Evaluation of Capital Needs in Insurance
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There are various methods to evaluate capital needs depending on the intended use and perspective. Static financial projections develop capital requirements over multiple years using regulatory factors. Dynamic financial projections simulate capital needs over time to achieve a defined outcome percentile. Regulatory regimes like Solvency II specify technical provisions, risk margin, and solvency capital requirements. Rating agencies also consider capital adequacy in their models using adjusted capital ratios like Moody's MRAC ratio.
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The rise and fall of subprime mortgage securitizations contributed in part to the ensuing credit crisis
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in part on analyses grounded in the loss development factor (LDF) method, and many did not conduct their own
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Evaluation of Capital Needs in Insurance
- 1. Evaluation of Capital Needs Jeff Courchene, FCAS, MAAA Kyle Mrotek, FCAS, MAAA Joy Schwartzman, FCAS, MAAA
- 7. Solvency II
- 8. Regulatory Minimum Capital Assets Market Consistent (for hedgeable) Best Estimate Risk Margin MCR Technical Provisions Solvency Capital Requirement – SCR Assets covering Technical Provisions, MCR and SCR
- 9. Technical Provisions Hedgeable insurance obligations Non-hedgeable insurance obligations Replication using financial instruments Sum of discounted best estimate and risk margin
- 13. Market Non-Life Health Default Operational BSCR SCR Life Premium & Reserve FX Cat Equity Lapse Property Spread Interest Expense Disability Mortality Long Cat Concentration Revision Factors Scenarios with simplified alternative Health LT Accident & Health ST Workers Comp. = adjustment for risk mitigating effect of future profit sharing SCR – (Standard Formula) Structure
- 15. Calculation of Basic SCR Aggregation of Capital Charges using Correlation Matrix in Standard Formulae. Market Default Life Health Non-life Market 1 - - - - Default 0.25 1 - - - Life 0.25 0.25 1 - - Health 0.25 0.25 0.25 1 - Non-life 0.25 0.5 0 0.25 1
- 17. Rating Agencies
- 24. Quantifying Risk and Capital Adjustments Example Source: Moody’s
- 25. Quantifying Risk and Capital Adjustments Example Source: Moody’s
- 30. Relating VAR/TVAR to Rating Source: Fitch
- 31. Ratings From VAR Source: Fitch
- 32. Ratings From TVAR Source: Fitch
Editor's Notes
- Presentation Title Friday 24 September 2010 A deep, liquid and transparent market is one where: Participants can rapidly execute large volume transactions with little effect on price Current trade & quote info is available to the public The above properties are permanent Examples of non-hedgeable risks are: Non-traded underlying Risks where duration exceeds a reasonable extrapolation from market prices (assume that reasonable extrapolations are also non-hedgeable but that best estimates would be used in the unreasonable extrapolation case) If there is uncertainty, the non-hedgeable method should be followed
- Presentation Title Friday 24 September 2010
- Presentation Title Friday 24 September 2010
- Presentation Title Friday 24 September 2010 How long should the period be in which the undertaking undergoes stress? Solvency II will probably be one year; for internal purposes a longer period may be more appropriate A VaR approach implies that the probability of ruin is set equal to a certain percentage (for example 0.5%) Economic capital for individual risks may be calculated in different ways. If risks are aggregated using stochastic simulations, the quantification method for individual risks is necessarily also stochastic. The Solvency II standard approach will most likely include stress testing and factors combined with a correlation matrix
- Presentation Title Friday 24 September 2010