SST im Vergleich zu Solvency II

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					SST im Vergleich zu Solvency II
Hansjörg Furrer
Head of Quantitative Risk Management – Division Insurance

24. Mai 2011

     Basic principles of the SST
     Comparison SST – Solvency II
     Internal model approval process
     Equivalence assessment

    24. Mai 2011
    The SST is an important instrument for
    FINMA to comply with their duties

     Primary objectives of insurance supervision in Switzerland:

      To ensure that the interests of the insured are adequately
      To ensure that the liabilities under insurance contracts can be
       fulfilled at all times

     Specific feature of life insurance: fulfilment of long term promises
     Therefore, particular importance is attached to solvency
     For FINMA, the Swiss Solvency Test SST is an important
      instrument to comply with their duties

    24. Mai 2011
    SST and Solvency II roadmap
    2001 – 2011

    2001/2002                                               Stock market crash

      2001                                                           Launch of the Solvency II Project
      2003         Launch of the SST project
      2004         Field test
      2005         Field test                                        QIS1
      2006         Revised Insurance Supervision Law entered         QIS2
                   into force. SST becomes mandatory reporting
                   requirement for large insurance companies.
      2007         Field test                                        QIS3
      2008         SST reporting (SST compulsory for all             QIS4
                   insurance undertakings)
      2009         SST reporting                                     Adoption of the Solvency II Framework Directive
                   FINMA goes live
      2010         SST reporting
      2011         End of the 5-year phase-in period: all insurers   QIS5
                   must meet the SST capital requirements.
      2013                                                           Entry into force of Solvency II

    24. Mai 2011
    Why it was important to set the SST into
    force timely on 01.01.2011

     Scenario: Protracted period of low interest rates
      An enduring period of low interest rates poses a threat to those life
       insurance companies that write traditional business: current investment
       yields are not sufficient to cover the interest expenses [average technical
       interest rate  2.5% to 3%]

                   Solvency I                                       SST
     Solvency margin is not sensitive to         Available funds are valued market-
      interest rate movements                      consistently  SST-ratio is interest rate
     release of valuation reserves and / or
      bonus reserves may help to gloss over       SST thus addresses potential problems
      the problem for a certain time               timely and accurately

     Policyholders, analysts, rating agencies    FINMA has the right to inter-
      etc. may be lulled into false security       vene in case the coverage 100%
                                                   is deemed insufficient        80%

                                                   (intervention ladders)        33%

    24. Mai 2011
    The SST is defined via a set of
     Mark-to-market (-to-model) for assets and liabilities
      All assets and liabilities are to be valued market-consistently. This means that
      valuation is based on reliable market values or – if no such values exist – on
      modeling, calibrated using market data.
     Risks to be quantified
      Risks to be quantified are market-, credit- and insurance risk .
     Stress scenarios
      Scenarios defined by the regulator as well as company specific scenarios have to be
      evaluated and, if relevant, aggregated within the target capital calculation.
     SST capital requirement
      An insurance company meets the SST capital requirements if the risk-bearing capital
      (available capital) exceeds the target capital (required capital).
     Models to be used
      Fully internal models or partial internal models must be used if the standard model
      provided by the supervisory authority is not appropriate to capture the risks born by
      an insurance company.
        Source: FINMA Circular RS 2008/44 SST
     24. Mai 2011
 Valuation and risk measurement
 in a nutshell                  Potential balance sheets at t = 1

                                             Market balance sheet
                                             at the valuation date

         Lk                                                Available
                          market valuation                                            1
 Ai                                                                                                                       2

                                                                                                                             3
                                                                                      J
Portfolio of assets and
liabilities                                            0                                         1
                                                                                                              Density function of a Pearson-type IV random variable

                                              In the focus:

                                              changes of the available capital over a one-year

 7                                            horizon

                                                                                                        -12      -10      -8     -6      -4      -2      0       2

     24. Mai 2011

     Basic principles of the SST
     Comparison SST – Solvency II
     Internal model approval process
     Equivalence assessment

