This document provides an overview of a workshop on capital management under Solvency II. It discusses key topics like the Solvency Capital Requirement (SCR), own funds, and managing the capital buffer. The drivers of changes to the SCR and own funds are explored, including market conditions, investment strategies, risk mitigation, and emerging risks. Modeling techniques for the SCR and own funds are also covered, such as the standard formula and internal models. Several examples are provided to illustrate how changes can impact capital requirements and underwriting approaches.

1. Capital management under the
Solvency II regime
Workshop material
Pre-Conference Workshop material 1

2. Overview
Contents 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. Capital in Solvency II
A 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. Drivers of the SCR changes
 Market conditions
 Growth of Business
 Investment strategies
 Risk Mitigation
 Emerging risks
Pre-Conference Workshop material 4

5. Own Funds and SCR changes
Common drivers and their impact
 Market conditions
 Investment strategies
 Risk Mitigation
Pre-Conference Workshop material 5

6. Emerging risks
and 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. SCR and Own Funds I
Modelling techniques and tools
 Standard Formula
 (Partial) Internal models
 Examples (to follow on dedicated slides)
 Free discussion on tools used or considered (to be
held offline)
Pre-Conference Workshop material 7

8. SCR and Own Funds II
Standard Formula
 Simple to implement and is obligatory to use
 Automatically supports consistency with Own Funds
calculation (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
 Doesn't give sufficient insight into the drivers of the
capital requirements for capital management purposes
Pre-Conference Workshop material 8

9. SCR and Own Funds III
(Partial) Internal Model
 An internal model is a complex solution covering all
risks faced by the Undertaking
 A Partial Internal Model combines an Internal Model
for the most relevant risks with the Standard Formula for
the rest
 Can be used to value Own Funds – if not used that
way, consistency of methodologies must be evidenced
 Reflects the Undertaking's view of the risk landscape
 Gives a better understanding of the risks taken and
supports business decisions
Pre-Conference Workshop material 9

10. Examples
SCR & 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 the
Underwriting risks (Fukushima scenario)
Pre-Conference Workshop material 10

11. Example 1
Underwriting risk – Reinsurance impact
 Reinsurance is a major technique of Risk Mitigation
 (Non-proportional) Reinsurance treaties are often not
handled fully by the Standard Formula
 Impact of Underwriting Risk on e.g. Sliding Scale
Ceding Commissions cannot be captured in the
Standard Formula
 Discussion to be held under blog post
http://blog.functionalfinances.com/?p=15
Pre-Conference Workshop material 11

12. Example 2
Simulating Capital driven Underwriting
 Underwriting will always depend on risk appetite and
available capital
 Simulating future Underwriting needs a reactive model
also taking into account Capital Requirement changes
 Standard Formula based calculation will give limited
insight
 Discussion to be held under blog post
http://blog.functionalfinances.com/?p=17
Pre-Conference Workshop material 12

13. Example 3
Management of Underlying
 Many insurance products having some underlying
asset (e.g. Unit Linked)
 Capital requirement for Market Risk will cover changes
of the value of the Underlying
 Underwriting policies will be partially Market Risk
Capital driven
 Discussion to be held under blog post
http://blog.functionalfinances.com/?p=21
Pre-Conference Workshop material 13

14. Example 4
Emerging risks
 Emerging risks do not imply a Capital Requirement
 Still, it is the best to quantify the possible Capital
Impact of such risks materializing
 By the very construction, Standard Formula cannot be
used
 An Internal Model reflecting the current risk profile is
also insufficient
 Discussion to be held under blog post
http://blog.functionalfinances.com/?p=26
Pre-Conference Workshop material 14