Irish Industry Submissions for QIS5
Agenda
• Background
• Participation
• Valuation
• Technical Provisions
• Own Funds
• SCR
• MCR
• Internal Models
• Overall Financial Impact
• Next Steps
Background
Recap of Solvency II – Three-pillar approach
Pillar 2:
Pillar 1:
Quantitative
capital requirements
 Technical provisions
 Minimum capital requirement
(MCR)
 Solvency Capital
Requirement (SCR)
Market-consistent valuation
of assets and liabilities
Economic Capital
Validation of internal models




Qualitative
supervisory review process
Corporate Governance
Principles for internal control
and risk management
ORSA
Capital add-ons
New focus for supervisor
Level of harmonisation
Group supervision
Pillar 3:
Disclosures
 Enhance market discipline
through public disclosures
 Annual FCR and Solvency
reports
 Provide additional (non-public
information to the supervisors
More pressure from capital
markets, investors and
shareholders
Recap of Solvency II – Balance Sheet
Assets
Liabilities
Surplus
Own funds
Solvency capital requirement
Minimum capital requirement
Assets covering
technical provisions
and SCR
Assets covering
technical provisions
Risk margin
Best estimate
…for non-hedgeable
risks
Technical provisions
Market-consistent valuation for
hedgeable risks
SCR
Adj
Market
BSCR
Health
Default
CAT
Non-SLT
Health
Op
Life
Non-life
Mortality
Premium
Reserve
Interest
rate
SLT
Health
Equity
Mortality
Property
Longevity
Spread
Disability
Morbidity
Lapse
Currency
Lapse
Expenses
Concentration
Expenses
Revision
Illiquidity
Revision
CAT
Premium
Reserve
Longevity
Intang
Lapse
Disability
Morbidity
Lapse
CAT
= included in the
adjustment for the lossabsorbing capacity of
technical provisions
under the modular
approach
Quantitative Impact Studies
The Story so far...
•
QIS1 - autumn 2005 - focused on testing the level of prudence in
technical provisions under several hypotheses
•
QIS2 - summer 2006 - covered methodology of the technical
provisions, SCR and MCR
•
QIS3 - summer 2007 - testing of the calibration of the parameters
•
QIS4 - summer 2008 - all areas of the proposed regime:
– balance sheet impact
– own funds
– the design and calibration of the standard formula.
– impact on groups and
– the comparison between internal model and standard formula results
Quantitative Impact Studies
...and so to QIS5
• 5th July, 2010 the European Commission wrote to
CEIOPS to ask them to run QIS5
• Conducted between July and November 2010, based
on data as at 31st December 2009
• Most comprehensive QIS to date
Introduction
QIS 5 Objectives
•
To provide another test of the system being developed for Solvency II
•
To achieve a high level of participation from solo undertakings (60%) and groups
(75%), with a particular emphasis that more small undertakings participate than
had been the case in previous studies
•
The main issues to be covered were:
– Calibration of Standard Formula
– Groups Calculations
– Internal Models
– Test Complexity
•
To increase the level of preparedness of both industry and supervisors
•
QIS5 Results will be used to calibrate the Level 2 Implementing Measures
•
Results will also be used to assess the needs and contents of the Level 3 guidance
relating to Pillar 1 requirements
Introduction
Considerations
•
This presentation is based on the results and feedback received from Irish
firms who participated in QIS5
•
Views expressed in this report are those of the individual companies and
not the Central Bank of Ireland
•
This presentation contains only a snapshot of the large number of
comments received
•
The feed-back provided by the Central Bank of Ireland to EIOPA reflected
the majority of the companies’ detailed submissions on almost every topic
•
QIS5 was only a test at a point in time and did not purport to represent
or pre-judge final calibrations
•
This presentation does not necessarily indicate the impact that Solvency
II will have on the Irish industry when Solvency II is implemented on 1st
January, 2013
Participation
Participation
• 220 Submissions to Central Bank of Ireland
• 81% of entities that will be subject to Solvency II
• 2,520 submissions Europe wide
• 68% of entities that will be subject to Solvency II
Participation
The Central Bank of Ireland would like to
express its gratitude to all companies who
participated in this exercise
Valuation
Valuation of Assets and Other Liabilities
|Comments
• International Accounting Standards
• More guidance on deferred taxes
Technical Provisions
Technical Provisions
• In general there was a reduction in the level of technical
provisions from Solvency I to QIS5. This arose due to:
– Best estimate against possibly prudent assumptions
– Discounting for non-life business
– Removal of surrender value floor for Life Business (i.e. can
hold negative provisions)
• Offsetting this to some extent was:
– Inclusion of Risk Margin
– Different cash-flows included in provisions due to contract
boundary used in QIS5
– Discounting using risk-free rates for life business.
