This document discusses insurance regulatory risk from the perspective of a large U.S. life insurer. It makes three key points: 1) Life insurance did not cause the financial crisis and is not inherently systemic, 2) Applying bank-centric rules to insurers would have unintended consequences, and 3) Regulation should focus on systemically risky activities rather than entities. It argues that imposing high capital standards designed for banks would harm consumers and create an unlevel playing field. Instead, the document proposes calibrating existing insurance capital regimes to ensure comparability across jurisdictions.

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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