Proposal for correction of the SCR calculation bias in Solvency II

In the context of Solvency II the Solvency Capital Requirement (SCR) is a well known financial demand which will have to be fulfilled by all European insurance companies to assure a theoretical ruin probability of 0.005 or less.     

Solvency II: stability problems with the SCR aggregation formula

One of the central issues in the Solvency II process will be an appropriate calculation of the Solvency Capital Requirement (SCR). This is the economic capital that an insurance company must hold in order to guarantee a one-year ruin probability of at most 0.5%. In the so-called standard formula, the overall SCR is calculated from individual SCRs in a particular way that imitates the calculation of the standard deviation for a sum of normally distributed risks (SCR aggregation formula). However, in order to cope with skewness in the individual risk distributions, this formula must be calibrated accordingly in order to maintain the prescribed level of confidence. In this paper, we want to show that the methods proposed and discussed thus far still show stability problems within the general setup.     

Solvency II: Das Governance-System in der Versicherungsgruppe

The Solvency II Directive creates a complex set of prudential rules to improve the protection of policyholders and to contribute to the stability of the financial market. One of the key elements is a system of governance, which is not only to be established in each undertaking concerned, but also at group level. This article shows that in a factual group, the parent company’s sphere of influence is very limited, rendering it impossible to implement an effective group-wide governance system. Thus, the achievement of the objectives is at stake. The author discusses various approaches to solving this problem and proposes an amendment to the law. Furthermore, the impact of the paradigm shift from a rules-based to a principles-oriented regulatory regime is analyzed.     

Modeling Period Effects in Multi-Population Mortality Models: Applications to Solvency II

Recently Cairns et al. introduced a general framework for modeling the dynamics of mortality rates of two related populations simultaneously. Their method ensures that the resulting forecasts do not diverge over the long run by modeling the difference in the stochastic factors between the two populations with a mean-reverting autoregressive process. In this article, we investigate how the modeling of the stochastic factors may be improved by using a vector error correction model. This extension is highly intuitive, allowing us to visualize the cross-correlations and the long-term equilibrium relation between the two populations. Another key benefit is that this extension does not require the user to assume which one of the two populations is dominant. This benefit is important because, as we demonstrate, it is not always easy to identify the dominant population, even if one population is much larger than the other. We illustrate our proposed extension with data from a pair of populations and apply it to the calculation of Solvency II risk capital.     

Aktuelle Entwicklungen in der Beaufsichtigung und Rechnungslegung von Versicherungsunternehmen: IFRS und Solvency II

Accounting and supervision are closely related, especially via the determination of regulatory capital. As a precondition for the harmonisation of solvency rules within Europe, as discussed in the context of Solvency II, there is a need for harmonised accounting rules regarding the recognition and measurement of assets and liabilities. The International Financial Reporting Standards resp. International Accounting Standards (IFRS resp. IAS) are used as a starting point. Insurance contracts are accounted for under IFRS 4, published in March 2004, which is only established as an interim standard allowing insurance companies to continue their existing accounting policy without major changes in their accounting systems. The IASB has just begun working on a final standard (Phase II). The IASB’s work on the final standard should be taken into account for the determination of regulatory capital as well. The third pillar of Solvency II is an additional connection between international accounting standards and the Solvency II project: extensive disclosure requirements companies shall provide disciplinary transparency with regard to their risk management systems and risk profiles.     

The dynamics of premium reserves of life annuities under the regime of Solvency II

The article considers the solvency requirements for a whole portfolio of annuities under the regime of Solvency II. More precisely, the following question is investigated: Which demand of interest on the initial capital – the Solvency II premium reserves – is needed in order to fit the balance for Solvency II capital requirements in the next year? It turns out, that even for a model portfolio of simple annuities with say guaranteed interest rate of 1,25% the demand of interest in one year is greater than 3%. So even if a life insurance company fulfill the capital requirements of Solvency II in 2016 the mentioned effect causes eventually problems in future times.     

A Tale of Two Runs: Depositor Responses to Bank Solvency Risk

We examine heterogeneity in depositor responses to solvency risk using depositor‐level data for a bank that faced two different runs. We find that depositors with loans and bank staff are less likely to run than others during a low‐solvency‐risk shock, but are more likely to run during a high‐solvency‐risk shock. Uninsured depositors are also sensitive to bank solvency. In contrast, depositors with older accounts run less, and those with frequent past transactions run more, irrespective of the underlying risk. Our results show that the fragility of a bank depends on the composition of its deposit base.     

Approximate value-at-risk calculation for heterogeneous loan portfolios: Possible enhancements of the Basel II methodology

This paper presents three possible methods by which the credit value at risk estimates coming from the Basel II IRB approach can be significantly improved upon. The feasibility of the suggested approaches is substantiated by applying it to an exemplary model portfolio.     

