Syndicate Capital Briefing

Transcription

1 Syndicate Capital Briefing 23/01/2017

2 Agenda Capital reviews 2016 Lloyd s capital review process Looking forward March and beyond Capital results for 2017 YoA Questions 2

3 Capital reviews 2016 How did it go? 3

4 Year of transition New Lloyd s Actuary Richard Rodriguez started in March 2016 No July submission of LCR Following feedback from the market Major model change Reviewed through the year More changes next year 4

5 Capital reviews 2016 Objectives 5

6 What were the key objectives for 2017 YOA? Successful transition to one submission format Major model change submissions Link with SCR reviews Key review period: September to November CPG aims to: offer a joined up review process with clear points of contact ensure CEOs of MAs are clear on Lloyd s view throughout use virtual teams (MRC lead team on capital) provide written feedback at specified points during the review ensure consistency with PRA Guidance; risk margin and contract boundaries adjustment initiate early awareness and approval of model development through major model change submissions 6

7 Overall it went well Generally positive feedback Peter Montanaro (CPG Chair) has written to all MAs Great buy in from the market on the process No major changes to the quantitative requirements Value of early engagement More efficient and effective process 7

8 Room for improvement? Many resubmissions this year More information to look at in the same timeframe Major model change applications through the year Not always time/resource efficient RI contract boundary adjustment was done on old/new basis 2018 YoA only on new basis Heavy burden on MAs and centre Reviewing process for 2018 YoA Same objectives 8

9 The reviews sit alongside the SAG process: Similar to last year Standards Assurance Group (SAG) assesses agents regulatory compliance SAG Terms of Reference: Assess MA compliance with Lloyd's Standards CPG Terms of Reference: Approve all Business plans & Syndicate capital requirements Capital and Planning Group (CPG) oversees Lloyd s capital setting and syndicate business planning processes Assess compliance with SII internal model tests and standards Authorise the use of syndicate internal models for capital setting & provide input to CPG Approve any Franchise Guideline dispensations Oversight and decision making CPG will make decision on prudential measures based on SAG input: Capital loadings Business plan restrictions Authorise syndicate major model changes RISK ASSURANCE FUNCTION MRC Technical Committee technical review TEAMS Review work & agent interaction Agent contact 9

10 Additional Features of the review process Second pair of eyes, SCR review for each syndicate was peer reviewed by another actuary SAG Terms of Reference: Assess MA compliance with Lloyd's Standards CPG Terms of Reference: Approve all Business plans & Syndicate capital requirements MRC technical committee, every peer reviewed CPG paper was discussed in detail by a panel of actuaries before CPG discussion This ensured consistency in SCR/validation reviews Assess compliance with SII internal model tests and standards Authorise the use of syndicate internal models for capital setting & provide input to CPG Authorise syndicate major model changes Approve any Franchise Guideline dispensations Oversight and decision making RISK ASSURANCE FUNCTION MRC Technical Committee technical review TEAMS Review work & agent interaction Agent contact 10

11 Where are we on validation? Validation reports used to aid capital reviews MAs faced challenge in validating the final number, due to time constraints Validation reports followed a good structure Board report covered key findings Technical report/appendices covered Feedback has now been sent to the market 11

12 Common validation issues One year risk: Validation has improved, but not yet adequate in some cases Quantitative tests can be included Sensitivity tests Scenario tests Reverse stress tests Alternatives considered Comparison with Standard Formula Qualitative assessment adds value too More importantly, One year SCR often not highlighted in the Board report 12

13 Common validation issues Reverse stress tests: Inconsistency in the test definition and design Challenges are: Quantifying ORSA scenarios Determining return period for the combined scenarios Selection of the collar of simulations around expert s return period Uses are: Validation of the final distribution Consideration of all the underlying dependencies 13

14 Common issues - Dependency Parameterisation Correlation coefficient/drivers/dependency structure Expert judgement unavoidable Rationale should be explained clearly Validation Expert judgements are often justified, not validated Purpose of different validation tests Sensitivity/stress tests how bad can it get? Scenario test when will it fail? Reverse stress test how does all the dependency structures work together? Alternative assumptions should be modelled, explanation not enough Joint exceedance probabilities explain the outcome Input v output correlation consider dampening effect in output correlation matrix Difficulty in applying dependencies where distributions sparse (e.g. RI credit risk defaults) 14

15 Common issues - Dependency Possible alternatives Aggregate data, model and compare this may not necessarily pick up tail dependency Backtest group data for similar pairs to increase data points Compare dependency at the tail and also the body of distribution Explain association through clarification of drivers Diversification benefits are pre / post diversification contributions consistent with the intended dependency structure? Example: Consider what parts (percentiles) of the stand-alone distributions contribute to the combined 99.5th (or other) percentile May indicate where the key considerations for correlations are (i.e. is it in extreme tail or other parts of the distribution ) Clearly this might be affected by the way the dependency structure has been modelled Consider what dependency you expect to see at different parts of the distribution to inform the decision on appropriate copula Might be interesting to see how this changes if different copulas are used 15

