1 / 31

Dynamic Capital Adequacy Testing

Dynamic Capital Adequacy Testing. Michael Hafeman Assistant Superintendent, Specialist Support Sector IAIS Annual Conference – Santiago, Chile – October 10, 2002. OSFI’s Approach. Promote understanding and management of risks by companies’ boards of directors and senior management

johana
Download Presentation

Dynamic Capital Adequacy Testing

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Dynamic Capital Adequacy Testing Michael Hafeman Assistant Superintendent, Specialist Support Sector IAIS Annual Conference – Santiago, Chile – October 10, 2002

  2. OSFI’s Approach • Promote understanding and management of risks by companies’ boards of directors and senior management • Establish capital requirements • Assess performance and strength • Promote effective disclosure

  3. Dynamic Capital Adequacy Testing – DCAT • Process of projecting and analyzing the trends of a company’s capital adequacy under a variety of future scenarios

  4. Purpose of DCAT • Assist board of directors and senior management in planning and risk management • Defensive in nature • Identify • Plausible threats to satisfactory condition • Actions which lessen likelihood of threats • Actions which mitigate a threat if it occurs

  5. Historical Context • OSFI began developing risk-based capital requirements for Life in mid-1980s • Actuaries (CIA) developed a forward-looking approach to assessment • Life capital and DCAT requirements since 1992 • P&C DCAT since 1998; new risk-based capital requirements from 2003

  6. DCAT Process • Development of base scenario • Identification and examination of possible threats • Development of plausible adverse scenarios • Projection and analysis of capital adequacy • Reporting of results

  7. Base Scenario • Normally, consistent with the business plan • All scenarios include inforce policies, forecast sales, and non-insurance operations • Realistic assumptions • Forecast period is usually 5 years for life companies and 2 years for P&C companies • Modeling software is available

  8. Plausible Adverse Scenarios • Adverse, but plausible, assumptions about matters to which an insurer’s financial condition is sensitive • Stress testing to assess plausibility • Differ among insurers • May change over time for an insurer

  9. Mortality Morbidity Persistency Cash flow mismatch Deterioration of asset values New business Expense Reinsurance Government and political action Off-balance sheet Others, if material Threats to Consider – Life

  10. Frequency and severity Pricing Misestimation of policy liabilities Inflation Interest rate Premium volume Expense Reinsurance Government and political action Off-balance sheet Others, if material Threats to Consider – P&C

  11. Refinements Required • Integrate scenarios, if the probability of an adverse scenario is high • Consider ripple effects • Impact on other base assumptions • Company’s response to adversity • Regulatory action, e.g., where minimum capital is not met • Policyholder actions

  12. Reporting • Primarily for board of directors and senior management • Copy of report is sent to OSFI • At least base scenario and three most risky scenarios must be tested and reported annually • Professional opinion is required

  13. Capital Adequacy Targets • Actuarial standard for satisfactory opinion: • Meet minimum regulatory capital requirement under the base scenario • Meet all future obligations under the base scenario and all plausible adverse scenarios • OSFI expects more – acceptable capital levels • OSFI encourages active discussions amongst the actuary, board and management of any scenarios where minimum capital is not met

  14. More Information • OSFI – www.osfi-bsif.gc.ca • Canadian Institute of Actuaries – www.actuaries.ca • Standard of Practice, Dynamic Capital Adequacy Testing, December 1998 • Educational Note, Dynamic Capital Adequacy Testing – Life and P&C, June 1999

  15. DCAT Case Study • Company in weakened position in 1992, due to investment losses • DCAT used to develop business plan to improve solvency position within five years • DCAT used to test viability of business plan under plausible adverse scenarios

  16. Forming a Business PlanMCCSR Ratio

  17. Forming a Business PlanAvailable Surplus

  18. Forming a Business PlanAnnual Income

  19. Business Plan – Base Scenario

  20. Scenario 1: Mortality

  21. Scenario 2: Morbidity

  22. Scenario 3: PersistencyMCCSR Ratio

  23. Scenario 3: PersistencyAvailable Surplus

  24. Scenario 3: PersistencyAnnual Income

  25. Scenario 4: Interest Rate Risk

  26. Scenario 5: Credit Risk

  27. Scenario 6: Expenses

  28. Scenario 7: Integrated Scenario

  29. Scenario 8: Ripple Effects

  30. Scenario 9: Ripple Effects

  31. DCAT Case Study: Base Scenario versus Actual Outcome

More Related