Transcript Solvency II – San Diego

COMPARISON OF REGULATION IN
AUSTRALIA, CANADA, AND THE U.K.
– San Diego
Glen Barnett
David J. Oakden
Ming Roest
12 September 2007
Agenda
Introduction
Canada
Australia
Europe
and UK
Comparison
Conclusions
Australia
(main focus on liability side)
• Brief History
- before late ‘90s, supervision under Insurance &
Superannuation Commission
- Replaced by Australian Prudential Regulation
Authority (APRA - www.apra.gov.au) - responsible
for supervision of financial institutions: Banking (&
other deposit-takers), Insurance, Superannuation.
Fully operational in 1999.
- Drafted new standards, which were under public
comment and review, when…
- 2001 failure of HIH (large failure!).
- Review process halted, new standards put
in place (some changes from late rounds
undone - a number of identified problems
with the wording remained)
- Royal Commission:
primary cause of failure -- under-reserving
2002 liability valuation basics:
- outstanding claims; premiums liability
- account for many sources of uncertainty:
process variability, parameter uncertainty, &
many other sources of risk
- reflect the future liability process and its
uncertainty (predictive distribution)
- discount at market rates
2002 liability valuation
Minimum liability:
- max(75th %ile, mean+½std.dev.)
median
mean
+/2
75th percentile
(upper quartile)
Predictive distribution of liability – must hold at least
upper end of one-tailed PI (not a CI for the mean)
2002 liability valuation:
- Not required to use probabilistic models in
estimating the relevant aspects of that
distribution – but easier to justify the
probability-distribution calculations with a
probabilistic model
• Some improvements were made to
GPS210, e.g. in 2004
Current situation:
Recent (2006) major update: GPS310
2006-07 phase-in
Outlines roles & responsibilities of:
• Approved Auditor
• Approved Actuary
GPS310
• Approved Auditor
- audits yearly statutory accounts and annual review of
other aspects of the operations. Provides a certificate and
a report on these to the Board. May also be required to do
other things (e.g. special purpose review)
• Approved Actuary
- assess overall financial condition
- advise on the valuation of insurance liabilities
- Financial Condition Report (FCR)
- Insurance Liability Valuation Report (ILVR)
… annually to the Board (then on to APRA)
- Actuarial peer review of ILVRs
GPS310
• Basic rule
- unchanged minimum: max(75th%ile, µ+½)
- but focus is more on modeling, looking to the
particular circumstances of the individual insurer,
(- information in FCR&ILVR)
• Requirement to follow the “relevant professional
standard” (PS300 for liabilities) where no conflict
- so wording of that also important.
(Where there is overlap, generally very similar)
GPS310
• Discounting:
- observable, market-based rates
(sovereign risk securities matching
liabilities currency and term profile)
- rates derived from a yield curve either directly,
or as a suitable average rate
Financial Condition Report
• business overview;
• summary of key results of ILVR
• Assess:
- recent experience & profitability,
- adequacy of past estimates
- asset & liability management, investment strategy
- current & future capital adequacy, approach to
capital management;
- pricing, premium adequacy;
- reinsurance arrangements (suitability, adequacy)
- risk management framework
Financial Condition Report
- value liabilities on prospective basis, both net and
gross of reinsurance and recoveries.
- value with regard to individual circumstances, but
must be at least greater of:
- 75% sufficiency for liabilities
- mean + ½ std. deviation of liabilities (incl. uncert.)
- overall and by class of business,
but diversification benefit applies to calculations by class
(generally provisions are higher than minimum)
[Valn of liabilities also needed for Minimum Capital Requirements]
Insurance Liability Valuation Report
For each class of business
- value of insurance liabilities
- assumptions used; extent experience-based
- availability & appropriateness of data
- significant aspects of recent experience;
- methodologies used to model mean
- indication of the uncertainty; standard deviation
Insurance Liability Valuation Report
- sensitivity analyses;
- description of probability distributions and
parameters, (or how uncertainty estimated
otherwise)
- risk margins that relate to the inherent uncertainty
Describe assumptions and methods so another
actuary can understand valuation process, results,
limitations & key risks
Capital Adequacy (GPS110)
- Either Internal Model (with approval) or Prescribed Method
• Prescribed
analysis of 3 main risk types
- insurance risk (risk GPS310 value is inadequate)
– generates a capital charge
(liabilities x factor for class of business
9-15% for direct-insurance outstanding;
more for premium liability, and for inward reinsurance)
- investment risk
– also a capital charge
(value x factor
1.2% for cash… 100% for loans to directors)
- concentration risk (related to Maximum Event Retention)
Capital Adequacy (GPS110)
• Internal Model
- covers at least those risks + more (operational risk, etc)
- determine capital to reduce probability of default
within 1year to < ½%
(lots about valuing capital and justifying model that I won’t
cover here)
Two tiers of capital (divided and then subdivided by quality)
- specified minimum proportions in higher subtiers,
maximum amounts in lower subtiers
Risk Management (GPS220)
• Must submit annual Risk Management Stratregy
- Systems for identifying, assessing, mitigating and
monitoring risks that may affect its ability to meet
obligations to policyholders.
- Have dedicated risk management function
• 3 year business plan
• Annual Risk Management Declaration
• Financial Information declaration
Summary
- model based for assets and liabilities (if approval),
but underlying minimum prescriptive
- assets and liabilities discounted at market rates
- implicit margins replaced with explicit risk margins
- recognition that insurer is subject to risk of the actual
liability process, not just its mean
(process variation major component of liability risk)
- regulator expects, & insurers do:
· use model based approaches;
· be more conservative than the prescriptive minimums
(e.g. holding more reserves and capital)
Conclusions
- possible in practice to determine appropriate reserves
incorporating process variability, parameter risk, etc etc
- possible in practice to determine appropriate reserves
incorporating discounting at market rates
- avoidance of implicit margins
→ better understanding of risk