16 RI contract boundaries TPs increase, SCRs and ECU reduction Previously ECU SCR Q2 TPs This has been sufficiently discussed! Impact reversed by adding back the difference: 1.35SCR Q2TPs Contract boundaries change Adjusted position 16

17 Lloyd s process 17

18 Lloyd s review process Analysis of Change EXAMPLE 18

19 LCR edition 1 5 change % change Exposure and Risk Margin Premium 1 [Note 1] % Premium 2 [Note 2] % Reserves 1 [Note 3] % Reserves 2 [Note 4] % Premium 1 + 1/2 * Reserves % Premium 2 + 1/2 * Reserves % Risk margin (RM) % 1:200 gross claims less 1:200 net claims [Note 5] % Available assets [Note 6] % B. ULTIMATE RISK SCR 2016 Sep 2016 Mar 2016 Sep vs Mar Significant movements between 2016 Sep and 2016 Mar Mean % SCR (submitted) % Undiversified % Diversification credit ( ) % Diversification credit (%) 16.9% 20.7% % Loading [Note 7] SCR (agreed) % SCR (agreed) + RM % Mean vs. Premium 1 + 1/2 * Reserves 1-9.3% -6.6% 42% Mean vs. exposure has increased by more than 5% SCR (agreed) + RM vs. Premium 1 + 1/2 * Reserves % 44.5% 10% 1:200 has increased by more than 5% SCR (agreed) + RM vs. Premium 2 + 1/2 * Reserves % 47.8% -4% Insurance risk Mean % The 1:200 has decreased but the mean profit has not 1: % 1:200 undiversified % Diversification credit ( ) % Diversification credit (%) 11.1% 19.5% -43% 1:200 + RM % Mean vs. Premium 1 + 1/2 * Reserves 1-6.6% -5.0% 32% Mean vs. exposure has increased by more than 5% 1:200 + RM vs. Premium 1 + 1/2 Reserves % 43.6% -7% 1:200 has decreased by more than 5% 1:200 + RM vs. Premium 2 + 1/2 Reserves % 46.9% -18% Premium risk Mean % 1: % Mean vs. Premium 1-6.5% -7.4% -12% Mean vs. exposure has decreased by more than 5% 1:200 vs. Premium % 38.4% 65% 1:200 has increased by more than 5% 1:200 vs. Premium % 39.1% 33% Reserve risk A. EXPOSURE & RISK MARGIN Mean % 1: % 1:200 + Risk margin % Mean vs. Reserves % -12.3% -13% Mean vs. exposure has decreased by more than 5% 1:200 vs. Reserves % 9.3% 41% 1:200 + RM vs. Reserves % 21.6% 10% 1:200 has increased by more than 5% 1:200 + RM vs. Reserves % 24.4% 5% 19

20 Supplementary Questionnaire Class Name Net Premium Mean Net Claims CAT Exposed ULRs including Catastrophe Mean 50th 75th 90th 95th 99.5th A Y 58% 39% 60% 75% 85% 92% B Y 75% 57% 65% 74% 79% 95% C N 63% 36% 78% 149% 227% 436% D N 73% 64% 75% 86% 93% 114% E Y 25% 26% 32% 45% 48% 55% F Y 49% 54% 66% 77% 85% 106% G Y 55% 65% 75% 78% 81% 85% H N 82% 72% 92% 113% 126% 165% I N 77% 87% 95% 120% 132% 177% J Y 54% 73% 83% 93% 100% 118% K Y 74% 78% 89% 102% 113% 189% L Y 28% 58% 68% 79% 88% 124% All other Total % 74% 88% 91% 99% 103% 20

21 Lloyd s review process Analysis of Change Supplementary Questionnaire Documentation Validation report Discussion with the agent Challenges Documentation often incomplete Sign posting risk of missing out on key details Documentation structure - pack doesn t need to be updated annually, but details are still required 21

22 What happens in March & beyond? 22

23 Specific re-submissions in March For a number of agents the CPG or SAG feedback was to require a resubmission in March either a material point to resolve; or agent proposed as work not complete not every case was where a capital loading applied we are currently working with agents on these For everyone else MB Y5013 applies: If circumstances change, leading to a material change in SBF and/or uscr, by the end of February 2017, then a resubmission of relevant returns must be made by 02 March

