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Call for Advice No. 10 Solvency capital requirement: <strong>the</strong> standard formula (life and non-life) Extract from <strong>the</strong> Call for Advice: The <strong>Commission</strong> would invite CEIOPS <strong>to</strong> give technical advice on ... appropriate EU standards for calculating <strong>the</strong> SCR. The advice should involve <strong>the</strong> following areas: • formulation of a detailed risk classification building on <strong>the</strong> work of <strong>the</strong> IAA • operational risk… • <strong>the</strong> most relevant modelling approaches for different risks in <strong>the</strong> standard formula should be analysed (…). The proposed modelling approach should take in<strong>to</strong> account <strong>the</strong> possibility of partial internal models. • When aggregating different risks, <strong>the</strong>ir dependencies should be carefully analysed <strong>to</strong> decide how, and <strong>to</strong> what extent, correlation effects should be taken in<strong>to</strong> account. … • Estimation of o<strong>the</strong>r parameters should also be analysed in detail: -which benchmarks and indexes could be used <strong>to</strong> define <strong>the</strong> parameters - which estimation periods should be chosen - how <strong>to</strong> address time-varying aspects (…) and <strong>to</strong> which extent <strong>the</strong>se could be taken in<strong>to</strong> account in Pillar II (…) - should expert judgement be used when setting <strong>the</strong> parameters or should <strong>the</strong>y be solely based on statistical inference - in which areas and <strong>to</strong> what extend would parameters need <strong>to</strong> be calibrated <strong>to</strong> national markets in order - how often should <strong>the</strong> parameters be updated and how • risk measure and calibration: - probability of ruin (…), with suitable skewness adjustments where necessary, may be preferred in <strong>the</strong> standard formula. - <strong>the</strong> principle could be <strong>to</strong> use a 1 year observation period although longer alternatives should also be studied (cf. also solvency control levels) - different ruin probabilities … 80
- going-concern aspects of business should be analysed and incorporated in<strong>to</strong> <strong>the</strong> model where feasible (…), or taken in<strong>to</strong> account through Pillar II measures - whenever possible, appropriate simulations and field-testing should be performed <strong>to</strong> support <strong>the</strong> EU decision making process. … The main concern regarding <strong>the</strong> implementation of Solvency II regime for SMEs is <strong>the</strong> potential complexity. This aspect has <strong>to</strong> be taken in<strong>to</strong> account both when developing quantitative measures and when formulating supervisory requirements for insurance companies. … Background 10.1 An Article for <strong>the</strong> definition of <strong>the</strong> SCR (N9 for “target capital” in document MARKT/2539/03) has <strong>to</strong> be developed. The following example outlines some possibilities for illustration and discussion purposes. It is tentative by nature and particularly <strong>the</strong> issues in square brackets require fur<strong>the</strong>r analysis and consideration. “To be able <strong>to</strong> absorb significant losses and <strong>to</strong> give [reasonable] assurance <strong>to</strong> policyholders, an insurance undertaking shall hold at all times solvency capital which is adequate having regard <strong>to</strong> its overall risk profile. Solvency capital requirement shall cover <strong>the</strong> relevant [underwriting, credit, market, liquidity, operational and o<strong>the</strong>r] risks. It shall be calibrated so that <strong>the</strong> probability of failure of an undertaking within [one] year is sufficiently low [“1/200” or “as defined in implementing measures”]. Explana<strong>to</strong>ry text Purpose of <strong>the</strong> SCR 10.2 The SCR should deliver a level of capital that enables an insurance undertaking <strong>to</strong> absorb significant unforeseen losses over a specified time horizon and gives reasonable assurance <strong>to</strong> policyholders that payments will be made as <strong>the</strong>y fall due. 10.3 The concept of SCR shares many features with economic capital in value-based management. Commercially, an undertaking will define its risk appetite and, where applicable, <strong>the</strong> public rating it wishes <strong>to</strong> achieve. It <strong>the</strong>n determines <strong>the</strong> economic capital that will be necessary <strong>to</strong> limit its probability of insolvency <strong>to</strong> a defined level. 81
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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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of the SCR estimat
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equirements to imp
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Call for Advice No. 12 Reinsurance
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Reflection in technical provisions
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• provide an estimate of an under
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particular reinsurer(s)’ aggregat
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they auto<
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einsurer to <stron
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should be a reduction in risk regar
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Call for Advice No. 13 Quantitative
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• the process of
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• handling questions from insuran
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member countries and in the
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components of the
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Background 14.1 Current insurance D
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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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