Practical Uses of Local Reporting in Taiwan Kitty Ching 金肖雲 VP, Actuarial Risk Management Joint Regional Seminar, 15 July 2009
Agenda Local Reporting in Taiwan Financial Reports & Risk Management Impact of IFRS & Solvency II 2
Local Reporting in Taiwan 3
«Not everything what can be counted counts and not everything what counts can be counted» Albert Einstein Source of Information: IAIS 4
The Meaning of Financial Reporting Why do we need to do report financial information? 5
The Meaning of Financial Reporting What s requirement for a good financial reporting? Transparent to its audience Accurate reflection a company s economic situation Comparison between companies (standardization) 6
Major Reporting in Taiwan Statutory Reporting (vs GAAP Reporting) Balance Sheet, P&L and Cash Flow Focus on policyholder protection Conservative valuation bases Back-end profit recognition 7
Major Reporting in Taiwan RBC Capital Requirement CFT & AA Report Premium Adequacy Reserve Adequacy Dividend Declaration Solvency Requirement Adequacy of Investment Strategy 8
Major Stakeholders Policyholders & Potential Customers Investors & Analysts Rating Agency Regulators Internal Management Potential Buyers 9
Its Practical Uses Embedded Value Reporting More suitable for long-term nature of insurance industry It s gaining importance by investors & analysts, particularly for FHC Crucial for a M&A transaction 10
Its Practical Uses MIS Report - Monitoring performance Sales volume/market share Source of earnings Expense control Investment return Claim management Channel cost control Operation efficiency KPI monitoring 11
Financial Reports & Risk Management 12
Emphasis of Enterprise Risk Management (ERM) Identify and quantify major risks (know your strength & weakness) Adequate pricing of major risks Appropriate investment strategy Suitable risk management strategy 13
Risk Management Report Risk Management Strategy & Report Risk appetite, risk tolerance & risk limits Risk/return requirement Sensitivity & stress testing Value at Risk Capital at Risk Economic Capital 14
Economic Capital An Example EC as of 2Q 2008 market sub risks (level 0) and nonmarket risks (level 1) market risks after inter subrisk diversification (level 1) all risks after inter risk diversification (level 2) all risks after inter business diversification (level 3) Market Risk 369.3 291.9 207.8 135.3 Interest rate risk 281.7 222.6 158.5 103.2 Equity risk 18.7 14.8 10.5 6.9 Real estate risk 3.1 2.5 1.8 1.1 FX risk 2.1 1.7 1.2 0.8 Credit spread risk 4.5 3.6 2.5 1.6 Interest rate volatility risk 59.1 46.8 33.3 21.7 Equity volatility risk 0.0 0.0 0.0 0.0 Business Risk 20.8 20.8 14.8 9.6 Credit Risk 5.4 5.4 3.8 2.5 Insurance Risk 131.6 131.6 93.7 61.0 Operational Risk 3.0 3.0 2.1 1.4 Modelled EC 530.0 452.6 322.2 209.8 Unmodelled Risk 7.0 4.5 Economic Capital 329.1 214.3 15
Impact of ERM on Financial Report Long-term risk taking will be as important short-term earnings focus No free lunch Economic value & capital will be the focus 16
Impact of IFRS & Solvency II 17
IFRS & Its Implementation Consistent accounting rules globally Total balance sheet approach Promote competition Attract international investors Reserve Adequacy Test based on best estimated assumption FAS 34 for non-insurance contracts FAS 40 for insurance contracts 18
How Could IFRS Affect Taiwan? Additional actuarial resources Reserve strengthening will be needed to meet minimum RAT standard Fair value valuation creates higher P&L volatility 19
Key Components of Solvency II 4 Principal Objectives Deepen the single market (minimum harmonization standard) Enhance policyholder protection Improve competitiveness of EU insurers Further better regulation 3 Pillars Quantitative requirements Qualitative requirements Disclosure & reporting 20
Key Components of Solvency II The new regime Establishes risk-sensitive capital requirements to encourage and reward good risk management Places emphasis on the responsibility of the senior management to manage their business responsibly Fosters and demands greater supervisory convergence 21
Impact of Solvency II Product Design Fewer & less guarantees Risks charged to policyholders properly Capital Management Crucial as capital becomes scarce & costly Economic capital will be the norm Risk transfer will be important 22
Further Development Continuous global convergence in accounting, solvency requirement to: Reduce regulatory arbitrage Better protect policyholders Promote the creation of open global market Further cooperation between supervisors Duration approach was accepted under conditions (mainly pension business) 23
Key Learnings Good financial reporting allows companies to know where they are and take necessary actions to reach company objectives Align performance measurement with risk management strategy Global convergence in accounting and solvency standard means more opportunities and responsibilities for actuaries 24
Thank You!! 25