Transcript Solvenz

Der Schweizer Solvenztest und Risk
Management
Federal Office of Private Insurance
Philipp Keller
Research & Development
Düsseldorf, 16 January 2007
1
Overview
Valuation
Economic
Balance Sheet
Limit System
Internal Models
Group
Diversification
Scenarios
Risk and Capital
Management
Risk Mitigation
and Transfer
Responsibilities
Risk Based
Supervision
2
Contents
• Principles-Based Supervision
• Swiss Solvency Test Methodology
• Market Consistent Valuation
• Internal Models
• Scenarios
• Risk and Capital Management
• Outlook
Valuation
Economic
Balance Sheet
Limit System
Internal Models
Group
Diversification
Scenarios
Risk and Capital
Management
Risk Mitigation
and Transfer
Responsibilities
Risk Based
Supervision
3
Supervision in the Past: Statutory Valuation
“The actuarial convention according to which the composition of the assets
determines the size of the liabilities is one of the weirdest emanations of the
human mind. It's a metaphor - like saying that the advent of jet planes made the
Atlantic narrower - and metaphor has a limited place in finance”
Speech given by Martin Taylor to the National Association of Pension Funds
conference
• Discount rates for liabilities were
set with reference to an
expected asset profit based on
past experience
• Implicit - often unknown prudence in liabilities
• No explicit valuation of
embedded options and
guarantees
• Amortized cost for bonds
• Solvency 1: No capital
requirement for market and
credit risk
• High risk assets resulted in reduction
of liabilities
• Sales-forces pushed for adding high
guarantees to life policies
• Foreclosing of investment
opportunities due to amortized cost
approach for bonds
• Cash flow underwriting
• Downward spiral when business
contracts
• Underwriting cycles are exacerbated
4
Correlation between Solvency 1 and SST
The correlation between the Solvency 1 ratio and the SST solvency ratio is 0 for
nonlife and approx. 0.5 for life (based on provisional data from field test 2006)
Life
Solvency 1 ratio
Solvency 1 ratio
Nonlife
Risk bearing capital / target capital
correlation  -0.178
Risk bearing capital / target capital
correlation  0.56
5
Rules- vs. Principles-Based Supervision
Underlying most arguments against the free market is
a lack of belief in freedom itself, Milton Friedman
Regulation: A system of laws, decrees, rules, principles, implicit
and explicit conventions and expectations, incentives, rewards
and punishments, etc.
Rule Based Approach
A system trying to define
and micro-manage the
insurance market
Principles Based Approach
Regulator
The complexity grows over
time, the system needs to
be adapted continuously to
new products
Dirigistic
Insurance Market
 The “5-year plan” approach to regulation
A system promoting a
free and liberal market
Regulator
The system needs to
promote competition,
punish collusion and create
a level playing field via risk
based capital requirementsLiberal Insurance
and transparency
Market
The market decides which companies
succeed or fail
6
Principles vs Rules
“.. in designing Solvency 2 our principal aim should be to incentivise
insurance firms to use, and reward them for using, modern risk
management practices appropriate to the size and nature of their business.”
Speech by John Tiner, Chief Executive, FSA, ABI conference on Solvency II
and IASB Phase II, 6 April 2006
A risk based solvency system has to rely on principles rather than rules
if it has to give incentives for risk management
Principles-based standards describe the objective sought in general
terms and require interpretation according to the circumstance.
