MAIF s contribution to CEIOPS s Consultation Papers n 19 and 20

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Douglas Lloyd
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1 MAIF s contribution to CEIOPS s Consultation Papers n 19 and 20 The text above constitutes MAIF s response to CEIOPS s CP 19 and 20. Some elements to present MAIF Group, a mutual insurer essentially established in France. MAIF (Mutuelle d Assurance des Instituteurs de France) was launched in 1934 by a handful of teachers, who decided to free themselves from the control of traditional companies in order to insure teachers cars without an intermediary. They created a mutual insurance company called «Mutuelle d assurance automobile des instituteurs de France» (Car mutual insurance company for teachers), or MAAIF, that became MAIF with the enlargement of the products proposed, whose success is due to the conviction of its founders and to the willingness and unity of a homogeneous social group. Today, 70 years old, MAIF is the Mutual for education, culture, research, sports and leisure, humanitarian and social. It became the 5th on the list of French private car and household insurers. The launching of Filia MAIF in 1988 allowed welcoming within MAIF Group those who share the values of mutual insurance, but could not enter MAIF for statutory reasons. The original feature of MAIF is that it managed, in an economic environment based on the individual profit-making, to preserve with the passing years its mutual authenticity by promoting following values: Democratic operating. Respect for the person. Transparency. Solidarity, which is expressed, among others, via the supplementary call for contributions or the rebate. Equity. As an association of people, and not of capital, MAIF conserves as its single aim the satisfaction of its members, as within MAIF, the member is much more than just an insurance consumer. He is first of all a player involved in the operation of its mutual by electing delegates who will represent him at the General meeting. In 2005, MAIF Group was representing: over 2,2 millions members, over 2,5 billions euros turnover, over 6000 employees, at local level, nearly 600 Board representatives which implement the policy of the Board of directors and guarantee and vivify a mutualistic relationship between the members and the Board of directors, 756 delegates elected by the members, 145 branch offices located all over the national territory to be the preferred speaker of the members.

2 MAIF s contribution regarding CEIOPS s Consultation Papers n 19 and 20. Section 1 and 2 of CP 20 : Introduction and adequacy of financial resources Best Estimate : CEIOPS recommends that cash flow projections should take into consideration experience and data from insurance industry. We consider that assumptions should be made based on a participant s experience if sufficiently reliable. Section 3 of CP 20: Valuation standards Considering technical provisions, CEIOPS proposes to determine the risk-margin using the Costof-capital approach. CEIOPS should clearly set the key parameters and assumptions underlying such an approach to ensure consistent application across different insurers and member states. CEIOPS should also clarify the definition of hedgeable and non hedgeable risks. CEIOPS proposes to calculate the best estimate retaining the most conservative result. Does it mean that we have to produce different best estimate calculations? We welcome further work to clarify valuation of best estimate. Indeed, there are different relevant actuarial methodologies to calculate the best estimate which lead to similar results as actuaries are conservatives regarding parameters and assumptions. But significant differences could appear when using different information systems or databases. The modelling of distribution tails may also lead to significant differences so that we welcome further work from CEIOPS to lead to transparent modelling. Regarding the inclusion of expenses in the cash flow projections, we think that CEIOPS should normalize methods of calculation. We think it should be possible to use both claims triangles and payment triangles to limit volatility of results Section 4 of CP 20: capital We feel that the increase of limitations on eligible elements to cover the capital requirements (tier 1 + tier 2 + tier 3 SCR; tier 1 ½ * SCR; tier 2 + tier 3 tier 1; tier 2 ½ * tier 1 etc.) is a penalty for insurers. We recommend the simplification of these limitations regarding the management of the company. Any limitation should be economically justified. Section 5 of CP 20 (Solvency capital requirements: standard formula) and CP General comments on the standard formula - EP NL premium and risk reserve: We support the inclusion of this approach in the SCR calculation especially for premium risk. Indeed, Paragraph 5.74 legitimates the use of expected profits and losses from next years business. In QIS2, NL pr is calculated with regards to a level of premiums. This SCR covers the risk of loadings increase. However, the calibration of premium risk should be done with the pricing

