The June 2009 edition of the Solvency ii
Association newsletter
Regulatory
Arbitrage and the Solvency ii Directive
Important differences in insurance
supervisory practices between the United States of America and the
European Economic Area lead to Regulatory Arbitrage
Dear Members,
As I travel around the world leading classes, I meet very
interesting professionals, like hedge funds managers and analysts.
For some of them,
Solvency ii is an opportunity, and regulatory
arbitrage is the name of the game.
From 17 to 19 of June, I lead a Solvency ii Equivalence class in
Bermuda, and from 22 to 24 of June I lead a Solvency ii class in
Canary Wharf, London. It would be a pleasure to meet some of you.
More at the end of the newsletter.
Arbitrage is the practice of taking
advantage of a difference (usually price difference) between two
or more markets.
In order to have arbitrage opportunities, we need to find a
difference.
Regulatory Arbitrage is the practice of
taking advantage of a regulatory difference between two or more
markets.
The main differences in insurance supervisory practices between
the United States of America and the European Economic Area that
lead to Regulatory Arbitrage:
1. The
Value-at-Risk measure, with a 99.5% confidence level, over a one
year period.
Solvency ii, Article 104
Design of the Basic Solvency Capital Requirement
The calculation of the Basic Solvency Capital Requirement is based
on the calculation of the following risk modules:
(a) non-life underwriting risk;
(b) life underwriting risk;
(c) health underwriting risk;
(d) market risk,
(e) counterparty default risk.
Each of the risk modules referred to in paragraph 1 shall be
calibrated using a Value-at-Risk measure, with
a 99.5% confidence level, over a one year period.
In the United States, capital requirements are generally
calibrated based on a TailVaR (TVaR) or Conditional Tail
Expectation, which accounts for the magnitude of the potential
loss in excess of the VaR threshold.
In Solvency II we have a consistent standard - the 99.5% VaR.
This standard applies
even in the standard formula.
In the United States,
the standard formula is not calibrated to a VaR or TVaR target.
Do do we have a difference? Absolutely!
2.
Catastrophe risk
Solvency II includes catastrophe risk for life and non-life.
In the United States there is nothing like that in the risk-based
capital (RBC) calculation.
3. The use of internal models
In the
United States firms introduce internal models in an incremental
way.
They
apply some models to new business only, and
use
floors.
They
use internal models to establish their capital requirements if
they engage in certain types of business.
In Solvency II internal models are encouraged and can be expected
to result in lower capital charges, as there is
no
explicit floor other than the Minimum Capital Requirement (MCR).
Internal models are seen as superior to the standard approach.
Firms
are encouraged to use internal models, although the use of
internal models reduces the overall capital required.
In the
United States regulators rely upon the firm's actuaries to attest
to the appropriateness of the models.
In the European Union supervisors review internal models before
granting permission to use them.
4.
There is no Own Risk and Solvency Assessment (ORSA) in the United
States
To find more about the ORSA you may visit:
www.own-risk-and-solvency-assessment.com
News
The UK
Financial Services Authority recently released their Feedback
Statement regarding Solvency II, commenting:
"We would stress that the risks of not developing detailed plans
for Solvency II implementation are great.
Firms
should have completed or be in the process of completing a
detailed gap analysis to identify any shortfalls in expected
compliance with the emerging Solvency II requirements, as they
bear on their operations".
News
Quantitative Impact Study 5 (QIS5)
Following on from QIS4, there will be a QIS 5 exercise in
June-November 2010. This should be included in Solvency II
planning.
News
Financial Services Authority, Insurance Risk Management: The Path
to Solvency II, May 2009
Revisions in light of the adopted Level 1 Directive
"The Directive as adopted contains a number of further changes
that may affect firms' planning. These changes are outlined below:
Groups
The Directive as adopted
does
not
include the 'group support' regime (the proposal that subsidiaries
meet their Minimum Capital Requirement using locally held capital
but rely on a parental guarantee to meet the Solvency Capital
Requirement.)
The
Directive
does,
however, envisage the Commission will review the benefits of a
group support regime within three years following implementation
of the Solvency II regime.
Although the group support provisions have been omitted, the
articles dealing with group supervision remain.
This means that there will still be a requirement for lead (group)
supervisors to review the Group SCR calculation and the ability to
specify capital add-ons where necessary, in consultation with
local regulators.
Furthermore, there are provisions setting out the role of
'supervisory colleges' and for further specification on how these
will function in practice to be set out at Level 2."
"The
Directive as adopted also now includes a symmetrical anti-cyclical
adjustment mechanism (a so called 'Pillar I dampener') to the
standard (non duration-based) equity risk charge.
The adjustment mechanism is designed to allow for a reduction
in the capital charge applied to equity holdings when equities
markets are falling, and conversely an increase in the charge in a
rising market.
Additionally,
if
there is an exceptional fall in financial markets,
the Directive makes allowance for supervisory authorities to
extend the period during which the firms must return to full
compliance with its SCR."
Dear
members,
The Solvency ii Association develops and maintains a compendium of
Solvency ii related risk and compliance topics. Subject matter
experts review and update this body of knowledge.
The Solvency ii Association offers two Solvency ii certification
programs:
A.
Certified Solvency ii Professional (CSiiP)
for professionals working in the EEA countries
B.
Certified Solvency ii Equivalence Professional (CSiiEP)
for professionals working in non-EEA countries
The Solvency ii Association has signed an exclusive worldwide
partner agreement with Solvency II Training Ltd, so the
Association will provide Solvency II Training classes worldwide
only in cooperation with Solvency II Training Ltd.
Next
European Solvency II Training Course:
Date: June 22-24, 2009
Location: Canary Wharf, London, UK
As Corporate Affiliates of The Institute of Continuing
Professional Development (CPD) our three-day Solvency II training
courses offer delegates a total of 24 (CPD) hours.
Contact: Ross Fenwick, Managing Partner, Solvency II Training
T: + 44 207 060 3312, F: + 44 207 681 3317
E: r.fenwick@solvencyiitraining.eu
W: www.solvencyiitraining.eu
Testimonials at: www.solvencyiitraining.eu
Best
Regards,
George Lekatis
President of the Solvency ii Association
General Manager, Compliance LLC
1200 G Street NW Suite 800, Washington DC 20005, USA
Tel: (202) 449-9750
Email: lekatis@solvency-ii-association.com
Web: www.solvency-ii-association.com
HQ: 1220 N. Market Street Suite 804, Wilmington DE 19801, USA
Tel: +1 (302) 342-8828
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