A rule-based approach is not be possible if internal models will be used
for regulatory purposes
A principles based approach however only works with a responsibility
culture and not with a compliance culture
7
Elements of Supervision
Principles based supervision
will depend on a web of
relationships between the
company, professional bodies
and the supervisor
For a liberal, principles based
approach to function, all have
to see to it that the system of
checks and balances works
Implications for
supervision: closer
contact and dialogue
with the board,
professional bodies
and all relevant
functions within the
company
Supervisor
Direct supervision
and check that
oversight
responsibilities
are implemented
Indirect supervision to ascertain
that professional standards are
defined and in-line with
regulatory expectations
Actuarial
Profession
Accounting
Profession
Professional
guidance and
enforcement of
code of conduct
Board of
Directors
Senior
Management
Risk
Management
Responsible
Actuary
Internal
Audit
8
Expectations on the Board
The Board of Directors is responsible for:
• the governance, guidance and oversight responsibilities that
are critical to an effective internal control structure
• defining necessary board committees (e.g. audit committee,
nomination and compensation committee,…)
• The Board as a whole needs to have sufficient technical as well as
strategical insurance know-how to be able to supervise and guide the
company as well as the necessary stature and mindset
• A Board must be prepared to question and scrutinise management’s
activities, present alternative views and have the courage to act in the
face of obvious wrongdoing
• The Board and management need to know how adverse a risk must be
for it to impair the insurer’s financial position. This should include all
risks arising from the insurer’s assets and liabilities
• The members of the Board need to satisfy fit and proper requirements
and have to minimize conflict of interests
• The Board needs to define the risk appetite and see to it that it is in
line with the actual risk capacity of the company
9
Elements of Supervision
As of 2007, FOPI will meet external Board of Directors and Senior
Management to discuss risk positions of companies and alignment of
strategy with risk capacity
For large or complex companies or companies with a high risk
exposure, the meetings will be at least yearly
FOPI will discuss with the Board the results of the SST/internal models
and specific risk exposures of the company
FOPI will discuss with senior management in addition the embedding of
the SST/internal model within the company, the relevance of risk
management as well as the influence of risk on the strategic
FOPI has no intention to set the strategies of the supervised
companies but wants to have comfort that strategic decisions
are discussed within senior management and with the board
in the context of the company’s actual risk capacity
10
Contents
• Principles-Based Supervision
• Swiss Solvency Test Methodology
• Market Consistent Valuation
• Internal Models
• Scenarios
• Risk and Capital Management
• Outlook
Valuation
Economic
Balance Sheet
Limit System
Internal Models
Group
Diversification
Scenarios
Risk and Capital
Management
Risk Mitigation
and Transfer
Responsibilities
Risk Based
Supervision
11
Swiss Solvency Test: Principles
Defines Output
4. Target capital is defined as the sum of the
Expected Shortfall of change of risk-bearing
capital within one year at the 99% confidence
level plus the market value margin
5. The market value margin is approximated by
the cost of the present value of future
required regulatory capital for the run-off of
the portfolio of assets and liabilities
6. Under the SST, an insurer’s capital adequacy
is defined if its target capital is less than its
risk bearing capital
7. The scope of the SST is legal entity and group
/ conglomerate level domiciled in Switzerland
Defines How-to
2. Risks considered are market, credit and
insurance risks
3. Risk-bearing capital is defined as the
difference of the market consistent value of
assets less the market consistent value of
liabilities, plus the market value margin
9.
Transparency
1. All assets and liabilities are valued market
consistently
All relevant probabilistic states
have to be modeled probabilistically
10. Partial and full internal models can
and should be used. If the SST
standard model is not applicable,
then a partial or full internal model
has to be used
11. The internal model has to be
integrated into the core processes
within the company
12. SST Report to supervisor such that
a knowledgeable 3rd party can
understand the results
13. Public disclosure of methodology of
internal model such that a
knowledgeable 3rd party can get a
reasonably good impression on
methodology and design decisions
14. Senior Management is responsible
for the adherence to principles
8. Scenarios defined by the regulator as well as
company specific scenarios have to be
evaluated and, if relevant, aggregated within
the target capital calculation
12
Swiss Solvency Test: Basic Equations
Most capital models consist of two basis components:
• A valuation V(.) is a mapping from the space of financial
instruments (assets and liabilities) in R:
V: A * L  R, where A * L is the space of all assets and
liabilities
• A risk measure rm(.) of a random variable (e.g. VaR, TVaR,…)
AC(t) = V(A(t))-V(L(t)), t=0,1
SCR = - rm( AC(1) – AC(0) )
Available capital at
time t: random variable
For the SST:
Available capital at
time 0: known
Valuation:
Market consistent
Risk Measure: Expected Shortfall
13
The Economic Balance Sheet
The market consistent (economic) balance sheet
Free capital
Available
capital
SCR: Required capital
for 1-year risk
