Analysis of LAGIC & Solvency II’s impact on Life Insurers

Furthermore, the bulk of the capital requirements in the risk portfolio and annuity portfolio derives from insurance risks and market risks respectively.. x List of Acronyms ABS Austra

Analysis of LAGIC & Solvency II’s impact on

Life Insurers

Kangjing Tan

A thesis submitted in partial fulfilment of the requirements

for the degree of Bachelor of Actuarial Studies with Honours at the Australian National University

30th October 2015

ii

Declaration

This thesis contains no material which has been accepted for the award of any other degree or diploma in any University, and, to the best of my knowledge and belief, contains no material published or written by another person, except where due reference is made in the thesis

Kangjing Tan

30th October 2015

Acknowledgements

This thesis would not be possible without the assistance of many wonderful people

I would like to thank my supervisor, Dr Aaron Bruhn for his continuous assistance, guidance and support throughout the year I would also like to thank Brendan Counsell and Bridget Browne for their kind assistance

I would also like to thank the Australian National University for awarding me the ANU-Singapore Alumni undergraduate scholarship and providing me the financial support throughout my degree

In addition, I would like to thank the Centre for International Finance and Regulation for awarding

me the CIFR/CMCRC Honours Scholarship and providing me the financial support for this thesis

Finally, I would also like to thank my family, friends and all honours colleagues for their tremendous support

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Abstract

Solvency II is a European Union (EU) legislative program to be implemented across all 28 member states It introduces a new and harmonised insurance regulatory regime across the EU The EU is the single largest economic market in the world and forms 24% of the world’s GDP (IMF, 2014)

The implementation of Solvency II garnered vast amounts of attention because it is the first insurance regulatory regime to be applied across all EU member states It is also one of the first insurance regulations in the world to follow the Basel Accord approach with a 3-pillar structure The 3 pillars cover namely capital requirements, risk management and disclosure requirements respectively

Previous regimes did not incorporate risk management and disclosure requirements This paradigm shift is not limited to the EU Many countries across the world are shifting towards such insurance regulatory approaches In Australia, the Life and General Insurance Capital (LAGIC), which is the regulation governing life and general insurers, follows a similar approach

This research thesis will focus on Pillar 1, Capital Requirements, of the insurance regulations The new Solvency II Pillar 1 Capital Requirements adopts a risk-based capital approach, which measures capital requirements for an insurer based on its risk profile It requires higher amount of capital for a higher amount of risk taken by the insurer Australia’s LAGIC also adopts a risk-based capital approach

By having a risk-based approach, regulators around the world hope to achieve a set of capital requirements which tailors to the insurers’ actual risk exposure This is paramount as the insurance industry is widely considered to be of systemic importance to the financial sector of the economy Regulators legislating insurers to set aside an amount of capital as a capital requirement hope to instil confidence and assurance in the insurers’ ability to meet its liabilities should unexpected events occur

This research thesis aims to achieve the following:

 To demonstrate the impact of LAGIC and Solvency II Capital Requirements on different insurance product portfolios, thus allowing a better understanding of both LAGIC and Solvency II

 To illustrate the significance of Solvency II’s Matching Adjustment (MA)

 To illustrate the differences in capital requirements of LAGIC, Solvency II (without MA) and Solvency II (with MA)

 To analyse the sufficiency of LAGIC and Solvency II Capital Requirements by conducting stress tests with the following scenarios: 1) Global Financial Crisis (GFC) conditions 2) Pandemic conditions 3) Pandemic + Financial Crisis conditions

3 separate insurance portfolios were created They are a risk portfolio, annuity portfolio and a combined portfolio The combined portfolio is the risk portfolio combined with the annuity portfolio All 3 portfolios are created with realistic assumptions which reflects current Australian life insurance industry data

This research showed that the annuity portfolio required a substantially larger capital requirement than the risk portfolio Furthermore, the bulk of the capital requirements in the risk portfolio and annuity portfolio derives from insurance risks and market risks respectively An interesting result

is that the total capital requirements for the combined portfolio is less than the sum of total capital requirements of the risk portfolio and the annuity portfolio This is because of the diversification benefits obtained when the risk portfolio is combined with the annuity portfolio

Our stress testing results showed that the capital requirements for the annuity and combined portfolio are insufficient for the GFC conditions stress test for both Solvency II and LAGIC, but sufficient under a milder financial crisis Also, the capital requirements for the risk portfolio are insufficient for the pandemic stress for both Solvency II and LAGIC

Does this insufficiency necessarily imply that the capital requirements are inadequate and that insurers are vulnerable to insolvency? No This will be further discussed in the thesis

