SAP Insurance Analyzer 1.0

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1 Application Help SAP Insurance Analyzer 1.0 Solvency Management PUBLIC Document Version: , May 30 Application Help SAP Insurance Analyzer 1.0 1

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3 Icons in Body Text Icon Meaning Caution Example Note Recommendation Syntax Additional icons are used in SAP Library documentation to help you identify different types of information at a glance. For more information, see Help on Help General Information Classes and Information Classes for Business Information Warehouse on the first page of any version of SAP Library. Typographic Conventions Type Style Example text Example text EXAMPLE TEXT Example text Example text <Example text> EXAMPLE TEXT Description Words or characters quoted from the screen. These include field names, screen titles, pushbuttons labels, menu names, menu paths, and menu options. Cross-references to other documentation. Emphasized words or phrases in body text, graphic titles, and table titles. Technical names of system objects. These include report names, program names, transaction codes, table names, and key concepts of a programming language when they are surrounded by body text, for example, SELECT and INCLUDE. Output on the screen. This includes file and directory names and their paths, messages, names of variables and parameters, source text, and names of installation, upgrade and database tools. Exact user entry. These are words or characters that you enter in the system exactly as they appear in the documentation. Variable user entry. Angle brackets indicate that you replace these words and characters with appropriate entries to make entries in the system. Keys on the keyboard, for example, F2 or ENTER. Application Help SAP Insurance Analyzer 1.0 3

4 Contents Solvency Management for Insurers... 5 Foundation Data for Solvency Management for Insurers... 6 Customizing for Solvency Management for Insurers... 8 Standard Objects of SAP Insurance Analyzer General Methods Close Main Risk Process Solvency II for All Risks Solvency II for Non-Life Underwriting Risk Solvency II for Counterparty Default Risk Solvency II for S_B_M: Solvency II Market Risk Solvency II for S_B_L: Solvency II Life Risk Overview of used templates, customizing tables and GMD classes per risk module... 1 Solvency II for Minimum Capital Requirement... 1 Solvency II for Risk Margin... 2 Overview of used templates, customizing tables and GMD classes for Minimum Capital Requirement and Risk Margin... 1 Application Help SAP Insurance Analyzer 1.0 4

5 Solvency Management for Insurers Use The SAP Insurance Analyzer Solvency Management for Insurers solution provides users with a risk framework including business content for the calculation of capital requirements based on the Solvency II guidelines issued by EIOPA. Unless otherwise specified, the following documentation relates to the December version of the Solvency II Technical Specifications that can be found here: _Revised_Technical_Specifications_for_the_Solvency_II_valuation_and_Solvency_Capital_Requirements_ calculations Part_I_.pdf The various processes supported by SAP Solvency Management for Insurers are shown here in overview: Prerequisites Foundation Data Customizing For more information, see the following two chapters. Application Help SAP Insurance Analyzer 1.0 5

6 Foundation Data for Solvency Management for Insurers Interest Rates To enable accounting as well as Solvency II calculations in the SAP Insurance Analyzer, yield curves should be defined. Within a particular yield curve one or more reference interest rates should be inserted. In case the object currency of all assets and liabilities considered in a particular Solvency II risk module equals the legal entity s balance currency, only one yield curve, corresponding to the legal entity s balance currency, has to be defined. Nonetheless several reference interest rates can be inserted for this yield curve, for example reference interest rates for different maturities and credit qualities. In case the object currency of one or more assets or liabilities in a particular Solvency II risk module is not the same as the legal entity s balance currency, yield curves for each distinct object currency should be defined, as well as reference interest rates associated with them. SAP Easy Access SAP Menu Financial Servies Foundation Market Data Interest Amongst others, specific values for a particular yield curve s reference interest rates at a particular date can be inserted into the SAP Insurance Analyzer by making use of the Non-SAP Data Management Solution. Specifically, in the transaction Data Management Inbound Services the step sequence FMD_IR Reference Interest Rates should be selected. SAP Easy Access SAP Menu Financial Services Insurance Analyzer Data Management Inbound Services Exchange Rates In case a particular Solvency II risk module entails assets or liabilities with an object currency different from the legal entity s balance currency, exchange rates between object currency and balance currency should be provided to enable accounting as well as Solvency II calculations. SAP Easy Access SAP Menu Financial Servies Foundation Market Data Exchange Rates Amongst others, exchange rates at a particular date can be added to the SAP Insurance Analyzer by making use of the Data Management Solution for non-sap systems. Specifically, in the transaction Data Management Inbound Services the step sequence FMD_FX Foreign Exchange Rates should be selected. SAP Easy Access SAP Menu Financial Services Insurance Analyzer Data Management Inbound Services Application Help SAP Insurance Analyzer 1.0 6