    24. Mai 2011
    Whilst SST is already in force, Solvency II
    legislation is still being finalized

     A full comparison of both supervisory regimes would consist in a comparison of the

                    • ‚Level 1„                         • Insurance
                      Directive                           Supervision
                    • ,Level 2„                           Law
                      Implementing                      • Ordinance
                      measures                          • SST Circular

     Detailed requirements that will apply to EU-insurers are a consequence of the
      ,Level 2‟ Implementing Measures:
      Nov 2010:     Commission released draft Level 2 Implementing Measures for public
      May 2011:     Commission published a summary of response. Main concerns:
                    volatility, pro-cyclicality, long-term products, transitional measures
      Nov 2011:     Definitive Level 2 implementing measures to be adopted
     24. Mai 2011
     Solvency II and SST
     Defining principles

     Total balance sheet approach      Total balance sheet approach

     Market-consistent valuation       Market-consistent valuation

     Risk based capital requirements   Risk based capital requirements
     • Insurance risks                 • Insurance risks
     • Market risks                    • Market risks
     • Credit risks                    • Credit risks
     • Operational risks

     24. Mai 2011
     Solvency II and SST

     “small” companies are not subject to   All legal entities must satisfy risk
     risk based capital requirements.       based capital requirements

                                            Use of a simplified model is
                                            acceptable depending on the risk
                                            profile of entity

                                            Most reinsurance captives may use
                                            a formula based approach

     24. Mai 2011
     Solvency II and SST

     Numerous impact assessments              Numerous field tests (impact
     before ultimate implementation           assessments) before final roll out
     (QIS1, …, QIS5)                          (field tests 2004 to 2007, tests 2008
                                              to 2010), mandatory participation
                                              since 2006 for large insurers

     Solvency II legislation set into force   SST capital requirements fully
     in 2013.                                 binding since 01.01.2011

     24. Mai 2011
     Solvency II and SST

     Value-at-Risk (VaR) of the change in     Tail-VaR (Expected Shortfall) of the
     available capital at the 99.5%           change in available capital at the
     confidence level                         99% confidence level

     Time horizon: one year                   Time horizon: one year

     Yield curve based on                     Yield curve based on
     • swap rates                             • government bond yields
     • illiquidity premium
     • deduction for credit risk (10 bps in

     24. Mai 2011
     Solvency II and SST
     Risk models

     Standard model: factor model         Standard model: stochastic model
     Standard model is default choice     SST emphasizes principles and
                                          encourages the use of internal

     All companies may use the standard   Internal models are mandatory for
     model                                reinsurers and insurance groups

                                          SST makes extensive use of
                                          scenarios (to reflect tail risk, tail
                                          dependencies, concentration risk,

     24. Mai 2011
     Solvency II and SST
     Group Solvency

     Operational entity approach (reflects   Legal entity approach (reflects
     management view)                        insured‟s view)

     Based on the consolidated accounts      Based on the specific structure of
                                             the group (granular approach)
     Assumes full diversification of risks   Diversification effects depend on
     within the group                        actual capital and risk transfer
                                             instruments (CRTI)

     Capital is assumed to be fully          Model takes into account
     transferable and fungible within        • restricted fungibility of capital and
     group                                   • limited liability of shareholders

     24. Mai 2011
     Based on QIS5 and corresponding SST figures,
     EU and Swiss insurance companies are overall
     well capitalized

     Effective date: 31 December 2009

                                                                               QIS5*                    SST
                                                                             (EUR bn)                 (CHF bn)
     Eligible own funds / risk-bearing capital                                   902                    166
     Requirements / target capital                                               547                    78
     Solvency ratio                                                            165%                    212%
     Surplus                                                                     355                    88

     (*) EIOPA Report on the fifth Quantitative Impact Study (QIS5) for Solvency II, Table 6, p. 25
      24. Mai 2011

