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SA3- legislation (Lloyd's (Funds at Lloyd's Money from Names.…

- - - - Once each member's capital requirements has been calculated a minimum of 40% of Overall Premium Income Limit (member capacity)= premium gross of RI and net of brokerage.
        In line- members tested twice a year that they have at least FAL equal to capital requirement
        Solvency deficits- if liabilities are greater than Premium Trust Funds the members have solvency deficits. Counted against FAL. If member's FAL can't meet PRA test then central assets may be earmarked
        Coming into line- Lloyd's has power to require members to lodge further assets
- - - - Solvency balance sheet
        
        Valuation of assets
        Assets valued at amount they could be exchanged between knowledgeable willing parties in arm's length transaction. Use of quoted market prices is default approach but may also use modelled amounts.
        Recoveries from RI are included as assets
        
        Eligible capital
        'Own funds' refers to basic own funds (assets less liabilities) plus ancillary own funds, which are then tiered based on specific criteria.
        Basic own funds- capital which already exists within the insurer e.g. ordinary shares
        Ancillary own funds- letters of credit, guarantees and calls on members of mutual to contribute capital
        Split this into three tiers based on loss absorbency and permanency
        Restrictions on quality of capital to cover MCR and SCR
        
        80% of MCR must be Tier 1
        
        Tier 3 cannot cover MCR
        
        50% of SCR must be covered by Tier 1 capital
        
        No more than 15% of the SCR may be covered by Tier 3 capital
        
        Restrictions on amount of capital used as coverage e.g. preference shares
        
        Technical Provisions
        Amount insurer would have to pay to transfer its obligations immediately to another insurer
        Comprise premium provisions (relating to future claim events covered by contracts that are required to be included in TPs) and claims provisions (relating to claims already incurred whether reported or not) and are the sum of best estimate and a risk margin
        
        Best estimate
        Probability weighted average of future cashflows, discounted to allow for time value of money.
        Should be no margin and must use all relevant available data, both internal and external
        Use interest rate swap rates allowing for credit risk for risk free rates
        
        Premium provisions
        Best estimate of future cashflows in respect of unexpired exposures rather than unearned proportion of written premium
        
        Contract boundaries
        Need to set assumption for the boundary of an existing insurance contract. Under Solvency II this is when:
        
        can unilaterally terminate the contract, refuse to accept premium or
        
        amend the benefits or premium in such a way that the premium fully reflects the risk
        
        Within the boundary need to consider contractually renewing premium and premium arising from policyholder option to renew on a best estimate basis
        
        Legal obligations basis for unincepted contracts
        Not yet incepted but cannot be waived or reduced by the company. Material where:
        
        delegated authority business
        
        brokers write business
        
        year end renewals written before 1 Jan
        
        tacit renewal agreements where automatic renewal unless policyholder decides to move
        
        Risk margin
        Calculated cost of capital to compensate firm taking on liabilities for needing to hold SCR over the lifetimes of the liabilities. Just for risk which cannot be hedge e.g. extreme market risk, credit RI reinsurance risk, insurance risk
        
        Estimate future development of SCRs in the future
        
        Multiple by cost of capital- currently 6%
        
        Discount using relevant risk free rate
        
        Can be reduced to take account of diversification
        
        Data quality
        Delegated Regulation contains requirements on data quality. Crucial because:
        
        consistent, accurate final estimates
        
        allows application of wider range of methodologies
        
        validation of methods more reliable
        
        effective comparisons over time and to market data
        
        Minimum Capital Requirement
        Calculated by taking the greater of:
        
        a factor applied to technical provisions (not including the risk margin) for each line of business, net of reinsurance, subject to a minimum of zero
        
        a factor applied to written premiums in each line of business over last 12 months, net of RI, subject to minimum of 0
        
        Intention is the MCR is calibrated to VaR of basic funds subject to confidence level of approximately 85% over a one year time horizon
        
        Solvency Capital Requirement
        Calibrated to VaR of basic funds subject to 99.5% confidence level over a one year time horizon
        Must cover at least: underwriting risk, market risk, credit risk and operational risk
        Can use:
        
        standard formula with simplifications
        
        standard formula
        
        standard formula with undertaking specific parameters
        
        partial internal model
        
        full internal model
        
        Standard formula
        SCR= BSCR + Adj + SCR(op)
        
        BSCR
        BSCR= sq.root(Total(Corr.i.j. x SCR.i. x SCR.j))+SCR.intangible
        There is a set correlation coefficient matrix
        
        Non-life underwriting
        Set standard deviations- similar to MCR but higher. Multiply by 3 to get the 99.5% VaR.
        Also multiple by factors representing XOL reinsurance- only motor vehicle liability, fire and general liability business (80% factor applied)
        Scope to reduce factors by 25% to allow for geographical diversification
        Allowance also made for diversification by line of business. Also 0.5 correlation coefficient between premium risk and reserve risk
        Non life CAT risk
        Complex series of sub modules for each type of CAT risk
        
        Market risk
        Different factors applied to different investment types. Multiply this by market value of the asset to get capital required.
        Interest rate capital reqmnt- stress yield curve by specified percentages, varying by term to maturity.
        
