KPMG Solvency II

Question 1

What is Solvency II?

Answer 1

New regulatory framework for the European insurance industry that adopts a more dynamic risk-based approach and implements a non-zero failure regime (0.5% probability of failure)

Question 2

Intents of Solvency II?

Answer 2

• Alignment of economic and regulatory capital
• Freedom to choose their own risk profile and match it with appropriate level of capital
• Early warning system for deterioration in solvency
• Better aligning risk and capital management

Question 3

List 3 goals of the 3 pillars

Answer 3

• Promote capital adequacy
• Provide greater transparency in the decision-making process
• Enhance the supervisory review process

Question 4

List advantages of Solvency II

Answer 4

• Consistent regulation in all territories
• Improve solvency of industry, thus means better protection for consumers
• Better capital management by aligning solvency with risk profile

Question 5

Discuss pillar 1 of Solvency II

Quantitative requirements

Answer 5

• Aims to ensure firms are adequately capitalized with risk-based capital
• All valuations are to be done in a prudent and market-consistent manner
• Cies may use either the Standard Formula or an internal model approach (subject to prior supervisory approval) to calculate regulatory capital requirements using its own internal model

Question 6

Discuss pillar 2 of Solvency II

Qualitative requirements

Answer 6

• Impose higher standards of risk management and governance within a firm’s organization
• Gives supervisors greater powers to challenge their firms on risk management issues
• Includes the ORSA ,requiring a firm to do its own forward-looking-self-assessment of risk

Question 7

Discuss pillar 3 of Solvency II

Disclosure requiremets

Answer 7

• Aims for greater levels of transparency
• Private AR to supervisors, and a public solvency and financial condition report that increases the level of disclosure required by firms
• Any current returns will be completely replaced by reports containing core information that firms will have to make to the regulator on a quarterly and annual basis
• Ensures that a firm’s overall financial position is better represented and includes more up-to-date information

Question 8

What are the three general levels of capital?

Answer 8

• Technical provisions to match insurer liabs (best estimate of liabs + Market value margin)
• Regulatory capital requirements (MCR + SCR + Capital add-on)
• Surplus capital

Question 9

Contrast Pillar I between Basel II and Solvency II

Answer 9

• Basel II applies separate models for investment, credit and operational risks
• Solvency II applies an integrated approach taking into account dependencies between risk categories

BaseI II concentrates on the ASSETS / Solvency II applies to both ASSETS and LIABILITIES