Embed Size (px)
Citation preview
Session 3Solvency Capital Requirements
Regional Training Seminar IAIS-ASSAL
San Salvador, El Salvador, 22-25 November 2010
Takao Miyamoto, IAIS Secretariat
Agenda
2
Assessment of financial solvency
Valuation of assets & liabilities for solvency purposes
Available capital resources– Broadly given as excess
of assets over liabilities– Subject to fungibility &
transferability aspects– Subject to quality criteria
Required regulatory capital– Reflects potential adverse
change of excess of assets over liabilities over time
Total Balance Sheet Approach
3
• Solvency is assessment of overall financial position– Consistent measurement of assets & liabilities– Explicit identification & consistent measurement of risks– Potential impact of risks on all components of balance
sheet
• Recognise interdependence – cannot be considered in isolation– Assets– Liabilities– Regulatory capital requirements– Capital resources
Assets & Liabilities – Quick Look
4
• Assets– Security– Liquidity– Diversification
• Liabilities– Technical provisions: Amount required to fulfill insurance
obligations & settle all commitments to policyholders– Other liabilities
• Asset-liability management (ALM)– Manage risk & business under coordinated decisions
Agenda
5
Assessment of financial solvency
Valuation of assets & liabilities for solvency purposes
Available capital resources– Broadly given as excess
of assets over liabilities– Subject to fungibility &
transferability aspects– Subject to quality criteria
Required regulatory capital– Reflects potential adverse
change of excess of assets over liabilities over time
Role of Capital
6
• Serve as safety cushion against adverse environment & financial fluctuation– Reduce probability of insolvency– Reduce losses to policyholders in event of insolvency
• Enhance safety & soundness of insurance (& other financial) sector– Macroprudential perspective
• Meet strategic & operational needs of capital– Start-up, growth (into new products, market segments etc.)– Allocation of capital for decision & performance review
Stakeholders
7
• Policyholders↑ Prefer sufficient capital to protect their interests
• Shareholders↓ Care about rate of return
↓ Existing shareholders want to maintain control
↑ Avoid worst scenario (insolvency & wipe-off all shares)
• Supervisors↑ More focus on policyholder protection & financial stability
↑ Insolvency may put job & reputation at risk
• Board & senior management↓ Under pressure from market for return
↓ Salary dependent on share prices or rate of return
↑ Insolvency may put job & reputation at risk
↑ Care about ratings agency
↑ Attract more customers by providing sense of safety
Different Perspectives
8
• Going concern– Carry on business as going concern and continue to take
on new business
• Run-off– Stop new business and manage only existing business until
they are settled or expired
• Winding (Break)-up: – Stop new business and settle or transfer existing business
as soon as possible
Quality & Suitability of Capital Resources
9
– Extent to which and in what circumstances capital element is subordinated to policyholders rights in insolvency or winding-up
Subordination
– Extent to which capital element is fully paid & available to absorb losses
Availability
– Period for which capital element is available
Permanence
– Extent to which capital element is free from mandatory payments or encumbrances
Encumbrance
Quality & Suitability of Capital Resources
10
Quality of capital
Loss absorbency
Loss absorbency under going concern
Loss absorbency under winding-up
Subordination
Availability
Permanence
Absence of encumbrance
Adjustment for Solvency Purpose
11
• Broadly regarded as assets over liabilities– Based on recognition & valuation for solvency purpose
• Certain types of liabilities (+)– e.g. subordinated debt– Act buffer to reduce loss to policyholders
• Contingent assets (+)– e.g. letters of credit, members’ calls by mutual, unpaid
element of partly paid capital
• Certain types of assets (–)– e.g. intangible assets, deferred tax assets– Realisable value under winding-up may be significantly
lower than economic value under going concern– Adjustment through deduction of capital resources or
addition to capital requirements
Group Issues
