Case Study - Consolidated Oversight - (Recommended Solutions) Regional Training Seminar IAIS-ASSAL-FIDES 26 November 2009, Lima Peru Takao Miyamoto, IAIS Secretariat

1 Group Structure HOLD INS FIN REIN Jurisdiction AJurisdiction BJurisdiction C 100% 60% 40% 100% Loan Reinsurance

2 Question 1 (Question 1) Group doest not appear to have been supervised from group-wide perspective What difference would it have made if it had been supervised on group-wide basis?

3 Question 1 If supervised from group-wide perspective (e.g. group-wide supervisor), they would have been in position to overview group, assessing –Group structure –Interrelationships –Capital adequacy –Reinsurance –Risk concentration –Intra-group transactions and exposures It would have led to better understanding of group situation and more timely & appropriate supervisory actions (early warning, remedial orders etc)

4 Question 2 (Question 2) Based on “Guidance Paper on the Role and Responsibilities of a Group-wide Supervisor”, who should have performed task of supervising group?

5 Question 2 Supervisor A appears to be best positioned to be group-wide supervisor –Group head (HOLD) was in jurisdiction A –Group’s risk management and internal controls were centrally controlled by HOLD –Supervisor A had follow-up approach power through INS How about “Supervisor of FIN in jurisdiction B” (not Supervisor B for insurance but supervisor in other sectors)? –FIN took up large portion on INS’s balance sheet –But… –Anyway, it could play important role

6 Question 3 (Question 3) Assume that Supervisor A was group-wide supervisor Evaluate Supervisor A’s performance with respect to “Principles on Group-wide Supervision” –Note where Supervisor A’s actions were both in accordance and not in accordance with principles

7 Question 3 – Principle 1 No evidence that Supervisor A sought to assess capital adequacy of group –Lack of group-wide perspectives, especially intra-group relations –Although management accounts were reviewed and Supervisor A did try some Supervisor A should have sought to understand risks assumed by FIN by –Communicating with respective sector supervisors in jurisdiction B –Using follow-up approach through INS to access information regarding FIN’s operations

8 Question 3 – Principle 1 Supervisor A may have had better to impose requirement to model FIS’s risks –FIN’s impact on INS’s solvency is large Supervisor A did not communicate with Supervisor C to gain reliable information on REIS’s capital adequacy

9 Question 3 – Principle 2 Fitness and propriety of HOLD’s board and senior management was questionable –It deceived Supervisor A –It failed to prevent poor accounting practices Supervisor A did not seem to have assessed fitness and propriety of board and senior management –Communication with respective supervisor in jurisdiction B could have raised concerns –Using follow-up approach through INS to access information regarding FIN’s operations

10 Question 3 – Principle 2 Examples of activities for assessment –Obtain character references –Make inquiry regarding criminal record, disciplinary action taken against board members with respect to professional misconduct –Evaluate experience and expertise of board members to ensure that board collectively has sufficient capacity for group operation management –Meet face to face

11 Question 3 – Principle 3 Supervisor A did not seem to have assessed risk management and internal control on group-wide basis –Contagion concerns may have arisen in association with rumor on FIN –Using follow-up approach through INS to access information regarding FIN’s operations Adequate assessment would have identified whether group had sound reporting & accounting procedures, sound monitoring & management of intra-group transactions –It seems to be weak given accounting violations

12 Question 3 – Principle 3 Also, they would have identified whether group had sound monitoring & management of intra-group transactions –FIN down-streamed capital, which were obtained through loan from INS, to form REIN –REIN provided reinsurance to INS –FEIN provided loan to FIN

13 Question 3 – Principle 4 From legislative perspective, Supervisor A had authority to carry out group-wide supervision –Supervisory A had ability to use follow-up approach However, as already mentioned, Supervisor A should have performed more in-depth analysis in many areas It is not clear whether omission was due to insufficient skills

14 Question 3 – Principle 5 Supervisor A would have been more effective if it had communicated with relevant supervisors Such cooperation ranges –Informal exchange of information for supervisory purpose –Memorandum of Understanding (MoU) –Supervisory College –Mutual recognition agreements As group-wide supervisor, Supervisor A should have taken leading role

15 Questions and Answers Thank you very much!