QIS4 on Solvency II. Country Report. for BELGIUM

Transcription

1 QIS4 on Solvency II Country Report for <Country> BELGIUM </Country> 0. INTRODUCTION The QIS4 exercise, as compared to QIS3, was in many respects an exercise in fine-tuning. The architecture that was tested under QIS4 involved only minor adjustments to the one tested under QIS3. A number of issues were changed, but not substantially: as regards the treatment of future profit sharing, an alternative was tested, and there were also some modifications regarding the calibration of the non-life underwriting risk module as well as a different approach for the MCR calculation. For some issues, QIS4 offers an initial answer to hitherto unresolved questions. Group aspects and the system of group support, the use of internal models and the option to use simplifications and proxies are thus addressed. The results of the QIS4 exercise are broadly in line with the outcome of QIS3. Needless to say, differences will appear when figures are compared, because of the changes from QIS3 to QIS4 but also because of the difference in sample size between the two exercises. 27 undertakings participated in the QIS4 exercise compared to 15 in QIS3. In terms of market coverage this is 88% in life (compared to 68%) and 65% in property and casualty (compared to 55% under QIS3).

2 1. OVERALL FINANCIAL IMPACT Coverage of the capital requirement Overall there is no problem regarding coverage of the requirements for eligible capital, with an overall ratio of 226.4% under the standard formula. Life undertakings and property and casualty undertakings are slightly above 160% and composites show a weighted ratio of 280%. The size of the undertaking does not seem to be significant on this particular point. None of the participating undertakings will have to raise its capital to meet the MCR. Two undertakings need to raise their capital to meet the SCR. Six undertakings have seen their surplus decrease and in the case of 18 undertakings there has been considerable improvement in the solvency situation. As to the results that internal models have generated, the sample is too small for meaningful conclusions. Capital requirements As to the capital requirements, without adjustments the capital requirement in QIS4 would equal 198% of the current capital requirement. With valuation adjustments included, however, the ratio falls to a weighted average of 66.3%. The main driver for this change is the adjustment of the liabilities. The impact of these adjustments is greatest for medium-sized firms. The capital surplus increases substantially, and is more than twice that of the surplus under Solvency I. This is particularly true for life undertakings and composites. For large and medium-sized undertakings, the Solvency II ratio is higher than the current one, whereas for small undertakings the opposite is true and the difference there is very noticeable. A further breakdown of the undertakings according to their specialization yields samples that are too small to allow for drawing meaningful conclusions. The overall solvency ratio comes out slightly higher than the Solvency I ratio (226% compared to 216% currently). This is also the case for life and composite insurers. For property and casualty undertakings, the surplus ratio is lower. Balance sheet changes The main change is the decrease under QIS4 in the insurance liabilities and the corresponding increase in equity. As insurance liabilities go down, equity goes up. The decrease in insurance liabilities is around 10%. The extra 10% goes to

3 equity that doubles. On the asset side there are no material changes. One noticeable change is the change in "lands and buildings" due to valuation at market prices. Insurance liabilities Overall, QIS4 insurance liabilities represent 88% of the current balance sheet liabilities. This is also the percentage for composites, while for life insurers the ratio is slightly higher (93%) and for property and casualty insurers substantially lower (76%). The size of the firm does not make a material difference. Components of SCR General comments The vast majority of the undertakings encountered little or no difficulty with the QIS4 methodology. On average, BSCR equals 114.6% of SCR, operational risk accounts only for 5.8%, with an adjustment for deferred taxes and future discretionary bonuses (FDB) of 20.4%. There are obviously noticeable differences between life (and composites) and non-life undertakings caused by the impact of the FDB. Market risk accounts for 83.4% of the BSCR, life underwriting risk for 13.6%, while non-life underwriting risk represents 18.6%. The nbscr/bscr ratio equals 84.7%. For life insurers the market risk is even more important, and so is the impact of FDB, with a nbscr/bscr ratio of 74.8%. For property and casualty insurers, non-life underwriting risk equals market risk in importance. Adjustment for the loss-absorbing capacity of technical provisions and deferred taxes The suitability and practicability of the adjustment for future profit sharing was not criticized, and thus allows us to conclude that it is appropriate. The effect of future profit sharing on capital charges is clear, with a substantial reduction for market risk. Undertakings do not fully use the loss-absorbing capacity of future profit sharing, the lower boundary SCR being still well beneath the BSCR after profit sharing. Market risk Market risk is the most important overall contributor to the capital requirement, with non-life and life underwriting risk following a distant second. This is most definitely the case in life insurance. In property and casualty insurance, market

