Transcript Solvenz

SST for Small Entities
Federal Office of Private Insurance
Zurich, 3 July 2006
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Contents
• Swiss Solvency Test: Principles
• Standard Formulae vs. Standard Models
• Work Load
• Impressions from the Industry
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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 is to give incentives for risk management
Principle-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 are
to be used for regulatory purposes
A principle based approach however only works within a
responsibility culture but not with a compliance culture
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The Importance of Being Consistent
con·sis·tent (k&n-'sis-t&nt): marked by harmony, regularity,
or steady continuity : free from variation or contradiction
Merriam-Webster Online Dictionary
For the Swiss regulator, consistency of the SST is key
Without consistency:
Main requirements on consistency:
• results are intransparent,
prudence will be implicit
• a layer of economically
irrelevant arbitrage
instruments will be developed
to exploit regulatory
inconsistencies
• between valuation of assets and
liabilities
• between valuation and risk
quantification
• between individual and group
level solvency tests
• between insurers and reinsurers
• between life and nonlife
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Valuation
Actuaries of the Past
Coyle & Sharpe © Mal Sharpe
Prediction of future asset returns and banking
conjectured gambling profits by using high
discount rates for the valuation of liabilities
Injection of ambiguity into the predictions by
using ‘prudent’ parameters
Never going back to past predictions and
forever using parameters used in the past
Actuaries of the Future
David Hilbert
Using recognized mathematical and
financial models
Having transparency on prudence by using
an explicit risk margin
Regularly reassessing and updating the
valuation and using most recent
information
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Defines Output
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
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
Transparency
1. All assets and liabilities are valued market
consistently
Defines How-to
Swiss Solvency Test: Principles
9. 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.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
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SST Standard Models
SST Standard Model: ‚Standard Scheme‘ rather than Standard
Formula
The standard scheme is similar to companies‘ internal model:
• gives incentives for risk management
• corresponds closely to the thinking of
the user of the model (e.g. actuaries,
investment specialists, CROs,…)
Financial market Risk: RiskMetrics type approach
(Covariance matrix of market risk factors)
Credit Risk: Basel 2 or Credit risk portfolio
models, credit risk of reinsurers via scenario
P&C Insurance Risk: Distribution based (small,
large and cat claims)
Life Insurance Risk: Covariance approach for life
insurance risk factors
• Allows easy use of partial internal
models
• allows easy and consistent
mapping of reinsurance (business
ceded)
• Companies have to determine
sensitivities of assets and liabilities to
financial market risk factors
• Analyze life and P&C insurance risk,
determine company specific
parameters
• Aggregate risk using convolutions etc.
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Contents
• Swiss Solvency Test: Principles
• Standard Formulae vs. Standard Models
• Work Load
• Impressions from the Industry
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Standard Formulae vs. Standard Models
Standard Formula: A simple
formula which uses easily
obtainable accounting or
other values to arrive at a
(more or less good) proxy for
necessary economic capital
(SCR). If the calculation can
be done by a HR manager,
then it is a standard formula.
Example: Solvency 1, GDV
model
Standard Model: An algorithm
or a description of a sequence
of calculation steps ending the
desired results and allowing
company specific adaptations.
If the user needs know-how
of the underlying model and
risks and expert judgment, it
is a standard model.
