Supervisory Framework for Risk Assessment and Risk-based Solvency

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. 2. . Substance. Worldwide Regulatory TrendsGlobal TendenciesRegulatory InitiativesRisk ManagementRisk Based Solvency Models Swiss Solvency TestInternal ModelGroup EffectsAppendix. . 3. Worldwide Regulatory Tendencies. . . Rule based. . Securities exchange blast. Crash. Dependence on speculation profitsAcceptance of negative specialized results to acquire trade to contribute out marketRisk administration regularly no issue.

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Supervisory Framework for Risk Assessment and Risk-based Solvency Philipp Keller, Federal Office of Private Insurance FSI, 28 April 2006

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Contents Global Regulatory Trends Global Tendencies Regulatory Initiatives Risk Management Risk Based Solvency Models Swiss Solvency Test Internal Model Group Effects Appendix

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Global Regulatory Tendencies Still some misfortune making long-tail business in the books (life and non-life) Smaller speculation benefits Scarce capital Reliance on venture benefits Acceptance of negative specialized outcomes to acquire trade to contribute out market Risk administration regularly no issue Explicit necessities on hazard administration, chance based capital prerequisites, straightforwardness Some settled guidelines, limits, reasonability Self-control Strengthening of supervision Stock market blast Crash Today Rule-based Principle-based time Competition Liberalization universal extension Cartels Build-up of concealed holds Possibly more unpredictable outcomes, better ALM, perhaps unique plans of action

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Global Regulatory Tendencies There are expenses and dangers to a program of activity, however they are far not as much as the long-run dangers and expenses of agreeable inaction John F. Kennedy before, protection directors additionally insurance agencies were not adequately mindful of monetary reality The valuation of advantages and liabilities were not sufficient for an investigation of hazard The fake smoothing of results regularly made organizations and managers slanted to agreeable inaction A satisfactory hazard evaluation was seen by some to be excessively perplexing and excessively difficult The money related emergency of 2000/2001 has appeared to all that the protection business was more uncovered than already suspected and both safety net providers and controllers saw the requirement for a more sufficient, hazard based supervisory system  numerous controllers (UK, NL, CH,… ) and the EU have begun activities to grow more hazard based supervisory models

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Regulatory Initiatives Banking 1980 1988 1996 1999 2007 Market Riski Amendment Impleme4ntation foBasel II SEC VaR Measure Basel Accord CBOT SPAN Start of Basel II European 1947 1957 1961 1973 1979 1997 2001 2002 2003 2005 2006 Campagne distributes gives an account of life and nonlife dissolvability appraisal 1. EU Nonlife Directive KPMG Report Sharma Report Muller report 1. EU Life Directive Start of Solvency 2 CEIOPS Established CEIOPS EQIS2 CEIOPS QIS1 International 1953 1985 1998 2000 2004 2005 2006 1992 Canadian RBC System FSA Realistic Balance Sheet Finalnd RBC Australia RBC UK ICA, NL DST Swiss SST US Life RBC Canada Life DST Canada P&C DST Singapore RBC

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Contents Global Regulatory Trends Prudential Supervision and Risk Management Risk Management Prudential Supervision Risk Based Solvency Models Swiss Solvency Test Internal Model Group Effects Appendix

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Prudential Supervision Prudential Supervision intends to deliberately assess the hazard profile and the hazard bearing limit of the administered substances. Finnish Financial Supervisory Authority What prudential supervision is about is shielding other individuals from the disappointment of the foundation by attempting to guarantee the organization is satisfactorily run. A satisfactorily run organization has to know why it's good to go. It require s to have a procedure and some thought of where its incomes will originate from. It has to realize what sort of dangers it countenances and, ideally, to attempt to gauge them. It has to recognize what sorts of dangers it needs to face and take measures to wipe out the rest. Furthermore, it needs some method for advising how much capital it needs to convey an adequate hazard balanced come back to shareholders Howard Davis, Chairman, Financial Services Authority, UK Prudential supervision is about measuring safety net providers' dangers, as well as to give motivating forces so that the organizations themselves deal with their dangers suitably, i.e. have a satisfactory hazard administration and corporate administration

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Risk Management Wir müssen wissen. Wir werden wissen. David Hilbert Risk administration is in charge of recognizing, surveying, breaking down, measuring and after that exchanging, relieving or tolerating of hazard For hazard administration to be powerful, there should be a hazard culture to such an extent that senior administration needs to know and hazard administration can tell "reality" about the dangers Senior administration and the board need to guarantee that there is a genuine discourse and straightforwardness in regards to dangers inside the organization Risk administration is not exclusively about control but rather about going up against issues and awkward truths transparently and sincerely A hazard based supervisory system ought to be to such an extent that it encourages an atmosphere in the market where a fitting danger culture and hazard administration is remunerated  standards rather than guidelines  obligation with senior administration  straightforwardness and trust in market and in controller