3 process in order to get a positive result. Such as calculated, NL pr squares with a confidence level over the VaR of 99.5%: we support the expected profit/loss approach. However, CEIOPS should supervise the calculations: CEIOPS should define the combined ratio that could be used to determine expected profits and losses (the provision calculation taken into account in the combined ratio should be consistent with the options determined in Solvency 2). As well as for internal models, we may use the combined ratio to determinate profits and losses only if it is used effectively for the management of the company. Supervisor should ensure the consistency of these calculations. - NL CAT catastrophe risk : We agree with the use of several scenarios. Indeed, the methodology allows taking into account the specificities of reinsurance programs. However, further work is required to ensure consistent determination of scenarios across different member states. 2. Non listed equities and directly-held unlisted stocks be taken into account in the different components of the SCR Market and in the safety measures As defined in CP 20, the estimation parameters of the SCR market «equities category» should not fundamentally change in comparison with QIS2 (35% instead of 40%) except if a scenario based approach would make these parameters dependent upon the holding period and the proportion of these equities of the all assets. On the other hand, a new module has been added; it s the SCR concentration whose goal is to take into account counterparty default risk that a company has to face up to a same issuer or to issuers belonging to a same group. We note that the safety measures described in CP 19 also integrate the implementation of supplementary qualitative and/or qualitative measures to assess different risks not, or not sufficiently, taken into account in the standard formula, as for instance the liquidity risk. However, to enable their development, insurance companies have launched subsidiaries whose stocks appear on the asset side in their balance sheet. These equities have a major strategic interest for the holding company, and it is not foreseen to sell them on a short/medium term. The fact that these equities are taken into account in the calculation of the SCR Market up to 40% or 35% of their «market value» leads to the consequence that it constitutes the major part of the SCR Market whereas there is no risk to realize a capital-loss on the short term for these equities. In the same way, the limits that could apply to assets that are not admitted to trading on an active regulated market would strongly penalize the equities held in strategic subsidiaries that do not meet the same financial goals as an investment portfolio. We also note that the holding of subsidiaries would be penalized a third time by the concentration component integrated into the standard formula. As a matter of interest, the French accounting regulation requires that the insurance companies take a look, by the end of each financial year, at the equities they hold, according to a determined holding period, in order to assess the potential capital losses and to make, if necessary, provisions for permanent decline in value. It is also important to notice that as most of the insurance companies equities have been bought at the par value of the capital, the accumulation of the surplus that have not been distributed since the acquisition leads to a value of the net assets of these subsidiaries that is much higher than the acquisition cost that is capitalized in the Mutual s balance sheet, so that the risk of permanent

4 decline in value is only theoretical whatever might be the assessment date of this risk within one year. Finally, we think it is useful to mention that insurance or banking subsidiaries are subject to supervisory review and that in this respect, poor running that could lead to a decline in value of these assets would be more rapidly identified for these companies than for others with other activities. That s the reason why MAIF recommends, as there is no market risk associated with its strategic unlisted equity interest, that they should not be included when calculating the SCR. Moreover, regarding the concentration risk and the liquidity constraints attached to these equities, they should be assessed at the level of the consolidated accounts of the parent company. 1. Assets differentiation within the equities and properties components of the SCR market : use of a scenario based approach In CP 20, CEIOPS s members recommend the use of a scenario based approach among others for equities, interest rates, properties and currency s components of the SCR market, without defining clearly the possible options that could be implemented. Financial assets with equity sensitivity analysed in the Mkt eq «equity risk» may cover assets with very various risk nature that would not have the same behaviour face to a decline of the stock market. Some assets classes may be isolated within assets with equity sensitivity: alternative funds (integrated by default in the equity module), private equity, structured products with warranty, diversified funds, and be assessed with different parameters more in accordance with their risk nature. A differentiation between the different assets composing the property class assessed within the Mkt «property» may also lead to use methods and parameters adapted to each component of this asset s class: exploitation property, investment property MAIF recommends that assets concerned that are not differentiated by risk nature within the equity and property modules on the SCR Market should be treated with a scenario based approach with parameters specific to their risk nature (use of a VAR methodology with volatility adapted to each asset for instance). Section 8 of CP 20 : MCR MCR: MAIF is in favour of the modular approach proposed in CP 20 (Section 8 - Part B). Because it allows a simplification of the MCR calculation (compared to the one for the SCR), as well as an explicit separation of the MCR and SCR calculations (leading to a lack of link between MCR and SCR). However, it doesn t seem relevant to consider an increase for the claims handling expenses (EXPro). This approach doesn t seem consistent with the principle of provisions portfolio cession that seems to be adopted for the estimation of the provisions: the value of the provisions is calculated with a level of prudence that is high enough to ensure its transfer to another insurer.

5 Formal contact for any question or request regarding these answers to CEIOPS s Consultation Papers: Nicolas BIARD (nicolas.biard@maif.fr) MAIF 200 Avenue Salvadore Allende F Niort France Téléphone : + 33 (0)

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