Technical Provisions
Ratio of QIS5 Technical Provisions to Solvency I
-622.4%
25th
Percentile
86.5%
-2.1%
79.5%
Minimum
Life
Non-life
Median
95.4%
93.4%
75th
Maximum
Percentile
99.1%
345.9%
99.7%
156.7%
Technical Provisions
Risk Margin
• Some companies complained that the full calculation was too
complex so that simplifications would always be needed
• Most companies reported that they used one of the
simplifications allowed
• Unavoidable market risk was too difficult to define
25th
Percentile
Median
75th
Percentile
EEA
Mean
Life
0.4%
1.4%
4.9%
2.7%
Non-life
4.1%
6.8%
9.7%
6.8%
Technical Provisions
Contract Boundary
• Many unit linked contracts were determined to have a zero
boundary because they were deemed to have unlimited ability
to vary contract terms
• There was inconsistency in the technical specification between
single premium and regular premium contracts in this regard
• Many thought that the definition of contract boundaries was
unclear
• The overwhelming view was that the QIS5 definition was out of
line with IFRS/IASB, uneconomic, inconsistent with the risk
profile of the contract and unrealistic
•
Some non-life comments looked for clarification on “bound but not
incepted” policies
Technical Provisions
Segmentation
• Several companies commented that the
segmentation was too broad and needed to be more
granular as too much business was ending up in the
miscellaneous category for non-life
• Against this many companies complained that the
split of motor business between property and
liability did not match practice in the Irish market,
which is to have one contract covering both risks
• Many life companies thought that the second level
of segmentation was too detailed and led to
unnecessary complication
Technical Provisions
Further Comments from EIOPA report
• Illiquidity Premium
– Split between buckets
– 1% reduction in technical provisions
• Transitional measures
• Reinsurance recoverables
– Split by LOB not in line with treaties
– Allowance for expected defaults difficult
Own Funds
Own Funds
Tiering
Ireland
Tier 1
Tier 2
Tier 3
95.7%
1.8%
2.5%
• Tier 1
– EEA Solo 91.9%
– EEA Group 81.5%
Own Funds
Expected Profits in Future Premiums
•
The majority of comments received in relation to Own Funds were in
respect of Expected Profits In Future Premiums (EPIFP)
•
In general there was support from companies for the concept of EPIFP
and its inclusion as Tier 1 Capital, but not for its method of calculation
•
Many companies complained that models were unable to do the
calculations without significant modification
•
The calculation should be unnecessary if EPIFP is to be treated as Tier 1
•
The majority of companies reported a zero EPIFP. As a percentage of Own
Funds, the highest figure for EPIFP was 90%, with a median of 12% for
those companies reporting a non-zero value
•
It should be noted that the size of EPIFP is directly linked to the definition
of the Contract Boundary
Own Funds
Further Comments from EIOPA report
• Other paid in capital instruments
– Material amounts, but use varies
– Existing hybrids unlikely to meet new criteria
– Transitional provisions
• Adjustments to own funds
– Ring fenced funds
– Participations in financial and credit institutions
