qis5 august 2010 seminar - eiopa · guidance ifrs-sii adjustments (assets) •goodwill •other...
TRANSCRIPT
26 August 2010 Page 1
CEIOPS
Disclaimer
Please note that those slides are not part of the formal QIS5 documentation as issued by the European Commission. They are not intended to, and do not, replace the QIS5 Technical Specifications or any other part of the QIS5 documentation. They do not supersede the European Commission documentation.
The seminar relied to a large extent on the QIS5 technical specifications, QIS5 spreadsheet, qualitative questionnaires as well as simplifications and helper tabs.
Answers to questions raised of European relevance will be integrated in the Q and A document.http://www.ceiops.eu/index.php?option=content&task=view&id=752
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CEIOPS
QIS5 - objectives
•Will require a high level of participation of solo undertakings and groups
• The main issues are
– The calibration of the standard formula
– Groups calculations
– Internal model
– Complexity
• But also to foster preparedness of industry and supervisors
CEIOPS is committed to ensuring the success of QIS5
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CEIOPS
Page 5
Aligning technical specification with level 2 implementing measures
•Design: ensure the inherent consistency of the proposals
•Quality: ensure that the proposals provide the appropriate level of financial soundness
–For example, what is the use of discussing the level of the capital requirements if these requirements are not supported by sufficient quality of capital?
•Calibration: regular review – transparency and credibility of the process
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CEIOPS
QIS 5 - timeline
2010
2011
March 2010 - CEIOPS provides draft technical specifications to EC
July 2010 – EC/EIOPC provide final technical specifications to CEIOPS
August–Nov – QIS 5 exercise• End of October for solo entities
• Mid November for Groups (analysis to be performed in a centralised database)
April 2011 – QIS 5 Report
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Pre-test and spreadsheets
6 Jul 12 Jul 19 Jul 26 Jul 2 Aug 9 Aug 16 Aug 23 Aug 30 Aug
Publication of final technical
specifications by EC
Solo+group spreadsheets available
Pre-test solo spreadsheets
•Aim of the pre-test is to debug the spreadsheets (highly involved but limited number of participants ideally) •Pre-test spreadsheets can not be used to submit final results
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Centralised databases
Group centralised databasePurpose: analysis of QIS 5 group
results
•Non anonymised or anonymised•To lead supervisor and then to CEIOPS / To lead supervisor and CEIOPS at the same time
Calibration centralised databasePurpose: refine non life and health underwriting calibration based on
QIS 5 solo results
•Via solo supervisors
Crypted containers and accessed using On-The-Fly-Encryption technology to ensure that the sensitive content will be never stored in a non-crypted
form.
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Spreadsheets and technical specifications but also …
•Simplification
•Helper tabs
•QIS5 for beginner guide
•National guidance
•Centralised databases
•Q and A
•Training
•Qualitative questionnaires
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Q and A
•Escalation process at EEA level: if national supervisors can not answer the question
•Content of the specifications: started on 6 July– EC included in the red flag procedure before the publication
•Spreadsheets: started on 23 August
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Trainings
•CEIOPS seminars
•European workshops
•Sharing experience
•National initiatives from supervisors and trade associations
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Qualitative questionnaires
•All undertakings
•Internal model users
•Group users
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After QIS5
•Further impact assessment based on data collected for “fine tuning”L2 and developing L3 – process to be agreed in the November MM
•If needed, short and restricted QIS6
•Implementation of Solvency 2!!!
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Page 17
To conclude
•QIS5 is crucial to test the system
–Therefore important not to make approximations (feasibility)
–To assess the impact
•QIS5 results will be use also to assess the needs and contents of L3 guidance linked to pillar 1
•QIS5 is a major step in the preparedness to Solvency 2
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Valuation of assets and Valuation of assets and ‘‘other liabilitiesother liabilities’’
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Valuation approach
• Economic, market consistent approach
– No subsequent adjustment for own credit risk
• IFRS as a proxy
– Only if reflects economic value!
