Catastrophe riskCatastrophe risk

Contact us

Ilse Frenchilse.french@za.pwc.com(011) 797 4094

Mark Claassenmark.claassen@za.pwc.com(021) 529 2521

Jonathan Havemannjonathan.havemann@za.pwc.com(011) 797 4154

Junaid Khanjunaid.khan@za.pwc.com(011) 797 5525

Shaneen Marshallshaneen.marshall@za.pwc.com(011) 797 5784

Solve for CATMotor in the formula:

-loge(0.995) = FUNLIM(CATMotor) +

FLIM(CATMotor)

where,

FMTPL= Frequency of the SA-wide Scenario per vehicle per annum

Risk Margin

Best Estimate• probability weighted average of future cash-fl ows taking account of the time value of

money• should allow for the uncertainty in timing, amount and occurrence of future cash-fl ows as

well legal, social and economic environment and any interdependencies between causes of uncertainty without incorporating additional margins

1. Segmentation of calculation – at a minimum by line of business(unbundle if necessary)

• Substance (nature of risk) over form (legal form)i.e. annuities from non-life contracts should be unbundled, valued separately as life insurance obligation

• Separately for obligations of different countries

Lines of Business – Insurers and Proportional Reinsurance:

Motor personal Motor commercial

Engineering Marine, Aviation & Transport (MAT)

Property personal Property commercial

Liability personal Liability commercial

Trade credit, suretyship Trade credit, suretyship and guarantee commercialand guarantee retail

Miscellaneous – includes crop, terrorism, legal expenses, travel, health and other

Lines of Business – Non-proportional and Facultative Reinsurers:

Non-prop and facultative MAT Non-prop and facultative terrorism

Non-prop and facultative liability Non-prop and facultative all other LoB

2. Cashfl ows – only with respect to business already written

(Gross of reinsurance recoveries)

Expenses included direct and indirect for servicing existing obligations (including costs of reinsurance administration), policy administration, claims handling, investment management, acquisition costs (including commissions) etc.

3. Time Value of Money

Use a risk-free interest rate term structure (yield curve) at valuation date for each currency and line of business.

Durations less than one year, discount rate (DR) = 1 year rate

Include an illiquidity premium if necessary

4. Method

Proportionate to the nature, scale and complexity of the risks (i.e. apply proportionality principle)

Deterministic or stochastic discounted cashfl ow projection

Premium provision

Premium & reserve risk

AggregationMarket risk exposure – measured by impact of movements in the level of fi nancial variables such as stock prices, interest rates, property prices and exchange rates.

Mktr, Mktc = Capital requirements for individual

Int Eq Prop Spread Curr Conc Il. prem

Int 1Eq * 1Prop * 0.75 1Spread * 0.75 0.5 1Curr 0.25 0.25 0.25 0.25 1Conc 0 0 0 0 0 1Il. prem 0 0 0 -0.5 0 0 1

Tier 2Basic own-fundsThe following items that are not included in Tier 1:

• Called up ordinary share capital;• The own funds in excess of amounts being used to cover related

risks in the case of restricted reserves; • Other called up capital instruments that absorb losses fi rst

or rank pari passu, on a going concern basis, with capital instruments that absorb losses fi rst.

• Other paid-in capital instruments including preference shares, subordinated mutual members accounts and subordinated liabilities, that do not have the features required for Tier 1 but that meet the criteria for Tier 2 basic own funds.

Tier 1Basic own-funds• Paid up and called up

common equity• The initial fund/members’

contributions less any items of the same type held by the insurer

• Share premium account• Reserves, being retained

earnings, other reserves and a reconciliation reserve.

• Surplus funds that fall under Article 91 (2) of the Solvency II Framework Directive

• Surrender value gap• Other paid in capital

instruments, e.g. preference shares, subordinated liabilities, subordinated mutual member accounts

Tier 3Basic own-funds• Net deferred tax assets; and• Other capital instruments including

preference shares, subordinated mutual members’ accounts and subordinated liabilities.

Ancillary own-fundsExisting arrangements currently eligible to meet solvency requirements which would constitute ancillary own funds under SAM, but which would not be eligible as Tier 2 ancillary own funds because that item would not be classifi ed in Tier 1 if it were called up and paid in.

