26 August 2010 Page 1 CEIOPS Disclaimer Please note that those slides are not part of the formal QIS5 documentation as issued by the European Commission. They are not intended to, and do not, replace the QIS5 Technical Specifications or any other part of the QIS5 documentation. They do not supersede the European Commission documentation. The seminar relied to a large extent on the QIS5 technical specifications, QIS5 spreadsheet, qualitative questionnaires as well as simplifications and helper tabs. Answers to questions raised of European relevance will be integrated in the Q and A document. http://www.ceiops.eu/index.php?option=content&task=view&id=752
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QIS5 August 2010 seminar - EIOPA · Guidance IFRS-SII adjustments (assets) •Goodwill •Other intangible assets •Property, plant and equipment •Inventories ... • direct spread
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26 August 2010 Page 1
CEIOPS
Disclaimer
Please note that those slides are not part of the formal QIS5 documentation as issued by the European Commission. They are not intended to, and do not, replace the QIS5 Technical Specifications or any other part of the QIS5 documentation. They do not supersede the European Commission documentation.
The seminar relied to a large extent on the QIS5 technical specifications, QIS5 spreadsheet, qualitative questionnaires as well as simplifications and helper tabs.
Answers to questions raised of European relevance will be integrated in the Q and A document.http://www.ceiops.eu/index.php?option=content&task=view&id=752
26 August 2010 Page 2
QIS5 planning
26 August 2010 Page 3
CEIOPS
QIS5 - objectives
•Will require a high level of participation of solo undertakings and groups
• The main issues are
– The calibration of the standard formula
– Groups calculations
– Internal model
– Complexity
• But also to foster preparedness of industry and supervisors
CEIOPS is committed to ensuring the success of QIS5
26 August 2010 Page 4
CEIOPS
QIS5 versus QIS4
26 August 2010 Page 5
CEIOPS
Page 5
Aligning technical specification with level 2 implementing measures
•Design: ensure the inherent consistency of the proposals
•Quality: ensure that the proposals provide the appropriate level of financial soundness
–For example, what is the use of discussing the level of the capital requirements if these requirements are not supported by sufficient quality of capital?
•Calibration: regular review – transparency and credibility of the process
26 August 2010 Page 6
CEIOPS
Preparing and running QIS5
26 August 2010 Page 7
CEIOPS
QIS 5 - timeline
2010
2011
March 2010 - CEIOPS provides draft technical specifications to EC
July 2010 – EC/EIOPC provide final technical specifications to CEIOPS
August–Nov – QIS 5 exercise• End of October for solo entities
• Mid November for Groups (analysis to be performed in a centralised database)
April 2011 – QIS 5 Report
26 August 2010 Page 8
CEIOPS
Pre-test and spreadsheets
6 Jul 12 Jul 19 Jul 26 Jul 2 Aug 9 Aug 16 Aug 23 Aug 30 Aug
Publication of final technical
specifications by EC
Solo+group spreadsheets available
Pre-test solo spreadsheets
•Aim of the pre-test is to debug the spreadsheets (highly involved but limited number of participants ideally) •Pre-test spreadsheets can not be used to submit final results
26 August 2010 Page 9
CEIOPS
Centralised databases
Group centralised databasePurpose: analysis of QIS 5 group
results
•Non anonymised or anonymised•To lead supervisor and then to CEIOPS / To lead supervisor and CEIOPS at the same time
Calibration centralised databasePurpose: refine non life and health underwriting calibration based on
QIS 5 solo results
•Via solo supervisors
Crypted containers and accessed using On-The-Fly-Encryption technology to ensure that the sensitive content will be never stored in a non-crypted
form.
26 August 2010 Page 10
CEIOPS
Spreadsheets and technical specifications but also …
•Simplification
•Helper tabs
•QIS5 for beginner guide
•National guidance
•Centralised databases
•Q and A
•Training
•Qualitative questionnaires
26 August 2010 Page 11
CEIOPS
Simplifications and helper tabs
26 August 2010 Page 12
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Page 12
National guidance
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CEIOPS
Q and A
•Escalation process at EEA level: if national supervisors can not answer the question
•Content of the specifications: started on 6 July– EC included in the red flag procedure before the publication
•Spreadsheets: started on 23 August
26 August 2010 Page 14
CEIOPS
Trainings
•CEIOPS seminars
•European workshops
•Sharing experience
•National initiatives from supervisors and trade associations
26 August 2010 Page 15
CEIOPS
Qualitative questionnaires
•All undertakings
•Internal model users
•Group users
26 August 2010 Page 16
CEIOPS
After QIS5
•Further impact assessment based on data collected for “fine tuning”L2 and developing L3 – process to be agreed in the November MM
•If needed, short and restricted QIS6
•Implementation of Solvency 2!!!
