Investor Presentaiton

Guernsey Financial Services Commission Industry Seminar - 21 November 2014 Insurance Supervision and Policy Division Presentation: Guernsey International and Interconnected Jeremy Quick, Director John Dunford, Deputy Director Good day. Before I hand over to John, I would like to talk for ten minutes about global regulatory developments in the insurance world and how these may affect Guernsey. The global financial crisis was, first and foremost, a banking crisis. However regulators soon came to ask themselves whether insurance companies might also pose the same sort of threat to global financial stability as had banks. Indeed, one large insurance company had had to be rescued by the US fed at some cost to the US taxpayer. This one failure deepened regulatory concern. The global regulatory architecture for insurance differed markedly at that time from that for banking though the two have since come closer together. Whilst banking was thought of as absolutely central to any economy not least for the multiplier effect, this was less clear for insurance companies. Consequently, insurance companies were often regulated by government departments whose main function was consumer protection rather than financial stability. Whereas the Basel Committee at that time at least was dominated by the G-10, the International Association of Insource Supervisors (IAIS) was a far more broadly-based body, also more open to industry participation than its banking counterpart. Regulatory concern about insurance companies was therefore not easily dismissed. Issues of regulatory knowledge and control were relevant but so too was the absence of any global capital standard, the presence of large global companies especially in the re-insurance sphere, the sheer size of the global insurance asset base and the often unclear use of derivatives and highly leveraged transactions. It was therefore unsurprising that the new overarching regulatory body, the Financial Stability Board, chose to include insurance risk in its core mandate. After several years focus, some of the original concern about insurance companies has gone away. Insurance companies are seen to be fundamentally different from banks due for example to their long maturities at least for life, the depth of reinsurance available and the double protection offered by reinsurance and the limited use of derivatives. Regulators also came to recognise that in key areas such as life reserving, INBR and asset selection, insurance companies had a history of conservatism. It was also accepted that general insurance rarely threatened financial stability. Indeed for some insurance companies are seen as part of the solution than the problem, in so far as they take on more long-term non-traditional assets, although there are also dangers here. Nevertheless, some regulatory concern about insurance companies remains and has largely materialised around capital for large international firms. The main issue is the continued lack of any agreed global capital standard. For this reason IAIS is now working towards such a 1

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