[Framework] Solvency II - Part 2 - SCR & MCR

SCR & MCR

This post is a continuation from my previous article on Solvency II  discussing capital requirement,  differences in Solvency I and Solvency II and how different countries are handling capital requirements.

The following shows how Solvency II differs from Solvency I.

Solvency I established minimum capital requirements without taking account into market values. 

Besides introducing a minimum capital requirement (MCR) for better monitoring,

Solvency II recommends approaches to value assets –by historical or amortized cost and by market value; and introduces separation of liabilities into market consistent valuation of hedgeable liabilities and best estimates for non-hedgeable liabilities.

MAS, BNM CAPITAL REQUIREMENT FOR LIFE INSURERS

A look at various authorities's capital requirement key points.

Malaysia (BNM)

• Issued the Guidelines on Internal Capital Adequacy Assessment Process for Insurers [RH/GL/003-29], Risk Based Capital Framework for Insurers [RH/GL 003-24], and Stress Testing for Insurers [RH/GL 003-23]

• Prescribed stress scenarios to calculate capital requirements for risks as follow:-
• Market Risks
• Liquidity Risks
• Credit Risks
• Insurance Risks
• Operational Risks
• Group Risks
• Note:- No guideline to calibrate/harmonize risks defined 

• Requires management to submit CAR (Capital Adequacy Ratios) targets to BNM derived from available capital and capital required [aggregate of capital charges for credit, market, insurance and operational risks faced by an insurer or surrender value capital charges.
• Life & general insurance risk capital charges (LCC) are  aimed to address the risk of under-estimation of the insurance liabilities and adverse claims experience, over and above the amount of reserves already provided.  

• Insurer Management Actions taken - Financial reports to be prepared and signed by Appointed Actuary annually on company’s financial conditions under number of scenarios.  

Singapore (MAS)

• Issued circular on Stress Testing on Financial Condition of Direct Insurer [ID 03/14]

• Require insurers to conduct stress testing on base scenarios and short-term scenarios.

• Prescribe risk factors as follow:-
• The potential failure of reinsurers to pay their share of the loss event either due to default or dispute over liability under the reinsurance arrangements;
• Investment-related losses such as crash in the equity market, changes in credit spreads etc;
• adverse deviation of claims experience
• the prevailing environment, including economic, medical, demographic, social and political situation at the relevant time;
• company’s experience in the next projection year arising from changes in
• i. reinsurance ceded,
• ii. reserving basis,
• iii. distribution to shareholders, and
• iv. taxation; and

• any other factors that have significant relevance to the insurer’s business.

• Insurer Management Actions taken - Stress Testing Report signed off by Appointed Actuary to be filed with regulators on an annual basis.

VIEWS

RBC Framework and rule-based regulations are embedded in MY & SG and challenges in adopting Solvency II will be in the ERM component and the ORSA framework which will be covered in subsequent posts.

Insurers are still required to adopt ORSA regardless of whether a standard formula or internal models were used previously and will cover risks not covered by SCR.