Actuarial Notes

A Global Framework for Insurer Solvency Assessment

By Insurer Solvency Assessment Working Party of the International Actuarial Association · International Actuarial Association · 2004

Study guide: Exam 6I

An IAA working party's research report meant to assist in developing a global framework for insurer solvency assessment and insurer capital requirements. Formed in 2002 by the IAA's Insurance Regulation Committee in support of the International Association of Insurance Supervisors, the Working Party describes the principles and methods for quantifying the total funds needed to give policyholders and shareholders a chosen level of confidence that an insurer's policyholder obligations will be met, as a foundation for a risk-based solvency capital system.

On the syllabus

  • Exam 6I — objectives B1–B2; Chapter 3 excluding Section 3.2.5; Chapter 4; Chapter 5 excluding Section 5.2.4, paragraphs 5.48–5.50, Sections 5.4.2 and 5.4.3; Chapter 6, Sections 6.1, 6.2 and 6.4; Chapter 7, pp. 60–66 excluding Section 7.3 (excluding appendices and details of items referenced).

Preface

1 Introduction

2 Executive Summary

3 Capital Requirements

  • 3.1 The Purpose of Capital
    • 3.1.1 Going Concern or Run-Off
    • 3.1.2 Who and What is to be Protected
    • 3.1.3 Exit Strategy Under Failure
    • 3.1.4 The Challenge of Insurer Solvency Assessment
    • 3.1.5 The Degree of Protection
    • 3.1.6 Time Horizon
    • 3.1.7 Role of Accounting – The Need for a Total Balance Sheet Requirement
  • 3.2 Supplements to Capital
    • 3.2.1 Corporate Governance
    • 3.2.2 Risk Management
    • 3.2.3 Investment Policy and ALM
    • 3.2.4 Stress Testing
    • 3.2.5 Risk Sharing and Participating Business
    • 3.2.6 Actuarial Peer Review
    • 3.2.7 Policyholder Protection Funds
    • 3.2.8 Supervisory Approach

4 Framework for Solvency Assessment

  • 4.1 The Three Pillars
  • 4.2 Fundamental Approach
  • 4.3 Total Balance Sheet Approach
  • 4.4 Degree of Protection
  • 4.5 Time Horizon
  • 4.6 Standardized and Advanced Approaches
  • 4.7 Total Company Approach
  • 4.8 Implementation Issues
    • 4.8.1 Data
    • 4.8.2 Rating Agencies
    • 4.8.3 Availability of Qualified Professionals
  • 4.9 Available Capital

5 Insurer Risks

  • 5.1 Risk Fundamentals
    • 5.1.1 Definition of Risk
    • 5.1.2 Introduction to Insurer Risk Types
    • 5.1.3 Key Components of Risk
  • 5.2 Types of Risks
    • 5.2.1 Underwriting Risk
    • 5.2.2 Credit Risk
    • 5.2.3 Market Risk
    • 5.2.4 Operational Risk
    • 5.2.5 Liquidity Risk
  • 5.3 Risk Measures
  • 5.4 Risk Management, Mitigation and Transfer
    • 5.4.1 Reinsurance
    • 5.4.2 Hedging
    • 5.4.3 Participating Insurance

6 Standardized Solvency Assessment

  • 6.1 Introduction
  • 6.2 Range of Standardized Approaches
    • 6.2.1 Development of a Standardized Factor-Based Approach
  • 6.3 Underwriting Risk – Life Insurance
    • 6.3.1 Mortality Risk
    • 6.3.2 Lapse Risk
    • 6.3.3 Expense Risk
  • 6.4 Underwriting Risk – Non-Life (General) Insurance
  • 6.5 Underwriting Risk – Disability Income
  • 6.6 Credit Risk
  • 6.7 Market Risk
    • 6.7.1 Standardized Approaches for Type A Risk
    • 6.7.2 Standardized Approaches for Type B Risk
  • 6.8 Operational Risk
  • 6.9 Final Steps

7 Advanced Solvency Assessment

  • 7.1 Introduction
  • 7.2 On Adopting Company-Specific Approaches
    • 7.2.1 Similarities to and Differences from Basel II
    • 7.2.2 Conditions for Approval
  • 7.3 Examples of Company Specific Approaches
    • 7.3.1 Credit Risk in Basel II
    • 7.3.2 Risk Pass-Through Products
    • 7.3.3 Experience Rating
  • 7.4 Internal Models
    • 7.4.1 Introduction to Internal Models
    • 7.4.2 Uses of Internal Models
    • 7.4.3 Validation Criteria
    • 7.4.4 Internal Models and the Valuation of Liabilities
    • 7.4.5 Internal Models and the Standardized Approach

8 Reinsurance

  • 8.1 Reasons for Purchasing Reinsurance
  • 8.2 Types of Reinsurance
  • 8.3 Effect of Reinsurance on the Risk Profile
  • 8.4 Challenges in Assessing the Impact of Reinsurance on a Company's Risk Profile
  • 8.5 Implications for Recognition of Reinsurance in a Future Solvency System
  • 8.6 Reinsurance Credit Risk

9 Total Company Requirement

  • 9.1 Concentration
  • 9.2 Diversification
  • 9.3 Risk Dependencies

Appendix A Life Insurance Case Study

Appendix B Non-Life (P&C) Insurance Case Study

Appendix C Health Insurance Case Study

Appendix D Market Risk

Appendix E Credit Risk

Appendix F Lessons from Insurer Failures

Appendix G Introduction to Insurance Risk

Appendix H Analytic Methods

Appendix I Copulas

Glossary

Sources