SOA Annual Meeting in Chicago

Session 91: Hot Topics

Tuesday, October 18, 2011

An Actuarial Update on the Dodd-Frank Act

Michael Frings, FSA, CFA, MAAA

Vice-President and Senior Actuary

Global Financial Solutions

RGA Reinsurance Company

Describe events giving rise to Dodd-Frank Act Outline significant provisions of Dodd-Frank Review key sections impacting actuaries and

insurance companies Update on status of Dodd-Frank implementation

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Presentation Agenda

Outsized, Unregulated OTC Derivatives Market Bank of International Settlements data

2008 Collapse of Wall-Street Banks Lehman, Bear-Sterns, Morgan Stanley

Record Number of Home Foreclosures Unprecedented US Govt Support & Spending

Backstop banks and money-market funds Bailouts of GM, AIG, Chrystler, etc. etc.

World-Wide Financial Crisis Iceland, Ireland, Greece

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Events Preceding Dodd-Frank Act

Officially, the Wall-Street Accountability and Consumer Protection Act of 2010

Signed into law July 21, 2010

Created in response to 2008 Financial Crisis

DFA written broadly Much of rulemaking left

to regulators 10 Sections

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Voilà, the Dodd-Frank Act (DFA)

I. Financial Stability Creates FSOC & OFR, Add’l authority to FRB

II. Orderly Liquidation Authority

III. Transfer of Powers to the Comptroller of the Currency, SEC and FRB

IV. Regulation of Advisors to Hedge Funds and Others

V. Insurance FIO, State-based ins reform, Non-admitted insurance, Reinsurance

VI. Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions (40 pages)

VII. Wall Street Transparency and Accountability Act Reg of OTC swaps markets, Reg of security based swap markets

VIII. Payment, Clearing and Settlement Supervision5

Financial Stability: Sections I – VIII

Title IX. Investor Protections and Improvements to the Regulation of Securities

Title X. Bureau of Consumer Financial Protection Title XIV. Mortgage Reform and Anti-Predatory

Lending Act Miscellaneous

XI. Federal Reserve System Provisions XII. Improving Access to Mainstream Financial Institutions XIII. Pay It Back Act XV. Miscellaneous Provisions XVI. Section 1256 Contracts

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Investor Protections, Consumer Protections, Mortgage Reform

• The Dodd-Frank Act expands the roles of the US Treasury, Federal Reserve, CFTC and SEC

• The Office of Thrift Supervision is eliminated– Authority split among the Comptroller of the Currency, SEC and the

Federal Reserve

• Prudential Regulators Keep Their Authority

• New Regulators are created– Federal Stability Oversight Council (FSOC)– Consumer Financial Protection Bureau (CFPB in Federal Reserve)– Federal Office of Insurance (FIO in US Treasury)

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Changes to Roles of Regulators

Designate specific companies as “systemically important” financial institutions (SIFI)

Instruct Federal Reserve to impose measures to regulate SIFIs

Permit the Federal Reserve, in extreme cases, to order companies to divest assets (or to be broken up)

Collect information from other regulators (federal & state) Identify regulatory gaps Identify other threats to US financial stability Facilitate cooperation and resolve disputes among

regulators Monitor US financial markets: integrity, efficiency and

competitiveness8

FSOC Key Responsibilities

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FSOC Members

Bureau of Consumer Financial

ProtectionFederal

Insurance Office(in US

Treasury)(Michael McRaith

Office of Financial Research

(in US Treasury)

Independent Member with

Insurance Experience

(Roy Woodall)

Selected State Insurance

Commissioner(John Huff-MO)

Selected State Banking

Supervisor

Selected State Securities

Commissioner

VOTING MEMBERS NON-VOTING MEMBERS

3 Insurance Members

First, and only, federal insurance body charged to Provide national coordination of the insurance sector Identify system-threatening gaps in insurance regulation Identify, to the FSOC, any insurer that is systemically important Coordinate & develop federal policy on prudential aspects of int’l

insurance Monitor extent to which communities/groups are underserved in

access to affordable insurance, excluding health insurance.

Interact with state insurance authorities Consultation on all insurance matters of national importance Consultation on prudential insurance matters of international

importance Determination of federal override of state law on issues affecting

international competition and regulation Determine state insurance matters to be pre-empted by covered

agreements10

Federal Insurance Office (FIO)

Includes Life, P&C. Excludes health insurance, some LTCi and crop insurance.

