Society of Actuaries of China Annual Meeting 2005 Solvency and financial risk management using reinsurance
Dr. Simon Sha
Munich Re Beijing
Steve Zhang, FSA, MAAA
Munich Re Hong Kong28-29 September 2005, Qingdao
Agenda
Solvency requirements and current developments
Worldwide 3
Reinsurance techniques for solvency and financial
risk management 11
Case studies 18
Company needs capital to prevent insolvency
Balance sheet
Liabilities
Capital/ Surplus
Assets
Capital/Surplus = Assets – liabilities
Company must balance the needs of all stakeholders.
Regulators and rating agencies will always like to see more capital
Better security for policyholders
High credit rating
Policyholders will generally like to see more capital
Better security
But more capital = higher price
Shareholders will generally like to see less capital
Better RoE
But less capital = higher risk
Solvency requirements and current developments worldwide
Capital and surplus: How much is enough?
Mean
Value
Probability
of outcome
Std. deviation
Value at risk (95th percentile)
Tail VaR95
An insurer’s true capital needs should be independent of the accounting system.
Capital need depends on the riskiness of the business
Capital available depends on how assets and liabilities are defined
Going-concern vs. wind-up
Regulatory capital vs. economic risk capital
Solvency requirements and current developments worldwide
Two mainstream minimum solvency standards
Solvency requirements and current developments worldwide
EU type
Simple two-factor approach
Based on liability side of balance sheet only
Can be viewed as a subset of the RBC
Example Asian markets: China, Hong Kong, India
US type
Risk-based capital
More sophisticated
Based on both sides of balance sheet
Example Asian markets: Japan, Singapore, Taiwan
Minimum solvency standards: EU type
The EU-type solvency rules provide no incentives for proper risk management.
Solvency requirements and current developments worldwide
EU-type standard
Solvency I requirements
4% of reserves for products with capital guarantees
1% of reserves for products without capital guarantees
0.3% of sum at risk
Reinsurance offers relief up to 15% for reserve-based solvency capital and up to 50% for sum-at-risk-based solvency capital.
The weakness of the EU-type standard
Overly simplified
Based on liability side of the balance sheet only
Not adjusted to the true risks of a life insurer
No difference between various types of assets
Ignores diversification effects
Minimum solvency standards: US type
Companies also need to perform scenario tests and cash-flow testing.
Solvency requirements and current developments worldwide
US-type standard
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