4 risk is still the major contributor but followed very closely by non-life underwriting risk. Within market risk, the major risk drivers are equity (nearly half of the market risk requirement) and interest rate risk; there are no fundamental differences based on the specialization of the undertakings. Many participating undertakings commented that the outcome of the equity module is too severe. A number of undertakings supported the dampener approach, while others disapproved of it. Those who were in favour of this approach argued that it is more in line with the characteristics of insurers commitments. Whether or not the option used for participations (for participations, the ratio of option 1 to option 2 is as high as 98.6% for equity risk, and 99.2% for market risk as a whole, leading to the conclusion that both options are equivalent for the participating Belgian undertakings), the capital requirement for equity is brought down by around 7% using the dampener and the capital requirement for market risk by a little under 5%, the effects being slightly more pronounced for life. Life underwriting risk Life underwriting risk accounts for a little over 10% of the total capital requirement. Within the life capital requirement, lapse and expense risk explain the larger part of the requirement, a conclusion generally valid irrespective of the size of the undertakings. Non-life underwriting risk Non-life underwriting risk represents 15% of the overall capital requirement. Within the non-life risk module, premium and reserve risk count for twice the contribution of catastrophe risk in the total requirement. Small differences occur depending on the size of the undertaking. The influence of geographical diversification is negligible, as most undertakings only have business locally. Therefore its incidence on SCR is not material either. Additional national guidance was given to ensure a uniform calculation of the catastrophe risk scenario. In principle, there should be no differences between business lines. Health underwriting risk

5 Health underwriting risk contributes only somewhat more than 5% to the total capital requirement. For the Belgian market, the major contribution comes from workers compensation, closely followed by short-term health, with long-term health contributing only marginally. Counterparty default risk The calculation of the counterparty default risk is considered to be too lengthy and the charge for unrated counterparties is seen as too high. Use of own undertaking data All participating undertakings are able to give own estimates for their premium and reserve risk. The length of the time series used does not pose a problem for the Belgian market, as this information has been part of prudential reporting for a sufficiently long time now. As to entity-specific parameters, very few undertakings made use of these, and therefore it is difficult to come up with a meaningful analysis. Possible reasons for this are that the undertaking-specific parameters are not materially different from the ones given in the QIS4 specification, which in turn may be explained by the fact that the calculation was done on the basis of accounting provisions rather than best estimate provisions. The use of entity-specific parameters should ease the concerns of some of the participating undertakings regarding the calibration in non-life insurance. Operational risk Most undertakings replied that the risk capital charge is appropriately designed and calibrated. This viewpoint needs to be somewhat nuanced, since many undertakings have voiced some doubts about its appropriateness, arguing that it is too early to form an opinion on this. The bulk of the undertakings confirm that their operational risk management system captures the operational risk events and near misses, quantifies these and keeps a record thereof. The events and near misses are categorized by most of the undertakings. About half of the responding undertakings have quantitative records of the risk events. Record-keeping is relatively recent, with very few undertakings having kept records for more than 5 years. Some undertakings use ORIC, some others use the Basel II categorization.