Own FundsClassifi cation of own funds into tiers and list of capital items:

Eligibility and limits applicable to Tiers 1, 2 and 3To meet the Solvency Capital Requirement:

• the proportion of Tier 1 items must be at least 50% of the SCR• the amount of Tier 3 items must be less than 15% of the SCR

To meet the Minimum Capital Requirement:

• only Tier 1 items and Tier 2 basic own funds items are eligible• at least 80% of the MCR should be met by Tier 1 items• Tier 3 basic own fund items and ancillary own funds are not eligible for the MCR

Within the limits above, other paid in capital instruments should be no greater than 20% of total Tier 1 own funds.

There are grandfathering criteria for SA QIS2 that have been drawn up to address the issue of mapping from one regime to another.

Regulated RegulatedRegulated Regulated

Non-Regulated

Non-Regulated

Non-Regulated

Non-Regulated

Subsidiaries (Dominant infl uence)

Participations (>20% or signifi cant infl uence)

Parent

Insurance InsuranceOther Financial Other FinancialNon-Financial Non-Financial

Assessment of Group SolvencySpecifi cations for calculating and reporting group capital requirements and group own funds.

Subsidiaries (Dominant infl uence)

Non-Financial

Participations (>20% or signifi cant infl uence)

Parent

Subsidiaries (Dominant infl uence)

Where: SCR* = SCR on consolidated accounts of controlled entities and ancillary entities

CROFS = Capital requirement of other entities from other fi nancial sectors

SCRNCP = Capital requirement of non-controlled entities

Eligible

Costs/timing/Ability

to extract/resulting fi nancial

Purpose

Entity Proportion of solo SCR Solo SCR Contributing SCR

Undertaking AUndertaking B ...

Adjusted Solo SCR

Intr

a-g

roup

tra

nsac

tio

ns

No

intr

a-g

roup

rei

nsur

ance

Minimum Capital Requirement (MCR)

Overall Calculation

If an insurer has calculated SCR using both the standard formula as well as an internal model, then the MCR is also calculated twice using both sets of information.

MCR=max {MCRcombined ; AMCR} where

MCRcombined= {min[max (MCRlinear ; 0.25 × SCR) ; 0.45 × SCR]}and

AMCR=Absolute fl oor of the MCR=max(15 million; 0.25 × Operating Expensesprevious year )

Linear Formula

MCRlinear= ∑ max(αj × Tech Provj ; β j × Premiumsprevious year j )

where

• the segmentation factors α j and β j are as per MCR.20 in the technical specifi cations per line of business• technical provisions used are at least zero, excluding risk margin and are net of reinsurance• premiums used are at least zero and are net of reinsurance

all lines of business j

Solvency Capital Requirement – Standard Formula

Basic Solvency Capital Requirement

Market Risk

Technical provisions

Recognition Contract Boundary Reinsurers Contract Boundary Insurers

Non-life Underwriting RiskOperational risk exposure – any inadequate/failed internal systems/processes, including personnel, external events and legal risks (excludes reputational risk and risk arising from strategic decisions).

SCROp= Capital requirement for Op Risk =min {(0.3 × Basic S C R) ;max (Oppremiums ; Opprovisions ) } where

OpPREMIUMS

=0.03 × Earned premiumprevious year+max(0;0.03 ×(Earned premiumprevious year 1.1×Earned premiumyear before previous year ))and

Opprovisions = 0.03 ×max(0;TechProv) • all premium inputs are gross of reinsurance• technical provisions exclude risk margin and include recoverable from reinsurance contracts and special purpose vehicles.

The potential compensation of unexpected losses through a decrease in deferred taxes.

Adjustment = Min( 0, ∆ deferred taxes resulting from instantaneous loss = SCRshock) i.e. adjustment should not be positive and should therefore not create a deferred tax asset.

SCRshock = BSCR + Operational Risk capital requirement + SCR for strategic participations

The negative adjustment may be either:

• a decrease in deferred tax liabilities; or • an increase in deferred tax assets.

Includes: participations in fi nancial and credit institutions (e.g insurance, banking , asset managers).

