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treatment of underwriting risk might follow that for life insurance. 10.155 In Annex D, CEIOPS has set out a first indication of how <strong>the</strong> approach outlined above may be adapted <strong>to</strong> incorporate an allowance for <strong>the</strong> effect of reinsurance. Market risk 10.156 In view of <strong>the</strong> importance of ALM in <strong>the</strong> overall risk management, assets and liabilities should be considered simultaneously whenever movements in market prices affect both of <strong>the</strong>m. In this ALM perspective, <strong>the</strong> main components of market risk should be addressed, namely interest rate risk, equity risk, property risk and currency risk. 10.157 An adequate <strong>the</strong>oretical basis for measuring market risk might be prespecified stress tests / what-if analyses. However, CEIOPS notes that such an approach may lead <strong>to</strong> practical difficulties, particularly with regard <strong>to</strong> <strong>the</strong> verification of <strong>the</strong> results. CEIOPS will test pre-specified stress tests and a fac<strong>to</strong>r-based approximation in QIS before deciding how market risk should be reflected in <strong>the</strong> standard formula. Clearly, <strong>the</strong> treatment of risk mitigation/financial hedging techniques will require fur<strong>the</strong>r consideration. 10.158 Within an assessment of market risk, <strong>the</strong> valuation of technical liabilities should be compatible with <strong>the</strong> rules on <strong>the</strong> technical provisions <strong>to</strong> be developed as part of <strong>the</strong> future solvency framework (cf. CfAs 7 and 8 on technical provisions). In life insurance, embedded options and <strong>the</strong> insurance undertaking's discretion <strong>to</strong> adjust profit sharing should be taken in<strong>to</strong> account. Credit risk 10.159 CEIOPS recommends testing a fac<strong>to</strong>r-based approach <strong>to</strong> model credit risk as <strong>the</strong> base model, with appropriate supplements for concentrated exposures. 10.160 CEIOPS notes two valuable sources of data input for determining <strong>the</strong> fac<strong>to</strong>rs that should be applied <strong>to</strong> credit risk: ratings and credit spreads (reflecting <strong>the</strong> markets’ perception of creditworthiness). The volume measure should be based on market value of <strong>the</strong> credit risk exposure (or marking <strong>to</strong> model when no market value exists). 10.161 For a fac<strong>to</strong>r based approach, CEIOPS notes <strong>the</strong> general principle that using more information should result in a capital requirement that is more closely aligned <strong>to</strong> <strong>the</strong> undertaking's risk profile. However, <strong>the</strong>re is a trade-off between <strong>the</strong> increase in <strong>the</strong> formula's complexity and <strong>the</strong> accuracy of <strong>the</strong> measurement. For QIS, CEIOPS will test: • an approach using both credit spreads and ratings information; • simplified approaches using just credit spread information, or 110
Operational risk just ratings information; and • <strong>the</strong> materiality of different types of credit risk exposure, including exposures <strong>to</strong> reinsurance counterparties and intermediaries. 10.162 For a standardised treatment of operational risk, CEIOPS recommends testing a multiple fac<strong>to</strong>r-based approach. The volume measure should be an adequate proxy for <strong>the</strong> scale of an insurance undertaking’s operations, and <strong>the</strong>refore <strong>the</strong> likely scale of operational risk exposure. Possible choices would be <strong>the</strong> level of gross premiums and/or technical provisions. Policy on solvency capital 10.163 CEIOPS supports <strong>the</strong> inclusion of more specific high-level principles on a 'Policy on solvency capital' as part of <strong>the</strong> risk management in <strong>the</strong> future Framework Directive. 10.164 Insurance undertakings should be required <strong>to</strong> have a Policy on solvency capital which should contain <strong>the</strong> following elements: • Insurance undertakings must define <strong>the</strong> level of Solvency Capital above which <strong>the</strong>y wish <strong>to</strong> operate in order <strong>to</strong> achieve <strong>the</strong>ir goals. • Insurers must also define <strong>the</strong> composition of <strong>the</strong> Solvency Capital, e.g. pure capital, hybrid <strong>to</strong>ols. The CEIOPS answer <strong>to</strong> CfA 19 94 has <strong>to</strong> be taken in<strong>to</strong> account. • The methods used <strong>to</strong> derive <strong>the</strong> capital goals. For instance, <strong>the</strong> realistic adverse scenarios which <strong>the</strong> insurer has considered and that have identified <strong>the</strong> capital level in line with <strong>the</strong> capital goals. • The methods and internal organisation used <strong>to</strong> moni<strong>to</strong>r performance against <strong>the</strong> goals about solvency capital. • The procedures <strong>to</strong> be applied in order <strong>to</strong> evaluate <strong>the</strong> impact on solvency capital (consumption of capital) of significant activities of <strong>the</strong> insurer. A sufficient level of confidence must be ensured so that nei<strong>the</strong>r any new activity (new products, new investments, etc.) nor a negative development of existing activities, will endanger <strong>the</strong> rights of <strong>the</strong> policyholders and beneficiaries. • Undertakings have <strong>to</strong> ensure that any modification of any element of available capital (including <strong>the</strong> contribution of insurer’s subsidiaries <strong>to</strong> available capital) is consistent with <strong>the</strong>ir policy and solvency capital, in order <strong>to</strong> control and avoid having a failure in <strong>the</strong> compliance of <strong>the</strong> SCR, or own goals on solvency capital, if higher than <strong>the</strong> SCR. 111