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Table of Contents

Declaration ii

Acknowledgements iii

Abstract iv

Table of Contents vi

List of Figures & Tables viii

List of Acronyms x

1 Introduction 1

1.1 Background 1

1.2 Thesis Outline 3

1.3 Risks Life Insurers face 4

2 Solvency II Development 7

2.1 Development of Regulation & Solvency Concepts 7

2.2 Solvency I & its limitations 8

2.3 Moving to Solvency II 9

2.4 Industry Involvement 11

2.5 Quantitative Impact Studies (QIS) 12

2.6 Impact of GFC on Solvency II 15

2.7 From CEIOPS to EIOPA 15

2.8 OMNIBUS II 15

2.9 Delay of Solvency II Implementation 16

2.10 Costs of Solvency II & Other Implementation issues 17

2.11 Industry Preparedness 17

2.12 Summary 19

3 Solvency II Regulation 20

3.1 Pillar 1 – Quantitative Measures 20

3.1.1 Valuation of Assets & Liabilities 21

3.1.2 Capital Requirements 25

3.2 Pillar 2 – Governance & Risk Management Requirements 29

3.3 Pillar 3 – Disclosure and transparency Requirements 30

4 Life and General Insurance Capital (LAGIC) Regulation 31

4.1 Background Information 31

4.2 Objectives of the LAGIC 32

4.3 Life and General Insurance Capital (LAGIC) 32

4.4 LAGIC Pillar 1 – Quantitative measures 33

4.5 LAGIC Pillar 2 & Pillar 3 38

5 Modelling Methodology 39

5.1 Modelling objectives 39

5.2 Models 39

5.3 Assets and Liabilities Assumptions 40

5.4 Other Modelling Assumptions 46

5.5 Policyholders 50

5.6 Solvency II Risk Margin Calculations 55

5.7 Solvency II Capital Requirements Stresses 55

5.8 LAGIC Capital Requirements Stresses 57

5.9 Stress Scenarios 58

6 Results & Analysis 63

6.1 Liabilities 63

6.2 Capital Requirements 64

6.3 Capital Base 69

6.4 Stress Scenarios 71

7 Further Discussion 78

7.1 Matching Adjustments (MA) 78

7.2 Stress Scenarios 79

7.3 Sufficiency of Capital Requirements 80

8 Conclusion 82

9 References 83

Appendix – Excel Workings 87

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List of Figures & Tables

Figure 1.1 Risks Life Insurers face 4

Table 2.1 Lamfalussy Process 10

Table 2.2 Industry bodies involved in Solvency II development 12

Figure 2.3 Solvency II expected compliance date 18

Figure 2.4 Solvency II expected compliance date by country 18

Figure 2.5 Solvency II development summary 19

Figure 3.1 3 Pillars of Solvency II 20

Figure 3.2 Calculation of Technical Provisions 21

Figure 3.3 Solvency II Matching Adjustment Illustration 24

Figure 3.4 Solvency II Balance Sheet 25

Figure 3.5 Calculation of the Solvency Capital Requirement (SCR) 27

Figure 4.1 LAGIC 3 Pillars 32

Figure 4.2 Prudential Capital Requirement (PCR) Calculation 34

Figure 4.3 Combined Stress Scenario Adjustment (CSSA) Calculation 36

Table 5.1 Annuity Assets Portfolio 41

Figure 5.2 Mortality Rate of a non-smoker male from age 20 to 70 44

Figure 5.3 Case 1, 30 year old female, non-smoker, Sum Insured = $1m 44

Figure 5.4 Case 2, 60 year old male, smoker, Sum Insured = $200,000 45

Table 5.5 Risk Portfolio Assets 45

Figure 5.6 Annuitant Mortality as a percentage of Population Mortality 48

Table 5.7 Lapse Rates for Level Term and YRT insurance policies 48

Table 5.8 Expenses for Level Term & YRT insurance policies 49

Table 5.9 Commission rates for Level Term & YRT insurance policies 49

Table 5.10 Male Level Term Life Insurance Age & Sum Insured (SI) Distribution 50

Table 5.11 Female Level Term Life Insurance Age & Sum Insured (SI) Distribution 50

Table 5.12 Level Term Life Insurance Policy Year Distribution 51

Table 5.13 Male YRT Life Insurance Age & Sum Insured (SI) Distribution 51

Table 5.14 Female YRT Life Insurance Age & Sum Insured (SI) Distribution 52

Table 5.15 Male Life Annuities Age & Annual Payments Distribution 53

Table 5.16 Female Life Annuities Age & Annual Payments Distribution 53

Figure 5.17 Distribution of Age which policyholder leaves Guaranteed Annuity Policy 54

Table 5.18 Male Guaranteed Annuities Age & Annual Payments Distribution 54

Table 5.19 Female Guaranteed Annuities Age & Annual Payments Distribution 54

Table 5.20 Summary of Solvency II Market Risk stresses 56

Table 5.21 Summary of Solvency II Life Underwriting Risk stresses 56

Table 5.22 Summary of LAGIC stresses (Asset Risk Charge) 57

Table 5.23 Summary of LAGIC stresses (Insurance Risk Charge) 58

Figure 5.24 ASX 200 Index 59

Figure 5.25 A-rated Corporate Bond Spread to the Australian Government Bonds 60

Table 5.26 GFC Conditions stress 60

Table 5.27 Pandemic + Financial Crisis stresses 62

Table 6.1 Value of Liabilities for each portfolio 63

Table 6.2 Overall Capital Requirements 64

Table 6.3 Risk Portfolio Capital Requirements 64

Table 6.4 Annuity Portfolio Capital Requirements 65

Table 6.5 Combined Portfolio Capital Requirements 67

Figure 6.6 Capital Requirements as a percentage of liabilities’ book value 68

Table 6.7 Required Capital under Solvency II, Solvency II (MA) and LAGIC 69

Table 6.8 GFC Conditions Stress (Risk Portfolio) 71

Table 6.9 GFC Conditions Stress (Annuity Portfolio) 72

Table 6.10 GFC Conditions Stress (Combined Portfolio) 72

Table 6.11 Pandemic Conditions Stress (Risk Portfolio) 74

Table 6.12 Pandemic Conditions Stress (Combined Portfolio) 75

Table 6.13 Pandemic & Financial Crisis Conditions Stress (Annuity Portfolio) 76

Table 6.14 Pandemic & Financial Crisis Conditions Stress (Combined Portfolio) 76

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List of Acronyms

ABS Australia Bureau of Statistics

APRA Australia Prudential Regulation Authority

BEL Best Estimate Liability

CEIOPS Committee of European Insurance and Occupational Pensions Supervisors

EIOPA European Insurance and Occupational Pensions Authority

EY Ernst & Young

FSC Financial Services Council (Australia)

IAIS International Association of Insurance Supervisors

ICAAP Internal Capital Adequacy Assessment Process

LAGIC Life and General Insurance Capital

MCR Minimum Capital Requirements

ORSA Own Risk and Solvency Assessment

PCA Prescribed Capital Amount

PwC PricewaterhouseCoopers

PCR Prudential Capital Requirements

QIS Quantitative Impact Study

RBA Reserve Bank of Australia

REIT Real Estate Investment Trust

SARS Severe Acute Respiratory Syndrome

SCR Solvency Capital Requirements

YRT Yearly Renewable Term insurance

1 Introduction

1.1 Background

In antiquity, risk was often perceived through the lens of fate and met with acceptance rather than defiance Protection against mishaps was seen as an interference with divine providence Insurance against death still arouse controversy among clerics even as late as the 19th century But risk sharing within social and business communities were seen as acceptable ways of alleviating losses Risk sharing based on solidarity was prevalent among village communities, trade associations and guilds (Swiss Re, 2013)

Modern life insurance policies were established in the early 18th century The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office It was founded in London in 1706 by William Talbot and Sir Thomas Allen The first life insurance plan specifies that each member pays a fixed annual payment per share when members are aged between 12 and