• Materiality applies
• Valuation hierarchy
– Requirements for the valuation process
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Guidance IFRS-SII adjustments (assets)
CEIOPS
• Goodwill
• Other intangible assets
• Property, plant and equipment
• Inventories
• Finance leases
• Investment property
• Participations in subsidiaries, associates and joint ventures
• Financial assets
• Non-current assets held for sale or discontinued operation
• Deferred tax assets
• Current tax assets
• Cash and cash equivalents
26 August 2010 Page 22
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Guidance IFRS-SII adjustments (liabilities)
CEIOPS
• Provisions
• Financial liabilities
• Contingent liabilities
• Deferred tax liabilities
• Current tax liabilities
• Employee benefits and termination benefits
26 August 2010 Page 23
Market risk for non with Market risk for non with
profit business profit business
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CEIOPS
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Agenda
• Market risk in QIS 5
• Look-through approach
• Market risk sub-modules
• Focus on spread risk
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Market risk in QIS 5
• Similar modular structure to QIS 4 but :
• One extra sub-module
• Calibrations adapted
• Some more detailed structural changes
• Scenario-based approach
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Market risk in QIS 5 – Correlation matrix
• New correlation parameters
• Up/Down correlation matrix
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Look-through approach
• “Substance over form” principle
=> Economic substance rather than legal form of the investment determines its treatment
• Assets underlying collective investment vehicles/funds must be examined and would be subjected to the relevant sub-modules.
• Look-through approach required while risks are material
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Equity
• 39% “Global” and 49% “Other”
• Symmetric ajustment : -9% in QIS 5
• 0,75 correlation between “Global” and “Other”
• Participations
• Strategic
• Financial and credit institutions
• Excluded from the scope of the group
• Duration dampener (article 304 of the Directive)
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Interest rate
• Scenario-based approach
• Shocks applied to the risk free term structures (not to the illiquidity premium)
• Upward stress and downward stress for each maturity (SCR.5.21)
• Two sets of correlation
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Property
• Scenario-based approach
• 25% charge
• Look-through approach for collective real estate vehicles
• Taking in account of gearing
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Currency
• Worst of -/+25% charge for all foreign currency holdings
• Erratum of the EC for this submodule
• Lower for several currencies pegged to the euro :
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Concentration
• Calculation per exposure:
• Exposures of the same group are not independent
• Charge depends on the rating
• Aggregation with zero correlation
• Special treatments:
• Sovereign bonds
• Covered bonds
• Property
• Participations
● Helper tab for this sub-module
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26 August 2010 Page 33
Liquidity premium
• New sub-module
• Capture the illiquidity premium risk (increase of the value of TP due to a decrease of in the illiquidity premium)
• 65% fall in the value of the illiquidity premium
• Negatively correlated with spread risk
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Focus on spread risk
• Scenario-based approach
• Separate treatment for:
• Bonds
• Structured products
• Credit derivatives
• Helper tab for this submodule
• Link with counterparty default risk
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Focus on spread risk - Bonds
• Simplification: factor-based approach
• Special treatment for:
• Covered bonds
• Sovereign and supranational debts
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Focus on spread risk – Structured products
• Two scenarios:
• direct spread shock (level of the shock depends on the rating class and the duration of the credit exposure)
• shock on underlying assets
• Scenario-based approach => 0 < Shock < 100% of MV
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Focus on spread risk – Credit derivatives
• Scenario-based approach
• Only credit derivatives which are not part of undertaking’s risk mitigation policy
• Upward shock (in absolute terms) and downward shock (in relative terms)
26 August 2010 Page 39
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Index
• Non life underwriting risk module
� General principles
� Catastrophe risk
- natural cat scenarios (regional)
- man made scenarios
- factor based method
�Undertaking specific parameters
• Counterparty default risk
• Technical specification, the spreadsheet, the qualitative questionnaires, helper tabs
• New in QIS 5, from QIS 4
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Non life underwriting risk –general principles
• Premium and reserve risk- factor based approach: volume of the business * volatility
• News about premium & reserve risks
– Geographical diversification
– Adjustment for non-proportional reinsurance (premium risk)
– New factor in premium volume measure for existing contracts expected to be earned after the following year
• New lapse submodule
• New structure of cat risk
26 August 2010 Page 41
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Non life underwriting risk –cat risk – new structure
• Method 1 (default one)
� regional scenarios for nat cat & man made,
� scenarios for perils/event (not LoB), brutto calculation
� nat cat & man made capital requirements aggregated (independency)
