Shaping a Constructive Regulatory Environment Musings from a Credit Rating Agency Roger Sellek Managing Director, Global Financial Services IIS 46 th Annual Seminar Westin Palace Hotel, Madrid 6 th – 10 th June 2010

2 Challenges Faced by Regulators  National governments must strike a balance between competing forces: –policyholder protection –socio-economic development –insurance-industry growth  Current trends toward macro-prudential stability and global cooperation produce a new level of complexity

3 Approaches to Policyholder Protection: Regulation vs Ratings Regulation  Auditing function  Answers to government authority − economic and industry growth objectives − international coordination  Jurisdictional issues Ratings  Transparency achieved with published criteria  Publicly available outcomes  Stratified view  Used commercially Similar Goals but Different Approaches

4 cccbbbbbbaaaaaa Superior capital Secure range capital Regulatorycapital Impaired The Capital Spectrum

5 Current Trends Impacted by Crisis Regulation  Macroprudential Supervision –eliminate the “regulatory gap” without excessive regulation or overlap  Group Supervision –“CommFrame” Ratings  Reassess approach to group ratings  Capture risk of entire enterprise –challenge is to consider each risk without over- weighting

6 Prerequisites to a sound insurance industry Political Security and Transparency Economic Prosperity Financial System Stability Sound Insuranc e Industry

7 Credit quality – a growing priority Importance of ratings set to grow as a key (international) tool to meet these needs Using ratings as a benchmark Growing awareness of credit quality Financial crisis has raised general level of awareness of credit quality across both consumer and commercial sectors Focus on counterparty credit Sharpened focus on counterparty credit will continue to embed ratings in the financial fabric of the insurance and reinsurance sectors Ratings becoming enshrined in legislation Ratings are increasingly becoming enshrined in insurance legislation around the world as regulatory regimes evolve and their sophistication increases

8 Ratings in insurance regulation (1)  China: –all foreign reinsurers required to meet minimum rating requirements lead insurers: minimum rating of A- other reinsurers: minimum rating of B++  Taiwan: –minimum ratings for international reinsurers AM Best: B+Fitch: BBB S&P: BBBMoody’s: Baa2 –these thresholds are increased by one notch for cessions of more volatile business lines  Malaysia: –under recently introduced RBC regime, risk charges for reinsurance range from 1.6% for AAA and reinsurers licensed under the Insurance Act 1996 to 12% for unrated reinsurance

9  Singapore: –admission criteria for direct insurers to include a track record of past and present credit ratings with at least one international rating agency –counterparty risk factors can be as high as 150%  New Zealand: –new Insurance (Prudential Supervision) Bill proposes: a rating from an approved rating agency required for all insurers unless: –start-up –very small –pure reinsurer or captive  Solvency II: –will have significant rating dependencies –default probabilities of up to ~ 30% included in current version of rules Ratings in insurance regulation (2)

10  Current trends suggest that there is a risk that insurance licensing requirements will become more burdensome, but will likely be offset by global cooperation among regulators  In the wake of the global financial crisis, regulators will seek to “guarantee” financial stability without sacrificing industry growth  The embedding of ratings within regulation will increase in sophistication and expand geographically Prophecy

Shaping a Constructive Regulatory Environment Musings from a Credit Rating Agency Roger Sellek Managing Director, Global Financial Services IIS 46 th Annual Seminar Westin Palace Hotel, Madrid 6 th – 10 th June 2010