EU Solvency II a non-life viewpoint

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EU Solvency II – a non-life viewpoint CAS Spring Meeting Orlando, Florida, 19 June 2007 Arne Sandström, Swedish Insurance Federation arne.sandstrom@forsakringsforbundet.se

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" Solvency II will be the crown gem of the European Union " Allessandro Iuppa President, NAIC Chair, IAIS at the EU Commission's open hearing in June 2006 Arne Sandström

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Contents The foundation to the Solvency framework inside EU A brief presentation of the Solvency II extend and different issues Arne Sandström

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EU Solvency foundation 1950-1960s: early work by Campagne , OECD, CEA and so forth Pentikäinen , Finland: evening out stores – hazard hypothesis 1970s: bargains 1973: first non-life coverage order 1979: first disaster protection mandate 1980s-1990s: 2 nd (1988) and 3 rd (1992) protection orders: introducing opportunity of administrations with home country control and the single-permit concept. 1991: Insurance Accounting Directive, IAD 1998: Insurance Groups Directive, IGD 2002: Financial Conglomerates Directive, FCD Arne Sandström

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EU Solvency foundation – Campagne's work amid the 50s and mid 60s Non-life approach: Used the consolidated proportion: Expense proportion = steady, and equivalent to 42% (0.42) Loss proportion takes after a beta circulation, in view of European information: at 0.9997 percentile the proportion is approx. 83% (0.83) Combined proportion = 42% + 83% = 125% (1.25) The organization needs approx 25% of the premium pay as an additional cradle! The likelihood or demolish more than 3 years is approx 1/1000! Arne Sandström

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EU Solvency foundation – Compromises amid the 70s Arne Sandström

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EU Solvency foundation 1980s Solvency inquire about done in e.g. Finland, UK and Norway 1986/1988 first/second Int. Conf. on Insurance Solvency 1990s-2000s: Risk-based capital frameworks presented in US, Canada, Japan, Australia and Singapore EU: 1994: a dissolvability survey  1997: the Müller report: * the framework has substantiated itself * there is no motivation to absolutely reexamine it  minor changes  Solvency I (2002)  the Solvency II extend Arne Sandström

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The principal decade - EU Solvency foundation The primary decade, 2000: new frameworks proposed and presented in, for example, Denmark, the Netherlands, Sweden, Switzerland, UK. IAIS and IAA take a shot at dissolvability IASB chip away at bookkeeping (protection contracts) EU – Solvency II: 2000-2003 – stage I: the learning stage 2003-2007 – stage II: the structure mandate stage 2007-2010/12 – stage III: the executing stage Arne Sandström

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Contents The foundation to the Solvency framework inside EU A brief presentation of the Solvency II extend and different issues Arne Sandström

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Lamfalussy strategy – comotology, a four-level approach: Level 1 : The European Commission, COM, receives a proposition for a system order  2-3 years embracing technique inside Council and parliament Level 2 : Level 2 panel - controllers : EIOPC, European Insurance and Occupational Pension Committee; " detail orders "  3 month embracing procedure for COM Level 3: Level 3 board of trustees - chiefs : CEIOPS, Committee of European Insurance and Occupational Pensions Supervisors; rules & gauges Level 4 : COM checks the part states' consistence with the EU legislation and may make lawful move. Arne Sandström

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Arne Sandström

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Pillar I Pillar III Pillar II Quantitative measures: Standard recipe for SCR & MCR (Partial) Internal models Qualitative measures: The supervisory audit prepare Disclosure: Supervisory reporting & answering to partners Three column approach – like Basel II Cornerstone: A Total Balance Sheet Approach Arne Sandström

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Prudent individual govern "No discretionary confinements on ventures" Investments Valuation Assets & Liabilities: advertise predictable "Liabilities" = specialized arrangements + "different liabilities" Technical arrangement computed on a present leave 1) esteem premise Hedgeable dangers: showcase steady valuation Non-hedgeable dangers: Best gauge 2) + Risk edge ( Cost-of-capital ) - 1) "cost of satisfying commitments" (IASB) 2) In IAA and IAIS phrasing: Current gauge Arne Sandström

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Hedging: "exercises intended to diminish the dangers forced by different exercises" Valuation Two fundamental building obstructs in Solvency II: – the valuation of specialized liabilities and - The assurance of capital prerequisites Ladder of mediation Prudent Person in addition to Arne Sandström

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Other issues Segmentation: e.g. lines of business Risk alleviation: money related supporting, reinsurance and so forth Group dissolvability A powerful arrangement of administration, e.g. Authoritative structure Fit & appropriate prerequisites on people A hazard administration framework, e.g. Systems, forms & reporting methodology Own hazard and dissolvability evaluation (ORSA) Actuarial capacity Disclosure (IASB/IFRS) Arne Sandström

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Pillar I: SCR - Standard recipe – a particular approach – chance modules , at any rate: Non-life endorsing hazard Life guaranteeing hazard Health endorsing hazard (extraordinary) Market chance Credit chance (incl spread and counterparty default chance) Operational hazard – chance charges : figure based or push tried Arne Sandström

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Pillar I: SCR – chance measure : VaR yet conceivable to utilize different measures, for example, TailVaR in Internal Models – certainty level : 99,5% utilizing VaR – time skyline of the dissolvability appraisal: a period skyline of one year for the capital prerequisite – conglomeration : straight connection ("tail relationship") Arne Sandström

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Standard equation - a secluded approach Arne Sandström

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Pillar I: SCR – standard equation in view of QIS 3 BSCR = Basic SCR C OP = Operational hazard Arne Sandström

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Pillar I: SCR Standard equation  Internal model SCR Partial Internal Model at least one of the hazard or sub-chance modules, additionally real specialty units SCR Replace a subset of parameters by substance particular (guaranteeing hazard modules) SCR Internal Model SCR Standard equation needs endorsement by the supervisory power Internal models: Use test Statistical quality principles Arne Sandström

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Pillar I: MCR –minimum capital necessity QIS 3: an "improved" secluded approach with a flat out floor (AMCR) The European protection industry need to have a "minimal approach" tried, i.e. a rate of SCR: MCR = x%SCR (for transitional courses of action the accompanying data ought to be uncovered: MCR = (1/3)*SCR) Arne Sandström

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Thank you Arne Sandström

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