Evolving Insurance Regulation

Transcription

1 FINANCIAL SERVICES Evolving Insurance Regulation A new dawn... March 2013 kpmg.com

2 Global Insurance Leadership Team About this report This report was developed by KPMG s network of regulatory experts. The insights are based on discussion with our firms clients, our professionals assessment of key regulatory developments and through our links with policy bodies. Frank Ellenbürger Global Head of Insurance and EMA region Coordinating KPMG in Germany Laura Hay Americas region Coordinating Insurance KPMG in the US Simon Donowho ASPAC region Coordinating Insurance KPMG in China Gary Reader Global Insurance Advisory Lead KPMG in the UK Frank Pfaffenzeller Global Insurance Audit Lead KPMG in Germany Hugh von Bergen Global Insurance Tax Lead KPMG in the UK Tim Roff Global Actuarial Lead KPMG in the UK Mary Trussell Global Focused Markets Insurance Lead KPMG in the UK Rob Curtis Global Insurance Regulatory Lead Director KPMG in the UK

3 Contents Foreword 2 Executive Summary 4 Latest international developments EU/US Dialogue debate/ issues and outcomes 6 Perspectives: Americas region 10 The Americas regulatory developments at a glance 12 Group supervision How ComFrame will change the supervision of internationally active insurance groups 18 Systemic risk The systemic debate shifts to insurers: the likely implications 22 Perspectives: ASPAC region 28 Asia-Pacific regulatory developments at a glance 33 The conduct agenda The emerging prudential and conduct oversight framework 48 Perspectives: EMA region Europe: Further delays to Solvency II 52 European Insurance and Occupational Pensions Authority (EIOPA) developments 55 EMA regulatory developments at a glance Middle East 56 Africa 59 Financial reporting, valuation and disclosure the latest developments Major steps forward five years away, but getting closer 65 Abbreviations 71 Acknowledgements 72 Latest developments in Enterprise Risk Management (ERM) Optimizing output to ensure value-enhancing performance 40

4 2 Evolving Insurance Regulation March 2013 Foreword 2013 represents a new dawn for insurers. Global equity markets are rebounding back to their highest levels since the Global Financial Crisis; there appears to be some light at the end of the tunnel for the eurozone crisis; and tentative green shoots of recovery should begin to emerge this year. Even regulation is now entering a new era in its post-crisis phase. Yet despite these encouraging developments, many insurers still find themselves facing significant challenges. Growth forecasts remain uncertain due to continuing global tensions and fragilities. Although numerous insurers have already begun to transform their business models in response to the changing business environment and successive regulations, they are now confronted with a future of weak demand and rising costs. Improving future growth prospects and market share and achieving a good return on capital while reducing unnecessary inefficiencies and costs are emerging as the short to medium term norms for most insurers. Jeremy Anderson, CBE Chairman, Global Financial Services Frank Ellenbürger Global Head of KPMG s Insurance Practice The global economy We all know that since 2008, the global economy has struggled to recover from the financial crisis Western economies in particular. Recovery remains fragile and uneven across different economic areas; interest rates remain at historically low levels; and availability of credit remains weak, which continues to affect growth. Persistent high unemployment (especially youth unemployment) and low consumer demand, together with increased regulatory requirements, have significantly contributed to the ongoing difficult trading conditions faced by many insurance firms. At the beginning of 2012, the International Monetary Fund (IMF) emphasized that financial stability was very fragile, especially in light of a potential intensification of the eurozone crisis. Thankfully, recent steps taken by the European Union to secure Greek bail-out funding have provided greater stability and new impetus to achieving social coherence. Measures taken to stabilize financial markets, such as the banking union proposals, aim to achieve greater integration. In the US, the fiscal cliff scenario continues to create instability in the financial markets, with the possibility of significant public sector budget cuts and other fiscal changes in 2013, which combined could lower US GDP. Such outcomes may be further compounded by any additional implications arising from the eurozone crisis. In contrast, many emerging economies continue to experience growth, although domestic challenges such as inflation remain a concern; and the ability to increase domestic consumption remains a key consideration for many. Regulatory Change The unrelenting pace of regulatory reform continues. Important insurance initiatives such as the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) and the European Union s Solvency II Directive remain a key focus. Increasingly, as more jurisdictions begin to implement the ICPs, assessing how best to accommodate multi-jurisdictional compliance and reporting requirements becomes a growing strategic challenge. On a global level, 2013 is likely to see a continuation of insurers focusing on different regulatory issues in response to local changes. European insurers continue to invest in Solvency II, where significant prudential change and consumer protection reforms continue. The Solvency II delays mean this could now be at a slower pace than before. Notwithstanding, the European Insurance and Occupational Pensions Authority (EIOPA) is continuing its efforts to push for convergence even though national supervisors may be keen to forge their own path ahead. In the US, where the National Association of Insurance Commissioners (NAIC) has responded to global developments, insurers are beginning to ascertain the impact of enhanced enterprise risk management requirements from 2015 onwards. In Asia, prudential issues, such as enhanced capital frameworks and group supervision, combined with a greater regulatory focus on distribution, continue to present insurers with fresh challenges. Importantly, supervisors in