Housed within the Treasury Department which will provide most of the staffing

Headed by a Director who: Reports directly to the Treasury Secretary Attends FSOC, but does not vote

Annual Report on the US insurance industry and FIO actions

Special report within 18 months of enactment on modernization of US insurance regulation

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Federal Insurance Office (FIO)

Ceding insurer’s state of domicile now regulates Credit for reinsurance, if NAIC accredited or similar

Other states can’t impose rules for reinsurer credit and must accept credit granted by cedant’s state of domicile

Non-US domiciled reinsurers may receive similar benefit

Dispute resolution Choice of law Imposing standard terms differing from contract

Reinsurer’s state of domicile still regulates Reinsurer solvency, if NAIC accredited

Other states can’t require additional financial info

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DFA Eases Rules on Reinsurance

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Actions After Dodd-Frank Act

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Government is busy writing regulations and performing studies as directed to do under DFA

Special interest groups are busy lobbying As of Oct 3rd, per Davis Polk, DFA requires 300 rules and 87

studies 64 finalized, 28 proposed but not due, 163 future deadlines,105

missed but proposed, and 21 missed not proposed In total, 163 rules have passed deadlines, of those 37 are now final 41 of the 87 studies are complete

Notable final rules Swap Data Repositories, Removal of Securities Ratings from Rules

and Forms, Truth in Lending, Increase in Maximum FDIC

Left to be done Frankly, a great deal… 17

Recent Activity

On Oct 11th, FSOC exposed proposed rule with 3 Stage Test Stage 1: Meets 1) and one of 2) – (6)

1) $50B+ global assets for US nonbank fin cos or $50B+ US assets for foreign nonbank fin cos

2) $30B+ in gross notional CDS

3) $3.5B+ in ASC 815 derivative liabilities

4) $20B+ in O/S loans borrowed and bonds issued

5) Leverage ratio of 15:1 or greater

6) Ratio of short-term debt (<12 mos) to total assets of 10% or greater

Stage 2: Further scrutiny of primarily public and regulatory sources of quantitative and qualitative data

Stage 3: Additional non-public company info. Proposed Determination. Hearing. SIFI. 18

Systemically Important Financial Institution

Volker Rule: Limits on Bank’s Proprietary Trading CFTC/SEC—Request for comment on study to determine

whether stable value contracts fall within the definition of a swap (comment period ended 9/26/2011)

IRS—Proposed rulemaking modifying Treasury regulationsto remove references to credit reatings and credit agencies (comment period ended 8/30/2011)

SEC—Proposed rule for nationally recognized statistical rating organizations (comment period ended 8/8/2011)

CFTC/SEC—Joint proposed rule and proposed interpretive guidance on the definitions of the terms “swap”, “security-based swap” and security-based swap agreement”. (comment period ended (7/22/2011) 19

Recent Activity: Proposed Rules

FCA/FDIC/FHFA/FRS/OCC—Proposal to establish swap margin and capital requirements. (comment period ended 7/11/2011)

CFTC—Reopening and extension of comment periods for rulemakings on the new framework for regulation of swaps (comment period ended 6/2/2011)

CFTC—Proposed new rules, guidance and acceptable practices for swap execution facilities (SEFs) (comment period ended 6/3/2011)

CFTC—Proposed definitions for “Swap Dealer”, “Security-Based Swap Dealer”, Major Swap Participant”, Major Secuirty-Based Swap Participant”, and Eligible Contract Participant”. (comment period ended 6/3/2011)

CFTC—Process for review of swaps for mandatory clearing (comment period ended 6/3/2011) 20

Recent Activity: Proposed Rules

Upcoming CFTC Task List

Clearinghouse rules Data recordkeeping and reporting End use exception Entity definitions/registration External business conduct Internal business conduct Product definitions/commodity

options Real-time reporting Position limits Segregation for cleared swaps Trading-Designated contract

markets and foreign boards of trade

Capital and margin Client clearing documentation and risk

management Conforming rules Disruptive trading practices Governance and conflict of interest Internal business conduct Investment of customer funds Swap execution facilities Segregation for uncleared swaps Straight-though trade processing

Second Half of 2011 First Half of 2012

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Plus, add task list of SEC, FRB, US Treasury, CFPB, etc.

Dodd-Frank Act passed with great fanfare in July 2010 Designed to fix macro-prudential problems following 2008 Financial

Crisis As a result, broadest single US federal financial law to date However, much of the details left to regulators Congressional oversight is partisan

Democrats seek to continue legacy of legislation Republicans seek to overturn many provisions, restrict funding, grill agencies

CFTC, SEC, FRB and other govt agencies continue to implement Impact of Dodd-Frank delayed but not defeated Impact on Insurance companies directly is less once expected

Not widely designated as SIFIs Impact of swaps regs & margins and consumer protection bureau to be seen

Will the next financial crisis be adverted or diminished? Europe 2012?

Summary

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QUESTIONS?