Swiss Life Holding AG · SIX:SLHN
Swiss Life — WestLB Versicherungs-Forum 2005
34 slides from Swiss Life's conference presentation, Apr 14, 2005
Slide 1: Swiss Solvency Test (SST)
Swiss Solvency Test (SST) WestLB Versicherungs-Forum 2005 Fritz D. Ehlers, Swiss Life, Düsseldorf, April 14th 2005
Slide 2: Contents
Contents 1. Solvency II 2. Project SST 3. Aims and concept of the SST 4. Future developments Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, April 14th 2005 2
Slide 3: Erroneous trends in the 1990s
Erroneous trends in the 1990th business focused on growth late reaction competition by external institutions only by promising (rating agenties, high bonuses regulators, ...) Life Insurance in the 90th disproportionate boosted share growth of expenses; quotas in asset allocations only partially char
Slide 4: Current regulation and its shortcomings
Current regulation and its shortcomings Solvency I risk measurement: • Asset risk accounted for only rudementary: 4% of mathematical provisions • Liability risk: volume measures (risk exposure, risk premiums) • Asset-liability risk: Not taken into account Life insurance market: • Decreasing interest
Slide 5: Solvency II Objectives
Solvency II Objectives • Create framework matching true risks • Encourage company measure & control of risk • Need for greater harmonisation (European level, international level, convergence of financial sectors) • Avoid sectoral arbitrage • More efficient group/conglomerate supervision • Flexible a
Slide 6: Solvency II: The pillars
Solvency II The 3 pillars Financial Supervisory Market Resources Review Discipline Pillar 1 Pillar 2 Pillar 3 Provisions, Minimum Capital Risk Management Disclosure Requirements Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, April 14th 2005 6
Slide 7: Solvency II Project
Solvency II Project IASB OECD US/ NAIC Accounting Development Canadian, IAIS Solvency II Australian, Solvency Swiss work IAA Member states‘ Groupe Consultative projects Basel II (Actuarial Guidance) (UK, NL, ...) Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, Apri
Slide 8: Risk-based insurance supervision
Risk-based insurance supervision • Finland: Risk-based framework since early 1980s • Canada: very sophisticated risk-based supervision, continually developed since mid 1980s • USA: based on Canadian approach, more rule-based • Australia: Since 2001 for P&C • Singapore: Introduced 2004 • South Africa
Slide 9: Contents
Contents 1. Solvency II 2. Project SST 3. Aims and concept of the SST 4. Future developments Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, April 14th 2005 9
Slide 10: Swiss Solvency Test Timeline (1)
Swiss Solvency Test Timeline (1) • 2002: H Lüthy appointed as new director of the FOPI - Re-orientation of the FOPI towards an increased prudential supervision • May 2003: start of the Swiss Solvency Test SST-Project: - All large insurers, re-insurers, actuarial and insurance associations participat
Slide 11: Swiss Solvency Test Timeline (2)
Swiss Solvency Test Timeline (2) • year-2004 field test participants: Life Non-life Health Providentia Baloise CSS Swiss Life Mobiliar Helsana Winterthur Winterthur Innova Zurich Visana risk perimeter: Swiss business only • 17 Jan 2005: meeting Swiss Life-FOPI to discuss the field test results • Jan
Slide 12: Swiss Solvency Test Timeline (3)
Swiss Solvency Test Timeline (3) • Jun 2005: start of second field test - field test open to all life- and non-life insurance undertakings - expected number of field test participants: 40 ~ 50 (15 life insurers) - risk perimeter: legal entity • Sep 2005: end of second field test run • as of 1 Jan 20
Slide 13: Contents
Contents 1. Solvency II 2. Project SST 3. Aims and concept of the SST 4. Future developments Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, April 14th 2005 13
Slide 14: Aims for the SST
Aims for the SST policyholder promoting protection risk culture s awareness of risks on all levels s adequate provisioning s design and implementation of s sufficient risk capital SST integrated risk management convergence of strengthening markets regulatory to economic through competition capital s
Slide 15: SST concept: Overview
SST concept Overview • Principle-based framework • Market-consistent valuation of assets and liabilities • Quantified risks: capital market, insurance, credit risks • Other risks (operational etc.) accounted for qualitatively • Standard models for asset-liability, life, non-life, and health risks •
Slide 16: SST concept: Risk classification
SST concept Risk classification Total Risk Financial Risks Insurance Risks Operational Risks quantitatively Market Risks Credit Risks qualitatively Interest Rates Spreads Share Price Loans BiometricParam. FX Reinsurers Behavioral Property Concentration Economic Factors Volatility Model Catastrophes
Slide 17: Solvency supervision: Pillar 1 and pillar 2
Solvency supervision Pillar 1 and pillar 2 Two complementary valuation methods are used Pillar 1 Pillar 2 Statutory valuation SST: Target capital statutory best- “realistic“ estimate provisions provisions provisions risk margin target minimal risk capital bearing solvency capital Swiss Solvency Test
