FSI 4 PZ Flashcards
(54 cards)
Who holds the ultimate responsibility for the prudent management of an insurer’s financial soundness, including meeting the Solvency Capital Requirement (SCR)?
The insurer’s board of directors holds the ultimate responsibility for the prudent management of the financial soundness of an insurer.
What are some key responsibilities of the board of directors concerning the SCR?
The board of directors must:
Ensure the insurer maintains an appropriate level and quality of eligible own funds to meet the SCR continuously.
Ensure the insurer has appropriate systems, procedures, and controls in place to meet the principles and requirements of this Standard on an ongoing basis.
Pay particular attention to areas where the standardised formula provides a choice of methodologies (including simplifications). They should be aware of these choices, the reasons for the selected options, and their impact.
Be responsible for assessing and approving changes to these methodological choices over time due to changes in factors like modelling capability or risk profile.
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Ensure that the Prudential Authority is kept informed about planned changes to the chosen methodologies.
Ensure that any required approvals from the Prudential Authority are obtained before implementing changes.
What is the role of the head of actuarial function regarding the SCR?
An insurer’s head of actuarial function is responsible for expressing an opinion to the board of directors regarding the accuracy of the calculations to derive the SCR,
including the appropriateness of the underlying assumptions.
They also have a specific responsibility concerning risk mitigation instruments, ensuring their effect on the SCR is materially reflective of the expected risk reduction at a 99.5% confidence level.
If weaknesses in assumptions lead to a material SCR reduction, the head of actuarial function should reduce the effect of these instruments accordingly
What are the responsibilities of an insurer’s auditor concerning the SCR?
The insurer’s auditor, appointed under section 32 of the Insurance Act, 2017, must audit the financial soundness of an insurer in accordance with their legal and regulatory obligations.
The auditor is required to report to the board of directors and the Prudential Authority any matters identified during their responsibilities that may indicate the insurer is not financially sound.
insurer and report any matters indicating the insurer is not financially sound to the board and the Prudential Authority.
Where can I find more detailed information about the roles and responsibilities of the board of directors and the head of actuarial function?
More detailed information can be found in the Governance and Operational Standards for Insurers (GOI 3).
What is the primary purpose of the Solvency Capital Requirement (SCR) established by this Prudential Standard?
The SCR sets out the basis on which insurers calculate their required capital using the standardised formula.
It establishes a critical level of financial soundness, below which regulatory intervention by the Prudential Authority will occur.
The SCR, along with the Minimum Capital Requirement (MCR), is designed to ensure the security of policyholder obligations and to provide triggers for regulatory intervention.
The SCR is the primary requirement within the Financial Soundness Standards for Insurers.
How is the SCR calculated under the standardised formula, and what time horizon and confidence level does it reflect?
The SCR is calculated using a standardised formula that is forward-looking and risk-based.
In most cases, this involves applying specified stress scenarios to an insurer’s assets and liabilities to assess the impact on basic own funds.
The SCR is calibrated to correspond to the value-at-risk of the basic own funds of an insurer at a confidence level of 99.5% over a one-year period.
What are the main risk categories addressed by the standardised formula in the calculation of the SCR?
The key risk categories are market risk, underwriting risk (covering both life and non-life insurance), and operational risk.
Describe the approach used by the standardised formula for calculating the capital required for different risks.
The standardised formula uses a modular approach to calculate the capital required for each risk category and the individual risk components within those categories.
This allows for the identification of capital requirements for specific risks. The capital requirements for market risk and underwriting risk are aggregated using a correlation matrix prescribed in the Standard, which allows for diversification benefits between some risk categories. This aggregation results in the Basic Solvency Capital Requirement (BSCR).
The total SCR is then calculated as the simple sum of the BSCR, the capital requirement for operational risk, the capital requirement for insurance-related participations in the same sector, and an adjustment for the loss-absorbing capacity of deferred taxes. No diversification benefits are recognised between these components when aggregating to derive the total SCR.
Does the SCR calculation explicitly account for new business, liquidity risk, and credit risk?
Yes, the SCR calculation considers new business expected to be written over the coming 12 months. For life insurance, the formula implicitly accounts for it.
The standardised formula does not include a capital requirement for liquidity risk. Instead, liquidity risk is addressed through monitoring and management measures.
Credit risk is incorporated as a component of market risk, specifically through the spread and default risk module.
Can insurers using the standardised formula account for risk mitigation techniques and future management actions in their SCR calculation?
Yes, the standardised formula allows for the risk-reducing impact of risk mitigation instruments and future management actions, subject to specific eligibility conditions and verifiability.
What is the role of simplifications in the standardised formula, and how are they applied?
The standardised formula allows for the use of simplified calculations under certain conditions, adhering to the principle of proportionality.
