07 July 2009
Published in: Capital - models, Insurance risk, Market risks, Operational risk, Regulation - supervision
Experts react to CEIOPS’ consultation papers
Watson Wyatt highlights the main issues in the more important of the 23 papers issued by CEIOPS last week [see IERM, 3 July 2009, "CEIOPS releases 23 consultation papers"]. These are our extracts from Watson Wyatt's analysis.
CP47: SCR standard formula - market risk
- CEIOPS proposes no changes to the structure of the market risk sub-module with the exception of the inclusion of a change to interest rate volatility in the interest rate stress.
- CEIOPS proposes adjustments to the currency-risk module, spread risk and concentration risk.
- Until the calibration of the stresses is considered in further consultation papers, it is not clear what impact the market-risk module will have on capital requirements.
CP48: SCR standard formula - non-life underwriting risk
- There have been significant changes to the catastrophe-risk module. CEIOPS will define standardized scenarios for all insurers and geographical diversification has been dropped, despite being generally welcomed by QIS4 respondents.
- The standard factors for non-life underwriting risk have not been changed from the previous QIS4 factors. This may be amended and is a significant issue because the market consensus seems to be that the QIS4 non-life underwriting risk factors were on the high side.
CP49: SCR standard formula - life underwriting risk
- For both future mortality and longevity stress tests, CEIOPS has continued with a one-off permanent step change. This is despite suggestions from a number of members that a more realistic trend assumption should be adopted.
CP50: SCR standard formula - health risk
- This gives further guidance on the classification of specific health insurance products.
- The health module is to be split between "SLT Health" and "Non-SLT Health". This should help undertakings to have a common understanding on the classification of health insurance and where it should be included in the SCR. This was one of the main concerns arising from QIS4.
CP51: SCR standard formula - counter-party default risk
- This should be read in conjunction with CP28
- The paper addresses some of the concerns about the complexity of the loss given default calculations identified in QIS4 and proposes some simplifications.
- The simplifications come at the price of a more conservative calculation and will have to be examined more closely to see how well they work.
CP53: SCR standard formula - operational risk
- CEIOPS has revised the parameters applied in the operational risk capital calculation. It has doubled all parameters compared to QIS4 (including the cap to 60% of the BSCR), except for the life technical provisions parameter which has tripled.
- This implies at least a doubling of operational risk capital compared to QIS4 which should go some way to reduce the gap between the internal model and standard formula results that were seen under QIS4.
- There is still no incentive to improve operational risk measurement and management short of promoting the use of internal models (full or partial) for operational risk.
CP55: advice on MCR
- This suggests some changes to the linear formula proposed in QIS4 for the MCR calculation.
- The MCR must be calculated quarterly and therefore requires a quarterly calculation of the SCR.
- This is potentially a lot of extra work for companies. However, subject to fulfilling certain criteria, undertakings will be allowed to apply simplifications in the quarterly calculation of the SCR in which they would only need to recalculate those risks that have changed significantly since the previous calculation.
CP56: tests and standards for internal model approval
- The standards required on documentation are perhaps not as bad as feared.
- There is, however, an unrealistic expectation that any expert judgement should be refutable, testable and falsifiable.
- CEIOPS recommends a principles-based assessment for the use test. CEIOPS envisages a high degree of embedding of the internal model in both the risk management system and the wider business, including using the model to inform business strategy.
CP60: assessment of group solvency
- This sets out further clarification around the calculation of the group SCR and calculation of basic own funds eligible to meet the group SCR.
- An important theme in the paper is group diversification benefits. CEIOPS states its initial views on the recognition of diversification benefits from "third country" subsidiaries. Justification of the recognition of diversification benefits with third country entities may be challenging.
- The paper also gives further detail on the fungibility and transferability of own funds.