ASSAL-IAIS Training Seminar:
Overview of the Swiss Solvency
Test
21st November 2012
Alex Summers
Global Life Actuarial
INTERNAL USE ONLY
Important note
The views expressed in this presentation are the presenter’s own and
do not necessarily represent the views of either Zurich Insurance Group
(Zurich), or FINMA
I am very grateful to colleagues within Zurich and at FINMA for their
assistance in preparation
© Zurich Insurance Company Ltd.
Further information from FINMA on the Swiss Solvency Test can be
found on FINMA’s website at http://www.finma.ch
INTERNAL USE ONLY
2
Agenda
• Context and history
• Key principles and conceptual framework
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
3
FINMA’s objectives*
"FINMA's mandate is to protect creditors, investors and policy holders
and ensure the smooth functioning of the financial markets.
Through consistent supervision and predictable regulation, we
make an important contribution to safeguarding the stability and good
reputation of the Swiss financial centre, and consequently to
enhancing its competitiveness.“
© Zurich Insurance Company Ltd.
Prof. Anne Héritier Lachat, Chair of the Board of Directors, FINMA
*: FINMA is the Swiss regulator for banking,
insurance and other financial services
INTERNAL USE ONLY
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The SST protects policyholders by requiring a
high probability of orderly run-off of business
SST identifies insurers* at risk of being
unable to honour their existing
obligations
A ladder of intervention allows
appropriate actions to be taken when
insurers run into difficulties
SST ladder of intervention
Risk
0 margin
Total required
capital
© Zurich Insurance Company Ltd.
SST sets capital requirements so that
there is high probability of orderly run-off
of business
Internally
Transfer of liabilities to a third party if
necessary
Both fulfilment and transfer value
concepts are thus central to the SST
Based on FINMA SST technical document p8
INTERNAL USE ONLY *: The term “Insurers” has been used throughout to indicate both insurance and reinsurance undertakings
5
The SST aims to be based more on principles
than rules
Liberty means responsibility. That is why most men dread it.
George Bernard Shaw
Principles encourage responsible management behaviour for good risk
and capital management
Principles are more challenging than rules both for the supervised and
for the supervisors
© Zurich Insurance Company Ltd.
Principles must be powerful and general.
Rules give less incentive for thoughtful risk management
Innovation discouraged, reducing long term competitiveness
Increased systemic risk
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© Zurich Insurance Company Ltd.
History of the SST: successful launch
despite challenging conditions
Developed 2003-2005
Field-tested in 2004 and 2005
In force since 1 January 2006
Larger companies first
Results not binding initially
As of 2008, all companies calculated SST
1.1.2011 SST capital requirements binding
2012 FINMA propose temporary lightening
of SST in context of extreme financial
markets and Solvency II uncertainty
Internal model approval process is ongoing
for many companies
So far no requirement for public disclosure
of results for individual insurers
Source: FINMA, 2012
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Swiss Solvency Test and Solvency II are
broadly equivalent
FINMA has applied for recognition of the SST as equivalent to SII
Defining principles of both risk-based framework are the same
Based on a holistic market consistent balance sheet
Requirements for good governance and transparent disclosure
© Zurich Insurance Company Ltd.
Uncertainty SII measures for Long Term Guarantees may cause differences
FINMA has proposed temporary adjustments to SST in response
EIOPA advice on Switzerland’s equivalence under Article 172, 227 and 260:
Switzerland meets the criteria set out in EIOPA’s methodology for
equivalence assessments under Solvency II…
…but caveats around looser public disclosure requirements, captives and
compliance / internal audit functions
INTERNAL USE ONLY
8
Agenda
• Context and history
• Key principles and conceptual framework
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
9
The SST Principles in full
5. The market value margin is approximated by
the cost of the present value of future
required regulatory capital for the run-off of
the portfolio of assets and liabilities
6. Under the SST, an insurer’s capital adequacy
is defined if its target capital is less than its
risk bearing capital
© Zurich Insurance Company Ltd.
7. The scope of the SST is legal entity and group
/ conglomerate level domiciled in Switzerland
8. Scenarios defined by the regulator as well as
company specific scenarios have to be
evaluated and, if relevant, aggregated within
the target capital calculation
INTERNAL USE ONLY
Source: FOPI, 2007
Defines How-to
4. Target capital is defined as the sum of the
Expected Shortfall of change of risk-bearing
capital within one year at the 99% confidence
level plus the market value margin
Transparency
Defines Output
2. Risks considered are market, credit and
insurance risks
3. Risk-bearing capital is defined as the
difference of the market consistent value of
assets less the market consistent value of
liabilities, plus the market value margin
9.