Insurer must intend to keep participations for long-term

Strategic participations must be excluded from Own Funds

Split of participations in the following categories:

• Countries that are members of EEA/OECD (“Global”)• JSE listed (“SA”)• Emerging markets (“Other”)

Capital requirements for strategic participationscategory i = ∑ ∆ NAV for participation shockcategory i

Participation shockcategory i Global SA OtherFinancial and credit 0% 0% 0%Insurance and other 37% 47% 53%

BSCR Aggregation

intangiblesSCRSCRSCRCorrBSCRij

jiij +××= ∑

SCRmkt,i= √(∑Correlation (Mktr,c) × Mktr,i × Mktc,i + Adjustment to capture loss absorbencyir,x,c

max(0,-(Best estimate liabilitybase - Best estimate liabilitymin - SES ∆Best estimate liability)

SES ∆ Best estimate liability=∑c

(√(∑r Correlation(Mktr,c)× Mktr,i

(SCRmkt,i (before adjustment)

* c = market risk c, r = market risk r, i = product group i

×∆Best estimate liabilityc,i

* These factors are equal to zero if the capital requirement for nominal level interest rate risk as determined in the interest rate risk section, is derived from capital requirement for the risk of a level increase in the interest rate term structure including loss absorbency of technical provisions. Otherwise, the factor is 0.5.

Adjustment to prevent double counting of loss absorbing capacity for each product group i:

Equity risk (Eq)

Split Global SA OtherEquity shock 37% 47% 53%

Equity risk exposure – all assets and liabilities whose value is sensitive to volatility of equity market prices

Hedging instruments – only take credit for half the exposure

Participations: do not include strategic, fi nancial and credit participations

Capital requirement for equity risk= √ ∑ Correlationi,j* × (Equity risksplit i × Equity risksplit j )split i,split j

Equity risk split i = change in NAV for immediate shock to equity split i , subject to maximum change of R0

*Correlation�_(i,j)^*=0.75 for all i,j and 1 for i,i

Illiquidity premium risk (Il. Prem)Illiquidity premium risk exposure – increase in the value of the technical provisions due to a decrease in the matching premium

Capital requirement for illiquidity premium risk = max (∆NAV | illiquidity premium

shock ; 0)Where:

Illiquidity premium shock = immediate effect on NAV of a 65% fall in the value of the

matching premium used in the calculation of technical provisions

Spread/Credit Default risk (Spread)

Currency risk (Curr)Currency risk exposure – various sources (investment portfolio, assets, liabilities and investments in relevant undertakings)

Local currency: currency in which insurer prepares its fi nancial statements Listed equity investment: sensitive to currency of main listing

Foreign currency: include any investment in foreign instruments where the Non-listed equity and property: sensitive to currency of locationcurrency risk is not hedged

Capital requirement for currency risk = max (∆NAV | fxupward shock; ∆NAV | fxdownward shock; 0)Where:

Fxupward shock = instantaneous rise in value of 25% of all currencies against the local currency

Fxdownward shock = instantaneous fall in value of 25% of all currencies against the local currency

Property risk (Prop)Property risk exposure - all assets and liabilities whose value is sensitive to volatility of property market prices

Property investments including: Land, buildings, Direct/indirect participations in real estate companies with periodic income and Property investment for insurer’s use (e.g. offi ce space)

* Investments in companies engaged in real estate management/project development/loans to leverage property investment is equity.

Capital requirement for property risk = change in NAV resulting from immediate 25% shock to value of property investment

SCRi, SCRj = Capital requirements for the individual SCR risks according to the rows and columns of the correlation matrix Corr:

Market risk concentrations (Conc)All assets other than:

• Strategic participations in fi nancial captured in SCRpart• Non-strategic participations in fi nancial and credit institutions that are excluded from Own Funds

Where:

Conci = ∆NAV | concentration shock

Concentration shock = immediate effect on NAV from an instantaneous decrease in values of excess exposure x solvency ratio in the concentrated exposure.

• gi is a parameter depending on credit rating of counterparty (see SCR.5.10 for more details on formulae defi nition)

Catastrophe Risk Charge

Standardised Scenarios

Natural Catastrophe

consists of the maximum of peak vertical perils and a number of aggregated smaller events from a combination of perils.

Man-Made Catastrophe

consists of aggregated capital charges per peril developed from scenarios

Factor Based Maximum Event Retention

Fire - property Motor Credit & Suretyship SCR.9.142.

