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Solvency Regulation in Iceland: Current Status and Future Environment

Explore the solvency status of Icelandic companies post FME's stress test, analysis of recent developments, implications of Solvency II, and discussion on capital, market risk, operational risk, and more.

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Solvency Regulation in Iceland: Current Status and Future Environment

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  1. securities market credit market insurance market pension- market Solvency Regulation in Iceland – Future Environment Willis Re’s Nordic Seminar20th June 2007Sigurður Freyr Jónatansson

  2. Current status • The solvency position of the largest companies is strong in most cases • This also applies for the smaller life insurance companies • Most of the companies are not severly affected by FME’s stress testLikely reasons: • High return on investments in last years • Changed accounting methods • Solvency I regulation only takes underwriting risk into account

  3. Increased investment in equities Reduced holdings in bonds Reduced loans Recent developments (1)

  4. Recent developments (2) • Increased activity abroad • Subsidiaries and participation • Norway • Sweden • Finland • Activity on the basis of freedom to provide services • UK • FME has increased cooperation with other supervisors

  5. Effect of Solvency II - Overview • Pillar I • Capital requirements on market risk • Reduced holding in equities? • Reduced concentration • Pillar II • Coordinated supervisory methods • Pillar III • Coordinated supervisory and public reporting • Groups and cross sectoral (GCS) issues • Group risk and diversification benefits

  6. Pillar I – Capital Adequacy

  7. Hedgeable vs. non-hedgeable risks • Insurance risks are non-hedgeable • We can probably assume that pure financial risks can be hedged

  8. Pillar I – Technical provisions • Will the best estimate be a challenge? • How to find the best estimate for annually renewable term life insurance contracts? • Opposite to QIS3 the probability of reinsurer default should be calculated (IASB compatible) • The risk margin will be calculated with the cost of capital method – future SCR will be estimated by proxies

  9. Pillar I - Capital • The proposed changes will probably not have effect on the current situation • New methods to raise capital might be necessary if the solvency requirements increase • Subordinated loans • Preference shares • Other forms of hybrid capital

  10. Pillar I – Operational risk • Not yet clear whether Pillar I or Pillar II are better suited to deal with this risk • Pillar I measurements could be supplemented with qualitative requirements • Companies would then benefit from good operational risk management

  11. Pillar I – Market risk • 1/200 year shock is 30-45% for equities • Therefore capital requirements for equities will always be high • Companies can reduce their risk by financial risk mitigating tools • Concentrations should be reduced • Spread risk measures the exposure changes in the credit spread/rating of counterparties

  12. Pillar I – Counterparty default risk • No significant problems have emerged regarding reinsurers • Increased use of financial mitigating tools could lead to increased importance of this risk

  13. Pillar I – Life underwriting risk • Calculations based on scenarios • Small companies might be allowed to use factor based proxies

  14. Pillar I – Non-life underwriting risk • The size factor was abandoned in QIS3 – it’s future is to be decided • Should SCR for this risk cover expected losses/profits? • Catastrophe risk based on scenarios – how do we define catastrophes in the Icelandic market?

  15. Pillar I – Safety measures • CEIOPS thinks that eligible assets must both be listed and meet given principles • The current list will probably not be amended • Current concentration limits regarding assets covering technical provisions will be dealt with by Pillar II

  16. Pillar II – some issues recently discussed by CEIOPS • Treatment of “third country reinsurers” • IRCA and SRP – terms that companies must get used to • Internal Risk and Capital Assessment • Supervisory Review Process • FME’s guidance on stress test and risk management should prepare companies for this • Supervisory powers – probably insignificant change in Iceland • Limits on assets • Risks not covered by the standard formula • Prudent person plus principle

  17. Some issues between now and Solvency II • The structure of the market and companies is getting more complex • The FME needs to have at any time the right information regarding the situation of companies • Solvency position • Risk management • Group structure – information on affiliated companies • Investments and asset allocation • Reinsurance and financial mitigation • Increased complexity means increased supervision and reporting requirements

  18. securities market credit market insurance market pension- market For more information:www.fme.iswww.ceiops.org

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