• Method 2 – factor based approach if method 1 can not be applied and PIM is not appropriate
� outside EEA
� for miscellaneous LoB
� for non-proportional reinsurance
• Own reinsurances programme
• Aggregation of methods 1 & 2 (independency)
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Non life underwriting risk –cat risk – method 1 – nat cat
• Perils:
�windstorm
� flood
� earthquake
� hail
� subsidence
• Capital requirement is calculated for each peril and country separately, aggregation at first by countries then by perils
• For each zone (cresta, post-code) undertaking’s exposure are required (total insured value) for each LoB affected by the peril (LoBs given in TS, for flood: Fire & other damages, MAT & MPD)
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Non life underwriting risk –cat risk – method 1 – nat cat
• Flood:
where CATflood_ctry – capital requirement for flood and the country
Qctry – factor for the country
FZONE – factors for the zones
AGGr,c – aggregation matrix for the country between the zones
TIVZONE – exposure (total insured value) for each zone
• Multiple events: subsequent losses for windstorm, flood and hail – capital requirement calculated as maximum from A and B type events
�A – one large event and additionally one smaller event (for flood 1 i 0,1)
�B – two moderate events (for flood 0,65 i 0,45)
ZONEZONEZONE TIVFWTIV *=
∑=rxc
cZONErZONEcrCTRYctryFlood WTIVWTIVAGGQCAT ,,,_ **
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Non life underwriting risk –cat risk – method 1 – man made cat
• The same events for all undertakings – no differentiation between countries or zones
• Events:
� fire
�motor
�marine, aviation
� liability
� credit & suretyship
� terrorism
• Aggregation capital requirements from above events with the independence assumption
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Non life underwriting risk –cat risk – method 1 – man made cat-example for the fire
• Option 1 –
where P- sum insured of the largest known concentration of exposures under the fire & other damages LoB in a 150m radius
x- proportion of damages caused by the scenarios (100%)
xPCATFire *=
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Non life underwriting risk –cat risk – method 1 – man made cat-example for the fire
• Option 2 (simplification)
where SI – sum insured by sub-line of business
(residential, commercial and industrial)
LSR – single largest risk across all sub-lines
Fx – market wide factors for each sub line
= ∑
−linessub
xxFire FSILSRMaxCAT *,
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Non life underwriting risk –cat risk – method 2
• For each event (storm, flood, earthquake, hail… the affected LoBsare given with the factors
• Capital requirement based on the estimation of gross written premium in the following year in the relevant LoBs
• Aggregation of events with the independency assumption, the exception of direct insurance and reinsurance for the same LoB
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Undertaking specific parameters
• Hierarchy:simplifications
=> standard formula => standard formula with USPs=> standard formula with PIM=> full internal model
• The approach based on the credibility factor –
�mix with the market factors
� longer history => higher weight
� 100% for 10/15 years
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Undertaking specific parameters
• Parameters to replace: σprem,lob , σres,lob, - in non life risk module and NSLT health
• For σprem,lob and σres,lob , there are 3 methods method can be chosen but the choice must be justified in the future (anty - cherry picking)
• Assumption of the methods should be checked, quality of data in the future is subject to the supervisory approval
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Counterparty default risk
• QIS4 approach (V-H):
� Inconsistent capital requirement
� Laborious, impracticable and cumbersome method of calculation
�Not fulfilled Vasicek distribution assumptions
� Inadequate (too high) capital requirement for the unrated counterparties
• New structure of the module:
�Rated exposures, small numbers of counterparties (type 1)
�Unrated exposures, many diversified counterparties (type 2)
• Aggregation of capital requirements of both types - with the small diversification effect (0,75)
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Counterparty default risk
commitments received by the undertaking, called up but are unpaid
deposits with ceding institutions
N>15N<=15
cash at bank
any other risk mitigating contracts
policyholder debtors, including mortgage loans
securitisations and derivatives
receivables from intermediariesreinsurance arrangements
Type 2 (unrated, diversified)Type 1 (rated, may not be diversified)
26 August 2010 Page 53
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Counterparty default risk –type 1 –SCRdef,1- theory
Probablility of default of the counterparty i:
where b – basic probability of default of the counterparty i
S – the amount of the shock, common for all counterparties with the probability distribution
α, τ -parameters
,)1()( ib
iiii SbbSPDPDτ
−+==
,10,)Pr( <<=≤ sssSα
26 August 2010 Page 54
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Counterparty default risk –type 1 –SCRdef,1- method of calculation
where
Input: LGDi
rating or solvency ratio
Given in the TS: PDj - depending on rating or solvency ratio,
coefficients ωjk
∑∑
⋅≤
⋅
⋅
= i
i
i
idef
LGDV
else
if
VLGD
V
SCR%5
, 5;min
3
1,
),,,(,1 1
ατωωω kjjkkj
N
j
N
k
jk PDPDLGDLGDV ==∑∑= =
26 August 2010 Page 55
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Counterparty default risk –type 1 –SCRdef,1- LGD method of calculation
• Cash at bank
• Deposits with ceding institutions
• Unpaid but called up capital
• Guaranties letters of credit, etc.
