Odomirok 25

Question 1

What is Solvency II?

Answer 1

a principles-based insurance regulatory system for capital levels of insurance companies in the European Union

Question 2

3 pillars of Solvency II

Answer 2

QGT
Quantitative: sets SCR & MCR (Solvency Capital Requirement & Minimum Capital Requirement)
* uses a total balance sheet approach
* SCR corresponds to 99.5% VaR (Value at Risk) meaning that the probability of ruin is < 0.5%

Governance: supervisory activities
* internal audit (report failure to follow company policies, deficiencies in internal controls)
* actuarial (ensure reasonability of DAM when calculating technical provisions - Data, Assumptions, Methods)
* risk management (perform ORSA to identify unique risks of company)
* compliance (report failure to comply with regulations to board of directors)

Transparency: supervisory reporting & public disclosure
* information from pillars 1 & 2 are given to the supervisor & financial markets
* purpose is to increase market discipline because companies know their decisions are public
* this should reduce intervention by regulators

Question 3

Solvency II formulas

Answer 3

• Total technical provisions = (Best Est. of Liabilities) + margin
• SCR assets required = (Best Est. of Liabilities) + margin + SCR
• MCR assets required = (Best Est. of Liabilities) + margin + MCR
• SCR = MCR + (SCR-MCR) (it includes MCR)
• IFRS assets = Free Surplus + SCR + Technical Provisions

Question 4

Solvency II regulatory action

Answer 4

• SCR assets required <= IFRS assets available: no action
• MCR assets required <= IFRS assets available < SCR assets required: regulator will intervene
• IFRS assets available < MCR assets required: company is no longer permitted to operate

Question 5

Solvency II vs. RBC

Answer 5

Pillar, Category, Solvency II, RBC

Pillar 1, method, principle-based, rule-based
Pillar 1, method, can be tailored with ORSA, same formulas for all insurers
Pillar 1, risks, more comprehensive, omits important risks
Pillar 1, reserves, discounted + margin, not discounted
Pillar 1, assets available, use IFRS assets, use SAP assets
Pillar 1, assets required, based on 99.5 percentile on loss distribution, not based on modeled results
Pillar 2, action levels, 2 action levels (SCR, MCR), 4 action levels (CRAM)
Pillar 3, disclosures, required more info to be made public, results are public but calculations aren’t

Question 6

Requirements for internal model to be approved - Solvency II

Answer 6

• model is Used in running the business
• model has been Validated by an independent 3rd party
• model is Documented

Question 7

Describe ORSA

Answer 7

Pertains to all short-term & long-term risks:
* identify, assess, monitor, manage, and report these risks (including capital requirements)
* includes all risks considered in Solvency II + unique company risks
* should explain any inconsistencies with MCR or SCR
* helps management understand how risk relates to capital (and to make good business decisions)

Items required:
* assessment of own solvency need
* whether it complies with the technical provision
* extent to which its risk profile deviates from the underlying assumptions of the technical provisions