The Emergence of Solvency II The GNAIE Perspective

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The Emergence of Solvency II The GNAIE
Perspective
Group of North American Insurance Enterprises

• Jerry M. de St. Paer
• Senior Vice President, Finance, AIG
• Executive Chairman, Group of North American
  Insurance Enterprises (GNAIE)

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What is GNAIE?

• GNAIE is an industry organization of US,
  Bermudian and Canadian based international
  insurance companies
• The goals of GNAIE are to assist North American
  and global standard setters and regulators, in
  cooperation with the global insurance industry
  and with insurance and other financial services
  industry trade associations, to support high
  quality insurance accounting and solvency
  standards

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Who are the Members?
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Why does the North American Insurance Industry
care about Solvency II?

• GNAIE members are significant participants in
  European and world-wide insurance markets, so we
  care about Solvency II
• US efforts to converge US GAAP with international
  accounting standards, and the emerging use of
  economic capital management in the insurance
  industry and by rating agencies, increase the
  influence of European solvency concepts

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Third Country Insurance Issues

• Level regulatory playing fields competitive
  considerations
• Group supervision issues
• Regulatory equivalence
• NAIC consideration
• Relationship between Solvency II and IFRS

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Level Regulatory Playing Fields Competitive
Considerations

• Identical insurers writing exactly the same
  business, assuming same quality of management,
  should be treated identically from a solvency
  viewpoint, regardless of domicile
• Solvency II group diversification benefits have
  been designed with EU groups in mind
• EU groups are lobbying hard for recognition in
  the EU of realisable diversification benefits
  attributable to their third country operations
• The ERM initiatives of Rating Agencies rightly do
  not discriminate on the basis of parent company
  domicile

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Group Supervision Issues

• Third country companies could be required by the
  supervisor to form a European Insurance Holding
  company
• Solvency II may allow European supervisors the
  option of requiring regulation at the group level
• Regulators could select the jurisdiction based on
  level of business

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Regulatory Equivalence

• There are no answers as to how equivalency is to
  be determined
• Criteria
• Legal structure
• There are no answers as to how equivalency will
  work with a jurisdiction like the US with no
  group supervision
• GNAIE members are being asked to pay the price of
  non-equivalence, yet provide the highest levels
  of European policyholder protection

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NAIC Consideration

• There is an urgent need for US Regulators to
  examine the impact of the group and third country
  issues of Solvency II on US companies
• Attainment of Third Country Equivalence cannot be
  an after-thought
• The current proposals have serious competitive
  implications and threaten to undermine the
  protection provided to policyholders by some of
  the worlds biggest and most financially secure
  insurers
• Pragmatic solutions needed insurers should not
  be forced to pay the price for variety of global
  supervisory structures
• A wait and see approach is not an option!

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Relationship between Solvency II and IFRS

• Solvency II is based on an economic balance sheet
  approach
• Assets at market value
• Technical provisions - current exit value i.e.
  market consistent
• Ignores unique settlement and service features of
  insurance liabilities
• Which, is identical to the IFRS DP proposals
• Without concern for accounting issues (e.g.
  profit recognition)
• But, Solvency and Accounting objectives differ!
• Current Solvency II proposals resulting in lower
  technical insurance liabilities than IFRS
  proposals
• Arguably, it should be the other way round
• But, recognition of artificial profit margins on
  day one is not the answer just to lower
  accounting technical liabilities
• More important to get the objective and
  measurement of Solvency II right!

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Final Thoughts

• Our support, as EU and global market
  participants, will greatly add weight to
  acceptance and convergence of the Solvency II
  standards
• Our support at the IAIS will speed the
  development of a global standard equivalent to
  Solvency II
• Our efforts in the US could support convergence
  to an equivalent standard in the US
• For either to occur, North American constituents
  must feel that Solvency II, generally is
  consistent with their needs and circumstances,
  and that the process of development is open and
  receptive to their comments
• Current treatment of third country insurers is
  very distant from this requirement
• GNAIEs desire is to continue to work closely
  with our European counterparts on global solvency
  principles, as we have done successfully on
  global accounting principles