UK Regulatory Framework: Realistic Balance Sheets and ICAS

Transcription

1 UK Regulatory Framework: Realistic Balance Sheets and ICAS Joint Regional Seminar Current Topics in Financial Reporting Kuala Lumpur: June Taipei: June Hong Kong: 28 June Beijing: June Mark Saunders, FIA, FASI, FSA Principal & Managing Director, Asia Tillinghast Financial Services Business Leader, Asia-Pacific Tillinghast, a business of Towers Perrin <copyright> 2006 Towers Perrin

2 Mark V.T. Saunders, FIA, FASI, FSA Mark Saunders is a Principal of Towers Perrin and Managing Director of Tillinghast s business in Asia-Pacific. He is a member of the Leadership Council of Tillinghast. He has been working in the insurance industry since the 1980 s and in Asia since He moved to Hong Kong in Before joining Tillinghast he was Asian Regional CEO and Executive Board Member of international life insurance operations of a UK-parented insurer including their joint venture in Korea. He has been involved in more than 100 actuarial appraisal value assessments of Asian insurers and is widely regarded as a leading practitioner in value determination and Mergers & Acquisitions of insurers in Asia. High profile deals in the public domain include: He provided the Actuarial Expert Opinion in the Prospectuses for the ground-breaking IPO of China Life in New York and Hong Kong and was also the lead actuarial consultant in the capital raising exercise for another leading stateowned insurer, Korea Life. He was also the Expert Actuary for the Actuarial Consulting Report in Great Eastern s Circular to Shareholders in relation to OCBC s voluntary unconditional offer. Mark has extensive experience in the operations of life insurance companies around the world. With his in-depth knowledge of Asian insurers and markets he has helped a number of domestic and international insurers in critical areas of acquisition, restructuring, capital raising, market entry (and exit), strategy, business operations, partnerships, product development, sales, distribution, bancassurance, financial and risk and capital management (including ALM), financial and regulatory reporting, actuarial, training and improving business performance Towers Perrin 2

3 Mark V.T. Saunders, FIA, FASI, FSA He has been the Appointed Actuary for eight insurers in Hong Kong, Singapore and Vietnam as well as Appointed Actuary Peer Reviewer for six companies. Also, he has provided Independent Actuary opinions for High Court sanctioned insurance business transfers and successful Expert Witness testimonials in the Court of First Instance. Mark has undertaken memberships of various insurance-related, actuarial, regulatory and professional Committees such as: Member of the Insurance Advisory Committee of the Hong Kong SAR, a Statutory body overseeing the insurance industry and established under the Insurance Companies Ordinance Member of the Hong Kong SAR Securities and Futures Commission Committee on Investment-Linked Assurance and Pooled Retirement Funds Member of the China Insurance Regulatory Commission ( CIRC ) Task Force for Embedded Value Reporting He is a regular facilitator of training sessions and speaker and chair at conferences and seminars as well as author of numerous articles and papers relating to the Asian insurance industry and has also made the occasional TV appearance! Mark is a Fellow of the Institute of Actuaries (UK), a Fellow of the Actuarial Society of India, a Fellow of the Society of Actuaries (US), a Fellow member of the Actuarial Society of Hong Kong and a Fellow member of the Singapore Actuarial Society. He has both a BSc (Honours) degree and Post Graduate Certificate of Education in Mathematics from Manchester University, UK Towers Perrin 3

4 What is a RBS, why were they introduced and who has to do one? Market value of assets Market-consistent value of liabilities including value of options/guarantees Includes a risk capital margin to test market, credit and persistency stresses 2001: Poor equity markets, with-profits solvency under pressure Existing statutory solvency measure widely criticised Bad Press Life Offices with With-Profits Liabilities in excess of 500m Covers more than 98% of total in-force WP business in UK <copyright> 2006 Towers Perrin 4 4

5 The Realistic Balance Sheet Assets Value of NP Business Inadmissibles Liabilities Realistic Free Capital Risk Capital Margin Current Liabilities WP Business Admissible Assets Realistic Policy Benefit <copyright> 2006 Towers Perrin 5 5

6 The Twin Peaks Test Assets Liabilities WPICC = statutory free capital less realistic free capital, subject to a minimum of zero. Value of NP Business Realistic Free Capital Inadmissibles Risk Capital Margin Assets Liabilities Current Liabilities Statutory Free Capital Free capital WPICC WP Business Admissible Assets Realistic Policy Benefit Realistic Peak WP Business Admissible Assets RMM Resilience Current Liabilities Statutory Peak WP Mathematical Reserves (After waivers) <copyright> 2006 Towers Perrin 6 6

