New Developments and Insurance Perspectives on Living Wills

Report
IAIR & AIRROC JOINT ISSUES FORUM FALL 2014
RESOLUTION PLANNING:
NEW DEVELOPMENTS AND
INSURANCE PERSPECTIVES ON
LIVING WILLS
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U.S. Regulators and Insurance Resolution Plans
• Under the Dodd-Frank Act in the United States, designated SIFIs are
required to submit resolution plans to the FRB and FDIC
• The designated insurer SIFIs, AIG and Prudential, submitted their
first resolution plans on July 1, 2014
• The FRB and FDIC are currently reviewing the plans and learning
about insurance in the process
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RESOLUTION PLAN CREDIBILITY
In 2013 the first round filers were told to focus on 5 obstacles.
In 2014 the FDIC (Not Fed) deems all first round filers 2013 plans “Non-credible”.
2013 guidance to focus on 5 key obstacles:
 Multiple competing Insolvencies
 Requirements for Global Regulatory cooperation
 Operations and interconnectedness
 Counterparty Actions
 Funding and liquidity
2014 “Not Credible” - Too big to fail, too complex to survive?
 Complex and irrational legal entity structure
 Entity structure does not take account of the resolvability
 Absence of an effective holding company structure hinders bail in
 No access to DIP financing
 Inability to ensure continuity of shared services in resolution
 Lack of operational capabilities for resolution preparedness
 No entity resilience to cross border failures
 Unrealistic assumptions about counterparty behavior
 Inadequate resolution plan
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ISSUES AND POSSIBLE ACTIONS TO RESPOND BY FIRST ROUND FILERS
Issue
Possible Actions
Complex and irrational legal entity structure
a. “White Sheet” entity design for to-be target
b. Establish multi year migration path
c. Institutionalize Legal Entity Rationalization
Entity structure does not take account of the
resolvability
a. Inventory Services, Assets, Liabilities to execute resolution
b. Entity re-alignment Services, Assets, Liabilities
c. Break up plan
Absence of an effective holding company
structure hinders bail in
a. Hold Co. design & migration path
b. SPOE Assessment
Absence of a stay on QFCs
a. Convert to ISDA protocol
No access to DIP financing
a. DIP sources and uses analysis
Inability to ensure continuity of shared
services
a. Stand alone bankruptcy resilient Shared Service Entities
b. Transfer to Bank of critical functions
c. Create redundant functions
Lack of operational capabilities for resolution
preparedness
a.
b.
c.
d.
No entity resilience to cross-border failures
a. Jurisdictional Analysis
b. Ring fencing of assets from liabilities
c. Resolution control analysis
Unrealistic assumptions about counterparty
and customer behavior
a. Counterparty Segmentation
b. Precedent and behavior analysis
Inadequate Resolution Plan
a. Entity level liquidity plan
b. Stress period extension
Y/N
Resolution Data Inventory
Simulation & desk top test
Resolution Operating Model
Resolution playbooks
3
OPERATIONS AND INTERCONNECTEDNESS – “A HUGE CHALLENGE”
The BAU operating model will almost certainly hinder resolution
“Organizations live as businesses but die as entities”
Operational

Identification & retention of critical personnel for wind-down is imperative

Formal SLAs that can transition to TSAs

Laser like focus on identifying interdependencies

Functional

Operational

Technology

Demonstrate Entity Resilience to cross failures

Identify impact on Payment Systems, Market Utilities, Clearing organizations
Cross Entity Issues

Liquidity pools

Inter group guarantees

Credit Provisions

Cross collateral/ default

Cross Border Interdependencies

Cross liens

Shared Operations

Third party contracts

Brand, IP etc.
4
DODD-FRANK RESOLUTION PLANNING FOR INSURANCE
Insurance resolution planning asks companies to solve problems they did not create…
The die is partially cast
 Insurance resolution plan follows a systemic designation (unlike the bank holding companies)
 Public statements from federal regulators
 Many critics; few apologists (and critics include readers of the plan)
State receivership system on trial
 State commissioner as actor and decision-maker
 Multiple resolution & guaranty systems
– Multiple resolution regimes inside of insurance…
– In addition to the multiple regimes outside of insurance
 State court is in charge (either Title I or Title II) – generally non-specialized and precedent may be
out of scale with experience
 Regulatory contagion – multiple regulators in play risks speed over wisdom
 “Systemic” challenges may outmatch jurisdictional reach and authority – national and international
issues
 Patchwork of derivative rules
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DODD-FRANK RESOLUTION PLANNING FOR INSURANCE
… and that do not exist for bank holding companies.
Plan must describe the actions of others
 State commissioner as actor and decision-maker
– Type of receivership – rehabilitation or liquidation
– Timing, decisions
 Guaranty fund system
– Portfolio transfer
– Administrative decisions
Other substantive challenges
 Assumptions regarding capacity and availability of the guaranty fund system
– Is it “public financing”?
– How much stress will regulators want to see?
 Separate accounts
 Cross-border operations and interconnectedness
 Single point of entry harder to envision
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U.S. Regulators and Insurance Resolution Plans
• In reviewing insurer resolution plans, FRB and FDIC particularly
focused on:
 Reporting requirements and measurements

Features of the insurance industry and business model (e.g.,
reinsurance, property/casualty vs. life insurance, and asset
management)

Features and consequences of insurance receiverships (e.g.,
process, multistate coordination, affiliated company coordination,
guaranty funds)
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FRB and FDIC Topics of Interest
• Differences in state regulatory frameworks

•
Difference in reporting obligations

•
To understand FRB and FDIC approaches to risk weightings of assets and
liabilities
Differences in receivership processes

•
To understand capital monitoring
Differences in regulatory capital treatment

•
To understand the nature of state oversight over insurers
To understand the processes surrounding rehabilitation, differences in state
to state treatment of receivership and guaranty funds
Features of the insurance industry and business model

To understand actuarial issues and risks associated with reinsurance and
captive reinsurers
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Contact Information
Patrick Hughes
(312) 601-9078
[email protected]
Samuel E. Proctor
(212) 909-6814
[email protected]
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