Solvency II in the Insurance Industry (eBook)

Maria Heep-Altiner is the head of the Research Group Financial & Actuarial Risk Management (FaRis) of the Institute for Insurance Studies at the TH Köln - University of Applied Science and as a lecturer responsible for the topic “Financial Management in Insurance Companies” where she has published several monographs in the past. Furthermore, she is a board member of the German Actuarial Association (DAV) as well as a scientific member of the advisory board of the German Insurance Supervisor (BaFin). In the past, Ms. Heep-Altiner has also been a scientific member of the EIOPA Insurance and Reinsurance Stakeholder Group.Martin Mullins is the head of the Department of Accounting and Finance at the Kemmy Business School (University of Limerick) and a Senior Lecturer in Risk and Insurance. He is currently working on a number of insurance related research projects, including three EU Commission funded projects in the area of emerging technologies and risk transfer. He maintains strong links with the insurance industry and works closely with Lloyd’s of London and XL Catlin on emerging risk.His work also encompasses the area of applied ethics as it pertains to new technologies. He is member of the international advisory board at The Center for Ethics & Value Inquiry (CEVI) at the Ghent University in Belgium. In the past, Martin Mullins has been a key member of an EU-China partnership team engaging with civil servants and academics in the area of financial regulation across China. Torsten Rohlfs is a member of the Research Group Financial & Actuarial Risk Management (FaRis) of the Institute for Insurance Studies at the TH Köln - University of Applied Science and as a lecturer responsible for the topic “Risk Management in the Insurance Industry” where he has published several monographs in the past.Furthermore, he is a member of the Chamber of Public Accountants (WPK) and a member of the Assekurata Rating Committee. 

Preface 6
Preliminary Remarks 8
Contents 10
List of Abbreviations 11
List of Figures 18
Chapter 1: Introduction 22
1.1 Basic Information with Respect to Solvency II 23
1.1.1 Summary of Pillar One 24
1.1.1.1 Available Capital 24
Fair Value Approach 24
Solvency II Balance Sheet 26
1.1.1.2 Solvency Capital Requirements 26
SCR and MCR 26
Available and Eligible Own Funds 27
1.1.2 Summary of Pillar Two 28
1.1.2.1 Governance and Risk Management System 28
System of Governance 28
Risk Management Process 28
ORSA Process 29
1.1.2.2 Supervisory Review 29
Supervisory Review Process 29
Capital Add-On 30
Prohibition of Business Activity 30
1.1.3 Summary of Pillar Three 30
1.1.3.1 Qualitative Requirements 30
Solvency and Financial Condition Report (SFCR) 30
Regular Supervisory Reporting (RSR) 31
ORSA Supervisory Report 31
1.1.3.2 Quantitative Requirements 31
1.1.4 Basic Information with Respect to Groups 31
1.2 Solvency II and Requirements on Company´s Processes 33
1.2.1 Data Delivery and IT Structure 34
1.2.1.1 Data Delivery 34
1.2.1.2 IT Structure 35
1.2.2 Company Processes 36
1.2.2.1 Process of Data Collection 36
1.2.2.2 Core Business Processes 36
Product Development, Acquisition and Underwriting 36
Portfolio Management 37
Asset Management 37
Claims Management 37
1.2.2.3 Business Support Processes 37
Corporate Management and Controlling 38
Finance and Accounting 38
Human Resources 38
1.3 Non-life Data Model for Solvency II Applications 38
1.3.1 Business Structure 39
1.3.2 Balance Sheet 41
References 42
Chapter 2: Application of the Data Model: Pillar One 43
2.1 Available Capital 43
2.1.1 International Financial Reporting Standards (IFRS) 45
2.1.1.1 True and Fair View Valuation 45
2.1.1.2 Valuation of Fixed-Income Assets 46
2.1.1.3 Valuation of Claims Provisions and Balance Sheet Equity 46
2.1.1.4 IFRS Balance Sheet 48
2.1.2 Solvency II Balance Sheet 49
2.1.2.1 Fair Value Measurement 49
2.1.2.2 Valuation of Claims Provision and Equity 50
2.1.2.3 Solvency II Balance Sheet 52
2.1.3 Market Consistent Embedded Value 53
2.1.3.1 Embedded Value Valuation Approach 53
2.1.3.2 MCEV Without Renewals 54
Projection of the Payments, Provisions, and Required Capital 54
Projection of the Profit and Loss Accounts 56
2.1.3.3 MCEV with Renewals 59
Projection of the Payments, Provisions and Required Capital 59
Projection of the Profit and Loss Accounts 60
2.1.4 Comparison of the Valuation Approaches 62
2.2 Solvency Capital Requirement: Standard Formula 63
2.2.1 Market Risk 66
2.2.2 Counterparty Default Risk 70
2.2.3 Underwriting Risk 72
2.2.3.1 Underwriting Risk: Non-life 73
2.2.3.2 Underwriting Risk: Health 75
2.2.4 BSCR, Operational Risk and Adjustments 76
2.2.5 Solvency and Minimum Capital Requirement 78
2.2.6 Risk Margin for Premium and Reserve Risk 80
2.3 Solvency Capital Requirement: Partial Internal Model 82
