High-end Actuarial Risk Management Solutions to Rationalize the Impact of Emerging Regulatory Trends on U.S. Insurers

Transcription

1 High-ed Actuarial Risk Maagemet Solutios to Ratioalize the Impact of Emergig Regulatory Treds o U.S. Isurers ws.com

2 High-ed Actuarial Risk Maagemet Solutios to Ratioalize the Impact of Emergig Regulatory Treds o U.S. Isurers ws.com

3 Cotets Itroductio Solvecy II Overview The Potetial Impact of Solvecy II o U.S.-based Isurers Solvecy II, Equivalece or SMI Which Regulatory Path Will the US Follow? The Way Forward WNS Actuarial Services ad Risk Maagemet ws.com

4 Itroductio 'Great Recessio' ad the Global Ecoomic Crisis Lead to Regulatios to Protect Isurace The past few years have witessed sigificat global fiacial turmoil ad extreme ecoomic crisis that had their roots i the sub-prime loa crisis, which led to the fall of Lehma Brothers ad started what has bee termed as the 'Great Recessio' or 'Log Recessio'. To add to the complexity, the sovereig debt crisis broke out i the Eurozoe i 2011; also, the world witessed itese geopolitical turmoil i the Middle East last year. Such itese ad climacteric chages have resulted i the world ecoomy eterig a phase, described as 'dagerous' by a Jauary 2012 World Bak report. Policy makers ad govermets the world over, are lookig at large-scale chages i regulatios ad iitiatig policy makeovers, i order to brig some respite to the world ecoomy ad shieldig busiesses ad ivestors, particularly i the fiacial services domai, from makig cripplig losses. Isurace is oe such sector where the sheer risk associated with the busiess eviromet ecessitates striget regulatory systems. Europe ad US the two biggest isurace markets i the world have felt the ripples of the past ecoomic crisis ad breakdow of fiacial markets, ad are ow bracig to protect the isurace busiess as well as ivestor setimets. The pricipal objective of isurace regulatio is to protect policyholders ad the society i geeral agaist excessive isurer isolvecy risk. The Iteratioal Associatio of Isurace Supervisors (IAIS), which boasts a membership of at least 190 global regulatory jurisdictios, is emergig as the iteratioal stadard setter for regulatios. I 2011, the IAIS developed its Isurace Core Priciples (ICPs), which are similar to the priciples i Solvecy II (see below). The IAIS is seekig to establish a commo framework (ComFrame), which will provide greater harmoizatio ad trasparecy for isurace supervisio across the globe. The ICPs are expected to moderize ad brig uiformity to the disparate supervisory frameworks, which oversee global isurace compaies. Some commo requiremets that have emerged from these regulatory developmets iclude: Movemet towards a more risk-based approach Capital ad solvecy measuremet Greater focus o risk maagemet ad goverace Use of stress ad sceario testig Group supervisio This paper highlights the potetial impact of these regulatory chages o U.S.-based isurers especially i view of the Europe-drive Solvecy II iitiatives ad describes other developmets udertake by U.S. supervisory bodies focusig o advaced risk maagemet practices. 02 ws.com

5 High-ed Actuarial Risk Maagemet Solutios to Ratioalize the Impact of Emergig Regulatory Treds o U.S. Isurers Solvecy II Overview Europe Gearig Up to Overhaul Capital Adequacy Requiremets, Corporate Goverace ad Disclosures with Solvecy II I Europe, Solvecy II the Europea Uio (EU) directive is all set to review ad revise the overall approach to regulatig isurace compaies i the Europea market. This directive will brig chages to capital adequacy requiremets ad determiatio, corporate goverace ad public disclosures. These chages are due to be implemeted i The Solvecy II regime is somewhat similar to the bakig regulatios of Basel II ad based o three guidig priciples (pillars), each pillar focusig o a differet regulatory compoet. Pillar I Estimatio of the QUANTITATIVE requiremets Assets ad Liabilities Market Cosistet Valuatio Solvecy Capital Requiremet (SCR) Stadard Formula or Iteral Model Miimum Capital Requiremet Pillar II Evaluatio of QUALITATIVE requiremets System of Goverace Ow Risk ad Solvecy Assessmet (ORSA) Supervisory Review Process Pillar III Disclosure of the istitutio's solvecy ad fiacial situatio Public Disclosure Aual Solvecy ad Fiacial Coditio Report Iformatio to be Provided for Supervisory Purposes The Potetial Impact of Solvecy II o U.S.-based Isurers While ot all U.S. isurace ad re-isurace compaies will be directly subject to Solvecy II that will come ito effect o Jauary 2014, most isurers will feel its impact i some way or the other. It is a huge challege for isurers, with the kid of chages that will eed to be implemeted: right from trasformatio of IT systems to revampig the culture of the compay. Oce implemeted, these chages will give isurers a defiitive edge over competitio. Compaies that fully embrace Solvecy II ad are appropriately equipped to demostrate to regulators that they meet Solvecy II requiremets ad have appropriate capital reserves will have greater flexibility tha their couterparts. However, the impact of Solvecy II will deped o the degree to which a isurer carrier is globally diversified. ws.com 03

