solvency ii

Reading List

Solvency II

2010-2012

Institute and Faculty of Actuaries

December 2012

List compiled by Scott McLachlan

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Contents ACTUARIAL MANAGEMENT ................................................................................................................ 1

AGENCY THEORY .................................................................................................................................. 1

ANNUITIES ............................................................................................................................................ 1

ASSET LIABILITY MATCHING .............................................................................................................. 1

BALANCE SHEETS................................................................................................................................. 2

BANKING ............................................................................................................................................... 2

BEHAVIOUR, CONSUMER ..................................................................................................................... 2

CAPITAL ADEQUACY ............................................................................................................................ 2

CAPITAL ALLOCATION ......................................................................................................................... 3

CAPITAL MANAGEMENT ..................................................................................................................... 4

COPULAS................................................................................................................................................ 4

CREDIT RATING .................................................................................................................................... 4

CREDIT RISK ......................................................................................................................................... 5

DYNAMIC SOLVENCY TESTING ........................................................................................................... 5

ECONOMIC PROJECTIONS .................................................................................................................... 5

ECONOMICS ........................................................................................................................................... 5

ENTERPRISE RISK MANAGEMENT ..................................................................................................... 5

EQUITIES ............................................................................................................................................... 6

EUROPE ................................................................................................................................................. 7

FINANCIAL CRISES ............................................................................................................................... 7

GENERAL INSURANCE ......................................................................................................................... 7

GERMANY .............................................................................................................................................. 8

GOVERNANCE ....................................................................................................................................... 8

HEALTH INSURANCE ........................................................................................................................... 8

INSURANCE ........................................................................................................................................... 8

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INSURANCE COMPANIES ..................................................................................................................... 8

INTEREST RATES .................................................................................................................................. 9

LIABILITIES ........................................................................................................................................... 9

LLOYDS .................................................................................................................................................. 9

LONGEVITY RISK .................................................................................................................................. 9

MARKET DISCIPLINE ......................................................................................................................... 10

MODELLING ........................................................................................................................................ 10

MULTIVARIATE ANALYSIS ................................................................................................................ 11

OPTION PRICING ................................................................................................................................ 11

PORTFOLIO MANAGEMENT .............................................................................................................. 12

PREMIUM RESERVES ......................................................................................................................... 12

REGULATION ...................................................................................................................................... 12

REINSURANCE .................................................................................................................................... 13

RESERVING ......................................................................................................................................... 13

REVIEWS ............................................................................................................................................. 13

RISK ...................................................................................................................................................... 13

RISK ASSESSMENT ............................................................................................................................. 14

RISK MANAGEMENT .......................................................................................................................... 14

RISK MEASUREMENT ......................................................................................................................... 16

SCENARIO GENERATION ................................................................................................................... 16

SHAREHOLDERS ................................................................................................................................. 16

SOLVENCY ........................................................................................................................................... 16

SOLVENCY II ........................................................................................................................................ 17

STOCHASTIC MODELS ........................................................................................................................ 22

SWITZERLAND .................................................................................................................................... 23

TAIL RISK MEASURES ........................................................................................................................ 23

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TAXATION ........................................................................................................................................... 23

VALUE-AT-RISK (VAR) ....................................................................................................................... 23

1

ACTUARIAL MANAGEMENT

Developments in the management of annuity business. Telford, P G; Browne, B A; Collinge, E J; Fulcher, P; Johnson, B E; Little, W; Lu, J L C; Nurse, J M; Smith, D W; Zhang, F (2011). 2011. [RKN: 72306] Shelved at: Online only Shelved at: JOU/INS BAJ (2011) 16(3) : 471-551.

The focus of the paper is non-profit lifetime annuities in the UK. Annuity insurers have been faced with, or have initiated, an unprecedented amount of change during the last decade, and rapid change is still continuing. We draw out implications for the actuarial management of the business, arising from the evolution of: longevity risk assessment and management, investment strategy and operations, financial reporting, and enterprise risk management. We discuss Solvency II in some technical depth, analysing the proposed rules for technical provisions and solvency capital requirement. Keywords: Annuities; Retirement Income; Longevity; Mortality Improvement; Reinsurance; Underwriting; Collateral; Investment; Asset-Liability Management; Financial Reporting; IFRS; Pillar I; Individual Capital Assessment; Enterprise Risk Management; Solvency II; Illiquidity Premium; Economic Capital http://www.actuaries.org.uk/research-and-resources/documents/developments-management-annuity-business

AGENCY THEORY

Is there market discipline in the European insurance industry? : An analysis of the German insurance market. Eling, Martin; Schmit, Joan T - 28 pages. [RKN: 70262] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 180-207.

Economists often argue in favour of market discipline as a means to distribute resources effectively and efficiently. These same arguments likely influence decision-makers as they incorporate market discipline as the third pillar of Solvency II, the European insurance regulatory scheme currently being implemented. Success for Solvency II, then, is dependent in part on the strength of influence found in market discipline. Our research indicates that the German insurance market demonstrates the existence of such discipline, although the actual effect appears smaller than previously found in the U.S. insurance market. Solvency II, therefore, seems to be following an appropriate path, although further research is needed to evaluate whether or not enhancements to market discipline within the European market are warranted.

ANNUITIES



ASSET LIABILITY MATCHING

Dimension reduction techniques and forecasting interest rates. Lazzari, Shaun; Wong, Celine; Mason, Peter (2012). - London: Staple Inn Actuarial Society, 2012. - [3], 70 pages. [RKN: 43540] Shelved at: Online only Shelved at: Online only

Techniques such as principal component analysis are widely used by actuaries, perhaps most frequently in the modelling of interest rate term structures. But are they being fully understood? This [paper] will: give an overview of the various methods available and their possible uses; highlight the relative importance of the many assumptions and choices to be made by the modeller; discuss how a business‟s assets and liabilities should be considered when constructing an interest rate model; place such issues in the context of a Solvency II internal model, touching on issues relating to curve fitting and tail behaviour. http://www.sias.org.uk/siaspapers/pastmeetings/view meeting?id=SIASMeetingJune2012

Dynamic management actions. Clark, Dominic; Kent, Jeremy; Morgan, Ed (2012). - London: Staple Inn Actuarial Society, 2012. - 31 pages. [RKN: 43537] Shelved at: Online only Shelved at: Online only

Slide presentation to Staple Inn Actuarial Society, 6 March 2012 Realistic modelling of dynamic management actions is critical to many areas of the financial management of a life insurance company today. In our overview of this topic we will: - explain what is meant by dynamic management actions (“DMA”) and what the main types of DMA are;

2

- introduce the areas in which DMA is important (e.g. Solvency II, MCEV, ALM etc); - describe how DMA can be linked to real expected management behaviour (including considerations around concepts such as the Use Test); - illustrate how improved modelling of DMA can, under some circumstances, materially influence calculated results; - show how understanding DMA and its interactions with dynamic policyholder behaviour can improve a company‟s Enterprise Risk Management; http://www.sias.org.uk/siaspapers/search/view paper?id=SIASPaperMar2012

BALANCE SHEETS

Everything you always wanted to know about the Solvency II balance sheet but were afraid to ask [copies of slides only]. Sheaf, Simon; Kelly, Stephen (2010). Institute and Faculty of Actuaries, 2010. [RKN: 73588]

http://www.actuaries.org.uk/sites/all/files/documents/pdf/workshop-a02-simon-sheaf-stephen-kelly.pdf

BANKING

A comparative assessment of Basel II/III and Solvency II. Gatzert, Nadine; Wesker, Hannah [RKN: 43637] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 539-570.

