Solvency II - Pillar 1 - MCR/Breaches/Tiers

Question 1

What VaR is the MCR?

Answer 1

85% VaR over 1 year

Question 2

How is the MCR found?

Answer 2

Apply a linear formula defined by rules

Question 3

What is the linear formula based on?

Answer 3

Technical provisions
Capital at risk on death/disability
Multipled by specified factors, which vary according to type of business (wp/ul/conventional without profit)

Question 4

How is the MCR related to SCR? When will the MCR hit those limits?

Answer 4

Must be in range of 25-45% of SCR

The formula doesn’t calibrate well to insurers and will hit max/min for a lot of insurers

Question 5

What happens on a breach of SCR?

Answer 5

Supervisory intervention stage

1. Insurer must inform regulator if breach likely in next 3 months or has happened
2. Recovery plan sent to regulator within 2 months of this
3. Breach must be rectified within 6 months of occurrence
4. If this is not done, regulator may extend for 3 more months or longer if exceptional market falls

Question 6

How could you rectify a breach of the SCR?

Answer 6

1. Increase own funds available to meet SCR

2. Reduce risks that go into SCR calculation

Question 7

What happens on a breach of MCR?

Answer 7

Regulatory Action
1. Insurer must inform regulator if breach likely in next 3 months or has happened
2, Submit short term finance scheme to regulator within 1 month
3. Must rectify within 3 months

Question 8

What might action might a regulator take on breach of MCR?

Answer 8

1. Restrict/stop disposal of assets

2. If short-term finance scheme doesn’t work, withdraw authorisation to sell NB

Question 9

What do ‘own funds’ refer to? And how are they then split?

Answer 9

Assets - tech prov - subordinate liabs

Split into basic own funds and ancillary own funds and then tiered

Question 10

Explain basic own funds and ancillary own funds

Answer 10

Basic = funds within insurer
Ancillary = not in in surer, but may be called upon in adverse scenarios

Question 11

Explain how capital is split into tiers?

Answer 11

Tiers are based on loss absorbancy and permanence

1. Tier 1 = highest quality, most loss absorbant and permanent e.g. paid-up ordinary share capital
2. Tier 3 = lowest quality like subordinated debt

Question 12

What are the restrictions on capital quality to be used to cover SCR and MCR?

Answer 12

SCR - T1>=50% T3=80% T3=0%
e.g. If MCR = 100, T1>80, T3 = 0
and SCR = 1000, T1>500, T3<150