Part 18 (Odomirok 25)

Question 1

What does Solvency II link

Answer 1

Links the required capital to the insurer’s specific risk profile

Question 2

What is Solvency II

Answer 2

A solvency regulation used in Europe

Question 3

What are the 3 pillars of Solvency II

Answer 3

Pillar 1 - Quantification: quantifying amount of capital that needs to be held
Pillar 2 - Governance: activities of regulators
Pillar 3 - Transparency: reporting of insurance companies position to regulators and public

Question 4

What does Pillar 1 address

Answer 4

quantitative requirements

Question 5

Calculation in Pillar 1

Answer 5

Solvency Capital Requirement (SCR)

Minimum Capital Requirement (MCR)

Technical Provisions (basically the liabilities)

Question 6

Solvency Capital Requirement is what
What happens if company with lower capital
Calculated using what 3 types of models

Answer 6

Required capital to limit the probability of ruin over the year to 0.5%

lower capital is subject to regulator intervention (where regulator takes over)

Standard formula (provided by regulator and more conservative with higher amount)
Internal models (need approval to use)
Mix of both

Question 7

What is the Minimum Capital Requirement/what will happen if lower

Answer 7

company with lower capital will lose its license and not be permitted to operate

Question 8

Technical provisions include what two things
How is it calculated

Answer 8

Includes reserves and risk margin

Calculated using methodology similar to P-GAAP, cost of capital exceeding the risk free rate (R- i) is 6%

Question 9

Free Surplus calulcation

Answer 9

Free Surplus =
Assets - Technical Provision - SCR

Question 10

What does Pillar 2 provde

Answer 10

Supervisory Review
Provides supervisors with
- Means of identifying firms with a higher risk profile
- and power to intervene

Question 11

Pillar 2 requires addressing these 4 functional areas

Answer 11

• Internal Audit
• Actuarial
• Risk Management
• Compliance

Question 12

Internal audit need production of what

Answer 12

report at least annually to board of directors about
- any deficiencies of internal controls and
- any shortcomings in compliance with internal policies/procedures

Question 13

What does the Actuarial area ensure, perform, and give opinion on in Pillar 2

Answer 13

• ensures the methods and assumptions used to get provisions are reasonable
• performs retrospective analyses of best estimates vs experience
• gives opinion about overall underwriting policy and adequacy of reinsurance arrangements

Question 14

What does Risk management monitor and ensure in pillar 2

Answer 14

• Monitors the risk management function
• Ensures internal model is integrated with risk management function

Question 15

What does compliance ensure and report

Answer 15

Ensures the internal control system complies with laws and regs

reports any compliance issues to board

Question 16

Pillar 2 also requires firms conduct what

Answer 16

an own risk and solvency assessment (ORSA)

Question 17

What is an ORSA

Answer 17

an Internal Assessment of the solvency need based on risk profile

Question 18

What should the ORSA contain info about

Answer 18

• Overall solvency need
• Compliance with capital and technical provision requirements
• Amount that risk profile differs from assumptions in SCR

Question 19

Pillar 3 goal

Answer 19

Report capital position from pillars 1 and 2 to the supervisor and financial markets

Question 20

What is the intent of reporting the information in Pillar 3

Answer 20

Provide the market with sufficient information to use its disciplinary function (like lower stock prices, less policyholders)

Question 21

Key difference between Solvency 2 and U.S regime

Answer 21

Solvency II is designed to be a group wide solvency measurement, while U.S. measurement is focused on the regulation of individual statutory entities

Question 22

How did the U.S regime treat capital before 2008 financial crisis

What did 2008 financial crisis lead to

Answer 22

Treated as being “walled” off from other entities in the group

2008 financial crisis lead to NAIC’s Solvency Modernization Initiative (SMI)

Question 23

What did the SMI approach change to the walls approach

Answer 23

Gave Windows and Walls approach

Question 24

What were the windows in SMI

Answer 24

• Enhanced communication between state regulators
• “Supervisory colleges” of international regulators (groups of regulators reviewing the performace)
• Access to and collection of information
• Enforced measured to protect policyholders if violations occur
• NAIC certification of state regulators

Question 25

What did the SMI maintain walls at

Answer 25

the statutory level, so regulators are still making sure companies have sufficient capital