Governance
1. All assets and liabilities are valued market
consistently
All relevant probabilistic states
have to be modeled probabilistically
10. Partial and full internal models can
and should be used. If the SST
standard model is not applicable,
then a partial or full internal model
has to be used
11. The internal model has to be
integrated into the core processes
within the company
12. SST Report to supervisor such that
a knowledgeable 3rd party can
understand the results
13. Regulatory disclosure of
methodology of internal model such
that a knowledgeable 3rd party can
get a reasonably good impression
on methodology and design
decisions
14. Senior Management is responsible
for the adherence to principles
10
SST principles aim for a sound, consistent
and transparent framework
• Risk based
• Principles based
• Holistic market consistent balance sheet giving economic view of both
assets and liabilities
• Available capital = market value of assets – best estimate liabilities
• Required capital based on risk margin* + potential change in available
© Zurich Insurance Company Ltd.
capital over 1 year time horizon, using 1 in 100 expected shortfall as a
risk measure, incorporating scenarios
• Applies both to legal entities and groups
*: For SST, also referred to as Market Value Margin (MVM)
INTERNAL USE ONLY
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Risk based framework for calculating
SST
Market Consistent Data and
Best Estimate Assumptions
Mix of predefined
and company
specific scenarios
Standard Models
or Internal Models
Valuation Models
Risk Models
Market Risk
Scenarios
Market Value
Assets
Credit Risk
Life
P&C
Best Estimate
Liabilities
Health
Risk margin
Output of analytical models (Distribution)
© Zurich Insurance Company Ltd.
Aggregation Method
Target Capital
INTERNAL USE ONLY
SST Report
Source: FOPI, 2007
12
Agenda
• Context and history
• Key principles and conceptual framework – BALANCE SHEET
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
13
SST Market Consistent Economic
Balance Sheet
The economic balance sheet gives a realistic picture of a
company’s financial position at a given point in time
Free capital
Required
capital for
1-year risk
Available Capital
Total
required
capital
Risk Margin
Best estimate
of discounted
liabilities
© Zurich Insurance Company Ltd.
Market value
of assets
Market
consistent
value of
liabilities
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Holistic market consistent balance sheet gives
a complete and transparent view
Consistent with transfer value concepts
A little light dispels a lot of darkness.
Rabbi Schneur Zalman
SST ladder of intervention
Valuation benchmark is price at which
knowledgeable business partners would
purchase or sell the positions in an arm’s
length transaction
Where these conditions are not
satisfied in stressed markets, plausible
methods and parameter estimates are
to be selected.
Risk
0 margin
Total required
capital
© Zurich Insurance Company Ltd.
Pro-cyclical effects need to be considered
Not necessarily aligned to existing
accounting standards
Materiality concept vital
INTERNAL USE ONLY
Based on FINMA SST technical document p8
15
Overview of risk margin in the SST
Risk margin is the extra amount needed above best estimate of
liabilities to cover the risks the liabilities bring
Non-hedgeable risks only
Present value of opportunity cost of regulatory capital needed to support
risks till the liabilities run off
Relevant for both transfer and fulfilment value concepts
SST risk margin is similar in nature to Solvency II risk margin
Details differ slightly
© Zurich Insurance Company Ltd.
SST Treatment of risk margin aims to avoid circularity
Simplifications are needed in practice
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Agenda
• Context and history
• Key principles and conceptual framework – RISK CALCULATIONS
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
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As a risk-based framework, SST aims for
transparent view of insurers’ exposure to risk
Nothing is easier than self-deceit. For what each man
wishes, that he also believes to be true. Demosthenes
Control and mitigation of risk are secondary objectives which are better
achieved via transparency
© Zurich Insurance Company Ltd.
SST aims to avoid prudence, restrictions on eligibility of capital,
investments and risk transfers
These would reduce transparency and transfer responsibility for risk
management to supervisor
SST also aims for an appropriate parameterisation, considering all
material, quantifiable risks
Not seeking to perpetuate a given business model or distort
transparent economic view for political aims
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Risk as Change of Available Capital
SST required capital covers the risk of adverse changes in the economic
balance sheet over the next year
The total capital requirement is set so that even after adverse experience, it
should still be possible to transfer business to a third party
Hypothetical balance
sheets at t=1
© Zurich Insurance Company Ltd.
