C - CAS Financial Reporting - Solvency II Flashcards
CAS FINANCIAL REPORTING - SOLVENCY II
Define Solvency II
Goal
new PRINCIPLE-BASED regulatory framework to determine the required capital level of insurers in EU.
to link insurer’s REQUIRED CAPITAL to their RISK PROFILE
CAS FINANCIAL REPORTING - SOLVENCY II
Briefly describe the 3 PILLARS
I : QUANTITATIVE CAPITAL REQUIREMENTS
(quantification)
—Solvency Capital Requirements (SCR)
—Minimum Capital Requirement (MCR)
II : SUPERVISORY ACTIVITIES
(governance)
—Internal Control and Risk Management
—Supervisory Review Process
III : SUPERVISORY REPORTING AND PUBLIC DISCLOSURE
(transparency)
—Transparency
—Disclosure
CAS FINANCIAL REPORTING - SOLVENCY II
ABOUT PILLAR III
Purpose
III : SUPERVISORY REPORTING AND PUBLIC DISCLOSURE
(transparency)
HOW info from Pillars I-II is given to supervisors and public
purpose :
FOSTER MARKET DISCIPLINE
because cie are aware that their risk-based decisions will be public
CAS FINANCIAL REPORTING - SOLVENCY II
ABOUT PILLAR I
- -method to quantify SCR
- -definition of SCR
- -consequence of falling below MCR and SCR
- -critic of VaR 99.5%
- -3 methods of calculation of SCR
- -3 elements to obtain approval to use internal model
I : QUANTITATIVE CAPITAL REQUIREMENTS
(quantification)
—Solvency Capital Requirements (SCR)
—Minimum Capital Requirement (MCR)
using TOTAL BALANCE SHEET APPROACH to quantify SCR
SCR : capital required to limit P(ruin) over 1-year to 0.5% (VaR 99.5%)
if capital falls below SCR : regulatory intervention
if capital falls below MCR : cie will not be permitted to operate
critic of Var 99.5% : not an adequate measure to support the risk to ultimate settelment
method of calculation of SCR :
–standard approach (spreadsheet from regulator)
–internal model
–mix of both
advantage of internal model: likely to have lower SCR.
internal model requires:
- -demonstrate the internal model is used to run the business
- -validated by independent 3rd party
- -documented appropriately
CAS FINANCIAL REPORTING - SOLVENCY II
ABOUT PILLAR II
- -2 requirements from Pillar II
- -Describe 4 key functional areas
- -Define ORSA
- -3 items ORSA should include at a minimum
- -purpose of ORSA
II : SUPERVISORY ACTIVITIES (governance)
- –Internal Control and Risk Management
- –Supervisory Review Process
Pillar II requires company:
1) to have governance structure in 4 key functional areas
–INTERNAL AUDIT
produce report annually to Board on deficiencies of annual controls
–ACTUARIAL
ensure reasonableness of methods and assumptions to calculate technical provision
–RISK MANAGEMENT
monitor RM function and maintain aggregated view
–COMPLIANCE
ensure compliance with law and report issues to Board
2) to complete an ORSA
ORSA :
all process and procedures used to IDENTIFY, ASSESS, MONITOR, MANAGE, REPORT risk
and
to determine funds necessary to ensure overall solvency needs are met at all times
ORSA should have at a minimum:
- -overall solvency needs considering risk profile, risk tolerance limit and business strategy
- -compliance with capital requirements and technical provision requirements
- -extent to which risk profile deviates from assumptions in the SCR
results of ORSA reported to supervisor
- -supervision will use this info as inputs for risk-based supervision and actions
- -ORSA is basis for dialogue with insurer