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High-end Actuarial Risk Management Solutions – to Rationalize the Impact of Emerging Regulatory Trends on U.S. Insurers


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This brilliant white paper decodes the Impact of Emerging Regulatory Trends on U.S. Insurers with special focus on Solvency II. Also find out how WNS’s specialized actuarial services can meet the …

This brilliant white paper decodes the Impact of Emerging Regulatory Trends on U.S. Insurers with special focus on Solvency II. Also find out how WNS’s specialized actuarial services can meet the emerging needs of customers across the insurance domain. Whitepaper is also available at -

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  • 1. High-end Actuarial Risk Management Solutions– to Rationalize the Impact of EmergingRegulatory Trends on U.S. Insurers
  • 2. High-end Actuarial Risk Management Solutions – to Rationalize the Impactof Emerging Regulatory Trends on U.S.
  • 3. ContentsIntroduction 02Solvency II Overview 03The Potential Impact of Solvency II on U.S.-based Insurers 03Solvency II, Equivalence or SMI –Which Regulatory Path Will the US Follow? 05The Way Forward 07WNS Actuarial Services and Risk Management 07
  • 4. IntroductionGreat Recession and the Global Economic Crisis Lead toRegulations to Protect InsuranceThe past few years have witnessed significant global financial turmoil and extreme economic crisis that hadtheir roots in the sub-prime loan crisis, which led to the fall of Lehman Brothers and started what has beentermed as the Great Recession or Long Recession. To add to the complexity, the sovereign debt crisis brokeout in the Eurozone in 2011; also, the world witnessed intense geopolitical turmoil in the Middle East lastyear. Such intense and climacteric changes have resulted in the world economy entering a phase, described asdangerous by a January 2012 World Bank report.Policy makers and governments the world over, are looking at large-scale changes in regulations and initiatingpolicy makeovers, in order to bring some respite to the world economy and shielding businesses and investors,particularly in the financial services domain, from making crippling losses.Insurance is one such sector where the sheer risk associated with the business environment necessitatesstringent regulatory systems. Europe and US – the two biggest insurance markets in the world have felt theripples of the past economic crisis and breakdown offinancial markets, and are now bracing to protect theinsurance business as well as investor sentiments. Theprincipal objective of insurance regulation is to protectpolicyholders and the society in general against excessiveinsurer insolvency risk.The International Association of Insurance Supervisors(IAIS), which boasts a membership of at least 190 globalregulatory jurisdictions, is emerging as the internationalstandard setter for regulations. In 2011, the IAIS developedits Insurance Core Principles (ICPs), which are similar to theprinciples in Solvency II (see below). The IAIS is seeking toestablish a common framework (ComFrame), which will provide greater harmonization and transparency forinsurance supervision across the globe. The ICPs are expected to modernize and bring uniformity to thedisparate supervisory frameworks, which oversee global insurance companies.Some common requirements that have emerged from these regulatory developments include:Movementn towards a more risk-based approachCapitaln and solvency measurementGreatern focus on risk management and governancen ofUse stress and scenario testingGroupn supervisionThis paper highlights the potential impact of these regulatory changes on U.S.-based insurers especially inview of the Europe-driven Solvency II initiatives and describes other developments undertaken by U.S.supervisory bodies focusing on advanced risk management practices.02 |
  • 5. High-end Actuarial Risk Management Solutions – to Rationalize the Impact of Emerging Regulatory Trends on U.S. InsurersSolvency II OverviewEurope – Gearing Up to Overhaul Capital Adequacy Requirements,Corporate Governance and Disclosures with Solvency IIIn Europe, Solvency II – the European Union (EU) Solvency n Capital Requirement (SCR) – Standarddirective is all set to review and revise the overall Formula or Internal Modelapproach to regulating insurance companies in the Minimum n Capital RequirementEuropean market. This directive will bring changesto capital adequacy requirements and Pillar II – Evaluation of QUALITATIVE requirementsdetermination, corporate governance and publicdisclosures. These changes are due to be System n of Governanceimplemented in 2014. Own n Risk and Solvency Assessment (ORSA)The Solvency II regime is somewhat similar to the Supervisory n Review Processbanking regulations of Basel II and based on threeguiding principles (pillars), each pillar focusing on Pillar III – Disclosure of the institutions solvencya different regulatory component. and financial situation Public n Disclosure – Annual Solvency andPillar I – Estimation of the QUANTITATIVE Financial Condition Reportrequirements Information n to be Provided forAssetsn and Liabilities – Market Consistent Supervisory Purposes ValuationThe Potential Impact of Solvency II onU.S.