55 At the end of the year, deceased members’ wives and children would receive a portion of the amicable contribution The payment amount was proportionate to the amount of shares owned Amicable Society started with 2000 members (Amicable Society, 1854)

As the Life Insurance companies developed in the 19th and 20th century, shareholding became essential as it allowed the separation of operating capital from risk capital and provided funds to expand businesses This laid the foundations for a rapid growth in the insurance industry in the

20th century (Swiss Re, 2013)

In 2013, global life insurance premiums totalled USD 2608 billion while global non-life insurance premiums totalled USD 2033 billion About USD 27 trillion of funds, which is approximately 12%

of global financial assets, were managed and invested by the global insurance industry in 2012 This is substantially more the 2013 US GDP of USD 16.77 trillion (Sigma, 2012)

The insurance industry is now seen as having systemic importance to the economy The failure of

an insurer can potentially trigger a financial crisis and deal great damage to an economy Former United States Secretary of the Treasury Henry Paulson warned that the failure of a major insurer can have a large, long-lasting effects on households and businesses that rely on basic insurance

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protection (US Treasury, 2008) As such, regulators around the world pay significant attention to the level of solvency of insurance companies The systemic importance of an insurer within a developed economy is highlighted with the failure of HIH insurance, the then 2nd largest insurer

in Australia, in March 2001 Several insurance markets, such as public liability, professional indemnity and builders warranty insurance were severely disrupted It even had ramifications to the wider economy where building construction sites were closed due to a lack of insurance coverage (Bellis, Lyon, Klugman & Shepherd, 2010)

The rationale for regulating insurers is to address the risk of insurer failures A key tool to minimise this risk is the adoption of a capital adequacy regime which enforces insurers to hold a minimum level of capital commensurate with their risk profile This approach vastly decreased the risk of insurer failure as risks taken on by insurers were now supported by adequate capital (Australian Prudential Regulatory Authority, 2012)

It is therefore vital that we study the risks that insurance companies face and evaluate the effectiveness of regulations in ensuring that insurance companies are managing these risks prudently

Hence, our thesis will look into Solvency II and LAGIC capital requirements, assess the impact

of these regulatory capital requirements on the insurance portfolios, and evaluate the sufficiency

of these regulatory capital requirements

1.2 Thesis Outline

This thesis will begin by narrating the development of modern-day insurance and introducing the material risks which a typical life insurer faces This chapter, Chapter 1 – Introduction, provides the backdrop for the subsequent discussion and analysis of Solvency II and LAGIC

Next, we will move on to the discussion of Solvency II and LAGIC regulations in Chapters 2 to

4 We will first examine the entire process of Solvency II regulation which spanned more than 10 years and cost a total of €2 to €3 billion in the implementation phase in Chapter 2 Then, the Solvency II regulation will be illustrated, with particular focus on Pillar I, Quantitative Measures,

in Chapter 3 Chapter 4 will look at LAGIC, similarly with particular focus on Pillar I, Quantitative Measures

After illustrating the regulatory regimes of Solvency II and LAGIC, we will strive to model a realistic set of assets and liabilities in Chapter 5, Modelling Methodology Chapter 5 aims to achieve our objective of analysing the impact and sufficiency of these 2 regulatory regimes The objectives, assumptions and approaches used in modelling the assets, liabilities, capital requirements and stress scenarios will be extensively discussed in this chapter

Chapter 6, Results and Analysis, will then cover the results obtained for the liabilities, capital requirements and capital base for the various portfolios It will also discuss the sufficiency of the capital requirements under the stress scenarios

After obtaining our results and analysis, Chapter 7, Further Discussion, will evaluate and further discuss certain issues mentioned in Chapter 6

Chapter 8, Conclusion, will summarise the findings and analysis from the research

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1.3 Risks Life Insurers face

We will now examine the risks that life insurers face:

Figure 1.1 Risks Life Insurers face

Insurance Risks

Insurance contracts share the common characteristic of the underwriting of a risk with uncertain chance of occurrence in return for a premium Hence, insurance risk is the risk of actual claim amounts deviating from expected claim amounts

Insurance Risks a Life Insurance company faces include the following:

Pandemic Risks - Pandemic (Greek; pan "all" + demos "people") is an epidemic of infectious

disease that has spread through human populations across a large region; for instance multiple continents, or even worldwide

An example of Pandemic Risk is the 1918 Spanish Flu which killed 40 million people around the world Such an event will drastically increase insurance claims (Centres for Disease Control and Prevention, 2006)

Interest Rate Risks

Equity Risks

Currency Risks

Credit Risks

Default Risks

Downgrade Risks

Operational Risks

Fraud

System Failures

Improper Business Practices

Liquidity Risks

Mortality Risk – Mortality Risk is the risk that the actual mortality experience differs from the

expected mortality experience, thereby leading to an increased claims payout

Morbidity Risk - Morbidity Risk is the risk that the actual morbidity experience differs from the

expected morbidity experience, thereby leading to an increased claims payout

Lapse Risk – Lapse risk is the risk that the number of policy lapses (or surrenders/withdrawals)

differs from the expected lapse experience, and negatively affects the profitability and value of the insurance company

Longevity Risk – Longevity risk is the risk that policyholders live longer than expected This

generally applies to annuity business where longer than expected survival will lead to an increased annuity payments

Expenses Risk – Expense risk is the risk that the expenses involved in the life insurance

company’s operations exceeds the expected amount

Market Risk:

Market risk is the risk that the insurance company experience losses in its asset portfolio as a result

of movements in market prices It includes:

 Interest Rate risk, the risk that interest rates or their implied volatility will change

 Equity risk, the risk that stock prices will change

 Currency risk, the risk that foreign exchange rates will change

Credit Risk:

Credit risk is the default risk of any counterparty to whom the insurer has an exposure to It includes the default risk of bonds/debt/derivatives in the insurer’s asset portfolio and counterparty default risk in reinsurance contracts

Insurers hold a substantial proportion of their investment portfolio in bonds In the United States, 75% of all life insurer’s asset portfolio are invested in bonds in 2010 (National Association of Insurance Commissioners, 2011) Government debts of developed countries are generally

Operational Risk:

Operational Risks is the risk due to failed internal processes, people and systems or from external events which are not inherent in financial, systematic or market-wide risk It is a risk which every company, not just a financial institution, faces