Cost of Capital Margin
Market
value of
assets
Market
consistent
value of
liabilities
Discounted
best estimate
of liabilities
Market
Value
Margin
Market value of
the replicating
portfolio
14
Risk as Change of Available Capital
Available capital changes
due to random events
Risk quantification via standard
models or internal models
Year 0
Year 1
Revaluation of
liabilities due to
new information
Available
Capital
Market Value
New business
Margin
during one year
Probability < 1%
Claims
Change in market
Catastrophes
value of assets
Market value
of assets
Market consistent
value of liabilities
Best estimate
of liabilities
Economic balance sheet
at t=0 (deterministic)
Probability density of
the change of available
capital
Average value of
available capital in
the 1% ‚bad‘ cases =
TailVaR = -SCR
Economic balance sheet
at t=1 (stochastic)
15
Standard vs. Internal Models
Risk Quantification:
• Using standard models for life, P&C and health companies, if
the standard models capture the risk the companies are
exposed to appropriately
• Using internal models for reinsurers, insurance groups and
conglomerates and all companies for which the standard model
is not appropriate (e.g. if they write substantial business
outside of Switzerland)
The use of an internal model is the default
option, the standard models can only be used if
they adequately quantify the company‘s risks
16
Market Consistent Valuation
Market Consistent Value of Liabilities: Best Estimate + MVM:
= market value (if it exists); or
= value of a replicating portfolio of traded financial
instruments + cost of capital margin for remaining basis risk
as a proxy for the MVM
Replicating portfolio: a portfolio of financial instruments which are
traded in a deep, liquid market, with cash flow characteristics matching
either the expected cash flows of the policy obligations or, more
generally, matching the cash flows of the policy obligations under a
number of financial market scenarios (IAIS Structure Paper)
Simple version (replication of expected cash flows): Replicating portfolio
consists of government bonds, MVM does not contain credit risk component
Complex version (replication of cash flows under a number of financial
market scenarios): Replicating portfolio consists of government and corporate
bonds, swaps and other derivatives to capture payouts of embedded options and
guarantees. MVM contains credit risk component, but basis risk is generally
smaller than under the simple replicating portfolio
17
Market Consistent Valuation: Life
Profit participation features: The market consistent value of life
portfolios containing substantial profit participation features
necessitates - in theory – the calculation of the economic and statutory
position of the company over the whole run-off of the company.
•The complexity in a group setting becomes daunting
•The management options/strategy of the company rsp. group needs to
be modeled over a long time horizon
•Current discussions with industry: Which simplifications are acceptable
Review of models: Supervisors need to have comfort that the
management rules correspond to the actual strategy; the
requirements on the technical sophistication of companies
increases massively
The theoretically correct method implies the use of multi-year
risk models for the whole group taking into account
management options per legal entity as well as intra-group
capital transfers over the whole duration of the run-off
18
SST Standard Models
Market Consistent Data
Mix of predefined
and company
specific scenarios
Standard Models
or Internal Models
Valuation Models
Risk Models
Market Risk
Credit Risk
Life
Scenarios
Market Value
Assets
P&C
Best Estimate
Liabilities
Health
MVM
Output of analytical models (Distribution)
Aggregation Method
Target Capital
SST Report
19
Contents
• Principles-Based Supervision
• Swiss Solvency Test Methodology
• Market Consistent Valuation
• Internal Models
• Scenarios
• Risk and Capital Management
• Outlook
Valuation
Economic
Balance Sheet
Limit System
Internal Models
Group
Diversification
Scenarios
Risk and Capital
Management
Risk Mitigation
and Transfer
Responsibilities
Risk Based
Supervision
20
Internal Models
A generic, scenario based
model for economic capital
calculations
The main task of an model used
for the SST or Solvency 2 is the
projection of the economic
balance sheet of a company from
now (t=0) to 1 year in the future
(t=1)
For the valuation of assets and
liabilities in one year‘s time, the
(possible) states of the world
have to be determined
In a scenario based model,
future states of the world at t=1
have to be simulated. These
states encompass the evolution
of all relevant risk factors over
the whole duration of the assets
and liabilities
Portfolio of Assets
and Liabilities
Risk Factors
Capital and Risk
Transfer Instruments
Dependency
Assumptions
Scenarios
s1, s2,…………..……., sn
Valuation
Profit and Loss
e1, e2,………….……., en
21
Internal Models
Simulated possible states
of the world at t=1, based
on information at t=0
(si(t)  s0): Projected
evolution of risk factors based
on information at t=0
(s1(t)  s0)
(s1(t)  s1(1))
(s2(t)  s0)
t=0
(s2(t)  s1(1))
s0
s0: State of the world
now (observable)
(s3(t)  s0)
(s1(t)  s3(1))
Economic balance
sheet at t=0
Economic balance
sheet at t=1
(si(t)  sj(1)): Projected
evolution of risk factors based on
simulated state of the world at t=1
22
Internal Models
The valuation of the economic balance sheet now (t=0) depends on
the state of the world now as well as the projection of the risk factors
(e.g. the possible evolution of the state of the world) from now until
the run-off of assets and liabilities. Risk factors are company specific
(interest rates, FX rates, mortalities, catastrophes, etc.)