Recession

Default

Single

Marine

Liability

Terrorism

Groups

Aviation

Exceptions:

Shock of Rand to Namibia, Lesotho and Swaziland = 5% (required to provide details as to exposure to these currencies)

Ancillary own-fundsAncillary own funds are items of capital other than basic own-funds which can be called up to absorb losses. They can comprise of the following items to the extent they are not basic own-funds items:

• Unpaid share capital or initial fund that has not been called up;• Letters of credit or guarantees;• Any other legally binding commitments received by insurers and reinsurers.• Letters of credit and guarantees which are held in trust for the benefi t of insurance

creditors by an independent trustee and provided by credit institutions • Any future claims which mutual or mutual-type associations may have against their

members by way of a call for supplementary contributions, within the next 12 months.• Any future claims which mutuals or mutual-type associations with variable

contributions may have against their members, within the following 12 months, that does not fall under that above.

• If any other item is currently eligible to meet solvency requirements and could constitute ancillary own funds under SAM then it may also be classifi ed as Tier 2 ancillary own funds provided that it represents own fund items which, if called up and paid in, would be classifi ed in Tier 1.

j

iMarket Life Non-life

Market 1Life 0.25 1Non-life 0.25 0 1

• Spread/credit default risk exposure includes: Bonds, Asset-backed securities, Structured credit products, Other credit risk investments.

• Risk mitigating instruments such as reinsurance contracts, special purpose vehicles and derivative hedges should be impaired in each of the modules in which risk mitigation is used. See Counterparty Default Risk sub-module under Underwriting Risk.

Capital requirement for spread risk = Capital requirement for the spread risk of bonds + Capital requirement for the spread risk of structured credit products + Capital requirement for credit derivatives

Capital requirement for the spread risk of bonds

= max (∆NAV | spread shock on bonds ; 0)

Where: spread shock on bonds = immediate effect on NAV from an instantaneous decrease in bond values due to widening of credit spread

Capital requirement for the spread risk of structured credit products

= max ((∆NAV |spread shock on underlying assets of structured products ; ∆NAV | direct spread shock on structured products ; 0)

Where: Spread shock on underlying assets of structured products = immediate effect on NAV from an instantaneous decrease in the values of structured products due to widening of credit spreads of bonds of the underlying assets

Direct spread shock on structured products = immediate effect on NAV from an instantaneous decrease in the values of structured products due to widening of credit spreads

Capital requirement for credit derivatives

= max ((∆NAV |upward spread shock on credit derivatives ; ∆NAV | downward spread shock on credit derivatives ; 0)

Where: Upward (downward) spread shock on credit derivatives = immediate effect on NAV after netting with offsetting corporate bond exposures, expected in an event of an instantaneous widening (narrowing) of the credit spread of credit derivatives

Counterparty default riskFor each of Premium and Reserve risk and Catastrophe Risk (Man-Made and Natural or Factor Based). The exposure to 5 largest counterparties should be assessed (all other counterparties are grouped together in a 6th counterparty to which an average rating is given).

V = Variance of the loss distribution and is calculated as follows:

Rating piAAA 0.002%AA 0.010%A 0.050%BBB 0.240%BB 1.200%B 4.175%CCC or lower 4.175%

1. For each rating class j, yj and zj are defi ned as:

where sums run over all independent counterparties i in the rating class j

2. Variance of loss distribution is then

where j and k in the sums run over all rating classes and ujk and vj are fi xed parameters which only depend on the rating classes

(3√V if √V ≤5% x ∑ counterparties LGD ,5√V

min(∑ counterparties LGD , 5√V) otherwise){SCRCDR =

ρ(σ)= - 1 exp(N[0.995] ×√(log(σ2+ 1))

√(σ2+ 1)

σlob= ∑r,cCorrLoblob r,lob c× σlob r× σlob c× Vlob r × Vlob c

V2√

σlob= (σprem,lob Vprem,lob )2+ 2ασprem,lobσ Vres,lob + (σres,lob Vres,lob )2

Vprem,lob+ Vres,lob

√

res,lob

V_lob=(V Prem+ V Res )×(0.75+0.25.DIVLob )lob lob

DIVlob= ∑j(Vprem,j,lob+ Vres,j,lob )2

(∑jVprem,j,lob+ Vres,j,lob )2

Vres,lob=PCOlob

Vprem,lob=max(P t,written;P

t,earned; P t-1,written) + P PP

lob lob lob lob

Vprem,lob=max(P t,written;P t,earned)+ P PPlob lob lob

pi is the PD and is defi ned according to the rating class

For unrated counterparties that are insurers that will be subject to SAM and that would meet their MCR, the probability of default, depending on the solvency ratio (own funds/SCR), is determined as