– Net deferred tax assets
• Ancillary own funds
Solvency Capital
Requirement
SCR
• Most companies saw an increase in SCR over RMSM
• Increase was generally greater for non-life
companies than life companies
Life SI
Table: Required capital to net provisions
25th
75th
Median
Percentile
Percentile
0.6%
2.2%
6.8%
Life QIS5
1.5%
3.5%
21.4%
Non-Life SI
4.3%
9.9%
22.2%
28.4%
53.7%
115.6%
Non-Life QIS5
SCR
Composition (All undertakings)
140%
EEA
200%
Ireland
180%
120%
22%
0%
49%
100%
9% 10%
140%
4%
60%
40%
102%
100%
12%
80%
60%
40%
32%
57%
12%
100%
27%
8%
28%
120%
80%
148%
102%
100%
20%
SCR
Adj TP/DT
SCR Op
BSCR
Intangibles
Diversification
Non-life
Health
Life
Counterparty
SCR
Adj TP/DT
SCR Op
BSCR
Intangibles
Diversification
Non-life
Health
Life
Counterparty
0%
Market
0%
Market
20%
30% 32%
0%
8%
160%
BSCR
Composition (Life undertakings)
140%
120%
Ireland
4%
120%
EEA (Diversified)
3%
1%
100%
24%
0%
100%
0%
0%
24%
80%
64%
80%
0%
8%
60%
60%
6%
102%
40%
40%
67%
49%
20%
BSCR
Intangibles
Diversification
Non-life
Health
Life
0%
Counterparty
BSCR
Intangibles
Diversification
Non-life
Health
Life
Counterparty
Market
0%
Market
20%
100%
BSCR
Composition (Life undertakings)
25th
Percentile
Median
75th
Percentile
Mean
0.0%
0.0%
0.0%
0.2%
Market
29.4%
49.9%
71.7%
47.6%
Default
2.0%
8.2%
19.9%
5.7%
Life
Underwriting
30.1%
51.2%
73.1%
62.8%
Health
Underwriting
0.0%
0.0%
1.7%
3.0%
(22.2%)
(29.1%)
(35.5%)
(23.0%)
Intangibles
Diversification
BSCR
Composition (Non-life undertakings)
140%
120%
Ireland
120%
0%
100%
20%
0%
100%
EEA (Diversified)
80%
52%
79%
80%
0%
60%
60%
101%
40%
16%
2%
4%
40%
20%
20%
21%
1%
33%
BSCR
Intangibles
Diversification
Non-life
Health
Life
Counterparty
Market
BSCR
Intangibles
Diversification
Non-life
Health
Life
Counterparty
0%
Market
0%
7%
100%
7%
BSCR
Composition (Non-life undertakings)
25th
Percentile
Median
75th
Percentile
Mean
Intangibles
0.0%
0.0%
0.0%
0.0%
Market
4.5%
15.2%
29.7%
20.5%
Default
7.3%
17.3%
40.6%
16.1%
Health
Underwriting
0.0%
0.0%
0.5%
3.5%
Non-Life
Underwriting
51.9%
73.6%
89.9%
78.4%
(10.5%)
(19.9%)
(26.9%)
(20.1%)
Diversification
100%
80%
60%
100%
24%
23%
0%
40%
20%
42%
Market Risk
39%
10%
6%
Diversification
140%
Illiquidity Premium
27%
Concentration
7%
120%
Currency
160%
Spread
42%
Property
14%
Equity
Ireland
Interest
80%
Market Risk
7%
Diversification
140%
Illiquidity Premium
120%
Concentration
100%
Currency
160%
Spread
Property
40%
Equity
20%
Interest
Market Risk
Composition (All undertakings)
EEA
8%
36%
30%
12%
60%
100%
28%
0%
Market Risk
Composition (All undertakings)
25th
Percentile
Median
75th
Percentile
Mean
Interest
5.4%
25.4%
60.6%
23.3%
Equity
0.0%
0.0%
28.4%
24.4%
Property
0.0%
0.0%
0.0%
7.0%
Currency
0.0%
22.6%
54.4%
38.8%
Spread
0.0%
0.3%
16.8%
27.3%
Concentration
0.0%
0.0%
42.6%
6.9%
Illiquidity
0.0%
1.6%
6.0%
14.3%
(16.3%)
(32.9%)
(48.2%)
(42.1%)
Diversification
Market Risk
Comments
• Problems looking through to underlying assets for
unit funds, especially when investing via unit
trusts/UCITS
• No allowance for dynamic hedging overstated risk
• Further work required to assess basis risk (i.e.
improve fund mapping)
• For unit linked business it was too complicated to do
the full calculation for each market risk shock (e.g.
