Solvency II

Question 1

Solvency 2

Answer 1

principles-based insurance regulatory system for capital levels of companies in the EU

Question 2

3 pillars of Solv2

Answer 2

Quantitative
Governance
Transparency

Question 3

Pillar 1

Answer 3

Quantitative: sets Solvency & Minimum Capital Requirements using a total balance sheet approach; SCR defined as 99.5% VaR

Question 4

Pillar 2

Answer 4

Governance: supervisory activities required in
Internal audit - report failure to follow company policies or deficiencies in internal controls)
Actuarial - ensure reasonability of DAM
Risk Management - perform ORSA to identify unique risks of company
Compliance - report failure to comply with regulations to board of directors

Question 5

Pillar 3

Answer 5

Transparency - supervisory reporting & public disclosure
Information from pillars 1 & 2 is given to the supervisor and financial markets with the intention of increasing market discipline and reducing the need for regulatory intervention

Question 6

Governance conditions that must be addressed

Answer 6

Fitness & propriety
Outsourcing
Internal control

Question 7

Risk margin calculation

Answer 7

1. cost of capital in period = SCR (99.5% VaR) * (R-i) for each of the years loss pmts expected
2. discount each yr, rate = risk-free rate + illiquidity premium
3. risk margin = sum of discounted cost of capital in all years

Question 8

Regulator intervention levels

Answer 8

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

SCR required = SCR + risk margin + best est liab
MCR = MCR + rm + best est liab
IFRS = balance sheet assets

Question 9

Compare Solvency II to RBC

Answer 9

Solv2 is EU, RBS is US
Solv2 principle-based, RBC rule-based
Solv2 can be tailored to ORSA, RBC strict formulas
Solv2 discounted, RBC not discounted
Solv2 IFRS assets, RBC SAP assets
Solv2 has 2 action levels (intervention, stop operations), RBC has 4 (CRAM)

Question 10

ORSA under Solv2

Answer 10

ORSA pertains to all short & long term risks
- identify, assess, monitor, manage, and report risks
- includes all risks in Solv2 + unique company risks
- should explain any inconsistencies with MCR or SCR
- helps management understand how risk relates to capital