As an insurance company is considered to be of systemic importance to the financial sector, it is vital that operational risks is appropriately dealt with

Liquidity Risk:

Liquidity risk is the risk that an asset cannot be traded quickly enough in the market to prevent a financial loss In the context of insurance, it is the risk that assets have to be sold below market value to meet outstanding liabilities (claims, expenses etc.) Proper asset liability management will mitigate this risk

1 Risk that is specific to an asset or a small group of assets

2 Solvency II Development

2.1 Development of Regulation & Solvency Concepts

Coupled with the establishment of the insurance industry is the growing awareness of the importance of its long term sustainability Before the introduction of the term “solvency”, concepts like statutory reserves were frequently adopted, which have been formed in the course of years and which serve as an extra guarantee for fulfilling the obligations undertaken (Sandstrom, 2007) The purpose of solvency is to determine a company’s ability to redeem its liabilities Solvency concepts apply to insurers as they are considered to be of systemic importance to the financial sector of the economy

The International Association of Insurance Supervisors (IAIS), an organisation of insurance supervisors and regulators from all over the world, defines solvency in its website as:

“The ability of an insurer to meet its liabilities under all contracts at any time Due to the very nature of insurance business, it is impossible to guarantee solvency with certainty In order to come

to a practicable definition, it is necessary to make clear under which circumstances the appropriateness of the assets to cover claims is to be considered.” (International Association of Insurance Supervisors, 2015)

As regulators and insurers found a greater need for a framework to evaluate solvency, greater effort was made to pioneer a solvency standard Professor Campagne, chairman of the Dutch Insurance Regulator, initially named the reserve which is used to evaluate solvency of life insurers

as a stabilization reserve During the 1950s, he extended the solvency concepts to non-life insurers Campagne was asked to present a report on solvency in 1957 to the European Insurance Committee

as his solvency approach gained prominence (Sandstrom, 2010)

Campagne considered a minimum solvency margin as a percentage of the technical provisions

He considered the risk on technical provisions as the biggest risk factor The idea behind his concept was to define a level of reserve such that the probability of insolvency is between 0.001 and 0.01 (Sandstrom, 2011)

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Campagne concluded that an extra reserve of 4% of the technical provision (Solvency margin) would achieve solvency with a 95% probability Thus, he proposed this requirement and it was implemented in the first life directive within the European Union in 1979 (Sandstrom, 2010)

The third EU Insurance Directive (92/96/EEC) established the single market for life insurance in the mid-1990s Insurance companies were then entitled to sell in the EU with no restrictions on the basis of a single member state authorisation This entitlement relied on the mutual recognition

of the supervision exercised by different national authorities (Polish Insurance Association, 2015)

2.2 Solvency I & its limitations

The then existing capital requirements for life insurers were established in 1979 under the First Life Directive (79/267/EEC) In 2002, the Directive 2002/38/EC amended the First Life Directive This amendment and update was known as Solvency I Solvency I was the precursor to Solvency

II

Under Solvency I, capital requirements were known as required solvency margin and were defined

by a simple blanket solvency margin Life insurers were required to set aside a solvency margin

of the sum of 4% of non-investment-linked technical provisions, 1% of investment-linked technical provisions and 0.3% of sums at risk (Official Journal of the European Communities, 2002)

Over time, the inadequacies and limitations of this approach became apparent The limitations of Solvency I were nicely summed up by the deputy head of the Central Bank of Ireland at the European Insurance Forum:

“It is unacceptable that the common regulatory framework for insurance in Europe in the 21st‐ century is not risk‐based and only takes account, very crudely, of one side of the balance sheet The European Union urgently needs a new regulatory standard which differentiates solvency charges based on the inherent risk of different lines of business and which provides incentives for enhanced risk management It urgently needs a framework that takes account of asset risks in an insurance company It urgently needs a framework that encourages better governance and

management of risk And it urgently needs a framework that provides better disclosure to market participants – on a consistent basis – of the health of insurance companies.” (Central Bank of Ireland, 2013, Address to the European Insurance forum)

To further complement the above ideas, the limitations of Solvency I were (O’Donovan, 2014):

 It did not adopt a risk-based approach and could require insurance companies to carry too much or too little capital

 It allowed different EU states to have different adaptation of capital requirements, thus resulting in significant discrepancies across EU states and hindered cross-border regulation It also resulted in regulatory arbitrage

 The level of solvency of an insurance company cannot be judged entirely based on its regulatory submissions

 Good risk management practices were not explicitly promoted

 Financial conglomerates were not regulated in a consistent manner

2.3 Moving to Solvency II

Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry It is a major EU directive and applies to all EU-based insurers and reinsurance entities with gross annual premium incomes exceeding €25 million

A supervisory ladder of intervention is embedded into Solvency II capital requirements, by setting two target levels of capital: the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR) Apart from the capital requirements, there are also regulatory standards on risk management and disclosure requirements (Official Journal of the European Union, 2009) Solvency II’s aim is to establish a revised set of EU-wide capital requirements and risk management standards which will replace Solvency I The objectives of Solvency II are: (Official Journal of the European Union, 2009)

 To align capital requirements with the underlying risks of an insurance company

 To maintain strong, effective policyholder protection while achieving capital allocation

 To develop a proportionate, risk-based approach to supervision with appropriate treatment for large international and small local insurance companies

 To achieve an EU-wide harmonized approach to supervision, thus providing a level playing field for all EU insurers

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 To increase international competitiveness of EU insurers and increase competition within

EU insurance markets

 To deepen integration of the EU insurance market

Solvency II was created in accordance with the Lamfalussy process which was developed in March

2001 The Lamfalussy Process is an approach to the development of the EU financial service industry regulations and was named after Alexandre Lamfalussy, the chair of the EU advisory committee which created it

The four levels of Lamfalussy Process applied to Solvency II are as follow (Insurance Europe, 2007):

Table 2.1 - Lamfalussy Process

European Commission

European Parliament, European Council Level 2 Implementing

measures

Detailed implementation measures

European Commission

European Insurance and Pensions Committee Level 3 Supervisory

standards

Guidelines to enhance supervisory

European Commission

Source: Solvency II - Understanding the Process (Insurance Europe, 2007)