-based InsurersWhile not all U.S. insurance and re-insurance a definitive edge over competition. Companies thatcompanies will be directly subject to Solvency II fully embrace Solvency II and are appropriatelythat will come into effect on January 2014, most equipped to demonstrate to regulators that theyinsurers will feel its impact in some way or the meet Solvency II requirements and haveother. It is a huge challenge for insurers, with the appropriate capital reserves will have greaterkind of changes that will need to be implemented: flexibility than their counterparts. However, theright from transformation of IT systems to impact of Solvency II will depend on the degree torevamping the culture of the company. Once which an insurer carrier is globally diversified.implemented, these changes will give insurers | 03
  • 6. The key scenarios and implications of Solvency II In addition, if the parent company plans to useon the U.S. Insurance Industry are as follows: an internal model, the subsidiary must then demonstrate that the results of their own1. Principles versus Rules-based Approach internal model are used as the basis to make The NAICs Risk-based Capital (RBC) system, business decisions, including underwriting, essentially a formula based approach was pricing and performance measurement. created to provide a standard capital requirement framework across all U.S. states. Similarly, U.S.-owned foreign subsidiaries will need to produce the required MCR and SCR Because of the sudden surge in economic calculations, comply with governance turmoil in recent times, there has been a shift requirements, and provide the required reporting from a rules-based approach to a principles- and disclosure. There will be implications for based approach to supervision and regulation. the parent company due to the change in the As insurance business is getting increasingly capital requirements themselves, as well as complicated with more complex products, implications on business decisions related to flexible commission structure, customers the subsidiary on the extent internal models are preference to guarantees, challenging economic being used in decision-making process. environment, new risk management frameworks 3. Capital Management and Competitiveness and dynamic regulatory changes, a principles- based approach enables a better alignment of Solvency II provides a framework for effective regulatory capital with the underlying risks faced capital and risk management where all the risks by insurers. are identified and managed adequately. The provision of risk-mitigation techniques2. U.S.-based and U.S.-owned Foreign Subsidiaries like re-insurance, hedging, diversification In order for the parent company to meet benefits will provide opportunities for Solvency II requirements, its U.S.-based EU-based insurers to change their risk profiles subsidiaries must provide the required MCR and capital requirement. and SCR calculations, must meet the Pillar II requirements regarding risk management In the short term, U.S.-based companies may practices and structure (including its Own Risk have a competitive advantage in pricing and Solvency Assessment), governance, products with low U.S. capital requirements as documentation and controls, and must provide compared to the Solvency II required capital. However, those companies using Solvency II information to their parent in order to meet the approaches may have a deeper understanding of reporting requirement under Pillar II. the underlying risks in the products, which will provide longer term advantages as financial results are realized.04 |
  • 7. High-end Actuarial Risk Management Solutions – to Rationalize the Impact of Emerging Regulatory Trends on U.S. InsurersSolvency II, Equivalence or SMI – WhichRegulatory Path Will the US Follow?While European insurers are gearing up to U.S. solvency framework and to assess whether anyimplement the directives of Solvency II, pressure changes to that framework are needed. The goal ofis mounting on the US to adopt global the SMI is to link economic capital requirements to aregulatory standards. companys risk profile. While the US annually improves its regulatory solvency system to adjust theThe opinion on whether US should adopt a system as needed, especially regarding the annualSolvency II-like regulatory framework is divided. update to the RBC formula and factors, the NAICsSome from the U.S. insurance fraternity feel that Solvency Modernization