The valuation of the economic balance sheet in 1 year depends on
the simulated states of the world at t=1 as well as projections of the
risk factors given the simulate states of the world at t=1
Insurance model are substantially more complex conceptually than
most bank models due to the long time horizon of liabilities. The long
time horizon makes model not just more difficult to calibrate but
qualitatively different from 10 day VaR engines or Basel 2 type credit
risk models used by banks.
To make the calculations tractable, most models use simplifications
(e.g. using only the expected risk free interest rate for discounting,
assuming steady states for the evolution of risk factors etc.). It is then
important, that the company is aware of the simplifications and the
underlying assumptions
23
Internal Models: Applications
Portfolio of Assets and
Liabilities
Risk Factors
Analysis of the value of
the firm for different
investors (policy
holders, share holders,
bond holders, etc.)
Capital and Risk
Transfer Instruments
Dependency
Assumptions
Analysis of the impact of
capital and risk instruments
on P&L (e.g. reinsurance,
contingent capital,…)
Scenarios
s1, s2,…………..……., sn
Specific scenarios allow
detailed analysis of underlying
causes of a company‘s risk
exposure
Impact of changes in mixture
of assets and liabilities for
ALM, product development,
exploring business
opportunities, etc.
Valuation
Profit and Loss
e1, e2,………….……., en
Different valuations
(economic, statutory,…) to
assess risks for relevant
metrics
Analysis of liquidity constrains
Capital allocation
Setting of limit systems
Different risk measures (VaR,
TailVaR,…) for various
confidence levels to capture risk
24
Modelling Deficiencies
Key Success Factors
Modelling Deficiencies
• Risk culture: Willingness to
know about risks and
acceptance that strategy has to
be aligned with the company’s
risk bearing capacity, engaged
board of directors
• Open dialogue within the
company (e.g. departments
communicate well, in particular
CRO, CFO, Actuary and CIO)
• Direct reporting line of the CRO
to the CEO
• Integrity of responsible persons
• Risk management and capital
management aligned
• Deep know-how of modellers,
know-how and support of senior
management and the board
• Rule based mindset of some companies
• Embedding within risk management
• Senior management pushing for
desired results
• Lack of appropriate documentation
• The modeling of optionalities is uneven
• Credit risk modeling: For some
companies, credit risk is new
• Real estate modeling: some companies
insist on modeling real estate as a mix
of bond-like and equity like tranches
• State dependent parameters are often
calibrated to ‘normal’ experiences (e.g.
correlations)
• The evaluation of scenarios is spotty
• Lack of peer review
• Data quality
25
Contents
• Principles-Based Supervision
• Swiss Solvency Test Methodology
• Market Consistent Valuation
• Internal Models
• Scenarios
• Risk and Capital Management
• Outlook
Valuation
Economic
Balance Sheet
Limit System
Internal Models
Group
Diversification
Scenarios
Risk and Capital
Management
Risk Mitigation
and Transfer
Responsibilities
Risk Based
Supervision
26
Scenarios
Company specific scenarios: Allow senior management and the
board to have an informed discussion on strategic decisions
For supervisors, the quality of company specific scenarios is a good
indication on the quality of the company’s risk management
Predefined scenarios: Allow the analysis of the risk exposure of the
company
For supervisors, they allow a discussion with senior management and
the board on the actual risk exposure of the company
Both company specific and predefined scenarios are important tools
for supervisors to assess the quality of risk management and the
company’s internal processes. They are the basis of an informed
dialog of supervisors with senior management and the board of
directors
27
Risk Concentrations
• The knowledge about the limitation of risk concentrations is an
essential part of risk management
• Insurers need to formulate and evaluate scenarios to identify and
quantify its main risk concentrations
• The identification of risk concentrations has to encompass the whole
spectrum of risks, and should not be limited to exposures to
counterparty only
• Senior management and the board of directors have to be informed
on the risk concentrations and the company’s strategy aligned
• The insurer then has to put into place an effective limit system
Scenarios
Risk Concentrations
Risk Management
Senior Management
Internal Models
Board of Directors
Limit System
Strategy
28
Contents
• Principles-Based Supervision
• Swiss Solvency Test Methodology
• Market Consistent Valuation
• Internal Models
• Scenarios
• Risk and Capital Management
• Outlook
Valuation
Economic
Balance Sheet
Limit System
Internal Models
Group
Diversification
Scenarios
Risk and Capital
Management
Risk Mitigation
and Transfer
Responsibilities
Risk Based
Supervision
29
Risk Management
Warren Buffett‘s three key principles for running a successful
insurance business:
• They accept only those risks that they are able to properly evaluate
(staying within their circle of competence) and that, after they have
evaluated all relevant factors including remote loss scenarios, carry
the expectancy of profit. These insurers ignore market-share
considerations and are sanguine about losing business to competitors
that are offering foolish prices or policy conditions.
