1. Regulation and Risk Management for Cross-Border Insurance Groups
Terri M. Vaughan and Randi Woods Webber
February 2015

2. The Agenda: Current Issues for Cross-Border Insurance Groups
Issues in regulation and supervision
Risk management in cross-border insurance groups

3. International Developments
Industry cross-border activity
Cross-border insurance groups
Reinsurance transactions
Capital management
Regulator cross-border activity
IAIS (1994)
Financial Sector Assessment Program (FSAP)
Financial Stability Board

4. Key Projects
Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)
Insurance Capital Standard (ICS)
Global Systemically Important Insurers (G-SIIs)

5. The Problem: Challenges in Supervising Internationally Active Insurance Groups (IAIGs)
Diversity in organizational structures
Complexity/transparency
Centralized functions
Diversity in markets
Insurance markets (products, concentration, capital markets, interconnectedness with banks, etc.)
Regulation/supervision: risk tolerance, regulatory culture and approach (principles-based vs. rules-based, relative emphasis on different tools)
Transparency in financial reporting
Concerns of regulators
Regulatory arbitrage/cross-border risks-shifting
Cross-border resolution
Level playing field??

6. FSB Membership
Argentina: Central Bank of Argentina Australia: Department of Treasury, Reserve Bank of Australia Brazil: Ministry of Finance, Central Bank, Securities & Exchange Commission Canada: Department of Finance, Bank of Canada, OSFI China: Ministry of Finance, People’s Bank of China, CBRC (bank regulator) France: Ministry of Economy, Finance and Foreign Trade; Bank of France, Autorité des Marchés Financiers (AMF) Germany: Ministry of Finance, Deutsche Bundesbank, Bafin Hong Kong SAR: Hong Kong Monetary Authority India: Ministry of Finance, Reserve Bank of India, Securities & Exchange Board Indonesia: Bank Indonesia Italy: Ministry of the Economy and Finance, Bank of Italy, CONSOB (securities) Japan: Ministry of Finance, Bank of Japan, Financial Services Agency Korea: Bank of Korea, Financial Services Commission

7. FSB Membership (cont.)
Mexico: Ministry of Finance & Public Credit, Bank of Mexico
Netherlands: Ministry of Finance, Netherlands Bank
Russia: Ministry of Finance, Central Bank, Federal Financial Markets Service
Saudi Arabia: Saudi Arabian Monetary Agency
Singapore: Monetary Authority of Singapore
South Africa: Ministry of Finance
Spain: Ministry of Economy and Finance, Bank of Spain
Switzerland: Swiss Federal Department of Finance, Swiss National Bank
Turkey: Central Bank of the Republic of Turkey
United Kingdom: HM Treasury, Bank of England, Financial Services Authority
United States: Department of the Treasury, Federal Reserve, SEC 
European Union: European Central Bank, European Commission
International Financial Institutions: BIS, IMF, OECD, World Bank
International Standard-Setting, Regulatory, Supervisory and Central Bank Bodies: BCBS, IOSCO, IAIS, IASB, CPSS, CGFS

8. International capital models in banking and for European insurance markets
The Basel Capital Accord
Basel I
Basel II
Basel III
Basel IV???
European Solvency Regulation
Solvency I and the European Common Market
Solvency II

9. Issues Basel II and Solvency II (pre-crisis)
Relative emphasis on consolidated capital requirements
Fungibility of capital: "Source of strength", "Group support"
Role of group supervisor
Valuation basis
Internal models vs. standard model
Reassessment following the financial crisis
Home vs. host conflict
Market consistent valuation
Internal models

10. ComFrame and the ICS: The debate
Emphasis on centralized processes, policies, risk management
Role of group-wide supervisor
Consolidated capital requirements
Reflecting local differences?
Standard vs. internal models
Valuation basis

11. The Range of Possibilities
Global markets Local markets
Single regulator Local regulators
Free movement of capital “Balkanized capital”

12. Other considerations Solvency II and equivalence
Impact on US firms doing business in Europe
Reinsurance collateral (A covered agreement?)
The effectiveness of the U.S. voice in international discussions
FSOC-designated firms
Prudential, AIG, MetLife
Others???

13. Principal International – A Real-World Example of Cross-Border Risk Management
Nine Business in Ten Countries
Types of Financial Services Businesses
Life Insurance
Annuities
Mandatory Pension
Voluntary Pension
Mutual Funds
Asset Management
All have very different Risk Characteristics and Capital Needs

14. From a Risk Perspective, Looking at Capital without Reserves just Doesn’t Make Sense
Life Insurance typically has high reserves
Pension business usually holds Account Values
Mutual Funds and Asset Management hold zero reserves
A better measure would be the Total Assets Required to provide the level of solvency that the regulatory expects.

15. In Pictures…

16. The Application is More Challenging than the Theory
Capital is NOT Fungible
Dividends are taxable
Often, they require regulatory approval
Most regulators want “their” capital residing in “their” country
Solvency Requirements are not Consistent Across Jurisdictions
Supervisory Colleges raise local capital requirements instead of lowering them
Regulator demanded guarantees (separate accounts, ring-fencing of assets, etc.) can result in significant trapped capital.

17. How Does PFG Try to Influence Change?
Local Industry Groups
Conversations tend to be more technical
Local Regulators
Tend to be less educated
“Xerox” copy approach to regulation
If you’re a hammer, everything looks like a nail
US Industry Groups and Government Influence
International Groups