完善金融业机构信息管理的建议

为保障金融体系稳健运行,防范系统性金融风险,人民银行自2009年开始进行了一系列规范和加强金融业机构信息管理工作,开发并建立了“金融业机构信息化管理系统”,为推进我国金融标准化建设、实现金融体系内信息共享奠定了基础。系统运行两年后,相关工作有待进一步完善。     

Evaluating the Technical Provisions for Traditional Brazilian Annuity Plans: Continuous-Time Stochastic Approach Based on Solvency Principles

This article presents an approach for evaluating the liabilities of traditional Brazilian annuity plans, using a continuous-time stochastic approach based on modern solvency principles. The technical provisions are obtained by means of conditional expectation, under a real-world measure and considering the peculiar characteristics of each plan and the financial guarantees and profit participations (bonus and dividend plans) embedded in the annuity plans. We assume that policyholder behavior is not optimal, but we also illustrate a calculation of provision assuming optimal policyholder behavior to show the differences between both assumptions. In this article all explicit provisions formulas are derived, and several relevant conclusions about the values of these provisions are discussed.     

Cross-Border Insolvencies in the 21st Century: A Proposal for International Cooperation

Faced with a maze of national insolvency laws, cross-border insolvencies currently lack the fairness to both debtor and creditor that can be found in domestic proceedings. Yet the problem of international insolvencies cannot be solved by independent action in individual nations, nor without a fundamental commitment to the principle of universality. This article discusses one proposed solution to the problem of how best to encourage the central administration of cross-border insolvencies. namely the Model International Insolvency Cooperation Act (“MIICA”). The author reviews MIICA's genesis, principles, provisions and prospects for implementation. Confrontées à une multitude de lois nationales sur l'insolvabilité, les faillites ayant lieu au-delà de nos frontières ne sont pas aussi équitables vis-àvis des débiteurs et des créditeurs que celles qui surviennent à l'intérieur du pays. Cependant, le problème de faillites internationales ne peut pas être résolu de façon indépendante par différents pays ou sans adhérer au principe de l'universalité. Cet article examine une des solutions proposées afin d'encourager le plus possible l'administration centrale des faillites qui se produisent à l‘étranger, notamment la “Model International Insolvency Cooperation Act” (“Loi Modèle sur la cooperation quant à l'insolvabilité internationale”). L'auteure passe en revue les origines, les principes, les disopositions et les perspectives d'application de la Loi.     

Proposal: a position for the insurance industry on genetic testing

Proposed legislation to limit the use of genetic test results in insurance underwriting has appeared with increasing frequency at the state and federal level. The proponents seek to protect consumers from unfair discrimination by insurers. Can we not develop a proactive approach, acknowledging that we do not need to do prospective testing while we assert that we must retain the current status of equivalency of information between the underwriter and the applicant?     

我国保险公司偿付能力报告改进的探讨

保险公司偿付能力报告是保险监管部门基于监管的需要要求保险公司定期报送的报告,保险监管部门希望根据这套报告来判断保险公司现在偿付能力是否充足,并预测保险公司未来偿付能力的变化。我国的偿付能力报告制度正在逐渐建立,笔者认为我国现行的偿付能力报告的内容存在一些问题,需要改进。本文从分析偿付能力报告目标出发,对现有的偿付能力报告提出一些改进建议,包括:建立预警指标体系形成多指标评价标准;增加现金流量信息;改善风险管理制度披露的内容;完善动态偿付能力测试的规定。     

我国第二代偿付能力监管制度体系建设中的几个关键问题

通过识别和界定我国第二代偿付能力监管制度体系的建设目标,结合前期相关研究积累,本文对比分析了中国保监会关于该制度体系建设《规划》中、以及制度体系建设领导小组《工作简报第1～3号》中所披露的初步设计方案,包括分析了该制度体系建设的基本原则、整体框架和制定监管资本要求的计算标准等问题,认为目前的思路和初步设计没有达到建设目标所要求的高度,并针对这些问题提出九条建议。     

Sticking to your plan: The role of present bias for credit card paydown

We use data from an online financial service to show that many consumers fail to stick to their self-set debt paydown plans. This behavior is best explained by present bias. Our empirical approach is informed by a parsimonious model showing that the sensitivity of spending to paycheck receipt reflects a present-biased agents short-run impatience, and that this sensitivity is reduced by available resources only for agents who are aware (sophisticated) of their future impatience. Classifying users accordingly, we find that (i) sophisticated users debt paydown decreases with short-run impatience, and that (ii) planned paydown is most predictive of actual paydown for sophisticated users.