Summary:

This draft paper sets out the authors’ views of what good practice for the actuarial aspects of internal models will look like in 2012, the year Solvency II is expected to be implemented. These practices are focused on the technical matters rather than professional ones. Actuaries working on internal models are likely to need to consider and follow such practices if their internal models are to be approved for use in calculating regulatory capital. 

The risk quantification techniques discussed in the paper can also be used in the Own Risk Solvency Assessment (ORSA) process, also required by Solvency II. The paper is therefore relevant to actuaries working in companies that are not planning to apply to use an internal model. 

The paper covers both life and non-life insurance and reinsurance, with a focus on the UK market, and reviews current practice as well as setting out possible future practice. This leads to identification of the areas that should be researched by the profession in order to prepare for 2012:

• Diversification and co-dependency of risks;
• Time horizon over which to measure risks;
• Extreme events;
• Group risk; and
• Data quality. 

The discussion gives an indication of the directions each of these elements might take. 

The paper is effectively a work in progress, and readers should ask themselves what they should do in response to the ideas discussed. 

A reasonable amount of knowledge of Solvency II is assumed, as well as familiarity with the concept of Internal Capital Models.

http://www.actuaries.org.uk/__data/assets/pdf_file/0009/146664/sm20090223.pdf

Summary

Acting in support of the International Association of Insurance Supervisors (IAIS) the Insurance Regulation Committee of the International Actuarial Association (IAA) formed the Insurer Solvency Assessment Working Party (WP) in early 2002 to prepare a report on insurer solvency assessment. This Report represents the culmination of that mandate and is meant to assist in the development of a global framework for insurer solvency assessment and the determination of insurer capital requirements. 

The IAA considers this Report to represent useful educational material. It is a lengthy but clearly written and comprehensive document. It is not intended to express a unique or absolute point of view with regard to the issues which surround the topic of insurer solvency assessment. 

The report deals with methods the supervisor might use to assess the current financial position as well as to understand the possible future financial positions of insurers. It addresses the following aspects:

• Capital Requirements: reviews the purpose of the capital and the important principles for the determination of appropriate levels of risk; describes defensive tactics for solvency protection and their role in the design of a capital requirement.
• Framework for Solvency Assessment: provides an introduction to the WP’s suggested approach towards insurer capital requirements. This section describes the fundamental principles underlying the framework and considers various implementation issues that will influence a supervisor in designing a local requirement.
• Insurer Risks: describes the key insurer risks and corresponding key considerations in measuring them.
• Standardized Approaches: describes the considerations involved in the design of standardized approaches to solvency assessment.
• Advanced Approaches: describes the considerations involved in the design of advanced or company-specific approaches to solvency assessment.
• Reinsurance: outlines the unique considerations involved with reinsurer solvency assessment.
• Total Company Requirement: describes the additional considerations involved in developing a combined approach to solvency assessment for an entire company or group of companies.
• A few case studies with numerical examples of most important elements of this report.
• In-depth discussions on market and credit risks.
• Lessons from Insurer Failures: provides insights from sample insurer failures.
• Introduction to Insurance Risk: provides a layman’s introduction to the risks faced by insurers.
• Mathematical tools for estimating loss distributions and a mathematical introduction into the copula theory. 

http://www.actuaries.org/LIBRARY/papers/global_framework_insurer_solvency_assessment-public.pdf