Milliman Limited registered in England and Wales under Company Number 407 Individual Capital Assessment – Individual Capital Assessment – Setting Solvency Capital Levels Setting Solvency Capital Levels 2005 Casualty Consultants’ Forum 2005 Casualty Consultants’ Forum Presented by Presented by Kyle Mrotek Kyle Mrotek 16 16 th th June 2005 June 2005
23
Embed
Individual Capital Assessment –Setting Solvency Capital Levels
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Milliman Limited registered in England and Wales under Company Number 4076731
Individual Capital Assessment –Individual Capital Assessment –Setting Solvency Capital LevelsSetting Solvency Capital Levels2005 Casualty Consultants’ Forum2005 Casualty Consultants’ Forum
Presented byPresented by
Kyle Mrotek Kyle Mrotek 1616thth June 2005 June 2005
Milliman
Agenda
Components of ICAComponents of ICA Approach to ICAApproach to ICA Modelled RisksModelled Risks Consideration of Capital RequirementConsideration of Capital Requirement Added Value Beyond Regulatory Added Value Beyond Regulatory
RequirementsRequirements
Milliman
Components of ICA
Milliman
Capital
Credit
Market
LiquidityGroup
Insurance
Operational
FSA Risk Types - Defining Capital Requirements
Milliman
• Insurance Risk:Insurance Risk: Adequate premiums, pricing methodology, deterioration of Adequate premiums, pricing methodology, deterioration of
reserves, catastrophes reserves, catastrophes
• Market Risk:Market Risk: Adverse movements in assets (both capital & interest)Adverse movements in assets (both capital & interest)
• Credit Risk:Credit Risk: Reinsurance, intermediaries, quality of counterparties and off Reinsurance, intermediaries, quality of counterparties and off
• Liquidity Risk: Liquidity Risk: Low liquidity of assets when required Low liquidity of assets when required
• Operational Risk:Operational Risk: Administration, compliance, event, fraud, governance, strategic and Administration, compliance, event, fraud, governance, strategic and
technological riskstechnological risks
• Group Risk: Group Risk: Insolvency/credit downgrading of parent, removal of guarantee, Insolvency/credit downgrading of parent, removal of guarantee,
• Probability of insolvency over a 1 year time Probability of insolvency over a 1 year time horizon is no greater than 1 in 200horizon is no greater than 1 in 200
• Dynamic Risk Model (DRM) of 2 of the Dynamic Risk Model (DRM) of 2 of the major risks – Insurance and Market risksmajor risks – Insurance and Market risks
• Non-modelled (excluded) risks need to be Non-modelled (excluded) risks need to be assessed separatelyassessed separately
• Combine capital requirements for risk Combine capital requirements for risk factors allowing for diversification benefitsfactors allowing for diversification benefits
Milliman
Estimate correlations between risk areas and determine aggregate capital requirement
Dynamic Risk Model
Individual Capital Assessment
Determining the ICA based on Risk Assessment
InsuranceRisk
CreditRisk
MarketRisk
OperationalRisk
LiquidityRisk
GroupRisk
AdditionalRisk
Consider
Benchmarks
Loss History
Consider
MaximumCash-flow
ContingencyPlans
Consider
CapitalStructure
ContagionRisk
Consider
ConcentrationRisk
SystemControls
Capital requirement for Insurance and
Market Risk
Consider
Counterparties
Off BalanceSheet Items
Milliman
Modelled Risks
Milliman
DRM Overview• Excel spreadsheet with VB add-insExcel spreadsheet with VB add-ins
• Projects on a stochastic basis expected cash-flows Projects on a stochastic basis expected cash-flows for 5 years from the valuation date in respect of:for 5 years from the valuation date in respect of:
– business in-force and asset holdingsbusiness in-force and asset holdings
– planned future business (for next 5 years)planned future business (for next 5 years)
• DRM is run for (say) 5,000 scenarios based on DRM is run for (say) 5,000 scenarios based on realistic assumptions for the mean and variance realistic assumptions for the mean and variance of loss ratios, claim payment patterns, future of loss ratios, claim payment patterns, future investment returns and expensesinvestment returns and expenses
• Additional assets required to cover liabilities and Additional assets required to cover liabilities and deficits emerging at the 99.5deficits emerging at the 99.5thth percentile (over 1 percentile (over 1 year) is the required capital for that scenarioyear) is the required capital for that scenario
Milliman
Outline of Process
SimulateResults
Sample fromDistributions
Model Insuranceand AssetPortfolio
Gross, and Net Results, in Financial Accounting Framework
Capital required aims to be sufficient to Capital required aims to be sufficient to reduce the probability of insolvency on a reduce the probability of insolvency on a realistic basis in the next 12 months to no realistic basis in the next 12 months to no more than 1 in 200 more than 1 in 200
Emerging as an industry-wide minimum Emerging as an industry-wide minimum standard (although other probabilities of standard (although other probabilities of insolvency over different time horizons can insolvency over different time horizons can be considered)be considered)
Total Required Assets 137,955 142,934 148,640 154,417 161,086
Capital Required 7,027 12,085
19,318 30,254 38,918
End of Year 5
(2009)
End of Year 3
(2007)
End of Year 1
(2005)
End of Year 2
(2006)
End of Year 4
(2008)
Milliman
Draft Results for DGS
£1.9 million in year 1 with 10% volatility £1.9 million in year 1 with 10% volatility £11.4 million in year 1 with 15% volatility£11.4 million in year 1 with 15% volatility £3.5 million in year 1 with 10% volatility & £3.5 million in year 1 with 10% volatility &
URRURR £22.8 million in year 1 with 15% volatility & £22.8 million in year 1 with 15% volatility &
URRURR
Milliman
Added Value BeyondAdded Value BeyondRegulatory RequirementsRegulatory Requirements