UK Regulatory Framework:
Realistic Balance Sheets and ICAS
Joint Regional Seminar –
Current Topics in Financial Reporting
Kuala Lumpur: 22-23 June
Taipei: 26-27 June
Hong Kong: 28 June
Beijing: 29-30 June
Mark Saunders, FIA , FASI, FSA
Principal & Managing Director, Asia
Tillinghast Financial Services Business Leader, Asia-Pacific
Tillinghast, a business of Towers Perrin
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Mark V.T. Saunders, FIA, FASI, FSA
Mark Saunders is a Principal of Towers Perrin and Managing Director of Tillinghast’s
business in Asia-Pacific. He is a member of the Leadership Council of Tillinghast.
He has been working in the insurance industry since the 1980’s and in Asia since 1989. He
moved to Hong Kong in 1994. Before joining Tillinghast he was Asian Regional CEO and
Executive Board Member of international life insurance operations of a UK-parented insurer
including their joint venture in Korea.
He has been involved in more than 100 actuarial appraisal value assessments of Asian
insurers and is widely regarded as a leading practitioner in value determination and Mergers
& Acquisitions of insurers in Asia.
High profile deals in the public domain include: He provided the Actuarial Expert Opinion in
the Prospectuses for the ground-breaking IPO of China Life in New York and Hong Kong and
was also the lead actuarial consultant in the capital raising exercise for another leading stateowned insurer, Korea Life. He was also the Expert Actuary for the Actuarial Consulting Report
in Great Eastern’s Circular to Shareholders in relation to OCBC’s voluntary unconditional offer.
Mark has extensive experience in the operations of life insurance companies around the
world. With his in-depth knowledge of Asian insurers and markets he has helped a number of
domestic and international insurers in critical areas of acquisition, restructuring, capital raising,
market entry (and exit), strategy, business operations, partnerships, product development,
sales, distribution, bancassurance, financial and risk and capital management (including ALM),
financial and regulatory reporting, actuarial, training and improving business performance.
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Mark V.T. Saunders, FIA, FASI, FSA
He has been the Appointed Actuary for eight insurers in Hong Kong, Singapore and
Vietnam as well as Appointed Actuary Peer Reviewer for six companies. Also, he has
provided Independent Actuary opinions for High Court sanctioned insurance business
transfers and successful Expert Witness testimonials in the Court of First Instance.
Mark has undertaken memberships of various insurance-related, actuarial, regulatory and
professional Committees such as:
„ Member of the Insurance Advisory Committee of the Hong Kong SAR, a Statutory body
overseeing the insurance industry and established under the Insurance Companies
Ordinance
„ Member of the Hong Kong SAR Securities and Futures Commission Committee on
Investment-Linked Assurance and Pooled Retirement Funds
„ Member of the China Insurance Regulatory Commission (“CIRC”) Task Force for
Embedded Value Reporting
He is a regular facilitator of training sessions and speaker and chair at conferences and
seminars as well as author of numerous articles and papers relating to the Asian insurance
industry and has also made the occasional TV appearance!
Mark is a Fellow of the Institute of Actuaries (UK), a Fellow of the Actuarial Society of India, a
Fellow of the Society of Actuaries (US), a Fellow member of the Actuarial Society of Hong Kong
and a Fellow member of the Singapore Actuarial Society. He has both a BSc (Honours) degree
and Post Graduate Certificate of Education in Mathematics from Manchester University, UK.
©2006 Towers Perrin
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What is a RBS, why were
they introduced and who has to do one?
„ Market value of assets
„ Market-consistent value of
liabilities including value of
options/guarantees
„ Includes a risk capital margin
to test market, credit and
persistency stresses
„ 2001: Poor equity markets,
with-profits solvency under
pressure
„ Existing statutory solvency
measure widely criticised
„ Bad Press
„ Life Offices with With-Profits
Liabilities in excess of £500m
„ Covers more than 98% of total
in-force WP business in UK
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The Realistic Balance Sheet
Assets
Liabilities
Value of NP Business
Realistic Free Capital
Inadmissibles
Risk Capital Margin
Current Liabilities
WP Business
Admissible Assets
Realistic
Policy Benefit
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The Twin Peaks Test
Assets
Liabilities
Value of NP
Realistic Free
Business
Capital
Inadmissibles
WPICC = statutory free capital less
realistic free capital, subject to a
minimum of zero.
