Trends and Developments
In collaboration with the European Insurance and Occupational Pensions Authority (EIOPA), the International Center for Insurance Regulation (ICIR) organized the 2nd International Conference on Global Insurance Supervision (GIS) – Trends and Developments, which was held at Goethe University Frankfurt, Germany on September 5-6, 2013.
Since this was a follow-up event to the first GIS conference in 2012, the organizers maintained the global scope of the conference and focused again on the topics of supervisory convergence and the search for global standards. Major issues such as systemic risk, Own Risk and Solvency Assessment (ORSA), and the potential for supervisory convergence on individual and group level across jurisdictions, regions and sectors, were discussed with regard to both the insurance and the banking industry. The objective of the conference was to encourage the exchange between supervisors and leading industry professionals on the subject of Global Insurance Supervision. Through prominent presentations of Self-assessment of Risks and Solvency and in-depth discussions of Supervisory Convergence in break-out sessions, operational solutions were derived.
Interconnectedness of Banking and Insurance
During the presentations, Helmut Gründl of the ICIR demonstrated the advantages of, but also the problems caused by the interconnectedness between banks and insurance. On the one hand, the long duration of life insurers’ liabilities and of bank loans leads to a duration mismatch between the asset and liability side of both sectors, which can be mitigated by selling bank bonds to insurers. On the other hand, possible bank bond defaults can cause contagion risk to insurers, and the reputational risk of one party can also increase due to financial distress of the other. During his presenation with the topic "Tao of risk management and regulatory developments in Asia", Makoto Okubo of Nippon Life Insurance Company presented his operational experience in risk management. In order to counter low interest rates, Nippon Life lowered the guaranteed interest rate for new policies, reduced operational expenses, changed investment strategies to match the characteristics of insurance liabilities, accumulated additional policy reserves and enhanced capital.
Elizabeth Ward of MassMutual and Tom Wilson of Allianz shared their experiences in implementing ORSA. They commented that the ORSA requirement from regulators is a forward-looking method that encourages management to anticipate potential capital needs and thus to take action. The industry representatives emphasized the importance of the flexibility of ORSA: “The ORSA is an ‘OWN’ assessment of the company – as such scope, timing and level of detail of the ORSA needs to be tailored to the company and should not prescribed by supervisors. This is especially true for small legal entities for which materiality thresholds should be considered.” In addition, they emphasized that supervisory feedback is helpful so as to understand specific reporting requirements and to efficiently communicate a summary view of the company risks.
In the afternoon four break-out sessions focused on the topic of supervisory convergence.
The participants intensely discussed specific questions such as:
- What powers should a supervisor have in times of crisis?
- What kind of resolution regimes do we need?
- Is a complete risk-mapping in cross border groups possible?
- What positive and negative impacts do industry actions have on global standard settings?
- Are insurance-linked securities being used as a vehicle for regulatory arbitrage?
Global Standards in Insurance Supervision
The second day of the conference was dedicated to the evolution of global standards in insurance supervision. A panel discussion summarized the lessons learned from previous projects and provided an outlook for insurance supervision. One of the proposals was to adopt hard rules on regulating global finance, with legal enforcement. In order to achieve this, increasing market transparency and coordination, building trust and gaining political support are crucial. Otherwise, rules will be applied with arbitrage. Although the difficulties and costs of establishing such international standards are obvious, in the long run the new “system” with sound compliances is assumed to be more efficient and beneficial. A counter-argument was that local markets have specific characteristics (e.g. cultural specifics) that cannot be ignored, in which case global standards may be problematic. Furthermore, policyholder protection and reducing arbitrage in capital allocation and pricing should be the ultimate goals of regulators, notwithstanding the implementation of global standards or local rules.