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SA3 Actuarial: General Insurance > 4 - Regulation Solvency II > Flashcards

4 - Regulation Solvency II Flashcards

1
Q

What are the reasons for introducing Solvency II?

A

1) Increasing the level of solvency harmonisation across Europe
2) Introduce capital requirements that are more sensitive to levels of risk being undertaken
3) Provide appropritate incentive for good risk management

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2
Q

What is pillar I?

A

This comprises quantitative requirements including risk based capital requirements
Assets and liabilities must be valued on a market consistent basis
Contains two solvency levels- MCR and SCR

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3
Q

What is the SCR?

A

Solvency capital requirement. Its the level above which there is no supervisory intervention for financial reasons.

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4
Q

What is the MCR?

A

Minimum capital requirement. It is the level below which the supervisors strongest actions are taken.

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5
Q

How is the SCR calculated?

A

The SCR may be calculated using a standard formula or subject to prior approval, an internal model.

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6
Q

How is the MCR calculated?

A

The MCR is calculated using a linear formula and must fall between 25% and 45% of the SCR.

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7
Q

What is Pillar II?

A

Comprises qualitative requirements focusing on governance, risk management and required functions (internal audit and actuarial).
Includes the supervisory review process.
Insurers required to carry out ORSA
Includes ‘prudent persons’ investments principles.
Can impose capital additions for govenance failings

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8
Q

What is pillar III?

A

Comprises reporting and disclosure requirements.
Includes a SFCR (Solvency financial and condition report)
Includes Regulatory Supervisory Report (RSR) and quantitative templates.
The aim of the public disclosures is to instill market discipline.

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9
Q

How are assets valued under SII?

A

Assets are to be valued at the amount that they could be exchanged between knowledgable and willing parties at an arms length transaction.
Use of quoted market values is default.
Where quoted values are not available mark to mark values should be used.

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10
Q

How are recoveries shown on a SII balance sheet?

A

Recoveries are shown as an asset rather than a negative liability. Must be reduced for risk of default.

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11
Q

What are basic own funds?

A

Broadly capital that already exist within the insurer.

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12
Q

What is ancillary own capital?

A

IT is capital that can be called upon in certain adverse circumstances but which does not currently exist within the insurer.

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13
Q

What are the 6 criteria for tiering capital?

A

1) subordination
2) loss absorbency
3) Sufficient duration
4) Free from incentives to redeem
5) No mandatory fixed charges
6) No encumbrances

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14
Q

What is the % of Tier I capital that must cover MCR and SCR?

A

80% MCR

50% SCR

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15
Q

What is the risk margin intended for?

A

It is the margin required to take the best estimate up to the amount that an insurance company or reninsurance company would need to take over the liabilities.
It is calculated by estimating the lifetime amount of SCR needed to suppport the risk that can’t be hedged.

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16
Q

What complicates the calculation of the risk margin?

A

It can get very complicated involving nested stochastic loops.
It must be disclosed by line of business, accounting for diversification benefit.

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17
Q

How are premium provisions calculated?

A

Best estimate of future cashflows in respect of unexpired exposures.
No credit is taken for DAC
No allowance is made for claims equalisation provision.

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18
Q

How is a contract boundary defined?

A

It is the point at which a compnay can unilaterally terminate the contract or
Ammend the premiums or benefits to reflect the risk.

19
Q

Describe and give examples of legal obligation basis

A

It is where tech provisions need to allow for legally obliged uninepted contracts.

  • Delegated authorities
  • Brokers where ther are backlogs of aggregated pipeline premiums
  • Tacit renewal agreements where the business is automatically renewed unless the policyholder decided to move the cover to another provider.
20
Q

Why might a company use an internal model?

A

If the risk profile differs substantially from the standard formula
The company wants one for risk management or decision making purposes

21
Q

What is the probability of loss covered by SCR?

A

99.5% over a one year time horizion

22
Q

What are the tests that an internal model must pass?

A 
Use Test
Statisitcal quality standards
Calibration standards
Profit and loss attribution
Validation standards
Documentation standards
23
Q

What is the use test?

A

This is where companies need to demonstrate that the internal model is widely embedded in the company.
Must prove it plays a significant role in decision making .
Must be used for capital assessments and allocation

24
Q

What are statistical quality standards?

A
  • The methods used are based on adequate, applicable and relevant actuarial and statistical techniques.
  • The methods usesd are based upon current and credible data and realistic assumptions
  • Diversification effects measurement is adequate
25
Q

What are callibration standards?