6 The key scearios ad implicatios of Solvecy II o the U.S. Isurace Idustry are as follows: 1. Priciples versus Rules-based Approach The NAIC's Risk-based Capital (RBC) system, essetially a formula based approach was created to provide a stadard capital requiremet framework across all U.S. states. Because of the sudde surge i ecoomic turmoil i recet times, there has bee a shift from a rules-based approach to a priciplesbased approach to supervisio ad regulatio. As isurace busiess is gettig icreasigly complicated with more complex products, flexible commissio structure, customer's preferece to guaratees, challegig ecoomic eviromet, ew risk maagemet frameworks ad dyamic regulatory chages, a priciplesbased approach eables a better aligmet of regulatory capital with the uderlyig risks faced by isurers. 2. U.S.-based ad U.S.-owed Foreig Subsidiaries I order for the paret compay to meet Solvecy II requiremets, its U.S.-based subsidiaries must provide the required MCR ad SCR calculatios, must meet the Pillar II requiremets regardig risk maagemet practices ad structure (icludig its Ow Risk ad Solvecy Assessmet), goverace, documetatio ad cotrols, ad must provide iformatio to their paret i order to meet the reportig requiremet uder Pillar II. I additio, if the paret compay plas to use a iteral model, the subsidiary must the demostrate that the results of their ow iteral model are used as the basis to make busiess decisios, icludig uderwritig, pricig ad performace measuremet. Similarly, U.S.-owed foreig subsidiaries will eed to produce the required MCR ad SCR calculatios, comply with goverace requiremets, ad provide the required reportig ad disclosure. There will be implicatios for the paret compay due to the chage i the capital requiremets themselves, as well as implicatios o busiess decisios related to the subsidiary o the extet iteral models are beig used i decisio-makig process. 3. Capital Maagemet ad Competitiveess Solvecy II provides a framework for effective capital ad risk maagemet where all the risks are idetified ad maaged adequately. The provisio of risk-mitigatio techiques like re-isurace, hedgig, diversificatio beefits will provide opportuities for EU-based isurers to chage their risk profiles ad capital requiremet. I the short term, U.S.-based compaies may have a competitive advatage i pricig products with low U.S. capital requiremets as compared to the Solvecy II required capital. However, those compaies usig Solvecy II approaches may have a deeper uderstadig of the uderlyig risks i the products, which will provide loger term advatages as fiacial results are realized. 04 ws.com