12
• Multiple (Double) gearing– Insurer invests in capital instrument of subsidiary
• Intra-group creation of capital– Insurer holds shares in or makes loans to another entity,
which holds capital instrument of insurer
Life insurance subsidiary (A)
Assets 22,700 Life fund 20,000
Debt to B 700
Equity 2,000
General insurance subsidiary (B)
Assets 3,500 Insurance liability
1,800
Debt 800
Equity 900
Holding company (P)
Assets 2,400 Debt to A 1,000
Equity 1,400 (500 owned by B)
Own 75% of shares
Own 100% of shares
Loan 1,000
Loan 700
Own 500 shares
Agenda
13
Assessment of financial solvency
Valuation of assets & liabilities for solvency purposes
Available capital resources– Broadly given as excess
of assets over liabilities– Subject to fungibility &
transferability aspects– Subject to quality criteria
Required regulatory capital– Reflects potential adverse
change of excess of assets over liabilities over time
Approaches
14
• Range of approaches allowed– Reflect nature, scale & complexity of risk & business
• Standard formula– Feasible for small & medium sized insurers– Should be designed to reasonably reflect overall risks
• Internal models (partial or full)– More tailored to individual insurers– Subject to prior approval & ongoing validation by
supervisors– Criteria: statistical quality test, calibration test, use test,
documentation
Process
15
Identify all material risk sources
Assess & characterise distributions
Aggregate risks
Measure capital requirements
Redistribute & use for management
Underwriting, credit, market, operational, liquidity etc,
CorrelationDependency
Required Capital and Technical Provision
16
Probability
Loss
Technical provision (current estimate &
risk margin)
Required capital
Solvency level(e.g. VaR (1 year, 99%)
Quantify or Not
17
• Some risks may be less readily quantifiable– Due to its nature, lack of data, lack of well developed model– e.g. strategic, reputational, liquidity, operational risks
• Alternative treatment– Simple proxies– Stress & scenario testing– Exposure limits– Qualitative requirements (e.g. systems, controls)
Diversification Effect
18
• Diversification effect exists– Horizontal (within risks)– Vertical (between different risks)– Business lines– Geographical– Across entities
• Whether & to what extent should it be allowed?– Dependencies increase in times of stress– Limited availability of data, especially stressed situation– Lack of fungibility of capital & transferability of assets– Robustness and reliability for supervisory actions
Example
19(Source) Joint Forum “Developments in Modelling Risk Aggregation”
Example
20(Source) Joint Forum “Developments in Modelling Risk Aggregation”
Agenda
21
Assessment of financial solvency
Valuation of assets & liabilities for solvency purposes
Available capital resources– Broadly given as excess
of assets over liabilities– Subject to fungibility &
transferability aspects– Subject to quality criteria
Required regulatory capital– Reflects potential adverse
change of excess of assets over liabilities over time
Demand vs. Supply
22
Assets
Other liabilities
Current estimate
Risk margin
Capital requirement
Liabilities
Available capital
Technical provision
• Supervisory assessment of financial position– Could be different from public financial reporting due to
prudential filter
Solvency Control Levels
23
• Prescribed Capital Requirement (PCR)– Above PCR, supervisor would not intervene on capital
adequacy grounds
• Minimum Capital Requirement (MCR)– If breached, supervisor would invoke strongest actions, in
absence of corrective actions
• Additional control levels– Range of different intervention actions between PCR &
MCR
ComFrame Update
24
Common Framework for the Supervision of Internationally Active Insurance Groups
(“ComFrame”)
Common Framework for the Supervision of Internationally Active Insurance Groups
(“ComFrame”)
Background
25
Current state of play• IAIS solvency regime (ICPs, standards & guidance)
remains high-level, not so concrete• Various approaches exist in different jurisdictions &
regions
Challenges• Difficult to implement and assess• Difficult for cross-border cooperation• Difficult for efficient global management
26
Five Modules
27
Timeline
1 July 2010
We are here – ComFrame is off to a good start!