Available online via Athens In the course of creating a single European market for financial services and in the wake of two financial crises, regulatory frameworks in the financial services industry in the European Union have undergone significant change. One of the major reforms has been the transition from static rules-based systems towards principles-based regulation with the intent to better capture the risk situation of an undertaking. For insurance companies, the regulatory framework Solvency II is being finalised and is scheduled for implementation after 2013. At the same time, the regulatory regime for banking, Basel II, has been revised in response to the financial crisis; the new version is Basel III. The aim of this paper is to conduct a comprehensive and structured comparative assessment of Basel II/III and Solvency II in order to detect similarities and differences as well as the benefits and drawbacks of both regimes, which might be profitably addressed. The comparison is conducted against the background of the industries‟ characteristics and the objectives of regulation. http://www.openathens.net/

BEHAVIOUR, CONSUMER


Slide presentation to Staple Inn Actuarial Society, 6 March 2012 Realistic modelling of dynamic management actions is critical to many areas of the financial management of a life insurance company today. In our overview of this topic we will: - explain what is meant by dynamic management actions (“DMA”) and what the main types of DMA are; - introduce the areas in which DMA is important (e.g. Solvency II, MCEV, ALM etc); - describe how DMA can be linked to real expected management behaviour (including considerations around concepts such as the Use Test); - illustrate how improved modelling of DMA can, under some circumstances, materially influence calculated results; - show how understanding DMA and its interactions with dynamic policyholder behaviour can improve a company‟s Enterprise Risk Management; http://www.sias.org.uk/siaspapers/search/view paper?id=SIASPaperMar2012

CAPITAL ADEQUACY

The Basel III and beyond. Cannata, Francesco; Quagliariello, Mario (2011). Risk Books, 2011. - 510 pages. [RKN: 74705] Shelved at: 519.287

Around the world, central bankers, regulators and governments have responded to the financial crisis with new regulation and legislation. The cornerstone of this global initiative to contain risk is Basel III – sweeping new regulatory standards for banks on capital adequacy and liquidity. These new standards will define markets and their practices for decades to come. Already, they are reshaping institutions, business models and balance sheets. Understanding Basel III and the thinking behind it is essential for market participants and for those charged with implementing the standards. In Basel III and Beyond, the first book-length treatment of Basel III, editors Mario Quagliariello of the European Banking Authority and Francesco Cannata of the Bank of Italy have assembled contributors from regulators and central banks involved in preparing the standards including a foreword from Mario Draghi, President of the European Central Bank. Key chapters describe and analyse the new elements of Basel III, as well as detailing important revisions to the 2004 accord. Written by the regulators themselves, Basel III and Beyond is the essential guide to the new global banking standards.

3

The development of a simple and intuitive rating system under Solvency II. Van Laere, Elisabeth; Baesens, Bart - 11 pages. [RKN: 72519] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 500-510.

Regulatory authorities pay considerable attention to setting minimum capital levels for different kinds of financial institutions. Solvency II, the European Commission's planned reform of the regulation of insurance companies is well underway. One of its consequences will be a shift in focus to internally based models in determining the regulatory capital needed to cover unexpected losses. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, this paper suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. The paper provides an interesting modelling of non-financial European companies rated by S&P. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable. Keywords: Solvency II ; Insurance ; Credit scoring ; External ratings ; Internal ratings http://www.openathens.net

Economic scenario generators and Solvency II : A discussion paper. Varnell, E M (2009). 2009. [RKN: 71785] Shelved at: ifp 11/09 (Lon) Shelved at: JOU/INS BAJ (2011) 16(1) : 121-159.

The Solvency II directive mandates insurance firms to value their assets and liabilities using market consistent valuation. For many types of insurance business Economic Scenario Generators are the only practical way to determine the market consistent value of liabilities. The directive also allows insurance companies to use an internal model to calculate their solvency capital requirement. In particular, this includes use of ESG models. Regardless of whether an insurer chooses to use an internal model, Economic Scenario Generators will be the only practical way of valuing many life insurance contracts. Draft advice published by CEIOPS requires that insurance firms who intend to use an internal model to calculate their capital requirements under Solvency II need to comply with a number of tests regardless of whether the model (or data) is produced internally or is externally sourced. In particular the tests include a Use Test, mandating the use of the model for important decision making within the insurer. This means that Economic Scenario Generators will need to subject themselves to the governance processes and that senior managers and Boards will need to understand what Economic Scenario Generator (ESG) models do and what they don‟t do. In general, few senior managers are keen practitioners of stochastic calculus, the building blocks of ESG models. The paper therefore seeks to explain Economic Scenario Generator models from a non-technical perspective as far as possible and to give senior management some guidance of the main issues surrounding these models from an ERM/Solvency II perspective. Keywords: Solvency II; Economic scenario generator; Governance; Economic assumptions; Enterprise risk management (ERM); Market consistent valuation; Economic capital; Regulatory capital; http://www.actuaries.org.uk/research-and-resources/documents/economic-scenario-generators-and-solvency-ii

Solvency risk capital for the short and long term: probabilistic versus stability criterion. Hürlimann, Werner [RKN: 43459] Shelved at: online only Belgian Actuarial Bulletin (2010) 9 : 8-16.

A simple dynamic solvency capital model for the underwriting risk of an insurance business is used to test the long-term properties of value-at-risk. Calibration of the solvency capital level over a variable time horizon is done according to a probabilistic criterion (confidence level as survival probability) and a stability criterion (constant initial capital per unit of expected accumulated claims). Emphasis is put on the differences between the assumptions of independent and comonotone dependent one-year insurance claims. The insurance risk probability distributions are restricted to some useful candidates. In particular, the chosen statistical models enable full analytical closed-form formulas for the unknown time varying parametric functions specifying the insurance risk solvency capital model under the stability criterion. Some shortcomings of the probabilistic criterion and desirable properties of the stability criterion are mentioned. A Solvency II application is also discussed. http://www.belgianactuarialbulletin.be/browse.php?

CAPITAL ALLOCATION

Demystifying the risk margin: theory, practice and regulation. Brown, Anthony (2012). - London: Staple Inn Actuarial Society, 2012. - 39 pages. [RKN: 43538] Shelved at: Online only Shelved at: Online only

Paper and separate slide presentation to Staple Inn Actuarial Society, 14 May 2012. The risk margin is one of the most complicated features of the 'new' market-consistent actuarial world embodied by Solvency II, MCEV and others. Much high quality work has been performed on the subject of the risk margin in the last few years, this paper aims to complement that with a comprehensive, straightforward, jargon-free and, above all, practical overview to the topic. We will explore the theoretical justification for the risk margin concept focussing on the policy choices made in various regimes, and review the regulatory guidance around its calculation. We will then look in some depth at the practicalities of calculation of the risk margin addressing issues such as appropriate allowance for diversification, costs of capital, allocation of capital, simplifications, etc. Whilst this paper has a bias towards the place of the risk margin within Solvency II, we hope that much of what is contained is transferable to the similar concepts embedded in other regimes. The paper has been designed to be read as a whole, but it is intended that the sections can be dipped into by those performing the calculations, to provide stage-by-stage guidance to the practitioner on the ground. http://www.sias.org.uk/siaspapers/pastmeetings/view meeting?id=MeetingMay2012 http://www.sias.org.uk/data/papers/SIASPaperMay2012a/DownloadPDF http://www.sias.org.uk/view paper?id=SIASPaperMay2012b

4

CAPITAL MANAGEMENT

Solvency II: A change of view. Saini, Harjit; Haslip, Gareth Staple Inn Actuarial Society, [RKN: 73707] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) November : 33-35.

Harjit Saini and Gareth Haslip describe how capital management at Lloyd's is changing in response to the requirements of Solvency II http://www.theactuary.com/

COPULAS

How they can jump together: multivariate Lévy processes and option pricing. Deelstra, Griselda; Petkovic, Alexandre [RKN: 43461] Shelved at: online only Belgian Actuarial Bulletin (2010) 9 : 29-42.

