Transcript actuaries.ca

CIA Annual Meeting
Vancouver
International Developments in Statutory
Solvency
Rob Curtis
Chair, Solvency & Actuarial Issues Sub Committee
IAIS
Head of Insurance Technical Risk
FSA
28 June 2007
Presentation overview
• Internationally, where have we come from
on solvency?
• Capital requirements
• Enterprise risk management
• Internal models
• Valuation of assets and liabilities
• Solvency 2 framework
• Likely future solvency work
Internationally, where have we come from on
solvency?
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Origins from OSFI
APRA
FSA
Solvency 2
IAIS
Capital requirements
Guidance paper addresses the
establishment of regulatory capital
requirements in a solvency regime.
Current guidance paper draft identifies 7
Key Features
Capital requirements
Key Feature 1 - Purpose and Definition of Capital
• Regulatory capital requirements should be
established such that, in adversity, an insurer’s
obligations to policyholders will continue to be
met as they fall due.
• These requirements should be defined such that
assets will exceed technical provisions and other
liabilities with a specified level of safety over a
defined time horizon.
Capital requirements
Key Feature 2 - Purpose and Definition of
Capital (Cont.)
• A total balance sheet approach should be
used to recognise the interdependence
between assets, liabilities, regulatory capital
requirements and capital resources and to
ensure that risks are appropriately
recognised.
Capital requirements
Key Feature 3 – Solvency Control Levels
• The solvency regime should include a range of
solvency control levels which trigger different
degrees of intervention by the supervisor in a
timely manner.
• The solvency regime should have due regard to
the coherence of the solvency control levels and
any corrective action that may be at the disposal of
the insurer, and of the supervisor, including
options to reduce the risks being taken by the
insurer as well as to raise more capital.
Capital requirements
Key Feature 4 – Approaches to Regulatory
Capital Requirements
• The solvency regime should allow a range
of approaches for determining regulatory
capital requirements, including
standardised approaches and, subject to
approval by the supervisor, the use of
internal models.
Capital requirements
Key Feature 5 – Approaches to Regulatory
Capital Requirements (Cont.)
• The solvency regime should require an
insurer to undertake periodic, forwardlooking continuity analysis and modelling of
the insurer’s ability to meet its regulatory
capital requirements under various
conditions.
Capital requirements
Key Feature 6 – Determining Regulatory
Capital Requirements
• The solvency regime should be explicit as
to the risks addressed in technical
provisions and in regulatory capital
requirements, or partially in both. The
regime should also be explicit as to how
risks are reflected in regulatory capital
requirements.
Capital requirements
Key Feature 7 – Supervisory Reporting and Public
Disclosure
• The solvency regime should be open and
transparent as to the regulatory capital
requirements that apply, and be explicit about their
objectives and the basis on which they are
determined (including the level of safety, risk
measures used and time horizon that underpin
them).
• The solvency regime should be supported by
appropriate public disclosure and additional
confidential reporting to the supervisor.
Enterprise Risk Management
Guidance paper provides guidance on the
establishment and operation of an
enterprise risk management framework, and
its importance from a supervisory
perspective in underpinning a robust
solvency assessment.
Current draft identifies 8 Key Features
Enterprise Risk Management
Key Feature 1 – Governance and ERM
• An insurer should establish, and operate within, a sound
enterprise risk management framework as part of its overall
governance structure. The framework should be integrated
with the insurer’s business operations, reflecting desired
business culture and behavioural expectations and addressing
all reasonably foreseeable and relevant material risks faced by
the insurer in accordance with a properly constructed risk
management policy.
• The establishment and operation of the ERM framework should
be led and informed by senior management and overseen by
the insurer's board.
• For it to be adequate for capital management and solvency
purposes, the framework should include provision for the
quantification of risk for a sufficiently wide range of outcomes
using appropriate techniques.
