Must Know Flashcards
What is the formula for Asset Shares?
AS=Prem+Inv ret+Misc Profits - Deductions - Tax
Where:
Misc Profits may be <0
Misc Profits = WP surrender profits+NP profits+Windfalls e.g. unexpected tax gains
Deductions = Expenses+Commission+Cost of Cover+Shareholder transfers+Deductions for smoothing/guarantees/options/cost of capital
What is the OLTB formula?
Trading Profit = P+I+G-E-C+(V0-V1)+(D1-D0)-L
P=premiums I=investment income G=asset value change E=expenses C=claims outgo V0-V1 = reduction in reserves if >0 D1-D0 = increase in DAC asset if >0 L = losses from previous years carried forward
How to get from the OLTB formula to BLAGAB?
Trading Profit = P+I+G-E-C+(V0-V1)+(D1-D0)-L Ignore D's and L: Shareholder Profit=SHP=P+I+G-E-C+(V0-V1) Let's I'=I+G Let E'=E-(V0-V1) So now SHP=P+I'-E'-C Let Policyholder Profit = C-P (claims-premiums) So now SHP=I'-E'-PHP Or SHP+PHP=I'-E'
Design Factors (20)
- Marketability
- Profitability including sensitivity of profit
- Admin systems
- Target market appropriate for design
- Capital/Solvency/Financing requirements
- X-subsidies/consistency with products
- Reinsurance possible/needed
- Guarantees and Options to offer
- Quality of service e.g. 24 hour call centres
- Distribution channel/commission levels
- Tax regulations
- Competition
- NTC liabilities
- Regulations and Legislation
- PRE/TCF/PPFM
- WPA/AFH
- Admissibility of assets
- Own reputation
- Any past problems
- RB vs. TB proportions
Everything related to CRR calculation, including situation when each peak bites?
BCRR=Basic Capital Resource Requirement=3.8m
MCR=Minimum capital requirement
ECR=Enhanced capital requirement
CRR=Capital resource requirement
WPICC=With Profits Insurance Capital Component
LTICR=Long term insurance capital requirement
RCR=Resilience capital requirement
RCM=Risk Capital Margin
MCR=max(BRC,LTICR+RCR)
ECR=LTICR+RCR+WPICC
CRR=max(MCR,ECR)
WPICC=Max(0, Regulatory excess capital-Realistic excess capital)
Where regulatory excess capital=admissible assets-(math res+lticr+rcr)
Where realistic excess capital=Realistic assets-(realistic liabilities+RCM)
If WPICC=0, then free surplus under Peak 1<Free surplus under Peak 2, and therefore Peak 1 bites
What makes up realistic assets in form 19?
Sum of:
1) Admissible assets
2) Excess admissible assets
3) PVFP from NP business in WP fund
What does form 19 look like excluding the in-depth FPRL?
(1) Realistic Assets
a. Admissible assets
b. Excess admissible assets
c. PVFP from NP business in WP fund
(2) Realistic Liabs
a. WPBR
b. FPRL
c. Realistic Current Liabs
(3) WC = (1)-(2)
(4) RCM
(5) Realistic Excess Capital = (1)-((2)+(4))=(3)-(4) aka. Realistic Surplus
What does the FPRL contain?
Planned enhancements to WPBR e.g. distribution of estate or expected misc. profits
Past Misc Profits/Losses attributed to WPBR (but not yet in the WPBR)
Planned Deductions with respect to smoothing/options/guarantees from WPBR
Planned deductions of other chargeable costs from WPBR
Future cost of guarantees
Cost of financial options
Cost of smoothing
Cost of non-contractual guarantees e.g. mortgage promises, TCF issues
Cost of financing
Other long term liabilties
What must dynamic management actions take into account, give examples of them?
Take into account: a. Time to take effect b. PPFM c. TCF Examples: 1. Bonus rates 2. Surrender values 3. Asset mix 4. Changes in DROGO
If Total RB paid to policyholders=100
How much is paid to shareholders in a 90/10 fund?
1/9 COB
So 100(1/9) as 100 is the CoB=actual payout of RB to policyholders
ie. Shareholders = (1/9)Payout to Policyholders
ie. Policyholder:Shareholder payout ratio is 9:1
If total payout between shareholders and policyholders is 100, how much goes to shareholders and how much to policyholders in a 90/10 fund?
