Flashcards in Pillar 2 Deck (12):
What are the 3 core rules of Pillar 2?
1. Methodology of capital resource assessment
2. Basis should be 99.5% one year survival probability over 1 year (0.5% ruin) or equivalent over longer term
3. Documentation adequacy of submission
Where should the ICA be considered?
Financial reporting and ongoing business decisions
2. product range
3. inv strat
4. m and a
What risks should be assessed under ICA?
As with Pillar 1:
Pension scheme risk
How should the risks be tested under ICA, what are the problems?
Stress and scenario testing
Often limited data for extreme events e.g. ops risk
How are assets valued in ICA?
Market to market (like pillar 1)
No admissibility limits
How are math res calculated under ICA?
Realistic basis ie. like pillar 1 peak 2
Market consistent and so stochastic
Credit allowed for present value of future profits on in-force business, this may mean more free assets (lower liabs) than under pillar 1
What is the technique to calculate the 99.5th percentile?
1. Do individual 1 in 200 stress tests to each risk factor over 1 year period (allow for 1 year NB or closure to NB)
2. Recalculate the new free surplus at end
3. This gives your capital requirement
Method 2 (run-off method):
1. Look at amount of capital needed at start to ensure firm can cover liabs until last policy run off, allowing for suitable stresses in risk factors
How do you allow for diversification benefits between the different risks in pillar 2?
Need to put through correlation matrices
Note that correlations in extreme events like these stresses may be different than normal
Why do you need to allow for non-linearity in individual risks?
The capital requirement for a subset of events happening at the same time with probability 0.995 may be higher than the sum of all different 1 in 200 scenarios capital requirements.
What stochastic asset model would be used in ICA, what is particularyl special about it? How would it be calibrated?
Real world ESG
calibrate using past parameters but advanced techniques in the tail
What value is the ICG if PRA satisfied/not satisfied?
ICG=ICA capital req
ICG>ICA cap req