7 High-ed Actuarial Risk Maagemet Solutios to Ratioalize the Impact of Emergig Regulatory Treds o U.S. Isurers Solvecy II, Equivalece or SMI Which Regulatory Path Will the US Follow? While Europea isurers are gearig up to implemet the directives of Solvecy II, pressure is moutig o the US to adopt global regulatory stadards. The opiio o whether US should adopt a Solvecy II-like regulatory framework is divided. Some from the U.S. isurace fraterity feel that a exact replica of Solvecy II is ot required for a isurace market like US, which accordig to the Natioal Associatio of Isurace Commissioers (NAIC), represets percet of the world-wide isurace market share vis-à-vis UK, which represets 6.48 percet of the market. Most others, however, feel that a 'Equivalece' of Solvecy II is desirable for the U.S. isurace market, which will have implicatios o regulatio, goverace, capital ad reserve calculatio ad, ultimately product desig for U.S. isurers, ad thus provide a level playig field amog isurers world-wide. Recet developmets i U.S. Isurace Regulatios I 2008, the Natioal Associatio of Isurace Commissioers (NAIC) i the US aouced a coordiated effort to aalyze the solvecy regulatory framework of isurace i the US. The NAIC has uderlied the importace of top-dow ivolvemet of the maagemet i order to uderstad eterprise-wide risks ad is lookig at corporate goverace i cosultatio with the idustry ad i lie with the ICPs proposed by the IAIS. Solvecy Moderizatio Iitiative (SMI) The NAIC started the Solvecy Moderizatio Iitiative (SMI) i 2008, with a aim to improve the U.S. solvecy framework ad to assess whether ay chages to that framework are eeded. The goal of the SMI is to lik ecoomic capital requiremets to a compay's risk profile. While the US aually improves its regulatory solvecy system to adjust the system as eeded, especially regardig the aual update to the RBC formula ad factors, the NAIC's Solvecy Moderizatio Iitiative (SMI) icludes focus o five key solvecy areas: Capital Requiremets Corporate Goverace ad Risk Maagemet Supervisio Accoutig ad Fiacial Reportig Re-isurace The SMI will highlight the stregths of the state-based atioal system of isurace regulatios ad idetify improvemets that might be made. All work o the project is expected to be completed by the ed of The first three areas are similar to Solvecy II's Pillars 1-3. The accoutig ad fiacial reportig area deals with ivestigatig the adoptio of Iteratioal Fiacig Reportig Stadards (IFRS) used i Europe. I the US, isurace compaies use Statutory Accoutig Priciples (SAP) while their corporate parets use Geerally Accepted Accoutig Priciples (GAAP). However, may U.S.-based multi-atioal compaies that are curretly usig Uited States Geerally Accepted Accoutig Priciples (US GAAP) have fiished a iitial impact assessmet, or are i the process of coductig a assessmet of covergig to IFRS. ws.com 05

8 Ow Risk ad Solvecy Assessmet (ORSA) Proposal I additio to SMI, the NAIC also released a draft proposal for the creatio of a US ORSA process. The proposal requires isurers to complete a ORSA aually for each statutory etity, as well as at the isurace group level, ad submit the results to state regulators. The results should demostrate that each etity's capital both regulatory ad ecoomic is sufficiet to cover the risks iheret i the isurer's busiess pla. Regulators will use this iformatio to better uderstad the prospective risks to each isurer's pla ad judge the adequacy of capital for the risks idetified. The ORSA proposal represets a broader ad prospective approach to U.S. isurace regulatio. Clearly, ORSA will supplemet the existig RBC review ad provide regulators with a more dyamic view of each compay's risk profile. Regulators will be able to key i o each isurer's top risks ad more efficietly allocate resources to the most critical areas for regulatory review. Solvecy II Equivalece I additio to stregtheig regulatios ad tools at home, the NAIC is also plaig to esure that the U.S. regulatory framework is deemed equivalet uder Solvecy II i Europe. Equivalece is importat to the competitiveess of U.S. isurers doig busiess i the Europe Ecoomic Area (EEA), particularly to esure that capital add-os or collateralizatio are ot imposed as a result of beig domiciled ad regulated by a o-eea equivalet regulator. The NAIC's SMI ad ORSA will aid i ay future Solvecy II equivalecy reviews. 06 ws.com

9 High-ed Actuarial Risk Maagemet Solutios to Ratioalize the Impact of Emergig Regulatory Treds o U.S. Isurers The Way Forward That the U.S. Isurace idustry is headig towards a regulatory overhaul is evidet from the iitiatives that are beig take by IAIS ad NAIC. Whether the regulatory chages will alig completely with Solvecy II or will be drive towards attaiig 'equivalece' with Solvecy II remais to be see. U.S. isurace firms that have direct relatioship with the Europea soil, either as a subsidiary or as a paret, will feel the impact of Solvecy II (as highlighted i the paper earlier). Whatever the sceario, the U.S. Isurace idustry will have to prepare itself to improve risk maagemet ad goverace, the key parameters to survive i the post-solvecy II world. U.S. Isurace compaies should look at Solvecy II as part of a process of cotiuous improvemet i risk maagemet ad goverace. Seior maagemet of isurace compaies should cosider the impact of Solvecy II i order to keep their compaies competitive, as the market at large could view compaies that adopt the stroger risk maagemet ad goverace procedures i Solvecy II as stroger ad better maaged compaies. Solvecy II requiremets will create greater cofidece i the isurace idustry's busiess model ad maagemet, as viewed ot oly by regulators but by ratig agecies, aalysts, ivestors ad other stakeholders. Implemetatio of Solvecy II ad similar regulatios like SMI or ORSA will require a sigificat amout of effort, i brigig about a chage i the orgaizatioal culture ad maagemet's approach to makig decisios. Risk Maagemet, beig the core of Solvecy II ad SMI, will eed sigificat amout of attetio ad focus. Additioally, it will also ecessitate the ivolvemet of techology ad automatio to make the trasitio to the ew regulatio possible. WNS Actuarial Services ad Risk Maagemet WNS is a world leader i providig actuarial offshore ad oshore services. We offer specialized actuarial services to meet the emergig eeds of our customers across all domais of the isurace idustry from Life, Auity, Retiremet, Property & Casualty, Health Isurace ad Re-isurace. Our capability icludes product developmet, pricig, cash flow projectios (Prophet / MG-Alfa / Moses / Igloo), fiacial ad statutory reportig, asset liability maagemet, claims reservig, predictive modelig ad optimizatio. ws.com 07

