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SST im Vergleich zu Solvency II Hansjörg Furrer Head of Quantitative Risk Management – Division Insurance 24. Mai 2011 Contents Basic principles of the SST Comparison SST – Solvency II Internal model approval process Equivalence assessment 2 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 safeguarded 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 supervision For FINMA, the Swiss Solvency Test SST is an important instrument to comply with their duties 3 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 4 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 sensitive 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 SST-ratio 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% 5 24. Mai 2011 The SST is defined via a set of principles 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 6 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 capital Marked-to- market valuation 1 Ai 2 3 J Portfolio of assets and liabilities 0 1 Density function of a Pearson-type IV random variable 0.25 0.20 In the focus: 0.15 changes of the available capital over a one-year 0.10 0.05 7 horizon 0.00 -12 -10 -8 -6 -4 -2 0 2 24. Mai 2011 Contents Basic principles of the SST Comparison SST – Solvency II Internal model approval process Equivalence assessment 8 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 consultation 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 9 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 10 24. Mai 2011 Solvency II and SST Scope “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 11 24. Mai 2011 Solvency II and SST Implementation 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 12 24. Mai 2011 Solvency II and SST Calibration 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 QIS5) 13 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 models 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, etc.) 14 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 15 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 https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports/QIS5_report_final.pdf 16 24. Mai 2011 Contents Basic principles of the SST Comparison SST – Solvency II Internal model approval process Equivalence assessment 17 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 groups 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 18 24. Mai 2011 FINMA‘s internal model approval process (2/2) Finali- 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 escalation) Process flow Validation of the processing On-site & co-ordination with review firms Review Execution program Prepara- Input plan & review tory work criteria Review 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 Contents Basic principles of the SST Comparison SST – Solvency II Internal model approval process Equivalence assessment 20 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) 21 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 22 24. Mai 2011 Conclusions 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 module The SST will not be adopted before the Level 2 Implementing Measures are known 23 24. Mai 2011
"SST im Vergleich zu Solvency II"