Solvency II - Pillar 1 - SCR Flashcards
What is the SCR?
VaR at 99.5% CI of variation over 1 year of basic own funds
What risks does the SCR cover?
non-life/life/health u/w
market risk
counterparty default risk
ops risk
Give a quick line on what the standard formula is?
Standard prescribed stress tests or factors, aggregated using correlation matrices
Give a quick line on what the internal model is?
Must be approved by supervisory authority
Must meet a number of standards including use test (demonstrate used in decision making and governence)
In simplifying the internal model/standard formula what must be taken into account?
Simplifications proportionate to nature/scale/complexity of risks
When can USP’s be used (undertaking specific paramters)
If regulator allows them
Instead of prescribed parameters
In standard formula
For underwriting risk (use own data)
When are risk mitigation techniques allow, what about dynamic hedging?
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
In the tree diagram what are the 3 main things the SCR is made of?
BSCR
Ops risk
Adjustments
In the tree what is BSCR made up of? ie. what are the risk modules
Market Health Counterparty Default Life Non-life Intangible
What makes up market risk?
equity property int rate spread currency concentration illiquidity
what makes up life risk?
mort morb disability longevity lapse expense revision catastrophe
Give an outline of the SCR calculation
- Individual stresses including 25% stress property, 15% permanent increase in mortality
- Take individual capital requirements doing NAV unstressed - NAV stressed where NAV = assets - BEL
- Put stresses through correlation matrix of other risks in the module to come up with combines capital req
In counterparty default risk, what exposures must a conpany differentiate?
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
After you get cap req for each module what do you do?
Put it through a correlation matrix
How is Overall SCR calculated?
Overall SCR = BSCR+SCR(ops risk) + Adj
What is SCR(ops)?
Ops risk is based on percentages of earned premiums and technical provisions
No correlation or diversification
What is the SCR adjustment for?
Loss absorbing capacity of technical provisions could include ability to reduce discretionary benefits or reduce deferred tax liability in stresses
How can the internal model be used if approved by regulator?
Partial or full alternative to Standard formula
How could a partial internal model be used?
For a few of the risk modules
Why would you use internal model?
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
What are the tests to gain approval of the IM?
- use test
- statistical quality standards
- Calibration standards
- Profit/loss attribution
- Validation standards
- documentation standards
- Submission to PRA of Self Assessment Template (evidence of compliance with requirements and 6 tests above)
1 line on use test
demonstrate widely used and significant role in internal governence/risk-management/decision making
1 line on statstical quality standards
minimum quality of data and assumptions including materiality considerations and use of judgement
1 line on calibration standards
standards to assess whether SCR on internal model has 99.5% VAR calibration equivalent
1 line on profit/loss attribution
- requirement to demonstrate how each risk categorisation in internal model will be used to explain causes and source of actual profit/loss
1 line on validation standards
internal model must be fully validated by insurer and subject to regular review including testing against experience
1 line on documentation standards
design and operational aspects to be clearly and thoroughly tested
what’s the key challenge of passing the use test
proof it’s embedded throughout company
what consensus might there be in the data/assumptions in the statistical quality standards. What are the problems in this?
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
What correlation related problems may there be in the assumptions for the internal model?
lack of data to fit correlations in extreme scenarios
If an IM doesn’t follow the same structure as standard formula (individual stresses and correlations) then what might it do?
stochastic sims using copulas to model dependency
who is ICAS+ open to?
british insurers with internal model..NOT standard formula!