Level 1 of Lamfalussy Process – Solvency II Directive

The European Commission published a Solvency II Framework Directive to be approved by the European Parliament and the European Council The Solvency II Directive was passed by the European Parliament on 25th November 2009 The European Commission frequently asked the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) for advice during this stage This sets out the broad framework principles to be achieved under Solvency II (Official Journal of the European Union, 2009)

Level 2 of Lamfalussy Process – Implementing Measures

When the Framework Directive was passed by the European Parliament, the European Insurance and Occupational Pensions Committee (EIOPC), a committee consisting of national ministries of finance, prepared implementing measures These measures provided the detailed specifications required as per the Directive These were the ‘level 2’ measures under the Lamfalussy process (Insurance Europe, 2007)

Level 3 of Lamfalussy Process – Supervisory Standards

The day-to-day supervision of insurers will be performed by national insurance supervisors who may prepare common guidelines to apply the standards set out in level 1 and level 2 This was achieved through CEIOPS (Insurance Europe, 2007)

Level 4 of Lamfalussy Process – Evaluation

When Solvency II is implemented, the European Commission will ensure Solvency II compliance

in all member states

Initial Solvency II preparations started in 2002 The proposed Solvency II Framework Directive was made available for discussion in European Parliament and European Council in the summer

of 2007 Certain detailed elements, such as the final set of formulae and requirements, were further specified by CEIOPS because of the high-level nature of the Solvency II directive As a result, various components of the Solvency II regulation were released over the years 2003 to 2012 (Insurance Europe, 2007)

The Solvency II framework has a three-pillar structure These pillars include quantitative, qualitative and disclosure requirements The detailed description of Solvency II will be given in Chapter 3

2.4 Industry Involvement

Numerous industry bodies at the EU level were involved in the development of Solvency II Regular consultations were made with the insurance industry, via the industrial bodies mentioned below in Table 2.2, in CEIOPS response to the European Commission’s queries

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Table 2.2 Industry bodies involved in Solvency II development

Comite Europeen des Assurances Represented the European insurance and reinsurance

industry through national insurance associations in each

EU Member State Association Internationale des

Societes d’Assurances Mutuelle

Represented Global mutual insurance companies and cooperative insurance companies

Association of European

Cooperative and Mutual Insurers

Represented European mutual insurance companies and cooperative insurance companies

International Credit Insurance &

Surety Association

Represented the European credit insurers

Chief Risk Offer Forum Represented the risk management issues of the 14 large

European insurance groups Chief Financial Officer Forum Represented the financial reporting issues of the 20 large

European insurance groups Groupe Consultatif Actuariel

Europeen

Represented the European actuarial profession

(Source: Solvency II: Stakeholder Communications and Change, O’Donovan, 2011)

2.5 Quantitative Impact Studies (QIS)

As a form of preparation for Solvency II, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) launched 5 Quantitative Impact Studies (QIS) between 2005 and

2011 in order to examine the effect of the Solvency II proposals on both company and industry levels (Insurance Europe, 2007)

First Quantitative Impact Study (QIS 1)

QIS 1 was undertaken between October and December 2005 The objective of QIS 1 was to evaluate the impact of the proposed rules on the required technical provisions by benchmarking the current technical provisions against predefined confidence levels QIS 1 enabled CEIOPS to evaluate the practicality of the calculations involved (CEIOPS, 2006)

QIS 1 concluded that Solvency II proposals had significant implications, although the total effect was to be assessed after the QIS 2 exercise (CEIOPS, 2006)

Second Quantitative Impact Study (QIS2)

QIS2 took place in spring 2006 It was broader and more thorough than QIS 1 Its main objective was to assess the solvency requirements proposed in the Solvency II regulations They included the Solvency Capital Requirements (SCR) and the Minimum Capital Requirements (MCR) These concepts shall be further discussed in Chapter 3 (CEIOPS, 2006)

The key issue which arose from QIS 2 was the inconsistent relationship between the SCR and MCR calculations The SCR was designed to be higher than the MCR such that a sterner regulatory intervention would occur should capital fall below the MCR (after falling below SCR) However, there were some instances in QIS 2 where calculations based on insurers’ submissions led to a higher MCR than SCR (CEIOPS, 2006)

Third Quantitative Impact Study (QIS 3)

QIS 3 occurred from April to June 2007 The objective of QIS 3 was to calibrate the Solvency Capital Requirements (SCR) and the Minimum Capital Requirements (MCR) formulas in order to better capture the risks faced by an insurer and avoid the scenario where the SCR fell below the MCR (CEIOPS, 2007)

QIS 3 also initiated the analysis on the impact of Solvency II on insurance groups Insurance groups are an entity with multiple subsidiaries which are also insurance companies Such insurance groups are common in the EU and were established for various reasons such as taxation reasons, cross-border activities and the regulatory requirement on the separation of life and non-life businesses (CEIOPS, 2007)

Forth Quantitative Impact Study (QIS 4)

QIS 4 occurred between April and July 2008 Its objective was to assess the various aspects of the proposals, mainly quantitative but also qualitative (CEIOPS, 2008)

QIS 4 revealed that approximately 90% of the insurers were able to meet the capital requirements

of the new SCR and less than 5% of insurers failed to meet the capital requirements of the MCR (CEIOPS, 2008)

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A strong desire for consistency between Solvency II valuation principles and international accounting standards was expressed Supervisors were concerned about the auditability of Solvency II balance sheets in member states which do not use international accounting standards (PwC, 2008)

The European Commission indicated that QIS 5 would be conducted as 66% of insurers and reinsurers did not participate in QIS 4 (CEIOPS, 2008)

Fifth Quantitative Impact Study (QIS 5)

QIS 5 occurred between Jan 2010 to final reporting in March 2011 The process took 15 months and was the longest QIS by duration It was also the last of all Quantitative Impact Studies before the scheduled implementation on January 2013 which itself was subsequently delayed (EIOPA, 2011)

QIS 5 was designed to simulate and assess the implementation of Solvency II and has the following objectives:

 An arguably final opportunity to examine the financial impact of Solvency II on insurance companies Many insurance companies would use the results of QIS 5 to drive business decisions