5 Evolving Insurance Regulation March Latin America, the Middle East, Africa and Russia are also now starting to examine how they introduce the new IAIS ICP requirements, which will have further impacts on insurers in these regions. Systemic Risk The introduction of proposals for global systemically important insurers (G-SIIs) may prove challenging, but equally, such reforms will also place pressure on regulators to confront current issues, such as sub-optimal supervisory structures, policyholder compensation schemes, group-wide supervision and more coordinated resolution mechanisms. Of particular importance are: The very nature of recovery and resolution requires cross-border coordination. The need for all regulators and supervisors to continue their participation in global activities and not develop specific regional requirements which might limit the ability of firms to operate internationally is especially important. We continue to support measures to build more integrated and effective approaches to solvency structures at a global level. Cross-border cooperation and implementation of systemic risk analysis could be better facilitated by group supervision at least at regional levels where possible. For example, there may be merit in examining the future role of EIOPA in undertaking and assuming full responsibility for group-wide supervision of European insurance groups deemed systemically important, assisted by local regulatory authorities where required. Such a structure begins to reflect those initiatives undertaken by the ECB in coordinating supervision for the largest banks across Europe. Similar Federal action could be initiated in the US. Further reforms to support consumer protection could also be considered. For example, an integrated and effective pan-european approach to insolvency structures and requirements could be considered. The possibility of creating a Europewide compensation scheme for policyholder protection purposes could also form part of the broader systemic risk considerations to facilitate greater commonality and treatment in response to insolvencies across Europe. Such measures would reinforce EIOPA s ability in supervising large European groups with crossborder activities and potentially reduce regulatory costs for insurers. Business Transformation We are finally seeing more focus on growth. But a variety of commercial pressures, such as determining an adequate pricing structure given economic headwinds; an ageing population in mature markets; and often outdated IT systems and processes are pushing insurers to re-assess their business models, operational end-to-end processes, and products. The aim for many insurers in 2013 seems to be optimizing returns and reducing costs, while ensuring a sustainable earnings base. To do this, insurers are increasingly taking measures to transform their risk and finance operations, leading to leaner and more competitive entity structures. The challenging environment of low yields is also forcing insurers to consider returns (especially funding of guarantees) and alternative assets which has wider risk and capital consequences. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) continue their separate insurance contract initiatives in order to improve, simplify and converge the financial reporting requirements for insurance contracts and to help investors with useful information supporting investor decision-making. Such initiatives will provide further transformational impetus for insurers; and while there is no final deadline confirmed, an exposure draft is expected in the first half of The rise of the Emerging Market While economic conditions are still fragile in many mature markets, most emerging markets continue to experience growth, despite inflationary pressures and appreciation of local currencies. As part of their strategic plans and business ambitions, domestic and foreign insurers now aim to leverage opportunities in these new markets, driven by relatively rapid demographic changes and a growing middle class. To capitalize upon such opportunities, insurers are developing new products and distribution channels in those countries which require innovative approaches, such as balance sheet optimization, greater use of social media, and ability to source and secure local management talent. Audit Reform Audit reform proposals such as those proposed by Commissioner Barnier in Europe and other developments in China and the US, considering mandatory auditor rotation may create significant changes in current insurance audit arrangements. It will be interesting to see if, at the same time, further pressure on increased transparency and reporting arrangements is put in place by policymakers. New regulatory requirements may revise or increase the audit scope, for example, the audit of statutory returns could be advanced in a number of jurisdictions. The ongoing regulatory change agenda and the renewed need for increased growth, profitability, capital returns and cost reductions remain central themes for all insurers. Being able to respond appropriately to these challenges will mark out the successful insurers in this new era and will define 2013 as yet another year to rise to the challenge. Are you ready for what lies ahead?

