Solvency: Models, Assessment and Regulation
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Summary
Until now there were no published analyses of the recent solvency work conducted in Europe, specifically the risk categories proposed by the International Actuarial Association (IAA). Answering the insurance industry's demand in the wake of the EU Solvency II project, Solvency: Models, Assessment and Regulation provides a concrete summary and review of solvency and inspires additional work in the field.
Following an introduction to the concept, the first section of the book provides a historical review of solvency, detailing solvency regulation and accounting within the EU. A review of the steps leading to Solvency II looks at accounting, supervision, the actuarial field, the first phase of Solvency II, international approaches to banking, and the solvency systems of 12 major nations.
The second section explores the current basis for solvency modeling, focusing on the valuation of assets and liabilities, dependency and various conservative approaches, as well as a baseline and benchmark approach. This section also provides examples of risk structure and the effects of diversification.
The final section discusses groups and internal modeling as it relates to EU Solvency II. It addresses insurance groups, financial conglomerates, reinsurance, the importance of internal modeling and stress testing, and the current state of the second phase of EU Solvency II.
Table of Contents
Introduction
General Outline of the Book
Organizations
A Selection of Solvency Readings
Solvency: What Is It?
In the 18th Century
What Does Solvency Mean?
PAST AND PRESENT: A HISTORICAL REVIEW AND DIFFERENT APPROACHES TO SOLVENCY
The European Union: Solvency 0 and Accounting
The Works of Campagne
Other Steps toward the First Directives
The Non-Life Directives (First, Second, and Third)
The Life Directives (First, Second, and Third)
Calculating the Solvency Margin for Non-Life Insurance
Business
The Insurance Accounting Directive (IAD)
The European Union: Solvency I
The Müller Report
Comments from Groupe Consultatif
The Solvency I Directives
Calculating the Solvency Margin for Non-Life Insurance
Business
Steps toward Solvency II:
Bank for International Settlements (BIS): The New Basel Capital
Accord
IASB: Toward a New Accounting System
IAIS: Insurance Principles and Guidelines
IAA: A Global Framework for Solvency Assessment
EU: Solvency II - Phase I
Steps toward Solvency II: 2
Australia
Canada
Denmark
Finland
The Netherlands
Singapore
Sweden
Switzerland
U.K.
U.S.
Some Other Systems
Summary of Different Systems
PRESENT: MODELING A STANDARD APPROACH
The Fundamental Ideas
A Model for the Solvency Assessment
Level of Capital Requirements
Risks and Diversification
Risk Measures
Valuations
Fair Value: Introduction
Purposes of Valuation
Best Estimate of Insurance Liability and Technical Provisions
Fair Value
Dependencies, Baseline, and Benchmark Models
Risk Measures
Assume Normality
Assume Nonnormality
Correlations between Risks: Different Levels of Conservatism
Parameters in a Factor-Based Model
One Example of Risk Categories and
Diversification
Insurance Risk
Market Risk
Credit Risk
Operational Risk
Liquidity Risk
Dependency
A Proposal for a Standard Approach: From Formula
to Spreadsheet
The Insurance Risk, CIR
Market Risk, CMR
Credit Risk, CCR
Operational Risk, COR
The Total Factor-Based Model
A Spreadsheet Approach
Parameter Estimates
An Example
PART C PRESENT AND FUTURE: EU SOLVENCY II - PHASE 2: GROUPS AND INTERNAL MODELING IN BRIEF
The European Union: Reinsurance, Insurance
Groups, and Financial Conglomerates
Reinsurance
Insurance Groups and Financial Conglomerates
The European Union: Solvency II - Phase II
Recommendations for the First Pillar
Recommendations for the Second Pillar
Recommendations for the Third Pillar
General Considerations
The First Wave of Requests (Pillar II)
The Second Wave of Requests Will Include the Following Issues
(Pillar I)
The Third Wave of Requests Will Include the Following Issues
(Pillar III)
A Brief Summary
Further Steps
Internal Models and Risk Management
Forecasting the Future and Risk Management
APPENDICES
Appendix A
A Proposal for a Standard Approach: One Step
toward Application
Insurance Risk
Market Risk
Credit Risk
Operational Risk
Appendix B
Insurance Classes
Non-Life Classes
Life Classes
Appendix C
From the Non-Life Directives
Solvency 0
Solvency I
Appendix D
From the Life Directives
Solvency 0
Solvency I
Appendix E
IAIS: Insurance Principles, Standards, and Guidelines
Principles
Standards
Guidances
Appendix F
From the Proposed Reinsurance Directive
Chapter 3: Rules Relating to the Solvency Margin and to the Guarantee
Fund
Appendix G
Annex I and Annex II in the Insurance Group
Directive
Annex I : Calculation of the Adjusted Solvency of Insurance
Undertakings
Annex II: Supplementary Supervision for Insurance Undertakings That
Are Subsidiaries of an Insurance Holding Company, a Reinsurance Undertaking or a Non-Member-Country Insurance Undertaking
Appendix H
From the Financial Conglomerates Directive
Amendments to the Non-Life Directive Made (EEC, 1973)
Amendments to the Life Directive (EEC, 1979)
Amendments to the Insurance Group Directive (COM, 1998)
Annex I: Capital Adequacy
Appendix I
Prudent Person Rule
Article 18: Investment Rules
Editorial Reviews
"… a timely and thorough historical analysis of the recent European work on solvency and financial strength and related accounting issues … The book provides readers with a veritable ‘Who’s Who’ of the numerous organizations intimately involved in the EU solvency debate … The author unquestionably succeeds, incorporating several detailed quantitative examples through a well-written and organized text. … Overall, the book offers a thorough and thoughtful discussion of the current state of evolution regarding solvency regulation, theory, and research in the EU. Policymakers, insurance academics, researchers, students, and other interested parties around the world may find this book highly relevant in understanding solvency models, formulation, assessment, and the debate over alternative strategies for reform. The book offers an objective overview of the issues that is understandable to both technical and nontechnical readers as well as important insights into identifying the key players, theory, and application across diverse and potentially unfamiliar systems."
—The Journal of Risk and Insurance, December 2009
"…the first available reference to offer a comprehensive account of the recent solvency work conducted in Europe. It provides a nice and very useful summary of the recent developments in the important area of asset and liability management that have been carried out in recent years, answering the insurance industry’s demand in the wake of the EU’s Solvency II project. … This book is well written, well organized and a very rich source of useful information for decision makers in the insurance industry, practitioners of the actuarial profession and financial asset managers. Researchers in both the fields of actuarial science and financial economics may find it informative and inspiring to further research in the field of asset and liability modeling."
—Scandinavian Actuarial Journal
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