Example: Internal Models,
ICA, SST
Standard Formula
Pros
Cons
•Simple
•Easy to check
•Very little work needed
•The way of calculation is
comparable
•Not risk sensitive
•Not company specific
•Often allows arbitraging against
•Gives no incentive for risk
management
•Underlying assumptions often
not clear
•Partial internal model are
difficult to integrate
•Financial and reinsurance risk
mitigation can not be captured
adequately
•Introduces systemic risk
Standard Model
Pros
Cons
•Incentivizes risk management •More work intensive
•Result is company specific
•Needs educated users
•Financial and reinsurance risk
mitigation fully reflected
•The results are comparable
•Underlying assumptions are
clear
•Result is more than just a
number
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Standard Formula vs. Standard Model
FOPI decided in an early phase of the development of the SST to
develop a standard model rather than a standard formula. There is no
simple standard formula for small companies, all insurers and
reinsurers, irrespective of size, have to calculate the SST using either
the standard model or an internal model:
• The main aim of Swiss risk based regulation • It is difficult or impossible for a
is to incentivize insurers to implement
company to use a partial internal
adequate risk management. This can not be model (e.g. for market risk) within a
achieved with a standard formula approach
standard formal framework. This puts
a great hurdle to small companies for
• Risk mitigation (reinsurance, guarantees,
using company specific internal
etc.) are difficult or impossible to be taken
models
into account by a standard formula. This
puts small insurer, which cede relatively
• In a standard formula, the steps of a
more risks to reinsurers at a disadvantage
calculation are comparable between
different companies, not however the
• The parameterization of a standard formula
results. In a standard model, the
is intransparent and there is the danger,
results are comparable, not
that parameters and risk factors will not be
necessarily however the way of
adapted to a changing risk environment
calculation. FOPI prefers
(example Solvency 1)
comparability of results rather than
comparability of form.
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SST for Small Entities: Comparability
• It is imperative that regulatory capital requirements are
comparable between different companies, i.e. that companies
with similar risks have similar capital requirements
• With a standard formula, the calculation steps are comparable,
not necessarily however the resulting capital requirement. A
standard formula is difficult or impossibly to make sufficiently
risk sensitive such that it can capture the risks of companies
with varying and heterogeneous risk exposures. For example,
Solvency 1 is comparable in the sense that the calculations
different companies make can easily be compared. However,
the results are not comparable
• Using a standard model the results rather than the calculation
steps become comparable and there is a level playing field
between insurers
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SST for Small Entities: Reinsurance
• Small companies transfer a substantial part of their risk (often
up to 80%) to reinsurers, allowing a substantial reduction in
necessary economic risk capital.
• A simple standard formula would not be able to capture this
risk transfer appropriately, putting small companies at a great
disadvantage compared to larger companies using internal
models. If small entities want to take advantage of risk transfer
to reinsurers in a standard formula regime, they would have to
develop or buy a full internal model
• The SST standard model is sufficiently complex to be able to
capture most common reinsurance deals without small
companies having to develop an internal model
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SST for Small Entities: Know-How
• It is not FOPI’s observation, that competence is correlated to
the size of companies. Small companies often have people
knowing a lot about all aspects of the business (insurance,
assets, etc.) whereas in large companies, the know-how tends
to be much more fragmented
• A sufficiently complex standard model can be the kernel for a
full internal model for a small companies. A standard model as
the SST allows the stepwise transition and incremental
adaptation of the standard model to a company specific
internal model via integration of partial models. With a
standard formula, small companies are forced to develop a full
internal model in a single step
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SST for Small Entities: Complexity
• Often, small companies have less complex business than large
insurers. The complexity of calculation is then also reduced.
This is often the case for smaller P&C companies which sell
only a small number of products or specialized life companies.
• This is however sometimes not always the case for small life
insurers which often also sell complex, long dated products
with embedded options (e.g. interest rate guarantees). FOPI
considers that adequate risk management, understanding and
quantification of risks is essential for these types of products,
irrespective of the size of the insurer due to policy holder
protection
• FOPI expects risk management and know how of companies to
be commensurate to the complexity of their business
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SST for Small Entities: Systemic Risk
• The use of many insurers of the same standard formula leads
to the danger of systemic risks. All models have shortcomings
and if all insurers use the same formula, they will all be
exposed to the same mistakes and blind spots.
• Solvency 1 is an example of a standard formula which is
leading to systemic risk in the market. The lack of charges for
market risk led many companies in Europe to go into risky
assets which all dropped in value at the same time in
2001/2002, causing insurers to sell shares at the same time,
depressing prices further.
• A risk based regulatory system which relies on internal models
and a standard model which can be adapted to the company
specific risk situation reduces the danger that all insurers will
make the same mistake at the same time.