The objectives of this paper are twofold. First it gives an overview of the different techniques that can be used to build multivariate Lévy processes. Second it provides new results on multivariate Lévy processes with stochastic volatility in particular the bivariate counter-monotonic Lévy copula is derived. http://www.belgianactuarialbulletin.be/browse.php?

Solvency II – Considering Risk Dependencies. Nguyen, Tristan; Molinari, Robert Danilo (2010). - Lahr: WHL Wissenschaftliche Hochschule Lahr, 2010. - 28 pages. [RKN: 72675]

In April 2009 the European Parliament adopted a directive “on the taking-up and pursuit of the business of Insurance and Reinsurance” (Solvency II). According to this Solvency II directive the Solvency Capital Requirement (SCR) corresponds to the economic capital needed to limit the probability of ruin to 0.5 %. This implies that (re-)insurance undertakings will have to identify their overall loss distributions. The standard approach of the mentioned Solvency II directive proposes the use of a correlation matrix for the aggregation of the single so-called risk modules respectively sub-modules. In our paper we will analyze the method of risk aggregation via the proposed application of correlations. We will find serious weaknesses, particularly concerning the recognition of extreme events, e. g. natural disasters, terrorist attacks etc. The reason for this is that correlations compress information about dependencies into a single ratio. Therefore important information concerning the tail of a distribution may possibly not be considered. In contrast, multivariate distribution functions provide full information with respect to dependencies between the relevant risks. However, aggregation of risks through “traditional” multivariate modeling causes technical difficulties. A possible solution for this dilemma can be seen in the application of copulas. We come to the conclusion that it would have been desirable to fix the concept of copulas in the new solvency directive. Even though the concept of copulas is not explicitly mentioned in the directive, there is still a possibility of applying it. (Re-)insurers will be able to design their internal models by using an aggregation method more complex but even more precisely (e. g. copulas) than the solely utilization of a correlation matrix. It is clear that modeling dependencies with copulas would incur significant costs for smaller companies that might outbalance the resulting more precise picture of the risk situation of the insurer. However, incentives for those companies who use copulas, e. g. reduced solvency capital requirements compared to those who do not use it, could push the deployment of copulas in risk modeling in general. http://www.akad.de/fileadmin/akad.de/assets/PDF/WHL Diskussionspapiere/WHL Diskussionspapier Nr 27.pdf

CREDIT RATING

Credit where it's due. Prowse, David; Hughes, Clara Staple Inn Actuarial Society, [RKN: 45266] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) June : 41.

The authors discuss the potential impact of Solvency II on insurer credit ratings http://www.theactuary.com/

The development of a simple and intuitive rating system under Solvency II. Van Laere, Elisabeth; Baesens, Bart - 11 pages. [RKN: 72519] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 500-510.

Regulatory authorities pay considerable attention to setting minimum capital levels for different kinds of financial institutions. Solvency II, the European Commission's planned reform of the regulation of insurance companies is well underway. One of its consequences will be a shift in focus to internally based models in determining the regulatory capital needed to cover unexpected losses. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, this paper suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. The paper provides an interesting modelling of non-financial European companies rated by S&P. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable. Keywords: Solvency II ; Insurance ; Credit scoring ; External ratings ; Internal ratings http://www.openathens.net

5

CREDIT RISK

Quantifying credit and market risk under Solvency II: standard approach versus internal model. Gatzert, Nadine; Martin, Michael [RKN: 43683] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 646-666.

Even though insurers predominantly invest in bonds, credit risk associated with government and corporate bonds has long not been a focus in their risk management. After the crisis of several European countries, however, credit risk has recently been paid greater attention. Nevertheless, the latest version of the Solvency II standard model (QIS 5), provided by regulators for deriving solvency capital requirements, still does not require capital for credit risk inherent in, e.g., EEA issued government bonds from Greece or Spain. This paper aims to provide an alternative approach and compares the standard model with a partial internal risk model using a rating-based credit risk model that accounts for credit, equity, and interest rate risk inherent in a portfolio of stocks and bonds. The findings demonstrate that solvency capital requirements strongly depend on the quality and composition of an insurer‟s asset portfolio and that model risk in regard to model choice and calibration plays an important role in the quantification. http://www.openathens.net/

DYNAMIC SOLVENCY TESTING

Impairment estimates of equity portfolios represented by model points. Benneman, Christoph; Hennig, Carsten [RKN: 43462] Shelved at: online only Belgian Actuarial Bulletin (2010) 9 : 43-49.

Equity instruments in simulation-based risk models are usually represented by model points in an aggregated view. Each model point represents all equity instruments of a sub portfolio (e.g., all equity instruments in a certain currency, a certain region or asset category). This approach is sufficient for the simulation of economic figures like average return of the portfolio and its correlation with other quantities. Accounting figures like impairments, however, need to be determined on a single asset level. For each simulation scenario, an average return of the portfolio is provided (usually by an Economic Scenario Generator). Based on this average return, scenario specific impairments have to be derived. The whole simulation consists of many (at least several thousand) scenarios therefore a reliable and fast procedure for the impairment calculation is needed. In this paper, we present a statistical approach for this purpose and compare its performance against a real portfolio of shares. http://www.belgianactuarialbulletin.be/browse.php?

ECONOMIC PROJECTIONS

Quelle structure de dépendance pour un générateur de scénarios économiques en assurance ? Impact sur le besoin en capital. Armel, Kamal; Kamega, Aymric; Planchet, Frédéric [RKN: 43467] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 155-192.

Cet article propose une analyse théorique et empirique de l'impact du choix de la structure de dépendance intégrée à un générateur de scénarios économiques sur le niveau du capital de solvabilité dans le cadre du dispositif Solvabilité 2. http://www.institutdesactuaires.com/bfa/

ECONOMICS

Energy and the wealth of nations by Charles AS Hall and Kent A Klitgaard : Book review. Brooke-Taylor, Tony Staple Inn Actuarial Society, - 1 pages. [RKN: 70662] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) September : 35.

Book review http://www.theactuary.com/

ENTERPRISE RISK MANAGEMENT


Slide presentation to Staple Inn Actuarial Society, 6 March 2012 Realistic modelling of dynamic management actions is critical to many areas of the financial management of a life insurance company today. In our overview of this topic we will: - explain what is meant by dynamic management actions (“DMA”) and what the main types of DMA are; - introduce the areas in which DMA is important (e.g. Solvency II, MCEV, ALM etc); - describe how DMA can be linked to real expected management behaviour (including considerations around concepts such as the Use Test); - illustrate how improved modelling of DMA can, under some circumstances, materially influence calculated results; - show how understanding DMA and its interactions with dynamic policyholder behaviour can improve a company‟s Enterprise Risk Management;

6

http://www.sias.org.uk/siaspapers/search/view paper?id=SIASPaperMar2012



Economic scenario generators and solvency II. Varnell, E M [RKN: 45284] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: BRI/ACT BAJ (2011) 16 (1) : 121-159.