7 Market Prices Assets such as shares and bonds can be assigned market prices. SAP Easy Access SAP Menu Financial Servies Foundation Market Data Prices for Financial Instruments Amongst others, market prices for assets can be inserted in the SAP Insurance Analyzer by making use of the Data Management Solution for non-sap systems. Specifically, in the transaction Data Management Inbound Services the step sequence FMD_SEC Prices for FI should be selected. SAP Easy Access SAP Menu Financial Services Insurance Analyzer Data Management Inbound Services Note that the market price of an asset, having a particular currency, can only be assigned to a particular exchange when this currency is supported by this exchange. Market Data Scenarios Market data scenarios provide different scenarios of market parameters such as yield curves, exchange rates, etcetera. Different market data scenarios must be made available for the various Solvency II shocks, as defined in the December 2012 version of the Solvency II Technical Specifications, to be applied. SAP IMG Financial Services Foundation Market Data Market Data Scenarios Edit Market Data Scenarios Application Help SAP Insurance Analyzer 1.0 7

8 Customizing for Solvency Management for Insurers Flow Type External (estimated) cashflows are uploaded classified by their flow type. SAP IMG Financial Services Insurance Analyzer Source Data Layer Primary Objects Master Data Settings for Attributes Cash Flow Data Edit Flow Types for Flow As per standard business content six flow types for life insurance are provided: YIGB future guaranteed benefits YIDB future discretionary benefits YICO future expenses and other cash outflows YIPR future premiums YICI future other cash inflows YSGO cash flows relating to options and guarantees YSLF all of the above combined into a single flow type where the additional level of granularity is not required For non-life these flow types related to claim provisions are provided: YSCAD claim provision administration expenses YSCAL claim provision allocated LAE* YSCCA claim provision counterparty adjustment YSCCL claim provision claim YSCFE claim provision future premium existing business YSCOI claim provision other inflow YSCOO claim provision other outflow YSCRE claim provision reinsurance recoverable YSCUL claim provision unallocated LAE And for non-life these flow types related to premium provisions are provided: YSPAD premium provision administration expenses YSPAL premium provision allocated LAE (Loss Adjustment Expenses) YSPCA premium provision counterparty adjustment YSPCL premium provision claim YSPPE premium provision future premium existing business YSPFE premium provision future premium future business YSPOI premium provision other inflow YSPOO premium provision other outflow YSPRE premium provision reinsurance recoverable YSPUL premium provision unallocated LAE General Derivations General derivations for both life and non-life cashflows are defined in the SAP Insurance Analyzer. The Derivation Environment YIVALUPARA with corresponding Derivaton Module Application Help SAP Insurance Analyzer 1.0 8

9 YIVALUPARA is used. Different derivation steps for each life, non-life and reinsurance cashflows are available. SAP IMG Financial Services Insurance Analyzer Infrastructure Communication & Worklist Services Data Sources General Derivations Selection Group Selection groups are used in predefined parts of the SAP Insurance Analyzer where clientdependent solutions are necessary. One example of selection group usage is in order to select the relevant flow types to be used for calculation in parts of counterparty default and premium reserve risk. SAP IMG Financial Services Insurance Analyzer Solvency Management Edit Basic Settings for Selection Groups Step Sequence Various customizing options can be performed here, including: Defining the order of application of step sequences; Setting the cashflow start date type for liability cashflows; Application of filters and assignments for data aggregation and ad hoc reporting; Assigning the market data area. SAP IMG Financial Services Insurance Analyzer Processes & Methods Solvency Capital Requirement Main Risk Edit Sequence Steps Simplification Settings Desired simplification settings for the Solvency II calculations can be defined as well. For example, the simplified collateral calculation for counterparty default risk can be set per legal entity. SAP IMG Financial Services Insurance Analyzer Processes & Methods Solvency Capital Requirement Main Risk Edit Simplification Parameters External Data stored as Generic Market Data As part of the delivered business content: YDMX: correlation matrices YSPRLOBSSD: standard deviations per line of business YSCAZORIWE: zone weightings for natural catastrophe YSCASCATRF: loading factors for man-made catastrophe YSCATREGRF: region factors for natural catastrophe YSDRPDCQS: default probabilities per credit quality step YSDRPDSOR: default probabilities per solvency ratio YSMRSPBOND: spread risk factors for bonds Application Help SAP Insurance Analyzer 1.0 9

