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Solvency Regulation in Iceland – Future Environment

securities market. credit market. insurance market. pension- market. Solvency Regulation in Iceland – Future Environment. Willis Re’s Nordic Seminar 20th June 2007 Sigurður Freyr Jónatansson. Current status. The solvency position of the largest companies is strong in most cases

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Solvency Regulation in Iceland – Future Environment

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  1. securities market credit market insurance market pension- market Solvency Regulation in Iceland – Future Environment Willis Re’s Nordic Seminar20th June 2007Sigurður Freyr Jónatansson

  2. Current status • The solvency position of the largest companies is strong in most cases • This also applies for the smaller life insurance companies • Most of the companies are not severly affected by FME’s stress testLikely reasons: • High return on investments in last years • Changed accounting methods • Solvency I regulation only takes underwriting risk into account

  3. Increased investment in equities Reduced holdings in bonds Reduced loans Recent developments (1)

  4. Recent developments (2) • Increased activity abroad • Subsidiaries and participation • Norway • Sweden • Finland • Activity on the basis of freedom to provide services • UK • FME has increased cooperation with other supervisors

  5. Effect of Solvency II - Overview • Pillar I • Capital requirements on market risk • Reduced holding in equities? • Reduced concentration • Pillar II • Coordinated supervisory methods • Pillar III • Coordinated supervisory and public reporting • Groups and cross sectoral (GCS) issues • Group risk and diversification benefits

  6. Pillar I – Capital Adequacy

  7. Hedgeable vs. non-hedgeable risks • Insurance risks are non-hedgeable • We can probably assume that pure financial risks can be hedged

  8. Pillar I – Technical provisions • Will the best estimate be a challenge? • How to find the best estimate for annually renewable term life insurance contracts? • Opposite to QIS3 the probability of reinsurer default should be calculated (IASB compatible) • The risk margin will be calculated with the cost of capital method – future SCR will be estimated by proxies

  9. Pillar I - Capital • The proposed changes will probably not have effect on the current situation • New methods to raise capital might be necessary if the solvency requirements increase • Subordinated loans • Preference shares • Other forms of hybrid capital

  10. Pillar I – Operational risk • Not yet clear whether Pillar I or Pillar II are better suited to deal with this risk • Pillar I measurements could be supplemented with qualitative requirements • Companies would then benefit from good operational risk management

  11. Pillar I – Market risk • 1/200 year shock is 30-45% for equities • Therefore capital requirements for equities will always be high • Companies can reduce their risk by financial risk mitigating tools • Concentrations should be reduced • Spread risk measures the exposure changes in the credit spread/rating of counterparties

  12. Pillar I – Counterparty default risk • No significant problems have emerged regarding reinsurers • Increased use of financial mitigating tools could lead to increased importance of this risk

  13. Pillar I – Life underwriting risk • Calculations based on scenarios • Small companies might be allowed to use factor based proxies

  14. Pillar I – Non-life underwriting risk • The size factor was abandoned in QIS3 – it’s future is to be decided • Should SCR for this risk cover expected losses/profits? • Catastrophe risk based on scenarios – how do we define catastrophes in the Icelandic market?

  15. Pillar I – Safety measures • CEIOPS thinks that eligible assets must both be listed and meet given principles • The current list will probably not be amended • Current concentration limits regarding assets covering technical provisions will be dealt with by Pillar II

  16. Pillar II – some issues recently discussed by CEIOPS • Treatment of “third country reinsurers” • IRCA and SRP – terms that companies must get used to • Internal Risk and Capital Assessment • Supervisory Review Process • FME’s guidance on stress test and risk management should prepare companies for this • Supervisory powers – probably insignificant change in Iceland • Limits on assets • Risks not covered by the standard formula • Prudent person plus principle

  17. Some issues between now and Solvency II • The structure of the market and companies is getting more complex • The FME needs to have at any time the right information regarding the situation of companies • Solvency position • Risk management • Group structure – information on affiliated companies • Investments and asset allocation • Reinsurance and financial mitigation • Increased complexity means increased supervision and reporting requirements

  18. securities market credit market insurance market pension- market For more information:www.fme.iswww.ceiops.org

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