Insurance Supervision in America

National, Regional and Global Financial Stability: Perspective from México

JOSÉ GERARDO LÓPEZ HOYO VICEPRESIDENT ANALYSIS AND SECTORAL STUDIES, INSURANCE AND SURETY NATIONAL COMMISSION (CNSF-MÉXICO) September 9th, 2016 Contents

BACKGROUND

1 THE NEVER ENDING STORY

ADAPTING THE FRAMEWORK

2 WORLDWIDE-NATIONAL EFFORTS

CLOSING REMARKS

3 FINAL COMMENTS Financial Stability The Never Ending Story

Some History*…

• During the Dutch Golden Age Tulipmania • Contract prices for tulip bulbs reached extraordinary high prices and March, 1637 suddenly collapsed. • First recorded speculative bubble.

• South Sea Bubble (Great Britain) and Mississippi Bubble (France) 1720 • Bond and Stock emission in Europe on America Investments Financial Crisis • Stock bubble  burst after loosing investors confidence.

Crisis of 1772 • 20 Banks in London went bankrupt after one banking house defaulted

Panic of 1792 • Run on banks in US after credit expansion of the Bank of the United States

Panic of 1796-97 • British and US credit crisis caused by land speculation bubble Mainly derived from insufficient regulation/supervision Mainly derived from other problems *This Time is Different: Eight Centuries of Financial Folly (Reinhart & Rogoff 2009) Financial Stability The Never Ending Story

19th Century 20th Century

• Danish state bankruptcy of 1813 • Panic of 1901 • Panic of 1819 • Panic of 1907 • Panic of 1825 • Panic of 1910–1911 • 1836-185 – Railway Mania • 1910 – Shanghai rubber stock market crisis • Panic of 1847 • 1921-1923 – Germany’s hyper-inflation • Panic of 1866 • Crash of 1929 Black Tuesday  “Great Depression” • Panic of 1873 – “Long Depression” • 1973 – 1975 Oil crisis • Panic of 1884 • 1980s – Latin American debt crisis • Panic of 1890 • Bank stock crisis (Israel 1983) • Panic of 1893 – Collapse of railroad overbuilding • 1987 – Black Monday • Australian banking crisis of 1893 • 1989–91 – US Savings & Loan crisis • Panic of 1896 –drop in silver reserves • 1990 – Japanese asset price bubble collapsed • early 1990s – Scandinavian banking crisis • 1992–93 – Black Wednesday – speculative attacks on currencies (Euro Exchange Rate Mechanism) • 1994–95 Speculative attack and default on Mexican debt (Tequila effect). Mainly derived from insufficient regulation/supervision • 1997–98 Asian Financial Crisis Mainly derived from other problems • 1998 Russian financial crisis Financial Stability The Never Ending Story

21st Century

• 2000–2001 Turkish economic crisis • 1999-2002 Argentine economic crisis • After U$-Arg$ parity, Currency run “Corralito & Cacerolazo” • 2001 – Bursting of dot-com bubble – speculations concerning internet companies crashed • 2008-2011 – Icelandic financial crisis • 2007–08 – Global financial crisis after Real State- subprime & Derivatives bubble. • 2010 European sovereign debt crisis • 2014 Russian financial crisis

Mainly derived from insufficient regulation/supervision Mainly derived from other problems Financial Stability The Never Ending Story

Common causes…. Volatility caused by external factors Asymmetric Causes of financial Information crisis Microeconomic issues on financial systems Inadequate Regulation and Supervision  Asset quality Derived from high  Asset-Liability leverage levels Management  Liquidity  Solvency Financial Stability  The Never Ending Story 2008 Aftermath – Mexico Perspectives on its supervisory scheme in 2009*

• As a result of the global financial crisis of 2008, the CNSF conducted in 2009 a comprehensive review of the main challenges to face in the near future regarding insurance regulation and supervision:

* CNSF President’s presentation at the Conference of the Mexican Insurers Association, 2009. Financial Stability  The Never Ending Story 2008 Aftermath – Mexico Perspectives on its supervisory scheme in 2009*

* CNSF President’s presentation at the Conference of the Mexican Insurers Association, 2009. Financial Stability  The Never Ending Story 2008 Aftermath – Mexico Perspectives on its supervisory scheme in 2009*

* CNSF President’s presentation at the Conference of the Mexican Insurers Association, 2009. Contents

BACKGROUND

1 THE NEVER ENDING STORY

ADAPTING THE FRAMEWORK

2 WORLDWIDE-NATIONAL EFFORTS

CLOSING REMARKS

3 FINAL COMMENTS Worldwide Efforts  FSB foundation

The subprime crisis that erupted in August 2008 was transformed into a systemic financial crisis, which epicenter was not only in the US, but moved to Europe and Japan and had a strong impact on the growth in emerging markets.

