There is a great deal of overlap between the goals of government regulators and credit rating agencies. The difference, however, is in the output, with regulators providing a license to trade, or not, and the rating agencies offering a graduated scale of relative strength. Regulatory solvency approval can be viewed as a “qualifier” or minimum standard required to be considered by a customer. A credit rating, on the other hand, can act as a “winner” or differentiating factor that results in a successful sale.
Posts Tagged ‘Casualty’
Current capital requirements in the United States are set at a legal-entity level. Yet there are currently no global requirements for companies that operate in more than one country, and calculation formulas for capital requirements typically vary in each jurisdiction. Solvency II is the closest to mandating a group standard. Solvency II uses the concept of “equivalence” to deal with differing capital regimes between the European Union and the rest of the world including the United States, instead of forcing Solvency II standards on a third country.
Addressing Own Risk and Solvency Assessment/Enterprise Risk Management and Insurance Capital Standard Globally
In accordance with the objectives of the National Association of Insurance Commissioners (NAIC) and European Insurance and Occupational Pension Authority (EIOPA), Own Risk and Solvency Assessment (ORSA) is “people and risk-centric,” primarily employing a principles-based approach, as opposed to a rules-based approach. This means that decisions on matters related to risks are largely based on the judgment of individuals relying on underlying facts, as opposed to decisions being made mostly by following intricate sets of rules. This is similar to the principles-based approach taken by International Financial Reporting Standards (IFRS). Although the calculation of the Solvency Capital Requirements (SCR) under Solvency II is rules based, like Insurance Capital Standard (ICS), Solvency II can be a “one size fits all” rules-based approach to capital, especially if the standard formula is used. (Re)insurers will need to find a way to incorporate ICS into their ORSA processes and the vehicle to accomplish this may be through the internal model.
Marsh and McLennan Companies, in Collaboration With the World Economic Forum, Publish the 11th Annual Global Risks Report
Disruptive shifts in technology, geopolitics, societal expectations, and economic patterns are creating instabilities that are directly impacting events in the world today. The World Economic Forum’s eleventh Global Risks Report highlights the issues that will exacerbate volatility and uncertainty over the next decade - while also presenting opportunities for governments and businesses to build resilience and deliver sustainable growth.
(Re)insurers that are required to implement Own Risk and Solvency Assessment (ORSA), or a similar framework such as Internal Capital Adequacy Assessment Process (ICAAP), may benefit by adopting a strong ORSA/enterprise risk management (ERM) framework. One such framework that could work on a global basis is illustrated below.
Own Risk and Solvency Assessment (ORSA) was first introduced as a regulatory requirement as a result of Solvency II. (Re)insurers would be wise to take note of the many similarities between Solvency II and the National Association of Insurance Commissioners’ (NAIC) ORSA and, where possible, avoid reinventing the wheel when trying to implement them. Now, and especially with the introduction of the Insurance Capital Standard (ICS), it is increasingly important for (re)insurers to avoid unnecessary, redundant and duplicative activity in the attainment of regulatory satisfaction by striving for a uniform framework to establish risk management and controls, corporate governance, transparency and disclosures across borders. In so doing, (re)insurers will gain optimum value from their ORSA.
There is very little doubt that (re)insurers face and will continue to face growing regulation and scrutiny both domestically and internationally. Therefore, (re)insurers should seek the most effective and efficient way to meet the growing demands of increased global regulation. What follows below is a brief discussion of the overlap of some of these new global regulatory requirements and thoughts on how (re)insurers might go about approaching them.
The average balance of payments in Indonesian reinsurance transactions over the past five years has been in a deficit of IDR5.65 trillion (USD455 million) per year. This has been a point of frustration for the Indonesian government. As such, the Indonesia Financial Services Authority (OJK) has instructed insurers to retain more risk and to reinsure more business with domestic reinsurers, including the recently-formed state reinsurer, Indonesia Re, to “improve and optimize capacity in the country.” The OJK has also encouraged all domestic reinsurers to obtain an international rating in order to improve competitiveness with foreign reinsurers. However, it is anticipated that high cessions to other unrated, domestic companies will increase credit risk charges and pressure capital adequacy ratios.
The China Insurance Regulatory Commission (CIRC) is instituting sweeping changes through its three-tiered China Risk Oriented Solvency System (C-ROSS) framework that will dramatically impact how (re)insurers conduct business. It will strengthen capital requirements, risk management and transparency disclosures - bringing China in line with, and in some cases overtaking, global standards. The C-ROSS framework is similar to Solvency II: three tiers focusing on quantitative, qualitative and disclosure requirements.
Other countries, such as the Philippines and Indonesia, have instituted rules that may, conversely, impede the development of a healthy, profitable insurance market. The Indonesian regulator’s recent steps to reduce capital outflows, with a focus on reinsurance premiums ceded to international reinsurers, remain highly debated and will be explored in greater detail later. The Philippines, in addition to a risk-based capital (RBC) framework, has instituted a minimum paid-up capital requirement (starting in 2006 and revised in 2013) that increases every two years and will result in a PHP2 billion (approximately USD44 million) minimum threshold in 2020. This will put minimum capital levels in the Philippines well above those of more developed markets, including Australia, Japan and Singapore. The policy applies uniformly across the industry regardless of premium volume, line of business or geographic scope and therefore its impact is more strongly felt by smaller carriers that will most likely be forced out of the market or into the arms of larger players. The Philippines Insurer and Reinsurer Association (PIRA) has been outspoken against the minimum capital requirement and stated a preference for a standalone RBC metric.