Solvency Update2008 CAS Spring Meeting – Quebec City 1 U.S. Insurance Solvency Today & Future Kris DeFrain, FCAS, MAAA, CPCU Senior Financial Regulatory Services Manager & Chief Property/Casualty Actuary NAIC June 16, 2008

Solvency Update2008 CAS Spring Meeting – Quebec City 2  States  EU Commission & CEIOPS / NAIC  Uniformity is Difficult, but is Key – No “Race to the Bottom” U.S. Current Solvency Regulation Compared to Proposed EU Solvency

Solvency Update2008 CAS Spring Meeting – Quebec City 3  U.S. Financial Regulation is Uniform Aided by Handbooks – Analysis, Examination, Troubled Company Aided by Accreditation System  National Prioritization System  Financial Analysis Working Group Nationally Significant Insurers and Groups Aids Consistency in Analysis of Companies U.S. Uniform Financial Regulation

Solvency Update2008 CAS Spring Meeting – Quebec City 4  Principles or Rules  Public Disclosure vs. Supervisory Reporting  Economic Capital - Enterprise Risk Management  Accounting & Valuation  Capital Requirement Methodologies U.S. Current Solvency Regulation Compared to Proposed EU Solvency

Solvency Update2008 CAS Spring Meeting – Quebec City 5  US Risk-Based Capital (RBC)  1990s … updated annually, but not as “modern”  Risk-Based, not all risks (operational, CAT)  Detailed Calculations, but still formula driven and uses industry averages  Early Warning / Intervention, Regulatory Requirements  EU – Standard Formula & Internal Models  Risk-Based, all quantifiable risks  Ladders of Intervention (SCR – first action, MCR – final action)  Economic Based – Target to BBB rating, 99.5% VaR  Question of MCR – will their method limit court fights? Capital Requirements

Solvency Update2008 CAS Spring Meeting – Quebec City 6  US has group supervision through NAIC Holding Company Act and Analysis/Examination and there are Lead State Exams  BUT…what is “group supervision”?  US does not calculate an overall group capital requirement, but US insurance groups have a roll-up of the subsidiary RBCs, so there is group consideration  EU proposals – Being debated so still undecided. Small and new member states fear loss of power to larger member states Group Issues

Solvency Update2008 CAS Spring Meeting – Quebec City 7 Which was first? IAIS or SII? SII IAIS What Impacts the U.S.?

Solvency Update2008 CAS Spring Meeting – Quebec City 8  IAIS  International Solvency Changes  EU (SII)  Canada  Australia  Basel II Driving Forces - Solvency Regulation

Solvency Update2008 CAS Spring Meeting – Quebec City 9 U.S. Announces New Solvency Modernization Initiative  Evaluation of International Initiatives, Including IAIS, Basel II, Solvency II, Canadian Solvency, Australian Solvency, and IASB  Work Plan – Focus on  Capital Requirements  International Accounting & Valuation Issues  Group Supervision  Reinsurance

Solvency Update2008 CAS Spring Meeting – Quebec City 10 Impact of International Accounting  Probably the largest potential change under consideration is adoption of International Accounting (IFRS)  There is a trend in the U.S.  U.S. SEC -- Foreign private issuers can use IFRS with no reconciliation to U.S. GAAP –effective March 2008  U.S. FASB may adopt IFRS in 2013…bye-bye GAAP?  U.S. NAIC Statutory Accounting (SAP) – based on U.S. GAAP…what happens next?

Solvency Update2008 CAS Spring Meeting – Quebec City 11 U.S. Valuation Issues  P&C  Principles Based – Book “Management’s Best Estimate”  Not discounted, Implicit Risk Margin  Life  Principles-Based Reserving Initiative  From Prescribed Formulas to a Process of Identifying and Measuring All Risks  From Industry Expectations to Company Expectations  Discounted, Implicit Risk Margins

Solvency Update2008 CAS Spring Meeting – Quebec City 12 U.S. Reinsurance Initiative  Single State U.S. Regulator Both US and non-US Reinsurers  Potential for A new NAIC entity, Reinsurance Supervision Review Dept. (RSRD), that would assess regulatory effectiveness of non-U.S. jurisdictions through an “outcomes-oriented” approach.

Solvency Update2008 CAS Spring Meeting – Quebec City 13 U.S. RBC Future??  Use Company Specific Models, Have some modeling today & are researching P&C CAT Risk Modeling, but what else?  Determine Regulatory Review Process Major U.S. Concerns: Must maintain legal authority at predetermined and “non- arguable” action/control levels; What about “Fairness”?

Solvency Update2008 CAS Spring Meeting – Quebec City 14 Solvency in the U.S. U.S. is the largest market in the world and has a solid financial solvency system as evidenced by experience, but we are operating in a global marketplace… there will be change.