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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Explanatory text S
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always have resources to</s
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developed. They would help
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8.28 A fourth option could be envis
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In principle, "the
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8.48 Three alternatives can be cons
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essential part of the</stro
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statistical estimate (with a level
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8.77 It may be argued that
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to use more sophis
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consequence on the
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8.105 In some cases, the</s
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This shall be reviewed, at least an
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ut the exposure <s
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Explanatory text M
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9.15 Solvency II could also employ
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9.28 The life formula yields itself
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14.12 In order to
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groups in its answer to</st
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affected; • Impose restrictions o
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14.43 Regarding the</strong
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off all contracts; • to</
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Call for Advice No. 15 Solvency con
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Minimum capital requirement (MCR) D
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adjusted SCR. From a purely technic
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to be implemented.
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capital
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absolute floor (expressed in euros
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Bolkestein agreed to</stron
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16.14 Generally speaking, complianc
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appoint an additional person <stron
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16.28 It should also be noted that
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Time of application 16.41 The asses
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of the individual
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Background 17.1 This document aims
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Review Panel would be a permanent g
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• the developmen
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asis for considering improvements <
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(I) Regulatory arb
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(II) Capital requirements at group
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into a SCR at grou
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18.31 Additionally, it must be deci
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Capital requirements 18.39 The Fram
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(III) Supervisory Review Process of
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18.60 In view of the</stron
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new structure would need to
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future Framework Directive. CEIOPS
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18.94 Model validation in t
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the assumptions us
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Annexes Annex A (Call for Advice No
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pursuing a strategy which t
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Specific principles for non-life in
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Conformity, suitability and suffici
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• existence of significant insuff
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A.64 In the tests
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the rules on <stro
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TVaR1-α for Tail Value-at-risk. In
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Degree of personalisation B.24 Tran
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B.34 There are two approaches <stro
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Segmentation B.44 In general terms,
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technical technical technical techn
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B.61 The second alternative was cho
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Dutch supervisory authority for <st
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Market risk Equity risk this altern
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B.95 In a scenario-based approach,
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B.106 As an alternative one could t
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where: KTSA = the
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Results from the a
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Solvency ratio prior to</st
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Number of instances Risk group Deta
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Conclusion In general, the<
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where: TP gross = technical provisi
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premium risk, the
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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