Appointed Actuary Symposium 2007 Solvency II Update

Transcription

1 watsonwyatt.com Appointed Actuary Symposium 2007 Solvency II Update Naomi Burger 7 November 2007

2 Agenda Overview Pillar 1 - Capital requirements Pillar 2 - Supervisory review Pillar 3 - Disclosure Conclusions 2

3 The existing solvency regime In place since First EU Directive in 1970s Only sets very high level requirements which are implemented in more detail by local regulations Issues Lack of harmonisation across Europe Doesn t necessarily reflect underlying risk exposures Lack of alignment between risk and capital requirements (e.g. no allowance for diversification) Limited incentive for good risk management Solvency II project initiated in

4 How is Solvency II being developed? Lamfalussy process European Parliament and Council of Ministers Consultation/influence: -CRO Forum -CEA (ABI) -IASB -IAIS -Group Consultatif EU Commission (internal Markets Division) / EIOPC (UK Treasury) Calls for advice CEIOPS (FSA) Proposals must be accompanied by impact assessment 4

5 Current Solvency II timeline Timetable QIS3 QIS4 Framework Directive QIS5 Implementing measures Recent developments QIS3 completed Draft framework directive published Updated timetable CEIOPS advice on groups Advice on MCR, SCR etc Shadow application 5

6 Agenda Overview Pillar 1 - Capital requirements Pillar 2 - Supervisory review Pillar 3 - Disclosure Conclusions 6

7 Pillar 1 Basic structure Inadmissible assets/ ineligible capital Eligible capital Market value of assets Free Capital Adjusted SCR MV liabilities (hedgeable) SCR MCR Supervisory capital add-on Solvency Capital Requirement Minimum Capital Requirement Risk margin (CoC approach) Best estimate liability (nonhedgeable) Technical provisions Other liabilities 7

8 Solvency II - Asset valuation Tradable assets at market value Non-tradable assets "valued prudently" No limits on which types of assets held Market value of assets MV liabilities (hedgeable) Free Capital Adjusted SCR SCR MCR Risk margin BEL Other liabilities 8

9 Solvency II Liability valuation Hedgeable risks valued market consistently Non-hedgeable risks valued at best estimate plus risk margin Future discretionary benefits generally included as liabilities Discount rate based on government bond yield curve or swap curve if more appropriate Stochastic calculation of options and guarantees Market value of assets MV liabilities (hedgeable) Free Capital Adjusted SCR SCR MCR Risk margin BEL Other liabilities 9

10 Solvency II Risk margins Cost of capital approach Time SCR i Cost of Capital Capital charges Future SCRs include all risks in year 1 but exclude market and credit risk from year 2 onwards Discount factor 0 SCR 0 * 6% = Cap charge 0 * D 0 1 SCR 1 * 6% = Cap charge 1 * D 1 2 SCR 2 * 6% = Cap charge 2 * D ω SCR ω * 6% = Cap charge ω * D ω Market value of assets Free Capital Adjusted SCR MV liabilities (hedgeable) SCR MCR Risk margin BEL Other liabilities 10

11 Eligible capital Quality Nature On balance sheet (basic own funds) High Tier 1 Tier 2 Medium Tier 2 Tier 3 Low Tier 3 Off balance sheet (ancillary own funds) Solvency tests T1 + T2 + T3 SCR T1 + T2 MCR For SCR For MCR 0.5 x (T1 + T2) T3 2 x T1 T2 + T3 T1 T2 11

12 Minimum Capital Requirement (MCR) MCR calibrated to 80 to 90% VaR over one year, but using a simple factor-based formula RPS MCR AMCR Free Capital Adjusted SCR SCR MCR mkt MCR nl MCR life Special Market value of assets RPS reduction for profit sharing based on comparison of reserves to guaranteed surrender values Correlations as for SCR Absolute MCR (AMCR) floor value Testing alternative approach of 33% of the SCR Transitional period (1 year) to allow time to cover MCR MV liabilities (hedgeable) MCR Risk margin BEL Other liabilities 12

13 Solvency Capital Requirement (SCR) SCR = BSCR + SCR op Calibrated to 99.5% 1 year VaR SCR BSCR SCR op = adjustment for the risk mitigating effect of future profit sharing SCR nl SCR mkt SCR def SCR health SCR life NL pr MKT eq Life lapse Life mort NL cat MKT sp MKT conc Life exp Life long MKT int Life dis Life cat MKT prop MKT fx Source: QIS3 technical specification 13

14 Example stress tests 10 year rates = +42%/-34% Global equity return = -32% Other equity return = -45% Real estate return = -20% AAA credit spreads = +0.25% A credit spreads = +1.03% Mortality = +10% Longevity = -25% Lapses = +/- 50% Expenses = +10% & +1% pa Disability = +35% (year 1), +25% (thereafter) Catastrophe = 0.15% deaths & 75% of VA policies lapse Source: QIS3 technical specification Stress test calibration continues 14

15 Aggregation of risks Factors prescribed CorrSCR SCR mkt SCR def SCR life SCR health SCR nl SCR mkt 1 SCR def SCR life SCR health SCR nl Source: Draft framework directive Favours a diverse portfolio of risks 15

16 Market risk - correlation matrices Factors prescribed Correlation matrix continuing to change CorrMkt Mkt int Mkt eq Mkt prop Mkt sp Mkt conc Mkt fx Mkt int 1 Mkt eq 0.75/0 1 Mkt prop 0.75/0.5 1/ Mkt sp Mkt conc Mkt fx Source: QIS3 technical specification and CEIOPS' "Pillar I issues further advice" Critical issue for some business lines 16

17 Agenda Overview Pillar 1 - Capital requirements Pillar 2 - Supervisory review Pillar 3 - Disclosure Conclusions 17

18 Pillar 2 Supervisory Review Process ( SRP ) should review: SCR Own Risk Self Assessment ( ORSA ) Risk management & internal systems and controls As part of the SRP the insurer will provide: Policy on solvency capital Analysis of differences between internal capital requirement and standard model SCR Multi-year perspective assessment Capital add-ons based on events beyond one year time horizon will be "neither routinely nor commonly applied" Detailed review => strain on supervisors 18

19 Agenda Pillar 1 - Capital requirements Pillar 2 - Supervisory review Pillar 3 - Disclosure Conclusions 19

20 Pillar 3 advice Key principles for disclosures Include information necessary for financial condition assessment by the supervisor Public disclosure to support transparency and market discipline Timely, accurate and readily understandable Supported by formal policy to assess appropriateness of disclosures Group and solo information provided where relevant Can be fulfilled by other disclosures Public disclosure on an annual basis as a minimum, regulatory disclosure frequency varies by item Total SCR and any capital add-on imposed by the supervisor to be disclosed (possibly 5 year moratorium on separate disclosures) Breaches of MCR and material breaches of the SCR to be publicly disclosed immediately Difficult to estimate the market impact 20

21 Agenda Overview Pillar 1 - Capital requirements Pillar 2 - Supervisory review Pillar 3 - Disclosure Conclusions 21

22 Conclusions Significant modeling enhancements are required Better risk quantification and management will follow Concerns over: Initial impact Systemic risk and volatility Complexity & cost for small firms Beginning to have wider impact Influencing thinking of non-eu regulators and rating agencies Interaction with economic capital methodologies 22

23 Questions 23