Solvency Performance of Turkish Insurance Sector

Dr. Ahmet GENÇ Director General of Insurance 09/30/2010

Outline



General



Current Turkish Implementation and Results



Solvency II Studies in Turkey



Future Plans

Directorate General of Insurance

General



There are two main calculation methods on solvency;

–

Solvency Margin - RBC Model

This method is used especially in the EU.

The solvency margin is the amount of regulatory capital an insurance undertaking is obliged to hold against unforeseen events.

Solvency margin requirements have been in place since the 1970s and it was acknowledged in the third generation Insurance Directives adopted in the 1990s.

It’s been mainly used in the US and partially in Japan and also in England since 1980’s and 1990’s.

Directorate General of Insurance

Solvency in Turkey

Current Solvency Regime in Turkey Solvency Margin The EU Method Risk Based Capital (RBC) Method

Directorate General of Insurance

Current Turkish Implementation



Two types of calculation ; 1- Solvency Margin

• •

Premium principle Claim principle

–

Required capital is the higher of amounts determined according to premium and claim principle.

Directorate General of Insurance

Current Turkish Implementation

2-RBC Method Risk Based Accounts:

– – – – –

Asset Risk Reinsurance Risk Off Balance Sheet Risk Excessive Premium Increase Risk Underwriting Risk

In the required capital calculation to be determined as per the second method, the asset risk, reinsurance risk, excessive premium increase risk, outstanding claim provision risk, underwriting risk and interest rate and currency risk of the companies are taken into consideration.

Directorate General of Insurance

RBC Model of Turkey



Example: In calculating the asset risk, asset account items are calculated with their risk weights indicated below; a) b) c) d) C ash Banks Government Bonds (Including Eurobond) Receivables from Reverse Repo Transactions Performed In Exchange of State Borrowing Notes e) Stocks Pertaining to Own Capital Group and Other Variable Revenue Financial Assets 0.000 * relevant amount 0.010 * relevant amount 0.000 * relevant amount 0.000 * relevant amount 0.250 * relevant amount GRAND TOTAL = REQUIRED CAPITAL

Directorate General of Insurance

How to Calculate Equity?



Equity means the total of; a) paid capital b) profit reserves c) capital reserves d) total of previous years' profits and the period profit after tax, e) equalization provision, f) sub-ordinated debts * Obtained by excluding the tangible assets and all foreseeable liabilities from the companies’ assets, minus the amount derived by deducting the losses of previous years and the period loss, if any.

Directorate General of Insurance

Required Capital

Required Capital is the highest one of Solvency Margin Method or RBC Method.

Directorate General of Insurance

Capital Adequacy Indicators of Turkish Insurance Sector

Assessment of the sector

2005 2006 2007 2008 2009 2010/6 Required Capital (ı) Total Equity (II) Difference (II-I) Difference/Required Capital 1.978.628.062

2.487.065.858

3.193.810.184

3.499.314.023

4.130.727.652

3.951.643.823

5.757.898.440

6.033.339.265

7.553.111.166

7.789.538.954

9.393.989.747

7.205.368.161

3.779.270.378

3.546.273.407

4.359.300.982

4.290.224.931

5.263.262.095

3.253.724.338

1,91 1,43 1,36 1,23 1,27 0,82 *:Generally, RBC method results more elevated in non-life and Solvency Margin results higher in life branches.

Directorate General of Insurance

Solvency II Studies in Turkey Quantitative Impact Studies (QIS) in Turkey



Solvency II Committee was established by Treasury on March 2009 in order to inform the insurance sector on Solvency II.



The aim of the Committee is to inform the sector, to engage the sector’s attention to Solvency II and to assess the impact of Solvency II on companies.

Directorate General of Insurance

Quantitative Impact Studies (QIS) in Turkey



The Committee pioneered to the sector for completing the QIS 4 studies and prepared manuals which describe how the QIS 4 solo spreadsheet should be filled.

Directorate General of Insurance

A pilot study for the sector



QIS 4 was a pilot study for the Turkish insurance sector; across the companies only ten of them took part in the QIS-4 studies.



Ten companies, of which 5 operate in life, 4 non-life and 1 in reinsurance participated in those studies.

Directorate General of Insurance

A pilot study for the sector



After the completion of the QIS 4 studies, companies reported Requirement (MCR).

their results to the Treasury with regard to Solvency Capital Requirement (SCR) and the Minimum Capital



Next, a comparison was made between the QIS 4 solvency regarding solvency.

requirement and the requirement defined in the current legislation

Directorate General of Insurance

Indicators on the company basis

Non Life -Reinsurance

A B C D E

Companies Current Method Required Capital for the Company (I)

235.625.340

300.795.800

177.146.638

159.021.664

197.325.817

MCR (II)

66.747.501

141.161.664

73.242.944

40.565.780

106.627.747

SCR (III)

215.136.604

347.740.778

211.569.455

172.067.198

242.909.030

DIFFERENCES I-II

168.877.839

159.634.136

103.903.695

118.455.885

90.698.070

I-III

20.488.736

-46.944.978

-34.422.817

-13.045.534

-45.583.213

Directorate General of Insurance

Indicators on the company basis

Life-Pension

A B C

Companies Current Method Required Capital for the Company (I)

23.801.244

40.580.239

27.559.919

MCR (II)

14.410.501

48.361.297

11.133.863

SCR (III)

72.052.505

241.806.483

37.001.228

DIFFERENCES I-II

9.390.743

-7.781.058

16.426.056

I-III

-48.251.261

-201.226.244

-9.441.308

Directorate General of Insurance

Future Plans



The Committee will work intensely on the pillar 2 and 3 of Solvency II.



A detailed notification on QIS; the experiences of the ten participant companies and the whole Solvency II system will be made to the sector.

Directorate General of Insurance



According to the road map, similar studies are planned to be done for all of the companies in the sector for QIS 5.

These ten participant companies will guide to the sector during the next studies. The manuals will also be helpful for the companies.

Directorate General of Insurance

THANK YOU

Directorate General of Insurance