Balance
sheet at t=0
t=1
t=0
INTERNAL USE ONLY
Source for illustration: FOPI, 2007
19
All material, quantifiable risks are
covered in the SST
Market risk
Interest rates, spreads, foreign exchange, equity, alternative investments,
volatilities
© Zurich Insurance Company Ltd.
Insurance risk
Reflecting both parameter and random risk
Non-life: settlement, new claims and accumulation risks
Life: mortality, longevity, disability/morbidity, recovery, expenses, lapse and
other options and accumulation risks
Health insurance risks
Impact of reinsurance has to be modelled separately (waiver possible)
Credit risk
Complete or partial default
Migration: change in creditworthiness or rating
For groups: changes in value of intra-group loans and other Capital and Risk
Transfer Instruments
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Other risks
Risk concentrations are considered within SST scenarios
Operational risk is currently not explicitly included in SST in the
context of self-assessment by Swiss insurers
Systematic quantitative assessment of operational risks considered
for investigation by FINMA
© Zurich Insurance Company Ltd.
Liquidity risks have to be taken into account in insurers’ risk
management outside of SST
Model risks need to be taken into account in risk management
Parameter risks incorporated into SST quantification
Impact of other model shortcomings needs to be recognised
FINMA can ask for explicit quantification in serious cases
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One year time horizon consistent with
transfer value concept
One year time horizon allows for ladder of intervention while keeping
calculation efforts reasonable for a given level of accuracy
Choice of time horizon is a key decision which for SST then determines
many areas of the framework
© Zurich Insurance Company Ltd.
SST volatilities are then set consistently with one year view
Mean reversion does not play a role
Treatment of business with long term guarantees remains consistent
with one year time horizon
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Risk measure is 99% expected shortfall
Year 0:
Year 1:
uncertain
known
Available capital changes
due to random events
Available
Capital
Probability density of
the change in available
capital
Revaluation of
liabilities due to
new information
New business
during one year
Probability < 1%
© Zurich Insurance Company Ltd.
Claims
Change in market
Catastrophes
value of assets
Market value
of assets
Best estimate
of liabilities
Economic balance sheet
at t=0 (deterministic)
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Average value of
available capital in
the 1% “bad” cases
= Expected shortfall
Economic balance sheet
at t=1 (stochastic)
23
Expected shortfall risk measure prevents tail
risks from being ignored
Results for 99.5% Value at Risk as
used for SII are typically not too
different from 99% Expected Shortfall
Expected shortfall requires more
thought when extrapolating risks into
extremes of the tail
Probability density of
the change in available
capital
Probability < 1%
© Zurich Insurance Company Ltd.
In practice ES is typically a more
stable measure than Value at Risk
Other useful mathematical properties
such as coherence
INTERNAL USE ONLY
Average value of
available capital in
the 1% “bad” cases
= Expected shortfall
24
SST requires use of Internal Models except
where Standard Model is adequate
The core of the SST framework are the underlying
methodology and principles, not the standard models
Valuation, risk measure,
time horizon,…
Methodology of the
Solvency Test
© Zurich Insurance Company Ltd.
Company specific
approach and
simplifications
Implicit and explicit prudence,
limits, etc. to take into account
the approximations used for
the standard model
Internal models are assessed with
reference to the methodology of
the SST framework
Internal Models
INTERNAL USE ONLY
Standard Models
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Standard Model and SST
SST Standard Model
Functional dependence of P&L on risk
factors is linear
Specified distributions (Normal except
GI)
Time 0 sensitivities
Focus only on guaranteed cash flows
gives disconnect with industry
Embedded Value
Realistic Internal Model based on SST
Methodology
Realistic dependence of P&L on risk factors
Dependency between risk factors can be
modeled more flexibly (e.g. tail dependency)
Risks can be assessed via generation of
scenarios of the economic state of the
company in one year’s time
Valuation and one year risk consistent
Conceptually more consistent with EV
© Zurich Insurance Company Ltd.
Model can map better company’s internal view
of business  embedding of the model easier
Standard model is adequate for
“simple” companies with few
optionalities and stable business
Source: After FINMA 2007
INTERNAL USE ONLY
Realistic model is adequate also for
companies with optionalities in both
assets and liabilities
26
Some SST Standard Model
simplifications
The following simplifications are applied consistently to both available
and required capital in the SST Standard Model
PRE (policyholders reasonable expectations) are fully risk bearing
Future discretionary benefits are excluded from calculations with
focus only on guaranteed cash flows
© Zurich Insurance Company Ltd.
