A New Era of Global Insurance Regulation

Vincent Xuan

Andy Ferris, FSA, MAAA, FCAAs I write this editorial, my five-day-old daughter, Chloe, is sleeping in her nursery, adjacent to my home office. Chloe, a word of Greek origin, means “blooming green shoot” and symbolizes the beginning of a new generation. Just as newer generations will grow up and eventually reshape the world that was developed by preceding ones, so does the actuary—with the creation of new theories and practices that will redefine and rejuvenate the profession.

This is true even for an actuary’s core area of practice—regulatory and financial reporting—although it has long been viewed as fundamentally static. Benjamin Franklin warned us, “When you’re finished changing, you’re finished.” Compared to the technology industry that changes people’s lives every second, the insurance industry usually gives people a sense of sluggish progression. However, I feel more optimistic because insurance regulators and those who set the standards have achieved major progress to catch up with the rapidly changing world.

Within the past few decades, insurance regulation and financial reporting standards have experienced remarkable change. This is a direct response to today’s sophisticated product design, the ever-changing insurance market and the unforgettable financial crisis in 2008.

For instance, in the United States, the National Association of Insurance Commissioners (NAIC), alongside 46 states, adopted the policy of principle-based reserves (PBR) after a seven-year journey. With the valuation method becoming effective Jan. 1, 2017, many insurers have already started implementing it as the industry begins a three-year transition period. In Europe, the insurance industry has gone through the first year of execution on the Solvency II directive. Even in the eastern hemisphere, after pricing interest rates and investment allocation were liberalized, China implemented the China Risk-Oriented Solvency System (C-ROSS), which resembles Solvency II.

Globally, international standard advocates are actively coordinating with local regulatory bodies to enhance consistency and reasonability across countries. On the capital side, the International Association of Insurance Supervisors (IAIS) continues to further clarify the technical details of the Insurance Capital Standards (ICS) to heighten the rate of adoption and implementation. On the financial reporting side, 126 jurisdictions have adopted the International Financial Reporting Standard (IFRS).

In this issue of The Actuary, I am excited to share insights on recent developments within the context of insurance regulation and financial reporting, with a taste of international flavor, from some of the industry’s leading practitioners.

Liz Dietrich, FSA, CERA, MAAA, and Ian Adamczyk, CPA, provide an update on IAIS’ activities on the technical development of the ICS in “Tailoring Global Capital Standards.” An introduction was published previously in the May 2016 issue of International News.

The article “A Vibrant Insurance Industry” by Hans Wagner, FSA, introduces the overall insurance regulatory system and framework in China, explains current regulatory initiatives driven by the State Council’s milestone paper and paints a possible trajectory of the government’s focus in the coming years.

In “Time for Change,” Rob Curtis summarizes recent changes and forward-looking steps in insurance regulation of various Asian countries, with an emphasis on capital and solvency, Own Risk and Solvency Assessment (ORSA), group supervision and consumer protection.

In “Back to the Beginning,” Henry Siegel, FSA, MAAA, tells a personalized account of IFRS 17 for insurance contracts through his participation in the process and stresses the importance of actuaries’ involvement to ensure the technical correctness and clarity of standards.

Mitchell Stephenson, FSA, MAAA, depicts a chronological picture of the model governance evolution and addresses the status of model governance in the actuarial profession in his article, “Navigating Risk.”

An old Chinese proverb says, “分久必合,合久必分.” (“That which is long divided must unify; that which is long unified must divide.”) Although everyone has seen the fruits of globalization, the recent changes of the global political arena may threaten to reverse that path. While insurers in Europe face tighter regulation, their U.S. counterparts may see a push for significant deregulation from the executive branch. Even though IFRS garnered worldwide adoption, the two largest insurance markets—the United States and China—neither require nor permit adherence. In the coming decades, whether insurance regulation across the globe will continue the path of unification or take a turn for separation, the result will likely be an outcome of the current battle between globalization and nationalism. And no one has a crystal ball. We must wait and see whether new regulations, such as PBR and Solvency II, will serve that purpose well.

Obviously, we are now in a new era of global insurance regulation. The regulatory environment today is strikingly different from the norm a few decades ago. Actuaries must stay abreast of upcoming changes and also constantly and actively engage themselves in the creation and ultimate implementation of such rules.

Vincent (Xu) Xuan, FSA, CFA, MAAA, is vice president and actuary at Prudential Financial in Newark, New Jersey.