26 August 2010 Page 17
CEIOPS
Page 17
To conclude
•QIS5 is crucial to test the system
–Therefore important not to make approximations (feasibility)
–To assess the impact
•QIS5 results will be use also to assess the needs and contents of L3 guidance linked to pillar 1
•QIS5 is a major step in the preparedness to Solvency 2
26 August 2010 Page 18
Valuation of assets and Valuation of assets and ‘‘other liabilitiesother liabilities’’
26 August 2010 Page 19
CEIOPS
The balance sheet
• Starting position for QIS5!
• Economic valuation
26 August 2010 Page 20
CEIOPS
Valuation approach
• Economic, market consistent approach
– No subsequent adjustment for own credit risk
• IFRS as a proxy
– Only if reflects economic value!
• Materiality applies
• Valuation hierarchy
– Requirements for the valuation process
26 August 2010 Page 21
CEIOPS
Guidance IFRS-SII adjustments (assets)
CEIOPS
• Goodwill
• Other intangible assets
• Property, plant and equipment
• Inventories
• Finance leases
• Investment property
• Participations in subsidiaries, associates and joint ventures
• Financial assets
• Non-current assets held for sale or discontinued operation
• Deferred tax assets
• Current tax assets
• Cash and cash equivalents
26 August 2010 Page 22
CEIOPS
Guidance IFRS-SII adjustments (liabilities)
CEIOPS
• Provisions
• Financial liabilities
• Contingent liabilities
• Deferred tax liabilities
• Current tax liabilities
• Employee benefits and termination benefits
26 August 2010 Page 23
Market risk for non with Market risk for non with
profit business profit business
26 August 2010 Page 24
CEIOPS
26 August 2010 Page 24
Agenda
• Market risk in QIS 5
• Look-through approach
• Market risk sub-modules
• Focus on spread risk
26 August 2010 Page 25
CEIOPS
26 August 2010 Page 25
Market risk in QIS 5
• Similar modular structure to QIS 4 but :
• One extra sub-module
• Calibrations adapted
• Some more detailed structural changes
• Scenario-based approach
26 August 2010 Page 26
CEIOPS
26 August 2010 Page 26
Market risk in QIS 5 – Correlation matrix
• New correlation parameters
• Up/Down correlation matrix
26 August 2010 Page 27
CEIOPS
26 August 2010 Page 27
Look-through approach
• “Substance over form” principle
=> Economic substance rather than legal form of the investment determines its treatment
• Assets underlying collective investment vehicles/funds must be examined and would be subjected to the relevant sub-modules.
• Look-through approach required while risks are material
26 August 2010 Page 28
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26 August 2010 Page 28
Equity
• 39% “Global” and 49% “Other”
• Symmetric ajustment : -9% in QIS 5
• 0,75 correlation between “Global” and “Other”
• Participations
• Strategic
• Financial and credit institutions
• Excluded from the scope of the group
• Duration dampener (article 304 of the Directive)
26 August 2010 Page 29
CEIOPS
26 August 2010 Page 29
Interest rate
• Scenario-based approach
• Shocks applied to the risk free term structures (not to the illiquidity premium)
• Upward stress and downward stress for each maturity (SCR.5.21)
• Two sets of correlation
26 August 2010 Page 30
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26 August 2010 Page 30
Property
• Scenario-based approach
• 25% charge
• Look-through approach for collective real estate vehicles
• Taking in account of gearing
26 August 2010 Page 31
CEIOPS
26 August 2010 Page 31
Currency
• Worst of -/+25% charge for all foreign currency holdings
• Erratum of the EC for this submodule
• Lower for several currencies pegged to the euro :
26 August 2010 Page 32
CEIOPS
26 August 2010 Page 32
Concentration
• Calculation per exposure:
• Exposures of the same group are not independent
• Charge depends on the rating
• Aggregation with zero correlation
• Special treatments:
• Sovereign bonds
• Covered bonds
• Property
• Participations
● Helper tab for this sub-module
26 August 2010 Page 33
CEIOPS
26 August 2010 Page 33
Liquidity premium
• New sub-module
• Capture the illiquidity premium risk (increase of the value of TP due to a decrease of in the illiquidity premium)
• 65% fall in the value of the illiquidity premium
• Negatively correlated with spread risk
26 August 2010 Page 34
CEIOPS
26 August 2010 Page 34
Focus on spread risk
• Scenario-based approach
• Separate treatment for:
• Bonds
• Structured products
• Credit derivatives
• Helper tab for this submodule
• Link with counterparty default risk
26 August 2010 Page 35
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26 August 2010 Page 35
Focus on spread risk - Bonds
• Simplification: factor-based approach
• Special treatment for:
• Covered bonds
• Sovereign and supranational debts
26 August 2010 Page 36
CEIOPS
26 August 2010 Page 36
Focus on spread risk – Structured products
• Two scenarios:
• direct spread shock (level of the shock depends on the rating class and the duration of the credit exposure)
