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1Pre-Conference Workshop material
Capital management under the Solvency II regime
Workshop material
2Pre-Conference Workshop material
Overview
Capital in Solvency II: A brief review
Drivers of the SCR changes
Drivers of the Own Funds changes
Own Funds and SCR changes: Common Drivers
Emerging risks – and their effect on Capital
SCR and Own Funds: Modelling techniques and tools
Contents of this workshop
3Pre-Conference Workshop material
Capital in Solvency II
Solvency II prescribes a Capital Requirement (SCR)
Own funds need to be valued by a new methodology
Capital buffer: difference between own funds and SCR
Managing this buffer is today’s topic
A brief review
4Pre-Conference Workshop material
Drivers of the SCR changes
Market conditions
Growth of Business
Investment strategies
Risk Mitigation
Emerging risks
5Pre-Conference Workshop material
Own Funds and SCR changes
Market conditions
Investment strategies
Risk Mitigation
Common drivers and their impact
6Pre-Conference Workshop material
Emerging risks
What are emerging risks
How capital management should treat emerging risks
Examples (to follow on dedicated slides)
Free discussion (to be held offline)
and their effect on Capital
7Pre-Conference Workshop material
SCR and Own Funds I
Standard Formula (Partial) Internal models Examples (to follow on dedicated slides) Free discussion on tools used or considered (to be held offline)
Modelling techniques and tools
8Pre-Conference Workshop material
SCR and Own Funds II
Simple to implement and is obligatory to use Automatically supports consistency with Own Funds calculation (e.g. Technical Provisions) SCR is calculated by formulae calibrated at 99.5% confidence for the majority of the insurance industry No option to assess other confidence levels Might not capture all (emerging) risks Doesn't give sufficient insight into the drivers of the capital requirements for capital management purposes
Standard Formula
9Pre-Conference Workshop material
SCR and Own Funds III
An internal model is a complex solution covering all risks faced by the Undertaking A Partial Internal Model combines an Internal Model for the most relevant risks with the Standard Formula for the rest Can be used to value Own Funds – if not used that way, consistency of methodologies must be evidenced Reflects the Undertaking's view of the risk landscape Gives a better understanding of the risks taken and supports business decisions
(Partial) Internal Model
10Pre-Conference Workshop material
Examples
ORSA requirements, business decisions (e.g. growth, a new product of termination of one)
Changes in investment policiesManagement of underwritten portfolioUnderlying asset management (e.g. Unit Linked)Cost of capital changes
Emerging risks, e.g. catastrophes not related to the Underwriting risks (Fukushima scenario)
SCR & Own Funds changes and their modelling
11Pre-Conference Workshop material
Example 1
Reinsurance is a major technique of Risk Mitigation (Non-proportional) Reinsurance treaties are often not handled fully by the Standard Formula Impact of Underwriting Risk on e.g. Sliding Scale Ceding Commissions cannot be captured in the Standard Formula Discussion to be held under blog post http://blog.functionalfinances.com/?p=15
Underwriting risk – Reinsurance impact
12Pre-Conference Workshop material
Example 2
Underwriting will always depend on risk appetite and available capital Simulating future Underwriting needs a reactive model also taking into account Capital Requirement changes Standard Formula based calculation will give limited insight Discussion to be held under blog post http://blog.functionalfinances.com/?p=17
Simulating Capital driven Underwriting
13Pre-Conference Workshop material
Example 3
Many insurance products having some underlying asset (e.g. Unit Linked) Capital requirement for Market Risk will cover changes of the value of the Underlying Underwriting policies will be partially Market Risk Capital driven Discussion to be held under blog post http://blog.functionalfinances.com/?p=21
Management of Underlying
14Pre-Conference Workshop material
Example 4
Emerging risks do not imply a Capital Requirement Still, it is the best to quantify the possible Capital Impact of such risks materializing By the very construction, Standard Formula cannot be used An Internal Model reflecting the current risk profile is also insufficient Discussion to be held under blog post http://blog.functionalfinances.com/?p=26
Emerging risks