 An opportunity to evaluate the readiness of insurance companies to perform calculations

in relation to Solvency II

 To use the result of QIS 5 to finalise the quantitative requirements of Solvency II The QIS 5 results indicated that the reduction in the surplus capital was approximately 12 percent when compared to the existing Solvency I capital requirements This was mainly caused by an increase in capital requirements, although the results vary widely depending on the utilization of

an internal model or the standard formula, the size of a company and the company’s line of business (Jean, Eom, Henriquez, 2011)

In addition, QIS 5 results indicated that 15% of the participants failed to meet the Solvency Capital Requirement (SCR), while 5% could not meet the Minimum Capital Requirement (MCR) Failure

in meeting SCR can result in regulatory action, and an insurance authority would step in when a company cannot meet its MCR (Jean, Eom, Henriquez, 2011)

2.6 Impact of GFC on Solvency II

The 2008 Global Financial Crisis (GFC) was widely dubbed by many economists as the worst financial crisis since the Great Depression of the 1930s As a result of the GFC, regulators around the world spent substantial resources in comprehending the issues which led to the GFC Regulators around the world believed that regulations should be reviewed to prevent a future crisis from occurring

As such, Solvency II development was being relooked at in the context of the GFC More emphasis was being placed on designing capital rules to prevent a future crisis (Jean, Eom, Henriquez, 2011)

2.7 From CEIOPS to EIOPA

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), established under the terms of European Commission’s Decision 2004/6/EC of 5 November 2003, was replaced by the European Insurance and Occupational Pensions Authority (EIOPA) on 1 January 2011 This was in accordance with Omnibus II, which will be discussed in the next section

CEIOPS had no powers to enforce a single EU regulatory regime or to settle a crisis and was merely entitled to adopt non-binding guidelines and recommendations Compared to its predecessor, EIOPA has special powers to enforce prudential standards through the development

of binding technical Standards (O’Donovan, 2014)

2.8 OMNIBUS II

As a result of the 2009 Lisbon Treaty and the establishment of EIOPA, a new architecture for implementing measures was required Thus, the Solvency II framework directive had to be adapted through Omnibus II

The Omnibus II directive clarified the role of EIOPA in the harmonisation of the approach to calculating capital requirements and technical provisions It also enabled EIOPA to propose technical standards as an additional tool for supervision (European Commission, 2013)

In addition, the Omnibus II directive contained a package of measures to provide clarity on the treatment of insurance products with long-term guarantees which mitigated the effects of artificial

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volatility These measures include: a volatility adjustment, a matching adjustment and the extrapolation of the risk-free interest rate (European Commission, 2013) These features will be discussed in the Chapter 3 Thus, this Directive ensured that long term guaranteed products could continue to be viably offered by the insurance industry

Furthermore, transitional measures such as transitional third-country equivalence were included

in the Omnibus II directive in order to avoid market disruption, thereby paving a smooth transition

to the Solvency II regime

On 11 March 2014, the European Parliament approved the Omnibus II Directive by 560 to 113 votes This was a vital milestone towards Solvency II implementation and provided further certainty to the Solvency II regime (European Commission, 2014)

2.9 Delay of Solvency II Implementation

With the completion of the draft Omnibus II proposal, Michel Barnier (the European Commissioner for Internal Market and Services) put forward a draft Directive postponing the application date of the Solvency II Directive to 1st January 2016 on 2nd October 2013

Commissioner Barnier remarked that “I have always wanted rapid implementation of Solvency II But the currently planned date is simply no longer tenable We have therefore proposed this postponement in order to avoid any legal uncertainty, especially for insurers and supervisory authorities; we have done this only after obtaining assurance from the Council and the Parliament that they would not further change this new application date of Solvency II” (European Commission, 2013, Statement by Commissioner Michel Barnier)

The intensive deliberation on the assessment of long-term liabilities and the long-term guarantee (LTG) package was a key reason behind Solvency II’s implementation delay This issue predominantly affects life insurers due to the substantial amount of long term products such as annuities which they hold The methodology behind discounting and valuing long-term liabilities could substantially affect the capital requirements of a life insurer With the LTG package, Solvency II now incorporates regulatory measures which mitigate the impact of short term market

movements on long term liabilities This new regulatory measures formed part of the Omnibus II directive

There was finally political certainty that Solvency II will finally be implemented amidst the series

of delays in the past few years With the approval of the Omnibus II directive, Solvency II looked set to be finally implemented on 1st January 2016 A single prudential regulatory rulebook for all insurers operating in the EU will finally be established

2.10 Costs of Solvency II & Other Implementation issues

Solvency II cost a total of €2 to €3 billion in the implementation phase and will incur €500 million

a year in ongoing costs after implementation This does not include the cost of additional capital which insurers are required to hold as a result of Solvency II capital requirements A substantial amount of the costs goes to implementing new information systems in order to achieve Solvency

II compliance (Insurance Europe, 2007)

Under Solvency II, insurers face substantial new requirements involving vast volumes of highly complex data on assets and liabilities Significantly more data would be required to be sourced, processed, stored and disseminated to senior management and the supervisory authorities Previously existing data were distributed across many different managers, firms and data vendors Accurately collating data from all these disparate sources to generate a unified picture posed an enormous challenge to insurers Data management capabilities are now an absolute regulatory necessity (RIMES, 2007)

2.11 Industry Preparedness

The confidence of insurers to meet solvency II requirements was strongly bolstered by the delay

of the regulatory deadline to 1st January 2016 According to a Pan-European survey with more than 170 insurers participants conducted in autumn 2013, most organizations only expected to be Solvency II compliant after 1st January 2015 (EY, 2014)

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(Source: Ernst & Young, Solvency II Survey, 2014)

Only Dutch insurers expect themselves to be fully Solvency II compliant by 2015 On the other hand, a number of French, German and British insurers expect to be Solvency II compliant after 1 January 2016 (EY, 2014) See Figure 2.4 below

Figure 2.4 Solvency II expected compliance date by country

(Source: Ernst & Young, Solvency II Survey, 2014)

Figure 2.3 Solvency II expected compliance date

2.12 Summary

The entire creation and implementation process of Solvency II spanned more than 10 years This

is not surprising as Solvency II is a massive revamp on the existing Solvency I insurance regulatory standards Moreover, Solvency II will apply to all 28 EU member states, whose insurance industry’s structure can be substantially different

Figure 2.5 below summarises the different phases of the development of Solvency II