6 4 Evolving Insurance Regulation March 2013 Executive Summary 2013 is shaping up to be another year of significant regulatory and commercial change requiring a new state of readiness. However, these changes bring opportunities as well as challenges. This publication analyzes the increasingly wide range of regulatory drivers for insurers and examines ways in which the industry can balance these new demands, while keeping an eye on creating positive value for enhanced performance. We highlight both the key challenges and opportunities for the insurance industry, outlining ways to maximize the opportunities that this new dawn presents. This year is the second full year since adoption of the revised IAIS ICPs, with many of the world s insurance regulators now putting pen to paper and proposing and implementing wide ranging reform packages. The jurisdictional-based regulatory framework across the globe remains far from a harmonized set of international regulations; this is an area we address first, by looking at the latest international developments occurring between the US and European Union regarding supervisory structures and requirements. This ongoing dialogue, which aims to improve the understanding and cooperation between the insurance markets, is vitally important if the insurance sector is to move to a more harmonized and converged set of regulatory requirements to the benefit of all stakeholders. The Americas Perspective provides key insights into a very diverse region from highly developed and complex regulatory environments with both prudential and market conduct regulations to those countries with rapidly growing insurance markets but with a very much emerging regulatory infrastructure. Interestingly all, from Canada to Argentina, are challenged by the revised ICPs developed by the IAIS. Programs of regulatory reform are reflected throughout the Americas. In particular, the revision of solvency standards, risk management (including the development of Own Risk and Solvency Assessment, or ORSA) and governance are all evident. It is becoming increasingly obvious that the consumer agenda is lagging behind the prudential requirements that have been subject to enhancement post the financial crisis. In the banking world, this is about the trust agenda but insurers are likely to get caught in the backlash. It will become necessary for the market conduct agenda to be addressed due to social, political and economic pressures within the different territories. Group supervision focuses on the increasing attention paid by supervisors in the assessment and management of group risk, both from the perspective of a top-down assessment of risk from the group headquarters level, to the risk attaching to the wider group on a particular local entity. We examine the ComFrame project in further detail and analyse the impact that the common framework project is likely to have on a defined set of Internationally Active Insurance Groups (IAIGs), including the emerging regulatory group risk management expectations. While specifically aimed at IAIGs, it is likely

7 Evolving Insurance Regulation March Insurers can expect more intrusive and product-focused supervision, a focus on the root causes of poor customer outcomes and a significantly lower tolerance for customer detriment. that at least some elements of these requirements will be adopted by national supervisory authorities in relation to a wider population of firms, so the proposals being put forward this June will likely provide a sense of direction of future insurance regulatory requirements for all insurers. Our focus on the shifting of the Systemic Risk agenda to insurers discusses the increasingly clear suite of regulations that the yet to be defined group of Global Systemically Important Insurers (G-SIIs) will be required to implement over the course of the next six or so years. G-SIIs will face three main types of measures which are being designed to reduce the probability and impact of a systemic shock: enhanced supervision; effective resolution; and higher loss absorbency (HLA) capacity (eg. capital requirements). Regulatory attention is expected to be directed at non-traditional non-insurance (NTNI) activities of insurers and insurance groups. These reforms are not only pertinent to G-SIIs. Many of the concepts and supervisory expectations arising from the current G-SII debate are likely to invariably find themselves being applied by regulators to a much wider group of insurers. To influence this debate, we provide our perspectives of possible approaches that may also need to be considered to move the systemic risk debate forward for all stakeholders concerned, including the likely implications for insurers. The ASPAC Perspective takes an in-depth look at the diverse Asia-Pacific region and considers the impact of global, regional and local regulatory forces that are increasingly shaping its insurance markets. There is a particular focus on prudential regulation in the region and an increasing regulatory appetite for reforms in the areas of customer treatment and conduct of business. We consider the potential impact of the establishment of the Association of Southeast Asian Nations (ASEAN) Economic Community on its ten ASEAN Member States in 2015 and beyond, and for the first time take a glimpse at the emerging markets of Cambodia and Myanmar. With the current focus on risk management in the industry and the strong IAIS focus on Enterprise Risk Management (ERM) standards through the ICPs, our analysis of the latest developments in ERM seeks to illustrate how insurers are approaching the ultimate goal of optimizing the information produced by the risk function in order to enhance performance and competitive advantage. Delivering real value from risk management is emerging as a critical issue for many insurers our review introduces a new approach to how insurance firms could measure the value being derived using risk-adjusted return on capital measures. The conduct agenda demonstrates how regulators are shifting towards outcomes-based regulatory reforms and are moving away from more traditional point of sale approaches, with an emerging regulatory framework that considers both prudential and conduct oversight. We argue that, overall, insurers can expect more intrusive and product-focused supervision, a focus on the root causes of poor customer outcomes and a significantly lower tolerance for customer detriment. The EMA Perspective looks first at what we can expect in relation to Solvency II and the continuing delays to implementation; whether it is now likely that the three-pillar elements of Solvency II could be de-linked; and whether its risk management, governance and possibly reporting standards may now reach implementation status ahead of the capital reforms. We provide an extensive overview of the main outstanding issues confronting regulators in reaching final conclusions concerning the pillar 1 requirements and provide an overview of the latest EIOPA considerations and the implications these issues will have for insurers. We also outline for the first time the emerging regulatory developments across the vast EMA region, particularly in the Africa and Middle East regions, providing a country-by-country overview of a number of significant developments, which will drive substantial change for insurers in those respective markets. The review of financial reporting, valuation and disclosure requirements completes this year s edition, where we provide an update on the long-running efforts of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to agree on a consistent standard for reporting insurance-related financial information. We also outline the major strides that have been made during 2012, particularly concerning the measurement of insurer assets and liabilities and actions to limit volatility of results and financial positions will require a new state of readiness are you prepared and able to maximize the opportunities this will bring?