∑=i

ij LGDy ( )2∑=i

ij LGDz jj

jkjj k

kj zvyyuV ⋅+⋅⋅= ∑∑∑

jiji

jjiiij pppp

ppppu

−++

−−=

))(1()1()1(

γ

22

)1()21(

i

iii p

ppv

−+−+

=γ

γ

25.0=γ

Corr Lob1 Lob 2 ... Lob 30Lob1 1Lob2 1... 1Lob30 1

Corr NP σ NPx σ Premium RiskLob1Lob2 See SCR.9.20 – 9.24...Lob30

Corr σ Reserve RiskLob1Lob2...Lob30

Volatility Volume

Additional information required see SCR.9.4.3

For each of the 11 events in the table below:

Net down for proportional reinsurance

Net down for non-proportional reinsurance

For each of the three scenarios (below):

-Net down for proportional reinsurance per line of business, per counterparty

-Net down for non-proportional catastrophe reinsurance per layer, per counterparty

(this should allow for retention levels, limits and resinstatements)

=Max( Scenario 1 Scenario 2 Scenario 3 )

a Vertical Peak Peril event and 3 x 1 in 10 year events(Horizontal Aggregate)

Total exposure per zone

(for Earthquake:per zone per LoB)

x relativity factor per zone

aggregated across zones

(using matrix)

aggregated across LoBs (Using matrix.

for Earthquake only)

x 1 in 200,10 or 20 year market factor

For each of 1 in 200 year Earthquake, 1in 200 year Hail, 1 in 10 year aggregate and 1 in 20 year aggregate:

Earthquake event is aggregated over LoBs: Residential property, commercial property, contents, engineering, Motor own damage.

a 1 in 20 year event and3 x 1 in 10 year events(i.e. only Horizontal Aggregate events)

Vertical Peak Peril event, a 1 in 20 year event and 2 x 1 in 10 year events(Horizontal Aggregate)

=√(√(∑(factor x GWP)2 + factor x GWP )2 + ∑(factor x GWP)2 + (factor x GWP+factor x GWP)

√∑(Man – Made Catx)2

GWP is the estimate of the forthcoming year which are affected by the catastrophe event

Factors are gross of reinsurance/retrocession and calibrated according to the table below:

Events Lines of business affectedGross Factor ct

Storm Motor, Engineering and Property 175%Flood Motor, Engineering, Property and Crop 113%Earthquake Motor, Engineering and Property 120%Hail Motor and Crop 30%Major fi res, explosions Engineering, Property and Crop 175%Major MAT disaster MAT 100%Major third party liability disaster Third party liability 85%Credit Credit 139%

MiscellaneousMiscellaneous (excluding Crop, Legal Expenses, Warranty and Travel, as well as Terrorism not allowed for under standardised scenarios)

40%

NPL Property NPL Property 250%NPL MAT NPL MAT 250%NPL Casualty NPL Casualty 250%

Independent

100% correlated

Independent

100% correlated

A

A

A

A

A

A

AA

A

SCR

SCR

SCR

SCR

SCR

SCR SCR

SCR

L

L

LL

L

L

LL L

Going-concern

Restrictions on OF

Operationally RFF

Barriers to sharing

profi ts/losses

Contractual and legal

1st Party cells

3rd Party cells

Approach 1:

OFRFF = ∑min((OFRFFi – SCRRFFi),0)+ (OFNRFF – SCRNRFF) =

Approach 2:

OFRFF = min(OFNRFF – SCRNRFF,DivBenRFF)

Excess OF Diversifi cation

Remainder of Business

Ring Fenced Funds

Operational Risk

Adjustment for loss absorbency deferred taxes

Strategic participations

Sum over:StormFloodEarthquakeMajor fi res/explosives

Non-proportional reinsurance property

Marine, Aviation & Transport (MAT)

Non-proportional reinsurance MAT

Sum over:HailMotor liability 3rd party liabilityCreditMiscellaneous

√(N

at C

at)2 +

(M

an –

Mad

e C

at)2

Maximum of:single largest risk–one location

Σ sum insured x Fire/BI market wide factor

Maximum of:

frequency/severity model assuming a Poisson distribution is fi tted to the frequency and a Pareto distribution to severity

Gross hare of hull cost if 2 largest aircraft exposures collide

Hull mitigation/reinsurance cover

Share of third-party & passenger liability if 2 largest aircraft exposures collide

Liability mitigation/reinsurance cover

Whole Account Protection

GWP credit LoB x 75% (loss ratio)

Test LR 25%, 50% and 100%

Fire residential

0.004%

Fire commercial

0.010%

Fire corporate & industrial

0.073%

Defi nition of Technical Provisions:

The current amount insurers would have to pay if they were to transfer their (re)insurance obligations immediately to another insurer.