Tax liabilities are fully risk bearing
All calculations are done pre-tax
INTERNAL USE ONLY
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Agenda
• Context and history
• Key principles and conceptual framework – AGGREGATION
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
28
SST does not specify an approach to
aggregation in calculating required capital
SST standard model makes use of mixture of correlation matrices,
convolutions and other simplifications for aggregation
© Zurich Insurance Company Ltd.
Copula approach can also work well for internal models, but is not a
requirement
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Agenda
• Context and history
• Key principles and conceptual framework – SCENARIOS
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
30
Scenarios are a key element of the SST to
capture extreme risks and combinations of
events
Scenarios in the SST are events or combinations of events that cause a severe
reduction in available capital but with low probability
Help ensure model gives adequate weight to tail risks and tail dependencies
Standard Model scenarios are defined by FINMA
Insurers must provide additional specific scenarios relevant to their business
© Zurich Insurance Company Ltd.
Two types of scenarios in SST:
Type 1: Scenarios to be aggregated into SST required capital
Type 2: Scenarios to be evaluate but to avoid double counting, not aggregated
into SST required capital
Holistic impact must be considered, not only insured claims amount
E.g. market risk impacts from a pandemic or terrorist attack
For each scenario, expected effect must be quantified
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Aggregation of scenarios into SST required
capital is based on simplifying assumptions
Assumed no more than one such extreme event each year, and they are
independent
Distribution in risk models assumed unchanged in event of extreme event
© Zurich Insurance Company Ltd.
Impact and probabilities define discrete point distributions which can then
be summed together with continuous distribution resulting from nonscenario risk calculations
Simple formula for Standard Model resulting from assumed Normal
distribution for non-scenario risk calculations
Monte Carlo simulation if using Internal Model
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© Zurich Insurance Company Ltd.
Scenarios in the SST Standard Model
The historical market stress scenarios cover: Stock Market Crash 1987, Nikkei Crash 1989, European
Currency Crisis 1992, US Interest Rates 1994, Russia / LTCM 1998, Stock Market Crash 2000
The list keeps growing and now includes additional synthetic market scenarios
INTERNAL USE ONLY
Source: FINMA SST Technical Document, 2006
33
Impact of Scenarios, SST 2009: Swiss life
insurers prompted to further mitigate interest
rate risk thanks to SST
© Zurich Insurance Company Ltd.
The crisis
could have
been much
worse!
INTERNAL USE ONLY
Source: FINMA SST report 2009
34
Agenda
• Context and history
• Key principles and conceptual framework
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
35
Principles of Group Solvency Testing
under SST
Groups are defined by legal entities and the web of ownership relations and
Capital and Risk Transfer Instruments (CRTIs) between them
Therefore one number is not enough to assess a group’s risk: it is first necessary
to analyze the solvency of the legal entities of the group
Consolidated view can then offer useful additional insight
© Zurich Insurance Company Ltd.
Group supervisor needs to ensure consistent risk quantification across legal
entities
Review the web of CRTIs and ensure that quantitative and qualitative
requirements on the CRTI are satisfied
In case of a group’s financial distress
The group supervisor should ensure capital mobility, and that capital flows
according to the CRTI in such a way that all the group’s policyholders are
protected optimally
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Analysis of CRTIs allows understanding of how
risks are spread within groups
Intra-group retrocession, contingent
capital issued and received, etc.
Fungible capital
Legal Entity 3
Parent Company
Market Value Margin
Legal Entity 1
Legal Entity 2
Group
© Zurich Insurance Company Ltd.
Intra Group Capital and Risk Transfer Instruments can only be considered if
they are legally binding and accepted by the regulators involved
A wide variety of CRTIs are possible, including intra-group reinsurance /
retrocession, guarantees, participations, dividends, loans, issuance of surplus
notes, securitization of future cash flows / earnings
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Setting SST capital requirements for
groups
All (material) legal entities have to be modeled as per standalone SST but
taking into account the web of CRTI
Symmetric valuation of CRTI permissible
Group’s required capital is then identical to that for parent company based on a
economic, realistic framework
© Zurich Insurance Company Ltd.
The value of a subsidiary for the parent company is its economic value
Independent of regulatory or accounting conventions the subsidiary is
domiciled in
SST allows economic value to be floored at zero
The one-year risk of a subsidiary for the parent is defined as the potential
change of the economic value of the subsidiary within a year
In practice group modeling for SST requires very considerable effort
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Group SST allows a consistent treatment and
allocation of diversification
© Zurich Insurance Company Ltd.