• Only credit derivatives which are not part of undertaking’s risk mitigation policy
• Upward shock (in absolute terms) and downward shock (in relative terms)
26 August 2010 Page 38
SCRSCR-- nnon life underwriting riskon life underwriting risk
26 August 2010 Page 39
CEIOPS
Index
• Non life underwriting risk module
� General principles
� Catastrophe risk
- natural cat scenarios (regional)
- man made scenarios
- factor based method
�Undertaking specific parameters
• Counterparty default risk
• Technical specification, the spreadsheet, the qualitative questionnaires, helper tabs
• New in QIS 5, from QIS 4
26 August 2010 Page 40
CEIOPS
Non life underwriting risk –general principles
• Premium and reserve risk- factor based approach: volume of the business * volatility
• News about premium & reserve risks
– Geographical diversification
– Adjustment for non-proportional reinsurance (premium risk)
– New factor in premium volume measure for existing contracts expected to be earned after the following year
• New lapse submodule
• New structure of cat risk
26 August 2010 Page 41
CEIOPS
Non life underwriting risk –cat risk – new structure
• Method 1 (default one)
� regional scenarios for nat cat & man made,
� scenarios for perils/event (not LoB), brutto calculation
� nat cat & man made capital requirements aggregated (independency)
• Method 2 – factor based approach if method 1 can not be applied and PIM is not appropriate
� outside EEA
� for miscellaneous LoB
� for non-proportional reinsurance
• Own reinsurances programme
• Aggregation of methods 1 & 2 (independency)
26 August 2010 Page 42
CEIOPS
Non life underwriting risk –cat risk – method 1 – nat cat
• Perils:
�windstorm
� flood
� earthquake
� hail
� subsidence
• Capital requirement is calculated for each peril and country separately, aggregation at first by countries then by perils
• For each zone (cresta, post-code) undertaking’s exposure are required (total insured value) for each LoB affected by the peril (LoBs given in TS, for flood: Fire & other damages, MAT & MPD)
26 August 2010 Page 43
CEIOPS
Non life underwriting risk –cat risk – method 1 – nat cat
• Flood:
where CATflood_ctry – capital requirement for flood and the country
Qctry – factor for the country
FZONE – factors for the zones
AGGr,c – aggregation matrix for the country between the zones
TIVZONE – exposure (total insured value) for each zone
• Multiple events: subsequent losses for windstorm, flood and hail – capital requirement calculated as maximum from A and B type events
�A – one large event and additionally one smaller event (for flood 1 i 0,1)
�B – two moderate events (for flood 0,65 i 0,45)
ZONEZONEZONE TIVFWTIV *=
∑=rxc
cZONErZONEcrCTRYctryFlood WTIVWTIVAGGQCAT ,,,_ **
26 August 2010 Page 44
CEIOPS
Non life underwriting risk –cat risk – method 1 – man made cat
• The same events for all undertakings – no differentiation between countries or zones
• Events:
� fire
�motor
�marine, aviation
� liability
� credit & suretyship
� terrorism
• Aggregation capital requirements from above events with the independence assumption
26 August 2010 Page 45
CEIOPS
Non life underwriting risk –cat risk – method 1 – man made cat-example for the fire
• Option 1 –
where P- sum insured of the largest known concentration of exposures under the fire & other damages LoB in a 150m radius
x- proportion of damages caused by the scenarios (100%)
xPCATFire *=
26 August 2010 Page 46
CEIOPS
Non life underwriting risk –cat risk – method 1 – man made cat-example for the fire
• Option 2 (simplification)
where SI – sum insured by sub-line of business
(residential, commercial and industrial)
LSR – single largest risk across all sub-lines
Fx – market wide factors for each sub line
= ∑
−linessub
xxFire FSILSRMaxCAT *,
26 August 2010 Page 47
CEIOPS
Non life underwriting risk –cat risk – method 2
• For each event (storm, flood, earthquake, hail… the affected LoBsare given with the factors
• Capital requirement based on the estimation of gross written premium in the following year in the relevant LoBs
• Aggregation of events with the independency assumption, the exception of direct insurance and reinsurance for the same LoB
26 August 2010 Page 48
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Undertaking specific parameters
• Hierarchy:simplifications
=> standard formula => standard formula with USPs=> standard formula with PIM=> full internal model
• The approach based on the credibility factor –
�mix with the market factors
� longer history => higher weight
� 100% for 10/15 years
26 August 2010 Page 49
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Undertaking specific parameters
• Parameters to replace: σprem,lob , σres,lob, - in non life risk module and NSLT health
• For σprem,lob and σres,lob , there are 3 methods method can be chosen but the choice must be justified in the future (anty - cherry picking)
• Assumption of the methods should be checked, quality of data in the future is subject to the supervisory approval