Transcript QIS 1-2 TESTILASKELMAT

SOLVENCY II
Part 4: Quantitative impact studies
Vesa Ronkainen
Insurance Supervisory Authority, Finland
30.11.2006
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Contents
1. Background
2. QIS2 excercise – the main results
3. References for Solvency II
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1. Background of QIS calculations
• CEIOPS has carried out so far 3 exercises to tentatively test
Solvency II quantitative impacts, namely the Preparatory Field
Study, the QIS1 and the recent QIS2
• These and forthcoming QIS rounds are part of a continuous
dialogue between CEIOPS, the European Commission,
insurance industry and other stakeholders that increase the
knowledge and help to shape the future solvency system for
the EU.
• So called Preparatory Field Study that took place in April and
May 2005 only concerned life insurance, and its main goal
was to test the infrastructure and to prepare for Quantitative
Impact Studies.
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1. Background - QIS1 exercise
• QIS1 calculations were done during the last 3 months of 2005.
Here the focus was solely on the technical provisions.
• The findings are discussed in the QIS1 summary report, which
is available on the CEIOPS website.
• In general QIS1 achieved its 2 main goals, namely giving a
rough indication of the levels of prudence in the current
technical provisions by benchmarking them against different
explicit percentiles (75% and 90% level of prudence), and
secondly giving insight to practicability of this type of
calculations.
• QIS1 paved the way for QIS2 and its main results will be
discussed in that context
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1. Background - QIS2 exercise
• QIS2 project in 2006 includes all the elements of Pillar 1
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quantitative requirements => a tentative, crude overall
quantitative picture of Solvency II can be formed:
The technical provisions (best estimate, 75%, and the Cost of
Capital approach advocated by the industry)
Capital requirements (incl. alternative methods): the Solvency
Capital Requirement SCR (new feature) and the Minimum
Capital Requirement MCR (cf Solvency 1)
Assets are marked to market
Eligible elements of capital are based on the current Solvency
1 rules with some necessary QIS2 adjustments (for hidden
reserves / deficits)
Calibration was crude and tentative in QIS2 and will be refined
in QIS3 for 2007
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2. QIS2 exercise
• Over 500 firms from 23 countries participated in
QIS2, compared with 312 firms from 19 countries in
QIS1.
• The market share of the respondents in these 23
countries is generally above 50%. There is still a size
bias present in QIS2 towards medium and large
sized firms, though less than in QIS1
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General economic results 1
• In general the capital requirements increased but on
the other hand the technical provisions decreased
and the available capital increased. The overall
effect was that the ratio of available capital to
required capital (SCR) decreased (compared to
Solvency I) for most life and non-life participants, but
still remained above 100%.
• In many countries, a number of undertakings would
need more capital according to QIS2 formulae, but
many things, including calibration, may still change
for the final SCR formula.
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General economic results 2
• The MCR solvency position is also above 100% for
most undertakings in the sample.
• In some cases SCR and MCR were quite close to
each other due to methodological differences when
calculating SCR and MCR. This inconsistency was
generally considered to be problematic.
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Suitability of methodology
• A number of useful comments were received from
undertakings and supervisors, particularly in relation to the
further development of the underwriting risk modules
• Although calibration was not in focus in this exercise, still
many critical comments were received. Their general message
was that some risk modules and correlations seem too
prudent (e.g. market risk, non-life underwriting risk and size
factor).
• It was also noted that the level of prudence in placeholder and
alternative methods were not always equal. Some information
and comparative figures of internal models were also received.
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Practicality of the exercise
• In many respects the findings are similar as in the
earlier QIS1 exercise. Technical provisions remain
the main challenge for most undertakings. Resource
issues were again severe (lack of time, data, people,
knowledge, and guidance).
• On average it took a couple of person months to
complete the study. However, it was difficult for
undertakings to estimate at this stage the level of
initial investment that Solvency II regime would
ultimately require.
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Technical provisions
• In most countries, the differences between the 75th percentile
provision and the cost-of capital provision were not significant.
• Although the answers provided may not form a representative
sample, in most countries a majority of participants seems to
prefer the CoC provision to the percentile provision because of
its simplicity (in life insurance in particular) and economic
interpretation.
• Approximative methods for the CoC calculation that did not
require stochastic modelling were generally available, while
this was not usually the case for the percentile approach.
• Practicability and harmonisation of the assessment (in
particular in life insurance with regard to hedgeable risks and
future bonuses) continue to pose a challenge to the Solvency
II process.
