Solvency II

Question 1

Pillar 1

Answer 1

Quantitative requirements including risk-based capital requirements (the Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR)).

Question 2

Pillar 2

Answer 2

Qualitative requirements focusing on governance, risk management and required functions and including the supervisory review process.

Question 3

Pillar 3

Answer 3

Reporting and disclosure requirements including a public Solvency and Financial Condition Report (SFCR) and a private Regular Supervisory Report (RSR).

Question 4

How to value assets in Balance Sheet

Answer 4

Assets should be valued at the amount for which they could be exchanged between knowledgeable willing parties in an arm’s length transaction

Question 5

Valuing TPs

Answer 5

Technical provisions should represent the amount that the insurance company would have to pay in order to transfer its obligations immediately to another insurance company. They comprise premium provisions and claims provisions and are equal to the sum of a best estimate and a risk margin (to reflect the cost of capital, rather than incorporate prudence.

Question 6

Basic Own Funds

Answer 6

The assets in excess of technical provisions and subordinated liabilities are called the ‘own funds’. These are split into basic and ancillary own funds, which are then tiered based on specific criteri

Question 7

MCR

Answer 7

The MCR is calculated using a factor-based approach for each line of business and is intended to be calibrated to a VaR confidence level of 85% over a one-year time horizon. Additionally, the MCR must lie between 25% and 45% of the SCR

Question 8

SCR

Answer 8

The SCR is calculated by combining a number of separate capital requirements and allowing for diversification credits. It is calibrated at a confidence level of 99.5% over a one-year time horizon.

Question 9

Methods used to calculate SCR

Answer 9

The SCR may be calculated using:
A standard formula with simplifications
A standard formula
A standard formula with undertaking-specific parameters (USPs)
A partial internal model, combining the standard formula for some risk factors and an internal model for the remaining risk factors
A full internal model

Question 10

6 Internal Model Tests

Answer 10

use test
statistical quality standards
calibration standards
profit and loss attribution 
validation standards
documentation standards

Question 11

Pillar 2 - Functions requiring written policies

Answer 11

risk management 
internal control
internal audit 
actuarial function 
outsourcing (if applicable)

Question 12

Purpose of ORSA

Answer 12

Identify all the risks to which insurer is subject and the related risk management processes and controls.

Question 13

Information to be provided under Pillar 3

Answer 13

the system of governance applied by the undertakings
the business they are pursuing
the valuation principles applied for solvency purposes
the risks faced
the risk management systems
capital structure, needs and management.

Question 14

Lloyd’s Solvency

Answer 14

Lloyd’s is also subject to Solvency II.

The solvency test is applied to the aggregate of all members’ exposures, and must be covered by FAL and central assets.

Members submit FAL, subject to a minimum, and are tested twice a year to ensure they are in line.

Managing agents submit syndicates’ SCRs on both a one-year and ultimate basis, and the ultimate SCRs are uplifted by 35% to give the ECA. The Lloyd’s Society SCR is set so that there is a 0.5% chance of ruin.

SAOs are produced for each open syndicate year of account. These are supported by a formal actuarial report, signed by an actuary holding a practising certificate