Impact of the Financial Crisis and Lessons Impact of the Financial Crisis and Lessons Learnt Learnt

Rob Curtis

Regional Information Session, Cape Town

5 March 2010

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OutlineOutline

• General Observations• Group Supervision Framework• Macro-level Supervision• Group Risk Assessment• Group Governance Assessment

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General ObservationsGeneral Observations

• The impacts of the financial crisis have been substantial and accordingly there are many organisations and others reflecting on the causes of the crisis and the lessons to be learned.

• Some of the main problems that were demonstrated during 2008 and up to now, and which need to be addressed by enhanced group-wide supervision, can be summarised as follows:

– Lack of oversight and monitoring of non-regulated subsidiaries/activities

– Legal and legislative limitations on insurance group supervision

– Quality and content of both regulatory structure and supervisory practice

– Lack of coordination of responsibilities / established coordination mechanisms between supervisors

– Lack of effective tools to minimise regulatory arbitrage on a cross sector and cross border basis

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Group Supervision FrameworkGroup Supervision Framework

- The potential for a more robust legal framework to facilitate supervision of groups on a

holistic basis • Highly centralised groups make it almost impossible to

adequately address the risks at a solo level and to rely on data/information received at that level.

– To enhance supervisory cooperation, convergence and information exchange• The crisis demonstrated that in stressed conditions,

supervisory cooperation and information sharing are crucial

• Role of supervisory colleges in assessing the investment policies of a particular group at the group level, as well as the risk management and internal control mechanisms of the group.

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Group Supervision FrameworkGroup Supervision Framework

• Supervisors need to share information and discuss cross-border threats to financial stability and the overall financial soundness of the insurance industry.

• Supervisors need to develop the same high minimum standards, otherwise possibilities for regulatory arbitrage may arise. This would strengthen mutual recognition of supervisory practices and foster supervisory equivalence.

• The quality of regulation and supervision across

jurisdictions needs to be aligned in order to close any regulatory loopholes and to avoid regulatory arbitrage.

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Macro-level SupervisionMacro-level Supervision

- To strengthen macro-prudential capabilities

• One lesson learnt in this crisis is that a micro-prudential view on individual entities alone is not sufficient and needs to be supplemented by a macro-prudential risk assessment.

• The FSF/FSB, IMF and other institutions are currently working on possible approaches.

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Macro-level SupervisionMacro-level Supervision

– To consider aspects of procyclicality• Regulatory regimes may become procyclical especially in times

of stress and this needs to be addressed by insurance supervisors e.g. credit risk. Capital requirements should be modelled appropriately and can be supported by other measures like stress testing exercises concerning, for example, credit risk.

– To consider issues of cross-sectoral consistency• Procyclicality or remuneration might be issues where cross-

sectoral cooperation may be of relevance. Although the extent of the relevance of those issues could be different between the sectors, possibilities for regulatory arbitrage between insurance and banking have to be addressed.

• The Joint Forum has developed work streams where the IAIS is involved in establishing cross-sectoral views (vis-à-vis just insurance specific views) on issues such as the treatment of off-balance sheet vehicles, the differentiated nature of the scope of supervision (including treatment of participations and oversight over non-regulated entities) and the scope of financial conglomerate supervision in general.

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Group Risk AssessmentGroup Risk Assessment

_ To provide a comprehensive framework for solvency assessment and supervision

• National supervisors as well as international standard-setters need to work on their own capabilities in this respect.

– To close any regulatory and supervisory gaps in group-wide supervision and to eliminate contagion risks • It became very clear that effective supervision needs to

look at all parts of a group that could have implications for the financial soundness of it to achieve adequate policyholder protection for the group entities.

• Non-regulated entities within a group can otherwise have serious implications towards other parts of it. Supervisors need to recognise the possible contagion lines between different parts of an insurance group as well as reputational risks.

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Group Risk AssessmentGroup Risk Assessment

– To adequately address diversification/concentration risk at group level (for both assets and liabilities) and transferability/fungibility of asset/capital• Supervisors should take a comprehensive approach in

evaluating any diversification and concentration of risks at the group level and the ability of the group to transfer capital while maintaining an adequate distribution of capital within the group. This is valid for the asset side as well as the liability side of the balance sheet.

– To adequately address intra-group liquidity risk exposure • Liquidity may also be transferred from different parts of a

group towards others. This can have difficult implications especially in the case of financial conglomerates with banking, insurance and non-regulated or under-regulated business.

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Group Governance AssessmentGroup Governance Assessment

- To address complexity and increase transparency and disclosure

• Overly complex legal or operating group structures in different legal environments might hinder proper supervision.

• Disclosure rules/requirements of groups may need to be strengthened.

– To enhance corporate governance/risk management frameworks to reflect the complex nature of large international insurance groups• Corporate governance and responsibility need to be improved

overall and gaps need to be closed in this area as well. This could include remuneration policies and incentive schemes.

• Internal models remain important for proper enterprise risk management, especially in comparison to standard models. Internal models provide the company as well as the supervisors with a better grasp of an individual group’s risks.

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