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About the course
The overall goal of this two day workshop is to appreciate why insurers get into distress and how the EU Solvency II Directive aims to prevent failures, and to identify the impact of the Directive on the business and capital strategy, risk management and financial standing of insurance companies.
Key Learning Outcomes:
- Recognise the key vulnerabilities of insurance companies that Solvency II is aiming to address and how this will fit into an early warning system for supervisors
- Understand the key proposals of the EU Solvency II Directive (capital requirements, supervisory review process and public disclosure) and appreciate how these will be applied
- Understand how both general and product-specific risks faced by life and non-life insurers and reinsurers will be addressed by Solvency II requirements
- Evaluate the impact of Solvency II on company strategy, risk management and credit ratings
A review of the challenges Solvency II aims to address: namely the key areas of heightened risk faced by different types of insurer.
- Business risks of life and non-life insurers
- Current issues in the operating environment
- Exercise: vulnerable lines of business
- Financial risk: poor quality and quantity of capital and liquidity risk
- Total financial resources: expected vs. unexpected losses
- Internal vs external factors
- Contagion risk
Signs of distress
- Common themes in troubled insurance companies: growth, over-concentration in volatile markets, asset and liability mismatches, excessive investment risk.
Solvency II Overview
The key differences between Solvency II and existing regulatory regimes and an appreciation of how eligible capital and technical provisions are to be determined relative to the risks borne.
- Overview of current regulatory regimes in EU, US and Asia, including stress testing
- Key liabilities for life and non-life insurers
- Discounting of liabilities; allowance for uncertainty; the “matching adjustment” and “volatility adjustment”
- Treatment of investment guarantees and discretionary benefits in life contracts
- Exercise: Matching long-term guarantees
Market-consistent liabilities and risk margin: hedgeable vs. non-hedgeable risks; comparison with IFRS accounting rules . Solvency II Framework
Roles of Pillars 1,2 and 3
Minimum Capital Requirement (MCR) vs. Solvency Capital Requirement (SCR); internal models vs. factor-based approach proposed; correlated and non-correlated risks; confidence levels and time horizon
Exercise: Risk correlations
Solvency II timescale
Principle of proportionality in regulation.
- Types of capital: shareholder, regulatory and economic capital
- Quality of capital: financial leverage; double leverage; intangible vs. tangible net worth; dependence on hybrid capital; fundability of capital
- Solvency II: Basic Own Funds and Ancillary Own Funds; definitions of Tiers 1, 2 and 3.
- Sources of liquidity and potential drains on liquidity
- Cash flow management; avoiding liquidity risk in product designs and financial transactions; managing life policy persistency
- Treatment of liquidity risk in Solvency II.
Pillar 1 Risk Modules
Reviews common analytical measures used for key business risks of insurer and relates these risks to the risk charges as calculated under the standardised approach for the SCR.
Underwriting and reserving risks
- Key challenges: paucity of relevant data; competitive pressures; macro-economic factors; catastrophes; and litigation trends
- Exercise: Non-life pricing challenges
- Case study: insurance companies with high underwriting and reserving risks
- Exercise: impact of poor persistency for life insurers
- Proposed underwriting risk modules under Pillar 1
- Risk mitigation: impact of ceded reinsurance and securitisation (e.g. catastrophe bonds and ISPVs) on capital requirements.
Investment risk (market, credit and interest rate risk)
- Key asset and liability management challenges: paucity of appropriate assets in emerging markets; balancing investment performance and backing contractual obligations; policyholder optionality; over-exposure to issuers and sectors; asset valuation challenges
- Case study: insurance companies with high investment risk
- Proposed investment and counterparty risk modules under Pillar 1; loss absorbency of technical provisions
- Risk mitigation using derivatives.
- Key operational risks faced by insurance companies
- Factor-based operational risk charges under Pillar 1.
Pillars 2 and 3
Explains how the key elements of Pillars 2 and 3 of Solvency II are intended to improve corporate governance and internal risk management in insurance companies, and how group supervision is intended to combat contagion risk.
- Departmental responsibilities and processes for managing investment, underwriting and counterparty risks
- Enterprise risk management: IAIS guidance
- Evidence of weak management and lack of integrity
- Significance of company’s strategy and ownership.
Pillar 2 requirements
- Key components of Own Risk Solvency Assessment: risk appetite; risk identification and assessment; risk measurement; risk reporting; link to business strategy; stress testing; governance structure
- Supervisory reviews
- Capital add-ons.
- Supervision of groups; treatment of non-EU operations
- Contagion risk; correlation of ancillary businesses
- Case study: Impact of contagion risk on a major insurance conglomerate
- Group supervisor; group support regime; Solvency II equivalence.
Pillar 3: disclosure
- Public disclosure: solvency and financial condition report
- Disclosure to regulator: report to supervisors.
Impact of Solvency II
- Impact of Solvency II on insurance company strategy: capital, enterprise wide risk management, risk mitigation, product design and investment strategy
- Exercise: Impact of SCR Risk Charges on key life insurance products
- Case study: Impact of Solvency II on a large European insurer.
Who should attend
Insurance professionals, analysts, risk managers, regulators, bankers, and auditors, but is also appropriate for a broader audience who wish to gain insight into changing solvency rules for insurance companies. The course is targeted at an intermediate level and assumes a basic understanding of insurance business lines and risks as well as accounting.