C - CAS Financial Reporting - Solvency II

Question 1

CAS FINANCIAL REPORTING - SOLVENCY II

Define Solvency II

Goal

Answer 1

new PRINCIPLE-BASED regulatory framework to determine the required capital level of insurers in EU.

to link insurer’s REQUIRED CAPITAL to their RISK PROFILE

Question 2

CAS FINANCIAL REPORTING - SOLVENCY II

Briefly describe the 3 PILLARS

Answer 2

I : QUANTITATIVE CAPITAL REQUIREMENTS
(quantification)
—Solvency Capital Requirements (SCR)
—Minimum Capital Requirement (MCR)

II : SUPERVISORY ACTIVITIES
(governance)
—Internal Control and Risk Management
—Supervisory Review Process

III : SUPERVISORY REPORTING AND PUBLIC DISCLOSURE
(transparency)
—Transparency
—Disclosure

Question 3

CAS FINANCIAL REPORTING - SOLVENCY II

ABOUT PILLAR III
Purpose

Answer 3

III : SUPERVISORY REPORTING AND PUBLIC DISCLOSURE
(transparency)

HOW info from Pillars I-II is given to supervisors and public

purpose :
FOSTER MARKET DISCIPLINE
because cie are aware that their risk-based decisions will be public

Question 4

CAS FINANCIAL REPORTING - SOLVENCY II

ABOUT PILLAR I

• -method to quantify SCR
• -definition of SCR
• -consequence of falling below MCR and SCR
• -critic of VaR 99.5%
• -3 methods of calculation of SCR
• -3 elements to obtain approval to use internal model

Answer 4

I : QUANTITATIVE CAPITAL REQUIREMENTS
(quantification)
—Solvency Capital Requirements (SCR)
—Minimum Capital Requirement (MCR)

using TOTAL BALANCE SHEET APPROACH to quantify SCR

SCR : capital required to limit P(ruin) over 1-year to 0.5% (VaR 99.5%)
if capital falls below SCR : regulatory intervention
if capital falls below MCR : cie will not be permitted to operate

critic of Var 99.5% : not an adequate measure to support the risk to ultimate settelment

method of calculation of SCR :
–standard approach (spreadsheet from regulator)
–internal model
–mix of both
advantage of internal model: likely to have lower SCR.

internal model requires:

• -demonstrate the internal model is used to run the business
• -validated by independent 3rd party
• -documented appropriately

Question 5

CAS FINANCIAL REPORTING - SOLVENCY II

ABOUT PILLAR II

• -2 requirements from Pillar II
• -Describe 4 key functional areas
• -Define ORSA
• -3 items ORSA should include at a minimum
• -purpose of ORSA

Answer 5

II : SUPERVISORY ACTIVITIES (governance)

• –Internal Control and Risk Management
• –Supervisory Review Process

Pillar II requires company:
1) to have governance structure in 4 key functional areas
–INTERNAL AUDIT
produce report annually to Board on deficiencies of annual controls
–ACTUARIAL
ensure reasonableness of methods and assumptions to calculate technical provision
–RISK MANAGEMENT
monitor RM function and maintain aggregated view
–COMPLIANCE
ensure compliance with law and report issues to Board

2) to complete an ORSA

ORSA :
all process and procedures used to IDENTIFY, ASSESS, MONITOR, MANAGE, REPORT risk
and
to determine funds necessary to ensure overall solvency needs are met at all times

ORSA should have at a minimum:

• -overall solvency needs considering risk profile, risk tolerance limit and business strategy
• -compliance with capital requirements and technical provision requirements
• -extent to which risk profile deviates from assumptions in the SCR

results of ORSA reported to supervisor

• -supervision will use this info as inputs for risk-based supervision and actions
• -ORSA is basis for dialogue with insurer