U.S. Solvency Modernization Initiative

1. U.S. Solvency Modernization Initiative Kris DeFrain, FCAS, MAAA, CPCU Senior Manager & Chief P&C Actuary NAIC Executive Headquarters CAS Casualty Loss Reserve Seminar Sept. 19, 2008

2. Things Are a Changin’ “A tsunami is approaching our shores.” …mostly from Europe in the form of two principles-based issues: • International Accounting Standards • International Solvency Standards (And EU Solvency II) And more countries are riding the wave

3. You Should Care… • SEC Reconciliation • FASB / IASB Accounting Convergence • Potential impact on SAP • US Solvency Modernization Initiative … it’s a comin’ fur sur…

4. Evolution of the U.S. Solvency System • We have developed a detailed and uniform financial regulatory system in the U.S. • In the 1990s we created risk-based capital requirements and have continued to improve the formula over time, including adding stochastic modeling and trend tests. • SAP was codified in 2001 into a comprehensive guide and has continued to be updated & improved since. • We are placing greater emphasis on Governance through a Model Audit Rule. • We are proposing to modernize Reinsurance & Principles-Based Reserving

5. Evolution of the U.S. Solvency System We have been continuously improving U.S. insurance regulation for many years. What we have on our plates now is an investigation of new ideas and an opportunity through the Solvency Modernization Initiative. • Long-term plan • Analyze other financial supervisory modernization initiatives • Identify areas for U.S. regulators to consider including in the current NAIC programs • RBC will change in some way • Internal Models, ERM, recalibration??? • International Accounting???

6. Solvency I • Not Risk Focused • P&C – multipliers on premium and reserves • An Increase in Premium with No Increase to Risk Results in Higher Capital • Out of Date • Some Countries Strengthened Regulation, but Not Uniformly • MAJOR Need for Improvement!

7. Solvency II in a Nutshell • On www.naic.org – find a draft comparison of US Solvency to EU Solvency II • ERM focus • Capital Requirements – Internal Models, Stochastic • Group solvency • Current hope of companies is to get geographical/ company diversification credits and lower the capital required to be held in individual companies so that groups/parent can hold the capital where it wants and transfer the capital when needed.

8. Solvency II – The Details Remain Thomas Steffen, CEIOPS Chair “There might be risks in the process. Details still have to be worked out and the devil often is in the details.” July 2007

9. Some of the Remaining Details… • Proportionality • Group Issues / Diversification • Finalization of capital requirements (SCR & MCR) • Valuation of Technical Provisions – link Accounting & Solvency • Implementing Measures & Supervisory Guidance

10. Conclusion • There’s a lot of good work in Solvency II, but it is still NOT FULLY DEVELOPED and it is still UNTESTED. • It may be premature to advance Solvency II (as a complete system) outside of the EU until details are decided, and perhaps even until the EU has some experience with the system to determine whether it will work in practice. • The U.S. has a detailed & thorough solvency regulatory system that includes RBC, financial analysis, and financial examination but there is always room for improvement; it’s going to happen.

11. Questions???? Kris DeFrain, FCAS, MAAA, CPCU Phone: 816-783-8229 E-mail: kdefrain@naic.org