Shareholders=100(1/10)
Policyholders=100(9/10)
ie. Shareholders=(1/10) of total payout
AFH responsibilities
- Calc liabs - Advise management on risks affecting ph liabs
- Calc cap req - Advise management on capital required to support business
- Monitor risks and inform management of concerns over possible failure to meet liabs
- Inform management of concerns writing NB
- Advice governing body on methods/assumptions for actuarial investigations
- Perform these investigations included solvency ones
- Report results of investigations to governing body
WPA responsibilities
- Advise management of discretion used in WP
- Produce report on this advice at least annually
- Produce publicly available annual report to ph
- Confirm in this report whether, in the WPA opinion, firm has accounted for PRE and TCF in using its discretion
- Advise management if assumptions calc WPICC consistent with PPFM
What company must do for AFH/WPA
- Keep them informed of plans and seek advice for implications to ph
- Pay due regard to their advice
- Provide them with adequate resources/data/systems as required
Part VII transfer
- Must obtain sanction from high court
- Must be within EEA states
- REport given in form approved by PRA from independent expert approved/nominated by them
- Adequately publish scheme
- Send all ph notice approved by PRA
- Send statement to ph and sh which
a. Sets out terms of scheme
b. Contains summary of (3)’s opinion - Confirm new company authorised to do this business
- Confirm new company able to cover regulatory capital requirements
- Anyone including employees/PRA/FCA has right to be heard in court
- Set out in Part VII of FSMA
Mathematical Reserves
- Prospective, prudent assumptions with MADs
- VIR less than 97.5% risk adj yields
- rb allowed for is reg, not if real
- lapses allowed in both
- If unitised, reserve >NPV if reg, anything if real
- Individual reserves>=Gteed SV
- Policy reserve<0 in some circumstances
- No future valuation strain
30 ways to control persistency
- Strong controls and governence
- Change design to reflect current market
- Sort out any financial strength issues
- Offer guarantees and loyalty bonuses to current biz
- Identify IFAs with poor persistency
a. Reduce commission
b. Cease trading with them - Alternate distribution channels
- Different target market
- Introduce trail commission on EB
- Level commission throughout term
- New fund manager with expertise if competition doing well
- See if just problem with company/product/whole market
- Improve customer service e.g. decrease turnaround times
- Outsource to improve service levels
- Commission to reward persistency
- Questionnaire on why leaving
- Retentions team
- Enhanced customer service to high value customers (profitable)
- Provide regular MI
- Incentives to management/IFA relations team to reduce it
- Collect premium via DD
- Monitor experience carefully
- Improve customer service so affinity with company
- Compare costs of doing these to money saved
- Offer lower cost alternative to full surrender e.g. part surrender
- Proactive - calling customer for periodic reviews
- If reputation problem increase good PR
- Wider range of products for brand loyalty
- Commission clawback
- Visit IFA and check compliant
- Train sales staff better
- Incentives to keep in force e.g. Reduce AMC after 10 years
- Reprice
- Increase fund options
- Surrender penalties on early lapses
- Commission to reward persistency e.g. clawback of initial commission
TCF outcomes
Outcome 1: Consumers confident TCF central to corp culture
Outcome 2: Products/services in market
designed to meet specific customer group needs and targeted accordingly.
Outcome 3: Clear information given to p/h. Kept
appropriately informed before/during/after PoS.
Outcome 4: Any customer advice is suitable and takes
account of their circumstances.
Outcome 5: Consumers provided with products that perform as firms have led them to expect. Service is of acceptable standard and as they have been led to expect.