2.4 Solvency Capital Requirement: Full Internal Model 84
2.4.1 Stochastic Profit and Loss Account 84
2.4.1.1 Modelling of Underwriting Risks 86
Premium and Reserve Risk: Regular Claims 86
Catastrophe Risk: Natural Catastrophes 86
Catastrophe Risk: Man-Made Catastrophe Risks 88
SCR Approximation for Nat Cat and Man-Made Catastrophe Risks 90
2.4.1.2 Modelling of Assets and Other Risks 92
2.4.2 Monte Carlo Simulations 93
2.4.2.1 Simulation Run 94
2.4.2.2 Simulated Scenario No. 5 95
2.4.3 Distribution of the Economic Capital 98
2.4.3.1 Determination of the Required Capital 98
2.4.3.2 Comparison with the Partial Internal Model 101
References 103
Chapter 3: Application of the Data Model: Pillar Two 105
3.1 Risk Management and ORSA 106
3.1.1 Risk Management Process 106
3.1.1.1 Risk Identification 107
3.1.1.2 Risk Assessment 108
3.1.1.3 Risk Aggregation 109
3.1.1.4 Risk Handling 109
3.1.1.5 Risk Control and Reporting 110
3.1.2 Own Risk and Solvency Assessment 110
3.1.2.1 Assessment of Catastrophe Risks by Suitable Statistical Techniques 111
3.1.2.2 Assessment of Operational Risks by a Risk Map Approach 112
3.1.3 Sensitivity Analysis 114
3.1.3.1 Fixed Input Changes 116
3.1.3.2 Fixed Output Changes 119
3.2 Value-Based Management 121
3.2.1 Value and Risk Based Indicators 122
3.2.1.1 Static Value and Risk Based Indicators 122
Free Surplus (FS) 122
Risk-Bearing Ability (RBA) 123
3.2.1.2 Dynamic Value and Risk Based Indicators 123
Return on Risk Adjusted Capital (RoRaC) 123
Economic Value Added (EVA) 124
Risk Adjusted Return on Capital (RaRoC) 125
3.2.2 Capital Allocation 125
3.2.2.1 Standard Formula 125
3.2.2.2 Full Internal Model 127
3.3 Business Plan and SCR Forecast 128
3.3.1 Forecast of Premium and Reserves 129
3.3.2 Forecast of Economic Profit and Loss 131
3.3.2.1 Technical Result of Economic Profit and Loss 132
3.3.2.2 Non-technical Result of Economic Profit and Loss 134
3.3.2.3 Comparison with the Simulated Expected Result 136
3.3.2.4 Economic Balance Sheet at the End of the Year 137
3.3.3 Forecast of the Solvency Capital Requirement 138
3.3.3.1 Single Risks 138
3.3.3.2 Risk Aggregation 141
3.3.3.3 Risk Margin for Premium and Reserve Risk 143
3.3.3.4 Comparison with the Actual Balance Year 143
3.4 Risk Control Systems 145
3.4.1 Limit Systems 146
3.4.2 Target-Performance-Comparison 149
3.4.2.1 Incurred Premium, Provisions, Profit and Loss 149
Premiums and Provisions 149
Economic Balance Sheet 151
3.4.2.2 Incurred Solvency Capital Requirement 152
3.4.2.3 Deviation Between Forecast and Incurred Capital Requirements 153
3.4.2.4 Value Based Management by KPI 155
Deviation Between Forecast and Incurred KPI 155
Risk-Based KPI on the Level of Single Risk Components 156
References 158
Chapter 4: Application of the Data Model: Pillar Three 160
4.1 Narrative Reporting 162
4.1.1 Solvency Financial Conditions Report 162
4.1.1.1 Summary 164
4.1.1.2 Section A: Business and Performance 165
4.1.1.3 Section B: System of Governance 165
4.1.1.4 Section C: Risk Profile 166
4.1.1.5 Section D: Valuation for Solvency Purposes 166
4.1.1.6 Section E: Capital Management 167
4.1.2 Regular Supervisory Report 168
4.1.2.1 Summary 169
4.1.2.2 Section A: Business and Performance 169
4.1.2.3 Section B: System of Governance 170
4.1.2.4 Section C: Risk Profile 172
4.1.2.5 Section D: Valuation for Solvency Purposes 174
4.1.2.6 Section E: Capital Management 175
4.1.3 ORSA Supervisory Report 176
4.2 Quantitative Reporting Templates 178
4.2.1 Topics Covered by QRT 179
4.2.1.1 Topics Covered by all QRT 179
4.2.1.2 Topics Covered by Public QRT 180
4.2.2 Public QRT: Business Structure 181
4.2.2.1 Preliminary Remarks 182
4.2.2.2 Mapping of the NL Data Model 183
4.2.3 Public QRT: Provisions and Claims 185
4.2.3.1 Preliminary Remarks 185
4.2.3.2 Mapping of the NL Data Model 186
4.2.4 Public QRT: Balance Sheet and Own Funds 188
4.2.4.1 Preliminary Remarks: Solvency II Balance Sheet 188
4.2.4.2 Preliminary Remarks: Own Funds 191
Eligible Own Funds to Meet the SCR 193
Eligible Own Funds to Meet the MCR 194
4.2.4.3 Mapping of the NL Data Model 194
4.2.5 Public QRT: SCR and MCR 197
4.2.5.1 Preliminary Remarks 197
4.2.5.2 Mapping of the NL Data Model 199
4.3 Key Performance Indicators on the Base of Public QRT 202
4.3.1 Key Indicators: Business Structure 204
4.3.1.1 Business Concentration by Line of Business 207
4.3.1.2 Business Concentration by Country 209
4.3.2 Key Indicators: Provisions and Claims 210
4.3.3 Key Indicators: Balance Sheet and Own Funds 212
4.3.4 Key Indicators: SCR and MCR 215
References 217
Appendices 219
Appendix A: Claims Triangles and Chain Ladder Approach 219
Appendix B: MCEV as a Revaluation of the Economic Balance Sheet 221
Appendix C: Standard Formula Correlation Matrices 223
References 225
Glossary 226
Index 234