10 Give our deep uderstadig of the isurace busiess, we assist our customers i the implemetatio of trasformatioal projects such as ratioalizatio of actuarial models, stadardizatio of reportig process, developmet of risk maagemet framework, assessmet of potetial impact of regulatory chages ad so o. WNS Actuarial Services utilizes a cost-efficiet global flexible delivery model, eablig customers to effectively deploy their valuable actuarial resources to strategic tasks. Stochastic Modelig of Busiess Risks We take advatage of ehaced techology platforms ad sophisticated modelig techiques to deliver improved isight ito your fudametal busiess risks, icludig morality, logevity, lapses ad iterest rate. We have assisted our customers i the developmet of replicatig portfolios i order improve the speed ad accuracy of certai calculatios ad meet the followig busiess eeds: Stochastic Calculatio of Ecoomic Capital Cost of Optios Asset Liability Maagemet / Hedgig ad Maagemet of Fiacial Risk Fast Close Fiacial Reportig Profitability Targets / Projectio of Shareholder Value Fiacial Reportig ad Aalysis We deliver busiess-critical services i major fuctioal areas of actuarial reportig, icludig data validatio, assumptios settig, movemet aalysis ad scearios testig across various reportig regimes like US GAAP, IFRS, MCEV, EEV. As fiacial reportig stadards evolve, our customers beefit from our broad kowledge of curret best practices ad isight o emergig issues. As idustry reportig stadards chage, we provide isight o emergig areas, icludig local coutry GAAP, impact of IFRS requiremets, Solvecy II. We ca also review your existig methods ad processes ad suggest improvemets to make your reportig process accurate ad faster. Risk Maagemet Solutios Ratig agecies, aalysts, shareholders, ad regulators are all takig more iterest i capital models ad risk maagemet. Effective risk maagemet acts as the commo lik betwee balace sheet stregth, operatig performace ad busiess profile. The key compoets of effective risk maagemet program are as follows: Alig Risk Appetite ad Strategy Ehace Risk Respose Decisios Reduce Operatioal Surprises ad Losses Idetify ad Maage Multiple ad Cross-eterprise risks Improvig the Deploymet of Capital We assist our customers i developig Ow Risk ad Solvecy Assessmet (ORSA) capability ad framework, embeddig its implemetatio withi a firm's decisio-makig process at maagemet ad operatioal level ad developig effective MI for iteral ad exteral stakeholders. 08 ws.com

11

12 Copyright 2012 WNS Global Services About WNS WNS (Holdigs) Limited (NYSE: WNS), is a leadig global busiess process outsourcig compay. WNS offers busiess value to 200+ global cliets by combiig operatioal excellece with deep domai expertise i key idustry verticals, icludig Travel, Isurace, Bakig ad Fiacial Services, Maufacturig, Retail ad Cosumer Packaged Goods, Shippig ad Logistics, Healthcare ad Utilities. WNS delivers a etire spectrum of busiess process outsourcig services such as fiace ad accoutig, customer care, techology solutios, research ad aalytics ad idustry-specific back-office ad frot-office processes. WNS has over 23,000 professioals across 25 delivery ceters world-wide, icludig Costa Rica, Idia, the Philippies, Romaia, Sri Laka ad Uited Kigdom. To lear more, please write to us at marketig@ws.com or visit ws.com