The Solvency II Directive mandates insurance firms to value their assets and liabilities using market consistent valuation. For many types of insurance business Economic Scenario Generators (ESGs) are the only practical way to determine the market consistent value of liabilities. The directive also allows insurance companies to use an internal model to calculate their solvency capital requirement. In particular, this includes use of ESG models. Regardless of whether an insurer chooses to use an internal model, Economic Scenario Generators will be the only practical way of valuing many life insurance contracts. Draft advice published by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) requires that insurance firms who intend to use an internal model to calculate their capital requirements under Solvency II need to comply with a number of tests regardless of whether the model (or data) is produced internally or is externally sourced. In particular the tests include a „use test‟, mandating the use of the model for important decision making within the insurer. This means that Economic Scenario Generators will need to subject themselves to the governance processes and that senior managers and boards will need to understand what ESG models do and what they don't do. In general, few senior managers are keen practitioners of stochastic calculus, the building blocks of ESG models. The paper therefore seeks to explain Economic Scenario Generator models from a non-technical perspective as far as possible and to give senior management some guidance of the main issues surrounding these models from an ERM/Solvency II perspective. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals

Handbook of solvency for actuaries and risk managers : Theory and practice. Sandstrom, Arne (2011). - Boca Raton: Chapman & Hall/CRC, 2011. - 1055 pages. [RKN: 39904] Shelved at: BUG/UHG (Lon)

This handbook can be divided into two main sections: general ideas about solvency (parts A, B, and C) and the European Solvency II projects (parts D, E and F). The first section discusses the solvency concept, the historical development, and its place as a part in an enterprise risk management approach. Further, there is a more general discussion on valuation, investment, and own-capital together with modeling and measuring. The last part, part C, discusses dependence, risk measures, and capital requirements. Subrisks and aggregation are also important parts. The main risks - market, credit, operational, liquidity, and underwriting risks - are discussed in general terms. The second section, devoted to the European Solvency II project, starts with its general ideas, valuation, investments, and own-funds (part D). The second part of this section, part E, is devoted to the standard formula framework. These two parts are based on CEIOPS' final advice. All calibrations done earlier in different quantitative impact studies (QIS), together with the politial progress of the project, are given in the appendices (part F).

EQUITIES



7

EUROPE



FINANCIAL CRISES



GENERAL INSURANCE

On my agenda: James Orr. Shah, Sonal Staple Inn Actuarial Society, - 2 pages. [RKN: 74925] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) January/February : 22-23.

Sonal Shah talks to the FSA's James Orr on the impact of Solvency II on the general insurance market and the regulator's preparations going forward http://www.theactuary.com/

Practical issues in the Solvency II Internal Model Approval Process (IMAP) for general insurance actuaries. Anzar, Jahan; Armstrong, James; Austin, Roger; Bartliff, Adrian; Bird, Chris; Cairns, Martin; Chan, Cherry; Chavez-Lopez, Gabriela; Dee, Andrew; Dunkerley, Gavin; Latchman, Shane; Menezes, David; Robertson-Dunn, Stephen; Strudwick, Melinda; Trong, Buu (2012). 2012. [RKN: 43557] General Insurance Convention (2012) : 189-360.

Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012

Reinsurance structure and shareholder value. Karim, James (2012). 2012. [RKN: 43558] General Insurance Convention (2012) : 361-383.


Reserving on a contract-by-contract basis. Monk, Joe; Brink, Peter; Hudson, Kathryn; Peet, Katherine; Raw, Leith (2012). 2012. [RKN: 43559] General Insurance Convention (2012) : 385-389.


Risk management for insurers : Risk control, economic capital and Solvency II. Doff, René (2011). - 2nd ed. - London: Risk Books, 2011. - xi, 322 pages. [RKN: 45485] Shelved at: BX/BXP/BUG (Lon) Shelved at: 519.287

All over the globe insurers are facing the impact of the turmoil on the financial markets, making it more crucial than ever to fully understand how to implement risk management best practice. In this timely second edition, industry expert René Doff argues that Solvency II, which aims to improve standards of risk assessment, should be regarded as an opportunity. Solvency II will provide incentives for insurance companies to improve their risk management systems and will allow you to benefit from the risk

8

management efforts in the context of supervision.

Taxing times for Solvency II. Fannin, Trevor; Rendell, Andrew Staple Inn Actuarial Society, [RKN: 39579] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2010) June : 42-43.

Article that takes a look at the impact of taxation on insurance companies under Solvency II. http://www.theactuary.com/archive

GERMANY



GOVERNANCE



HEALTH INSURANCE

Health Insurance & Solvency II [copies of slides only]. Smith, John; Varnell, Elliot (2010). Institute of Actuaries and Faculty of Actuaries, 2010. [RKN: 73279]

http://www.actuaries.org.uk/system/files/documents/pdf/smithvarnell.pdf

INSURANCE

Something in reserve. Sheaf, Simon Staple Inn Actuarial Society, [RKN: 45370] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) July : 30-31.

Simon Sheaf describes the intricacies of reserving under Solvency II for non-life insurers. http://www.theactuary.com/

INSURANCE COMPANIES



9

INTEREST RATES



LIABILITIES

Market-consistent valuation of insurance liabilities by cost of capital. Mohr, Christoph - 27 pages. [RKN: 74738] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 315-341.

online access via International Actuarial Association: http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN This paper investigates market-consistent valuation of insurance liabilities in the context of Solvency II among others and to some extent IFRS 4. We propose an explicit and consistent framework for the valuation of insurance liabilities which incorporates the Solvency II approach as a special case. The proposed framework is based on replication over multiple (one-year) time periods by a periodically updated portfolio of assets with reliable market prices, allowing for 'limited liability' in the sense that the replication can in general not always be continued. The asset portfolio consists of two parts: (1) assets whose market price defines the value of the insurance liabilities, and (2) capital funds used to cover risk which cannot be replicated. The capital funds give rise to capital costs; the main exogenous input in the framework is the condition on when the investment of the capital funds is acceptable. We investigate existence of the value and show that the exact calculation of the value has to be done recursively backwards in time, starting at the end of the lifetime of the insurance liabilities. We derive upper bounds on the value and, for the special case of replication by risk-free one-year zero-coupon bonds, explicit recursive formulas for calculating the value. In the paper, we only partially consider the question of the uniqueness of the value. Valuation in Solvency II and IFRS 4 is based on representing the value as a sum of a 'best estimate' and a 'risk margin'. In our framework, it turns out that this split is not natural. Nonetheless, we show that a split can be constructed as a simplification, and that it provides an upper bound on the value under suitable conditions. We illustrate the general results by explicitly calculating the value for a simple example. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN

Replicating formulae: efficient calibration techniques : [Efficient curve fitting techniques]. Hursey, Chris; Scott, Rebecca (2012). - London: Staple Inn Actuarial Society, 2012. - 32 pages. [RKN: 43536] Shelved at: Online only Shelved at: Online only

Slide presentation, also titled 'Efficient curve fitting techniques' to Staple Inn Actuarial Society, 7 February 2012 The use of internal models under Solvency II has led to the development of proxy liability models that can be used to evaluate liabilities under many thousands of scenarios. One of the most widely used techniques for this purpose is that of replicating formulae. This paper proposes a method to determine efficient replicating formulae by introducing a theorem that identifies optimal fitting points and points of maximum error. The implementation of this method significantly reduces the burden of performing hundreds of accurate liability calculations thus leading to the potential saving of many hours' effort. http://www.sias.org.uk/siaspapers/search/view paper?id=SIASPaperFeb2012

LLOYDS



LONGEVITY RISK

Deterministic shock vs. stochastic value-at-risk: an analysis of the Solvency II standard model approach to longevity risk. Börger, Matthias [RKN: 43373] Shelved at: Per: Blätter (Lon) Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2010) 31 (heft 2) : 225-259.