7 Main Requirements of RBS ASSETS Market Value where available Valued by reference to market conditions and assets with similar characteristics otherwise LIABILITIES Valued by reference to market prices or equivalent marketable assets Allows for market cost of hedging guarantees and options Non investment elements also valued market-consistently A risk neutral asset model Appropriate account of policy options/guarantees Dynamic interactions to account for Policyholder behaviour Management actions <copyright> 2006 Towers Perrin 7 7

8 Current Issues in calculating RBS Management Actions/Policyholder behaviour Projected Balance Sheets Tax Movement Analysis Number of scenarios/ variance reduction De-risking strategies/ ALM <copyright> 2006 Towers Perrin 8 8

9 Individual Capital Adequacy Standards in context.. Global context Basel II EU RBCD Solvency II IAS UK context Integrated Prudential Sourcebook (PSB) which includes ICAS Senior Management Arrangements, Systems and Controls (SYSC) Role of the Actuary Financial Reporting Requirements Financial Conglomerates / Insurance Groups Directive <copyright> 2006 Towers Perrin 9 9

10 There are two main aspects to ICAS / PSB Risk Risk Management Firms will will need to to ensure that that they they have a robust risk risk management framework in in place and and can can demonstrate the the existence of of the the framework to to the the FSA FSA Risk Risk Measurement Firms will will need to to calculate a capital requirement using stress and and scenario tests and and be be prepared to to present their analysis and and assumptions to to the the FSA FSA <copyright> 2006 Towers Perrin 10 10

11 Bringing together the regulatory framework Regulatory balance sheet WP realistic balance sheet Individual Capital Assessment FSA Individual Capital Guidance Systems and controls reviews <copyright> 2006 Towers Perrin 11 11

12 There are three fundamental ways of approaching ICAS ICAS RCM+ Stress tests Economic capital models <copyright> 2006 Towers Perrin 12 12

13 The three approaches compare as follows Enhanced RCM Minimum effort required May satisfy the FSA in early years while more sophisticated approaches are developed May give higher capital requirement In the longer term FSA will expect more sophistication Stress and scenario tests Moderate effort involved Management can understand and agree on stress tests Provides level of capital for each risk Should give lower capital requirement than Enhanced RCM Difficult to calibrate and aggregate Economic capital model Significant time to implement and validate Demonstration of business usage required prior to FSA acceptance Aggregation allowed for within model Not all risks can be modelled Potentially minimises capital requirements Intermediate approach for WP companies Approach for non-profit companies, some WP companies Longer term approach for large WP companies <copyright> 2006 Towers Perrin 13 13

14 ICAS continues to evolve but is having a real impact on companies.. ICAS has increased the focus on risk measurement and management at the senior / board level. The use test Greater focus on risk policies and controls As a result, companies are more actively managing their risk exposures: Reductions in market risk exposure and implementation of sophisticated hedging strategies Focus on credit exposures and annuitant longevity exposures Greater focus on operational risk issues Changes in product design <copyright> 2006 Towers Perrin 14 14

15 Some Final Thoughts: The move to better understanding risk is clearly positive In particular, the best placed businesses have a strong understanding of the relationship between: Risk Capital These three elements are inextricably linked Value In particular, note how implementing a Market Consistent Embedded Value approach provides a key element of a strong Risk-Capital-Value Framework for your business. As actuaries, we are extremely well placed to understand risk where we need to focus is in how we effectively communicate that understanding to senior management and Boards. Make this YOUR responsibility! <copyright> 2006 Towers Perrin 15 15

16 A powerful communication aid when trying to explain risk PODs Based on a target of 40,000 at retirement, with the existing portfolio, there is little chance of success. If the client wants to stay with a Conservative profile, it would be possible to improve the position by adopting the alternative optimised asset allocation. If the alternative risk profile is adopted, the probability of success would be increased to 19% 2005 Towers Perrin C:\Documents and Settings\higgij\My Documents\Marketing Material\Storyboards\PensionsCaseStudyDecember2005.ppt 16

17 And Finally. Risk is not bad. without risk, reward is limited As an insurer, risk should be your loved one; so strive to understand, treat with due care and attention and you will be rewarded! Mark Saunders Mark Saunders Principal & Managing Director, Asia Tillinghast Financial Services Business Leader, Asia-Pacific Telephone: Fax: <copyright> 2006 Towers Perrin 17 17