spread risk)
3%
100%
48%
0%
40%
0%
6%
20%
Life Underwriting
Risk
80%
0% 11%
Diversification
36%
CAT
6% 0%
23%
Revision
120%
Expenses
160%
Lapse
36% 43%
Disability
140%
Longevity
Ireland
Mortality
40%
Life Underwriting
Risk
Diversification
120%
Catastrophe
80%
Revision
100%
Expenses
160%
Lapse
13%
Disability
60%
Longevity
20%
Mortality
Life Underwriting Risk
Composition
EEA
140%
36%
100%
49%
60%
100%
36%
11%
Life Underwriting Risk
Composition
Mortality
25th
Percentile
1.5%
Longevity
0.0%
0.0%
2.0%
13.5%
Disability
0.0%
0.0%
0.8%
3.0%
24.0%
63.0%
82.8%
36.2%
Expenses
2.5%
12.6%
35.5%
6.3%
Catastrophe
0.4%
4.1%
30.9%
36.2%
(14.6%)
(22.1%)
(35.4%)
(43.1%)
Lapse
Diversification
6.6%
75th
Percentile
19.1%
47.9%
Median
Mean
Life Underwriting Risk
Comments
• The most commented on aspect was the longevity risk.
All companies who commented felt that this risk should
be an improving mortality trend rather than a once off
improvement
• Many companies commented that assessing the lapse
risk at policy level was difficult and not intuitive: lapse
risk should be done at product rather than policy level
• Some companies said that mass lapse rates were too
high in general, while some specified that it was too high
where policies had large surrender penalties
• For reinsurance contracts there was a difficulty in
determining the policy level lapse risk, since there is only
an indirect link with the ultimate policyholder
21%
80%
80%
60%
60%
100%
69%
40%
20%
20%
0%
0%
1%
Non-life Underwriting Risk
120%
Diversification
140%
Lapse
52%
100%
CAT
Ireland
Premium & Reserve
0%
Non-life Underwriting Risk
120%
Diversification
140%
Lapse
100%
CAT
40%
Premium & Reserve
Non-Life Underwriting Risk
Composition
EEA
20%
50%
100%
70%
Non-Life Underwriting Risk
Composition
25th
Percentile
Median
75th
Percentile
Mean
Premium &
Reserve
37.4%
63.0%
86.5%
69.3%
Catastrophe
30.2%
62.7%
81.2%
51.7%
0.0%
0.0%
0.0%
0.3%
(11.5%)
(21.2%)
(24.9%)
(21.2%)
Lapse
Diversification
Non-Life Underwriting Risk
Comments
• CAT Risk Method 1 too complex
• CAT Risk Method 2 overly penal
• Premium and Reserve risk over calibrated
• Non proportional reinsurance not well catered for
• Difficult to apply reinsurance programmes,
particularly to CAT module
• Data requirements too onerous
• Lapse module generally ignored
Counterparty Default Risk
Comments
•
Nearly all comments related to the complexity of the calculation, in
particular to the calculation of the risk mitigating effect within the Loss
given Default (LGD). Companies complained that this required them to
recalculate the SCR for each counterparty with and without reinsurance,
which is very onerous even with a low number of counterparties.
Comments were made that the complexity of the calculations led to
simplifications or approximations being used
•
In addition, the complexity of the formula means that it was difficult to
anticipate or sense check the results or explain the results to
management
•
Type 2 default rates were too penal
•
Inclusion of cash inconsistent as it is not a risk mitigant. Also no
allowance for recovery rate means it is more penal to hold cash than
derivatives
•
Many companies complained of the difficulty in understanding how to
distinguish between Type 1 and Type 2 exposures
SCR
Further Comments from EIOPA report
• Loss absorbency of deferred taxes
– Frequently not calculated – SCR overstated?
