Frank Achtert, Managing Director, Financial Intelligence Team
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The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its final and third set of advice to the European Commission (EC) at the end of January. The advice notably excluded final advice on non-life underwriting risk.
UK
In November of 2009 the Financial Services Bill 2009 added the new regulatory objective of ‘financial stability.’ The act imposes a duty on the Financial Services Authority to promote international regulation and supervision. Amendments to the existing financial services legislation apply to all ‘authorized persons” in addition to the previous application to solely the banking institutions. They also include new rules on remuneration. Collective proceedings or class actions are envisaged for financial services claims. Regulations will be introduced for authorized persons to produce a recovery and resolution plan (also known as a ‘living will’) in stressed circumstances such as failure of all or part of a business.
Germany
Given the background of the financial crisis and the criticism of traditional payment systems for top managers, the German legislative body tried to introduce a tool that would guide directors and officers’ remuneration. They introduced a compulsory deductible in the D&O cover provided by the companies for board members and members of the supervisory board. “If the company buys insurance against risks the board member will be faced with in connection with his occupational activity for the company, a deductible of min. 10 percent of the claim, max. 1.5 times of the fixed annual salary of the manager must be implemented.” However, insurers developed new insurance products to cover the compulsory deductible, potentially eliminating the impact of the new law on board members.
USA
A package of financial reforms comprising nine bills was passed by the U.S. House of Representatives in December of 2009 including:
- Financial Stability Improvement bill. Applying to large (over USD50Bn in assets) systemically risky firms, the bill is designed to prevent a repeat of the 2008-2010 financial crisis. Aimed principally at banks, it will present a radical change for large insurance companies.
- Federal Insurance Office (Kanjorski) bill. The proposed federal office of insurance would sit within the U.S. Treasury Department. Its goal is to improve government expertise and monitor all aspects of the insurance industry including systemic risks. However critics warned it could become a data collection monster, duplicating the role of state supervisors, and interpose between international agreements and state solvency laws. Industry trade associations contend that a single point of government liaison for the U.S. insurance industry internationally could be a positive feature.
- Restoring American Financial Stability (Dodd) bill. Although a far-reaching piece of legislation that would also create an office of national insurance within the U.S. Treasury, this would be mainly an advisory body with power to issue subpoenas. It incorporates the idea of merging the federal oversight of the banking system from four government agencies into one new agency. However this bill would not allow federal regulation to pre-empt state laws.
- Proposed Consumer Financial Protection Agency. While general insurance is not included in the remit of the new agency there are specific references to credit, title and mortgage insurance.
Bermuda
A Capital Solvency Requirement model is being implemented, although it may be substituted by a suitable model maintained by the regulated entity. Increased monitoring and transparency for Class 4 and Class 3B insurers is under way with the goal of obtaining mutual recognition with regulators in other jurisdictions. During the first half of 2009, some 24 new insurance entities were established in Bermuda and a new class of insurer, the SPI, was introduced.
Japan
The Financial Services Agency decided to allow domestic companies to use International Financial Reporting Standards, beginning in March, 2010. It also has ended the option for some companies to submit consolidated financial statements according to US accounting rules. The decision on adoption of International Financial Reporting Standards as mandatory for Japanese companies is scheduled for 2012. However, a move to bring international standards closer to the US-style ‘full fair value’ system could jeopardize the decision to adopt these standards in Japan.
Australia
The Australian Prudential Regulatory Authority has proposed financial reporting changes that would align nonlife regulatory reporting with prevailing accounting standards to simplify the regulatory process. Following industry comment and a Quantitative Impact Study, a proposal is anticipated in February 2010, to be finalized by July, with prudential and reporting standards based on statutory accounts, rather than on annual returns. Advantages to the regulator will include a more detailed view of profitability and performance with an unchanged capital framework.
Takaful - Islamic Insurance
The takaful insurance market has grown at approximately twice the rate of conventional insurance in Muslim countries. However, there has been a push-back from sharia scholars who opine that recent financial innovations are bending key religious precepts. For example, some so-called “Islamic bonds” are blatantly imitating conventional interest-paying bonds, which are banned from sharia-compliant practices. Although South East Asian scholars are regarded as more liberal than their Middle East peers, the debate between different factions within regions has led to calls for more regulation and international standardization of sharia-compliant products. One regulator, Bank Negara Malaysia, has commenced public consultation on a concept paper “Guidelines on the Takaful Operational Framework.” However, few territorially specific industry boards command global acceptance.
