C3. Odomirok 25

Question 1

Briefly describe the Solvency Capital Requirement (SCR)

Answer 1

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.

Question 2

3 pillars of Solvency II

Answer 2

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

Question 3

3 methods to calculate the SCR:

Answer 3

1. Standard formula: a spreadsheet provided by the regulator
2. Internal models
3. Mix of Both

Question 4

2 things that Pillar 2 (Supervisory Review) provides supervisors with

Answer 4

1. Means of identifying firms with a higher risk profile

2. Power to intervene

Question 5

What does the “internal audit” functional area require that the insurer do

Answer 5

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.

Question 6

List the 4 functional areas that need to be addressed by the insurer’s governance structure:

Answer 6

1. internal audit
2. actuarial
3. risk management
4. compliance

Question 7

What does the “risk management” functional area require that the insurer do:

Answer 7

• monitor the risk management function and maintaining an aggregate view
• ensure that the internal model has been integrated with the risk management function

Question 8

What does the “actuarial” functional area require that the insurer do

Answer 8

• 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

Question 9

Briefly describe the Own Risk and Solvency Assessment (ORSA):

Answer 9

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.

Question 10

What does the “compliance” functional area require that the insurer do

Answer 10

• ensure that the internal control system is effective to comply with all applicable laws and regulation
• promptly report any compliance issues to the board

Question 11

Briefly describe Pillar 3 (Supervisory Reporting/ Public Disclosure):

Answer 11

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.

Question 12

What does ORSA need to contain at a minimum:

Answer 12

• Overall solvency need (based on the specific risk profile, approved risk tolerance limits, business strategy)
• Compliance with capital requirements and the requirements of the technical provision
• Extent to which the risk profile deviates significantly from the assumptions underlying the SCR