Outcome 6: No unreasonable post-sale barriers e.g. complaints/switch product/switch provider/make claim/lapse/surrender
List the names of professional guidance, which ones are important for AFH/WPA
- Actuaries code
- TAS D/M/R/I
- Inspru
- Genpru
a. GN39 = general responsibilities of approved persons incl. AFH/WPA
b. GN40 = role of AFH - Solpru
AOS Projection Approach
AOS Projection Approach
- Set Assets = value of liabs at t=0
- Calc expected A-L at time 0 by proj A and L e.g. A-L=20
- Change 1 expected assumption at t=0 to actual experience
- Recalculate A-L at t=1 allowing for (3) e.g. (A-L)’ = 30
- Contribution to surplus of that assumption is (A-L)’ - (A-L) = 30-20=10
- Repeat for all assumptions 1 at a time and building off each other until all changed to actual
Comments:
- Most popular approach as simple, robust
- No unique way
- A->E or E->A is possible
- Effect of each change depends on order done
- Consistency year on year most important
- Reasonableness checks are appropriate
AOS Formula Approach
- Set A=L at t=0 just like projection approach
- Calc liabs at t=1 on expected assumptions just like projection approach
- Recalc liabs at t=1 to find contribution to surplus using formulae
Comments:
- For non-linked without profits, too complex for UL (simplifying assumps would be used)
- Formulae required for mortality/withdrawals/expenses/investment return/NB
- Non-unique approach
- A->E or E->A
- Consistency important
- Allow for tax
SII Pillar 1, 2, 3 summary
Pillar 1:
1. Minimum capital requirements
2. Incl. BEL/RM/MCR/SCR methodology
3. Where TP=BEL+RM
4. Valuation of A and L methodology (Market Consistent)
5. MCR/SCR from SF or approved IM
6. MCR/SCR held in addition to TP
Pillar 2
1. Supervisory review
2. Including governence incl. Capital add-ons if risk not covered or inadequately modelled
3. Including ORSA which includes ALL risks and confirmation of ongoing solvency
Pillar 3 (QRS)
1. Disclosure and supervisory templates
2. Incl. Reg. Sup. Report/Quant Rep Temp/Solv Fin Cond Rep (public)
The SII chart of assets and ilabs
Assets
Ineligible capital + T3/T2/T1
Liabs
BEL+RM+MCR+SCR+Free capital
SII valuation of assets methodology
- MC valuation (arms length etc.)
- So MV if available and reliable
- If not then use MC M2Model technique
- No admissibility limits
- Includes Reinsurance recovery adjusted for default
BEL methodology
- MC valn
- PV future expected cf’s
- BE assumps not prudence/mad’s
- Disc rate is risk free rate
- RFR @ gilts or swaps with credit adj
- Stochastic techniques likely w/ 1000’s sims
- Stoch tech for cost of g’s and o’s, closed form allowed
- Policy by policy preferred, grouping allowed
- All decrements and p/h actions allowed for incl. lapses
- All relevant past/present/future data internal/external allowed for in assumps
- Premiums up to contract boundary
- Expenses and expense inflation allowed for
- No closure reserve
- Dynamic p/h and management actions allowed
- Discretionary WP benefits allowed for
- Illiquidity premium allowed for:
a. QIS5 - % of illiquidity premium
b. Countercyclical adj = adj disc rate in fin stress
c. Matching adj = Account for predictable LTL’s with H”M assets - Unit res and non-unit res unbundled
Assumps summary
- BE assumps no prudence/mad’s
- All decrements and p/h actions allowed for incl. lapses
- All relevant past/present/future data internal/external allowed for in assumps
- Premiums up to contract boundary
- Expenses and expense inflation allowed for
- No closure reserve
- Dynamic p/h and management actions allowed
- Discretionary WP benefits allowed for
Risk Margin methodology
- Extra amount over BEL that have to compensate an insurer to transfer to them (so compensates for unhedgeable risks and cost of holding capital)
- Unhedgeable risks are insurance/ops/reinsurer default
- Use cost of capital method (cost of holding capital for extra risks)
- Project capital requirements for unhedgeable risks (subset of SCR) over run off of business
- Not simple to project SCR as nested stochastic and relies on RM!
- Approximations can be used e.g. Reserves=0.2*SCR and then project reserves..
- The cost of capital rate used in SII is 6%
- Multiply each projection capital requirement by this and discount at risk free rate
- Sum is the Risk Margin
- Individual product RM’s needed but can take into account diversification up to group level (use proportion of SCR or another approximate method)
SCR standard formula risk diagram?
SCR->Adj, BSCR, Ops
BSCR->market, life ins, counterparty default, intangible, non-life, health
Market->equity/property/interest rate/credit spread widening/currency/concentration/illiquidity
Life ins->mort/morb/longevity/expenses/persistency/revision/CAT e.g. pandemic
Counterparty default->Type 1(rated, undiversified)/Type 2 (unrated, diversified)
Give 2 examples of the loss absorbing capacity of TP?
- Discretionary benefits
2. Reduce deferred tax liability in stress
MCR calculation
- Simple factor based linear formula based on 85% VAR over 1 year
- Formula based on TP and capital at risk from morb or mort multiplied by factors
- Factors vary whether WP, UL, trad without profit
- 0.25SCR<0.45 SCR
- Formula calibrates poorly and expected lots of insurers are on the boundaries
How are own funds (amount above TP) split? What restrictions are there on SCR and MCR?