8 Latest international developments EU/US Dialogue debate issues and outcomes At the conclusion of the annual International Association of Insurance Supervisors (IAIS) conference held in Washington in October , the EU-US Dialogue on Insurance Regulation, an informal body which includes top supervisors from the EU and US, held a special session to compare EU and US regulatory regimes. The meeting was significant, for it was the first time both sets of supervisors have formally come together to discuss supervisory issues, whether further convergence could be achieved and the extent of differences that currently exist. The EU-US Dialogue formally presented a 100-page document on the two insurance regulatory regimes. 1. Request for the EU-US Dialogue Project paper for Public Comment on the Technical Committee Reports Comparing Certain Aspects of the Insurance Supervisory and Regulatory Regimes in the European Union and the United States. Issue Date: September 27, Presented at the IAIS 19th Annual Conference, Washington, D.C., October Summary The joint study compared certain aspects of the insurance supervisory and regulatory regimes that are expected to be part of Solvency II in the EU with the state-based regime in the US. A group steering committee agreed upon seven topics considered of fundamental importance to a sound regulatory regime and to the protection of policyholders and financial stability: Professional secrecy/confidentiality Group supervision Solvency and capital requirements Reinsurance and collateral requirements Supervisory reporting, data collection and analysis Supervisory peer reviews Independent, third party review and supervisory on-site inspection Separate technical committees of industry experts were formed to consider each of the seven topics.

9 Evolving Insurance Regulation March Group supervision has become an important aspect of the overall supervisory process, because group membership can pose unique risks, such as reputational risk, as well as benefits, such as capital options and risk diversification. Key outcomes Disappointingly, the paper provides two main observations, without offering a firm commitment to change, reflective of the highly sensitive environment that has come to dominate the EU/US insurance supervisory relationship: 1. The state-based regime overseen and enforced by the National Association of Insurance Commissioners (NAIC) is a more mature regime that has been in effect for many years. It is viewed as a robust system that coordinates effectively across jurisdictions, notwithstanding the varying regulation which applies across states. In comparison, Solvency II and the European Insurance and Occupational Pensions Authority (EIOPA) are still largely works-in-progress. For example, guidelines in some cases are still being drafted with supervisors conscious of capital and liquidity problems faced by the industry; 2. In an attempt to coordinate and harmonize regulation across borders, the EU regime adopts a more rulesbased prescriptive approach, with quantitative and qualitative checkpoints and criteria, compared to the US regime, which relies on the NAIC to enforce adherence. Below is a topic-by-topic summary of the report and the different points of comparison: 1. Professional secrecy and confidentiality This section of the report focuses on an analysis of the policy objectives of confidentiality laws; the relationship between freedom of information laws and insurance confidentiality laws in the US and the EU, authority to share information across borders, and the laws associated with information exchanges. Both regimes seek to balance the objective of maintaining professional secrecy with appropriate flexibility to share information with other supervisory authorities that have a legitimate and material interest in the information. Key commonalities: Neither regime provides a single, all-encompassing definition of confidential information. Both regimes have a spectrum of penalties that can be administered to violators of professional secrecy laws, depending on the severity of the breach. Primary regulatory oversight responsibility rests with US states insurance departments and the EU Member State supervisory authorities. Key differences: Structural approaches to confidentiality are very different. The EU starts from the presumption of confidentiality and identifies exceptions. US penalties vary from state to state as there is a clearer emphasis on access to public records. In the EU regime, EIOPA participates as a competent authority in its own right whereas in the US, the NAIC is not considered a supervisory authority. In the US, the states rather than the federal government have primary regulatory responsibility for regulating the insurance business including professional secrecy laws. 2. Group supervision This section primarily compares the EU and the US s application of regulatory oversight to a group. Group supervision has become an important aspect of the overall supervisory process, because group membership can pose unique risks, such as reputational risk, as well as benefits, such as capital options and risk diversification. Key commonalities: Both regimes set a similar primary policy objective for group supervision of policyholders, which is to enhance the financial stability of the insurance group. Both regimes have requirements for group reporting, with a particular focus on group-specific risk and intragroup transactions (IGTs). In both regimes, the ORSA will be reported on at least an annual basis. Key differences: The US supervision of insurance companies is described as a windows and walls approach (ie. still statebased with no formal, group-wide requirements), whereas the EU supervision is more holistic and applies at the level of the group. The risk-based capital (RBC) formula used in the state-based regime in the US is a factor-based model, using an RBC ratio as an aggregation method for assessing overall insurance group capital, whereas the Solvency II Directive provides for an explicit group capital requirement. The EU s group solvency assessment includes a total balance sheet approach using the default approach calibration to a confidence level of 99.5 percent over a one-year period. In the US, risk aggregation is carried out through the RBC and the group ORSA. The legal requirements are more prescriptive in the EU, whereas in the US, management has the discretion to determine the specific methodologies chosen. 3. Solvency and capital requirements Both the EU and the US operate a capital adequacy program. The RBC system in the US sets a minimum amount of capital (to identify poorly capitalized companies) to be held before action is prompted, at a level lower than the EU

