Chapter 37

Question 1

Define risk margin

Answer 1

Represents an estimate of the fair value of the non-market risk with the BEL regulation

Question 2

Define the objectives of solvency II and its pillars

Answer 2

• It ensures that insurers hold enough capital to meet policyholder obligations, even under severe adverse scenarios
• It does this through imposing a solvency capital requirement and a minimum capital requirement
• It also aims to promote good risk governance and transparency
  *. It ensures stability in financial institutions and consumer protection
  Pillar 1: quantification of risk exposures and capital requirements
  Pillar 2: supervisory regime (risk management plus controls and own view)
  Pillar 3: disclosure requirements (public and private disclosure)

Question 3

What does ORSA require from insurers?

Answer 3

RIQAR
1. Identify risks to which it’s exposed
2. Identify risk management process and internal controls in place
3. Quantify ongoing liability to meet MCR and SCR
4. Analyse quantitative and qualitative
5. Identify relationship between risk management and level quality of fin resources needed and and available

Question 4

Define economic capital (risk-based)

Answer 4

Amount of capital provider determines is appropriate to hold in excess of L to cover its risks under adverse conditions with a given degree of confidence over a time horizon
It is based on:
1. Risk profile of A+L
2. Correlation of risks
3. Objectives of provider
4. Target credit loss tolerance

Question 5

What are the 3 pillars of Basel Accords

Answer 5

Pillar 1: banks must quantify their MCR for their main risks (credit, market and operational)
Pillar 2: required to assess and ensure their capital adequacy is sufficient over long-term = ICAAP

Question 5

What is the purpose of ORSA?

Answer 5

Provide board with assessment of:
i. adequacy of its risk management
ii. current and likely future solvency position

Question 6

What is the purpose of ICAAP?

Answer 6

Don’t RIP capital
Risk identification on all balance sheet and measurement
Internal capital adequacy relative to risk profile
Processes for risk management development and application

Question 7

Discuss using internal models s solvency II standard formula for reg bs

Answer 7

Solvency II:
- Risk tested
- Risk margin calc
- Correlation matrix
- Stress tests and scenario
- Average risks of insurer
Internal model:
- Needs to be approved by reg
- Only done if you believe cap req should be lower
- Aggregation of risks (copulas)
- Lots of data and expertise
- Must be resilient
- Takes long to be approved
- More work -> more expertise
- Can be used for economic requirements

Question 8

Risk measures

Answer 8

• RAROC
  Can be used for entire institution
  Can be used to compare diff and div
  Based on actual/expected return and actual expected capital
• EIC
  (RAROC-hurdle)capital
  can be used to encourage marginal growth opportunities