Solvency II - Pillar 1 - SCR

Question 1

What is the SCR?

Answer 1

VaR at 99.5% CI of variation over 1 year of basic own funds

Question 2

What risks does the SCR cover?

Answer 2

non-life/life/health u/w
market risk
counterparty default risk
ops risk

Question 3

Give a quick line on what the standard formula is?

Answer 3

Standard prescribed stress tests or factors, aggregated using correlation matrices

Question 4

Give a quick line on what the internal model is?

Answer 4

Must be approved by supervisory authority

Must meet a number of standards including use test (demonstrate used in decision making and governence)

Question 5

In simplifying the internal model/standard formula what must be taken into account?

Answer 5

Simplifications proportionate to nature/scale/complexity of risks

Question 6

When can USP’s be used (undertaking specific paramters)

Answer 6

If regulator allows them
Instead of prescribed parameters
In standard formula
For underwriting risk (use own data)

Question 7

When are risk mitigation techniques allow, what about dynamic hedging?

Answer 7

RMT allowed in SCR if basis risk immaterial
Residual risks should be recognised
Dynamic hedging not allowed under standard formula but is in internal model

Question 8

In the tree diagram what are the 3 main things the SCR is made of?

Answer 8

BSCR
Ops risk
Adjustments

Question 9

In the tree what is BSCR made up of? ie. what are the risk modules

Answer 9

Market
Health
Counterparty Default
Life
Non-life
Intangible

Question 10

What makes up market risk?

Answer 10

equity
property
int rate
spread
currency
concentration
illiquidity

Question 11

what makes up life risk?

Answer 11

mort
morb
disability
longevity
lapse
expense
revision
catastrophe

Question 12

Give an outline of the SCR calculation

Answer 12

1. Individual stresses including 25% stress property, 15% permanent increase in mortality
2. Take individual capital requirements doing NAV unstressed - NAV stressed where NAV = assets - BEL
3. Put stresses through correlation matrix of other risks in the module to come up with combines capital req

Question 13

In counterparty default risk, what exposures must a conpany differentiate?

Answer 13

Type 1 exposure - may not be diversified, counterparty likely rated (bonds/derviatives etc.)
Type 2 - diversified, counterparty unlikely rates (intermediaries)
Each type treated differently to come up with cap req, then it’s combined

Question 14

After you get cap req for each module what do you do?

Answer 14

Put it through a correlation matrix

Question 15

How is Overall SCR calculated?

Answer 15

Overall SCR = BSCR+SCR(ops risk) + Adj

Question 16

What is SCR(ops)?

Answer 16

Ops risk is based on percentages of earned premiums and technical provisions
No correlation or diversification

Question 17

What is the SCR adjustment for?

Answer 17

Loss absorbing capacity of technical provisions could include ability to reduce discretionary benefits or reduce deferred tax liability in stresses

Question 18

How can the internal model be used if approved by regulator?

Answer 18

Partial or full alternative to Standard formula

Question 19

How could a partial internal model be used?

Answer 19

For a few of the risk modules

Question 20

Why would you use internal model?

Answer 20

Risk profile differs from that in standard formula
If has already been developed for other purpose like risk management
If made to by regulator as they think SF has inappropriate risk profile for that company

Question 21

What are the tests to gain approval of the IM?

Answer 21

1. use test
2. statistical quality standards
3. Calibration standards
4. Profit/loss attribution
5. Validation standards
6. documentation standards
7. Submission to PRA of Self Assessment Template (evidence of compliance with requirements and 6 tests above)

Question 22

1 line on use test

Answer 22

demonstrate widely used and significant role in internal governence/risk-management/decision making

Question 23

1 line on statstical quality standards

Answer 23

minimum quality of data and assumptions including materiality considerations and use of judgement

Question 24

1 line on calibration standards

Answer 24

standards to assess whether SCR on internal model has 99.5% VAR calibration equivalent

Question 25

1 line on profit/loss attribution

Answer 25

1. requirement to demonstrate how each risk categorisation in internal model will be used to explain causes and source of actual profit/loss

Question 26

1 line on validation standards

Answer 26

internal model must be fully validated by insurer and subject to regular review including testing against experience

Question 27

1 line on documentation standards

Answer 27

design and operational aspects to be clearly and thoroughly tested

Question 28

what’s the key challenge of passing the use test

Answer 28

proof it’s embedded throughout company

Question 29

what consensus might there be in the data/assumptions in the statistical quality standards. What are the problems in this?

Answer 29

might not be sufficient events for 99.5th percentile past experience to be used
consensus over equity shock likely
but should adapt to whether the particular company invests in more/less volatiles shares

Question 30

What correlation related problems may there be in the assumptions for the internal model?

Answer 30

lack of data to fit correlations in extreme scenarios

Question 31

If an IM doesn’t follow the same structure as standard formula (individual stresses and correlations) then what might it do?

Answer 31

stochastic sims using copulas to model dependency

Question 32

who is ICAS+ open to?

Answer 32

british insurers with internal model..NOT standard formula!