Odomirok 25

Question 1

3 pillars of Solvency II

Answer 1

• Pillar 1: Quantification: Quantitative capital requirements (Solvency Capital Requirement & Minimum Capital Requirement)
• Pillar 2: Governance: Supervisory Activities (Internal control & risk management; Supervisory review process)
• Pillar 3: Transparency: Supervisory reporting & public disclosure

Question 2

Briefly describe the Solvency Capital Requirement (SCR)

Answer 2

The SCR is the required capital to limit the probability of ruin over the year to 0.5% (protect against the 99.5% VaR). Companies with lower capital are subject to regulatory intervention.

Question 3

3 methods to calculate the SCR

Answer 3

1. Standard formula: a spreadsheet provided by the regulator
2. Internal models
3. Mix of Both

three requirements for the company’s internal model to be approved for use in calculating Solvency II quantitative capital requirements.
* Model is used in running the business
* Model has been validated by an independent third party
* Model is documented appropriately

Question 4

2 things that Pillar 2 (Supervisory Review) provides supervisors with

Answer 4

1. Means of identifying firms with a higher risk profile
2. Power to intervene

Question 5

List the 4 functional areas that need to be addressed by the insurer’s governance structure

Answer 5

1. internal audit
2. actuarial
3. risk management
4. compliance

Question 6

What does the “internal audit” functional area require that the insurer do

Answer 6

Produce a report at least annually to the board of directors about any deficiencies of the internal controls & any shortcomings in compliance with internal policies & procedures.

Question 7

What does the “actuarial” functional area require that the insurer do:

Answer 7

• ensure that the methods and assumptions used to derive the technical provisions are reasonable.
• perform a retrospective analysis of best estimates vs experience.
• opine on the overall underwriting policy and adequacy of reinsurance arrangements

Question 8

What does the “risk management” functional area require that the insurer do

Answer 8

• monitor the risk management function & maintaining an aggregate view
• ensure that the internal model has been integrated with the risk management function

Question 9

What does the “compliance” functional area require that the insurer do

Answer 9

• ensure that the internal control system is effective to comply with all applicable laws & regulation
• promptly report any compliance issues to the board

Question 10

Briefly describe the Own Risk & Solvency Assessment (ORSA)

Answer 10

An internal assessment of the solvency need based on the risk profile. The ORSA can be dened as the entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long term risk a (re)insurance undertaking faces or may face and to determine the own funds necessary to ensure that the undertaking’s overall solvency needs are met at all times.

Question 11

What does ORSA need to contain at a minimum

Answer 11

• Overall solvency need (based on the specific risk profile, approved risk tolerance limits, business strategy)
• Compliance with capital requirements & the requirements of the technical provision
• Extent to which the risk profile deviates significantly from the assumptions underlying the SCR

Question 12

Briefly describe Pillar 3 (Supervisory Reporting/ Public Disclosure)

Answer 12

This focuses on increasing the transparency of the insurer’s risks & capital position. It provides the means by which the capital & regulatory position derived from Pillars 1 & 2 are reported to the supervisor & financial markets.

Question 13

The difference between RBC and Solvency II

Answer 13

• Solvency II uses IFRS assets, while RBC is based on SAP values. This causes differences in the asset valuation.
• Required capital under Solvency II is based on the 99.5% VaR, while RBC is not based on modeled results.
• Reserves are not discounted under RBC, while Solvency II discounts reserves and adds a risk margin.
• Solvency II can be tailored to individual companies (ORSA), while RBC uses the same set of formulas for all companies.
• RBC does not consider many risks which Solvency II does, including Interest rate risk, Catastrophe risk, and Operational risk
• RBC has four action levels based on the RBC ratio, while Solvency II has two quantitative requirements (SCR and MCR).
• Solvency is principle based, while RBC is rule based.