– Additional guidance required
• Equivalent scenario
– Intended to simplify calculation of loss absorbency of
technical provisions and deferred taxes
– Default method only used by 39% of undertakings
– Extensive feedback - too complex and impractical
Minimum Capital
Requirement
MCR
• About 5% of companies failed to meet the MCR
– Similar figure across EEA
• The MCR generated few comments though some
companies did comment that it was not risk based
• Whilst there was a corridor for the MCR of 25% to
45% of SCR, the absolute floor for the MCR did
push some companies above this corridor, including
some for whom the calculated SCR was less than
the absolute floor for the MCR
Internal Models
Internal Models
• Internal Model review is an on-going process
• Models vary in design from each other and from the
format of the standard formula
• QIS5 happened early in the Internal Model process
• Difficult to draw too many meaningful conclusions
about quantitative results
Internal Models
• Of the Irish companies which gave internal model
results the majority used a group model
• The majority of companies already used internal
models for a variety of purposes
• The majority of models required further refinement
to meet Solvency II requirements
• Expert judgement was widely used
Internal Models
Differences to Standard Formula
• The internal model included an equity volatility risk and an
interest rate volatility risk
• The internal model reflected concentration risk implicitly
through spread risk and explicitly by managing the risk
through a Credit Name Limit Policy ensuring that no additional
capital charges applied
• The internal model did not explicitly identify claims revision
risk separately from the Underwriting Risk around the
underlying claims driver
• Internal model credited full tax benefits in the SCR
• No capital was held for non-reporting currency risk
• A different approach or calibration was taken to aggregating
risks
Internal Models
Differences to Standard Formula
•
Internal model allowed for full diversification benefit between all legal
entities and EEA and non-EEA countries
•
The internal model had significantly more risk factors than the standard
model
•
Mortality risk was split into trend uncertainty, level uncertainty, volatility
and calamity. Level, trend and volatility were combined into life noncatastrophe and calamity was separated. Same for morbidity. Disability
was placed under morbidity risk. Non-life was split into prior, current noncatastrophe and current catastrophe
•
Insurance risk was assessed but catastrophe risk was not split out
•
The loss of the risk mitigating benefit associated with reinsurer default
was not considered in the Standard Formula
•
The lines of business in the internal model were generally at a much more
granular level than those of the standard formula
Overall Financial
Impact
Overall Financial Impact
• Most companies saw an increase in Own Funds due to lower
technical provisions
• Most companies saw an increase in required capital
• Hence the impact on surplus and solvency ratio depends on
the change in Own Funds versus change in required capital
• Overall there is no simple pattern although far more
companies saw a reduction in surplus capital than saw an
increase
• The majority of those that did see an increase write life
business
• In tables below Solvency I required capital is based on 150%
of RMSM or 100% of MGF
Overall Financial Impact
Surplus Capital
• Surplus capital is defined as the available capital in
excess of the capital requirement
Type of
company
Decrease Decrease
more
up to
than 50%
50%
Increase
up to
50%
Increase
more
than 50%
Total
Life
10
9
12
45
76
Non-life
72
37
20
14
143
Total
82
46
32
59
219
Overall Financial Impact
Solvency Ratio
• Solvency ratio is defined as available
capital/required capital for Solvency I and eligible
Own Funds/SCR for QIS5
Type of
company
Increase
Decrease
Total
Life
45
31
76
Non-life
32
111
143
Total
77
142
219
Overall Financial Impact
SCR Coverage
EEA
Ireland
13%
More than 400%
Between 350% and 400%
Between 350% and 400%
6%
7%
8%
Between 300% and 350%
Between 250% and 300%
Between 200% and 250%
17%
Between 150% and 200%
13%
Between 120% and 150%
11%
Between 120% and 150%
9%
8%
Between 100% and 120%
4%
6%
Between 75% and 100%
16%
Less than 75%
5%
10%
12%
Between 200% and 250%
14%
0%
7%
Between 250% and 300%
Between 150% and 200%
Between 75% and 100%
5%
Between 300% and 350%
11%
Between 100% and 120%
14%
More than 400%
10%
15%
9%
Less than 75%
20%
0%
5%
10%
15%
20%
Overall Financial Impact
SCR Coverage
Non Life
Life
32%
More than 400%
Between 350% and 400%
9%
Between 350% and 400%
Between 300% and 350%
Between 300% and 350%
Between 250% and 300%
11%
9%
Between 200% and 250%
11%
Between 200% and 250%
Between 75% and 100%
15%
Between 100% and 120%
0%
12%
6%
Between 75% and 100%
7%
Less than 75%
0%
17%
Between 120% and 150%
4%
Between 100% and 120%
10%
Between 150% and 200%
11%
Between 120% and 150%
4%
5%
7%
Between 250% and 300%
8%
Between 150% and 200%
3%
More than 400%
5%
10%
20%
Less than 75%
15%
20%
25%
30%
35%
0%
5%
10%
15%
20%
25%
Next Steps
Next Steps
•
Reviewing and contributing to the further development of the
Level 2 Implementing Measures, Level 3 Guidelines and standards
and development of additional transitional arrangements
– Further guidance on deferred taxes
– EPIFP task force
– Further detail on MCR calibration
•
Working with firms in the ‘pre-application’ phase of the Internal
Model Approval Process
•
Engaging with European counterparts for the review of European
cross-border groups’ internal models
•
If you haven’t already done so – discuss the implications of the
QIS5 results for your firm at your next Board meeting
Questions?