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Reinsurance Regulatory Modernization Framework

At the National Association of Insurance Commissioners (NAIC) summer meeting, discussions continued regarding the Reinsurance Regulatory Modernization Framework, which would change the reinsurance collateral requirements. There appear to be a number of issues that would delay implementation of this framework including both constitutional and non-constitutional issues.

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Financial Intelligence Team
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Introduction

When Solvency II becomes effective in 2012, group support — which would have allowed capital held at the group level to cover the requirements of any company in the group — will be not permitted. This prohibition will require group entities to hold capital according to the Solvency Capital Requirements (SCR) in each individual entity. The application of group-level diversification benefits to individual entities will not be allowed. This last-minute change to the original framework directive may cause some groups to change their structures. At a minimum, they are likely to rethink how much risk capital will be carried at the group level versus the operating entity level given that the risk capital needed in the group will increase without recognition of group support.

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The Financial Accounting Standards Board (FASB) continues to work on the Insurance Contracts project. The FASB has indicated that it will not support current exit value for reserving, but is favoring fulfillment value instead. Fulfillment value represents the amount that will actually be paid as claims become due (essentially the present value of expected losses plus a risk margin). Measurement of fulfillment value would use expected cash flows (i.e., a probability-weighted average of possible cash flow results) rather than a “best estimate.” In addition, a company should use all information available, including industry and market information and the company’s own historical data.

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Guy Carpenter’s Financial Intelligence Team (FIT) scours the insurance and reinsurance marketplace for information that affects how risk-bearers manage risk and capital. FIT uses information from financial markets, rating agencies, regulators and other sources to help carriers optimize the deployment of their capital.

There’s more to managing capital than expected loss, value at risk (VaR), and the other basic metrics on which insurers and reinsurers rely. Other factors to be considered include:

• Regulatory updates (including Solvency II)
• Rating agency developments
• Financial market shifts
• Tax law changes
• Accounting standard developments

None of these factors is static, making it crucial that carriers have access to a resource that continually monitors these areas and understands how they could impact risk-bearers. FIT works with Guy Carpenter’s broking teams and Specialty practices to ensure that our clients benefit from our investment in addressing the full set of issues that shape the business of risk and capital management.

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Fair value accounting - also known as “mark-to-market” - has appeared in the headlines quite frequently, largely because of the ongoing financial catastrophe. Recent statements by the Securities and Exchange Commission (SEC), Financial Accounting Standards Board (FASB), and International Accounting Standards Board (IASB) have fueled the debate, and the U.S. government’s USD700 billion bailout package requires that the SEC perform a study on the impact of fair value accounting on financial institutions … and suspend the practice, if necessary.

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