Drivers of Regulatory Changes 0 Global desire for consistency. 0 Industry consolidation is increasing multi-jurisdiction players. 0 IAIS protocols. 0 The financial meltdown. 0 European development. 0 IFRS 0 Solvency II 0 The financial crisis has highlighted the need for more effective corporate governance and risk management in all types of financial institutions. 0 Prudential Regulation 0 Risk Management 0 Capital Management 0 Balance 0 Business agenda 0 Consumer protocols International Association of Insurance Supervisory (IAIS) 0 190 jurisdictions (including Canada & US). 0 World standard setter for insurance supervisors. IAIS Insurance Core Principles October 2011 0 More risk-based approaches to capital and solvency measurement. 0 Focus on risk management and governance. 0 Increased use of stress and scenario testing. 0 Group supervision. Capital Adequacy 0 Risk-based capital (RBC) regimes differ greatly. 0 Inconsistent capital requirements. 0 Inconsistent approaches to capital adequacy. Risk-Based Capital 0 Typically measures asset, insurance and business risks. 0 Scope is expanding to include credit, market and business risks. 0 Management now adopting enhanced ERM. IAIS Now Requires 0 Target criteria for capital management. 0 Calibration of a standardized approach. Internal Models 0 IAIS permits superintendents to allow internal models to determine regulatory capital requirements. 0 Insurer must document the design, construction and governance of the model. 0 Including the underlying rationale and assumptions. Own Risk and Solvency Assessments (ORSA) 0 Identify and quantify risk. 0 Policy outlining management of all relevant and material risks. 0 Relationship between tolerance limits: 0 Capital requirements 0 Economic capital 0 Methods for monitoring risk. 0 ORSA to be regularly conducted: 0 Assess adequacy of risk management 0 Current and future solvency positions Governance 0 Board and senior management responsibility. 0 Includes: 0 Underwriting risks 0 Credit risks 0 Market risks 0 Operational risks 0 Liquidity risks 0 Relationship between risk management and quality of financial resources needed and available. Financial Reporting - IFRS 0 Replaces Generally Accepted Accounting Principles for public companies. 0 Standardizing financial statement format. 0 Accurate reflection of current liabilities and assets. 0 “Fair Value” 0 Mandatory valuation principles. Three Pillars 1. Demonstrate adequate financial resources. 2. Demonstrate adequate system of governance 3. Public disclosure and regulatory requirements. 0 European driven reform intended to establish a new set of : 0 Capital requirements 0 Valuation 0 Governance standards 0 Reporting requirements 0 Effect on non-European Markets: 0 European insurers operate globally. 0 Equivalence – non- European insurers do business in Europe. 0 IAIS – cooperation and collaboration between regulators. 0 How Can this affect your pool? 0 Reinsurance 0 Actuaries 0 Accountants 0 Auditors Why can you learn from the Canadian experience? 0 Because we are already dealing with these changes. Office of the Superintendent of Financial Institutions (OFSI) 0 Federal regulator of all national financial institutions – banks, insurers etc. 0 Moved off of rules-based regulation money years ago. 0 Principal-based regulation proved highly effective during crises: 0 No default 0 Institutions emerged very strongly. Global Finance Magazine August 2011 world’s safest banks in North America 1. Royal Bank of Canada (Canada) 2. Toronto Dominion (Canada) 3. Scotia Bank (Canada) 4. Casse Centrale Desjardin (Canada) 5. BNY Mellon (USA) 6. BMO (Canada) 7. CIBC (Canada) 8. JP Morgan Choice (USA) 9. Well Fargo (USA) 10. U.S. Bancorp (USA) 50 Safest Banks in the World 0 7 American 0 6 Canadian 0 6 Germany 0 6 France No other country has more than 3. 0 Enhanced global credibility has resulted in more rigorous evaluation. 0 Provincial regulators follow OFSI’s lead. 0 Seeking Solvency II equivalence. Results 0 RBC (system has installed many years ago). 0 Minimum Capital Test (MCT) now a well established industry standard. 0 Stress testing – dynamic capital adequacy test (DCAT) for a decade. 0 IFRS has been implemented. 0 ERM requirements are in place. 0 Reinsurance Risk Management Plans. 0 Chief Risk Officer. U.S. Situation 0 In large part will depend on the state regulators. General Indications 0 2008 National Association of Insurance Commissioners (NAIC) commenced the solvency modernization initiatives (SMI). 0 No implementation of Solvency II but will aim for a “equivalent” platform. 0 More of a standard formula approach to RBC. 0 Many regulators are leery of internal models. 0 ORSA is on the immediate horizon. 0 ERM and capital management will undoubtedly be a component of future regulations. Financial Institutions Commission (FICOM) 0 “Recommended” we adopt OFSI’s ERM protocols. 0 Gave us a year to implement. 0 Guidelines in handout. Our Approach 0 Manageable 0 Meaningful 0 Value for members Key results 0 Capital Management Plan. 0 ERM Policy. Capital Management Plan 0 Stochastic model 0 Stress test 0 10,000 scenarios 0 Used MCT as metric 0 Model Details 0 The model is based on a series of 10,000 simulations which generated full balance sheet projections as well as MCT calculations and other metrics. 0 Claims are generated based on theoretical distributions for each line of business from the 2011 rating study. Claims are generated for future years based on trending, growth and a frequency and a severity distribution. 0 Model Details (cont’d) 0 Additional shocks are distributions for: included by generating 0 A 10% chance of generating a loss in excess of $2.5 million, which could be not reflected in the past experience data. 0 A reserve deficiency mechanism which assumes with a 5% chance that liabilities are 20% deficient, a 10% chance that liabilities are 10% deficient and a 10% chance that liabilities are excessive by 5%. Our model only assumes this shock in the year 2011. 0 That members’ assessments for all pools, including those finding the MIABC’s retention be set at the 75th percentile confidence level. 0 That the MIABC gradually reduce its reliance on reinsurance by increasing it’s retention level, insofar as it receives concurrence from its appointment actuary. 0 That investment income should not be credited to members’ assessments. That if the MIABC ‘s capital falls below $250% MCT, the MIABC should consider replenishing it by retroassesing the membership if the MIABC’s capital is more than 250% MCT but less than 450% MCT, no dividends should be distributed. If the MIABC’s capital is between 450% MCT and 650% MCT, any dividends should be limited to 10% of the previous year pool assessment. If the MIABC’s capital exceeds 650% MCT, dividends should be limited to a maximum of 15% of the previous year’s pool assessment. ERM Plan 0 Engaged a consultant for the final phase. 0 Adopted policy. Risk Categories 0 Insurance 0 Investment 0 Business operations 0 Human Resources 0 Regulatory / Legal 0 Strategy / Reputational 0 IT ERM Implementation Staff working groups 0 Representation from each department. 0 Review consultant’s assessment. 0 Assign owner and Board report. 0 Set target tolerance. 0 Mitigation options. 0 Mitigation plan. 0 Monitoring and reporting. Conclusions 0 Changes are coming. 0 Governance is critical. 0 ERM inevitable. 0 Onus on us to make it work.