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Individual Capital Assessments – so what? Mohammad Khan The 3 rd Younger Members Convention

Individual Capital Assessments – so what? Mohammad Khan The 3 rd Younger Members Convention. 29-30 November 2004, The Chesford Grange Hotel, Kenilworth. Individual Capital Assessments (ICA). What is capital? ICA quick review Is the ICA useful? Lessons learnt

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Individual Capital Assessments – so what? Mohammad Khan The 3 rd Younger Members Convention

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  1. Individual Capital Assessments – so what?Mohammad KhanThe 3rd Younger Members Convention 29-30 November 2004, The Chesford Grange Hotel, Kenilworth

  2. Individual Capital Assessments (ICA) • What is capital? • ICA quick review • Is the ICA useful? • Lessons learnt • What do you do when the regulator knocks at your door?

  3. What is capital?

  4. ICA ECR ICG RMM Internal Capital Assessment (ICA) Regulatory capital requirements (formula based) Individual Capital Guidance (ICG) set by the FSA ICA Quick Review - 1

  5. ICA Quick Review - 2 - Exemptions Exemption from: Run-off companies (with Part IV permission) ECR Mutuals (not subject to insurance directive) ECR UK branches of EEA and Swiss firms ECR, ICA Note: UK branches of non-EEA, non-Swiss firms: • ECR to be met for Worldwide business

  6. ICA Quick Review – 3 – What are the risks? Insurance risk Operational risk “inherent uncertainties as to the occurrence, amount and timing of insurance liabilities” “risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events” Market risk Liquidity risk “adverse variation in costs or returns resulting from a change in market price or rate” “risk that… though solvent … does not have sufficient financial resources available to meet its obligations as they fall due or… only at excessive cost” “if another party fails to perform its obligations or fails to perform them in a timely fashion” “risk arising from membership of a group of firms” Credit risk Group risk

  7. ICA Quick Review - 4 CP190 and CP04/07 is not just about Models Need to embed Capital Management into organisation Is not a threat but an opportunity for good capital management Regulatory timescales are short

  8. Is the ICA useful? – 1 • Yes… • …but depends on how you view it…

  9. Is the ICA useful? – 2 – Capital Management Process Risk appetite Risk assessment Planning Risk management practices Determine capital requirements Allocation of capital Capitalmanagement RAPM Planning Products andpricing Investment andreinsurance Stakeholder communication

  10. Is the ICA useful? - 3 • Why go to all this bother?

  11. Is the ICA useful? – 4 - Significant and increasing pressures require all insurance companies to manage capital more effectively Longer-term pressures that require action now Immediate Pressures • Continuing low interest rate environment • Increases in business failures and recent asset quality concerns / writedowns • Stock market volatility • Quantification of overall risks • Effective usage of capital • New Economic Capital Requirement • Integrated Prudential Sourcebook • Stakeholder expectations • Delivering price benefits to customers • Rating agencies demanding greater transparency • Global consolidation in financial services • Regulatory Focus • Significant management, process, and behavioural change needed – Prudential Sourcebook • IAS • Greater volatility of earnings

  12. Is the ICA useful? – 5 – A number of economic capital specific challenges How to deal with risk diversification across risk classes? Value management framework How to deal with geographical risk diversification? Economic capital How to deal with surplus capital? Risk management framework How to deal with capital held as acquisition war-chest? How to deal with reputational capital? How to deal with differences between economic, actual and regulatory capital?

  13. Lessons Learnt – 1 • It’s not easy • It requires the buy in of many people in the organisation, not just management

  14. Tax IT Accounting Partial Involvement Risk Mgmt Sales & Marketing Others - External parties Consultants FSA Rating Agencies Reinsurers Lessons Learnt – 2 – Who is involved? Board & Senior Management Underwriters/ Account Managers Finance Core Involvement Treasury Reins Claims Actuaries

  15. Lessons Learnt – 3 – What’s the process? • It takes time • There was a lot to do

  16. Business processes Analysis Management information Planning Modelling S&S testing Economic Capital Model ICA Adverse scenarios Allowance for other risks Risk register Lessons Learnt - 4 – Ideal ICA? ECR FSA discussion MI ICG • Solvency monitoring • ECR, ICA, ICG • Capital management

  17. What do you do when the regulator knocks at your door? - 1 • Panic? • Pray? • Pretend you are not there? • Show them your whizzy model? • Show them a fully documented framework with integrated controls and processes?

  18. What do you do when the regulator knocks at your door? - 2 • PREPARE BEFORE THEY KNOCK

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