Initiative (SMI) includesan exact replica of Solvency II is not required for an focus on five key solvency areas:insurance market like US, which according to theNational Association of Insurance Commissioners Capital n Requirements(NAIC), represents 33.56 percent of the world-wide Corporate n Governance and Risk Managementinsurance market share vis-à-vis UK, whichrepresents 6.48 percent of the market. Most others, Supervision nhowever, feel that an Equivalence of Solvency II is Accounting n and Financial Reportingdesirable for the U.S. insurance market, which willhave implications on regulation, governance, capital Re-insurance nand reserve calculation and, ultimately product The SMI will highlight the strengths of thedesign for U.S. insurers, and thus provide a level state-based national system of insuranceplaying field among insurers world-wide. regulations and identify improvements that might be made. All work on the project is expected to beRecent developments in U.S. Insurance completed by the end of 2012.Regulations The first three areas are similar to Solvency IIsIn 2008, the National Association of Insurance Pillars 1-3. The accounting and financial reportingCommissioners (NAIC) in the US announced a area deals with investigating the adoption ofcoordinated effort to analyze the solvency regulatory International Financing Reporting Standards (IFRS)framework of insurance in the US. The NAIC has used in Europe. In the US, insurance companiesunderlined the importance of top-down involvement use Statutory Accounting Principles (SAP) whileof the management in order to understand their corporate parents use Generally Acceptedenterprise-wide risks and is looking at corporate Accounting Principles (GAAP). However, manygovernance in consultation with the industry and in U.S.-based multi-national companies that areline with the ICPs proposed by the IAIS. currently using United States Generally Accepted Accounting Principles (US GAAP) have finished anSolvency Modernization Initiative (SMI) initial impact assessment, or are in the process ofThe NAIC started the Solvency Modernization conducting an assessment of converging to IFRS.Initiative (SMI) in 2008, with an aim to improve the | 05
  • 8. Own Risk and Solvency Assessment Clearly, ORSA will supplement the existing RBC review and provide regulators with a more dynamic(ORSA) Proposal view of each companys risk profile. Regulators willIn addition to SMI, the NAIC also released a draft be able to key in on each insurers top risks andproposal for the creation of a US ORSA process. more efficiently allocate resources to the mostThe proposal requires insurers to complete an critical areas for regulatory review.ORSA annually for each statutory entity, as well asat the insurance group level, and submit the results Solvency II Equivalenceto state regulators. The results should demonstratethat each entitys capital — both regulatory and In addition to strengthening regulations and tools ateconomic — is sufficient to cover the risks inherent home, the NAIC is also planning to ensure that thein the insurers business plan. U.S. regulatory framework is deemed “equivalent” under Solvency II in Europe. Equivalence isRegulators will use this information to better important to the competitiveness of U.S. insurersunderstand the prospective risks to each insurers doing business in the Europe Economic Area (EEA),plan and judge the adequacy of capital for the particularly to ensure that capital add-ons orrisks identified. The ORSA proposal represents a collateralization are not imposed as a result of beingbroader and prospective approach to U.S. domiciled and regulated by a non-EEA equivalentinsurance regulation. regulator. The NAICs SMI and ORSA will aid in any future Solvency II equivalency reviews.06 |
  • 9. High-end Actuarial Risk Management Solutions – to Rationalize the Impact of Emerging Regulatory Trends on U.S. InsurersThe Way ForwardThat the U.S. Insurance industry is heading towards their companies competitive, as the market at largea regulatory overhaul is evident from the initiatives could view companies that adopt the stronger riskthat are being taken by IAIS and NAIC. Whether the management and governance procedures inregulatory changes will align completely with Solvency II as stronger and better managedSolvency II or will be driven towards attaining companies. Solvency II requirements will createequivalence with Solvency II remains to be seen. greater confidence in the insurance industrysU.S. insurance firms that have direct relationship business model and management, as viewed notwith the European soil, either as a subsidiary or as only by regulators but by rating agencies, analysts,a parent, will feel the impact of Solvency II investors and other stakeholders.