Solvency II

Question 1

describe Solvency II

Answer 1

principle-based system to determine required capital levels of insurance companies in the European Union

Question 2

three pillars of Solvency II

Answer 2

I) quantitative capital requirements
II) requirements for governance and risk management
III) disclosure and transparency requirements

Question 3

Pillar I of Solvency II

Answer 3

calculates capital requirements

• technical provisions include best estimate of liabilities plus risk margin
• minimum capital requirement (MCR) - below this level companies are not allowed to operate
• solvency capital requirement (SCR) - below this level companies are subject to regulatory intervention

Question 4

how SCR is calculated

Answer 4

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

Question 5

Pillar II of Solvency II

Answer 5

requires governance structure to address key functional areas and completion of ORSA

Question 6

key functional areas that should be addressed by governance per Pillar II of Solvency II (4)

Answer 6

• Internal Audit – produces an annual report that describes any shortcomings in internal controls
• Actuarial – calculates technical provisions using reasonable methods, provides a hind-sight analysis of best estimates against experience, and provides opinions on underwriting policy and reinsurance arrangements
• Risk Management – monitors risk management and maintains an aggregated view of the business
• Compliance – ensures internal controls comply with applicable laws and regulation

Question 7

three things [European] ORSA must contain

Answer 7

• overall solvency need and risk tolerance limits
• compliance with capital and technical provision requirements
• extent to which the risk profile of the company deviates from the assumptions underlying the SCR

Question 8

Pillar III of Solvency II

Answer 8

annual and quarterly reports provided to the regulator and disclosed to the public

Question 9

three areas U.S. ORSA should cover

Answer 9

• description of risk management framework
• assessment of risk exposure
• group assessment of risk capital and prospective solvency assessment

Question 10

how actuaries interact with U.S. ORSA process (5)

Answer 10

• ERM actuaries typically own overall drafting of the ORSA Summary Report
• estimation and monitoring of the insurer’s risk exposure in relation to risk tolerances
• modelling of risk capital adequacy and prospective solvency assessment
• risk identification and assessment/estimation process
• may review the ORSA Summary Report as part of regulatory examination