Capital management under theSolvency II regime  Workshop material             Pre-Conference Workshop material   1
OverviewContents of this workshop Capital in Solvency II: A brief review Drivers of the SCR changes Drivers of the Own ...
Capital in Solvency IIA brief review Solvency II prescribes a Capital Requirement (SCR) Own funds need to be valued by a...
Drivers of the SCR changes Market conditions Growth of Business Investment strategies Risk Mitigation Emerging risks ...
Own Funds and SCR changesCommon drivers and their impact Market conditions Investment strategies Risk Mitigation       ...
Emerging risksand their effect on Capital What are emerging risks How capital management should treat emerging risks Ex...
SCR and Own Funds IModelling techniques and tools Standard Formula (Partial) Internal models Examples (to follow on ded...
SCR and Own Funds IIStandard Formula Simple to implement and is obligatory to use Automatically supports consistency wit...
SCR and Own Funds III(Partial) Internal Model An internal model is a complex solution covering allrisks faced by the Unde...
ExamplesSCR & Own Funds changes and their modelling ORSA requirements, business decisions (e.g. growth,a new product of t...
Example 1Underwriting risk – Reinsurance impact Reinsurance is a major technique of Risk Mitigation (Non-proportional) R...
Example 2Simulating Capital driven Underwriting Underwriting will always depend on risk appetite andavailable capital Si...
Example 3Management of Underlying Many insurance products having some underlyingasset (e.g. Unit Linked) Capital require...
Example 4Emerging risks Emerging risks do not imply a Capital Requirement Still, it is the best to quantify the possible...
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Capital management under the Solvency II regime

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Capital management under the Solvency II regime

  1. 1. Capital management under theSolvency II regime Workshop material Pre-Conference Workshop material 1
  2. 2. OverviewContents of this workshop Capital in Solvency II: A brief review Drivers of the SCR changes Drivers of the Own Funds changes Own Funds and SCR changes: Common Drivers Emerging risks – and their effect on Capital SCR and Own Funds: Modelling techniques and tools Pre-Conference Workshop material 2
  3. 3. Capital in Solvency IIA brief review Solvency II prescribes a Capital Requirement (SCR) Own funds need to be valued by a new methodology Capital buffer: difference between own funds and SCR Managing this buffer is today’s topic Pre-Conference Workshop material 3
  4. 4. Drivers of the SCR changes Market conditions Growth of Business Investment strategies Risk Mitigation Emerging risks Pre-Conference Workshop material 4
  5. 5. Own Funds and SCR changesCommon drivers and their impact Market conditions Investment strategies Risk Mitigation Pre-Conference Workshop material 5
  6. 6. Emerging risksand their effect on Capital What are emerging risks How capital management should treat emerging risks Examples (to follow on dedicated slides) Free discussion (to be held offline) Pre-Conference Workshop material 6
  7. 7. SCR and Own Funds IModelling techniques and tools Standard Formula (Partial) Internal models Examples (to follow on dedicated slides) Free discussion on tools used or considered (to beheld offline) Pre-Conference Workshop material 7
  8. 8. SCR and Own Funds IIStandard Formula Simple to implement and is obligatory to use Automatically supports consistency with Own Fundscalculation (e.g. Technical Provisions) SCR is calculated by formulae calibrated at 99.5%confidence for the majority of the insurance industry No option to assess other confidence levels Might not capture all (emerging) risks Doesnt give sufficient insight into the drivers of thecapital requirements for capital management purposes Pre-Conference Workshop material 8
  9. 9. SCR and Own Funds III(Partial) Internal Model An internal model is a complex solution covering allrisks faced by the Undertaking A Partial Internal Model combines an Internal Modelfor the most relevant risks with the Standard Formula forthe rest Can be used to value Own Funds – if not used thatway, consistency of methodologies must be evidenced Reflects the Undertakings view of the risk landscape Gives a better understanding of the risks taken andsupports business decisions Pre-Conference Workshop material 9
  10. 10. ExamplesSCR & Own Funds changes and their modelling ORSA requirements, business decisions (e.g. growth,a new product of termination of one) Changes in investment policies Management of underwritten portfolio Underlying asset management (e.g. Unit Linked) Cost of capital changes Emerging risks, e.g. catastrophes not related to theUnderwriting risks (Fukushima scenario) Pre-Conference Workshop material 10
  11. 11. Example 1Underwriting risk – Reinsurance impact Reinsurance is a major technique of Risk Mitigation (Non-proportional) Reinsurance treaties are often nothandled fully by the Standard Formula Impact of Underwriting Risk on e.g. Sliding ScaleCeding Commissions cannot be captured in theStandard Formula Discussion to be held under blog post http://blog.functionalfinances.com/?p=15 Pre-Conference Workshop material 11
  12. 12. Example 2Simulating Capital driven Underwriting Underwriting will always depend on risk appetite andavailable capital Simulating future Underwriting needs a reactive modelalso taking into account Capital Requirement changes Standard Formula based calculation will give limitedinsight Discussion to be held under blog post http://blog.functionalfinances.com/?p=17 Pre-Conference Workshop material 12
  13. 13. Example 3Management of Underlying Many insurance products having some underlyingasset (e.g. Unit Linked) Capital requirement for Market Risk will cover changesof the value of the Underlying Underwriting policies will be partially Market RiskCapital driven Discussion to be held under blog post http://blog.functionalfinances.com/?p=21 Pre-Conference Workshop material 13
  14. 14. Example 4Emerging risks Emerging risks do not imply a Capital Requirement Still, it is the best to quantify the possible CapitalImpact of such risks materializing By the very construction, Standard Formula cannot beused An Internal Model reflecting the current risk profile isalso insufficient Discussion to be held under blog post http://blog.functionalfinances.com/?p=26 Pre-Conference Workshop material 14

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