In general, the capital requirement under Solvency II is determined as the 99.5% Value-at-Risk of the Available Capital. In the

10

standard model‟s longevity risk module, this Value-at-Risk is approximated by the change in Net Asset Value due to a pre-specified longevity shock which assumes a 25% reduction of mortality rates for all ages. We analyze the adequacy of this shock by comparing the resulting capital requirement to the Value-at-Risk based on a stochastic mortality model. This comparison reveals structural shortcomings of the 25% shock and therefore, we propose a modified longevity shock for the Solvency II standard model. We also discuss the properties of different Risk Margin approximations and find that they can yield significantly different values. Moreover, we explain how the Risk Margin may relate to market prices for longevity risk and, based on this relation, we comment on the calibration of the cost of capital rate and make inferences on prices for longevity derivatives. http://link.springer.com/article/10.1007/s11857-010-0125-z



A Value-at-Risk framework for longevity trend risk. Richards, Stephen J; Currie, Iain D; Ritchie, Gavin P (2012). - London: Institute and Faculty of Actuaries, 2012. - 23 pages. [RKN: 43564] Shelved at: ifp 11/12

Presented on 19 November 2012, Edinburgh; and on 26 November, 2012 (London) Longevity risk faced by annuity portfolios and defined-benefitt pension schemes is typically long-term, i.e. the risk is of an adverse trend which unfolds over a long period of time. However, there are circumstances when it is useful to know by how much expectations of future mortality rates might change over a single year. Such an approach lies at the heart of the one-year, value-at-risk view of reserves, and also for the pending Solvency II regime for insurers in the European Union. This paper describes a framework for determining how much a longevity liability might change based on new information over the course of one year. It is a general framework and can accommodate a wide choice of stochastic projection models, thus allowing the user to explore the importance of model risk. A further benefit of the framework is that it also provides a robustness test for projection models, which is useful in selecting an internal model for management purposes. http://www.actuaries.org.uk/events/one-day/sessional-research-event-value-risk-framework-longevity-liabilities http://www.actuaries.org.uk/sites/all/files/A%20Value%20at%20risk%20framework%20for%20longevity%20risk%20PRINTVERSION.pdf

MARKET DISCIPLINE



MODELLING


The Solvency II directive mandates insurance firms to value their assets and liabilities using market consistent valuation. For many types of insurance business Economic Scenario Generators are the only practical way to determine the market consistent value of liabilities. The directive also allows insurance companies to use an internal model to calculate their solvency capital requirement. In particular, this includes use of ESG models. Regardless of whether an insurer chooses to use an internal model, Economic Scenario Generators will be the only practical way of valuing many life insurance contracts. Draft advice published by CEIOPS requires that insurance firms who intend to use an internal model to calculate their capital requirements under Solvency II need to comply with a number of tests regardless of whether the model (or data) is produced internally or is externally sourced. In particular the tests include a Use Test, mandating the use of the model for important decision making within the insurer. This means that Economic Scenario Generators will need to subject themselves to the governance processes and that senior managers and Boards will need to understand what Economic Scenario Generator (ESG) models do and what they don‟t do. In general, few senior managers are keen practitioners of stochastic calculus, the building blocks of ESG models. The paper therefore seeks to explain Economic Scenario Generator models from a non-technical perspective as far as possible and to give senior management some guidance of the main issues surrounding these models from an ERM/Solvency II perspective. Keywords: Solvency II; Economic scenario generator; Governance; Economic assumptions; Enterprise risk management (ERM);

11

Market consistent valuation; Economic capital; Regulatory capital; http://www.actuaries.org.uk/research-and-resources/documents/economic-scenario-generators-and-solvency-ii

The elephant in the room. Tsanakas, Andreas Staple Inn Actuarial Society, - 2 pages. [RKN: 70661] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) September : 32-33.

Dr Andreas Tsanakas examines the use of internal models in insurance, the associated pitfalls, and how solvency regulation should approach them http://www.theactuary.com/

Rising to the Solvency II challenge. Shaw, Richard; Smith, Andrew; Spivak, Grigory Staple Inn Actuarial Society, [RKN: 39469] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2010) April : 36-37.

Article considering different approaches to modelling economic capital in the advent of Solvency II. http://www.theactuary.com/archive

Solvency II: Boxing clever. Cox, Andrew Staple Inn Actuarial Society, [RKN: 73705] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) November : 30-31.

Andrew Cox models an implementation of the one-year test using two approaches http://www.theactuary.com/



MULTIVARIATE ANALYSIS



OPTION PRICING



12

PORTFOLIO MANAGEMENT



Replicating portfolios: calibration techniques for the calculation of the Solvency II economic capital. Devineau, Laurent; Chauvigny, Matthieu [RKN: 44523] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.21) : 5-57.

When endeavoring to build an internal model, life insurance companies are often faced with the choice of which method to use for the distribution of shareholder‟s equity over one year. However, the highly stochastic nature of this type of approach can sometimes lead to significant calculation times that threaten to compromise its operational implementing. The use of calculation acceleration or approximation techniques therefore appears as essential to the application of such methods. One possible approach is the use of the Replicating Portfolios technique, in which the projection times are strongly reduced by an estimation of shareholder‟s equity based on a portfolio of assets that replicates the best estimate of the company's liabilities. However, the calibration of the Replicating Portfolios method presents several difficulties that may lead to unsatisfactory results. In this article, we introduce a calibration technique that was developed in order to guarantee the robustness of the estimation of the Solvency II economic capital. http://www.institutdesactuaires.com/bfa/

PREMIUM RESERVES

Solvency II technical provisions – What actuaries will be doing differently? [summary for discussion]. Dreksler, Susan [et al.] (2012). - London: Institute and Faculty of Actuaries, 2012. - 1 pages. [RKN: 43486] Shelved at: ifp 03/12 (Lon) Shelved at: JOU

Discussion held at Staple Inn, London on 19 March 2012 -- Paper is summary for discussion only Here are four areas that we would like to discuss in the order we would like to address them. In places we have been deliberately controversial to stimulate discussion: Premium provision; Binary events; Validation; Reinsurance http://www.actuaries.org.uk/sites/all/files/20130326 Web%20brief.pdf

REGULATION





What Solvency II firms can learn from Swiss solvency experience [summary for discussion]. Eves, Michael J; Keller, Philipp L (2012). - Edinburgh: Institute and Faculty of Actuaries, 2012. - 1 pages. [RKN: 43485] Shelved at: ifp 03/12 (Lon) Shelved at: JOU

13

Discussion held at Royal College of Physicians, Edinburgh on 19 March 2012 -- Paper is summary only Switzerland introduced the Swiss Solvency Test (SST) as a regulatory requirement in 2006. Since 2011, the capital requirements are in force and insurers have to have their internal models approved by the regulatory authority. While the SST is not identical to Solvency II, there are many commonalities and Switzerland is likely to obtain equivalency from Solvency II. The SST differs from Solvency II in that many insurers and reinsurers have to use an internal model to determine their regulatory capital requirements. In contrast to Solvency II, using an internal model is the norm, rather than the exception. All reinsurers, insurance groups and all insurers for which the standard model is not applicable have to develop an internal model. Overall, close to 100 insurers use partial or full internal models, among them most life insurers. We present our experiences with the SST, in particular relating to internal models and their validation and supervisory approval. We also present the Swiss experience with smaller companies, many of which also use at least partial internal models. http://www.actuaries.org.uk/sites/all/files/What%20Solvency%20II%20Firms%20Can%20Learn%20from%20Swiss%20Solvency%20Experience.pdf

REINSURANCE





RESERVING

Reserving on a contract-by-contract basis. Monk, Joe; Brink, Peter; Hudson, Kathryn; Peet, Katherine; Raw, Leith (2012). 2012. [RKN: 43559] General Insurance Convention (2012) : 385-389.


Solvency II Reserving : What will you be doing differently? [copies of slides only]. Kirk, Jerome; Theaker, David (2010). Institute and Faculty of Actuaries, 2010. [RKN: 73526]

http://www.actuaries.org.uk/sites/all/files/documents/pdf/pl4-jerome-kirk-david-theaker.pdf



REVIEWS

Energy and the wealth of nations by Charles AS Hall and Kent A Klitgaard : Book review. Brooke-Taylor, Tony Staple Inn Actuarial Society, - 1 pages. [RKN: 70662] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) September : 35.