Slide 18: SST concept: Policyholder protection
SST concept Policyholder protection Risk-based solvency standard: • Accounts for the actual risks run by the company Ensure that each company has sufficient capital: • Time horizon one year • Confidence level of 1% (may change) • Capital after one year in these cases is on average sufficient for ano
Slide 19: SST concept: Risk measure
SST concept Risk measure Time horizon: 1 year (pragmatic and compatible with many internal models of insurers) Definition of target capital: Target capital Z is defined as the Expected Shortfall of the change of risk- bearing capital on a given confidence level a plus a Risk Margin Shareholders: Onl
Slide 20: Target capital for life insurance model
SST concept Target capital for life insurance model Analytic model Scenario aggregation Expected shortfall as risk measure Examples:: market risk n Pandemic n Stock market crash n Default of reinsurer insurance risk n ... weighted average of scenarios and results from analytic model + credit risk +
Slide 21: SST concept: Cash flow representation of assets and liabilities
SST concept: Cash flow representation of assets and liabilities cash flows are the basic building blocks: The future cash flows of all Assets assets and liabilities have to be discounted with appropriate discount factors (valid as of the Liabilities valuation date). Then, the present value of assets
Slide 22: SST concept: Life insurance model
SST concept Life insurance model Standard model Scenarios • Risk factors • Pandemic mortality, longevity, morbidity, recovery, lapse, • Mortality (long term embedded options, expenses changes) • Assumptions • Longevity - Changes of risk factors are normally distibuted • Lapse - Specified covariances
Slide 23: SST concept: Asset-liability model
SST concept Asset-liability model A number of risk-factors are specified and Risk Factors effects of changes in risk-factors have to • Interest Rate: risk-free prescribed by regulator be calculated for assets and liabilities at - Sensitivities: the same time • Shift for different time buckets • Inte
Slide 24: SST concept: Asset-liability scenarios
SST concept Asset-liability scenarios For test run: historical scenarios: Example: Financial Distress • Stock Market Crash 1987 The Financial Distress Scenario is • Nikkei Crash 1989 inspired by collapse of First • European Currency Crisis 1992 Executive • US Interest Rates 1994 • Russia / LTCM 1998
Slide 25: SST concept: Credit risk
SST concept Credit risk • Credit risk (excluding reinsurers) are handled with stochastic model (spread volatility) and a credit risk capital charge (CRCC) • CRCC will be added to target capital • CRCC equals Basel II credit risk charge using the standard approach • Reason for special treatment of cr
Slide 26: SST concept: Risk margin (1)
SST concept Risk margin (1) For insurance risks: target capital needs to take into account risks after RBC time-horizon 1 year S S risk-margin Not good enough: Target capital A L A defined such that risk-bearing capital L Best-estimate is positive with given probability (e.g. liabilities 99%) after
Slide 27: SST concept: Risk margin (2)
SST concept Risk margin (2) Risk margin on best-estimate provisions: Covers risks which emanate after 1 year time-horizon of SST (Run-off risks after 1 year) -> integral part of SST Market consistent provisions = Best-estimate provisions + risk margin Risk margin = cost for future regulatory capital
Slide 28: SST concept: Risk margin (3)
SST concept Risk margin (3) Target Capital with actual asset portfolio Target Capital with portfolio converging from actual to optimally replicating portfolio taking into account limited liquidity of assets Target Capital Actual Portfolio converged with optimally approximately to optimally replicati
Slide 29: Swiss Solvency Test Scope
Swiss Solvency Test Scope Institutions covered by the SST Swiss insurance companies with branches (also in foreign countries) (Capital under management of life insurance in Switzerland: » CHF 220 bn) Institutions not covered by the SST Autonomous pension funds (Capital under management: » CHF 480 bn
Slide 30: Contents
Contents 1. Solvency II 2. Project SST 3. Aims and concept of the SST 4. Future developments Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, April 14th 2005 30
Slide 31: Swiss Solvency Test: Current issues
Swiss Solvency Test Current issues • Requirements for internal models • Diversification effects in groups • Modelling issues (e.g. embedded options) • Cooperation of regulators: Consistent application of the SST • Consistency of the SST with Solvency II Swiss Solvency Test, Fritz D. Ehlers, WestLB V
Slide 32: Swiss Solvency Test: Transition to pillar 1
Swiss Solvency Test Transition to pillar 1 Pillar 1 Solvency I Target capital Pillar 2 Target capital Fieldtest 1 Fieldtest 2 Phased Introduction 2005 2006 2007 2008 … Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, April 14th 2005 32
Slide 33: Reference
Reference White paper of the Swiss Solvency Test: www.bpv.admin.ch/de/pdf/white_paper_sst.pdf Swiss Solvency Test, Fritz D. Ehlers, WestLB Versicherungs-Forum 2005, Düsseldorf, April 14th 2005 33
Slide 34: Thank you
é SwissLife Thank you