      Basic principles of the SST
      Comparison SST – Solvency II
      Internal model approval process
      Equivalence assessment

     24. Mai 2011
     FINMA‘s internal model approval
     process (1/2)
     A       The Insurance Supervision Ordinance allows firms to elect to
             calculate their target capital by using a standard model provided
             it matches the company-specific risk situation
     B       If the standard model is not suitable, then FINMA requires
             insurers to develop and use an (partial) internal model(1)
              There is no standard model for reinsurers and insurance
      About 70 companies (out of 140) applied to use an internal model
       for SST calculations
      Important: there is no pre-application phase. Once a firm submits a
       formal application to use an internal model under SST, the approval
       process begins (no restrictions regarding approval period)

     (1)   Corresponding to Article 119 of the Solvency II Framework Directive

      24. Mai 2011
   FINMA‘s internal model approval
   process (2/2)
                          Delega-                                                             Juristic        Dispatch                 sation
               Sub-                  Off-site    Review      Quality   Decision   Meeting                                 Right to a
                          tion &                                                              review of the   of the                   (incl.
               mission               review      report(1)   control   APC(2)     with firm                               hearing
                          Planning                                                            order           order                    options for
                          Validation of the
                          processing                                                                                                   On-site
                          & co-ordination with                                                                                         review

                          Execution program                                                                                            Prepara-
     Input                plan      & review                                                                                           tory work

    Output                                        report
                                                                       Decision                                Order(3)

    Note: on-site reviews will be postponed (2012 and beyond)

   (1) Includes the findings of the off-site review. Findings are categorized as follows: “serious”, “moderate” and “slight”
   (2) APC: Approval Committee
   (3) The order can be: acceptance, conditional acceptance or a rejection of an internal model. Conditions under which a model can still be
19      accepted are, among others: usage for a limited period of time or aggregation with additional stress scenarios
    24. Mai 2011

      Basic principles of the SST
      Comparison SST – Solvency II
      Internal model approval process
      Equivalence assessment

     24. Mai 2011
     Equivalence Assessment (1/2)

      July 2010:        CEIOPS issued CP81 outlining its draft advice to the
                         EC on Solvency II equivalence assessments for third-
                         country supervisory regimes
      August 2010:      CEIOPS issued its final advice in which it provided
                         guidance to the EC regarding which third-country
                         supervisory regimes should be included in the first wave
                         of equivalence assessments (Switzerland wrt. Art. 172,
                         227, 260)
      September 2010: CEIOPS Members agreed that FINMA‟s supervision of
                       reinsurers is equivalent to that applying to EU reinsurers
                       under the Reinsurance Directive 2005/68/EC
      November 2010: CEIOPS has been invited to assess the equivalence of
                      the Swiss (and Bermudian) supervisory systems under
                       Article 172 (reinsurance supervision)
                       Article 227 (group solvency calculation)
                       Article 260 (group supervision)
     24. Mai 2011
     Equivalence Assessment (2/2)

      January 2011:   FINMA submits the completed questionnaire for the
                       Solvency II Equivalence Assessment to EIOPA
                       (150 pages!)
      May 2011        EIOPA on-site visits (11 – 19 May)
     ?                Decision

     24. Mai 2011

      Both SST and Solvency II are up-to-date frameworks for assessing
       insurance companies‟ financial soundness
      The smooth implementation of the SST as per 01.01.2011 was a challenge
       for all involved parties
      The financial crisis led to a lot of re-thinking (volatility, pro-cyclicality, ...)
      Swiss insurers seek to align the SST with Solvency II, in particular with
       regard to the yield curve (swap rates vs. government bond yields)
      The introduction of mitigation factors (Pillar 1 dampeners for equity risk,
       illiquidity premiums, extrapolation towards UFR, ...) are in obvious
       contradiction with market consistent valuation principles (Use Test?)
      A harmonization of the SST with Solvency II would also impact the P&C risk
      The SST will not be adopted before the Level 2 Implementing Measures are

      24. Mai 2011

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