Book review http://www.theactuary.com/

RISK

Executive's guide to Solvency II. Buckham, David; Wahl, Jason; Rose, Stuart (2011). - 1st ed. - Hoboken, NJ: Wiley, 2011. - xi, 194 pages. [RKN: 42966] Shelved at: BUG (Lon)

Part of the Wiley and SAS Business series, this book will guide you through Solvency II, especially if you need to understand the subtleties of Solvency II and risk–based capital in basic business language. Among the topics covered in this essential book are: * Background to Solvency II

14

* Learning from the Basel Approach * The Economic Balance Sheet * Internal Models * People, Process, and Technology * Business Benefits of Solvency II Executive's Guide to Solvency II has as its aim an explanation for executives, practitioners, consultants, and others interested in the Solvency II process and the implications thereof, to understand how and why the directive originated, what its goals are, and what some of the complexities are. There is an emphasis on what in practice should be leveraged upon to achieve implementation, specifically data, processes, and systems, as well as recognition of the close alignment demanded between actuaries, the risk department, IT, and the business itself.





RISK ASSESSMENT


Part of the Wiley and SAS Business series, this book will guide you through Solvency II, especially if you need to understand the subtleties of Solvency II and risk–based capital in basic business language. Among the topics covered in this essential book are: * Background to Solvency II * Learning from the Basel Approach * The Economic Balance Sheet * Internal Models * People, Process, and Technology * Business Benefits of Solvency II Executive's Guide to Solvency II has as its aim an explanation for executives, practitioners, consultants, and others interested in the Solvency II process and the implications thereof, to understand how and why the directive originated, what its goals are, and what some of the complexities are. There is an emphasis on what in practice should be leveraged upon to achieve implementation, specifically data, processes, and systems, as well as recognition of the close alignment demanded between actuaries, the risk department, IT, and the business itself.

RISK MANAGEMENT


Around the world, central bankers, regulators and governments have responded to the financial crisis with new regulation and legislation. The cornerstone of this global initiative to contain risk is Basel III – sweeping new regulatory standards for banks on capital adequacy and liquidity. These new standards will define markets and their practices for decades to come. Already, they are reshaping institutions, business models and balance sheets.

15

Understanding Basel III and the thinking behind it is essential for market participants and for those charged with implementing the standards. In Basel III and Beyond, the first book-length treatment of Basel III, editors Mario Quagliariello of the European Banking Authority and Francesco Cannata of the Bank of Italy have assembled contributors from regulators and central banks involved in preparing the standards including a foreword from Mario Draghi, President of the European Central Bank. Key chapters describe and analyse the new elements of Basel III, as well as detailing important revisions to the 2004 accord. Written by the regulators themselves, Basel III and Beyond is the essential guide to the new global banking standards.


Paper and separate slide presentation to Staple Inn Actuarial Society, 14 May 2012. The risk margin is one of the most complicated features of the 'new' market-consistent actuarial world embodied by Solvency II, MCEV and others. Much high quality work has been performed on the subject of the risk margin in the last few years, this paper aims to complement that with a comprehensive, straightforward, jargon-free and, above all, practical overview to the topic. We will explore the theoretical justification for the risk margin concept focussing on the policy choices made in various regimes, and review the regulatory guidance around its calculation. We will then look in some depth at the practicalities of calculation of the risk margin addressing issues such as appropriate allowance for diversification, costs of capital, allocation of capital, simplifications, etc. Whilst this paper has a bias towards the place of the risk margin within Solvency II, we hope that much of what is contained is transferable to the similar concepts embedded in other regimes. The paper has been designed to be read as a whole, but it is intended that the sections can be dipped into by those performing the calculations, to provide stage-by-stage guidance to the practitioner on the ground. http://www.sias.org.uk/siaspapers/pastmeetings/view meeting?id=MeetingMay2012 http://www.sias.org.uk/data/papers/SIASPaperMay2012a/DownloadPDF http://www.sias.org.uk/view paper?id=SIASPaperMay2012b



Fit for purpose. Cannon, Chris; Dunn, Neil; Singh, Budhi; Skinner, Justin Staple Inn Actuarial Society, - 2 pages. [RKN: 72077] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2010) Jan / Feb : 26-27.

Chris Cannon asks Neil Dunn, Budhi Singh and Justin Skinner how actuaries shape up as risk managers in the insurance market http://www.theactuary.com/archive




All over the globe insurers are facing the impact of the turmoil on the financial markets, making it more crucial than ever to fully understand how to implement risk management best practice. In this timely second edition, industry expert René Doff argues that Solvency II, which aims to improve standards of risk assessment, should be regarded as an opportunity. Solvency II will provide incentives for insurance companies to improve their risk management systems and will allow you to benefit from the risk management efforts in the context of supervision.



16



RISK MEASUREMENT

Buy-and-hold strategies and comonotonic approximations. Marin-Solano, Jesus; Roch, Oriol; Dhaene, Jan; Ribas, Carmen; Bosch-Príncep, Manuela; Vanduffel, Steven [RKN: 43460] Shelved at: online only Belgian Actuarial Bulletin (2010) 9 : 17-28.

We investigate optimal buy-and-hold strategies for terminal wealth problems in a multi-period framework. As terminal wealth is a sum of dependent random variables, the distribution function of final wealth cannot be determined analytically for any realistic model. By calculating lower bounds in the convex order sense, we consider approximations that reduce the multivariate randomness to univariate randomness. These approximations are used to determine buy-and-hold strategies that optimize, for a given probability level, the Value at Risk and the Conditional Left Tail Expectation of the distribution function of final wealth. Finally, the accurateness of the different approximations is investigated numerically. http://www.belgianactuarialbulletin.be/browse.php?

SCENARIO GENERATION



SHAREHOLDERS



SOLVENCY




This handbook can be divided into two main sections: general ideas about solvency (parts A, B, and C) and the European Solvency II projects (parts D, E and F). The first section discusses the solvency concept, the historical development, and its place as a part in an enterprise risk management approach. Further, there is a more general discussion on valuation, investment, and own-capital together with modeling and measuring. The last part, part C, discusses dependence, risk measures, and capital

17

requirements. Subrisks and aggregation are also important parts. The main risks - market, credit, operational, liquidity, and underwriting risks - are discussed in general terms. The second section, devoted to the European Solvency II project, starts with its general ideas, valuation, investments, and own-funds (part D). The second part of this section, part E, is devoted to the standard formula framework. These two parts are based on CEIOPS' final advice. All calibrations done earlier in different quantitative impact studies (QIS), together with the politial progress of the project, are given in the appendices (part F).



SOLVENCY II

Abstract of the discussion Economic scenario generators and solvency II. [RKN: 45285] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: BRI/ACT BAJ (2011) 16 (1) : 161-179.

http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals





Credit where it's due. Prowse, David; Hughes, Clara Staple Inn Actuarial Society, [RKN: 45266] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) June : 41.

The authors discuss the potential impact of Solvency II on insurer credit ratings http://www.theactuary.com/


Paper and separate slide presentation to Staple Inn Actuarial Society, 14 May 2012. The risk margin is one of the most complicated features of the 'new' market-consistent actuarial world embodied by Solvency II, MCEV and others. Much high quality work has been performed on the subject of the risk margin in the last few years, this paper aims to complement that with a comprehensive, straightforward, jargon-free and, above all, practical overview to the topic. We will

18

explore the theoretical justification for the risk margin concept focussing on the policy choices made in various regimes, and review the regulatory guidance around its calculation. We will then look in some depth at the practicalities of calculation of the risk margin addressing issues such as appropriate allowance for diversification, costs of capital, allocation of capital, simplifications, etc. Whilst this paper has a bias towards the place of the risk margin within Solvency II, we hope that much of what is contained is transferable to the similar concepts embedded in other regimes. The paper has been designed to be read as a whole, but it is intended that the sections can be dipped into by those performing the calculations, to provide stage-by-stage guidance to the practitioner on the ground. http://www.sias.org.uk/siaspapers/pastmeetings/view meeting?id=MeetingMay2012 http://www.sias.org.uk/data/papers/SIASPaperMay2012a/DownloadPDF http://www.sias.org.uk/view paper?id=SIASPaperMay2012b