10 8 Evolving Insurance Regulation March 2013 While there are differences in the means by which the EU and US regimes handle reporting, data collection and analysis, there are similarities in the overall objectives and approach. Solvency Capital Requirement (SCR). While the primary objective of both regimes is to protect policyholders, for this purpose, both regimes take different approaches. Both regimes have a similar concept of ORSA assuming Solvency II adoption within Europe, but the EU sets the process in law and prescribes that the qualitative and quantitative assessments are performed against a set standard. In comparison, the US allows for more management discretion. The role of capital varies under the two regimes. The RBC calculation is a standardized approach to measuring a minimum amount of capital used to calculate different levels of action points; it is not an indicator of financial strength. Solvency II includes two independently calculated capital levels, the Minimum Capital Requirement (MCR) and SCR, that allow different types of regulatory actions to be taken. Key commonalities: Both regimes provide thresholds, which, when breached, result in regulatory actions. The capital requirements in both regimes are supported by the requirements on governance, supervisory review, and reporting to supervisors. Both regimes have requirements in relation to investments that aim to ensure that the investment portfolios are established and managed prudently; however, these objectives are achieved in different ways. Key differences: The SCR under Solvency II includes all quantifiable risks of the insurer, while the RBC includes risks considered material to the industry, with some modules looking at company specific assumptions. In enforcing, the Solvency II framework is designed to provide incentives for risk management, whereas the RBC primarily relies on supervisory tools other than capital requirements. 4. Reinsurance and collateral requirements This section covers the key differences and commonalities that exist between both regimes in relation to the supervisory requirements for reinsurance and collateral, including policy objectives, risk transfer requirements, credit for reinsurance and collateral requirements, capital requirements and consistency. Key commonalities: Both regimes seek to ensure the ongoing solvency of domestic insurance and reinsurance companies in order to protect policyholders. In both regimes, the solvency requirements applied to reinsurance companies largely mirror the solvency regime applied to direct insurers. These requirements and other risk mitigation techniques must fulfil criteria relating to genuine and effective risk transfer in order to receive credit. Under both regimes, insurers ceding reinsurance must reflect the counterparty default risk associated with reinsurance counterparties in their capital requirements. Key differences: In the EU, reinsurance undertakings are required to limit their objectives to the business of insurance and related operations, although direct insurers may be authorized to write reinsurance business. US reinsurers are generally permitted to write insurance businesses on a direct or assumed basis. The state-based regime in the US generally applies a fixed RBC charge for recoverable amounts depending on the line of business. 5. Supervisory reporting, data collection and analysis While there are differences in the means by which the EU and US regimes handle reporting, data collection and analysis, there are similarities in the overall objectives and approach. Both regimes seek or require: Harmonized and comprehensive reporting The analysis of data to identify the risks posed to insurers Disclosure requirements on undertakings The use of reporting to monitor compliance. Key commonalities: Both the EU and US will require ORSA reporting Both regimes require harmonized data collection that is straightforward, transparent and fair. Findings and data will be stored in a comprehensive database, which will also allow for retrieval and analysis. Regular and ad-hoc quantitative and qualitative reporting and analysis are provided. Key differences: The state-based system in the US has a mature, harmonized data collection and analysis function administered by the NAIC. While the EU also has a mature system in place, this is at the member-state level and not across the EU as a whole. The EU includes a detailed description of governance and risk management systems, while the US system prefers the monitoring to occur mostly through on-site examinations and focuses on expected outcomes.

