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
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Questions and Answers
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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)