10 YSMRSPSTP: spread risk factors for structured products YSMCOCQS: concentration risk factors per credit quality step YSMCOSVR: concentration risk factors per solvency ratio YSMCRAMCR: absolute minimum capital requirements YSMCRNLSFC: factors per line of business for non-life insurance YSMCRLTPFC: factors per line of business for life insurance To be provided as customer specific external data: YIFLOW: external cashflows YSEPREMN12: earned premium estimates for upcoming 12 months YSRMLOBFAC: parameters for the risk margin calculation YSSCRADDON: Add-on capital requirement SAP Easy Access SAP Menu Financial Services Insurance Analyzer Source Data Layer Primary Objects Generic Market Data Application Help SAP Insurance Analyzer

11 Standard Objects of SAP Insurance Analyzer SAP Insurance Analyzer uses the standard objects already provided by SAP Bank Analyzer. These include Financial Transactions, Financial Instruments, Settlement Accounts, Positions, Business Transactions, Accounts and Physical Assets. Use Insurance specific additional templates include: Insurance Policy (Y40POL) Insurance Policy Contract (Y40POLC) Insurance Policy Contract Coverage (Y40POLCV) Insurance Policy Coverage Option (Y40POLCVO) Reinsurance Treaty (Y40TRTY) Reinsurance Treaty Period/Generation (Y40TRTYG) Reinsurance Treaty Section (Y40TRTYGS) Reinsurance Treaty Participation (Y40TRTYGSP) In addition, a new version, YIA for all insurance relevant objects such as bonds, shares, physical assets etc. is available for use by insurers. Structure Direct Insurance Application Help SAP Insurance Analyzer

12 Reinsurance Application Help SAP Insurance Analyzer

13 General Methods Close Use The General Methods Close Process is used to set the time stamp for all Financial Position Objects that will be used in the following Main Risk Process for the calculations on the single risk level. Financial Position Objects represent the to be processed Financial Transactions (e.g Policy, Treaty) and Financial Instruments (e.g. Bond, Share). Refer to SAP Easy Access menu Financial Services Insurance Analyzer Processes & Methods General Methods Close Application Help SAP Insurance Analyzer

14 Main Risk Process Use The Main Risk Process is used to calculate the Solvency Capital Requirement. The Process can be run for individual modules or in a single step. The following section will describe both. Refer to SAP Easy Access menu Financial Services Insurance Analyzer Processes & Methods Solvency II Main Risk Process Application Help SAP Insurance Analyzer

15 Solvency II for All Risks Runs all step sequences relevant for processing Solvency calculations Prerequisites See above regarding foundation data, customizing settings and generic market data. The following processes must or can be run prior to the Solvency II processes. Process Description Optional or mandatory Data Management Upload and Inbound Services Run reconciliation report Close SDL Timestamp Run daily accounting processing including post external Business Transactions Update secondary Business Transactions Run Key Date Valuation Transfer master and flow data from SAP and non-sap systems External business transactions are posted from the SDL to Accounting to a position clearing account Update secondary picks up the posted business transactions from step (2) and performs additional internal accounting calculations as necessary. Financial positions valued as at key date Optional Mandatory Mandatory Mandatory Required for parts of Solvency II non-life calculation Process 1. Run General Methods Close Set time stamp for all Financial Position Objects that will be used in the following Main Risk Process for the calculations on the single risk level. Financial Position Objects represent the to be processed Financial Transactions (e.g Policy, Treaty) and Financial Instruments (e.g. Bond, Share). 2. Solvency II Main Risk Process a. Mass Processing for calculation on Single Risk Level Look-Through Calculation of the fair (market) value and other parameters (e.g duration) under best estimate and shocked scenarios for market & underwriting (Sub-) Risks as well as Counterparty Default Risk according to EIOPA Technical Specifiacations (see Background) Historized saving in the YSMAINRISK RDL Application Help SAP Insurance Analyzer

16 b. Post Processing Calculation of Net Asset Values for all market & underwriting (Sub-) Risks as well as Counterparty Default Risk according to EIOPA Technical Specifiacations (see Background) Aggregation to BSCR Calculation of MCR & Risk Margin Optional preparation for Pillar 3 reporting (AREP including sample content only) Historized saving in YSMAINAG RDL Application Help SAP Insurance Analyzer