11 Evolving Insurance Regulation March The EU will fully integrate ORSA within the Solvency II framework, whereas in the US, the ORSA is still pending implementation of the forthcoming model law, following the NAIC guidance manual on ORSA. 6. Supervisory peer reviews The report focuses on the practice of EIOPA and the NAIC, referring to the activities of other institutions where relevant. Review programs are developed by representatives of states/competent authorities that are themselves subject to review. Non-regulators may provide input to the development of the program. The report is structured to address issues relevant to the scope, process, and outcomes of the Accreditation Program and the EIOPA Review Process. Key commonalities: For both regimes, persons responsible for coordination of the process ensure relevant procedures are followed. Both regimes involve legal counsel on a consultative basis. Both regimes require those responsible for conducting reviews to be insurance regulation specialists, and appropriate steps are taken to avoid possible conflicts of interest. Key differences: Accreditation in the US system deals with financial solvency regulation, but does not include market conduct issues. In contrast, the EU peer review process both covers prudential and market conduct issues. The objectives vary between regimes too: the state-based regime assesses whether the insurance departments are meeting minimum standards, while the EU regime strives to achieve high quality supervisory outcomes. What are the implications for insurers? While we are encouraged by the international dialogue and debate, issues concerning the setting of policyholder protection levels (capital) remain outstanding and need to be addressed if there is to be true global convergence. Despite the good work performed, neither the US nor the EU has made any further comment on the issue of equivalency between the two jurisdictions. This issue remains a real concern to the industry. Given the Solvency II delays, an alternative is to now look to the new ComFrame proposals by the IAIS to provide a coherent and converged framework, focusing on an outcomes-based set of requirements. It is clear that there are both differences and similarities shared across the regimes. The decisions made at both international and domestic levels will shape the playing field on which insurance 7. Independent third party review and supervisory on-site inspection This section covers significantly different areas of external scrutiny, internal controls, and supervisory inspections within the supervisory regime. Specifically, this report covers three key topics: independent audits, actuarial reports, and on-site examinations. Key commonalities: Both regimes have directives or regulations that require an annual external audit. Supervisors in both regimes are provided with the necessary authority to conduct on-site examinations. Both regimes have regulations that allow supervisors to conduct companies operate. Efforts towards greater convergence should continue. The development of a US ORSA, which essentially aims to achieve the same outcomes as the European ORSA, should help insurers active in both markets to streamline their risk management operations, reporting requirements and governance arrangements. It is important for insurers to stay abreast of the changing international regulatory environment and to understand the impacts of regulatory change on their business models. Insurers should continue their involvement in efforts to develop the ComFrame proposals of the IAIS. Ongoing bespoke regulatory requirements from the two biggest global markets invariably costs all participants, particularly policyholders. examinations of all companies writing insurance business in their states as often as necessary. Key differences: In the EU, all insurers are required to have their annual accounts and consolidated accounts audited. In the US, audits are not required for insurers that have fewer than 1,000 policyholders, or if they have annual premium income of less than US$1 million. The state-based regime in the US requires a full-scope financial examination to be performed at least once every five years. Under the Solvency II Directive, there are no frequency requirements for examinations.

12 10 Evolving Insurance Regulation March 2013 Perspectives: Americas region Insurers face a new regulatory environment as significant regulatory change within the Americas region continues unabated. Countries from Canada to Argentina are deep into financial services regulatory reform efforts with insurance continuing to be a main target of these reforms. Safely navigating the already choppy regulatory waters will only prove more difficult in the coming years. Many of the most significant jurisdictions in the Americas have recognized that reform of their insurance regulatory regime is necessary; the only question left is the form such new regulation will take. October 2012 saw the US host the annual IAIS conference in Washington, D.C. The agenda focused on the international challenges of global regulatory reform, including lively discussion of ComFrame and consideration of what the supervisor of the future may look like. The insurance regulatory agenda stretches out for many years into the future as important decisions are being made now which will affect the regulatory landscape for years to come especially decisions as to the future of group supervision and crossborder regulation. Insurance companies and insurance supervisors that wish to stay ahead of the domestic agenda increasingly need an international perspective and strategy. Although somewhat buried in the political turmoil of the 2012 US presidential election, the Federal Insurance Office (FIO) began to show that it intended to be a major player on the international scene. The FIO was a key player in the much-lauded EU-US Dialogue which aimed to bridge perceived regulatory gaps between the two largest insurance markets. Indeed, the recent appointment of former senator Ben Nelson as CEO of the National Association of Insurance Commissioners (NAIC) was a tacit nod to the increased importance of the federal government in what has been almost exclusively a state-based insurance regulatory regime. As the political season in the US has passed and the FIO has notably begun to increase its staffing of late, the US insurance industry expects the FIO this year to release two eagerly awaited reports that have been thus far delayed. These two reports to the US Congress one report regarding how to modernize and improve US insurance regulation and one report on US and global reinsurance markets have the potential to shape the direction of any future US regulatory reform. We first look at a set of regional regulatory trends and impacts for the region, followed by a local country regulatory focus section. Backdrop: an increasingly complex and active marketplace 2013 in the Americas region poses a number of challenges. The global macroeconomic environment and the changing regulatory landscape continue to shape the development and growth of insurance as a product within the region. In addition, the regulatory environment has led to changes in the way insurance companies organize themselves and the strategic outlook for new growth areas, both in product and target markets. The regulatory environment has led to changes in the way insurance companies organize themselves and the strategic outlook for new growth areas, both in product and target markets.

