U.S. Solvency Modernization Initiative

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U.S. Solvency Modernization Initiative

• Kris DeFrain, FCAS, MAAA, CPCU
• Senior Manager Chief PC Actuary
• NAIC Executive Headquarters
• CAS Casualty Loss Reserve Seminar
• Sept. 19, 2008

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Things Are a Changin

• A tsunami is approaching
• our shores.
• mostly from Europe in the form of two
  principles-based issues
• International Accounting Standards
• International Solvency Standards
• (And EU Solvency II)
• And more countries are riding the wave

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You Should Care

• SEC Reconciliation
• FASB / IASB Accounting Convergence
• Potential impact on SAP
• US Solvency Modernization Initiative
• its a comin fur sur

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Evolution of the U.S. Solvency System

• We have developed a detailed and uniform
  financial regulatory system in the U.S.
• In the 1990s we created risk-based capital
  requirements and have continued to improve the
  formula over time, including adding stochastic
  modeling and trend tests.
• SAP was codified in 2001 into a comprehensive
  guide and has continued to be updated improved
  since.
• We are placing greater emphasis on Governance
  through a Model Audit Rule.
• We are proposing to modernize Reinsurance
  Principles-Based Reserving

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Evolution of the U.S. Solvency System

• We have been continuously improving U.S.
  insurance regulation for many years.
• What we have on our plates now is an
  investigation of new ideas and an opportunity
  through the Solvency Modernization Initiative.
• Long-term plan
• Analyze other financial supervisory modernization
  initiatives
• Identify areas for U.S. regulators to consider
  including in the current NAIC programs
• RBC will change in some way
• Internal Models, ERM, recalibration???
• International Accounting???

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Solvency I

• Not Risk Focused
• PC multipliers on premium and reserves
• An Increase in Premium with No Increase to Risk
  Results in Higher Capital
• Out of Date
• Some Countries Strengthened Regulation, but Not
  Uniformly
• MAJOR Need for Improvement!

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Solvency II in a Nutshell

• On www.naic.org find a draft comparison
  of US Solvency to EU Solvency II
• ERM focus
• Capital Requirements Internal Models,
  Stochastic
• Group solvency
• Current hope of companies is to get geographical/
  company diversification credits and lower the
  capital required to be held in individual
  companies so that groups/parent can hold the
  capital where it wants and transfer the capital
  when needed.

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Solvency II The Details Remain

• Thomas Steffen, CEIOPS Chair
• There might be risks in the process. Details
  still have to be worked out and the devil often
  is in the details.
• July 2007

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Some of the Remaining Details

• Proportionality
• Group Issues / Diversification
• Finalization of capital requirements (SCR MCR)
• Valuation of Technical Provisions link
  Accounting Solvency
• Implementing Measures Supervisory Guidance

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Conclusion

• Theres a lot of good work in Solvency II, but it
  is still NOT FULLY DEVELOPED and it is still
  UNTESTED.
• It may be premature to advance Solvency II (as a
  complete system) outside of the EU until details
  are decided, and perhaps even until the EU has
  some experience with the system to determine
  whether it will work in practice.
• The U.S. has a detailed thorough solvency
  regulatory system that includes RBC, financial
  analysis, and financial examination but there is
  always room for improvement its going to happen.

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Questions????

• Kris DeFrain, FCAS, MAAA, CPCU
• Phone [phone]
• E-mail kdefrain_at_naic.org