The Financial Stability Board (FSB) was created in response to the international financial crisis of 2008-2009, under the decision of the Group of Twenty (G-20) in 2009, as a stronger and larger successor of the Financial Stability Forum (FSF).

The FSB is an international organism which pursues the effectiveness and stability of the international financial system, and is formed by the ministries of finance, central banks and financial bodies of the member countries. Worldwide Efforts  FSB objectives and mandate

Article 1. Objectives of the Financial Stability Board The Financial Stability Board (FSB) is established to coordinate at the international level the work of national financial authorities and international standard setting bodies (SSBs) in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. In collaboration with the international financial institutions, the FSB will address vulnerabilities affecting financial systems in the interest of global financial stability.

Article 2. Mandate and tasks of the FSB (1) As part of its mandate, the FSB will: (a) assess vulnerabilities affecting the global financial system… (b) promote coordination and information exchange among authorities… (f) set guidelines for and support the establishment of supervisory colleges; (g) support contingency planning for cross-border crisis management, particularly with respect to systemically important firms; (2) The FSB will promote and help coordinate the alignment of the activities of the SSBs to address any overlaps or gaps … relating to prudential and systemic risk, market integrity and investor and consumer protection, infrastructure, as well as accounting and auditing. Worldwide Efforts  FSB Framework

International Financial Institutions International Standard-Setting and Other Bodies Bank for International Settlements (BIS) Basel Committee on Banking Supervision (BCBS) International Monetary Fund (IMF) Committee on the Global Financial System (CGFS) Organization for Economic Co-operation and Development Committee on Payments and Market Infrastructures (CPMI) (OECD) International Association of Insurance Supervisors (IAIS) The World Bank International Accounting Standards Board (IASB) International Organization of Securities Commissions (IOSCO)

Worldwide Efforts  FSB Recent Work

Implementation Issues Recent FSB Press Releases: Policy Issues

02/09/16: FSB and IMF publish progress report on second phase of G20 Data Gaps Initiative 01/09/16: FSB publishes second progress report on measures to reduce misconduct risk 31/08/16: FSB reports to G20 Leaders on financial regulatory reforms IMF, FSB and BIS publish Elements of Effective Macroprudential Policies 26/08/16: FSB publishes progress reports on implementation of reforms to the OTC derivatives market and on removal of barriers to trade reporting 25/08/16: FSB publishes progress report to G20 on action plan to assess and address the decline in correspondent banking 18/08/16: FSB publishes further guidance on resolution planning and fifth report to the G20 on progress in resolution 17/08/16: FSB completes peer review of India 16/08/16: FSB publishes discussion note on Essential Aspects of CCP Resolution Planning and progress report on CCP workplan 08/08/16: FSB launches peer review of the G20/OECD Principles of Corporate Governance and invites feedback from stakeholders 19/07/16: FSB publishes progress report on implementation of recommendations to reform major interest rate benchmarks 22/06/16: FSB publishes Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities Worldwide Efforts  FSB Recent Work

Implementation Issues Recent FSB Press Releases: Policy Issues

06/06/16: FSB releases guidance on resolution planning for systemically important insurers 27/05/16: FSB Americas RCG discusses FSB priorities, financial reforms, correspondent banking and asset management activities 25/05/16: FSB publishes Thematic Review on the Implementation of the FSB Policy Framework for Shadow Banking Entities 25/04/16: FSB Regional Consultative Group for Sub-Saharan Africa discusses implementation and effects of regulatory reforms FSB Regional Consultative Group for the Middle East and North Africa discusses regulatory reforms 18/03/16: FSB publishes Second Thematic Peer Review on Resolution Regimes 23/02/16: FSB releases report on possible measures of non-cash collateral re-use 7/12/15: FSB publishes fourth EDTF report on bank risk disclosures 4/12/15: FSB RCG for the Americas discusses financial stability reforms and reductions in correspondent banking 19/11/15: FSB completes Peer Review of Turkey 18/11/15: FSB publishes Standards and Processes for Global Securities Financing Data Collection and Aggregation 12/11/15: FSB publishes reports on transforming shadow banking into resilient market-based finance 10/11/15: FSB publishes fourth progress report on compensation practices Worldwide Efforts  FSB Recent Work

