Flashcards in C3. Odomirok 25 Deck (12):
Briefly describe the Solvency Capital Requirement (SCR)
The SCR is the required capital to limit the probability of ruin over the year to 0.5% (protect against the 99.5% VaR). Companies with lower capital are subject to regulatory intervention.
3 pillars of Solvency II
Pillar 1: Quantification: Quantitative capital requirements
(Solvency Capital Requirement and Minimum Capital Requirement)
Pillar 2: Governance: Supervisory Activities (Internal control and risk management; Supervisory review process)
Pillar 3: Transparency: Supervisory reporting and public disclosure
3 methods to calculate the SCR:
1. Standard formula: a spreadsheet provided by the regulator
2. Internal models
3. Mix of Both
2 things that Pillar 2 (Supervisory Review) provides supervisors with
1. Means of identifying firms with a higher risk profile
2. Power to intervene
What does the "internal audit" functional area require that the insurer do
Produce a report at least annually to the board of directors about any deficiencies of the internal controls and any shortcomings in compliance with internal policies and procedures.
List the 4 functional areas that need to be addressed by the insurer's governance structure:
1. internal audit
3. risk management
What does the "risk management" functional area require that the insurer do:
-monitor the risk management function and maintaining an aggregate view
-ensure that the internal model has been integrated with the risk management function
What does the "actuarial" functional area require that the insurer do
-ensure that the methods and assumptions used to derive the technical provisions are reasonable.
-perform a retrospective analysis of best estimates vs experience.
-opine on the overall underwriting policy and adequacy of reinsurance arrangements
Briefly describe the Own Risk and Solvency Assessment (ORSA):
An internal assessment of the solvency need based on the risk profile. The ORSA can be defined as the entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long term risk a (re)insurance undertaking faces or may face and to determine the own funds necessary to ensure that the undertaking's overall solvency needs are met at all times.
What does the "compliance" functional area require that the insurer do
-ensure that the internal control system is effective to comply with all applicable laws and regulation
-promptly report any compliance issues to the board
Briefly describe Pillar 3 (Supervisory Reporting/ Public Disclosure):
This focuses on increasing the transparency of the insurer's risks and capital position. It provides the means by which the capital and regulatory position derived from Pillars 1 and 2 are reported to the supervisor and financial markets.