Update on Solvency Assessment and Management ( SAM ) Presenter: Andre Jansen van Vuuren

Transcription

1 Update on Solvency Assessment and Management ( SAM ) Presenter: Andre Jansen van Vuuren Date: 26 and 28 March 2018

2 Agenda Main SAM developments affecting the balance sheet Engagement process with our clients Case study 1 Managing the SCR for a Non-life cell Case study 2 Managing the SCR for a Life cell Reflection on change and adaption process Slide 2

3 Main developments Initial share capital and retained earnings Invested assets, fixed assets, current assets SCR Eligibility MCR Eligibility Changes in method to calculate Eg. Current liabilities New SAM requirement Claims liabilities, premium liabilities, Discounted Cashflow reserve Slide 3

4 Main developments (continued) SCR Eligibility MCR Eligibility Slide 4

5 Main developments (continued) Separate Financial Soundness Standards (Branches, Groups, Insurers (FSI), Lloyds, Microinsurers) Multiple versions circulated and comments worked into subsequent versions Latest (and potential last pre-sam implementation) published 9 Mar 2018 For insurers (FSI) there are 13 Prudential Standards around Financial Soundness 2 Guidance notes Slide 5

6 Main developments (continued) FSI 4.1 Market Capital Requirement FSI 4.2 Life Underwriting Capital FSI 4.3 Non-life Underwriting Capital FSI 4.4 Operational Capital FSI 2.3 Determination of Eligible Own Funds SCR Eligibility MCR Eligibility FSI 4 Calculation of the SCR Using the Standardised Formula FSI 2.1 Valuation of Assets and Liabilities Other than Technical Provisions FSI 2 Valuation of Assets Liabilities and Eligible Own Funds FSI 2.2 Valuation of Technical Provisions Slide 6

7 Main SAM developments affecting the balance sheet Engagement process with our clients Case study 1 Managing the SCR for a Non-life cell Case study 2 Managing the SCR for a Life cell Reflection on change and adaption process Slide 7

8 Engagement process ❶ Participate in SAM development process (parallel reporting, SAM structures, comment etc) ❷ Interpret standards for captive businesses (engage stakeholders) ❸ Develop, implement and improve enabling architecture (calculation engines) ❹ Engage internally with PMs and MEs on results ❺ Engagement process tailored per cell owner and / binder holder Slide 8

9 Engagement process (continued) Communication drive through PMs beginning 2018 Standardised memorandum explaining key concepts of SAM for our cell clients For Life cell clients, this memorandum has been sent out beginning of 2018 For the non-life cell clients, this memo is prepared per cell client every quarter since 2017 Include estimates of the restated balance sheet, Own funds (OF) and capital requirement (SCR) Slide 9

10 Engagement process (continued) For some cell clients, there have been work done to reduce the SCR with examples: Detailed exposure data to move Natural Catastrophe to scenario based Work with underwriter to estimate Man Made catastrophe on scenario based Placing reinsurance to reduce capital estimates (catastrophe life, lapse risk life, catastrophe non-life) Changes to policy wordings with explicit policy limits on occurrence of events Slide 10

11 Engagement process (continued) Slide 11

12 Engagement process (continued) Slide 12

13 Main SAM developments affecting the balance sheet Engagement process with our clients Case study 1 Managing the SCR for a Non-life cell Case study 2 Managing the SCR for a Life cell Reflection on change and adaption process Slide 13

14 Case study 1 Managing the SCR for a Non-life cell SCR BSCR Operational Non-Life Underwriting Market Premium & Reserve Catastrophe Interest Rate Equity Lapse Currency Property Spread and Default Concentration Illiquidity Premium Slide 14

15 Case study 1 Managing the SCR for a Non-life cell (continued) =? Depends on correlation matrix SCR BSCR Operational Non-Life Underwriting Market Premium & Reserve Lapse Catastrophe Interest Rate Currency Equity Property Spread and Default Illiquidity Premium Concentrati on Slide 15

16 Case study 1 Managing the SCR for a Non-life cell (continued) For example, let s assume for Market risk we have calculated charges of: Interest 10 Equity 2 Property 0 Spread and default 30 Currency 0 Concentration 20 Then the 6666, but aggregating using correlation matrix prescribed under SAM the answer is 42.5 Slide 16

17 Case study 1 Managing the SCR for a Non-life cell (continued) Let s look at example of Non-life SCR with no excess of loss reinsurance cover and after overlaying excess of loss reinsurance cover XoL layers above R5m retention, cost 3.5% of layer Gross Net Premium and reserve risk 20m 20m Lapse 0m 0m Catastrophe risk 201m 25m Non-life aggregated charge 206m 35m Slide 17

18 Case study 1 Managing the SCR for a Non-life cell (continued) Number observations Reducing NLUW by R170m had to pay R6.8m to reinsurers Net CAT risk equal to retention (R5m) + cost of reinstatement (R6.8m) + default risk of reinsurers (R13.2) Business observations To date, industry been buying XoL from business perspective only RI broker advice, own risk appetite for volatility and RI market rates played important roles Slide 18

19 Case study 1 Managing the SCR for a Non-life cell (continued) Proposed steps when adding the impact on capital requirement (SCR) into existing RI purchase considerations Use SI per cresta zone to calculate Natural CAT Evaluate each of 8 Man Made CAT scenarios Must aim for all reinsurers on panel are in eligible jurisdictions Check no vertical exhaustion Balance cost of RI cover with seeking high RI credit rating Slide 19

20 Main SAM developments affecting the balance sheet Engagement process with our clients Case study 1 Managing the SCR for a Non-life cell Case study 2 Managing the SCR for a Life cell Reflection on change and adaption process Slide 20

21 Case study 2 Managing the SCR for a Life cell SCR Life Underwriting BSCR Market Operational Mortality Interest Rate Disability- Morbidity Longevity Currency Equity Expense Lapse Spread and Default Property Retrenchment Catastrophe Illiquidity Premium Concentration Slide 21

22 Case study 2 Managing the SCR for a Life cell (continued) Now Overlay CAT RI Overlay Lapse RI Mortality Longevity Disability / Morbidity Life Lapse 1,435 1, Life Expense Life CAT Retrenchment Life aggregated charge 1,457m 1,442m 899m Slide 22

23 Case study 2 Managing the SCR for a Life cell (continued) Recognition of negative rand reserves for virtually all life clients Most of the time, see corresponding mass lapse risk capital requirement ( BBBBBB when 40% mass lapse shock bites) Lapse risk purely exists because recognising negative rand reserves Artificial and reinsurers have developed covers (SII and SAM) to reinsure this risk CAT RI always been available in the market, having risk capital for CAT on life side not that commonplace to date Slide 23

24 Main SAM developments affecting the balance sheet Engagement process with our clients Case study 1 Managing the SCR for a Non-life cell Case study 2 Managing the SCR for a Life cell Reflection on change and adaption process Slide 24

25 Reflection on change and adaption process Previous state Linear application Key components Relatively easy to explain Transition state Hard and soft standard Changing requirements Moving timeline Industry re-training Change management challenges Adapted state Architecture eloquence Process efficiency Capital optimisation Information asymmetry improved Slide 25

26 Reflection on change and adaption process (continued) Communication process well advanced with cell clients aware of the impact of SAM Some clients already completed initiatives to reach Own Funds > Solvency Capital Requirement Work continues for selected clients End goal the same for all, just workload to achieve goal that differs Encourage all clients to keep engaging us through their PMs Slide 26

27 End Questions and discussion. Slide 27