In general, the capital requirement under Solvency II is determined as the 99.5% Value-at-Risk of the Available Capital. In the standard model‟s longevity risk module, this Value-at-Risk is approximated by the change in Net Asset Value due to a pre-specified longevity shock which assumes a 25% reduction of mortality rates for all ages. We analyze the adequacy of this shock by comparing the resulting capital requirement to the Value-at-Risk based on a stochastic mortality model. This comparison reveals structural shortcomings of the 25% shock and therefore, we propose a modified longevity shock for the Solvency II standard model. We also discuss the properties of different Risk Margin approximations and find that they can yield significantly different values. Moreover, we explain how the Risk Margin may relate to market prices for longevity risk and, based on this relation, we comment on the calibration of the cost of capital rate and make inferences on prices for longevity derivatives. http://link.springer.com/article/10.1007/s11857-010-0125-z






Slide presentation to Staple Inn Actuarial Society, 6 March 2012 Realistic modelling of dynamic management actions is critical to many areas of the financial management of a life insurance company today. In our overview of this topic we will: - explain what is meant by dynamic management actions (“DMA”) and what the main types of DMA are; - introduce the areas in which DMA is important (e.g. Solvency II, MCEV, ALM etc); - describe how DMA can be linked to real expected management behaviour (including considerations around concepts such as the Use Test); - illustrate how improved modelling of DMA can, under some circumstances, materially influence calculated results; - show how understanding DMA and its interactions with dynamic policyholder behaviour can improve a company‟s Enterprise Risk Management; http://www.sias.org.uk/siaspapers/search/view paper?id=SIASPaperMar2012


The Solvency II directive mandates insurance firms to value their assets and liabilities using market consistent valuation. For many types of insurance business Economic Scenario Generators are the only practical way to determine the market consistent value of liabilities. The directive also allows insurance companies to use an internal model to calculate their solvency capital requirement. In particular, this includes use of ESG models. Regardless of whether an insurer chooses to use an internal model, Economic Scenario Generators will be the only practical way of valuing many life insurance contracts. Draft advice published by CEIOPS requires that insurance firms who intend to use an internal model to calculate their capital requirements under Solvency II need to comply with a number of tests regardless of whether the model (or data) is produced internally or is externally sourced. In

19

particular the tests include a Use Test, mandating the use of the model for important decision making within the insurer. This means that Economic Scenario Generators will need to subject themselves to the governance processes and that senior managers and Boards will need to understand what Economic Scenario Generator (ESG) models do and what they don‟t do. In general, few senior managers are keen practitioners of stochastic calculus, the building blocks of ESG models. The paper therefore seeks to explain Economic Scenario Generator models from a non-technical perspective as far as possible and to give senior management some guidance of the main issues surrounding these models from an ERM/Solvency II perspective. Keywords: Solvency II; Economic scenario generator; Governance; Economic assumptions; Enterprise risk management (ERM); Market consistent valuation; Economic capital; Regulatory capital; http://www.actuaries.org.uk/research-and-resources/documents/economic-scenario-generators-and-solvency-ii



The end of the beginning. Brown, Anthony Staple Inn Actuarial Society, [RKN: 45267] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) June : 42-43.

Anthony Brown looks at what we have learned from the fifth Solvency II quantitative impact study and considers where we go from here. http://www.theactuary.com/

Everything you always wanted to know about the Solvency II balance sheet but were afraid to ask [copies of slides only]. Sheaf, Simon; Kelly, Stephen (2010). Institute and Faculty of Actuaries, 2010. [RKN: 73588]

http://www.actuaries.org.uk/sites/all/files/documents/pdf/workshop-a02-simon-sheaf-stephen-kelly.pdf


Part of the Wiley and SAS Business series, this book will guide you through Solvency II, especially if you need to understand the subtleties of Solvency II and risk–based capital in basic business language. Among the topics covered in this essential book are: * Background to Solvency II * Learning from the Basel Approach * The Economic Balance Sheet * Internal Models * People, Process, and Technology * Business Benefits of Solvency II Executive's Guide to Solvency II has as its aim an explanation for executives, practitioners, consultants, and others interested in the Solvency II process and the implications thereof, to understand how and why the directive originated, what its goals are, and what some of the complexities are. There is an emphasis on what in practice should be leveraged upon to achieve implementation, specifically data, processes, and systems, as well as recognition of the close alignment demanded between actuaries, the risk department, IT, and the business itself.

Fit for purpose. Cannon, Chris; Dunn, Neil; Singh, Budhi; Skinner, Justin Staple Inn Actuarial Society, - 2 pages. [RKN: 72077] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2010) Jan / Feb : 26-27.

Chris Cannon asks Neil Dunn, Budhi Singh and Justin Skinner how actuaries shape up as risk managers in the insurance market http://www.theactuary.com/archive


This handbook can be divided into two main sections: general ideas about solvency (parts A, B, and C) and the European Solvency II projects (parts D, E and F). The first section discusses the solvency concept, the historical development, and its place as a part in an enterprise risk management approach. Further, there is a more general discussion on valuation, investment, and own-capital together with modeling and measuring. The last part, part C, discusses dependence, risk measures, and capital requirements. Subrisks and aggregation are also important parts. The main risks - market, credit, operational, liquidity, and underwriting risks - are discussed in general terms. The second section, devoted to the European Solvency II project, starts with its general ideas, valuation, investments, and own-funds (part D). The second part of this section, part E, is devoted to the standard formula framework. These two parts are based on CEIOPS' final advice. All calibrations done earlier in different

20

quantitative impact studies (QIS), together with the politial progress of the project, are given in the appendices (part F).

Health Insurance & Solvency II [copies of slides only]. Smith, John; Varnell, Elliot (2010). Institute of Actuaries and Faculty of Actuaries, 2010. [RKN: 73279]

http://www.actuaries.org.uk/system/files/documents/pdf/smithvarnell.pdf





Market-consistent valuation of insurance liabilities by cost of capital. Mohr, Christoph - 27 pages. [RKN: 74738] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 315-341.

online access via International Actuarial Association: http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN This paper investigates market-consistent valuation of insurance liabilities in the context of Solvency II among others and to some extent IFRS 4. We propose an explicit and consistent framework for the valuation of insurance liabilities which incorporates the Solvency II approach as a special case. The proposed framework is based on replication over multiple (one-year) time periods by a periodically updated portfolio of assets with reliable market prices, allowing for 'limited liability' in the sense that the replication can in general not always be continued. The asset portfolio consists of two parts: (1) assets whose market price defines the value of the insurance liabilities, and (2) capital funds used to cover risk which cannot be replicated. The capital funds give rise to capital costs; the main exogenous input in the framework is the condition on when the investment of the capital funds is acceptable. We investigate existence of the value and show that the exact calculation of the value has to be done recursively backwards in time, starting at the end of the lifetime of the insurance liabilities. We derive upper bounds on the value and, for the special case of replication by risk-free one-year zero-coupon bonds, explicit recursive formulas for calculating the value. In the paper, we only partially consider the question of the uniqueness of the value. Valuation in Solvency II and IFRS 4 is based on representing the value as a sum of a 'best estimate' and a 'risk margin'. In our framework, it turns out that this split is not natural. Nonetheless, we show that a split can be constructed as a simplification, and that it provides an upper bound on the value under suitable conditions. We illustrate the general results by explicitly calculating the value for a simple example. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN

Metodología para el cálculo de escenarios de caída de cartera en solvencia II en presencia de contagio entre cancelaciones. Ayuso, Mercedes; Guillén, Montserrat; Pérez-Marín, Ana M [RKN: 43378] Anales del Instituto de Actuarios Españoles (Epoca 3a) (2011) 17 : 13-30.

http://www.actuarios.org/espa/anales.htm

On my agenda: James Orr. Shah, Sonal Staple Inn Actuarial Society, - 2 pages. [RKN: 74925] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) January/February : 22-23.