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Risk Management Possible set-up of hazard and capital administration inside an insurance agency: a wide range of authoritative structures are conceivable Capital Dividends Equity Hybrid Contingent Senior Board CFO Capital Management Risk Capacity advertise, credit chance Risk Appetite Risk and capital administration, reinsurance Claims Payment Under-composing Assets CIO CRO Reserving ALM Appointed Actuary showcase, credit chance Pricing Actuary credit, protection chance protection chance Liabilities Sales Insurance Market Reinsurance Capital Market inward outer Intra Group Portfolio Swaps Securitization,… Traditional, Premium, Future Profit Coinsurance,… Finite

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Risk Management Warren Buffett's three key standards for maintaining a fruitful protection business: They acknowledge just those dangers that they can legitimately assess (remaining inside their hover of skill) and that, after they have assessed every single pertinent variable including remote misfortune situations, convey the anticipation of benefit. These back up plans overlook piece of the overall industry contemplations and are cheery about losing business to contenders that are putting forth silly costs or arrangement conditions. They restrict the business they acknowledge in a way that ensures they will experience the ill effects of a solitary occasion or from related occasions that will debilitate their dissolvability. They constantly scan for conceivable connection among apparently random dangers. They maintain a strategic distance from business including moral hazard: No matter what the rate, attempting to compose great contracts with terrible individuals doesn't work. While most policyholders and customers are decent and moral, working with the couple of exemptions is normally costly, at times remarkably so. February 28, 2002, Warren E. Buffett A protection controller ought to set motivations such, that great hazard administration practices are remunerated: setting straightforward necessities putting obligation to the board and senior administration Enforce prerequisites reliably

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Prudential Supervision: Pitfalls to Avoid A controller must be mindful so as not to give impetuses for optional hazard administration of administrators Secondary Risk Management: the distraction of hazard supervisors with dealing with their own particular dangers. This can prompt to a culture of hazard avoidance. Side effects are that disclaimer sections turn out to be longer than the master conclusion, a multiplication of dangers which are considered to have the capacity to consider every contingency, the recognition that all hazard are unsuitable and a distraction with lingering, not well characterized chance. (in light of 'The Risk Management of Everything: Rethinking the legislative issues of instability', Michael Power, Demos 2004) Symptoms of auxiliary hazard administration in supervision: The emphasis on cutoff points on ventures and items The dread of straightforwardness, permitting agreeable inaction A fixation on customs instead of substance The dread and dismissal for goodness' sake new and eccentric Secondary hazard administration must be battled with straightforwardness: of the financial condition of the organizations additionally of the administrative prerequisites and a proceeding with, open engagement of the administrators with all partners

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Prudential Supervision: Pitfalls to Avoid Risk administration is significant, be that as it may, there are a few pitfalls to maintain a strategic distance from The Regulation of Everything Regulation ought to focus on applicable dangers Self-direction and market powers ought to have their place The Myth of Auditability Audits ought not be utilized to annul duty Over-dependence on auditability can prompt to registration mindset both inside the business and the controller Limits of Quantification Residual dangers (e.g. operational dangers) can get to be distinctly exploded hard and fast of extent Due to absence of information and clear ideas, pseudo-measurements are utilized for capital prerequisites Dangers of Secondary Risk Management Excessive reflection on dangers can prompt to the observation that threat sneaks wherever Risk administration ought to manage an organization's dangers, not deal with their own particular hazard Excessive Internal Control Excessive inward control can prompt to a bureaucratic, chance disinclined organization

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Principles versus Rules for Risk-Based Solvency Principle-based gauges portray the target looked for by and large terms and require elucidation as indicated by the condition. Organizations tailor approach with the end goal that unmistakably expressed target is accomplished Objective can be achieved if organizations decipher standards reliably Principle-based Objective Company particular hazard based dissolvability appraisal = Rule-based Objective Rule based approach does not permit really organization particular hazard evaluation (or the arrangement of guidelines gets to be distinctly colossal and Byzantine) Attained outcome veers off from genuine organization particular dissolvability prerequisite, contingent upon how well principles catch the circumstance of the back up plan

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Contents Global Regulatory Trends Risk Management Risk Based Solvency Models Capital Models Risk Based Solvency Frameworks Scope Time Horizon Risk: Definition, Classification, Risk Measures Valuation: Economic, Fair Value versus Amortized Cost The Market Value Margin Risk Bearing Capita