Flashcards in Pillar 2 Deck (12):

1

## What are the 3 core rules of Pillar 2?

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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

2

## Where should the ICA be considered?

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Financial reporting and ongoing business decisions

e.g.

1. pricing

2. product range

3. inv strat

4. m and a

3

## What risks should be assessed under ICA?

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As with Pillar 1:

Market

Interest

Credit

Reinsurance exposure

Persistency

Plus:

Mortality

Morbidity

Expense risk

Pension scheme risk

Liquidity risk

Group risk

Ops risk

4

## How should the risks be tested under ICA, what are the problems?

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Stress and scenario testing

Often limited data for extreme events e.g. ops risk

5

## How are assets valued in ICA?

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Market to market (like pillar 1)

No admissibility limits

6

## How are math res calculated under ICA?

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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

7

## What is the technique to calculate the 99.5th percentile?

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Method 1:

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

8

## 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

9

## 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.

10

## What stochastic asset model would be used in ICA, what is particularyl special about it? How would it be calibrated?

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Real world ESG

#arbitrage free

calibrate using past parameters but advanced techniques in the tail

11

## What value is the ICG if PRA satisfied/not satisfied?

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ICG=ICA capital req

ICG>ICA cap req

12