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Chapter 4
Legislation (Lloyd's solvency (Regulated by the PRA,…
Chapter 4
Legislation
Solvency II
applies to all EU insurance and reinsurance companies with gross premium income exceeding 5m euro or gross technical provisions exceeding 25m euro
Pillars
Pillar 3
- Reporting and disclosure requirements
- Including public Solvency and Financial Conditions Report (SFCR)
- Reporting to supervisory authority of Regulatory Supervisory Report (RSR)
- SFCR and RSR should include sufficient information to assess:
- system of governance applied by the undertakings
- business they are pursuing
- valuation principles applied for solvency purposes
- risks faced
- risk management systems
- capital structure, needs and management
Pillar 2
- Qualitative requirements
- Focus on governance, risk management and required functions (internal audit and actuarial)
- Should have written policies in respect of each of the following functions:
- risk management
- internal control
- internal audit
- actuarial function
- outsourcing (if applicable)
- Required to carry out an Own Risk and Solvency Assessment (ORSA)
Pillar 1
- Quantitative requirements
- Including risk-based capital requirements
- Assets and liabilities valued on a market consistent basis
- SCR level above which no supervisory intervention
- MCR level below which strongest supervisory actions
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Solvency II balance sheet
Assets valued at amount "could be exchanged between knowledgeable willing parties in an arm's length transaction".
Technical provisions amount pay in order to transfer obligations immediately to another insurance company.
- Comprise premium and claims provisions
- Equal to the sum of a best estimate and risk margin (reflect CoC rather than incorporate prudence)
"Own funds" are assets in excess of technical provisions and subordinated liabilities.
- Split into basic and ancillary own funds
- Then tiered on specific criteria
MCR and SCR
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SCR
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May be calculated using:
- Standard formula with/without simplifications
- Standard formal with undertaking-specific parameters (USPs)
- Partial/full internal model
SCR based on standard formula risk charges:
- Operational risk
- an adjustment, e.g. for loss absorbing capacity of deferred taxes
- market risk
- non-life underwriting risk
- life underwriting risk
- health risk
- counter-party default risk
- intangible asset risk
Full/partial internal modal approval:
- use test
- statistical quality standards
- calibration standards
- profit and loss attribution
- validation standards
- documentation standards
Lloyd's solvency
Regulated by the PRA, Solvency II requirements largely same as companies market. Adjusted slightly for Lloyd's structure.
Member capital calculations use "ultimate SCR". Member is is in line if FAL at least equal to Lloyd's capital requirement (has 35% uplift, generally minimum of 40% of capacity)
SAOs are produced for each open syndicate year of account. Supported by formal actuarial report, signed by actuary holding practising certificate.
Lloyd's maintains central assets for solvency, called upon if member FAL is exhausted. The Lloyd's SCR is calculated so that central assets are held at the 99.5% level.