WTO Branches and Groups Harvey Duckers FIA Government

WTO – Branches and Groups Harvey Duckers, FIA Government Actuary’s Department

WTO - philosophy • • Globalisation Free markets Avoidance of anti-competitive practices Enabling Market Access – Foreign Ownership of domestic companies – Branches of foreign companies allowed

WTO – Regulatory Impacts • • • Branches need to be regulated Financial Groups need to be regulated Regulators have to be international in outlook Encourages Regulation to be cross-sectoral Rating Agencies already look across Groups

Branch / Group Issues • Double Gearing • Intra-Group Transactions • Risk Concentration • Risk Management

Double Gearing - Groups Regulator Holding Company 50% Equity Capital 50% Debt Capital Company 100% Equity Capital The Holding Company borrows money against the value of the Company, so that additional liabilities are outside the Company

Double Gearing - Branches Host Regulator Branch Head Office Home Regulator Solvency Measure = Assets - Liabilities Regulatory Capital Requirement If Host Solvency > Home Solvency then Host Solvency may be lost in HO calculation

Intra-Group Transactions 1 • • • Service Agreements Transfers of Assets Loans / Debts / Deposits Equity and/or Debt Capital Reinsurance Others

Intra-Group Transactions - 2 • Asset Admissibility Limits are a blunt tool to try to reduce the impact • But a Group may have offshore / unregulated entities in which it places certain transactions - for instance Enron

Risk Concentration • Company A has an adequate risk control / retention strategy • Company B, a Subsidiary of Company A, has an adequate risk control / retention strategy • Taken together (A + B) take on excessive risk • Simple Example – a large property is co-owned by A and B. If the value of the property reduces, then Company A loses in two ways

Risk Management • Company A has an adequate Risk Management Strategy • Other Group companies do not. • Threats – Even the best run group company is likely to be constrained to use other group members (otherwise there may be no group synergy benefits). – All financial companies rely on the confidence, once it is lost entire companies can disappear quickly. – Rating Agencies look at the entire group. Problems in one part of a group may lead to rating down-grades with knock on effects.

GAD • Professional Consultants to Government only • No conflict of interest with Private Sector Email: Harvey. Duckers@GAD. Gov. UK