- Basic (within insurer) and ancillary own funds (can be called upon in stress)
- Tier 1 (high quality, most loss absorbing e.g. Shares) to Tier 3 (e.g. Subordinate debt)
- MCR >80pc tier 1 and 0% tier 3
- SCR >50pc tier 1 and <15pc tier 3.
Why want good data quality?
- Accurate results
- Consistent results
- Credible conclusions
- Comparable results over time so better risk management
- Varying methods possible so appropriate ones found for task (BEL)
- Validation of methodology reliable
What risks are there in the risk management chapter
Credit Market Liquidity Ops inc. unit pricing as source of risk Insurance Reinsurance (counterparty, legal, systems and data risks) Underwriting Longevity and mortality projections Longevity hedging Group risk
What are the methods to manage (raise) available capital. Which ones are just for Peak 1 balance sheet and don’t have much effect on realistic capital
- Equity
- Subordinated loans
- Securitisation (increase peak 1 capital, little impact on realistic capital)
- Financial reinsurance (mainly for peak 1 capital)
A. Reinsurance commission
B. surplus relief
C. Virtual capital
D. Eliminate in admissible assets by reinsurance block of business - Derivatives
- Reduce mismatch which reduces cost of Gtee and O
- Increase admissible assets
- Weaken prudence in peak 1 (genuine reason)
Reasons to do AoS and AoEV
AoS:
- Recon opening/closing values
- Fin effect of diff between act and exp experience
- Fine effect of writing NB
- Check on data/valn process if independent of valn data
- Reg requirement in peak 2
AoEV
- Recon opening/closing values
- Assist changing basis by comparing act. vs exp experience
- Provide management with value of NB over year
- Validate data and calc process
- Required under minimum disclosure guidance
- Remuneration - identify areas performing well/poor
- ID unprofitable contracts for redesign/reprice
- ID individual sources of profit/loss to increase/limit
What is EEV profit, what does experience variance in lapses effect in AOEV and what do experience variance in expenses effect?
EEV profit = PVIF1-PVIF0+T
T=Trading profit = P+I+G-C-E+(v0-v1)+(d1-d0)-L
Lapse variance effects reserves and PVIF
Expense variance effects expenses and investment return
If V1=100 and PVIF1=400 with actual lapses = 10%
How to calculate experience variance if expected lapses was 15%?
Reserves:
1) Reserve with 10% lapse = 100 (Actual)
2) So reserve with 0% lapse = 100/0.9
3) So reserve with 15% lapse = 0.85*(100/0.9) (Expected)
4) Effect on EV = - (Actual-Expected)
PVIF:
1) PVIF with 10% lapse = 400 (actual)
2) PVIF with 0% lapse = 400/0.9
3) PVIF with 15% lapse = 0.85*(400/0.9) (expected)
4) Effect on EV = Actual-Expected
If Expenses = 0.06P but were expected to be 0.04P
Where P=premiums
And actual investment return=0.05(P-E+V0)+(1.05^(0.5)-1)*(C)
What will be the effect on EV of expense variance?
On expenses:
Actual - Expected = 0.02P (negative effect on EV)
On investment return:
Expected = 0.05(P-0.04P+V0)+(…)
Actual=0.05(P-0.06P+V0)+(…)
So A-E=0.05(-0.06P+0.04P)=0.05(-0.02P)
If A-E for expenses is positive, then negative effect on EV as higher expenses reduces profit
What does the AOEV template look like and how might you split it further?
Split is columns for:
- Capital requirement
- Free surplus
- PVIF
- Total
1. Opening EV Expected return on FS (i*FS) Expected return on IF (i*PVIF) Experience variance Operating assumption changes NB contribution Development costs 2. Operating return before tax/exceptionals Investment return variance Effect of economic assumption changes Effect of currency movement Exceptionals 3. Return on EV before tax Attributed tax 4. Return on EV after tax \+Capital raised -Capital distributed 5. Closing EV
What is the analysis of change in WC template?