17 Solvency II for Non-Life Underwriting Risk Solvency II Non-Life Underwriting Risk consists of three modules: premium reserve risk, catastrophe risk and lapse risk. The modules premium reserve risk and catastrophe risk are currently supported by the Insurance Analyzer. S_B_N_PR: Premium Reserve Risk The premium reserve risk module applies to all policies that belong to a Solvency II non-life line of business. S_B_N_CA: Catastrophe Risk The catastrophe risk module applies to all policies that belong to an appropriate Solvency II nonlife line of business or where an appropriate sub-line of business applied (e.g. marine platform). S_B_N_LA: Lapse Risk The lapse risk module applies to all policies that belong to a Solvency II non-life line of business. No calculations have been implemented in this area for version 1.0 of the Insurance Analyzer. Application Help SAP Insurance Analyzer

18 Solvency II for Counterparty Default Risk S_B_D: Counterparty Default Risk The counterparty default risk module is applied to all business partners with participations and non-zero recoverables in reinsurance treaties. Application Help SAP Insurance Analyzer

19 Solvency II for S_B_M: Solvency II Market Risk Solvency II market risk consists of seven underlying risk modules: interest rate risk, equity risk, property risk, spread risk, currency risk, concentration risk. All underlying risk modules, except for counter-cyclical premium risk, are supported by the SAP Insurance Analyzer. Besides supporting the underlying risk modules, the SAP Insurance Analyzer also supports the Solvency II market risk module itself. Every Solvency II market risk underlying risk module has its own prerequisites. However, there are also some general prerequisites, described before in the section Prerequisites, applying to all of the underlying risk modules. The prerequisites of the Solvency II market risk module are simply equal to the general prerequisites combined with the prerequisites of all the Solvency II market risk underlying risk modules and will therefore not be described explicitly. S_B_M_IN: Interest Rate Risk The interest rate risk module applies to all assets and liabilities for which the net asset value (i.e. assets minus liabilities) is sensitive to changes in the term structure of interest rates or interest rate volatility. S_B_M_EQ: Equity Risk The equity risk module applies to all assets and liabilities for which the net asset value (i.e. assets minus liabilities) is sensitive to changes in the level or volatility of market prices for equities. S_B_M_PR: Property Risk The property risk module applies to all assets and liabilities for which the net asset value (i.e. assets minus liabilities) is sensitive to changes in the level or volatility of property. S_B_M_SP: Spread Risk The spread risk module applies to all assets and liabilities for which the net asset value (i.e. assets minus liabilities) is sensitive to changes in the level or volatility of credit spread over the risk-free interest rate term structure. When modeling an asset representing a bond or loan other than a residential mortgage loan issued by an insurance or reinsurance undertaking, it is necessary to attach a business partner in the role of issuer to the asset by means of a partner relationship. In the business partner s attributes it is necessary to specify the S2 BP Classification as well as the S2 BP MCR Type to ensure that the right shock factors will be applied to the asset. The liability template that is supported by the SAP Insurance Analyzer for the spread risk module is Y40POL with corresponding template version YIA. To be more precise, for liabilities, the spread risk module is supported only for the template Y40POLCV which is a child of the template Y40POLC which in its turn is a child of the template Y40POL. Application Help SAP Insurance Analyzer

20 S_B_M_CU: Currency Risk The currency risk module applies to all assets and liabilities for which the net asset value (i.e. assets minus liabilities) is sensitive to changes in the level or volatility of currency exchange rates. Note that only an asset or liability that has an object currency not equal to the legal entity s balance currency can be taken into account by the currency risk module. S_B_M_CO: Concentration Risk The concentration risk module applies to all assets considered in the following Solvency II market risk underlying modules: equity risk, property risk and spread risk. The concentration risk module excludes all assets covered by the Solvency II default risk module in order to avoid any overlap between both elements of the standard calculation of the SCR. When modeling an asset relevant for concentration risk, it is necessary to attach a business partner in the role of issuer to the asset by means of a partner relationship. In the business partner s attributes it is necessary to specify the S2 BP Classification, the S2 BP MCR Type, the S2 MR Co. Solv. Ratio and the S2 MR Concentr. Type to ensure that the right shock factors will be applied to the asset. Application Help SAP Insurance Analyzer