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Contents
• Swiss Solvency Test: Principles
• Standard Formulae vs. Standard Models
• Work Load
• Impressions from the Industry
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Experiences from Field Test 2005
• Field test 2005: approx 15 life, 15 nonlife and 15 health insurers
participated
• Some companies have also include their branches into their
calculations
• The field test included all large and most mid-sized Swiss insurers as
well as a number of smaller companies
• The participants of the field test comprise approx. 93% of the
provision in life and approx 85% of premiums in nonlife
• The main result was that the standard model can be used even by
small companies.
• The work load ranged from 1 month for small companies to more
than one year for international groups
• The additional information gained by the standard model was
perceived by most as worth the extra work compared to a simple
factor model
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Work Load
Result of the Field test: Total Work Load in Person Months (PM)
Small Companies
Small to Mid-Sized Companies
Mid-Sized Companies
Large Companies, Groups
Initally for
Fieldtest
1-2 PM
2 - 3 PM
9 - 15 PM
12 - 24 PM
Subsequently
< 1 PM
< 2 PM
4 - 8 PM
< 12 PM
Split for field test on average:
• 20% - 30% for internal education, communication
• 30% - 40% for developing valuation
methodology, preperational work (data, IT),…
• 20% - 30% for actual calculation
Based on initial feedback from a part of the field test participant
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Work Load
Total workload for life
and nonlife
companies, split into
work for field test
2005 (initial) and
estimates for work for
SST during later years
Contains modelling
of branches
Contains build-up of
valuation methodology
and software
450
400
350
300
Company using
already existing
partial models
Y-axis: person days of
250
work
X-axis: logarithmic
scale for size of
company (assets)
200
Branches
150
100
Life initial
Life later
Nonlife initial
Nonlife later
50
0
n
10n
100n
Small
1000n
Mid-Sized
10000n
Large
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Contents
• Swiss Solvency Test: Principles
• Standard Formulae vs. Standard Models
• Work Load
• Impressions from the Industry
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Impressions from the Industry
In einer breit angelegten Feldstudie, an der 2005 rund 45
schweizerische Versicherungen freiwillig teilgenommen haben, wurden
die Ergebnisse vom BPV analysiert und in verdichteter Form publiziert.
Die Befürchtungen einer generellen Unterkapitalisierung haben sich
ebenso wenig bewahrheitet wie der Vorwurf, dass der Aufwand für
kleine und mittelgrosse Versicherer nicht vertretbar ist. Offene Fragen
im Zusammenhang mit der Einführung des SST werden in
entsprechenden Arbeitsgruppen angegangen und in Rundschreiben und
Verfügungen des BPV gefasst.
Swiss Insurance Association, Jahresbericht 2005/06
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Impressions from the Industry
Implementation of the SST for small companies:
„Wir haben diesen Sommer viel gelernt über unser Versicherungsgeschäft
und über die Bedeutung von einzelnen Zahlen. Es gab viele Diskussionen
über Kennziffern usw. welche zu einem Wissensaufbau in unserer
Geschäftsführung führten und dazu beitragen werden, dass wir die
Gesellschaft mit noch besseren Entscheidungsgrundlagen führen können.
Die Ergebnisse aus dem SST-Testlauf nutzen wir auch für Diskussionen mit
dem Verwaltungsrat (es gibt eine zusätzliche Sicht auf den Vermögensstand
und den Geschäftsverlauf). Ich bin überzeugt, dass der SST die Führung von
unserer Gesellschaft zukünftig unterstützen wird. Die Aufsicht lieferte uns
dementsprechend ein weit ausgebautes Führungshilfsmittel.“
Comment by Martin Rastetter from the ‘Metzgerversicherung’ a
small-to-midsized nonlife company with approx CHF 160 Mio tech.
provisions
Days of work used approximately:
Initially:
Internal: 40-50 days,
External: 15-20 days
Afterwards:
Internal: 15-20 days,
External: 10-15 days
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Impressions from the Industry
Das per 1.1.2006 revidierte Versicherungsaufsichtsgesetz (VAG) sieht
u. a. eine Verstärkung der Aufsichtsinstrumente vor. Als weiteres bringt
es eine Verfeinerung der Solvenzkontrolle mittels des neu geschaffenen
SST-Verfahrens (Swiss Solvency Test), das nach einer dreijährigen
Übergangsfrist definitiv vorliegen muss.
