2011 ANNUAL MEETING ASSEMBLÉE ANNUELLE 2011

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Spencer Golden
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1 2011 ANNUAL MEETING ASSEMBLÉE ANNUELLE 2011 June les 29 et 30 juin Session/Séance : #10 Solvency II Speaker(s)/Conférencier(s) : Dan Doyle

2 Background Bermuda Monetary Authority seeking equivalence Insights from PwC s advisory role - Develop capital risk factors for P&C and long-term (Life) insurers Major reinsurance jurisdiction PricewaterhouseCoopers LLP 2

3 Project Parameters Threshold TVaR(99) ~ VaR 99.6% over one year Constraints: o Simplistic existing regime o No consistent valuation standards o Multiple stakeholders o BMA resources o Time PricewaterhouseCoopers LLP 3

4 Two Major Concerns Variable Annuities (Seg funds) No consistent valuation standards o Long term approach Stress long term assumptions Confidence levels o One year stress (volatility + Cat) Use reserves as run off Adjustment for different valuation basis PricewaterhouseCoopers LLP 4

5 Approach to Bermuda Solvency Capital Requirements Approach : o Use other jurisdictions (MCCSR, S&P, QIS 5, A&M Best ) o Use first principles (mortality, longevity...) o Use P&C (asset, credit) o Other risks (lapse, liquidity, market) o Variable annuities Total Balance Sheet approach Allow for adjustments Allowed for approved models PricewaterhouseCoopers LLP 5

6 Bermuda Where: C fi C eq C LTint C LTmort C LTnp C LTr C LTmorb C LTlong C LTVA C LToth C LTcred C op = capital charge for fixed income investment risk; = capital charge for equity investment risk; = capital charge for interest and liquidity risk = capital charge for insurance risk - mortality = capital charge for insurance risk - non-proportional = capital charge for insurance risk - riders = capital charge for insurance risk - morbidity and disability = capital charge for insurance risk - longevity = capital charge for variable annuity guarantee risk = capital charge for other insurance risk = capital charge for credit risk; and = capital charge for operational risk PricewaterhouseCoopers LLP 6

7 Capital Requirement Model Why the square root? Operational Risk Asset defaults from P&C Lapse PricewaterhouseCoopers LLP 7

8 European Union QIS 5 - Results Source: Framework for a New Standard Approach to Setting Capital Requirement PricewaterhouseCoopers LLP 8

9 Capital Requirement Model Mortality Risk (C LTmort ) Use 3 SD s (99.86 percentile) for volatility Catastrophe 1/1000 Vary factor by size Used real data to derive Check against other regimes PricewaterhouseCoopers LLP 9

10 Bermuda Mortality Factors Tier NAR ($ Billions) Adjustable product/treaty Non-adjustable product/treaty Factor (per 1000 of NAR) 1 NAR <1B B - 5B B -10B B - 50B NAR > 50B PricewaterhouseCoopers LLP 10

11 Capital Requirement Model Longevity risk (C LTlong ) Annual claims volatility is minimal Catastrophe (medical breakthrough) Used in-force annuity data John Kingdom (UK)- modify improvement floors to estimate CTE(99) Factor 6% of reserves Check against other regimes (MCCSR 2%) PricewaterhouseCoopers LLP 11

12 Capital Requirement Model Variable Annuity Risk (C LTVA ) Use TBS approach CTE 99 1 years (CTE 97, 3 years) Use parameters (fund volatility, fund value and guarantee value to derive factors) Looked at (GMIB, GMWB, GMAB, GMDB, GEEB) No hedging BMA encourage companies to use models PricewaterhouseCoopers LLP 12

13 Bermuda VA Guarantee Type NAR factor Volatility (0%,10.0%] Volatility >10.0% Minimum Floor Factor Volatility Volatility (0%,10.0%] >10.0% Guaranteed Minimum Accumulation Benefit (GMAB): <5 years to maturity 65% 125% 4.00% 7.00% Guaranteed Minimum Accumulation Benefit (GMAB): >=5 years to maturity 20% 70% 1.50% 4.00% Guaranteed Minimum Death Benefit (GMDB): Return of Premium, Ratchet, Reset 4% 13% 0.25% 0.75% Guaranteed Minimum Death Benefit (GMDB): Enhanced Benefits (roll up) 12% 21% 0.75% 1.25% Guaranteed Minimum Income Benefit (GMIB) 100% 160% 5.00% 8.00% Guaranteed Minimum Withdrawal Benefit (GMWB) 60% 90% 3.25% 5.00% Guaranteed Enhanced Earnings Benefit (GEEB) 1% 17% 0.00% 1.00% The capital requirement for variable annuities is calculated to be: CLTVA ( TotalBS Re qi Re si, where i TotalBS Re = Total balance sheet requirement for variable annuity benefit i; q i Res i = Net Bermuda statutory reserves PricewaterhouseCoopers LLP 13

14 Summary Solvency target (100%)/ Operating target (120%) No factors can capture all risk Must be recourse for exceptions Many models available to help gage results PricewaterhouseCoopers LLP 14

15 Questions? This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

BERMUDA MONETARY AUTHORITY. The Bermuda Solvency Capital Requirement Long-Term 2010 Instruction Handbook

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