Enterprise Risk Management
Governance and an Enterprise
Risk Management Framework
Feature 1
Risk Management
Policy
Feature 2
Risk Tolerance Statement
Feature 3
Feedback Loop
Feature 4
Own Risk and Solvency Assessment (ORSA)
Feature 5
Feedback Loop
Feature 4
Economic and Regulatory
Capital
Feature 6
Continuity Analysis
Feature 7
Role of supervision
Feature 8
Enterprise Risk Management
Risk Management Policy
Key Feature 2
• An insurer should have a risk management policy
which outlines the way in which the insurer
manages each relevant and material category of
risk, both strategically and operationally, and
describes the linkage with the insurer’s tolerance
limits, regulatory capital requirements, economic
capital and the processes and methods for
monitoring risk.
Enterprise Risk Management
Key Feature 3 – Risk Tolerance Statement
• An insurer should establish and maintain a risk tolerance
statement which sets out its quantitative and qualitative
tolerance levels overall and defines tolerance limits, taking
into account each relevant and material category of risk and
the relationships between them. The risk tolerance statement
should outline how the insurer’s risk management policies and
procedures embed the defined tolerance limits in the insurer's
on-going operations.
• The risk tolerance levels should be based on the insurer's
strategy and be actively applied within the insurer's enterprise
risk management framework and under the insurer's risk
management policy.
Enterprise Risk Management
Key Feature 4 – Risk Responsiveness and
Feedback Loop
• The insurer's risk management should be
responsive to change.
• The ERM framework should incorporate a
feedback loop, based on appropriate and
good quality information management
processes, which enable the insurer to take
the necessary action in a timely manner in
response to changes in its risk profile.
Enterprise Risk Management
Key Feature 5 – Own Risk and Solvency
Assessment (ORSA)
• An insurer should perform its own risk and
solvency assessment, encompassing all
reasonably foreseeable and relevant material risks
including, as a minimum, underwriting, credit,
market, operational and liquidity risks and
identifying the relationship between risk
management and the level and quality of financial
resources needed.
Enterprise Risk Management
Key Feature 6 – (ORSA Cont.)
• The insurer should apply its own risk and solvency
assessment to determine the financial resources it
needs to manage its business given its own risk
tolerance and business plans, and to demonstrate
that supervisory requirements are met.
• The insurer's risk management actions should be
based on its own risk and solvency assessment
and both its economic capital and regulatory
capital requirements.
Enterprise Risk Management
Key Feature 7 – Continuity Analysis
• An insurer should analyse its ability to continue in
business and the risk management required over a
longer time horizon than typically used to
determine regulatory capital requirements.
• Such continuity analysis should address a
combination of quantitative and qualitative
elements in the medium and longer term business
strategy of the insurer and include projections of
the insurer's future financial position.
Enterprise Risk Management
Key Feature 8 – Role of Supervision in Risk
Management
• The supervisor should undertake regular reviews
of an insurer's risk management processes, and its
financial condition according to the nature, scale
and complexity of the insurer’s business.
• The supervisor should use its powers to require
strengthening of risk management in relation to
solvency assessment and capital management,
where necessary.
Internal Models
The guidance paper sets out a high-level
framework for supervisors to use in the
assessment of internal models used by
insurers.
Outlines 10 key features which should be
encouraged for all insurers using internal
models for solvency assessment and
capital management purposes.
Internal Models
Key Feature 1 – Using an Internal Model to
Determine an Insurer’s Economic Capital
• An insurer's internal model should be one
of its main strategic and operational
decision-making tools which integrates the
processes of risk and capital management
to assess the risks faced within its
business, and assist in determining the
capital needed to meet those risks, where
appropriate.
Internal Models
Key Feature 2 - Using an Internal Model to
Determine an Insurer’s Economic Capital (Cont.)
• An insurer's internal model should be calibrated
on the basis of defined modelling criteria which
the insurer believes will determine the level of
capital appropriate and sufficient to meet its
business plan and strategic objectives, ensuring
as a minimum, that the insurer can continue to
meet its policyholder liabilities as they fall due.
• This level of capital should be responsive to the
risk profile of the insurer.