Opening WC
Opening adjustments
Update LT assumptions from new valn date (insurance assumption variance)
Roll forward balance sheet with actual investment return and new val date economic scenarios (economic variance)
Value of NB
Update roll forward insurance experience (insurance experience variance)
Closing WC
Unexplained
Acutal time 1 WC
3 ways to use AOS/AOWC results
- NB impact used for max sales limits
- Constant -ve reg. surplus means more prudence needed
- De-risk the BS to protect solvency
What are the sources of surplus?
- Change in regs/meth/model/corrections
- Change in assumptions
- Actual vs. expected inv ret
expenses
mort
morb
lapses
exits
charge in UL and UWP
tax - Effect of NB
2 ways of defining surplus arising over a year (profit)
- Profit formula = P+I+G-E-C+(v0-v1)+(d1-d0)-L
2. (A-L)1-(A-L)0
Reasons for EEV?
- Consistency between companies
- Clear g and o valuation methodology incl. time value
- Min disclosure levels to address comparibility concerns
What disclosures do MCEV/EEV need?
- EV value
- Sensitivities
- Analysis of movement in EV
- Methodology/assumptions results basis disclosed
- New for MCEV is standard report formats for consistency
What are the EEV failures?
- No consistency, no specific approach between companies
- Risk disc rate not discussed - no methodology to set it
- No clear g and o calc method
- No method for cost of holding req cap.
- Numerous approaches, not comparable
Goals of MCEV?
- To address EEV concerns
- Liq premium included in risk free rate
- Risks free rate on swaps+liq prem
- MC calibration - so cf’s are at MV
- Consistency of applications addressed by being credible and robust
- Clear guidance on investment return and disc rate
- Guidance on movement analysis/nb value/non-hedgeable risks
- Disclosure guidance
12 EEV principles
- Measure - EEV is a measure of consolidated value of s/h interests in covered biz
- Covered biz - should be clearly identified and disclosed
- EV=FS+PVIF+req cap-cost of holding req cap excludes NB
- FS = MV of assets held above those required for liabs
- Req cap = assets not backing liabs but distribution to s/h restricted
- PVIF = pv future sh cf’s from assets backing liabs accounting for g’s and o’s
- G’s and O’s allowed for including stoch valn of TVOG
- Excludes NB (sales/renewals/alterations)
- Assumptions -
a. account for past/present/future expectations and any other relevant data
b. actively reviewed
c. varying assumptions if sufficient evidence - Economic assumptions
a. At MV
b. consistent with observable reliable market data
c. No smoothing of MV’s allowed or any adjustment - WP assumptions
a. Bonus rates allowed for
b. SHT’s allowed for and assumptions made on p/h s/h split of profits - Disclosures - results at consolidated group level
Sources of change in WC?
- A not matching L
- P/h g and o take up
- Discretion
- Inv ret on free assets
- Opening adjustments e.g. corrections/methods/models/regs/data
- Economic variances e.g. inv ret on WC, yields, volatilities
- Insurance variances - assumption changes or actual vs. expected differences
- NB
- Capital injections/distribution
- Unexplained aim to minimise, target a % of total liabs
Pillar 3
- Disclosure and Supervisory reporting regime
- Defined reports sent to regulator and public
- Regular Supervisory Report (RSR) produced annually and sent to regulator
- RSR is private report
- RSR contains:
a. Solvency calculation results
b. ORSA details
c. Risk management process details
d. Qualitative information
e. Quantitative Reporting Templates (QRT)
- a subset of QRT to support MCR calculation will be required quarterly - Sometimes a summary of the RSR may be produced with only material changes detailed
- Solvency and Financial Condition Report (SFCR) produced annually
- SFCR is publicly disclosed report
- Contains subset of QRT and qualitative information from RSR
- Some items can be omitted if demonstrated to be confidential
Differences to Solvency I
- More extensive disclosures
- Increased transparency
Pillar 2 governance
- Sets out req and resp of key functions
- Board have overall responsbilitiy for ongoing SII compliance
- All insurers must have
a. RM/
b. actuarial/
c. compliance/
d. int audit functions - Clear segregation of responsibilities needed - Pillar 2 defines minimum levels
SF calc
- Different risk modules and sub-modules analysed as per chart
- First calculate SCR for each risk sub-module
- Then run through correlation matrix and matrix multiplication to get overall SCR for that risk
- Then run each risk module SCR through correlation matrix and matrix multiplication to get combined BSCR
- Make an adjustment for loss absorbing capacity of technical provisions including ability to adjust discretionary benefits
- Make an adjustment for Ops risk based on % of premiums and TP
Extras:
- SCR calculated using change in NAV (assets-BEL) ie. stressed NAV-base NAV (if stressed NAV decreases by 20 then 20 is your SCR)
- Example stresses are property down 25%, mortality up 15%
- Ops risk in SF is uncorrelated/undiversified with other risks
- The stresses come from detailed rules from supervisor
IM calc
- Must be approved by regulator
- Full or partial model possible
- Useful is risk profile different to standard formula
- May already have EC model going
- Capital requirements will be different than SF
- Regulator can force company to do it if SF not appropriate
- SCR must still cover all SF risks and 99.5th percentile VAR over 1 year calibration
- 6 tests to be passed before approved
- Use test is most challenging
10 If tests passed, IM structure up to company
11 e.g. could use stochastic modelling not stresses
12 Self-assessment template completed and sent to regulator
13It includes how the use-test has been passed 10. Data quality and assumptions also a problem
14 Limited extreme event data - Likely industry concensus will happen e.g. equity down 20%
- Will allow for company specific features e.g. more volatile equity holdings
- Allow for correlations changing in extreme situations
18 IMAP is the UK process - IM is costly
The 6 tests:
- Use test - embedded in company, used in decisions/rm/gov
- Statistical quality - min quality standards met covering data/assumps/aggregation
- Validation - fully validated by company
- Calibration - SCR is equivalent to 99.5th percentile over 1 year
- Documentation - design/operation well documented
- Profit/loss attribution - demonstrate risk category attribution of p/l
Other SII impacts
- Will be a group SCR accounting for diversification
- Each subsidiary must cover own SCR
- Group SCR>Sum of individual MCR’s
- Optimal product mix may change
- Optimal asset mix may change
- Some assets lead to lower capital requirements
- M&A activity increase for diversification benefits
- MI changes related to SII
- External disclosures to increased and change
- Share price/credit rating may change
Mathematical Reserves
- Prospective, prudent with MADs
- VIR less than 97.5% risk adj yield
- Individual pol res may be less than 0
- pol res should be above gtee sv.
- No future valn strain
- Non-unitised must have reserve>NPV if reg, or GPV or NPV is real
- RB’s allowed in reg, not needed in real
- Lapses allowed for
Credit risk definition
- AKA counterparty risk
- Incurred when firm exposed to loss if counterparty fails to perform contractual obligation
- Includes timing
Market risk definition
- Incurred when firm exposed to loss as a result of market movements meaning fluctuations in income or asset value or amount of liabilities
- e.g. equity/property/interest rate/credit spread/concentration/currency/illiquidity
Liquidity risk definition
- Incurred when firm exposed to loss from short term cashflow mismatches
- Not long term mismatch risk
Operational risk
- Risk of loss from inadequate or failed internal people/processes/systems or from external events
Explain unit pricing risk for ops risk
- Example of processing risk
Examples are: - Errors in calculating price of units for allocation/disallocation to p/h
- Errors in calculating price of unit created/cancelled
- Compensation for errors/inequity calculation
Insurance risk definition
- No universal definition
- From fluctuations in timing/frequency/severity of insured events expected when underwritten
- Part is underwriting risk
Underwriting risk examples
Examples from
- Medical u/w
- /non-disclosure
- Equality legislation
- Gender testing
What risks does reinsurance bring up?
Counterparty/legal/systems and data
Group risk definition
Where activities of a subsidiary within a group effects financial strength or reputation of the group or other subsidiaries
What other risk controls are there
- Monitor exposure to risks frequently
- External and internal audit
- Control accounts
- Detailed management information
Pillar 2 ORSA
- Own risk and solvency assessment
- In addition to MCR and SCR
- Identify ALL risks exposed and related RM and controls
- E.g. Qualitative like Reputational not covered in pillar 1
- Show ongoing ability to meet MCR SCR over bp horizon, 3-5 year
- No prescribed CI, it’s what company feels appropriate
- E.g. Relating to target credit rating or risk appetite
- Used in capital add on decision
- Prove used by senior management and for strategic decision making
6 IM tests
The 6 tests:
- Use test - embedded in company, used in decisions/rm/gov
- Statistical quality - min quality standards met covering data/assumps/aggregation
- Validation - fully validated by company
- Calibration - SCR is equivalent to 99.5th percentile over 1 year
- Documentation - design/operation well documented
- Profit/loss attribution - demonstrate risk category attribution of p/l
