Mini Case Study on Insurance Core PrinciplesMini Case Study on Insurance Core Principles- ICP23 Capital Adequacy and Solvency -- ICP23 Capital Adequacy and Solvency -

Insurance Training Seminar IAIS - ASSALBuenos Aires, Argentina, 1-4 November 2005Makoto Okubo – Member of the Secretariat

International Association of Insurance Supervisors (IAIS)

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

2 November 2005Makoto Okubo

Definition of Solvency – IAIS glossaryDefinition of Solvency – IAIS glossary

Definition of Solvency – IAIS glossary

Ability of an insurer to meet its obligations (liabilities) under all contracts at any time

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

3 November 2005Makoto Okubo

Definition of Solvency – IAIS glossaryDefinition of Solvency – IAIS glossary

• To remain solvent an insurer must:

– Manage its risks

– Ensure asset cash flows are available to meet liabilities when payable

– Maintain a safety margin of assets over liabilities

Ability of an insurer to meet its obligations (liabilities) under all contracts at any time

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

4 November 2005Makoto Okubo

ICP23 Capital adequacy and solvencyICP23 Capital adequacy and solvency

The Supervisory authority requires insurers to comply with the prescribed solvency margin

This regime includes capital adequacy requirements

and requires suitable forms of capital

that enable the insurer to absorb significant unforeseen losses

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

5 November 2005Makoto Okubo

Elements of a Solvency RegimeElements of a Solvency Regime

EC a : Solvency regime addresses in a consistent manner:

• valuation of liabilities, including technical provisions and the margins contained herein

• quality, liquidity and valuation of assets

• matching of assets and liabilities

• suitable forms of capital

• capital adequacy requirements

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

6 November 2005Makoto Okubo

Allowance for risk mitigation or transferAllowance for risk mitigation or transfer

EC b: Allowance for risk mitigation or transfer considers its effectiveness and the security of counterparty

• Any allowance for reinsurance should consider:– the effectiveness of the risk transfer– the likely security of the reinsurance

counterparty

• See ICP19 – Insurance activities

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

7 November 2005Makoto Okubo

Suitable Forms of CapitalSuitable Forms of Capital

EC c: Suitable forms of capital are defined• Assessing the Suitability of Capital:

– Ability of supervisors to restrict its distribution– Freedom from encumbrances and security

interests– Freedom from requirements or incentives to

redeem or repay the funds– Freedom from mandatory fixed charges

against earnings– Legal subordination to the rights of

policyholders and other creditors

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

8 November 2005Makoto Okubo

Capital Adequacy RequirementsCapital Adequacy Requirements

EC d : Capital adequacy requirements are sensitive to:

• size, complexity and risk of an insurer’s operations

• accounting requirements that apply to the insurer

• Risk mitigated by capital:– Underwriting risk– Credit risk– Market risk– Operational risk

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

9 November 2005Makoto Okubo

Capital Adequacy Requirements Capital Adequacy Requirements (cont.)(cont.)

EC e: Minimum capital adequacy requirements should be set at a sufficiently prudent level

EC f: Capital adequacy requirements are established at a level so that an insurer can absorb significant unforeseen losses

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

10 November 2005Makoto Okubo

Solvency Control LevelsSolvency Control Levels

EC g : Solvency control levels are established: • Supervisor intervenes and requires corrective

action or impose restriction, where solvency position reaches below control levels

• Control level is set so that corrective action can be taken in a timely manner

• A control level is required• Often expressed in relation to minimum (i.e. 150%)• Insurers should also set targets (not less than the

control levels)• See guidance paper on solvency control levels (2003)

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

11 November 2005Makoto Okubo

Issues Related to GroupsIssues Related to Groups

EC h : Inflation of capital (multiple gearing, intra-group transactions, etc.) is addressed

• Group issues include:– Contagion risk– Related-party transactions– Double or multiple-gearing of capital

• Solvency regimes need to consider both solo and group-wide capital adequacy– See Joint Forum “Supervision of Financial

Conglomerates” (February 1999)

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

12 November 2005Makoto Okubo

Issues Related to BranchesIssues Related to Branches

EC i : Solvency regime addresses requirements upon an insurer operating through a branch• Branch is not a separate legal entity, so has

no capital of its own• Some regimes require assets be held in trust

within the jurisdiction– Amount equal to liabilities in respect of policies

written in the jurisdiction, plus a margin equivalent to the capital that would be required of a local insurer with the same book of business

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

13 November 2005Makoto Okubo

Advanced criteriaAdvanced criteria

AC j: Solvency regime provides for periodic, forward-looking analysis of an insurer’s ability to meet its obligations under various scenarios

AC k: Supervisor assesses the structure of solvency regime against those of a peer group of jurisdictions and works towards consistency

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

14 November 2005Makoto Okubo

Mini Case StudyMini Case Study

• Imagine your are member of a mission team of the IMF/World Bank for an FSAP assessment of the insurance sector

• Assessment for the ICP23 Capital Adequacy and Solvency (90 min. for group discussion)

• Each group will interview the commissioner of country X or Y (5-10 min. per group)

• Each group will make a presentation (5-10 min. per group)

Mini Case Study Mini Case Study on Insurance on Insurance

Core Principles – Core Principles – ICP23 Capital ICP23 Capital Adequacy and Adequacy and

SolvencySolvency

15 November 2005Makoto Okubo

www.iaisweb.org

International Association of Insurance SupervisorsInternational Association of Insurance Supervisors

Questions and Answers

makoto.okubo@bis.org or visit www.insurance-finance.com

This presentation is prepared based on the Insurance Core Curriculum Module 23A – Solvency Principles and Structures (Authors: Michael Hafeman and Craig Thorburn, July 23, 2004)