• They limit the business they accept in a manner that guarantees they
will suffer no aggregation of losses from a single event or from related
events that will threaten their solvency. They ceaselessly search for
possible correlation among seemingly-unrelated risks.
• They avoid business involving moral risk: No matter what the rate,
trying to write good contracts with bad people doesn't work. While
most policyholders and clients are honorable and ethical, doing
business with the few exceptions is usually expensive, sometimes
extraordinarily so.
February 28, 2002, Warren E. Buffett
30
Risk Management
The Need for Probabilistic Thinking
For a risk culture to develop, senior management, the board and supervisors
must be able to understand the probabilistic nature of the world
Example: A CRO hedges the risk of interest rates falling since the company is
short in duration. Interest rates then increase and the hedge expires
worthless. Senior management then criticizes the CRO for „destroying“ profit
Example: A CRO models the exposure to hurricane risk according to industry
best-practice but the actual loss is a multiple of the predicted loss. The
supervisor then assume wrong-doing and an intentional optimistic assumption
to minimize required regulatory capital
In insurance, reality can – and often will be – different from prediction.
While only one of the possible outcomes will be realized, there
nevertheless are many a-priori potentialities, which the company and
risk management have to consider
31
Risk Mitigation and Transfer
Internal Models will enable also mid-sized insurers and groups to
manage risks firm wide and will open many channels for risk transfer
and mitigation
Asset mix to optimize
diversification
between asset classes
Use of derivatives, dynamic
hedging of embedded
optionalities,…
Improved ALM
Reinsurance
Transfer of peak risks, cat
risks and optimization of LoB
diversification
Insurer
Securitization, SPEs
Optimized
Diversification
Optimized intra-group
capital allocation 
intra-group capital
and risk transfer
Optimized LoB diversification:
business mix, geographical
spread via coinsurance,
reinsurance, portfolio swaps,…
32
Impressions from the Industry
… Zusammen mit aussenstehenden Aktuaren haben wir die notwendigen,
aufwendigen Arbeiten frühzeitig in Angriff genommen und erachten sie als
Fitnesstest. Zudem sehen wir die Chance, optimale Beurteilungsgrundlagen für
unsere neue Rückversicherungslösung zu erhalten. Die bisherigen
Zwischenresultate bestätigen die gute Solvabilität und Risikofähigkeit der
emmental.
Geschäftsbericht 2005, Emmental Versicherung
“For our risk and investment strategy we need to be able to quantify the cash
flow structure and the risk bearing capacity of our portfolios. For this the SST is
a good (although in many aspects still to be modified and enhanced) basis. In
addition, we can use the SST to test capital requirements for alternative
investment strategies. As we have not yet an equally well suited internal model,
the SST is for us of great benefit. We see it as an integral part within our ALM
process.”