Figure 2.5 - Solvency II development summary

In the next chapter, we will look into the details of Solvency II

• 5 QISs launched between 2005 and 2011

to assess the impact of Solvency II on company and industry levels

Omnibus II

• Final amendment to Solvency II for Jan 2016 implementation

Solvency II Implementation (Jan 2016)

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3 Solvency II Regulation

Solvency II, unlike its predecessor Solvency I, adopts a principle-based rather than a rules-based approach It contains 3 pillars which cover both the quantitative and qualitative regulatory requirements They aim to promote capital adequacy, greater transparency and enhance supervision The 3 pillars are as follows (Official Journal of the European Union, 2009):

 Pillar 1 – Quantitative Measures

 Pillar 2 – Qualitative Measures

 Pillar 3 – Disclosure

We will focus on Pillar 1 in this research Figure 3.1 below provides a quick summary of the 3 pillars of Solvency II which will be discussed in the next section

Figure 3.1 - 3 Pillars of Solvency II

3.1 Pillar 1 – Quantitative Measures

Pillar 1 – Quantitative Measures mainly covers the rules relating to the valuation of assets and liabilities, and Capital Requirements

There are 2 capital requirements under Solvency II – Solvency Capital Requirements (SCR) & Minimum Capital Requirements (MCR) The MCR is set at an amount lower than the SCR In this research thesis, we will focus on the SCR More details will be discussed in Chapter 3.1.2 We will first look at valuation of assets and liabilities

Governance

• Own Risk and Solvency Assessment (ORSA)

• Supervisory Review

• Market Discipline

3.1.1 Valuation of Assets & Liabilities

The primary objective of valuation requires an economic, market-consistent approach to the valuation of assets and liabilities

Solvency II requires the insurer to use market values wherever possible in the valuation of assets and liabilities In addition, Solvency II requires insurers to create technical provisions which correspond to the amount insurers would have to pay should they transfer their insurance obligations immediately to another insurer Liabilities are thus measured under the ‘Exit Value’ basis

There are 2 distinct liabilities valuation methods When dealing with hedgeable risks2, the technical provision is the market value When dealing with non-hedgeable risks3, the technical provision is the Best Estimate (BE) plus a risk margin (Official Journal of the European Union, 2009)

Figure 3.2 - Calculation of Technical Provisions

Non Hedgeable

-Best Estimate

Hedgeable

Market Value

In the case where expert judgement is used or required, it must be based on expertise of persons with relevant experience, understanding and knowledge of the risks inherent Here are some instances where expert judgement is necessary (Official Journal of the European Union, 2009):

 Selection of relevant data, time period and assumptions

 Correcting errors in data and appropriate treatment of outliers or extreme events

 Adjusting data to reflect current or future conditions

 Selection of valuation techniques

(𝟏 + 𝒓𝒕+𝟏)𝒕+𝟏

⁄

Where CoCM = Risk Margin

CoC = Cost of Capital rate

SCRt = the SCR for year t as calculated for the insurer

rt = Risk-free rate for maturity t

Simplifications for the calculation of the risk margin are allowed The degree of simplification depends on the scale, complexity and nature of the risks inherent in each business Simplifications suggested include (Official Journal of the European Union, 2009):

 Approximate individual risks within some or all of the modules/sub-modules

 Approximate the entire future years’ SCR using proportionate measure

 Approximate risk margin as % of best estimate

In this research thesis, SCR is calculated by approximating the entire future years’ SCR using

proportionate measure More details will be discussed in section 5.3

Discount rates & Matching Adjustments

Risk-free interest rates are used in the Solvency Standard Formula when discounting future cash flows

Under Solvency II Pillar 1, incentives are given to insurers for matching cash flows of long term liabilities with cash flows of long term assets4 Such asset-liability matching means that short-term asset price movements will not impact the insurer’s ability to pay off the long term liabilities Hence, it is vital to avoid artificial volatility in technical provisions, capital requirements or capital resources which do not reflect real movements in the insurer’s financial position or risk exposure

As part of the Omnibus II, an agreement on the Long Term Guarantee package was reached, which defined the way long-term products will be valued under Solvency II The long term insurer’s ability to meet cash flow needs is better captured by incorporating the long term investment strategies in a market consistent valuation framework The Long Term Guarantee package

contains the ‘matching adjustment’ used in valuing liabilities

4 An example of asset-liability matching is in an annuity portfolio where the assets cash flows in the form

of bond coupon payments matches the expected liability cash flows in the form of annuity payments

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The Matching Adjustment (MA) aims to offset short-term asset value fluctuations resulted from

risks other than default risks by decreasing the best estimate liabilities value through an increase

in the risk-free discount rate Under Pillar 1, insurers using the matching adjustments are required

to meet supervisory approval (Official Journal of the European Union, 2009)

In order for the matching adjustment to be used, insurers have to meet strict rules and conditions Conditions for the matching adjustments are: (Official Journal of the European Union, 2009)

 Assets in the Annuity Portfolio are to be Ring-fenced Ring-fencing segregates this pool

of assets from other assets of the insurer These assets can only be used to meet the liabilities in the Annuity Portfolio

 Assets in the Annuity Portfolio are to consist of bonds or other assets which similar flow characteristics

cash- Cash flows of the asset portfolio are fixed and cannot be changed by the issuers of the assets or any 3rd parties

The MA is equal to the spread of the bond yields over the risk-free rate minus the estimated spread for cost of downgrade and default It is the parallel upward shift to the risk free discount rate used

in valuing eligible policy liabilities (MAS, 2014) Figure 3.3 below illustrates how the MA works:

Figure 3.3 - Solvency II Matching Adjustment Illustration

(Source: Monetary Authority of Singapore, RBC 2 Consultation Paper, 2014)

3.1.2 Capital Requirements

We will first look at the balance sheet of an insurer under Solvency II See Figure 3.4 below:

Figure 3.4 - Solvency II Balance Sheet

(Source: Deloitte, Technical Provisions under Solvency II, 2010)

The left bar of the figure illustrates the assets while the right bar illustrates the liabilities of the insurer’s balance sheet

In Pillar 1, Market Values rather than Book Values shall be used Free Surplus is the market value

of assets in excess of the sum of the technical provisions, SCR and MCR

The Technical Provision is made up of the Best Estimate and the Risk Margin The method of calculating the Technical Provision is mentioned earlier in Section 3.1.1