Sonal Shah talks to the FSA's James Orr on the impact of Solvency II on the general insurance market and the regulator's preparations going forward http://www.theactuary.com/

Practical issues in the Solvency II Internal Model Approval Process (IMAP) for general insurance actuaries. Anzar, Jahan; Armstrong, James; Austin, Roger; Bartliff, Adrian; Bird, Chris; Cairns, Martin; Chan, Cherry; Chavez-Lopez, Gabriela; Dee, Andrew; Dunkerley, Gavin; Latchman, Shane; Menezes, David; Robertson-Dunn, Stephen; Strudwick, Melinda; Trong, Buu (2012). 2012. [RKN: 43557] General Insurance Convention (2012) : 189-360.


Quantifying credit and market risk under Solvency II: standard approach versus internal model. Gatzert, Nadine; Martin, Michael [RKN: 43683] Shelved at: Online Only Shelved at: Online Only

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Insurance: Mathematics & Economics (2012) 51(3) : 646-666. Even though insurers predominantly invest in bonds, credit risk associated with government and corporate bonds has long not been a focus in their risk management. After the crisis of several European countries, however, credit risk has recently been paid greater attention. Nevertheless, the latest version of the Solvency II standard model (QIS 5), provided by regulators for deriving solvency capital requirements, still does not require capital for credit risk inherent in, e.g., EEA issued government bonds from Greece or Spain. This paper aims to provide an alternative approach and compares the standard model with a partial internal risk model using a rating-based credit risk model that accounts for credit, equity, and interest rate risk inherent in a portfolio of stocks and bonds. The findings demonstrate that solvency capital requirements strongly depend on the quality and composition of an insurer‟s asset portfolio and that model risk in regard to model choice and calibration plays an important role in the quantification. http://www.openathens.net/

Quelle structure de dépendance pour un générateur de scénarios économiques en assurance ? Impact sur le besoin en capital. Armel, Kamal; Kamega, Aymric; Planchet, Frédéric [RKN: 43467] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 155-192.

Cet article propose une analyse théorique et empirique de l'impact du choix de la structure de dépendance intégrée à un générateur de scénarios économiques sur le niveau du capital de solvabilité dans le cadre du dispositif Solvabilité 2. http://www.institutdesactuaires.com/bfa/

Replicating formulae: efficient calibration techniques : [Efficient curve fitting techniques]. Hursey, Chris; Scott, Rebecca (2012). - London: Staple Inn Actuarial Society, 2012. - 32 pages. [RKN: 43536] Shelved at: Online only Shelved at: Online only

Slide presentation, also titled 'Efficient curve fitting techniques' to Staple Inn Actuarial Society, 7 February 2012 The use of internal models under Solvency II has led to the development of proxy liability models that can be used to evaluate liabilities under many thousands of scenarios. One of the most widely used techniques for this purpose is that of replicating formulae. This paper proposes a method to determine efficient replicating formulae by introducing a theorem that identifies optimal fitting points and points of maximum error. The implementation of this method significantly reduces the burden of performing hundreds of accurate liability calculations thus leading to the potential saving of many hours' effort. http://www.sias.org.uk/siaspapers/search/view paper?id=SIASPaperFeb2012

Replicating portfolios: calibration techniques for the calculation of the Solvency II economic capital. Devineau, Laurent; Chauvigny, Matthieu [RKN: 44523] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.21) : 5-57.

When endeavoring to build an internal model, life insurance companies are often faced with the choice of which method to use for the distribution of shareholder‟s equity over one year. However, the highly stochastic nature of this type of approach can sometimes lead to significant calculation times that threaten to compromise its operational implementing. The use of calculation acceleration or approximation techniques therefore appears as essential to the application of such methods. One possible approach is the use of the Replicating Portfolios technique, in which the projection times are strongly reduced by an estimation of shareholder‟s equity based on a portfolio of assets that replicates the best estimate of the company's liabilities. However, the calibration of the Replicating Portfolios method presents several difficulties that may lead to unsatisfactory results. In this article, we introduce a calibration technique that was developed in order to guarantee the robustness of the estimation of the Solvency II economic capital. http://www.institutdesactuaires.com/bfa/




All over the globe insurers are facing the impact of the turmoil on the financial markets, making it more crucial than ever to fully understand how to implement risk management best practice. In this timely second edition, industry expert René Doff argues that Solvency II, which aims to improve standards of risk assessment, should be regarded as an opportunity. Solvency II will provide incentives for insurance companies to improve their risk management systems and will allow you to benefit from the risk management efforts in the context of supervision.





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Solvency II Reserving : What will you be doing differently? [copies of slides only]. Kirk, Jerome; Theaker, David (2010). Institute and Faculty of Actuaries, 2010. [RKN: 73526]

http://www.actuaries.org.uk/sites/all/files/documents/pdf/pl4-jerome-kirk-david-theaker.pdf









STOCHASTIC MODELS


In general, the capital requirement under Solvency II is determined as the 99.5% Value-at-Risk of the Available Capital. In the standard model‟s longevity risk module, this Value-at-Risk is approximated by the change in Net Asset Value due to a pre-specified longevity shock which assumes a 25% reduction of mortality rates for all ages. We analyze the adequacy of this shock by comparing the resulting capital requirement to the Value-at-Risk based on a stochastic mortality model. This comparison reveals structural shortcomings of the 25% shock and therefore, we propose a modified longevity shock for the Solvency II standard model. We also discuss the properties of different Risk Margin approximations and find that they can yield significantly

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different values. Moreover, we explain how the Risk Margin may relate to market prices for longevity risk and, based on this relation, we comment on the calibration of the cost of capital rate and make inferences on prices for longevity derivatives. http://link.springer.com/article/10.1007/s11857-010-0125-z

SWITZERLAND



TAIL RISK MEASURES



TAXATION



VALUE-AT-RISK (VAR)




In general, the capital requirement under Solvency II is determined as the 99.5% Value-at-Risk of the Available Capital. In the standard model‟s longevity risk module, this Value-at-Risk is approximated by the change in Net Asset Value due to a pre-specified longevity shock which assumes a 25% reduction of mortality rates for all ages. We analyze the adequacy of this shock by comparing the resulting capital requirement to the Value-at-Risk based on a stochastic mortality model. This comparison

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reveals structural shortcomings of the 25% shock and therefore, we propose a modified longevity shock for the Solvency II standard model. We also discuss the properties of different Risk Margin approximations and find that they can yield significantly different values. Moreover, we explain how the Risk Margin may relate to market prices for longevity risk and, based on this relation, we comment on the calibration of the cost of capital rate and make inferences on prices for longevity derivatives. http://link.springer.com/article/10.1007/s11857-010-0125-z



A Value-at-Risk framework for longevity trend risk. Richards, Stephen J; Currie, Iain D; Ritchie, Gavin P (2012). - London: Institute and Faculty of Actuaries, 2012. - 23 pages. [RKN: 43564] Shelved at: ifp 11/12

Presented on 19 November 2012, Edinburgh; and on 26 November, 2012 (London) Longevity risk faced by annuity portfolios and defined-benefitt pension schemes is typically long-term, i.e. the risk is of an adverse trend which unfolds over a long period of time. However, there are circumstances when it is useful to know by how much expectations of future mortality rates might change over a single year. Such an approach lies at the heart of the one-year, value-at-risk view of reserves, and also for the pending Solvency II regime for insurers in the European Union. This paper describes a framework for determining how much a longevity liability might change based on new information over the course of one year. It is a general framework and can accommodate a wide choice of stochastic projection models, thus allowing the user to explore the importance of model risk. A further benefit of the framework is that it also provides a robustness test for projection models, which is useful in selecting an internal model for management purposes. http://www.actuaries.org.uk/events/one-day/sessional-research-event-value-risk-framework-longevity-liabilities http://www.actuaries.org.uk/sites/all/files/A%20Value%20at%20risk%20framework%20for%20longevity%20risk%20PRINTVERSION.pdf

solvency ii

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