International Solvency and Accounting Working Group Conference Call Recap

On Wednesday, May 16, 2007, The International Solvency and Accounting Working Group (“Group”) held a conference call to discuss two draft white papers written by the International Association of Insurance Supervisors (IAIS):

• Risk Management Standards for Solvency Purposes
• Use of Internal Models by Insurers

On the call were various regulators and interested private entities.

Risk Management Standards for Solvency Purpose

Kris DeFrain, National Association of Insurance Commissioners’ (NAIC) Chief Managing Actuary, summarized the white paper on Risk Management Standards.  She reviewed the key requirements of the standards and stated that the white papers focused on a framework of risk management, identifying risk and establishing risk tolerance as it relates to solvency.

Ms. DeFrain indicated that supervision should focus on the nature, scale and complexity of business.  Further, the white paper includes annexes which define certain risks (as defined in the IAIS glossary) for clarity.

There was open discussion by the interested parties on the call.  Call participants agreed that the development of these standards was proceeding quickly and seeking approval of this white paper for a scheduled October Meeting was impractical.  Another concern expressed by the group was that adopting risk management standards without application guidance would create ambiguity.  Further, the group agreed that this white paper should provide risk management guidance and not mandatory requirements.  Following the discussion, the group agreed to incorporate these comments into another document, which would likely be voted on next week.

Internal Models by Insurers

Ms. DeFrain summarized the draft white paper regarding the Internal Models.  She indicated that this paper is not at a point where standards are finalized.  Also, she stated that the paper would coincide with a similar paper being drafted by the International Actuarial Association.  The white paper suggests that insurers, at a minimum, subject their models to three tests: a statistical test, a use test, and a calibration test.  Discussion ensued and concerns were raised primarily over the use and calibration tests.  Regarding the use test, the requirement to link the risk management and capital management processes could be problematic.  Regarding the calibration test, the group agreed that adding a time period on the calibration confidence level, such as one year, would be advisable.  Currently, the white paper recommends a 99.5% confidence level.

Also, there was some disagreement on the call by regulators and private companies regarding the ability of regulators to review internal models that have not been used or regulator-approved.  The regulators were not comfortable limiting their ability to review such models as some companies suggested.

Comments on these white papers are due to the IAIS Subcommittee on May 25, 2007.

The group may hold an email vote on adopting comments prior to this date.

There being no further business, the call ended.

The above information is intended to be a brief summary of the discussion on this conference call. It is not intended to provide a comprehensive analysis of the items discussed. Should you have any questions please do not hesitate to contact this office.