=> LGD = Value according to Valuation section of the TS
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Counterparty default risk –type 1 –SCRdef,1- LGD method of calculation
• Reinsurance, securitization, derivative
=>
RM = hypothetical SCR (without taking into account RM contracts) –real SCR for underwriting and market risk – real SCR for those risk
* Different percent values
( ) ( )( ),0;covRe%50max*
iiii CollateralRMerablesLGD −+⋅=
( ) ( )CollateralCollateral MktRiskMktValueCollateral −⋅=*
%100
26 August 2010 Page 57
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Counterparty default risk –type 2 –SCRdef,2- method of calculation
Scenario approach with the shock equal to
where
E- Sum of the values of type 2 exposures, except for receivables from intermediaries which are due for more than 3 months
E_past-due Sum of the values of receivables from intermediaries which are due for more than 3 months
,*%90*%15 duepastEE −+
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Counterparty default risk
• Simplifications of RM calculation (conditions!)
�Derivatives, which affect in RM one submodule of market risk – only market risk
� For reinsurance: calculate the difference in non-life risk for all reinsurance counterparties and allocate them as follows
SCRhypnl − SCR withoutnl≈ SCRhyp
nl − SCR withoutnl *Reci/Rectotal
where Reci are the reinsurance recoverables towards counterparty (i) and Rectotal the overall reinsurance recoverables
�Calculation by subsets not every single counterparty
�Collateral =85*% Market Value of collateral
• Qualitative questionnaire
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Areas Covered
This Morning
– Technical Provisions• Best Estimate• Discounting and Liquidity Premium• Contract Boundaries
This Afternoon
– SCR and MCR• Life modules• Loss absorbing capacity of technical provisions• Op Risk• MCR
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Structure
•Theory (briefly)
•Spreadsheet
•Helper tabs
•Questionnaire
•Questions and discussion
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Best Estimate
• Probably the fundamental part of the Solvency II calculation
• Best Estimate: corresponds to the probability-weighted average of future cash-flows, taking into account the time value of money (Article 77(2))
• No margins
• Market consistent
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Discounting and Liquidity Premium
• Risk free rate
• Swaps – 10 bps
• Provided by CEIOPS
• Liquidity Premium for all products
• Three buckets
• Liquidity premium transitional
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Contract Boundaries
• Very important for EPIFP
• TP 2.15
• Only include cash flows within contract boundary:
– Where insurer has unilateral right to:•terminate contract
•reject premiums
– Where insurer has unlimited ability to:•amend premiums or benefits in future
– “Unlimited ability” - economic perspective
– Includes future policies exercised under options / guarantees
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Principles from the technical specifications
• Section V.2.5:
� TP.5.3: COC of providing eligible own funds at the level of the futursSCR over the lifetime of the (re)insurance obligations
� TP.5.4: futurs SCR with minimal market risk. Includes:� Underwriting risk� Unavoidable market risk� Credit risk (reinsurance and SPV)� Operational risk
� Loss absorbing capacity of TP, no loss absorbing capacity of deferred taxes
�Same future management actions
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Calculation
• Risk free: without illiquidity premium
• TP.5.16: Futurs basic SCR should be calculated using the relevant SCR modules and sub-modules
• TP.5.20 : The calculation should be calculated on a best effort basis
• TP.5.25 : Calculation per line of business
• Calculation as a whole
• Allocation to the lines of businesses
• Simplifications TP.5.28 to TP.5.73
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Hierarchy of simplifications (TP.5.31)
• Level 1: full calculation without using simplifications
• Level 2: Approximations at the level of (sub)-risks
• Level 3: Approximation at the level of the whole SCR for each futurSCR
• Level 4: Approximation ‘ at once ‘ all futurs SCR
• Level 5: Percentage of the best estimate
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Life modules
• 99.5% VaR over one year
• Seven modules:
– Mortality
– Longevity
– Morbidity
– Revision
– Lapse
– Catastrophe
– Expense
• Simplifications and USP available
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Loss absorbing capacity of technical provisions
• SCR can be reduced to take account of the loss absorbency of technical provisions
Assets
Before stress
Liabs
Own
Funds
Post-stress,
no actions taken
AssetsLiabs
Own
Funds
Post-stress, with impact of
management actions
and deferred taxes
Assets
Liabs
Own
Funds
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Approach 1 - Modular
Three-step process:
1. Calculate modules assuming no actions taken (“gross”calculation) and aggregate into a gross SCR
2. Calculate modules assuming loss-absorbing management actions are taken (“net” calculation) and aggregate into a net SCR