13 The key areas of development are increased policy and supervisory requirements in the areas of: Corporate governance Enterprise risk management Solvency and capital standards Financial reporting and the development of International Financial Reporting Standards (IFRS) Consideration of the consumer agenda and other high-risk areas, such as fraud and anti-money laundering. Regulatory trends and drivers Insurance Core Principles (ICPs) The region continues to see a high degree of regulatory policy development, consultation and implementation. Both insurers and regulators have struggled to keep up with the volume of regulatory reform. It is clear that countries within the Americas have looked at other international insurance regulatory frameworks, however, not all have moved to a Solvency II approach. Greater consideration has been given to the ICPs that were in development and were adopted by IAIS members in October Many countries have adopted a review and implementation timetable. Insurers who wish to understand the regional implications would do well to consider the ICPs as adopted as a template for future regulatory requirements. An obvious example of this is the development of the ORSA, governance, enterprise wide risk management and changing capital requirements. Systemically Important Insurers The consideration of whether any insurer can be considered a Global Systemically Important Insurer (G-SII) or Domestic Systemically Important Financial Institution (D-SIFI) continues with a particular focus within the United States a jurisdiction which has been very influential in the development of standards and requirements at both a domestic and international level. This comes as no surprise, given the impact of the financial crisis on a number of US financial holding companies within both the insurance and banking sectors. There is an expectation that a number of insurance companies within the US will be designated as systemically important by the Financial Stability Oversight Council (FSOC). It is understood that the designation of systemically important for an insurer could be made as early as the spring of FSOC is currently going through a three step assessment process in considering the designation of insurers as systemically important. Consumer Agenda Within the IAIS agenda, prudential standards have appeared at the forefront of recent developments. When looking at the balance of regulatory reform, in many ways the consumer protection agenda is the poor relation. Although domestically many countries have a developed consumer protection framework, it is clear that the consumer agenda remains an area of focus. Going forward we can expect to see further harmonization of regulatory requirements, regulatory consumer studies, enhancements to regulatory consumer protection and an increase in enforcement/sanction activity where consumer failings or detriment occur. There is an expectation that a number of insurance companies within the US will be designated as systemically important by the Financial Stability and Oversight Council (FSOC).

14 12 Evolving Insurance Regulation March 2013 Americas regulatory developments at a glance The significant regulatory developments across the Americas region are outlined below, providing an introduction for each country with a look into the areas of solvency capital and risk management, consumer protection and (where significant developments are expected) financial reporting. Argentina In Argentina, 2012 brought economic deceleration and changes in the sector regulations. Depending on each segment, the insurance market expanded its volume of premiums by more than 30 percent, at current values, and increased its volume of policies by up to 15 percent. These figures are opposed to the stagnation of the overall economy and the fall in construction and other areas of the production sector. According to data provided by the Argentine Insurance Regulator (SSN), the growth rate accelerated in July and September, compared with the annual average, which creates positive expectations for In addition, the Life segment recorded the greatest increase between January and September (34 percent at current values), compared with the Property (31 percent) and Retirement (28 percent) segments. The workers compensation insurance segment rose by 37 percent, in line with the increase in salaries and in the volume of insured personnel at a general market level. On the other hand, in the property segment, the automobile line still has the highest impact, with a 27 percent growth at current values, which implied a rise in the number of policies issued by approximately 15 percent. However, only 76 percent of the automobile fleet is deemed to be insured. Another growing line was in agriculture. Its growth is related to the expansion of the sown area (as per data provided by the SSN, only 59 percent of the sown hectares are insured). The most significant changes in insurance regulation during 2012 were related to the obligation to repatriate foreign investments and cash, the impossibility of remitting dividends abroad and purchasing reinsurance abroad (except for specific cases), and the increases relating to the minimum capital requirements to operate in the insurance and reinsurance business. Additionally, there is an obligation to invest in the real economy (production and infrastructure projects), which will have an impact on The level of impact will vary by segment: Property from 10 percent to 20 percent of the investment portfolio and Life and Retirement from 13 percent to 30 percent of their portfolios. Moreover, during 2012 the digital policy system was implemented. This system was launched by the regulator in 2011, and provides information on all the policies of the automobile line issued in the country online. In the reinsurance segment, in October 2012 the SSN finally defined the valuation and presentation accounting standards applicable to the financial statements of reinsurance companies, which is in line with the new regulatory framework that is in place. In addition, at the end of October 2012, the SSN, pursuant to the National Government s requirements, launched the National and Strategic Insurance Plan (PlaNeS) This plan is mainly aimed at increasing the insurance penetration in Argentina, which is still low (2.73 percent of the GDP), compared with other countries in the region, such as Chile (4 percent) and Brazil (3.1 percent). The production of the insurance sector as a whole is expected to be around 5 percent of the GDP by Also in October 2012, the National Executive passed the new Workers Compensation Insurance law. The law increases the amount of workers compensation, transfers the legal claim from the labor to the civil jurisdiction and eliminates the possibility of making a claim before the Workers Compensation Insurance Companies while also bringing an action in Court (civil jurisdiction). During 2012, various and opposing transactions are noted in terms of mergers and acquisitions of sector companies. In this sense, some international groups have increased their presence in the local market by acquiring insurance companies from other international groups. Market expectations for 2013 are similar to those for 2012; a sustained growth of the insurance industry in general is expected, at similar levels to those evidenced in 2012.