Solvency Capital Requirement (SCR) – The amount of funds the insurer are required to hold so

that the insurer is able to meet its obligations over the next 12 months with a probability of at least 99.5%

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Minimum Capital Requirement (MCR) – The amount of funds the insurer are required to hold

so that the insurer is able to meet its obligations over the next 12 months with a probability of at least 85%

The introduction of two levels of capital requirements establishes an early warning mechanism thus allowing earlier supervisory actions if needed When an insurer’s capital falls below the SCR, supervisors will be required to take action in order to restore the capital requirements above the SCR When an insurer’s capital fall below the MCR, ‘ultimate’ supervisory action is triggered The license of the insurer will be confiscated with its assets liquidated and its liabilities transferred

to another insurer (European Commission, 2015)

Solvency Capital Requirements (SCR)

The insurer has to use either the SCR standard formula or an internal model to calculate the SCR

at least once a year and report the results to the supervisory authorities (Official Journal of the European Union, 2009)

The Solvency Capital Requirements cover the following risks under the standard formula (Official Journal of the European Union, 2009):

 Non-life underwriting risk

 Life underwriting risk

 Health underwriting risk

The SCR standard formula for a life insurer covers the following risks:

 Life Underwriting risk

 Market risk

Value-Figure 3.5 below illustrates the calculation of the SCR:

Figure 3.5 - Calculation of the Solvency Capital Requirement (SCR)

MortalityLongevityDisabilityLapseExpenseRevisionCatastropheRegulatory

Adjustment

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The Basic Solvency Capital Requirements (BSCR) incorporates the market risk, default risk, intangible risk and life underwriting risk modules As the above risks have various correlation among each other, a Solvency II pre-defined correlation matrix is used to incorporate any diversification benefits (Official Journal of the European Union, 2009)

𝑩𝑺𝑪𝑹 = √∑ 𝑪𝒐𝒓𝒓 𝑺𝑪𝑹𝒊,𝒋× 𝑺𝑪𝑹𝒊× 𝑺𝑪𝑹𝒋

where

𝑪𝒐𝒓𝒓 𝑺𝑪𝑹𝒊,𝒋 refers to the correlation matrix pre-defined by Solvency II

The individual Market, Default, Life, Intangible SCR modules aim to calculate the Value-at-risk

of each relevant risk at confidence level of 99.5% over a 1 year period More details on the capital requirements calculation is covered in section 5.7

Operational Risk Charge

Operational risk is the risk of losses arising from failed or inadequate internal processes, or from external events Operational risk increases with the amount of business activities as it derives from failed or inadequate internal processes, or from external events

In Solvency II, the Operational Risk Charge is calculated as:

𝑀𝑖𝑛(0.3 × 𝐵𝑆𝐶𝑅, 𝑂𝑝) + 0.25 × 𝐸𝑥𝑝𝑢𝑙 Where 𝑂𝑝 = 𝐵𝑎𝑠𝑖𝑐 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑟𝑖𝑠𝑘 𝑐ℎ𝑎𝑟𝑔𝑒 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠

𝑂𝑝 = 𝑀𝑎𝑥(𝑂𝑝𝑝𝑟𝑒𝑚𝑖𝑢𝑚𝑠, 𝑂𝑝𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝑠)

𝑂𝑝𝑝𝑟𝑒𝑚𝑖𝑢𝑚𝑠= 4% × 𝐺𝑟𝑜𝑠𝑠 𝐸𝑎𝑟𝑛𝑒𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑠 𝑓𝑜𝑟 𝑙𝑖𝑓𝑒 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒

𝑂𝑝𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝑠= 0.45% × 𝐺𝑟𝑜𝑠𝑠 𝑇𝑒𝑐ℎ𝑛𝑖𝑐𝑎𝑙 𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝑠 𝑓𝑜𝑟 𝑙𝑖𝑓𝑒 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝐸𝑥𝑝𝑢𝑙= 𝐴𝑛𝑛𝑢𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑓𝑜𝑟 𝑢𝑛𝑖𝑡 𝑙𝑖𝑛𝑘𝑒𝑑 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠

(Official Journal of the European Union, 2009)

Minimum Capital Requirements (MCR)

MCR is calculated using the formula given in the Solvency II directive There is an absolute minimum amount of €3.7m for life insurers When the MCR exceeds the minimum MCR amount,

it would be in the range of 25% to 45% of the SCR as calculated by the standard formulas for the MCR (Official Journal of the European Union, 2014)

We will focus on the SCR instead of the MCR as our interest is on the sufficiency of the SCR rather than the MCR

3.2 Pillar 2 – Governance & Risk Management Requirements

Pillar 2 of Solvency II deals with Governance and Risk Management Requirements It aims to improve the overall enterprise risk management and governance of the insurer

Under Pillar 2, insurers are required to have an effective system of governance that provides sound and prudent management of the company The insurer must adopt an effective risk management system, comprising but not limited to, strategies and reporting procedures necessary to identify, manage, measure, monitor and report on a continuous basis the risks it faces (Society of Actuaries Ireland, 2013)

A regulatory requirement of Pillar 2 is the submission of the Own Risk and Solvency Assessment (ORSA) According to the Solvency II regulation, the ORSA supervisory report should include:

 The quantitative and qualitative results of the ORSA and the relevant conclusions

 The methods and main assumptions used in the ORSA

 Information on the insurer's overall solvency needs and relevant analysis

 Any quantifiable risks of the insurer which are not reflected in the calculation of the SCR (Official Journal of the European Union, 2014, Article 306)

In addition to the ORSA report, the insurer is required to undergo regular supervisory reporting which include the following areas:

 Trends and factors which affect business and performance

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3.3 Pillar 3 – Disclosure and transparency Requirements

Pillar 3 deals with disclosure and transparency requirements It addresses transparency, disclosure

to the public and supervisory reporting It aims to improve market discipline and allow comparison amongst insurers, thereby leading to greater competition

Pillar 3 requires the insurer to submit a group solvency and financial condition report which are required to be publicly disclosed The group solvency and financial condition report has to include the following information:

 Business and performance

 System of governance

 Risk Profile

 Valuation methodology and assumptions

 Capital Management

(Official Journal of the European Union, 2014)

This research thesis will focus on Pillar 1 of Solvency II