Risk Capital
Assets
Margin
Current Liabilities
WP Business
Admissible
Realistic
Assets
Policy
Benefit
Realistic
Peak
Liabilities
Statutory
Free capital
Free Capital
WPICC
WP Business
RMM
Admissible
Resilience
Assets
Current Liabilities
Statutory
Peak
WP
Mathematical
Reserves
(After waivers)
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Main Requirements of RBS
ASSETS
„ Market Value where available
„ Valued by reference to market
conditions and assets with similar
characteristics otherwise
LIABILITIES
„ Valued by reference to market
prices or “equivalent” marketable
assets
„ Allows for market cost of hedging
guarantees and options
„ Non investment elements also
valued market-consistently
„
A risk neutral asset model
„
Appropriate account of policy options/guarantees
„
Dynamic interactions to account for
„
Policyholder behaviour
„
Management actions
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Current Issues in calculating RBS
„ Management Actions/Policyholder behaviour
„ Projected Balance Sheets
„ Tax
„ Movement Analysis
„ Number of scenarios/ variance reduction
„ De-risking strategies/ ALM
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Individual Capital Adequacy Standards
in context…..
Global context
UK context
„ Basel II
„ Integrated Prudential Sourcebook (PSB)
„ EU RBCD
„ Solvency II
„ IAS
which includes ICAS
„ Senior Management Arrangements,
Systems and Controls (SYSC)
„ Role of the Actuary
„ Financial Reporting Requirements
„ Financial Conglomerates / Insurance
Groups Directive
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There are two main aspects to ICAS / PSB
Risk
Risk
Management
Management
Firms
Firmswill
willneed
needto
toensure
ensurethat
thatthey
theyhave
haveaa
robust
robustrisk
riskmanagement
managementframework
frameworkin
inplace
place
and
andcan
candemonstrate
demonstratethe
theexistence
existenceof
ofthe
the
framework
frameworkto
tothe
theFSA
FSA
Risk
Risk
Measurement
Measurement
Firms
Firmswill
willneed
needto
tocalculate
calculateaacapital
capital
requirement
requirementusing
usingstress
stressand
andscenario
scenariotests
tests
and
andbe
beprepared
preparedto
topresent
presenttheir
theiranalysis
analysis
and
andassumptions
assumptionsto
tothe
theFSA
FSA
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Bringing together the regulatory framework…
Regulatory
balance sheet
WP realistic
balance sheet
FSA
Individual Capital
Assessment
Individual Capital
Guidance
Systems and
controls reviews
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There are three fundamental ways of
approaching ICAS
ICAS
ICAS
RCM+
RCM+
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Stress
Stresstests
tests
Economic
Economic
capital
capital
models
models
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The three approaches compare as follows
Enhanced RCM
„ Minimum effort required
Stress and scenario tests
Economic capital model
„
Moderate effort involved
„
„
May satisfy the FSA in
early years while more
sophisticated approaches
are developed
„
Management can
understand and agree on
stress tests
Significant time to
implement and validate
„
„
May give higher capital
requirement
„
Provides level of capital
for each risk
Demonstration of
business usage
required prior to FSA
acceptance
„
In the longer term FSA
will expect more
sophistication
„
Should give lower capital
requirement than
Enhanced RCM
„
Aggregation allowed for
within model
„
Not all risks can be
modelled
„
Potentially minimises
capital requirements
„
Intermediate approach for
WP companies
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Difficult to calibrate and
aggregate
Approach for non-profit
companies, some WP
companies
Longer term approach for
large WP companies
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ICAS continues to evolve but is having
a real impact on companies …..
„ ICAS has increased the focus on risk measurement and
management at the senior / board level.
„ The “use” test
„ Greater focus on risk policies and controls
„ As a result, companies are more actively managing their risk
exposures:
„ Reductions in market risk exposure and implementation of
sophisticated hedging strategies
„ Focus on credit exposures and annuitant longevity exposures
„ Greater focus on operational risk issues
„ Changes in product design
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Some Final Thoughts:
„ The move to better understanding risk is clearly positive
„ In particular, the best placed businesses have a strong understanding of
the relationship between:
Risk
Capital
Value
„ These three elements are inextricably linked
„ In particular, note how implementing a Market Consistent Embedded Value
approach provides a key element of a strong Risk-Capital-Value Framework
for your business.
„ As actuaries, we are extremely well placed to understand risk – where we
need to focus is in how we effectively communicate that understanding to
senior management and Boards. Make this YOUR responsibility!
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A powerful communication aid when
trying to explain risk … PODs
Based on a target of
£40,000 at retirement,
with the existing
portfolio, there is little
chance of success.
If the client wants to
stay with a
“Conservative” profile, it
would be possible to
improve the position by
adopting the alternative
optimised asset
allocation.
If the alternative risk
profile is adopted, the
probability of success
would be increased to
19%
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And Finally ….
Risk is not “bad” …. without risk, reward is limited
“As an insurer, risk should be your loved one; so strive
to understand, treat with due care and attention and
you will be rewarded!”
Mark Saunders
„ Mark Saunders
Principal & Managing Director, Asia
Tillinghast Financial Services Business Leader, Asia-Pacific
Telephone:
Fax:
E-mail:
+852 2593 4535
+852 2525 9706
mark.saunders@towersperrin.com
www.towersperrin.com/tillinghast
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