(as highlighted in the paper earlier). Whatever thescenario, the U.S. Insurance industry will have to Implementation of Solvency II and similarprepare itself to improve risk management and regulations like SMI or ORSA will require agovernance, the key parameters to survive in the significant amount of effort, in bringing about apost-Solvency II world. change in the organizational culture and managements approach to making decisions. RiskU.S. Insurance companies should look at Solvency Management, being the core of Solvency II andII as part of a process of continuous improvement SMI, will need significant amount of attention andin risk management and governance. Senior focus. Additionally, it will also necessitate themanagement of insurance companies should involvement of technology and automation to makeconsider the impact of Solvency II in order to keep the transition to the new regulation possible.WNS Actuarial Services andRisk ManagementWNS is a world leader in providing actuarial Our capability includes product development,offshore and onshore services. We offer specialized pricing, cash flow projections (Prophet / MG-Alfa /actuarial services to meet the emerging needs of Moses / Igloo), financial and statutory reporting,our customers across all domains of the insurance asset liability management, claims reserving,industry from Life, Annuity, Retirement, Property & predictive modeling and optimization.Casualty, Health Insurance and Re-insurance. | 07
  • 10. Given our deep understanding of the insurance As financial reporting standards evolve, ourbusiness, we assist our customers in the customers benefit from our broad knowledge ofimplementation of transformational projects such current best practices and insight on emergingas rationalization of actuarial models, issues. As industry reporting standards change, westandardization of reporting process, development provide insight on emerging areas, including localof risk management framework, assessment of country GAAP, impact of IFRS requirements,potential impact of regulatory changes and so on. Solvency II.WNS Actuarial Services utilizes a cost-efficient We can also review your existing methods andglobal flexible delivery model, enabling customers processes and suggest improvements to make yourto effectively deploy their valuable actuarial reporting process accurate and faster.resources to strategic tasks. Risk Management SolutionsStochastic Modeling of Business Risks Rating agencies, analysts, shareholders, andWe take advantage of enhanced technology regulators are all taking more interest in capitalplatforms and sophisticated modeling techniques to models and risk management. Effective riskdeliver improved insight into your fundamental management acts as the common link betweenbusiness risks, including morality, longevity, lapses balance sheet strength, operating performance andand interest rate. We have assisted our customers business the development of replicating portfolios inorder improve the speed and accuracy of certain The key components of effective risk managementcalculations and meet the following business needs: program are as follows:Stochasticn Calculation of Economic Capital Align n Risk Appetite and StrategyCostn of Options Enhance n Risk Response DecisionsAssetn Liability Management / Hedging and Reduce n Operational Surprises and Losses Management of Financial Risk Identify n and Manage Multiple andFastn Close Financial Reporting Cross-enterprise risksProfitabilityn Targets / Projection of Improving n the Deployment of Capital Shareholder Value We assist our customers in developing Own Risk and Solvency Assessment (ORSA) capability andFinancial Reporting and Analysis framework, embedding its implementation within aWe deliver business-critical services in major firms decision-making process at management andfunctional areas of actuarial reporting, including data operational level and developing effective MI forvalidation, assumptions setting, movement analysis internal and external stakeholders.and scenarios testing across various reporting regimeslike US GAAP, IFRS, MCEV, EEV.08 |
  • 11. Copyright © 2012 WNS Global Services About WNS WNS (Holdings) Limited (NYSE: WNS), is a leading global business process outsourcing company. WNS offers business value to 200+ global clients by combining operational excellence with deep domain expertise in key industry verticals, including Travel, Insurance, Banking and Financial Services, Manufacturing, Retail and Consumer Packaged Goods, Shipping and Logistics, Healthcare and Utilities. WNS delivers an entire spectrum of business process outsourcing services such as finance and accounting, customer care, technology solutions, research and analytics and industry-specific back-office and front-office processes. WNS has over 23,000 professionals across 25 delivery centers world-wide, including Costa Rica, India, the Philippines, Romania, Sri Lanka and United Kingdom. To learn more, please write to us at or visit