Two solvency tests (“twin peaks”) for with-profits (participating) business –
statutory (based on EU directives) and
realistic (FSA’s own test)
different approaches to both reserves/valuation and capital
realistic approach applies only for largest 37 firms (with-profit liabilities over £500 mn)
Realistic peak more sensitive to economic conditions, but provides no incentive for good risk management.
Non-profit (non-participating) business subject to single statutory test.
At 31/12/2005 the realistic peak was higher than regulatory peak for 32 of 37 realistic reporters.
For the 32 an extra requirement (WPICC) is added to the regulatory requirement to ensure regulatory surplus does not exceed realistic surplus.
Minimum capital (Pillar 1): life firms
Resilience capital requirement Long Term Insurance Capital Requirement (LTICR) Mathematical reserves Regulatory Peak WPICC Realistic peak ECR MCR The Twin Peaks Risk Capital Margin (RCM) Realistic reserves WPICC brings regulatory peak up to realistic peak
Not intended to be a risk based capital – role of individual capital standards
It is intended to be better than EU solvency standard and reflect risks better
Minimum capital (Pillar 1): general/P&C
Pillar 1 - General Insurance MCR Minimum Capital Requirement ECR ICA ICG Enhanced Capital Requirement Individual Capital Assessment Individual Capital Guidance Can be less than 100% of ECR in certain cases May be equal to or higher than firm’s ICA Directive minimum