FINANCIAL CONDITION REPORTING Ioana Abrahams 13 November 2009.
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Transcript of FINANCIAL CONDITION REPORTING Ioana Abrahams 13 November 2009.
FINANCIAL CONDITION REPORTING
Ioana AbrahamsIoana Abrahams
13 November 200913 November 2009
13/11/2009
Slide 2
FinancialServices
Board
AGENDA
Current methodology
Background
FCR
FCR to date
FCR Graphical Overview
Model options under FCR
Prescribed Model
Internal Model
Partial Model
Conclusion
Way forward
13/11/2009
Slide 3
FinancialServices
Board
CURRENT METHODOLOGY
Current methodology
Insurance liabilities:
Outstanding claims reserves (OCR)
Incurred but not reported reserve (IBNR)
Unearned premium provision (UPP)
Unexpired risk reserve (URR)
Contingency reserve: 10% of NWP
Capital requirement:
Additional amount: 15% of net written premium (NWP)
Minimum of R3 million (shortly to be increased to R5 million then 10 million under FCR)
13/11/2009
Slide 4
FinancialServices
Board
BACKGROUND
Current methodology doesn’t allow for:
Underlying risks
Size of insurer
Diversification / concentration
Risk management
FSB is implementing risk-based supervision
IAIS requirements must be met
Act changes made during 2008 to facilitate FCR
World-wide trend to move to different techniques
13/11/2009
Slide 5
FinancialServices
Board
FCR TO DATE
The FCR process was started in 2002
Various working groups formed
The first calibration done during 2005
First issues paper released for comment in December 2006
Comments received were taken into account and this resulted in a recalibration exercise
Recalibration exercise started in 2007; now nearly complete
13/11/2009
Slide 6
FinancialServices
Board
FCR GRAPHICAL OVERVIEW
Fair value of assets
Ris
k m
anag
emen
t
Financial Condition Report
Excess Assets
Fair
valu
e of
adm
issi
ble
asse
ts
Free Assets
LiabilitiesConsist of best estimate plus
additional prescribed margins.
Minimum CapitalRequirement
Minimum of R10m
VERY SIMILAR TOLIFE INSURANCE
13/11/2009
Slide 7
FinancialServices
Board
MODEL OPTIONS UNDER FCR
Prescribed Method
Industry structure
Industry Parameters
Internal Models
Company structure
Company parameters
Peer review (application)
Annual certification by an actuary
Partial Models
A combination of above two options
Revised issues paper
13/11/2009
Slide 8
FinancialServices
Board
PRESCRIBED MODEL
Based on aggregate industry data – “average” view
Formulae for reserves and margins
Capital requirement allows for proportional reinsurance and expenses
Some shortcomings of initial model:
Non-proportional reinsurance
Data not always reliable
Cell business
Reinsurance companies
13/11/2009
Slide 9
FinancialServices
Board
PRESCRIBED MODEL
Capital requirement
Consists of:
Asset Capital Charge
• Very small part of total capital charge
• Protection against loss in market value of the assets backing the
liabilities and other capital elements
Insurance Capital Charge
• Major part of total capital charge
• Calculation tool in ST return
13/11/2009
Slide 10
FinancialServices
Board
PRESCRIBED MODEL
Assets
Use current Act & Directives
Insurance liabilities
Claim liabilities
OCR – best estimate (should be the same)
IBNR – six-year run-off per business class
Premium liabilities
UPP – as before, seen as 75% sufficient
URR – as before
Prescribed margins take liabilities to 75% sufficiency
13/11/2009
Slide 11
FinancialServices
Board
PRESCRIBED MODEL: REVISED
Small working group was formed in 2007
Considered comments on how previous method could be improved
Terms of reference for recalibration
Deloitte was appointed for the recalibration exercise
Three years of data added (FY 2005 - 2007)
Aims:
Simplify previous method
More appropriate method for typical insurers
13/11/2009
Slide 12
FinancialServices
Board
PRESCRIBED MODEL: REVISED
The following changes were made to the previous prescribed model:
Simplify diversification and correlation
Discounted IBNR
Credit Risk: Reinsurance
Credit Risk: Assets
Non-proportional reinsurance (MER)
Remove expense and investment return adjustment
Minimum CAR – will include an allowance for operating expenses and operational risk
13/11/2009
Slide 13
FinancialServices
Board
PRELIMINARY RECALIBRATION RESULTS
13/11/2009
Slide 14
FinancialServices
Board
EFFECT OF UPDATES
13/11/2009
Slide 15
FinancialServices
Board
INTERNAL MODEL
This is (in our opinion) what an insurer should develop – However:
Determining regulatory capital should not be the primary reason
Appropriateness with respect to complexity of risks
Detailed data required
Guidance will be updated, taking international practices into account
13/11/2009
Slide 16
FinancialServices
Board
INTERNAL MODELS
Qualitative standards
IM based on sound risk management principles and structure
Integral part of day-to-day management
Independent review
Audit trail
Analysis of change
13/11/2009
Slide 17
FinancialServices
Board
INTERNAL MODEL
Specification of risk factors
Must consider all risks
Rank most important risks
Suitable method chosen – not necessarily stochastic
Allow for correlations between risks (method not prescribed)
Stress testing
Specific tests not prescribed
Test model sensitivity to assumptions
13/11/2009
Slide 18
FinancialServices
Board
INTERNAL MODEL
Sign-off and review
Board assumes ultimate responsibility
Statutory actuary sign-off of calculations
Actuary to follow professional guidance
IAA guidance on internal models
SA guidance for reserving completed
External review required for approval (at this stage)
13/11/2009
Slide 19
FinancialServices
Board
INTERNAL MODEL
Proposed model approval process
Approval for calculating regulatory capital
External providers’ models not approved automatically
Application form
On-site visits
Use test, calibration test, statistical quality test
Model used at least one year prior to implementation
Progress from prescribed partial internal model
Can’t regress without approval
Application subject to a fee
13/11/2009
Slide 20
FinancialServices
Board
PARTIAL MODEL
This is a combination of own company specific factors and industry factors
Same approval process proposed as for the full internal model route
13/11/2009
Slide 21
FinancialServices
Board
CONCLUSION
The FCR model is specific to the short-term environment
The proposed FCR approach fits in with international developments
Risk-based capital requirements
A better model to run an insurance business
13/11/2009
Slide 22
FinancialServices
Board
WAY FORWARD
New Solvency Assessment and Management (SAM) project
Based on Solvency II
Will encompass both life and short-term insurance
Work done to date on FCR will be the first draft for discussion for short-term insurance
First Steering Committee meeting end November 2009
Full implementation 1 January 2014; however, standardised model for short-term insurance to be implemented on 1 January 2012