15 Evolving Insurance Regulation March Bermuda Bermuda s insurance market is unique, with two distinct elements firstly, one of the largest international reinsurance markets, and secondly, the largest captive domicile. In addition, with the introduction of Special Purpose Insurer legislation in Bermuda, there has been significant growth in risk securitization, including cat-bond issuance as well as a large number of dedicated Insurance Limited Securities funds. These distinct markets present very differing regulatory risks which have been recognized by the Bermuda regulator, The Bermuda Monetary Authority (BMA), in the development of its regulatory program. Commercial Sector Regulation Bermuda is a first wave country in the EU Solvency II equivalence assessment process. The regulatory regime has been constructed with the aim of mutual recognition with the EU and with reference to the International Standards and the Core Principles of IAIS. In 2011, Bermuda went through a preliminary assessment from EIOPA, in which it was determined that Bermuda was largely equivalent or partially equivalent for the commercial sector, with the exception of the life regime. Since that initial assessment, the BMA has continued its development of regulation and the supervisory process for the commercial sector such that it is now, in many respects, ahead of the EU. The commercial sector comprises Class 4, 3B, and 3A license holders for the non-life sector and Class E, D and C for the life sector. Currently effective are the following key elements: Pillar 1 (Capital) Standard model (Bermuda Solvency Capital Requirement non-life-only) and own model approval process as well as an eligible capital regime consistent with Solvency II. A standard model for the life sector was released in 2012 and following consultation with industry, has been completed for Class E insurers. A group Bermuda Solvency Capital Requirement (BSCR) has also been developed, with groups encouraged to submit the results to the BMA. However, largely because of the delays in Solvency II, the BMA has decided to phase in the implementation of its group solvency requirements over a six year period. Pillar 2 (Risk and governance) Code of Conduct (establishing minimum governance requirements); an own capital self assessment process called the Commercial Insurers Solvency Self Assessment (CISSA), a Commercial Insurer Risk Assessment (CIRA) and Catastrophe Risk Return to address the heavy property catastrophe concentrations in the Bermuda market. All elements are required for groups, including a Group Solvency Self Assessment (GSSA). Pillar 3 (Disclosure) Enhanced regulatory reporting (annual and quarterly), public financial information (Generally Accepted Accounting Principles (GAAP) financial statements). In addition to the above, the BMA has issued a Consultation Paper outlining an Economic Balance Sheet (EBS) approach, which leverages GAAP (either IFRS or US) and applies certain prudential adjustments, including discounting of technical reserves. Implementation of the EBS has been deferred, recognizing that other international regulators are yet to effectively implement EBS. Supervision The BMA has adopted a risk-based approach to supervision against the enhanced regulations. It has a Risk Analytics process to drive risk identification and prudential oversight. The BMA is the group supervisor for a number of Bermuda-based groups and either holds or participates in regular supervisory colleges. Non-commercial sector Regulation Captives (Limited Purpose Insurers) are licensed as Class 1, 2 or 3 companies (non-life) and A or B (life). The current regulatory requirements recognize the limited purpose of these types of insurance and reinsurance vehicle. They are established as risk management tools for larger corporate organizations. Policyholders typically comprise shareholders and related parties. The BMA has continued to recognize this fundamental difference the development of regulation for these Limited Purpose vehicles remains sensitive to those differences. To date, the principal change has been the introduction of the Code of Conduct. There are no proposals to change capital requirements, which remain a function of either premium or technical reserves. Annual reporting requirements have been enhanced and facilitated by an electronic filing process. It includes the audited statutory financial statements (as currently required); supplemental unaudited financial data including investment, underwriting, reserving and collateral; a qualitative risk selfassessment; and a confirmation of compliance with other aspects of the license, including changes to controllers and the ability to continue to operate at current capital levels. This return has been constructed recognizing the principles of a three pillar regime and is designed to enable the BMA to execute supervision in an effective and risk-focused way. Supervision Supervision of this sector of the market will continue to be a combination both desk-based (review of the returns) and on-site recognizing the important roles that captive managers play in this market. Special Purpose Insurers The BMA designed and implemented Special Purpose Insurer (SPI) legislation to facilitate, amongst other things, the increasing convergence of the capital and insurance markets. The regulatory framework for SPIs is less intrusive, based on the fundamental principle that the SPI is a fully funded vehicle used for a transaction between two (or more) knowledgeable and sophisticated counterparties, each of whom understand the risks associated with the transaction. The SPIs are subject to an expedited regulatory approval process due to the fully funded nature of the entity, they are only required to have capital of US$1. They also benefit from an exemption to file an annual Loss Reserve Specialist opinion and can also apply for relief from filing audited financial statements. Since its implementation, the SPI legislation has been used for numerous securitizations and cat-bond issuances. It is a very fast and efficient way to facilitate these types of transaction.