24 High level principles of the March reassessments Highlights of SCR Re-assessments: Resubmissions for material (greater than 10%) movements excluding FX/risk in the SCR to ultimate. Also resubmit the revised one-year SCR For any SAG related issues you may wish to make a resubmission this is fine but please contact us if planning on doing this Resubmissions must be made at the year-end exchange rates (US$:GBP rate was 1.24), see MB Y5053 for all currencies LCRs should be re-submitted by 1pm, 2 March 2017 Where no resubmission is required and the current SCR is still valid, agents should confirm this to Lloyd s via QMC form 990 Remember: We will adjust ECAs for year end exchange rates, movements in risk margins and RI CB changes for mid-year CiL 24

25 Our mutual interest Similar review process Business as usual/live SII environment Less time spent reviewing/addressing feedback Fewer model changes or CPG loadings Revised major model change process Guidance amended to ensure an efficient process Feedback from January workshop to be considered No major changes in LCR submission planned 25

26 A way forward? Deep dive reviews To allow better understanding of agent model Faster and more efficient review in September More quantitative information on case-by-case basis Syndicate capability oversight team to allow better engagement No relaxation of regulatory requirement planned BAU validation 3 year plan for deep dive validation Commerciality of the market will continue be the focus Model drift Lloyd s Internal Model (LIM) Syndicate specific information LIM validation 26

27 Capital Results for 2017 YOA 27

28 Capital vs. exposure has increased Economic Capital Assessment vs Gross Premium ECA as a Percentage of GP Year of Account Notes: For Active Syndicates ONLY GP: Gross Written Premium net of Special Purpose Arrangement premium. ECA: Excludes the reserve margin credits allowed in 2010/2011/ / 2015/ 2016 YOA: GGP & ECA is as at mid-year coming into line (CIL) 28

29 and CPG loadings have increased m Ultimate Loading No. of Syndicates YoA YoA 29

30 Drivers of the movements Review process: revised SCRs based on feedback on Soft market/lower profitability FX rate Vendor model updates Exposure change/other: Mostly RI contract boundary change and changes to plan or RI (FX excluded) CPG loadings/ulr loading: Operational risk loadings relating to risk management and non modelling issues Premium and reserve risk issues ULR difference with plan Other (late plan changes, model validation, etc.) 30

31 Detailed results 31

32 Results for 2017 YOA: user beware LCR risks vs. exposure: an update from last year Based on November 2016 CiL and November 2017 CiL data Keep in mind the caveats / limitations this is a partial selection of metrics the exposure measures are not optimal gaps/jumps may occur near the percentiles shown excludes new syndicates means are volume weighted 32

33 Results for 2017 YOA: user beware Remember: distance from the market mean is not a validation test Common theme for 2017 YoA vs YoA: means / lower percentiles mostly stable upper percentiles have increased for most cases 33

34 Ultimate SCR vs. net premium Ult SCR: F309 Net PI: F313 table 1 col D row 1 34

35 Ultimate SCR vs. exposure (net premium + ½ net reserves) Ult SCR: F309 Exposure: Net PI + 0.5*Net Reserves 35

36 Premium risk vs. net premium Ult premium risk (pre diversification): F309 Net PI: F313 table 1 col D row 1 36

37 Reserve risk + risk margin vs. reserves Reserve risk (pre Diversification) F309 Risk margin: F312 col P total Net Reserves: F312 cols H+I-J Total less Proposed YOA 37

38 Market risk vs. available assets Market risk (pre Diversification): F309 Available assets: F312 col Q Total less Proposed YOA + F313 table 1 col D row 1 38

39 RI credit risk vs. 1:200 recoveries RI credit risk (pre Diversification): F309 1:200 Recoveries (approximated): F311 table 1 col G row 4 less row 3 39

40 Operational risk vs. net premium Operational risk (pre Diversification): F309 Net PI: F313 table 1 col D row 1 40

41 SCR(1) vs. SCR(U) + RM Ult SCR and one year SCR: F309 Risk margin: F312 col P total 41

42 SCR(1) vs. SCR(U) + RM 140% Market average One year SCR / (Ultimate SCR + risk margin) 120% 100% 80% 60% 40% 20% 0% Expect more scrutiny here Syndicates 42

43 SCR(1) vs. SCR(U) + RM 140% One year SCR / (Ultimate SCR + risk margin) 120% 100% 80% 60% 40% 20% 0% Syndicates Note that the sample of syndicates for this graph is the submitted LCR, so excludes any syndicates based on the Lloyd s syndicate benchmark model. Market average 2017 YoA 2016 YoA 43

44 One year emergence Greater scrutiny continued in 2016 CPG loadings: 178m one year vs. 143m ultimate (approx) RI contract boundaries did not impact one year SCR PRA continues to give close scrutiny Lloyd s approach on emergence patterns: Mechanical approaches (high or low) not advisable Provide justification if <70% or >90% This is a challenging area and an important one 44

45 Questions 45

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