Group Level Diversification
A parent company benefits from group-level diversification since the
random change of its assets and liabilities is not fully correlated to the
changes of the economic value of its participations
Restrictions on capital mobility have to be taken into account
Group level diversification is effected via web of ownership
‘Down-streaming’ of Diversification
A parent can down-stream group diversification to its subsidiaries via
CRTIs e.g. legally binding parental guarantees
A parental guarantee lowers the SCR of the subsidiary but increases
the SCR of the guarantor
Restrictions on capital mobility have to be taken into account
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39
Agenda
• Context and history
• Key principles and conceptual framework
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
40
Introducing SST required a lot of effort
on all sides…
FINMA SST team consists almost of 20 quantitative specialists
Each company is assigned a team out of these 20 people.
Each internal model is assigned a team out of these 20 specialists.
SST team evaluates approximately 130 annual SST reports, producing
feedback to insurers regarding:
Solvency ratio (SST ratio)
Quality of calculations
Quality of documentation
© Zurich Insurance Company Ltd.
SST team evaluates approximately 80 (partial) internal models
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… but the effort was worthwhile
When SST was field tested there was
no meaningful correlation between
SST results and those of the
previously existing Solvency 1
framework
© Zurich Insurance Company Ltd.
This could indicate simple factor
based Solvency 1 results gave little
insight into economic reality indicated
by risk based solvency testing
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42
Agenda
• Context and history
• Key principles and conceptual framework
• Groups & Capital and Risk Transfer Instruments
• Experiences
© Zurich Insurance Company Ltd.
• Selected practical aspects
INTERNAL USE ONLY
43
FINMA has been an enthusiastic supporter of
equivalence between SST and Solvency II
Equivalence should not compromise consistency of framework for
regulation
© Zurich Insurance Company Ltd.
It brings many benefits
Sharing of best practice
Less wasted effort
Less regulatory arbitrage
Improved competitiveness of local market
Improved appeal to multinationals, bringing capital and expertise
Policyholders benefit in the end
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Explicit concept of materiality is vital
For regulation to be feasible to implement and enforce, a concept of
materiality is needed
In the SST, documented non-significant positions and non-relevant risks
can be omitted or presented in a simplified manner if the overall impact
of all simplifications is no more than either
10% of available capital
10% of required capital
10% of solvency ratio
© Zurich Insurance Company Ltd.
The lower the threshold, the higher the cost
The key is being able to spot companies close to trouble
FINMA can ask for more detailed calculations if solvency ratio close to
or below 100%
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Effort for internal model approval on all sides
should not be underestimated
High quality documentation helps
Unlike SII, SST IMAP is not time
bound
No pre-approval phase
© Zurich Insurance Company Ltd.
Model changes during review period
can be a challenge
Special attention is needed for
keeping decisions on models and
calculations consistent over
companies and over time
INTERNAL USE ONLY
By early 2012, FINMA had
completed 27 model reviews
Sector
Unconditional
acceptance
Conditional
acceptance
Rejection
Life
General insurance
Health
Reinsurance
Insurance groups
1
2
1
2
0
3
6
0
4
3
1
2
0
2
0
Total
6
13
8
Source: FINMA, 2012
46
Risk quantification is only one part of a
successful framework for insurance regulation
SST applies a Use Test and requires regular validation, thorough
documentation and senior management responsibility for adherence to
SST principles
Clearly defined requirements for regular regulatory reporting, as well as
reporting of losses or changes in risk-profile
© Zurich Insurance Company Ltd.
The Swiss Solvency Test is also complemented by the Swiss Quality
Assessment (SQA)
SQA considers Corporate Governance, Risk Management and
Internal Control Systems for Swiss Insurers
Restrictions on quality of “Tied Assets” backing liabilities
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Overview of SST
• Risk based
• Principles based
• Holistic market consistent balance sheet giving economic view of both
assets and liabilities
• Available capital = market value of assets – best estimate liabilities
• Required capital based on risk margin + potential change in available
© Zurich Insurance Company Ltd.
capital over 1 year time horizon, using 1 in 100 expected shortfall as a
risk measure, incorporating scenarios
• Applies both to legal entities and groups
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The SST has established itself as an
essential supervisory tool for FINMA
Introduction of SST motivated Swiss insurers to address their solvency
situation
Companies took necessary capital increasing and risk reducing
measures
Companies improved their risk management
With the SST, FINMA has access to an effective solvency testing
instrument
Solvency problems are identified in a timely fashion
© Zurich Insurance Company Ltd.
