icelandic experience of qis3 – what to be expected in qis4 and nearest future? credit market...
TRANSCRIPT
Icelandic experience of QIS3 – What to be expected in QIS4 and nearest future?
credit market
securities market
pension-market
insurancemarket
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
Recent developments (1)
Increased investment in equities
Reduced holdings in bonds
Reduced loans
The ratio of some investment types in the balance sheet
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
35,0%
40,0%
45,0%
50,0%
2003 2004 2005 2006
Bonds
Equities
Loans
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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
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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
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QIS3
During April and May the FME held several meetings with companies on different aspects of QIS31. Market risk, counterparty default risk and balance sheet items2. Life technical provisions and life underwriting risk3. Non-life technical provisions and non-life underwriting risk4. Group issues5. Additional questionnaires
Meeting with some companies in June where specific guidance was given
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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?
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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
For more information:www.fme.is
www.ceiops.org
credit market
securities market
pension-market
insurancemarket