6 Internal models For internal models the responses received do not allow us to highlight any particular tendency. Participants' internal models generate capital requirements that are lower, close to or higher than the results produced by the standard formula. Own funds (standard formula and internal models) Own funds are classified as Tier 1 for 98.5% of the total, the remainder being classified as Tier 2. There are some small differences between life, property and casualty, and composite insurance undertakings, but these do not seem to be material. Small and medium-sized undertakings classify all of their capital as Tier 1. The figures on own funds seem to indicate that the proposed tier system is workable and suited to the participating undertakings. The tier structure and the limitations thereon do not seem to give rise to problems. The eligible elements under Solvency II equal 214% of the eligible Solvency I capital. Nearly half of the Tier 1 elements are value adjustments, a quarter are common equity capital. The composition of eligible capital elements varies according to the type of undertaking. Equity capital is, aside from the value adjustments, the main component for composites, whereas this element is clearly less important for life and for property and casualty undertakings. There are also noticeable differences depending on the size of the undertaking, but here the particularities of the reporting undertakings considerably distort the comparison. Hybrid capital instruments represent 4% of total own funds under QIS4. Dated issued capital instruments constitute 70% of total hybrid capital instruments, undated capital instruments 30%. Dated instruments are mainly Tier 1 (65%), undated instruments are entirely Tier 1. As to the appropriateness and practicability of the specification that ring-fenced structures can serve as own funds only up to the proportional contribution of the ring-fenced fund to the company s SCR, only one undertaking commented and finds that the limitation should not be restricted to the proportional contribution of the fund to the SCR. Own funds held in ring-fenced structures should be allowed to serve as own funds up to the SCR of the structure. Finally, with regard to the group support mechanism, no amount of group support as part of own funds has been taken into account.

7 2. ASSETS AND OTHER LIABILITIES (other than technical provisions) The proposed design, practicability and quantitative impact of proposed methods for the valuation of assets and liabilities appear to be generally accepted, with very few comments received. The figures used for QIS4 purposes are obtained either by using the QIS4 methodology or by deriving the figures from vendor models or internal models. Assets are valued marked-to-market, with the exception of reinsurance assets, which a number of participants mark to model. Liabilities are either valued marked-to-market or marked-to-model, with the exception of insurance liabilities, which are mostly valued marked-to-model. 3. TECHNICAL PROVISIONS Move from Solvency I to Solvency II For life insurance, the main source of difference between QIS4 and local GAAP figures with respect to technical provisions is the discount rate used. For non-life, the main differences originate from the best estimate methodology as compared to the local GAAP prudent reservations. Methodology Regarding the methodologies adopted for the calculation of technical provisions, few comments were received. For non-life, chain-ladder methods were used, while no specifics were given for life, and this was also true with regard to the reasons for using simplified approaches. As to the design and practicability of the proposed methods for calculating the technical provisions, no major difficulties were reported. The valuation of options and guarantees did not trigger remarks, and for the calculation of the risk margin, the one comment received was that more guidance would be helpful. Regarding the risk margin, the cost-of-capital approach is generally accepted. Undertakings generally advocate recognition of diversification between lines of business. Regarding the quantitative outcome of the exercise, QIS4 life net technical provisions equal 95.9% of Solvency I net provisions while for non-life this ratio is 80.3%.

8 In life the risk margin is on average 1.2% of the best estimate provisions. The risk margin in non-life insurance represents 6.7% of the best estimate provision. Noticeable differences occur here per line of business. Definition of future premiums Some undertakings encountered difficulties in understanding the specifications on this point and would appreciate further details in the future on what is expected of the undertakings in this field. Interest rate Most undertakings used the curves prescribed in the QIS4 specification. Some undertakings used the curves of their internal model. Life Insurance Provisions The definition of future discretionary bonuses has not given problems. Most companies reported not to have modelled management actions or to have done this to a very limited extent. The undertakings must have used hypotheses different from the lower boundary to evaluate the impact of future profit sharing as the ratio BSCR lower boundary to BSCR is lower than the ratio BSCR including the risk absorbing effect of future profit sharing to BSCR. Non-Life Insurance Provisions Regarding the methodologies used to project the future cash-out flows, most undertakings reported the use of run-off triangles produced by the chain-ladder method for the modelling of future cash outflows. The run-off triangles used included both paid claims triangles and incurred claims triangles. Details on the actuarial method used were not given, but the assumption is that traditional actuarial methods were used. The case-by-case approach was rarely used. Undertakings that did use it specified the circumstances in which this was done, and indicated that the current valuation was used as the best estimate. The homogenous risk grouping for non-life business was done using the QIS4 segmentation.

