And one man in his time plays many part.
All the world’s a stage,
And all the men and women merely players;
They have their exits and their entrances,
Edward Liddy is a player who made made his exit as CEO of Allstate in December 2006 and his entrance as CEO of AIG this past September.
One of the many parts he will play in his time is the role of advocate for a federal backstop to the property/casualty insurance insurance industry – a role he played at a December 2005 industry conference.
… catastrophic storms can impact geographies beyond traditional coastal areas, is precisely why the industry needs a federal backstop.
Liddy said the approach is two-pronged: states should have a pool funded with a portion of premiums paid by policyholders — modeled after the reinsurance-like Florida Hurricane Catastrophe Fund as well as a federal backstop that would be broadly funded and would grow on a tax-free basis…
In December 2005, I was too busy finding coats for families that had lost theirs and more to Katrina to give insurance much thought. However, the idea of a federal backstop is about as appealing to me as spending another night in a travel trailer with no heat.
Having given insurance a great deal of thought since joining Sop on Slabbed, I see a clear connection between a federal backstop and the world stage that is the place where the men and women of the insurance industry will increasingly make their exits and entrances. In that regard, I found Liddy’s comments recorded in a transcipt of the PBS program, CEO Exchange, particularly interesting.
… I made a decision, oh six years ago or so, not to pursue the international arena. Insurance is different. It’s not as global as some other industries are. I think that was a good decision at the time. I question it… as I look at where the growth is, around the globe right now, and it’s many of the evolving or emerging countries, and we are not there, I wonder if that is a shortcoming in our strategy… Making a decision that’s good for the next 2-3 years, and making a decision that’s good for the next 20-30 years, sometimes are at odds with each other, and being able to balance those two, can sometimes be difficult.
Deloitt Touche traces its history from England in the late 1800’s and began focusing on a global future during a period that began in 1990. Their leadership in Solvency II is understandable from that perspective.
The European Commission has proposed a ground-breaking revision of EU insurance law designed to improve consumer protection, modernise supervision, deepen market integration and increase the international competitiveness of European insurers. Under the new system, known as ‘Solvency II’, insurers would be required to take account of all types of risk to which they are exposed and to manage those risks more effectively...(emphasis added)
The new system would introduce more sophisticated solvency requirements for insurers, in order to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents. This will help to increase their financial soundness. Currently, EU solvency requirements only cover insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer’s investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). All these risk types pose material threats to insurers’ solvency but are not covered by the current EU system.
Insurers would also be required to focus on the active identification, measurement and management of risks, and to consider any future developments, such as new business plans or the possibility of catastrophic events, that might affect their financial standing. Under the new system, insurers would need to assess their capital needs in light of all risks…[supervision]would shift [from a focus] on compliance monitoring and capital to evaluating insurers’ risk profiles and the quality of their risk management and governance systems. (emphasis added)
Solvency II is modeled after the European Union’s banking reform, Basil I and Basil II and reflects the same three pillar design with each pillar governing a different aspect of the Solvency II requirements and approach.
An interactive version of the graphic is found on the Deloitt Touche website. As these three questions suggest, the FAQ publication of the European Union is also insightful (note the spelling is correct albeit by European standards).
32. What will the proposal mean for insurers that are headquartered outside the EU (‘third-country insurers’)?
The proposal includes specific rules for branches of direct insurers headquartered outside the EU which are similar to those applied to branches of insurers headquartered within the EU. Conversely, the treatment of cross-border provision of insurance services and reinsurance activities conducted by third-country insurers and reinsurers essentially remains a matter for Member States as long as they respect their EU and international obligations.
However, in order to promote greater harmonisation with respect to the treatment of third-country insurers and reinsurers and to take account of the international nature of insurance markets today, the proposal includes a number of provisions that enable the equivalence of a third-country solvency regime to be assessed.(emphasis added)
The proposal also allows for the conclusion of mutual recognition agreements with third countries concerning the supervision of reinsurance entities that conduct business in the territory of each contracting party.
20. Will the new framework allow for securitisation?
The new solvency framework will recognise the economic substance of insurance activity and will focus on risk and the management of risk. Securitisations, as well as other risk mitigation techniques such as reinsurance and derivatives, can be a very useful tool for insurers in managing their risk exposures. The new solvency regime allows insurers to use such techniques and to get commensurate solvency capital relief arising from such a use, provided that insurers can demonstrate that they understand the nature and limitations of such techniques, and provided that there is a real transfer of risk.
39. Is the proposal a ‘Lamfalussy’-style Directive? What are implementing measures?
Yes, this is a ‘Lamfalussy’-style proposal for a Framework Directive. This means that the Framework Directive (‘Level 1’) focuses mainly on elaborating the basic enduring principles, or political choices, underpinning the solvency system. The more detailed, technical rules will then be put in place by the Commission in the form of implementing measures (‘Level 2’), which will be subject to scrutiny by the European Parliament and the Council of Ministers. (See Annex A.3 of the Impact Assessment for an explanation of the Lamfalussy Process).
Congress is currently being encouraged to pass legislation establishing a federal role in insurance regulation and provide a federal backstop – a proposal that has much in common with Solvency II.
The publication of draft framework Directive for Solvency II will also be closely monitored by non EU countries and there are expectations that US and Asian regulators will move towards a Solvency II type regime over time.
“The prospect of global solvency standards based on the EU standard should provide an early mover advantage to EU insurers in the same way that UK insurers are well positioned for the Solvency II…
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Convergence between the insurance industry and the capital markets is now a reality. Insurance linked securities are dramatically changing the landscape of the European insurance and reinsurance market.
What’s more, the European Union Commission has now released the first draft directive of Solvency II – the most far-reaching change to the framework governing insurance companies in the EU for over 20 years. This will encourage more risks to be securitised by allowing you to reduce your capital requirements.
The Lamfalussy Process is an approach to the development of financial service industry regulations used by the European Union. Originally developed in March of 2001…It is composed of four “levels,” each focusing on a specific stage of the implementation of legislation.
At the first level, the European Parliament and Council of the European Union adopt a piece of legislation, establishing the core values of a law and building guidelines on its implementation. The law then progresses to the second level, where sector-specific committees and regulators advise on technical details, then bring it to a vote in front of member-state representatives. At the third level, national regulators work on coordinating new regulations with other nations. The fourth level involves compliance and enforcement of the new rules and laws.
Change we need or a case of change we need to survive that we first have to survive to change? Was the scheme a test run?