• Only existing contracts• Recognised when the (re)insurer

becomes a party of the contract or commits to the risk

• At latest when cover begins• Tacit renewals prior to reporting date

are to be recognised

Contract Recognition Contract Boundary

Outwards Reinsurance:

Consistent with underlying contract

Make allowance for potential changes in future reinsurance rates

Insurer:

Contracts valued until rates can next be reviewed i.e. re-price

Inwards Reinsurance:

Point where the reinsurer has the unilateral right to change policy conditions contract in order to re-price or re-underwrite.

Cash-bask bonus:

Technical Provision and contract boundary decision should be separate from main benefi t

Includes length of obligation to policyholders for which fees/premiums for this benefi t have already been received or will be received within contract boundary

GranularityRisk margin must be calculated per line of business

Companies may: calculate risk margin for whole business and allocate to lines of business (as per contribution of line of business to overall SCR)

Simplifi cation of allocation to lines of business: refer to TP.5.28

Risk margin simplifi cationsLevel 1: Full calculation of all SCRs without any simplifi cations

Level 2: Approximate individual risks in modules

Level 3: Approximate whole SCR (proportional)

• Future SCRs are proportional to the best estimate technical provisions for the relevant year

• For operational risk: companies need to consider extent to which assumption that SCRs for operational risk develop line in line with best estimate of technical provisions (net of reinsurance) is biased

Assumptions which are permitted to remain unchanged regarding risk profi le of obligations:

• Composition of sub-risks in underwriting risk module

• Reinsurers’ and SPVs credit standing• Unavoidable market risk (in relation to net

best estimate)• Proportion of reinsurers’ and SPVs’ share of

obligations• Loss absorbing capacity of technical

provisions

Level 4: Estimate all future SCRs at once (duration approach)

• Combine BSCR, loss absorbing capacity, cap charge for operational risk

• Using modifi ed duration of liabilities to calculate present & all future SCRs in one step

• Companies may use same assumptions to remain unchanged as per Level 3

Level 5: Risk margin is calculated as a proportion of best estimate of future liabilities

• Can only be used if insurer only has 1 line of business, or business outside the main line of business is immaterial

• The table below must be used to determine the proportions applicable to different lines of business.

Operational risk

U/avoidable market risk

Credit risk

Operational risk

(1)

Best estimate liability

(3)

(3)

(3)(3)

Reporting date 1 2

Year

(5): (4) x 6% = Risk margin

Steps to calculate Risk margin

SC

R M

odules (2)

(4) Capital released in line with liability run-off pattern

(1) + (2) = (3)

99.5th Percentile Capital

3 4

Lines of business Proportion of best estimate liabilityDirect insurance and accepted treaty proportional reinsurance

Motor (personal and commercial) 8.0%Engineering 5.5%Marine, aviation and transport 7.5%Property (personal and commercial) 5.5%Liability (personal and commercial) 10.0%Trade Credit, suretyship and guarantee 9.5%Miscellaneous non-life insurance 15.0%

Accepted non-proportional and facultative reinsuranceMarine, aviation and transport business 8.5%Property (excluding terrorism) 7.0%Terrorism business 7.0%Liability business 17.0%

Claims Provision

• Discounted Cash-fl ow method (can be stochastic probability distribution or deterministic chainladder)

• Include IBNR and reported but not settled claims

• Gross of reinsurance recoveries and net of VAT

• Appropriate future claims infl ation assumption • Appropriate currency exchange rates

Premium Provision

Discounted Cash-fl ow method

Take account of policyholder behavious i.e. lapses

Claims provision

Salvage & subrogation

Future expected Premiums

See section V.2.6.2 in technical specifi cations for possible simplifi cations

Reinsurance or special purpose vehicle recoveries:

• Recoveries on premium provision should be calculated separately from recoveries on outstanding claims provision

• Explicit calculation, follows the same principles and methodology as best estimate • Cash-fl ows should only include payments in relation to compensation of insurance events

and unsettled insurance claims (no expenses)• Note timing of payments, different or similar to direct payment pattern• Adjusted to take account of expected losses due to default of the counterparty using PD

and LGD or recovery rate. (See V.2.2.3)

A simplifi ed approach for good credit quality (adjustment less than 5% ) is:

Adjustment =-max{(1-Recovery Rate) x Best Estimate Recoveries x Duration of Recoverables x PD/(1-PD), 0}

Outstanding claims paid

Claims related expenses

• Expenses to service existing obligations

• Claims payments on existing contacts after valuation date before contract boundary

Allocate type of expense and indirect economically

SCR

QIS II for Non-Life Insurers

Maximum loss from default of largest (2 exposures; 2 group exposures),

with PML of 14% and a recourse rate of 28%

Identifi cation of largest exposures: SCR.9.146

Scenario: Collision between two of largest (gross) container carriers.

Gross exposure to cargo costs of 2 largest container carriers

Maximum gross exposure to marine liability costs relating to cargo insurance

Cargo and liability mitigation/reinsurance cover

SASRIA to hold fi xed amount

If offer top-up cover, determine share of losses in scenarios = Max

• Scenario 1: 1 in 200 year individual loss

• Scenario 2: 1 in 200 year aggregate loss split in 2 events

• Scenario 3: 1 in 200 year aggregate loss split in 3 events

Liability LoB x Risk FactorProfessional Indemnity 150%General Public Liability 80%Employers Liability 1000%Directors and Offi cers 300%Products Liability 60%

Aggregate up using matrix below then

Largest concentration

of crop exposure

across largest footprint

100% damage factor

100% damage factor

Largest concentration

of forestry exposure in

26kha

50%damage factor

Largest concentration

of blood & livestock exposure

across largest footprint

ALPHAMTPL

FAILMTPLUNLIM xGLVYLIMFxF

= ***)(

[ ]ALPHA

MTPLFAILMTPLLIM x

GLVYLIMFxF

−= **)1(*)(

MTPL

MTPLe

MTPL VYRPF

)11(log −−=

ALPHAMTPL

FAILMTPLUNLIM xGLVYLIMFxF

= ***)(

[ ]ALPHA

MTPLFAILMTPLLIM x

GLVYLIMFxF

−= **)1(*)(

MTPL

MTPLe

MTPL VYRPF

)11(log −−=

Parameters provided:

• Pareto shape parameter (ALPHA) = 2

• LIMFAIL= proportion of extreme losses that are considered to occur in such a way that the cover is unlimited =6%

• VY= Number of heavy commercial motor vehicles insured in SA by insurer

• GLMTPL: Gross Loss of SA-wide Scenario = R100 million

50 years

VY= Total vehicle years 3.2 million year Industry Loss

See SCR.9.121 for the case where there are no policy limits

PI Public L EL D&O Prod LPI ...Public LELD&OProd L

Fire - Agriculture

Lapse riskLapse risk exposure - Risk of change in liabilities due to a change in expected exercise rates of policyholder options.

Policyholder options: options to fully/partially terminate, decrease, restrict, suspend, establish or resume insurance cover

Contract boundaries <1 year: Upward and downward lapse risk calculations should be set at a minimum of simplifi cation method (whether simplifi cation methods are met or not)

Lapse riskup Lapse riskdown Lapse shockmass• Capital requirement

after an increase of 50% in option take-up rates

• Must be calculated for different homogenous groups

• Shocked rate should not exceed 100%

• maximum is 0

• Capital requirement after a reduction of 50% in assumed option take-up rates

• Must be calculated for different homogenous groups

• Shock should not change affected rate by more than 20%

• Capital requirement for the combination of

• surrender of 45% of individual policies with positive strain

• surrender of 70% of group/linked policies with positive strain

Lapselevel, group i=max(Lapse riskup+ Lapse riskdown) Lapsemass,group i = max(ΔNAV after applying Lapse shockmass ;0)

Capital requirement for lapse risk=max (∑Lapsemass,group i , ∑ Lapselevel,group i ,√(∑ Lapsemass,group i ) 2+(∑Lapselevel|mass group i )