        Counterparty default risk
        Differentiates between:
        
        Type 1- consist of small number of counterparties which are usually rated e.g. RIs. Based on loss distribution derived from loss given defaults and default probs
        
        Type 2 exposures- if diversified mix and not rated. Based on immediate shock assuming losses of 90% and which have been due for more than 3 months and 15% on other receivables
        
        Operational risk
        Greater of 3% of gross earned premiums during the previous 12 months and 3% of gross technical premiums. Maximum of 30% of basic SCR. No diversification allowance between op risk and others
        
        Adjustment
        Could include the loss absorbency of deferred taxes as e.g. if equity gains fall then tax lower, would be pushed back in event of a shock scenario
        Therefore acts to offset the capital needed. Deferred tax liability within best estimate liabilities remains unchanged
        
        Internal model
        Appropriate if risk profile of business differs materially from that underlying standard formula or if they already use and internal one.
        Could have to hold less capital
        IMAP
        Must pass following tests:
        
        use test- difficult to embed and start risk culture. Also hard to evidence this is the case
        
        statistical quality standards- quality of data to calibrate extreme events is limited. Setting correlation factors is often difficult
        
        calibiration standards
        
        profit and loss attribution
        
        validation standards
        
        documentation standards
        
        Tight deadline of six months for regulatory body to grant approval. But have set up a pre-application process. This involves regular meetings to discuss
        
        Use test
        Demonstrate use throughout business- internal governance, risk management and decision making processes
        
        Statistical quality standards
        
        methods used to calculate prob distributions forecast based on adequate and relevant actuarial and statistical techniques
        
        methods used based on current and credible info
        
        data used is accurate, complete and appropriate
        
        can take account of dependencies within and across risk types if system for measuring is adequate
        
        Calibration standards
        Provides policyholder equivalent to VaR of 99.5% of basic own funds over a one year time horizon
        Different time period or risk measure can be used as long as gets to equivalent level of protection
        
        Profit and loss attribution
        Annually, insurance and RI undertakings are required to review and explain how the risk chosen in internal model corresponds to profits and losses by business unit
        
        Validation standards
        Monitor performance, review appropriateness of specification and test against experience
        
        Documentation standards
        Document the design and operational procedures
    - - Risk management function
        Need strategies, processes and reporting procedures to identify, measure, monitor, manage and report the risks they could be exposed to. Must cover each risk type. If have internal model then needs to cover all aspects of internal model e.g. test, document
      - Internal control
        
        administrative and accounting procedures
        
        internal control framework
        
        appropriate reporting arrangements at all levels of the undertaking
        
        compliance function
      - Internal audit
        Evaluates adequacy and effectiveness of internal control system. Must be objective and independent
      - Actuarial function
        
        coodinate the calculation of TPs
        
        ensure the appropriateness of the methodologies and underlying models used as well as the assumptions made in the calc of TPs
        
        assess the sufficiency and quality of the data used in the calc of TPs
        
        compare past best estimates against experience
        
        inform the supervisory body of the reliability of the calculation of the TPs
        
        express opinion on overall underwriting policy
        
        express opinion on adequacy of RI
        
        contribute to effectiveness of the risk management system
      - ORSA
        Own risk and Solvency Assessment- goes beyond the MCR and SCR
        Requires identification of all risks to which the firm is subject to- will likely include more than just those modelled in Section I
        Must quantify ability to continues to meet the MCR and SCR over the business planning horizon, allowing for new business
        Includes the following components:
        
        assessment of overall solvency needs (considering specifics to the firm)
        
        compliance with capital requirements and TPs
        
        consideration of extent of deviation of risk profile from that assumed in modelling
        
        Performed annually and must be reported to regulator.
        Looks at all the stuff you'd expect and need to document all this- data, methodology, sensitivity, uncertainty, peer review
    - - SFCR and RSR includes
        
        system of governance applied by undertakings
        
        business they are pursuing
        
        valuation principles
        
        risks faced
        
        risk management systems
        
        capital structure
        
        system of governance
- - - - Chief Actuary
        Two certificates- non life with Lloyd's and non life without Lloyd's
        Specific technical requirements:
        
        Considering appropriate reserving bases and methodologies for valuing assets and liabilities
        
        Pricing bases
        
        RI arrangements
        
        Measuring, managing and mitigating issues and risk to which an insurer is exposed
        
        Assessing capital requirements
      - Lloyd's Actuary
        Provide details about the work you have done in the last four years , particularly last 12 months, which demonstrates experience of setting reserves in London MArket