21 Solvency II for S_B_L: Solvency II Life Risk Solvency II life risk covers the risk arising from the underwriting of life insurance, associated with both the perils covered and the process followed in the conduct of the business. The life underwriting risk module consists of seven sub-modules, i.e. mortality risk, longevity risk, disability/morbidity risk, lapse risk, expense risk, revision risk and catastrophe risk. All these subrisk modules are supported by SAP Insurance Analyzer. In SAP Insurance Analyzer, a simplified approach is used to perform the calculation of the best estimate of technical provisions, which is aligned to the Cash-Flows Model and based on the estimated future cash flows. They should be delivered to the SAP Insurance Analyzer from external actuarial systems, e.g.: prophet. These cash flows should not include the amounts recoverable from reinsurance contracts and special purpose vehicles and the projection horizon should cover the full lifetime of all the cash in- and out-flows required to setlle the obligations related to existing (re)insurance contracts on the date of valuation. Application Help SAP Insurance Analyzer

22 Y40POL Y40POLC Y40POLCV Y40POLCVO Y40TRTY Y40TRTYG Y40TRTYGS Y40TRTYGSP S41SHARE S41BONDEX S48PHYSACC Edit Flow Types General Derivations Edit Sequence Steps Selection Groups Simplification Parameters YDMX YIFLOW YSEPREMN12 YSPRLOBSSD YSCASCATRF YSCATREGRF YSCAZORIWE YSDRPDCQS YSDRPDSOR YSMRSPBOND YSMRSPSTP YSMCOCQS YSMCOSVR YSMCRAMCR YSMCRNLSFC YSMCRLTPFC YSRMLOBFAC YSSCRADDON Overview of used templates, customizing tables and GMD classes per risk module Module Templates Customizing Generic Market Data S_B_N_PR S_B_N_CA S_B_N_LA None S_B_D S_B_M_IN S_B_M_EQ S_B_M_PR S_B_M_SP S_B_M_CU S_B_M_CO S_B_L * Use of S48PHYSACC is optional for premium reserve risk and property risk. Application Help SAP Insurance Analyzer 1.0 1

23 Solvency II for Minimum Capital Requirement Solvency II requires that (re)insurance undertakings hold eligible basic own funds, to cover the Minimum Capital Requirement (MCR). SAP Insurance Analyzer covers the calculation of MCR not only for non-life or life insurance undertakings, but also for composite undertakings, where the notional non-life and life MCR should also be calculated. The calculation of MCR is based on the aggregated results from all life and non-life risk modules, e.g.: technical provisions for non-life obligations in the line of business Motor vehicle liability insurance and proportional reinsurance. Information about these risk modules has already been described in previous sections. The MCR-specific prerequisites are as follows: The MCR is subject to an absolute floor (AMCR) which depends on the nature of the undertaking. The values of AMCR are given by EIOPA: EUR for non-life insurance undertakings, EUR for life insurance undertakings, EUR for reinsurance undertakings, EUR for composite undertakings. These values are available in the class YSMCRAMCR of Generic Market Data. Application Help SAP Insurance Analyzer 1.0 1

24 Solvency II for Risk Margin The risk margin is a part of technical provisions in order to ensure that the value of technical provisions is equivalent to the amount that (re)insurance undertakings would be expected to require in order to take over and meet the (re)insurance obligations. It should be calculated by determining the cost of providing an amount of eligible own funds equal to the SCR necessary to support the (re)insurance obligations over the lifetime thereof. SAP Insurance Analyzer supports the level 5 of the hierarchy of simplification methods for projecting future SCR, i.e.: the risk margin is approximated by calculating it as a percentage of the best estimate technical provisions net of reinsurance. The calculation of the risk margin is included in the risk module of MCR in the SAP Insurance Analyzer. Similar to MCR, the calculation of risk margin is based on the aggregated results from all other risk modules. Information about these risk modules has already been described in the previous sections. Application Help SAP Insurance Analyzer 1.0 2

25 Y40POL Y40POLC Y40POLCV Y40POLCVO Y40TRTY Y40TRTYG Y40TRTYGS Y40TRTYGSP S41SHARE S41BONDEX S48PHYSACC Edit Flow Types General Derivations Edit Sequence Steps Selection Groups Simplification Parameters YDMX YIFLOW YSEPREMN12 YSPRLOBSSD YSCASCATRF YSCATREGRF YSCAZORIWE YSDRPDCQS YSDRPDSOR YSMRSPBOND YSMRSPSTP YSMCOCQS YSMCOSVR YSMCRAMCR YSMCRNLSFC YSMCRLTPFC YSRMLOBFAC YSSCRADDON Overview of used templates, customizing tables and GMD classes for Minimum Capital Requirement and Risk Margin Module Templates Customizing GMD MCR As required underlying risk modules Risk Margin As required underlying risk modules Application Help SAP Insurance Analyzer 1.0 1