2 )

Lapselevel|mass group i =(1- Lapse shockmass ×Lapse levelgroup i , if Lapsemass,group i >0

Lapselevel,group i ,Otherwise{i i i i

Solvency Ratio piGreater than 200% 0.025%Greater than 175% 0.050%Greater than 150% 0.100%Greater than 125% 0.200%Greater than 100% 0.500%Greater than 90% 1.000%

Solvency Ratio piGreater than 80% 2.000%Less than or equal to 80% 4.175%No rating subject to Solvency II

4.175%

Intangible Asset RiskIntangible asset risk is made up of

• market risk - as for other BS items and • internal risk - inherent to the specifi c nature of the

asset, e.g. a risk to the commercialisation of the intangible asset.

SCRintangible= Capital requirement for Intangible

Asset Risk =0.8 ×Value of intangible assets

Capital requirement for concentration risk= √( ∑ (Conc2)i

i

i

√(CATStd Scenario ) 2+(CATfactor based )

2

Interest rate risk (Int)

Level Increase in rates for all durations (SCR.5.22)

Infl ection Increase in short-term and long term rates & decrease in medium-term rates (SCR.5.23.D)

Twist Increase in short-term rates and decrease in long-term rates (SCR.5.23.B)

LevelIncrease in rates for all durations (SCR.5.25.E)

Interest rate risk

Real interest rates

Nominal interest rates

* Absolute change in interest rates should be at least 1%

NOTE: Companies with foreign exposures: Use same change in yield curves & assume local and foreign yield curves are fully correlated

Base case approach for calculating SCR

Capital requirement for interest rate risk= max(0,∆NAV for upward shock to risk–free curve,

∆NAV for downward shock to risk–free curve) See SCR5.25.E for details on shocks to be applied to risk-free curve

Interest rate riskshock i = change in NAV for direction of shock resulting in highest capital requirement

See SCR.5.25.H for adjustment to shocsk to refl ect curve used to determine asset market values.

Capital requirement for interest rate risk= √(Interest rate risknominal+ Interest rate riskreal+ 0.25(Interest rate risknominal × Interest rate riskreal )

Capital requirement for nominal interest rate risk= √( ∑ Interest rate risk shock i )i

Alternative approach

(to be used for assessing the effect of multiple interest rate stresses vs. two stresses in base case approach)

Please note that the content of this poster constitutes a simplifi ed summary of the SA QIS II Technical Specifi cations issued by the FSB on Friday 13 July 2012 (this can be found on the FSB’s website www.fsb.co.za). The content is specifi c to non-life insurers and is not exhaustive. This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specifi c professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© PricewaterhouseCoopers (“PwC”), the South African fi rm. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers in South Africa, which is a member fi rm of PricewaterhouseCoopers International Limited (PwCIL), each member fi rm of which is a separate legal entity and does not act as an agent of PwCIL.

NLpr=ρ(σ)×V

≈3×σ×V

The group SCR calculation will be performed as follows:

Method Description When is it needed?Current calculations (G2.3)

D&A Current calculations Compulsory

SAM Alternative 1: (G2.4)

D&A with local requirements applied to non-South African entities

If you have non-South African entities

SAM Alternative 2: (G2.5)

D&A with SAM applied to the non-SA entities

If you have non-South African entities

SAM Alternative 3: (G2.6)

D&A with solo internal model results used for South African entities, where available

If you have an internal model for at least one entity

SAM Alternative 4: (G3)

Accounting Consolidation Compulsory

SAM Alternative 5: (G4)

Combination of D&A and Accounting Consolidation

Optional

The scope of the group calculation is as follows:The Deduction and Aggregation method is as per G.2. The Accounting Consolidation method is as per G.3. and is illustrated below:.

See SCR.5.7 for more details

The formulae below are used to calculate the capital charge for premium and reserve risk.

• Premium risk - results from fl uctuations in the timing, frequency and severity of insured events for unexpired risk and policies/contracts to be written/incepted (including renewals).

• Reserve risk - results from fl uctuations in the timing and amount of claim settlements relating to claim events that occurred prior to the valuation date.

Ring-Fenced Funds (RFF)

Defi cit

Surplus

Key

12-11436~QIS II poster.indd 1 24/07/2012 09:32:52 AM