2) MetLife (1) Prudential US (3) Non-life AIG (4) Allianz (1) Axa (1) * Figure in the bracket represents the number of subsidiaries Assicurazioni Generali (1) 3

5 Possible reasons behind the prevalence of the subsidiary form are; (i) Acquisition of Japanese insurers (For example, US Prudential have acquired 6 failed Japanese life-insurers) (ii) Subsidiarisation of former Japanese branches (For example, AIG have subsidiarised two branches and Metlife has subsidiarised one branch in the last few years) (iii) There is no significant merit in the branch form (Japanese insurance regulations applicable to Japanese subsidiaries and Japanese branches are almost identical) (iv) For personal lines of business (e.g., personal life insurance), domestically incorporated firms can enjoy higher trust from the clients. 4

6 2. Current supervisory regime for G-SIIs G-SIIs are subject to the same regulatory/supervisory framework as Japanese insurers. No distinction between a domestically-owned firm and a foreign-owned firm under the Japanese insurance regulatory/supervisory framework However, special attention or consideration shall be given to non-japanese insurers including G-SIIs. Relatively more likely to cede their insurance risks to theirs group-affiliated entities outside of Japan Particularly, variable insurance products (such as variable annuities) with minimum guarantee option 5

7 JFSA as a host supervisor needs to pay great attention to ensure the protection of policyholders in Japan. Which group entity insurance risks are ceded? Whether such entity has sufficient solvency margin? For an effective supervision of G-SIIs, JFSA will need to examine the management and soundness of those firms on a global and group-wide basis. 6

8 3. Outstanding issues Close communication and co-operations with the home supervisors are vital for effective supervision of G-SIIs. JFSA participate in Supervisory Colleges of 4 G-SIIs Sufficient group-level information on G-SIIs through their Japanese subsidiaries/branches is desirable. 7

9 Going forward, the following measures will be worthwhile to consider. Direct contact with the Management of the G-SIIs Headquarters Able to comprehend the business conditions of the G-SIIs on a global and group-wide basis. Co-operation with G-SIIs home supervisors through supervisory dialogues Able to comprehend G-SIIs group-wide risk profiles/factors that would affect their business operations in Japan. 8

10 Since 2013, JFSA has been enhancing its financial monitoring policy to ensure continuous monitoring through integration of off-site monitoring and on-site inspections. JFSA will continue to enhance and strengthen its supervisory framework for G-SIIs business operations in Japan. 9

11 (Reference) Outline of JFSA s Financial Monitoring Policy (Since 2013) 1. Real-time monitoring of developments within the financial sector and financial systems, and identification of potential risks In addition to the ex-post snap-shot of individual financial institution by on-site inspection, more focus on forward-looking identification of potential vulnerabilities and risks to the financial sector and system as a whole. For that, timely and continuous monitoring of developments within the financial institutions and markets will be enhanced. Also, analysis of macro-economic developments with possible impact to safety and soundness of the financial system will be incorporated into the financial monitoring. 10

12 2. Identification of common issues and risks across each industry and proactive policy response In addition to reviews of individual financial institutions issues, identification of issues and risks that are common across the financial industry or the financial system as a whole is required for proactive policy response to address potential risk and vulnerabilities to the financial system. Under the newly introduced horizontal reviews, thematic approaches will be adopted and common issues and areas will be reviewed across the industry, e.g., oversight of overseas operations under the expanding international business and contribution of the revitalization of rural economies. 11

13 3. Encouraging towards the best practices In addition to reviews of compliance with and risk management at minimum standard level required by laws, regulations and inspection manuals, higher level or best practices of risk management are necessary subject to business and risk profiles of financial institutions, including large financial institutions competing with global top players. Dialogues which would encourage financial institutions upgrading towards the best practices level will be conducted as part of the new financial monitoring. Also, root causes of the issues and weaknesses will be addressed more effectively in the monitoring, rather than ad-hoc and superficial compliance with minimum standard requirements. 12

14 THANK YOU FOR YOUR KIND ATTENTION! 13