Download Solvency and Risk Based Supervision

EAC HARMONIZATION:
Solvency and Risk Based
Supervision
The East African Community
One People, One Destiny
October 21-23, 2015
Nairobi, Kenya
About the FSVC….
FSVC is a USAID government funded privatepublic partnership that channels high level
volunteer technical assistance to help build sound
financial systems in emerging countries. Over the
past 20 years, FSVC has sent over 8500 volunteer
consultants on 2500 missions in 50 countries. In
Kenya, FSVC is funded by USAID-Nairobi and an
implementing partner of Trade Africa. More about
FSVC can be found on our website at
www.fsvc.org.
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Achieving EAC Insurance
Sector Excellence
INSANITY IS DOING THE SAME THING OVER AND
OVER AND EXPECTING A DIFFERENT RESULT.
-Albert Einstein
(Emerging market insanity: insurance sector
development without actuaries?)
Goal: Challenge how we think about insurance
regulation, in EAC countries and regionally, and the
relationship between insurers, regulators and EAC
economic development.
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Perspectives on Harmonization and RBS
What do you see?
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EAC: Drivers of Regulatory Change
• Global desire for consistency.
• Increasing number of multi-jurisdiction
players.
• IAIS protocols.
• The financial meltdown.
• A path to harmonization.
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Insurance Financial Regulation:
Traditional Model
Compliance Based Regulation: Set at a
Point in Time
• Application of law regardless of the material
risk of the licensee.
• Limited focus on individual risks.
• Resource Intensive.
• Does not easily incorporate non-prudential
risks e.g. operational
• Easy to administer.
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How We Regulate: New
Standard
Risk Based Regulation: Prospective and Ongoing Regulation
• Adoption of“proportionality,” i.e., size, nature, complexity.
• Resource efficient BUT resource dependent: qualified
actuaries, accountants, auditors supported by professional
organizations.
• Constant reassessment of risk by company and regulator.
• Encompasses all risks including those that are operational
and those not easily quantified, e.g., reputational risk.
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Shifts in IAIS Focus
• More risk-based approach to capital
and solvency measurement.
• Focus on risk management and
governance.
• Increased use of stress and
scenario testing.
• Group supervision.
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Risk-Based Capital (RBC)
• Method of measuring minimum capital
appropriate for insurer to support overall
business operations considering size and
risk profile.
• Can be interim step to RBS.
• Typically measures asset, insurance and
business risks.
• Formulaic, not tailored to individual
company.
• Basis for regulatory action.
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RBC Formula
• Not all risks accounted for.
• Each component of formula not
material to all companies.
• Not totally accurate for all companies
but reasonably accurate for most
companies.
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RBC Components
• R0 – Asset Risk Affiliated 14%
• R1 – Asset Risk Fixed Income 2%
• R2 – Asset Risk Equity 21%
• R3 – Asset Risk Credit 7%
• R4 – U/W Risk Reserve 36%
• R5 – U/W Net Premiums Written 20%
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How Does RBC Formula Apply?
• Calculates minimum capital level (Authorized
Control Level) compared to company’s actual
capital held (Total Adjusted Capital)
–
–
–
–
Company Action Level 200% ACL
Regulatory Action Level 150% ACL
Authorized Control Level 100% ACL
Mandatory Control Level 70% of ACL
• E.g., insurer with 200% RBC ratio has capital =
to twice its RBC
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Risk Based Supervision Defined
A structured process aimed at identifying
most critical risks facing each company and,
through focused review by supervisor,
assessing company management of risks
and company financial vulnerability to
potential adverse experience.
Source: World Bank
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Solvency: Risk, Governance and
Supervision
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ICP 7 Corporate Governance
Supervisor requires insurers to establish and
implement a corporate governance framework
which provides for sound and prudent
management and oversight of the insurer’s
business and adequately
recognises and
protects the interests
of policyholders.
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Governance
• Board and senior management responsibility.
• Includes:
–
–
–
–
–
Underwriting risks
Credit risks
Market risks
Operational risks
Liquidity risks
– Relationship between risk management and
quality of financial resources needed and
available.
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ICP 17 Capital Adequacy
Supervisor establishes capital adequacy
requirements for solvency purposes so that
insurers can absorb significant unforeseen
losses and to provide for degrees of
supervisory intervention.