Implementation Issues Recent FSB Press Releases: Policy Issues

09/11/15: FSB issues final Total Loss-Absorbing Capacity standard for global systemically important banks FSB publishes report on implementation and effects of the G20 financial regulatory reforms FSB proposes creation of disclosure task force on climate-related risks 06/11/15: FSB releases report to G20 on the decline in correspondent banking FSB releases progress report on reducing misconduct risk in the finance industry 05/11/15: FSB completes Peer Review of Saudi Arabia 04/11/15: FSB reports describe progress in implementing OTC derivatives market reforms… 03/11/15: November 2015 New measures to promote resolvability, including effective cross-border resolution FSB publishes the 2015 update of the G-SIB list FSB publishes the 2015 update of the G-SII list 01/10/15 FSB releases progress report on FX benchmark reforms 22/09/15 Progress report on work to enhance CCP resilience Recent FSB reports to G20 Finance Ministers and Central Bank Governors 13/08/15 FSB completes Peer Review of China 30/07/15 Next Steps on the NBNI G-SIFI Assessment Methodologies 24/07/15 Progress in Implementing OTC Derivatives Market Reforms 09/07/15 FSB publishes an interim report on Progress in Reforming Major Interest Rate Benchmarks 02/07/15 FSB launches and invites feedback on its Peer Review on implementation of the FSB policy framework for shadow banking entities National Efforts  The Case of Mexico

Mexico’s regulatory framework is part of the international efforts towards the standardization of financial regulation and supervision, as the basis for preserving the stability of the global financial system. In this context, three are the most relevant experiences that serve as reference for Mexico’s Regulatory Framework: 1. Principles and standards developed by the International Association of Insurance Supervisors (IAIS). 2. Recent developments regarding solvency models, which included an analysis, among others, of the European Project of Solvency II, the Solvency Modernization Initiative of the United States and the Swiss Solvency Test. 3. The key lessons derived from the international financial crisis of 2008 in terms of risk management, corporate governance, transparency and market discipline, which, despite not having generated significant adverse effects on the Mexican financial system, offered the opportunity to prevent similar situations in the future of our financial market. National Efforts  The Case of Mexico

• In addition to the adjustments made in the regulation and supervision of Mexican insurance and surety sectors, in 2014 was created the Mexican Council for Financial System Stability (Consejo de Estabilidad del Sistema Financiero Mexicano, CESF). • The CESF is the permanent authority in charge of the coordination, evaluation and risk analysis regarding financial stability among the authorities that comprise it, and its objective is to avoid interruptions or substantial alterations in the functioning of the financial system and, if necessary, to minimize their impact if they have place. • The CESF must always respect the powers and duties that the legal framework gives to each of the authorities that are represented in this council. • Composed by: Ministry of Finance and Public Credit (SHCP) Central Bank (Bank of Mexico, BM) Banking and Securities National Commission (CNBV) Insurance and Surety National Commission (CNSF) Retirement Savings System National Commission (CONSAR) Bank Savings Protection Institute (IPAB) National Efforts  The Case of Mexico; Implementing ORSA

As an example of the adoption of international standards, the regulation in Mexico establishes that insurance companies must perform a Own Risk and Solvency Assessment (ORSA), which is a tool for decision-making and strategic analysis.

ORSA’s objective is to assess, in a continuous and prospectively manner, the overall solvency of the company, according to the needs related to the risk profile of each insurance institution.

The ORSA includes, amongst other elements, the evaluation of:

• the global solvency needs of the institution in accordance with its specific risk profile;

• the risk tolerance limits approved by the board of directors ; and

• the business strategy, including the monitoring of the possible future impacts over the solvency, based on the dynamic solvency test.

In Mexico, the ORSA must be delivered in an annual basis to the CNSF. Contents

BACKGROUND

1 THE NEVER ENDING STORY

ADAPTING THE FRAMEWORK

2 WORLDWIDE-NATIONAL EFFORTS

CLOSING REMARKS

3 FINAL COMMENTS Final Comments

• The CNSF has been seeking a higher level of compliance to international standards that contribute to international financial stability, among which are the Insurance Core Principles (ICP) of the IAIS.

• Among the basic principles related to financial stability are those who consider relevant the exchange of information. In this sense, the CNSF has become signatory of a significant number of Memoranda of Understanding with several countries including the IAIS MoU as well as the ASSAL.

• Additionally, the CNSF has actively participated in various supervisory groups of global insurance groups, through the Colleges of Supervisors and multinational organizations. Final Comments

• Episodes of financial instability are basically due to the lack of information therefore:

PILAR I PILAR 2 PILAR 3

QUANTITATIVE ELEMENTS REVISION AND CONTROL MARKET DISCIPLINE

Quantitative Information on Information between Information and risk Management & Transparency to Assets & Liabilities Shareholders Stakeholders and Third Corporate Governance Parties

Regulators and Supervisors must deal with such information and if the case, share it with other regulators and supervisors. Insurance Supervision in America

National, Regional and Global Financial Stability: Perspective from México

JOSÉ GERARDO LÓPEZ HOYO VICEPRESIDENT ANALYSIS AND SECTORAL STUDIES, INSURANCE AND SURETY NATIONAL COMMISSION (CNSF-MÉXICO) September 9th, 2016