Icelandic experience of QIS3 – What to be expected in QIS4 and nearest future?

1. securities market credit market insurance market pension- market Icelandic experience of QIS3 – What to be expected in QIS4 and nearest future? Solvency II and Risk Management13th November 2007Sigurdur Freyr JónatanssonThe Financial Supervisory Authority (FME) Iceland

2. Contents • An overview of the Icelandic market • The history of participation in QIS • The experience in QIS3 • Few points of improvement in QIS4 • The developments in the near future

3. The non-life market • The 3 largest companies have yearly premiums around or just under 100 m EUR • They write insurance in all main classes – 50% in motor • One smaller company in all main classes • One specialised liability insurer with business only in the UK

4. The life insurance market • 4 small companies • 3 have close links to non-life insurers • 1 company is owned by a bank • Foreign companies have had around 33% market share • The ratio of life insurance premiums as a percentage of GDP is amongst the lowest in Europe • Pension funds cover large part of the disability risk

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

6. Recent developments (2) • Increased activity abroad • Subsidiaries and participation • Norway (a company owned by an Icelandic insurance company) • Sweden (a company owned by an owner of an Icelandic insurance company – financial conglomorate) • Finland (participation in an insurance company by an owner of an Icelandic insurance company) • Activity on the basis of freedom to provide services • UK • FME has increased cooperation with other supervisors

7. Previous QIS’s • QIS1 • 3 non-life companies participated • QIS2 • 2 non-life companies participated • QIS2 was not a success as regards the quality of the submissions, therefore the FME decided to increase assistance to companies

8. QIS3 • During April and May the FME held several meetings with companies on different aspects of QIS3 • Market risk, counterparty default risk and balance sheet items • Life technical provisions and life underwriting risk • Non-life technical provisions and non-life underwriting risk • Group issues • Additional questionnaires • Meeting with some companies in June where specific guidance was given

9. QIS3 Participation • All non-life insurance companies participated • Two life insurance companies participated • One group gave results which could be used in a report, however group issues where not given priority • In general the quality of submissions was higher in QIS3 than in QIS2.

10. The experience in QIS3 – Technical provisions • Life insurance is mainly term insurance – treated as a yearly renewable contracts • As payments are made almost immediately the claims provisions are very short term • Therefore the helper tab did not give any risk margin • Is there a risk margin for simple companies like this? • There were no problems in non-life

11. The experience in QIS3 – Market risk • Equity risk has a very high impact and could become a problem in the future • Concentration risk did also have high impact • Generally the companies were able to do the calculations but it takes time. • The same people as is responsible for the annual accounts and reports to the FME

12. The experience in QIS3 – Counterparty default risk • This module did not receive much attention • FME believes that further guidance must be given to smaller companies on how to rate their counterparts • Could become more important in the future if the market risk can be reduced by risk mitigation

13. The experience in QIS3 – Life underwriting risk • Both companies used the factor based proxies • The main risk is mortality risk but it should be further defined how to calculate disability and morbidity risk • It is unsure whether there are enough resources to calculate the stress scenarios

14. The experience in QIS3 – Non life underwriting risk • The impact of this risk is high • Some insurance classes have been operated with loss in recent years – the companies have had their profits based on financial income • The national catastrophe event was defined by the FME

15. The experience in QIS3 – Capital • The solvency margin of Icelandic companies is usually based on items that can be classified as tier 1 (equity items) • In the few cases of uncertainty a guidance was given by the FME

16. The experience in QIS3 – MCR • There were no interplay problems with the modular approach, as there is no significant profit sharing • The big question for the Icelandic companies is how asset risk will be treated in the final MCR

17. The experience in QIS3 – Groups • The problem was that group issues were saved to last • The companies have to be clear on whether they are calculating market risk on the basis of the group or the parent company • A general issue is that after IFRS solo accounts are becoming more scarce and less reliable

18. Improvements in QIS4 (1) • Due to higher importance of the groups issues they should be given higher priority • FME will hold a meeting for the companies which will give an overview of: • Current legal environment for groups supervision • Proposed changes in the Solvency II directive • A guidance for QIS4 • The group awareness will hopefully increase

19. Improvements in QIS4 (2) • The best method for calculating risk margin in life insurance? • Counterparty default risk has to be given higher attention • In general companies must be aware of the resources needed • This time of year is not perhaps the best, but ... • The results of QIS3 show that QIS4 is of high importance

20. The future – what to be expected? (1) • The largest non-life companies are very close to being medium-sized • Therefore they do not need simple proxies to calculate the technical provisions – no incentive to produce market data • What is the situation of smaller companies or new entrants?

21. The future – what to be expected? (2) • More risk mitigation of market risk or internal modelling? • Higher risk appetite means either higher capital requirements or higher demands to risk management • The recent experience of high investment returns but loss on non-life insurance activity seems to increase capital requirements • This is different from Solvency I where an increase in premiums increases solvency requirements

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