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ICP 16: Solvency and Risk
Management
Supervisor requires:
 insurers identify, quantify risk under wide range of outcomes.
 insurers document risks, measurement approaches used,
assumptions made.
 insurers implement risk management policy outlining how risks
managed.
 insurer describes relationship between tolerance limits,
regulatory capital requirements, economic capital.
 insurers have asset-liability management policy and describe
relationship to product development, pricing , investment
management.
 insurers have explicit investment policy and how policy complies
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with regulatory requirements.
ICP 16 continued
• insurers have underwriting risk polices.
• insurers have risk tolerance statement with quantitative,
qualitative risks.
• tolerance levels in business strategy, day to day
operations.
• insures ERM framework responsive to risk profile
changes.
• insurer ERM framework has feedback loop.
• insurer performs own risk and solvency assessment
(ORSA) on adequacy of risk management, current and
future solvency position.
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ERM and ORSA
ORSA is element of insurer’s Enterprise Risk
Management (ERM) framework. Links insurer’s risk
identification, measurement, prioritization processes
with capital management and strategic planning.
Each insurer’s ORSA is unique, reflecting business,
strategy and approach to ERM. Regulator uses ORSA
to understand insurer process. At minimum ORSA
should discuss three major areas:
• Insurer’s Risk Management Framework
• Insurer’s Assessment of Risk Exposure
• Group Risk Capital and Prospective Solvency Assessment
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ORSA: A Tool to Improve Solvency
Regulation and Company
Profitability
• Identify and quantify risk.
• Policy outlining management of all relevant and
material risks.
• Relationship between tolerance limits:
– capital requirements
– economic capital
• Methods for monitoring risk.
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Capital Calculation: Internal
Models
IAIS permits superintendents to
allow internal models to determine
regulatory capital requirements.
• Insurer must document the design, construction and
governance of the model.
• Including underlying rationale and assumptions.
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Regulator: RBS Framework
Solvency Framework
Valuation
Prudent
Risk Measurement
Time Horizon Risk
SCR
Measure
Market
Consistent
Liabilities
Legal
Entity
Risks
Group
Principles
Multiyear
Group Risk
Consolidated
Observable
VaR
CRTs only
CRTs only
Market Prices
TailVaR
Unobservable
others
1 year
Assets
Quantification
Scope
Market
Credit
Amortized cost
for bonds
Undiscounted for
P&C
Mix of book value,
market value
Prudent discount Mark to Model MVM
rate at time of sale
No recognition of
derivatives etc.
Prudent assumptions
Liabilities
Assets
Scope
LoB
Quantile (?)
Mathematical
Framework
Legal Entity
Group
Insurance
Standard
Models
Operational?
Internal
Models
Others?
Proxy
Scope
Type
Cost of Capital
Quantile?
Factor
Life
Parallel run with
standard models
Others?
RBC
P&C
Stand-alone run
Scenario
Health
Mandatory vs
facultative
RI?
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Insurer: Risk Management Framework
Possible set-up of risk/capital
management within insurance
company: different
organizational structures are
possible
Dividends
Equity
Senior
Capital
Hybrid Contingent
Board
CFO
Capital Management
Risk Capacity
market, credit risk
Risk Appetite
Assets
Risk and capital management,
reinsurance
Reserving
ALM
CRO
CIO
market, credit risk
Liabilitie
s
Pricing
Actuary
insurance risk
Underwriting
Claims
Payment
Appointed
Actuary
credit, insurance
risk
Sales
Reinsurance
external
Traditional,
Finite
internal
Intra
Group
Insurance
Market
Premium, Future Portfolio Swaps
Coinsurance,…
Profit
Capital
Market
Securitization,…
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ASANTE!
Questions
Comments
?
Concerns
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This training is made possible by the generous support of the American people
through the United States Agency for International Development (USAID).
The contents are the responsibility of the Financial Services Volunteer Corps
and do not necessarily reflect the views of USAID or the United States
Government.
Financial Services Volunteer Corps
10 East 53rd Street, 36th Floor
New York, U.S.A.
Tel. + 1 (212) 771 1412
Fax + 1 (212) 421 2162
www.fsvc.org
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