Internal Models
Key Feature 3 – Criteria for the Use of an
Internal Model to Determine an Insurer’s
Regulatory Capital Requirements
• Where a supervisory regime allows the use
of internal models to determine regulatory
capital requirements, the supervisor should
establish appropriate modelling criteria to
be used for that purpose, which would
ensure broad consistency between all
insurers within the regime.
Internal Models
Key Feature 4 – Construction of the Internal Model
- Model Design
• The type of internal model used should be
appropriate to the nature, scale and complexity of
the insurer's business. In constructing its internal
model, an insurer should adopt risk modelling
techniques and approaches which are most
appropriate to the nature, scale and complexity of
the risks incorporated within the insurer's risk
strategy and business objectives, and which are
suitable for use as part of its risk and capital
management processes and procedures.
Internal Models
Key Feature 5 – Model Design (Statistical Quality
Test)
• As part of its internal validation process for
internal models, an insurer should conduct a
'statistical quality test' which assesses the base
methodology of the quantitative model. An insurer
should consider the model inputs, parameters,
assumptions used and the appropriateness of the
methodology as part of this test process, and
ensure that the data used in the model is of
sufficient quality and robustness.
Internal Models
Key Feature 6 – Model Design (Calibration Test)
• As part of its internal validation process for internal models, an
insurer should conduct a 'calibration test' to assess that the
output produced by the model is consistent with the modelling
criteria established by the insurer to satisfy its risk strategy
and business objectives.
• Where the insurer also uses its internal model for determining
its regulatory capital requirements, it should recalibrate the
model to the modelling criteria specified by the supervisor,
where these are different from its own modelling criteria. The
insurer should then conduct a further calibration test to
confirm the validity of the model outputs for this purpose.
Internal Models
Key Feature 7 – Governance and Communication (Use Test)
• In order to successfully validate its internal models for use as
part of risk and capital management, an insurer should
conduct a 'use test' to ensure that the internal model, its
methodologies and results, are fully embedded into the risk
strategy and operational processes of the insurer.
• The insurer's board and senior management should have
overall control of and responsibility for the construction and
use of the internal model for risk management purposes, and
ensure that they have sufficient understanding of the model's
construction, outputs and limitations, in particular its
consequences for risk and capital management decisions.
Internal Models
Key Feature 8 – Supervisory Approval of the Use of an
Insurer’s Model for Regulatory Purposes
• Where an insurer is allowed (or required by the supervisor) to
calculate its regulatory capital requirements using an internal
model, as part of an overall assessment into the insurer's
financial position, the use of the internal model for regulatory
capital purposes should be subject to a prior approval process
by the supervisor.
• In considering the review of an insurer's internal model, the
supervisor should ensure that it remains fit for purpose in
changing circumstances against the criteria of the statistical
quality test, calibration test, and use test, and that the model
has robust governance and internal controls in place.
Internal Models
Key Feature 9 – Supervisory Responsibilities
• The supervisor should ensure that it has access to
the necessary skills, competencies, and resources
in order to enable it to adequately assess an
insurer's internal model for regulatory purposes.
• The supervisor may wish to examine reviews
conducted by relevant external specialists. In such
instances, the supervisor would have ultimate
responsibility for approving the use of the
insurer's internal model for regulatory capital
purposes.
Internal Models
Key Feature 10 – Supervisory Reporting and Public Disclosure
• An insurer should provide information on its internal models
for both supervisory reporting and public disclosure. The
information should include details of how the model is
embedded into the insurer's governance and operational
processes and risk strategy, as well as information on the risks
assessed by the model and the capital assessment derived
from its operation.
• The supervisor should have the power to require insurers to
report information necessary for supervisory review and
ongoing approval where appropriate. The supervisor should
consider the appropriate level of public disclosure having due
regard to any proprietary or confidential information.
Valuation
Current position of IAIS is to issue a
position paper in conjunction with the IAIS
response to the IASB Discussion Paper
Valuation of Assets and Liabilities – General
Requirements
• The valuation of assets and liabilities for
solvency purposes should be undertaken
on a market consistent basis.