9 4. MCR The new design of the linear calculation and the application of the corridor did not cause difficulties. The preferred approach is the compact approach, as undertakings continue to see difficulties with the other approaches as regards proper interplay with SCR. On average, the combined MCR lies at around 35% of the SCR. The application of the corridor does not influence the outcome. For life insurers the outcome is on average well below the former figure. Overall, a number of participating undertakings have an MCR that is below the lower boundary of the corridor, with an equal number having an MCR above the upper boundary of the corridor. This occurs across all types of undertakings. As to the size of the undertakings, there are no occurrences among large undertakings other than for the combined MCR ratio with MCR derived through an internal model. Based on the dispersion of results and looking at minimum and maximum values for the MCR ratios, the conclusion could be drawn that the proposed design and calibration is coming close to what it should be. A thorough investigation of the outcome of the scarce outliers remains necessary. 5. GROUPS To date, group results were submitted by one large cross-border insurance group (11 entities consolidated) and by one small specialized domestic insurance group (3 entities consolidated). The two groups represent about 11% of premium income for the Belgian market. Given the very limited number of group results, any conclusions are necessarily very preliminary. Diversification benefits are in the range of 7-16% of the sum of solo SCRs. At group level, own funds are largely sufficient to cover both the MCR and SCR. It should be noted that no account was take of the elimination of intra-group transactions or of the use of group support arrangements.

10 6. OTHER ISSUES The country report is supposed to give a good general overview of how Solvency II will change the financial situation of the insurance sector in the country. Essential in this regard is the quality and representativeness of the data used for the exercise. Because of the need to produce a country report within the strict deadline given, the attention that could be given to the quality of the data is perhaps less than optimal, and the necessary consultations with the participating undertakings on their reporting have in many cases been postponed until after the production of the national report. It follows that when supervisors find any inaccuracies in the data reported by the undertakings concerned and lack the time to correct these in a timely manner, the only logical step is to remove these data, thereby giving rise to a further problem as regards the categorisation of the data and the effect thereof. The reporting undertakings are split up into 5 types of undertakings and 3 size classes. For jurisdictions such as Belgium, with limited participation in terms of number of undertakings, such a subdivision immediately raises problems, since the representativeness of a number of categories diminishes and confidentiality can no longer be guaranteed. For these reasons, we see value in reconsidering the concept of the QIS exercises. One possible alternative is to shift the national focus towards the quality of the reporting and push back the drafting of national reports to a later date. For the European report, the figures are essential. The aggregated figures at European level should serve as the basis for the European report. A European report composed of the national reports could follow. 7. Closing remark The financial crisis highlights the need for further reflection on a number of issues. Is the level of capital that is envisaged sufficient, is the approach that is proposed for a number of risks the appropriate one, is the calibration correct? These are just a few of the questions that come to mind. These questions should be tabled as further progress is being made in the drafting of the implementing measures. This would enhance the probability of having, in the end, a solid solvency framework resilient enough to withstand major shocks..

11 GLOSSARY SCR : The Solvency Capital Requirement corresponds to the economic capital a (re)insurance undertaking needs to hold in order to limit the probability of ruin to 0.5%, i.e. ruin would occur once every 200 years MCR : The Minimum Capital Requirementrepresents a level of capital below which policyholders' interests would be seriously endangered if the undertaking were allowed to continue to operate. BSCR : BSCR is the Solvency Capital Requirement before any adjustments, combining capital charges for five major risk categories : market risk, counterparty default risk, life underwriting risk, non-life underwriting risk and health underwriting risk. nbscr : Net Basic Solvency Capital Requirement ( nbscr BSCR Adj ) nscr : Capital charges for the individual SCR risks including the risk absorbing effect of future profit sharing Adj FDB : Adjustment for the risk absorbing effect of future profit sharing FDB : Risk absorption ability of future profit sharing Lower boundery SCR : An SCR under the assumption that undertakings have as far as possible passed on the impact of shocks to policyholders (reducing the yield) rather than having absorbed the loss themselves using own funds. ORIC (Operational Risk Insurance Consortium): ORIC provides an insurance industry database of quality operational loss-event information. FDB