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SA2 Final > Solvency II > Flashcards

Solvency II Flashcards

1
Q

Pillar 3

A
  1. Disclosure and Supervisory reporting regime
  2. Defined reports sent to regulator and public
  3. Regular Supervisory Report (RSR) produced annually and sent to regulator
  4. RSR is private report
  5. RSR contains:
    a. Solvency calculation results
    b. ORSA details
    c. Risk management process details
    d. Qualitative information
    e. Quantitative Reporting Templates (QRT)
    - a subset of QRT to support MCR calculation will be required quarterly
  6. Sometimes a summary of the RSR may be produced with only material changes detailed
  7. Solvency and Financial Condition Report (SFCR) produced annually
  8. SFCR is publicly disclosed report
  9. Contains subset of QRT and qualitative information from RSR
  10. Some items can be omitted if demonstrated to be confidential

Differences to Solvency I

  1. More extensive disclosures
  2. Increased transparency
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2
Q

Pillar 2

A
  1. Supervisory review process
  2. Supervisor may decide a capital add-on is needed to cover risks that haven’t been modelled at all or adequately in pillar 1
  3. ORSA required
  4. ORSA is to:
    a. Identify all risks to which exposed
    b. Identify risk management and controls in place
    c. Quantify ongoing ability to meet MCR/SCR
  5. You can split Pillar 2 into governence requirements and ORSA

Governence

  1. Sets out requirements and responsibilityies of key functions
  2. Board have overall responsbilitiy for ongoing SII compliance
  3. All insurers must have
    a. Risk management/
    b. actuarial/
    c. compliance/
    d. internal audit functions
  4. Clear segregation of responsibilities needed - Pillar 2 defined minimum levels

ORSA
1. In addition to SCR/MCR
2 Identify ALL risks to which subject and risk management/controls related
3. Not all risks covered in MCR/SCR e.g. reputational risk
4. Quantify ability to meet MCR/SCR over business planning horizon (3-5 years) - allow for new business
5. Confidence level not prescribed - should be level company feels appropriate
6. e.g. own risk appetite level or to achieve AAA rating
7. Considered by supervisor when deciding if capital add-on needed
8. Evidence required ORSA used by S.management and impact on ORSA considered when making strategic decisions

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3
Q

Pillar 1 in general, include main PIlar 1 discussion areas/headings

A
  1. Calculation of the min cap requirements for firms
  2. Methodologies for valuation of A&L (tech prov)
  3. Market consistent basis
  4. 2 capital requirements - SCR/MCR
  5. SCR calculated using:
    a. Prescribed standard formula
    b. IM approved by regulator
    c. A mixture of a. and b.
  6. MCR and SCR are capital required to be held above TP

Discussion areas are:

  1. Charts including the risk chart for standard formula
  2. Valuation of A
  3. Valuation of TP
    a. BEL
    b. Risk margin
  4. Capital requirements
    a. SCR - overview/SF including risk chart/IM
    b. MCR
    c. Supervisory intervention
  5. Quality of capital
  6. Data quality
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4
Q

What does the standard formula risk chart look like

A 
Top=SCR
Middle = Loss absorbing adjustment/BSCR/Ops risk
Bottom = 
1. Market
2. Counterparty Default
3. Life
4. Intangible
5. Health
6. Non-life

Market Risk sub-modules:

  1. Equity (rcm)
  2. Property (rcm)
  3. Int rate (rcm)
  4. Credit spread (rcm)
  5. Currency
  6. Concentration
  7. Illiquidity

Counterparty Default:

  1. Type 1 - rated counterparty, undiversified
  2. Type 2 = unrated counterparty, diversified

Life insurance risk:

  1. Mortality
  2. Longevity
  3. Disable/morbidity
  4. Lapse (rcm)
  5. Expenses
  6. Revision
  7. CAT e.g. pandemic
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5
Q

Explain the standard formula calculation of SCR

A
  1. Different risk modules and sub-modules analysed as per chart
  2. First calculate SCR for each risk sub-module
  3. Then run through correlation matrix and matrix multiplication to get overall SCR for that risk
  4. Then run each risk module SCR through correlation matrix and matrix multiplication to get combined BSCR
  5. Make an adjustment for loss absorbing capacity of technical provisions including ability to adjust discretionary benefits
  6. Make an adjustment for Ops risk based on % of premiums and TP

Extras:

  1. SCR calculated using change in NAV (assets-BEL) ie. stressed NAV-base NAV (if stressed NAV decreases by 20 then 20 is your SCR)
  2. Example stresses are property down 25%, mortality up 15%
  3. Ops risk in SF is uncorrelated/undiversified with other risks
  4. The stresses come from detailed rules from supervisor
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6
Q

Valuation of Assets in SII, differences from Solvency I?