Valuation
•
In line with a market consistent valuation approach,
observable inputs from deep and liquid markets should be
used to the fullest extent possible in the valuation of
technical provisions.
•
In the absence of deep liquid secondary markets that provide
sufficiently robust values of insurance obligations, elements
of insurance obligations should be valued using cash flow
models or other methods that reflect the settlement of the
insurance obligations and accord with principles,
methodologies and parameters that the market would expect
to be used. Such valuations could be considered to be
"market consistent”.
Valuation
Valuation of technical provisions
•
Technical provisions should be valued in a prudent, reliable
and objective manner to allow comparison across insurers
worldwide.
•
An exit model is preferable for the valuation of technical
provisions, noting that the value of technical provisions
includes a risk margin and that any profit on inception
should be recognised only where the valuation has provided
for an appropriate and sufficiently reliable risk margin.
•
The credit standing of an insurer should not be considered
in the valuation of its insurance liabilities.
Valuation of Assets and Liabilities
Components of the Technical Provisions
•
Technical provisions comprise two components
– the current estimate of the costs of meeting the
insurance obligations (Current Estimate) and a
margin for risk (Margin over Current Estimate or
MOCE).
–
Given the intrinsic uncertainty of insurance
obligations, the technical provisions need to include a
risk margin over the current estimate of the cost of
meeting the policy obligations.
Valuation of Assets and Liabilities
Components of the technical provisions (Cont.)
– The risk reflected in the risk margin in technical
provisions relates to all liability cash flows and thus to
the full time horizon of the insurance contracts
underlying these technical provisions.
• The current estimate should be determined as an
unbiased estimate of the future cash flows that are
expected to arise from each policy or contract,
reflecting the time value of money. That is, the
current estimate is the expected present value of
probability weighted cash flows using current
assumptions.
Valuation of Assets and Liabilities
Components of the technical provisions
(Cont.)
• The MOCE should be determined using
market consistent principles,
methodologies and parameters, such that
the technical provisions reflect the value
that an insurer would be expected to require
in order to take over the obligations
Valuation of Assets and Liabilities
• The determination of the technical
provisions should take into account, on the
basis of credible current assumptions, any
embedded options or guarantees for the
policyholder or the insurer, including the
possibility of policy lapse and the payment
of a surrender value.
Solvency 2 Framework
• Commission level 1 draft text includes highlevel principles for the new solvency
regime.
• CEIOPS has published various Consultation
Papers providing advice on the details.
• Further development in level 2
implementing measures to now occur and
the QIS results to be analysed.
Solvency 2 Framework




Pillar 1:
Pillar 2:
Pillar 3:
Quantitative
capital requirements
Qualitative
supervisory review
Market
discipline
Technical provisions
Minimum capital
requirement (MCR)
Solvency Capital
Requirement (SCR)
Investment rules
Market-consistent
valuation
Validation of internal
models
Use of internal
models to calculate
regulatory capital
(SCR)


Principles for internal
control and risk
management
Supervisory review
process
New focus for
supervisor
Level of harmonisation
Use of internal
models as part of
own risk & solvency
assessment



Transparency
Disclosure
Support of risk-based
supervision through
market mechanisms
More pressure from
capital markets
More pressure from
rating agencies
Disclosure of
internal model
information
Solvency 2 Framework
Solvency 2 uses the same basis as the IAIS
except:
• Confidence level comparable with a
minimum investment grade level
approximately equating to a 99.5% VaR
calibrated confidence level over a one year
timeframe
• Risk margin: Cost of capital approach
• Groups proposal
Likely Future Solvency Work
• IAIS committed to publishing standards in 2008.
• Tentative moves now being examined regarding
Group solvency requirements and mutual
recognition.
• In Solvency 2, CEIOPS will focus on level 2
implementing measures following approval of the
draft Commission text in July.
• Other jurisdictions now actively in the process of
changing their solvency regimes e.g. Japan and
Australia.
• Industry consultation will be ongoing.
Any questions?