Capital requirements for health insurance under Solvency II

Transcription

1 Capital requirements for health insurance under Solvency II Medical Expense Insurance: Actuarial Aspects and Solvency Afternoon Seminar at the AG Insurance Chair in Health Insurance, KU Leuven 25 April 2013

2 Solvency II Group supervision & cross-sectoral convergence Groups are recognised as an economic entity => supervision on a consolidated basis (diversification benefits, group risks) Pillar 1: quantitative requirements 1. Harmonised calculation of technical provisions 2. "Prudent person" approach to investments instead of current quantitative restrictions 3. Two capital requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) Pillar 2: qualitative requirements and supervision 1. Enhanced governance, internal control, risk management and own risk and solvency assessment (ORSA) 2. Strengthened supervisory review, harmonised supervisory standards and practices Pillar 3: prudential reporting and public disclosure 1. Common supervisory reporting 2. Public disclosure of the financial condition and solvency report (market discipline through transparency)

3 SCR standard formula Modules of the SCR standard formula Non-life underwriting risk Life underwriting risk Health underwriting risk Market risk Counterparty default risk "The health underwriting risk module shall reflect the risk arising from the underwriting of health insurance obligations, whether it is pursued on a similar basis to that of life insurance or not, following both from the perils covered and the process used in the conduct of business."

4 Definition and segmentation of health insurance Heterogeneity of the European health insurance market 27 different social systems and insurance traditions substitutive, supplementary or complementary large variety of medical services covered long-term or short term covering expenses or paying lump sums special features like premiums adjustments, risk equalisation Health Task Force in 2010 Members: supervisors, industry representatives, actuaries Worked on definition segmentation health risk equalisation systems

5 Definition and segmentation of health insurance Health insurance covers one or both of the following: The provision of medical treatment or care including preventive or curative medical treatment or care due to illness, accident, disability or infirmity, or financial compensation for such treatment or care Financial compensation for illness, accident, disability or infirmity Medical expense insurance (ME) Income protection insurance (IP) Workers' compensation insurance (WC) = health insurance relating to accidents at work, industrial injury and occupational disease.

6 Definition and segmentation of health insurance Non-life insurance obligations (NSLT Health) ME insurance * IP insurance * WC insurance ME prop. reinsurance * IP prop. reinsurance * WC prop. reinsurance Health nprop. reinsurance * excluding WC Life insurance obligations (SLT Health) Health insurance Annuities Health reinsurance

7 SCR standard formula

8 Health underwriting risk module Health NSLT Health SLT Health CAT Premium & Reserve Mortality Lapse Mass accident Lapse Longevity Expense Accident concentration Morbidity/ Disability Revision Pandemic

9 Premium and reserve risk SCR pr = 3 σ V multiplication by 3 corresponds to slightly skewed distribution of annual losses standard deviation of annual losses, normalised by volume measure volume measure V = V prem +V res

10 Calibration of standard deviations Non-life and NSLT health calibration controversial since QIS2 poor empirical justification For QIS5 larger calibration exercise of CEIOPS But data base and calibration methodology remain controversial 2010/2011 EIOPA Joint Working Group on Calibration Chaired by Peter ter Berg (Dutch National Bank) Involves supervisors, industry representatives and actuaries Mid-2011: new calibration proposal for non-life and NSLT health

11 Data basis Content of data sets: Earned premiums Claims triangles Ultimate loss estimates Expenses Gross/net of reinsurance; including/excluding CAT losses About 2700 data sets from insurers of 26 EEA member states

12 Insurers BE Insurers Countries Medical expenses Income protection Workers' compensation NP reinsurance 8-6

13 Data limitations and data cleaning Automatic filters for data anomalies manual correction or exclusion of data Length of data series: min 3 years, confirmed by sensitivity analysis Insurers' data excluding CAT only usable for property insurance for other LoB manual removal of isolated peaks Data with outlying residuals removed Mainly use of data gross of reinsurance because sample of net data significantly smaller

14 Estimation process Step 1: Estimation of standard deviation per insurer Step 2: Modelling of size-dependent standard deviation Step 3: Derive calibration from the model

15 Step 1: Estimation of standard derivation per insurer Premium risk: Standard estimator applied to time series of combined ratios Reserve risk: Standard estimator applied to time series of run-off ratios Mean squared error of prediction (MSEP) Merz/Wüthrich: "Modelling The Claims Developement Result For Solvency Purposes"

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17 Step 2: Modelling of size-dependent standard deviation Premium risk: Variance proportional to premiums or squared premiums or a mixture of both Lognormal distribution of annual loss Maximum likelihood estimation Reserve risk: Run-off ratios same model as for premium risk with best estimate as volume measure MSEP two approaches: Variance proportional to squared best estimate; least squares fitting Similar model as for premium risk with best estimate as volume measure

18 Step 3: Correction for sample bias Size bias of sample Larger insurers may be overrepresented in the sample Use of size distribution of QIS5 participants plus correction for missing small participants National market bias Some national markets may be better represented in the sample than others Average of country standard deviations, weighted with country market size

19 Example: Medical expense insurance premium risk

20 Step 3: Choice of relevant insurer size for calibration How many insurers should be below/above the relevant size? How many policyholders should belong to insurers below/above the relevant size? Median insurer size, but not more than 95% of policyholders should belong to insurers larger than the relevant size.

21 Results Medical expenses Income protection Workers' compensation NP reinsurance Premium risk Reserve risk QIS5 new QIS5 new 4% 5% 10% 5% 8.5% 9% 14% 14% 5.5% 8% 11% 11% 17% 17% 20% 20%

22 Impact assessment Change in SCR Medical expenses +5% Income protection ±0% Workers' compensation +15% NP reinsurance ±0% Premium and reserve risk +4% More details about the calibration on EIOPA's website: "Calibration of the Premium and Reserve Risk Factors in the Standard Formula of Solvency II"

23 Solvency Capital Requirement The SCR standard formula is not the last word! Recognition of health risk equalisation systems Undertaking-specific parameters Premium and reserve risk Revision risk Partial and full internal models Capital add-ons