Risk Based Capital Solvency 2

Transcription

1 Risk Based Capital Solvency 2 Varun Gupta, FIAI, FIA CILA 29 th -30 th August

2 Adequacy of Financial Resources Solvency 2 Free assets Assets covering technical provisions, and assets Risk margin Best estimate - Technical provisions

3 Risk Based Capital Solvency 2 Assets Market value where possible Technical Provisions Market consistent preferable and risks hedge able Otherwise best estimate plus risk margin Best estimate cash flows discounted at risk free rates Risk Margins Cost of capital approach for non hedgeable risks Determine future requirements as liabilities run off Determine holding cost of capital (eg 6% above risk free) Determine present value of holding cost of capital, and Add to technical provisions Targeting a 99.5% VaR over a 1 year time horizon Granular set of approximately 20 factors with allowance for correlations and mitigating impact of profit sharing Targeting a 90% VaR over a 1 year time horizon Simplified range of factors

4 : proposed principles Derived using either an approved internal model or a standard formula Partial internal model Full internal model Standard formula 99.5% confidence level over 1 year As a minimum to cover insurance, market, credit and operational risks Part of supervisory review process (SRP)

5 Pillar 1 (std. formula) B op nl mkt def health life NLpr MKTeq MKTconc LIFElapse LIFEmort NLcat MKTsp LIFEexp LIFElong MKTint LIFEdis LIFEcat MKTprop MKTfx Health LT = Health ST Health WC = adjustment for the risk -mitigating effect of future profit sharing

6 Life Lapse onerous of +50% increase/-50% decrease/30% run on the company Pillar 1 (std. formula) - Participating Life exp +10% increase in expenses Defined as a maximum of a % of reserves and % of earned premium for participating B op nl mkt def health life NLpr MKTeq MKTconc LIFElapse LIFEmort NLcat MKTsp LIFEexp LIFElong Mkt eq a negative equity shock of 45% Mkt int onerous of +55% or 40% fall in interest rates MKTint MKTprop MKTfx = LIFEdis Health ST Health WC LIFEcat Life mort +10% increase in mortality Life Cat 25% of capital at risk Health LT

7 Participating products Statutory reserves COG Risk margin Best estimate Technical provisions - Current Stat position Assessed Solvency 2 (QIS 4)

8 Participating products -Best estimate (with no MADs) -No surrender value floors - No S/H transfers +Current Costs +Explicit COGs +Risk Margin (Cost of Capital) Statutory reserves COG Risk margin Best estimate Technical provisions - Current Stat position Assessed Solvency 2 (QIS 4)

9 Participating products Formulaic Solvency margin (% reserves + % Solvency margin) mkt life op - (150%) - (100%) Statutory reserves COG Risk margin Best estimate Technical provisions - Current Stat position Assessed Solvency 2 (QIS 4)

10 Rest the same as participating business Pillar 1 (std. formula) - ULIPs Calibrated as 25% of administrative expenses incurred B op nl mkt def health life NLpr MKTeq MKTconc LIFElapse LIFEmort NLcat MKTsp LIFEexp LIFElong MKTint LIFEdis LIFEcat MKTprop MKTfx = Health ST Health WC Health LT

11 ULIP products - No surrender value floors +No allowance of noncontractual future premiums?? +Current Costs +Explicit COGs +Risk Margin (Cost of Capital) Statutory reserves COG Risk margin Best estimate Technical provisions - Current Stat position Assessed Solvency 2 (QIS 4)

12 ULIP products Formulaic Solvency margin (% reserves + % Solvency margin) - (150%) op life mkt - (100%) Statutory reserves COG Risk margin Best estimate Technical provisions - Current Stat position Assessed Solvency 2 (QIS 4)

13 QIS 4 assesment summary Participating Technical provisions ULIPs Technical provisions Overall impact Capital reduced Overall impact Capital reduced Holding excessive capital does not only mean S/H strain but a lower policyholder outcome and a lesser served public interest

14 Some other product forms Health products Technical provisions (Mortality/morbidity + Counterparty default) Overall impact likely to be a higher capital Guarantees

15 Other capital regimes ICA Alongside Solvency l approach Full value of assets included Best estimate liabilities Capital requirement based on internal model Confidence level 99.5% VaR No public disclosure Solvency II Replaces Solvency I May be asset eligibility and admissibility restrictions Best estimate plus risk margin Standard alternative to internal models Confidence level 99.5% VaR More disclosure

16 Other capital regimes US More product and risk specific Long term time horizon (liability run off) CTE measures for both Technical provisions and Solvency capital Solvency II All encompassing One year measure Technical provisions best estimate with a risk margin on top Confidence level 99.5% VaR More disclosure

17 Next steps Bracing ourselves for more impact/assessments on different capital regimes Industry wide participation in this consultative process Laying down a roadmap and framework with Principles and specifications More QIS Supervisory review and reporting processes

18 Disclosures Only unit linked business and participating business (without riders) in-force as of December 2007 was modeled. The results though detailed do not conform to the rigor required associated with the statutory reporting process Suitable proxy/simplifications have been assumed for purpose of this analysis. Options and guarantees have been valued using suitable closed form solutions. Shocks for purposes currently use parameters calibrated to EU markets. A special thanks to Ridhi Anand, Harneetika Allagh and Nakul Yadav for the modeling and projection work The views expressed here are towards the profession and do not necessarily reflect the opinion of my employer