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Statements concerning accounting, legal, regulatory or tax matters should be understood to be general observations based solely on the author’s experience in the reinsurance industry, and may not be relied upon as accounting, legal, regulatory or tax advice which he is not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.
Two main themes emerged in the response to the aftermath of the recent financial crisis. Efforts to improve the transparency of accounting and reporting regimes gained ground and debate focused on how best to structure and approach regulation in order to achieve tighter control and reduce market turmoil. Through working parties, the International Association of Insurance Supervisors is tackling these issues: revision of core principles, financial stability and group supervision.
The development of Solvency II continues to be one of the most significant regulatory developments for the insurance industry applicable to both primary carriers and reinsurers. European insurers are starting to focus now on the risk-sensitive regime they will face in 2012, especially on the impact of the risk-based quantitative requirements for measuring financial positions and capital adequacy.
Chris McKeown, CEO of Global Analytical and Specialty Practices Contact
The threats to which (re)insurers’ capital is exposed seem to multiply with alarming regularity. Today, the industry is contending with risks that were barely imaginable (at best) 20 years ago. In an age when carriers must respond to casualty catastrophes, the possible effects of climate change and financial market calamity - perhaps all on the same earnings call - it’s natural to wonder if the right tools and techniques for the job are available. Risk and capital management have only grown in complexity, a trajectory that is quite likely to continue - and probably accelerate.
With 2009 coming to a close, this week we’re taking a look at the most popular stories of the year.
Cat Bonds Persevere in Tumultuous Market*: A slow issuance year in 2008 masks a story of resilience and risk management flexibility. After a record-setting year in 2007, catastrophe bond issuances fell 62 percent by issuance volume and 52 percent by transaction count last year. During the first half of the year catastrophe bond issuance was tempered by ample capacity and favorable rates in the traditional reinsurance market, dampening sponsor demand for alternative capacity sources, with the fourth quarter quieter than expected. Overall, however, catastrophe bonds generally withstood the impact of onerous market forces and survived a substantial financial market test of their utility as risk and capital management instruments.
Cat Bond Update: Second Quarter 2009: The catastrophe bond market continues to advance, though issuances are down from 2008. The activity represents a positive rally from the hiatus during the second half of 2008. For the first half of 2009, nine bonds have been issued, with aggregate risk capital of USD1.38 billion. The continuing stabilization of financial markets and a decrease in catastrophe bond spreads, however, could result in more issuance activity in the second half of the year, particularly for sponsors which had considered issuances in the first and second quarters but deferred their plans because catastrophe bond spreads were considered to be too wide (i.e., catastrophe bond protection was considered to be too expensive).
David Priebe, Chairman of Global Client Development *
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The third quarter is usually quiet for the catastrophe bond market, and 2009 was consistent with past years. Issuers completed two transactions, bringing USD412 million in risk capital to the market. Nonetheless, risk capital issued was up by a third relative to the same quarter last year, as both catastrophe bonds issued were upsized considerably. The consensus estimate for the entire year remains USD3 billion to USD4 billion, implying a strong fourth quarter for primary issuance.
David Priebe, Chairman of Global Client Development
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A year ago, (re)insurers’ access to capital markets was in doubt. A worldwide financial crisis decimated balance sheets, sent equity values tumbling and caused credit markets to come to a standstill. Today, however, the situation has changed completely. Catastrophe bond issuances have resumed, and the mergers and acquisitions (M&A) market is gaining momentum. (Re)insurers are turning to capital markets to address a wide range of strategic and tactical needs. It is clear that this source of capital remains both viable and reliable.
Norman Brown, Managing Director, GC Securities and Bart Zanelli, Managing Director, GC Securities*
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A mergers and acquisitions (M&A) trend is beginning to form in the (re)insurance industry. With capital being restored to carriers’ balance sheets, M&A is expected to accelerate next year and particularly in 2011. Both strategic and tactical opportunities are being pursued, and as some (re)insurers capitalize on them, others will follow. A podcast at the end of this article provides deeper commentary and insights into the (re)insurance M&A market.
Norm Brown and Bart Zanelli, both Managing Directors in GC Securities*, discuss the (re)insurance industry M&A market in this new GC Capital Ideas podcast. Click the audio player below to listen to the interview, or download the interview in a file that will work with your iPod.
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* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies, Inc. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.