Standardisation does not imply simplicity, although the Prudential Authority permits simplifications where provided for and where they can be justified as proportionate to the nature, scale, and complexity of the risks.
Insurers do not require prior approval but are expected to justify the use of simplifications if asked by the Prudential Authority, who may disallow their use if the justification is not satisfactory.
What is the primary method for calculating the SCR for most risk categories and components under the standardised formula?
For most risk categories and components, the calculation of the SCR is based on applying stress scenarios to the assets and liabilities of the insurer. However, in cases where the scenario approach is not suitable due to the nature of the risk, a linear capital factor is applied instead.
How is the capital requirement measured when a stress scenario is applied?
When the capital requirement for a risk component is calculated by applying a stress scenario, it is measured by its impact on the level of basic own funds. The change in basic own funds (△ 𝐵𝑂𝐹) is considered positive when the stress scenario results in a loss of basic own funds.
If a scenario results in an increase in basic own funds (a negative △ 𝐵𝑂𝐹), the contribution of the scenario outcome to the overall SCR must be set to zero, unless explicitly stated otherwise in the detailed Standards.
What happens if a stress scenario results in an increase in basic own funds?
If a scenario results in an increase in basic own funds (a negative △ 𝐵𝑂𝐹), the contribution of the scenario outcome to the overall SCR must be set to zero, unless explicitly stated otherwise in the detailed Standards.
What factors can an insurer take into account when revaluing assets and liabilities under stress scenarios?
When revaluing assets and liabilities for stress scenarios to calculate capital requirements for individual risk components, an insurer may take account of any likely future management actions as well as the effects of any eligible risk mitigation instruments, provided certain conditions are met. Insurers should also consider possible changes to policyholder behaviour under the assumed stress scenarios if there is a causal link between policyholder behaviour and the scenario.
How should technical provisions be interpreted for the purpose of the standardised formula SCR calculations?
For the purposes of the SCR standardised formula calculations, references to technical provisions within the calculations for the individual SCR modules should be interpreted as excluding the risk margin to avoid circularity in the calculation.
An insurer may elect to calculate its SCR using technical provisions including the risk margin, but this is subject to the approval of the Prudential Authority. This approach will require an iterative process to determine both the SCR and the risk margin until they stabilise.
Can an insurer choose to calculate its SCR using technical provisions including the risk margin?
Yes, an insurer may elect to calculate its SCR using technical provisions including the risk margin, but this is subject to the approval of the Prudential Authority. This approach will require an iterative process to determine both the SCR and the risk margin until they stabilise.
How does the standardised formula treat the forward-looking nature of the SCR in relation to new business?
Reflecting its forward-looking nature, the SCR covers the risk of existing business at a point in time as well as new business expected to be written over the coming 12 months
For life insurance business, the formula implicitly allows for the risk of new business by assuming capital released from existing business will cover the capital required for new business, so no explicit allowance is made.
Expected profits or losses from new business are not included in the SCR calculation for either life or non-life business.
Can future management actions be considered when calculating the capital requirement for individual risk components?
Yes, future management actions may be taken into account when calculating the capital requirement for individual risk components, but this is subject to certain conditions.
a)To the extent that the stress scenario under consideration is regarded to be an instantaneous stress, no management actions may be assumed to be taken during the stress, unless explicitly stated otherwise;
b) However, an insurer may need to reassess the value of the technical provisions after the stress. Assumptions about future management actions may be taken into account at this stage. The approach taken for the recalculation of the best estimate to assess the impact of the stress should be consistent with the approach taken in the initial valuation of the best estimate, but based on the post-stress assumed environment
c) Any assumptions regarding future management actions for the assessment of the standardised formula SCR should be objective, realistic and verifiable. Insurers should ensure that the overall allowance for future management actions, after allowing for aggregation across risk components, does not exceed the maximum realistic impact of such actions.
What are the conditions for taking future management actions into account during an instantaneous stress scenario?
To the extent that the stress scenario under consideration is regarded as an instantaneous stress, no management actions may be assumed to be taken during the stress, unless explicitly stated otherwise.
When can assumptions about future management actions be considered after an instantaneous stress?
An insurer may need to reassess the value of the technical provisions after the stress. Assumptions about future management actions may be taken into account at this stage. The approach for recalculating the best estimate should be consistent with the initial valuation but based on the post-stress environment.
What general criteria must assumptions about future management actions meet for the SCR calculation?
Any assumptions regarding future management actions for the assessment of the standardised formula SCR should be objective, realistic, and verifiable. Insurers should ensure that the overall allowance for these actions does not exceed the maximum realistic impact after considering aggregation across risk components.
What are the reporting requirements if there are significant deviations from planned management actions?
Significant deviations from planned management actions that may have a material impact on the SCR must be reported to the Prudential Authority, along with an analysis explaining the reasons for the deviation and its consequences.