A

-Need to demonstrate that internal model does give protection to a 1 in 200 year event

26
Q

What is profit and loss attribution?

A
  • Companies required to review at least annualy the causes and sources of profit and losses for each major business unit.
  • Includes requirement to show how categorisation of risk in internal model can explain sources of profit and loss
27
Q

What are validation standards?

A
  • Monitoring the performance of the model
  • Reviewing the ongoning appropriateness
  • Testing against experience
28
Q

What are documentation standards?

A

Requirement to document deisgn and operation of internal model

29
Q

What are the practical difficulties of the internal model?

A
  • use test- difficult to embed and evidence
  • Quality of data. Historical data for 1 in 200 year event very limited
  • Setting correlation assumptions under extreme events is challenging
  • 6 month deadline for submission of internal model to approval
30
Q

How do companies get round the 6 months deadline issue?

A

-By engaging the supervisor early in the model development and refinement process.
Effectively getting pre approval

31
Q

For pillar II. What functions must have written policies in place?

A
  • Risk management
  • Internal Control
  • Internal audit
  • Actuarial
  • Outsourcing (if applicable)
32
Q

What areas does the risk managment function need to cover?

A
  • Underwriting and reserving
  • Asset liability managment
  • Investments
  • Liquidity and concentration risk
  • Operational risk
  • Reinsurance
33
Q

What is the scope of interal control?

A

Administrative and accounting procedures
Internal control framework
Appropriate reporting arrangements at all levels of undertaking
A compliance function

34
Q

What is the purpose of internal audit?

A

Its responsible for evaluating the adequacy and effectiveness of interal control systems and other elements of the system of governance.
Must be objective and independent from the other operational functions.

35
Q

What are the roles of the actuarial function?

A
  • Coordinate the technical provisions.
  • Ensure the appropriateness of methedologies and underlying models used
  • Verify assumptions made in the calculation of technical provisions
  • Assess the sufficiency and quality of data used
  • Compare best estimate against experience
  • Inform the supervisor of the reliability and adequacy of the calculation of technical provisions
  • Oversee the calculation of technical provisions as set out in Article 82.
  • Express an opinion on the overall undewriting policy
  • Express an opinion on adequacy of reinsurance arrangements
  • Contribute to risk management system and ORSA
36
Q

What is the ORSA?

A

The entirety of the processes and procedures employed to identify, monitor, manage and report the short and long term risks an insurance undertaking faces or may face and to determine the own funds necessary to ensure that the undertakings overall solvency needs are met at all times.

37
Q

What does the ORSA require?

A
  • Identify all risk to which it is subject and the mitigating risk management and controls
  • This will include risks not covered under pillar I such as reputational risk
  • Also needs to quantify its ability to meet the MCR and SRC over the business planning horizon, allowing for new business
  • Must be reported to the supervisor
38
Q

What does the insurance company need to evidence to the supervisor in regards to ORSA?

A

That it is used by senior management and that it has an impact on strategic decisions.

39
Q

What are the components of ORSA?

A
  • The assessment of overall solvency needs
  • Compliance on a continuous basis with capital requirements and technical provisions
  • consideration of the extent to which risk profile deviates from assumptions underlying internal model
40
Q

How often should the ORSA be peformed?

A

At least annualy or following a significant change in risk profile.

41
Q

What 5 elements of the ORSA do companies need to explain and justify?

A

1) Methedology and assumpitons
2) Results and sensitivity or results to assumptions
3) Appropriateness of methedology used
4) Sources of data and systems and controls around the data
5) Approach for dealing with paramater uncertainty and fluctuations

42
Q

What should the documentation of the ORSA include (7)?

A

1) Description of areas included
2) Description of process of of conducting ORSA and key persons involved
3) Stress tests used and their results
4) The amount of overall solvency needs and financial condition of the undertaking including sign off by the management body.
5) Strategies for raising additional own funds where necessary
6) a description of the independed assessment and results of last assessment
7) The frequency and contents of internal reporting.

43
Q

What should SFCR allow an analyst to assess?

A

System of governance applied by the undertakings
Business they are pursuing
Valuation principles applied for solvency purposes
Risks Faced
Risk management systems
Capital structure

44
Q

What are the principle sections of the SFCR?

A 
Summary
Business and performance
System of governance
risk profile
Valuation for solvency purposes
capital management
Additional voluntary information

SA3 Actuarial: General Insurance (3 decks)

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