Insurance and Regulatory Risk A U.S. G-SII Perspective

1. ©UFS
©UFS
Insurance and Regulatory Risk
A U.S. G-SII Perspective
Insurance Risk North America Conference
November 5, 2013
Stanley J. Talbi
Executive VP and Chief Risk Officer

2. Three Key Points
 The life insurance business did not cause the financial
crisis and is not a source of systemic risk
 Imposing bank-centric regulations on life insurance
companies would create unintended consequences
 A better approach to regulating life insurance companies
would focus on activities
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3. Business Fundamentally Different From Banking
 Banks are asset driven
 Goal: Find attractive assets to invest in, then find lowcost, short-term funding to purchase assets. High
liquidity risk.
 Life insurers are liability driven
 Goal: Sell long-term promises, then find assets that
match the cash flows of those promises. Low liquidity
risk.
 What banks call “maturity transformation” we call a
“maturity mismatch”
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4. Life insurance not Systemic
 There has never been a systemic event in the traditional
insurance space
 Executive Life (U.S.)
 Mutual Benefit (U.S.)
 General American (U.S.)
 Confederation Life (Canada)
 Kyoei (Japan)
 Equitable (U.K.)
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5. Impact of IAIS/FSB Framework on a U.S. G-SII,
 MetLife was named a G-SII and is being assessed by the
U.S. Financial Stability Oversight Council (FSOC) as a
possible U.S. non-bank SIFI.
 Absent FSOC designation the impact of G-SII designation
is unclear.
 If and when the FSOC designates MetLife a SIFI, we will
be subject to consolidated supervision by the U.S. Federal
Reserve.
 U.S. capital rules for non-bank SIFIs not yet finalized.
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6. Observations on assessment methodology and policy
measures.
 Assessment methodology continues to evolve
 Comprehensive supervision and effective resolution regimes make
sense
 should be designed to capture insurance risks and reflect the
unique nature of a liability driven business model
 should target systemically risky activities and recognize
“traditional” management of non-traditional/non-insurance
activities in support of core business
 should recognize that structural separation may concentrate
vs. decrease risk
 Most critical issue is FSB requirement of a backstop capital
requirement (BCR) and quantitative capital standard (QCS)
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7. Capital Requirements - Observations
MetLife supports the overall effort to enhance capital regulations.
However,
 Imposing bank centric rules on insurers would harm consumers
 Faced with unnecessarily costly requirements, insurers would
have to:
Raise the price of the products they offer
Stop offering certain products altogether
 Oliver Wyman estimates consumers would pay $5bn – $8bn a
year in higher prices or lower benefits
 Imposing additional requirements on a few institutions instead
of on systemic activities will create an unlevel playing field
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8. Sensible Principles for Effective Backstop Capital Requirement
 Tailored and calibrated to the activities of the institution
 Ensures sufficient capital to protect solvency even in
severe stress
 Comprehensively captures entities and risks
 Provides a basis for comparison across jurisdictions and
financial institutions
 Can feasibly be implemented – requires minimal
adjustments, none of them complex
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9. MetLife Proposes Augmented European Insurance
Groups/Financial Groups Directive Framework
Key elements of the framework
Supports
consolidated
regulatory approach
• Produces a single Group-wide capital solvency
ratio
Includes Holding
company assets
• Applies Basel III to any HoldCo that is not a
regulated insurance company
Includes all noninsurance
subsidiaries
• Applies appropriate capital requirements to
non-insurance entities (e.g., Basel for banks)
Improves
comparability
• Scales capital requirements across major
global solvency regimes to achieve greater
comparability
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10. Proposed Framework Aggregates Local Regulatory Rules
Basel III capital charges
for HoldCo activities
Holding Co.
(if any)
US Life
US P&C
Foreign
Life
…
Captive
Bank
…
Nonregulated
entity
Insurance subsidiaries
Insurance statutory regulations
Basel III or other appropriate
framework
Comprehensively addresses all activities using most tailored rules
A meaningful Group Solvency Ratio requires scaling of various
ratios (available and required capital) across multiple jurisdictions
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11. Example of approach (hypothetical)
1 Sum the available
and required capital
2 Calibrate required
capital across regime
Insurance entities
Required Capital: 100
Required Capital: 100
(US)
Available Capital: 500
Available Capital: 500
Available capital:
1,000
Required capital: 200
3 Adjust for HoldCo
double leverage
4 Determine capital
ratio
Scaling
X 1.0 -> Required capital: 200
Unconsolidated holding
company balance sheet
Assets Liab. and equity
Bonds:
Total debt: 700
1
300 Total equity: (400)
Insurance entities
Assets: 300
Assets: 300
(Japan)
Debt: 700
Debt: 700
Available capital: 800
Required capital:
100
X 2.0 -> Required capital: 200
Aggregated activitiesbased capital ratio
Required capital: 425
Capital = 1800 – 400 =
1400
Group Solvency Ratio =
329%
X 1.0 -> Required capital: 25
Holding company
Required capital: 251
=
Total
Available capital: 1,800
Required capital: 425
We believe that the calibration issues, while challenging, are addressable
1. 100%
RWA for corporate bond assets, converted to required capital by multiplying by 8.5% (Basel III Tier 1 minimum ratio, inclusive of the capital
conservation buffer)
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12. Key Challenges
 Developing a BCR by end 2014 will be challenging
 The adoption of banking measures (like Basel) or simple leverage
ratios will achieve comparability in “form” but not “substance”
 Comparability can be achieved via:
 Adopting a single global accounting standard (difficult) or
 A focused calibration exercise that scales existing measures
(achievable)
 Key questions need to be and are being addressed:
 How to scale capital across different insurance regimes to ensure
comparability
 How to set minimum capital ratios (including calibration of capital
rules for insurance vs. non-insurance / banking like activities)
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13. Other Insurance Industry Challenges
 ORSA Implementation – NAIC SMI
 ALM in a Low Interest Environment
 Managing Risks in Investment Portfolios
 Model Risk Governance
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14. Other Insurance Industry Challenges
 Modeling Economic Capital
 Emerging Risks – Technology
 Stress Testing
 Risk Culture
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15. © Oliver Wyman
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