Conservative measures can be taken based on a ladder of intervention
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Source: FINMA 2012
49
SST Solvency Position of Swiss Life Insurers, SST
2009-2012
SST Solvency Position of Swiss Non-Life Insurers,
SST 2009-2012
100%
100%
Excess Capital
98%
96%
94%
92%
90%
88%
86%
84%
82%
80%
2008 2009 2010 2011 2012
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Expected
shortfall SCR
Market Value
Margin
Best estimate
liabilities
% Total market value of assets
% Total market value of assets
© Zurich Insurance Company Ltd.
Despite a baptism of fire, the SST has given a
clear and helpful view in tough times
Excess Capital
98%
96%
94%
92%
Expected
shortfall SCR
90%
88%
86%
84%
82%
80%
2008 2009 2010 2011 2012
Market Value
Margin
Best estimate
liabilities
50
Thank you for your attention
© Zurich Insurance Company Ltd.
Any further questions?
INTERNAL USE ONLY
51
APPENDIX – Swiss Solvency Test
compared against Solvency II
© Zurich Insurance Company Ltd.
Source: FINMA 2010
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52
Solvency II and SST
Preamble
Solvency II covers pillars I, II and III
SST focuses on pillar I aspects
including elements of pillar II.
© Zurich Insurance Company Ltd.
A full comparison of both supervisory
regimes would consist in a comparison
of Solvency II with the Swiss Insurance
Supervision Act.
For the following slides we focus on pillar I aspects of supervision and
compare the SST with the pillar I aspects of Solvency II.
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Solvency II and SST
Defining principles
Total balance sheet approach
Market-consistent valuation
Market-consistent valuation
Risk based capital requirements
• Insurance risks
• Market risks
• Credit risks
• Operational risks
Risk based capital requirements
• Insurance risks
• Market risks
• Credit risks
• Operational risks not modeled; capital
add-ons considered.
© Zurich Insurance Company Ltd.
Total balance sheet approach
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Solvency II and SST
© Zurich Insurance Company Ltd.
Calibration
Value at risk of the change in available
capital at 99.5% confidence level.
Expected shortfall of the change in
available capital at 99% confidence
level.
Time horizon: one year
Time horizon: one year
Yield curve based on swap rates and a Yield curve based on government
liquidity premium depending on nature bonds.
of liability.
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55
Solvency II and SST
Risk Model
Standard model: formula.
Standard model: stochastic model.
Standard model is default choice.
SST emphasizes principles and encourages
the use of internal models.
All companies may use the standard model.
Internal models are mandatory for certain
companies and groups.
Similar requirements on internal models.
Similar requirements on internal models.
© Zurich Insurance Company Ltd.
SST makes extensive use of scenarios (to
reflect tail risk, tail dependencies,
concentration risk, etc.).
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56
Solvency II and SST
Valuation: Market Consistency
Market-consistent valuation is an
autonomous principle.
IFRS fair values are default choice for
assets (QIS 4).
IFRS fair values are acceptable if
market-consistent.
© Zurich Insurance Company Ltd.
Directive stresses market-consistent
valuation as an autonomous principle.
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Solvency II and SST
Scope
“small” companies not subject to risk based
capital requirements.
All legal entities must satisfy risk based
capital requirements.
Use of a simplified model is acceptable
depending on risk profile of entity.
© Zurich Insurance Company Ltd.
Most reinsurance captives may use a
formula based approach.
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58
Solvency II and SST
Implementation
Numerous field tests (impact
assessments) before final roll out (field
tests 2004 to 2007, tests 2008 to
2010), mandatory participation since
2006 for large insurers.
Solvency II capital requirements will
probably become binding in ….?
SST capital requirements became fully
binding in 2011.
© Zurich Insurance Company Ltd.
Numerous impact assessments before
final roll out (QIS1,2,3,4,…).
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59
Solvency II and SST
© Zurich Insurance Company Ltd.
Group Solvency
Operational entity approach (reflects
management view).
Legal entity approach (reflects insured’s
view).
Based on the consolidated accounts .
Based on the specific structure of the group.
Assumes full diversification of risks within
the group.
Diversification effects depend on actual
capital and risk transfer instruments.
Capital is assumed to be fully transferable
and fungible within group.
Model takes into account
• Restricted fungibility of capital and
• Limited liability of shareholders.
Focus: solvency of consolidated group.
Focus
• Solvency of each legal entity
• Dependencies between legal entities
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