3. The difference between these leads to the SCR adjustment
• The adjustment for deferred taxes is based on the difference in deferred taxes under the gross and net SCRs
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Approach 2 – Equivalent Scenario
3-step process:
1. Calculate undiversified capital charges for each risk (either gross or net)
2. Find the diversified capital requirement
3. Allocate the diversification benefit back to each risk to find the single equivalent scenario
– This is done by using the relative weights of risks and correlations
– Adjusted SCR is then calculated by running the single equivalent scenario stresses
• Adjustment for deferred taxes is calculated by looking at the value of deferred taxes under the single equivalent scenario
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Loss absorbing capacity of technical provisions
Modular approach
• Simpler to understand
• More extensively tested in QIS4
But
• Requires two calculations for each relevant risk module
• May not fully capture the effects of possible double counting of loss absorbency
Single equivalent scenario
• Avoids double counting of loss absorbency
• Fewer calculations required
• More realistic treatment of management actions
• Easier to incorporate deferred taxes
But
• More complex to understand the methodology
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Agenda
• Scope
• Conditions for using of risk mitigation techniques
• Financial Risk Mitigation
– Basis Risk
– Rolling hedging
– Credit derivatives
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Scope
• Purchasing or issuing of financial instruments which transfer risk to the financial markets
• Examples:
• Put options to cover the risks of falls in assets
• Credit derivatives to cover the risk of failure (or downgrade) of a counterparty
• Currency swaps to cover currency risk
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Conditions for using in QIS 5
• Legal certainty, effectiveness and enforceability
• Liquidity and certainty of the value
• Direct, explicit, irrevocable and unconditional features
• No double counting of mitigation effects
• Credit quality of the counterparty : at least BBB
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Financial risk mitigation – Basis risk
• Matching between underlying assets or references of the financial mitigation instrument and undertaking exposures is required
• When matching is not perfect, financial risk mitigation technique should be accepted in QIS 5 if:
• Correlation between hedged assets and assets underlying the derivatives is nearby 1
• Correlation between hegded name and names referring to CDS is nearby 1
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Financial risk mitigation – Rolling hedging
• Pro rata temporis used for risk mitigation techniques which cover only a part of the next year
• Dynamic hedging : not a risk mitigation technique in QIS 5
• Rolling hedge programme can be accepted under conditions
=> Taking into account of all the risks that can arise from the rolling over of the hedge
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Financial risk mitigation – Credit derivatives
• Applied procedures for the using of credit derivatives required
• Following credit events must be covered:
• Failure to pay the amounts due
• Bankruptcy or insolvency of the obligor
• Restructuring of the underlying obligation
• Mismatch between the underlying obligation and the reference obligation allowed if:
• Reference obligation is junior to the underlying obligation
• And same obligor shared
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Operational Risk
• Straight forward factor based approach
• No diversification benefits
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MCR
• Approximately 85% VaR over 1 year
• Straight forward factor based approach
• Subject to a window
• And to an absolute minimum
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Elements• Core spreadsheets .xls
– Participants tab!!!!!! (currency, internal model, …)
– Check all tabs are complete and right
– Use the overview tab and checks (true/false) that are in the spreadsheets)• E.g. Balanced BS!
• Qualitative questionnaire– Solo or group! - .doc
– Excel file (solo or group, information on transitional for own funds, internal models if relevant) .xls
– Internal model if relevant .doc
• Additional request for refining calibration of non life and Health non SLT underwriting risks .xls
• Simplification and helper tabs .xls– if asked by national supervisors or considered useful for the understanding of the results
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Key points for solo undertakings
•Liquidity premium
•Transitional on discount rate
•Risk margin
•Equivalent scenario versus modular approach
•Internal model results
•Expected profits in future premiums
•Transitional on own funds
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Post submission
•Be ready to answer questions from your supervisors!
•It will help improve quality of results and avoid misunderstandings