A
  1. MC valn - assets xchanged at arms length, 2 willing party
  2. i.e. MV
  3. If no accurate MV then mark to model

Differences to now:

  1. Most of europe = bv
  2. Reinsurance recovery is asset not liab
  3. Reinsurance asset adjusted for default risk.
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7
Q

SII valuation of TP in general (3 points)

A
  1. TP=BEL+RM
    2, MC approach
  2. Amount insurer has to pay to transfer BEL to another insurer
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8
Q

BEL methodolody

A
  1. MC valuation
  2. PV of future expected cashflows discounted at risk free
  3. BE assumptions used, no prudence/MADs
  4. Assumptions allow for all decrements and policyholder actions including lapses
  5. All relevant past/present data internal/external taken into account for assumption setting
  6. Premiums allowed up to contract boundary
  7. Expenses and expense inflation allowed for
  8. No closure reserve
  9. WP discretionary benefits allowed for
  10. Dynamic management/policyholder actions allowed
  11. Stochastic techniques with 1000’s of sims likely
  12. Policy by policy projection appropriate, grouping allowed
  13. If financial options/guarantees stochastic techniques, though closed form solution may be allowed
  14. Risk free rate is gilts or swaps + credit risk adjustment
  15. Adjustment for illiquidty premium on risk free rate too (compensation for holding illiquid asset)
    Possible illiquidity adjustments:
  16. QIS 5 was proportion of illiquidity premiums
  17. Countercyclical premium = adjustment to discount rate in times of financial stress
  18. Matching adjustment = adjustment for companies with predictable long term liabs and hold to maturity assets
  19. UL unit res and non-unit res unbundled
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9
Q

Explain the internal model methodology including 6 tests

A
  1. Must be approved by regulator
  2. Full or partial model possible
  3. Useful is risk profile different to standard formula
  4. May already have EC model going
  5. Capital requirements will be different than SF
  6. Regulator can force company to do it if SF not appropriate
  7. SCR must still cover all SF risks and 99.5th percentile VAR over 1 year calibration
  8. 6 tests to be passed before approved
  9. Use test is most challenging - to prove embedded in company and used for decisions/risk man/governence
  10. Data quality and assumptions also a problem
  11. Limited extreme event data
  12. Likely industry concensus will happen e.g. equity down 20%
  13. Will allow for company specific features e.g. more volatile equity holdings
  14. Allow for correlations changing in extreme situations
  15. If tests passed, IM structure up to company
  16. e.g. could use stochastic modelling not stresses
  17. IMAP is the UK process
  18. IM is costly
  19. Self-assessment template completed and sent to regulator
  20. It includes how the use-test has been passed etc.

The 6 tests:

  1. Use test - embedded in company, used in decisions/rm/gov
  2. Statistical quality - min quality standards met covering data/assumps/aggregation
  3. Validation - fully validated by company
  4. Calibration - SCR is equivalent to 99.5th percentile over 1 year
  5. Documentation - design/operation well documented
  6. Profit/loss attribution - demonstrate risk category attribution of p/l
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10
Q

Explain MCR

A
  1. Factor based linear formula
  2. 85th percentile VAR over 1 year
  3. 0.25xSCR<0.45xSCR
  4. Most will be on the limits
  5. Factors based on type of product (wp/ul/without p) and the tech provision level
  6. If fall below, regulator remove authorisation to sell NB
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11
Q

Explain the importance of good quality data in SII

A
  1. more complete/correct=more consistent/accurate calcs
  2. wider range of methods to calculate BE possible
  3. Validation more reliable
  4. Credible conclusions made
  5. Comparisons over time of results more effective
  6. Understanding of business and results better
  7. More likely to be able to use IM
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12
Q

Other effects of SII on an insurer

A
  1. Will be a group SCR accounting for diversification
  2. Each subsidiary must cover own SCR
  3. Group SCR>Sum of individual MCR’s
  4. Optimal product mix may change
  5. Optimal asset mix may change
  6. Some assets lead to lower capital requirements
  7. M&A activity increase for diversification benefits
  8. MI changes related to SII
  9. External disclosures to increased and change
  10. Share price/credit rating may change
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SA2 Final (6 decks)

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