Der Zweck des SST ist nicht nur das Zielkapital der einzelnen
Versicherer zu bestimmen, sondern auch das Riskmanagement und das
Risikobewusstsein der Gesellschaft zu fördern. 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
Emmental Versicherung: Mutual insurer with 47‘000 policy holder and
approx. 40 Mio premiums
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Impressions from the Industry
Effiziente Risikopolitik dank Swiss Solvency Test (SST). Kapital ist
eine knappe Ressource, die effizient gesteuert und optimal verteilt
werden muss. Zum besseren Schutz der Versicherungsnehmer wird
2006 der vom Bundesamt für Privatversicherungen (BPV)
entwickelte Schweizer Solvenztest eingeführt. Der Test ist Teil der
verbesserten Aufsicht und ermittelt die Fähigkeit eines
Versicherungsunternehmens, die eingegangenen Risiken aus der
gesamten Geschäftstätigkeit zu tragen. innova arbeitete an der
Entwicklung des schweizerischen Solvenztests in der Projektgruppe
des BPV mit und hat diesen bereits zweimal freiwillig durchgeführt.
Das Ergebnis des Tests zeigt, dass wir die hohen Anforderungen
klar übertreffen.
Geschäftsbericht 2005, Innova
Innova: Health insurer with 55000 policy holders and 117 Mio premiums
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Impressions from the Industry
Implementation of the SST for midsized companies:
“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”, a
mid-sized insurance group.
Days of work used approximately:
Initially:
Internal:
220 days for life, 170 days for nonlife
Afterwards:
Internal: ~180 days for life, 150 days for nonlife
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Impressions from the Industry
Swiss Solvency Test (SST) unternehmensweit eingeführt. Die
Visana garantiert ihren Kunden jederzeitige Zahlungsfähigkeit. Mit dem
Inkrafttreten des neuen Versicherungsaufsichtsgesetzes (VAG) sorgt ein
neu entwickeltes Instrument, der Swiss Solvency Test (SST), für noch
mehr Sicherheit und Transparenz im Bereich der Zusatzversicherungen
nach VVG. Die Versicherer müssen sich intensiv mit verschiedenen
Risikoszenarien auseinandersetzen und der Aufsichtsbehörde deutlich
mehr Informationen hierzu liefern. Der SST ist von Gesetzes wegen nur
für Versicherungen nach Versicherungsvertragsgesetz (VVG)
verbindlich, der Bereich der obligatorischen Krankenpflegeversicherung
untersteht dem Krankenversicherungsgesetz (KVG). Die Visana
überprüft jedoch die Auswirkungen der diversen Risikosimulationen
auch auf die Grundversicherung und betreibt somit ein
unternehmensweites Risk Management.
Visana, Geschäftsbericht 2005
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Impressions from the Industry
Implementation of the SST for large companies:
"Die Winterthur Gruppe unterstützt grundsätzlich die Einführung des
Swiss Solvency Test. Im Gegensatz zum heute gültigen Solvenzregime
gibt der Swiss Solvency Test ein präziseres Bild über die
Risikoexposition einer Versicherungsgesellschaft. Das ist im Interesse
der Versicherten und der Versicherer. Das Risk Management der
Winterthur arbeitet intern schon seit einigen Jahren mit vergleichbaren
Risikomodellen und hat seine Erfahrungen in den SST eingebracht. Im
Rahmen von Solvency II entwickelt sich in der EU ein vergleichbares
Solvenzregime. Wichtig ist, dass der schweizerische
Versicherungsregulator den Versicherungsgesellschaften eine
angemessene Übergangsfrist bei der Erfüllung der neuen
Anforderungen einräumt, und die Entwicklungen im Rahmen von
Solvency II bei der weiteren Ausgestaltung des SST angemessen
berücksichtigt."
Joachim Oechslin, Chief Risk Officer Winterthur Group
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For More Information
Philipp Keller:
[email protected]
+41 31 324 9341 / +41 76 488 3141
Thomas Luder:
[email protected]
+41 31 325 0168
Mark Stober:
[email protected]
+41 31 323 5419
Web-Links:
www.bpv.admin.ch
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