Mr. Edward Rivera, Esq. Deputy Commissioner of Insurance of Puerto Rico How to Present Financial Information/ The Role of Disclosure Brasil, Rio de Janeiro May 2007

THE AIM OF FINANCIAL INFORMATION DISCLOSURE: CONSUMER PROTECTION

FORM AND QUALITY OF THE DICLOSURE

The information should be: –Open –Transparent Public disclosure should also be: –Reliable –Timely FORM AND QUALITY OF THE DICLOSURE

HIGHER LEVEL OF RISKS CONVEY SPECIFIC DISCLOSURE REQUIREMENTS

Higher level of disclosure Risks inherently involved in the business These risks, pertinent to the very nature of our business cause: –A higher degree of estimation in regards to liabilities; –The possibility of systematic underestimation or overestimation of liabilities (ex. The pandemic), and, –A significant time span between estimation and actual total of liabilities. HIGHER LEVEL OF RISKS CONVEY SPECIFIC DISCLOSURE REQUIREMENTS

International Association of Insurance Supervisors (IAIS)

IAIS – PRINCIPLE 26

Information, Disclosure and Transparency states IAIS – PRINCIPLE 26 “The supervisory authority requires that insurers disclose relevant information on a timely basis in order to provide interested parties with a clear picture of its business activities and its financial condition and to promote a better understanding of the risks involved.”

Public disclosure and transparency as an overlay The supervisory regime should identify which solvency information should be made public safe, sound and efficient manner

QUALITY OF DISCLOSURE

Relevant Timely Reliability QUALITY OF DISCLOSURE It is material enough for a market participant to consider in making an investment or transacting with the company. Information reported as soon as practicable after it is known by the company. Quarterly reports or intra-period reports may provide an additional tool to the supervisor. Disclosure may be delayed for a short period to allow for verification.

Comprehensive Reliable QUALITY OF DISCLOSURE Market participants can form a well rounded picture of the insurer’s financials, performance, ownership and governance arrangements. Faithful to the financial situation it seeks to represent. verifiable neutral complete

Accessible Transparent QUALITY OF DISCLOSURE Disseminated well enoungh so that market participants take adequate notice. Sufficient risk bearing capital available to meet its insurance obligations with an undisputed degree of probability. CLEANER

DISCLOSURE VS. PROTECTION OF CONFIDENCIAL INFORMATION: A REGULATOR’S PENDULUM

Public Disclosure Confidential Reporting DISCLOSURE VS. PROTECTION OF CONFIDENCIAL INFORMATION: A REGULATOR’S PENDULUM The idea is to have open and transparent disclosure of an insurer’s compliance with regulatory requirements while showing to the public that they are appropriately carrying out the responsibility to manage their risks and protect their policyholders.

Regulator’s ordinarily paternalistic approach Balanced regulatory process –Responsibility –Risks it undertakes Enterprise Risk Management Regulation based on risk assessment DISCLOSURE VS. PROTECTION OF CONFIDENCIAL INFORMATION: A REGULATOR’S PENDULUM

WHAT SHOULD BE DISCLOSED?

Financial position Financial performance Risk exposure and risk management Basic business and corporate governance information WHAT SHOULD BE DISCLOSED?

HOW THE INFORMATION IS PRESENTED?

Accordance to generally accepted national and international standards.

National Association of Insurance Commissioners (the NAIC) –Uniformity –Blanks forms prescribes the form and content of the information to be included The International Accounting Standard Board (IASB) –standards specifically for insurance contracts IAIS, has advanced three standards on disclosures concerning technical performance and risks: –IAIS No. 9, dealing with Non-Life insurers and Reinsurers; –IAIS No. 12 for life insurers, and –IAIS No. 11 concerning investment risks and performance for Insurers and Reinsurance HOW THE INFORMATION IS PRESENTED?

Relevant Timely AccessibleComprehensive Reliable Comparable Consistent Disclosure Key Elements

Standard 9 –Be divided by Business Classes –Include an Analysis of Technical Performance –State Reserve Adequacy information Requires that information be shown using development triangles –Number of claims –Risk Concentration information –Reinsurance information –Capital information –Sensitivity, Stress Testing and Scenario Analysis HOW THE INFORMATION IS PRESENTED?

Standard 12 –Company Profile –Technical Risks –Technical Provisions –Capital Adequacy Position –Organization of the Business –Profit Sharing HOW THE INFORMATION IS PRESENTED?

Standard 11 –Disclosures concerning investment risks and performance for Insurers and Reinsurance –Market transparency –Market discipline –Investment Risks investment objectives, policies and management risk exposure asset class segregation, description and profiling performance measurement HOW THE INFORMATION IS PRESENTED? However it is not intended that this standard should conflict with accounting requirements. Instead, this standard may be viewed as providing additional insurance-specific disclosures that insurers should make.

CASE STUDY: PUERTO RICO

1.Annual Report as required by Article of the Insurance Code of Puerto Rico These blanks, among other data, require detail disclosure of the following information: a.Financial Statements detailing for each item; a.for each business line; b.investments: acquired or sold; c.notes to the financial statements d.notas a los estados financieros explicando en forma resumida sus políticas y prácticas de contabilidad; e.development of loss reserves per class of business f.etc. CASE STUDY: PUERTO RICO

2.Certified Financial Statements 3.Quarterly Financial Reports 4.Annual Certification of Insurer’s Stockholders 5.Statistical Reports 6.Ad Hoc Reports CASE STUDY: PUERTO RICO

CONCLUSION

Mr. Edward Rivera, Esq. Deputy Commissioner of Insurance of Puerto Rico How to Present Financial Information/ The Role of Disclosure Brasil, Rio de Janeiro May 2007