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The components of SCR in QIS2
SCR
SCRnl
NLprem
SCRcred
mkt
Mkteq
SCRcred
Mktprop
SCRop
SCRlife
SCRhealth
Lifemort
Healthexp
Lifeexp
Lifemorb
Healthxs
Lifedis
Lifelong
Healthac
Lifelapse
SCRcred
NLres
NLcat
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Mktint
Mktfx
QIS 2 technical specifications
• Solvency Capital Requirement SCR is based on 1-year 99,5 %
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VaR (or in theory 99 % TailVaR), but in QIS2 the calibration
was very crude and tentative
Risk classification follows the proposal of the IAA
Usually both a factor- and a scenario-based alternatives were
tested
The placeholder was usually the simpler factor-based methods
except for the interest rate risk
Dependencies were addressed via correlation coefficients
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QIS 2 technical specifications (cont)
• Interest rate risk (includes both assets and technical
provisions)
- 5 duration buckets and shocks (see below)
• Equity risk 40 % shock for both methods (hedging
was taken into account)
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QIS 2 technical specifications (cont)
CorrMkt=
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Mktint
Mkteq
Mktprop
Mktint
1
Mkteq
0.75
1
Mktprop
0.75
1
1
Mktfx
0.25
0.25
0.25
Mktfx
1
Maturity t (years)
1-3
3-6
6-12
12-18
18+
relative change sup(t)
0.75
0.5
0.4
0.35
0.3
relative change sdown(t)
-0.4
-0.35
-0.3
-0.25
-0.2
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QIS 2 technical specifications (cont)
• Real estate risk 20 % shock
• Currency risk 25 % shock
• Credit risk = sum of the products of rating-weights,
effective durations and market values:
1.1
A ratings-based approach as follows:
SCRcred1   g(rating i )  RDuri  MVi
i
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where the function g produces a risk weight according to the following
table:
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ratingi
CEIOPS rating bucket
g risk weight
AAA
I – Extremely strong
0.008%
AA
II – Very strong
0.056%
A
III – Strong
0.66%
BBB
IV – Adequate
1.312%
BB
V – Speculative
2.032%
B
VI – Very speculative
4.446%
CCC or lower
VII – Extremely speculative
6.95%
Unrated (except
reinsurance)
VIII – unrated
1.6%
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QIS 2 technical specifications (cont)
• Life insurance underwriting risk – several submodules
• Non-life insurance underwriting risk – 3 submodules
• Operational risk was simply approximated as a percentage of
premiums and technical provisions
• Internal model based results were also welcome
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QIS 2 technical specifications (cont)
• Minimum Capital Requirement MCR
- 2 options: ‘transitional’ and ‘post-transitional’
- ‘post transition MCR’ was calculated in principle as the
SCR except for calibration
- ‘transitional MCR’ is based on Solvency I (50% or
100%)
- Run off costs
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Risk profiles in QIS2
• In life insurance the market risk was usually
dominant
• In non-life insurance the underwriting risk was the
most important, and then the market risk
• There was a wide dispersion between different
insurance companies and markets
• Risk components are of course sensitive to the
parameters chosen, which will be adjusted for QIS3
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Other findings 1
• There was a fairly wide dispersion noted in the number of
medium and large sized, life and non-life, undertakings in each
country that provided comparative figures from their internal
models for part or all of the SCR calculation, and in the results
derived from these models. However, the following features
were observed in most countries.
- the life underwriting risk charges measured by the internal
models consistently exceeded the corresponding risk module of
the SCR
- for non-life underwriting risk, the internal models generally give
lower outcomes than the placeholder SCR
- for credit risk, the internal models almost all give higher values for
credit risk than the SCR
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Other findings 2
• Where figures from different entities within a group
were combined, then most groups took the
consolidated balance sheets as a starting point for
the assessment of both provisions and the SCR.
• The reported reductions of group risk capital including diversification effects - show a wide range
of values
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3. References
There is a large amount of publicly available papers about the
Solvency II project. Some interesting websites are:
• European Commission
(http://ec.europa.eu/internal_market/insurance/index_en.htm)
• CEIOPS (www.ceiops.org)
• Groupe Consultatif (www.gcactuaries.org)
• CEA (www.cea.assur.org)
• IAIS (www.iaisweb.org)
• IAA (www.actuaries.org)
• CFO Forum (www.cfoforum.nl)
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