Comment by René Bühler from the “National Versicherung
“[The SST] produces a lot of interesting data, and we now know more about the
company and understand its business better. Most important of all, however, is
that we are now sure we have enough reserves, and we know that the reserves
could in fact be smaller.“
Interview with Patrizio Polesana, Metzgerversicherung in ‚Life and Pension
Magazine‘
33
Management of Group Diversification
The SCRs of a group‘s legal entities can be optimized using capital and
risk transfer instruments
The amount of optimization available to the group depends on the
definition of the MCR
SCR
SCR
MCR
Legal Entity 1
MCR
Legal Entity 2
Capital and risk
transfer instruments (CRTI)
allow allocation and downstreaming of diversification
between different legal
entities of a group
SCR
MCR
Legal Entity 3
34
The CRTI Approach
Group Test: Assumes capital
transfer only via formal capital and
risk transfer instruments
• The CRTI approach for groups is
consistent with FOPI‘s solo solvency test:
Only formal CRTI are considered, nonlegally enforceable promises by the
group to support a subsidiary are not
quantified within the solo SST
• The CRTI approach requires modeling of
(major) legal entities, thereby giving
incentives for appropriate capital
management according to legal entities
economic capital needs
Solo Test: Assumes capital transfer
only via formal capital and risk
transfer instruments
• The CRTI approach better captures the
options and strategy of a group in case
of financial distress than the consolidated
model
FOPI decided to choose the CRTI
approach for the group solvency test
Formal capital and risk transfer instruments
35
CRTI Approach: Risks
The risk of a subsidiary for the parent company is emanating from the change in
economic value of the subsidiary and – potentially – from CRTI which will be
implemented during a time horizon of one year
Adverse event impacting the
subsidiary’s balance sheet,
subsidiary is insolvent
Subsidiary
A
L
Subsidiary
Parent
A
L
A
L
A
L
A
L
Parent
A
L
Economic value of
subsidiary as asset
of the parent
Missing capital of subsidiary
is replenished with assets
from the parent
No CRTI in place: The
subsidiary is in default, the
economic value of the subsidiary
for the parent is zero. The CRTI
approach takes into account the
legally limited liability structure:
The model assumes that in case
of financial distress, the group
will not support a subsidiary if
no CRTI are in place
An insolvency protection
guarantee from the parent to
the subsidiary is in place:
The subsidiary is in run-off, the
value of the subsidiary for the
parent is zero and capital is
further depleted due to payout
of guarantee
36
CRTI Approach Properties: Diversification
Group Level Diversification: A parent company
benefits endogenously from group level diversification by
taking into account the dependency structure between
the risks of its subsidiaries and the risks of the parent
company
Parent Company
Subsidiary1
Down-streaming of Diversification: A parent
company can down-stream group level diversification via
capital and risk transfer instruments (e.g. intra-group
retrocession, guarantees, etc.) to its subsidiaries.
A guarantee from the parent to a subsidiary allows a
subsidiary to reduce the economic capital requirement
but increases the capital requirement for the parent
If there is no formal instrument from the parent to the
subsidiary which ensures that the parent will support the
subsidiary, then the subsidiary cannot benefit from being
part of a group
Within the SST, diversification is not seen as a (virtual)
asset but as the fact that required capital is reduced due
to a legal entity being part of a group
Subsidiary2
Parent Company
Subsidiary1
Subsidiary2
Assets exceeding technical
provisions and debt
SCR
Effect of Diversification
SCR without taking into
account diversification
37
Contents
• Principles-Based Supervision
• Swiss Solvency Test Methodology
• Market Consistent Valuation
• Internal Models
• Scenarios
• Risk and Capital Management
• Outlook
38
Outlook
Prediction is very difficult, especially about the future
Niels Bohr
Consequences of an economic and risk based view:
• A consistent quantification of all risks will demand that many functions
within a company work together: actuaries, underwriter, claims
managers, RI specialists, CROs, CIOs, CFOs,…
• An economic view of business will demand deeper quantitative skills
• Companies will have to optimize their economic performance 
optimization of asset liability mismatch, coherent reinsurance
programs, securitization of risks, optimization of diversification via
coinsurance, geographical spread, etc.
• Mid-sized companies might become being squeezed between smaller,
specialized and nimble insurers and large, well diversified insurance
groups
• Large companies will have to optimize their risk and capital allocation
to maximize diversification
39
Outlook
Whether a pervasive risk culture can develop and lead to an
innovative, thriving insurance market depends not only on the
re/insurance market, but also on how future regulation will be
implemented
Main issues:
• Group Diversification: Will group level diversification be recognized
or do local supervisors insist on full (physical) capitalization of all legal
entities in their territory?
• Legacy Regulation: Will implicit prudence margins, limits on
investment, eligibility of assets be replaced with an economic view of
risk and transparency or will the old prudence driven approach with
supervision coexist with the risk-based solvency framework?
• Internal Models: Will supervisors accept that company-specific riskbased solvency will entail to a certain degree the subjective
assessment of re/insurers of their risk exposure or will supervisors
prefer to achieve comparability of calculation steps via standardmodels rather than comparability of results via internal models?
40
Outlook
I believe we are on an irreversible trend toward more
freedom and democracy - but that could change
Dan Quayle
The success of principles based supervision will depend crucially on:
• Trust and an open and informed dialog between the industry and the
supervisor
• Development of a responsibility culture  the willingness to do the
right thing rather than purely complying with a minimal set of rules
• Adequate self-governance of the industry and relevant professional
associations (actuaries, accountants,…)
The ultimate responsibility for ascertaining adherence to principles lies
with the supervisor but a principles based supervisory framework will
depend on devolving responsibility for implementing the principles away
from the supervisor to the board of directors, senior management and
professional organizations
41