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Solvency Performance of Turkish Insurance Sector Dr. Ahmet GENÇ Director General of Insurance 09/30/2010
Outline • General • Current Turkish Implementation and Results • Solvency II Studies in Turkey • Future Plans
General • There are two main calculation methods on solvency; • Solvency Margin - RBC Model It’s been mainly used in the US and partially in Japan and also in England since 1980’s and 1990’s. This method is used especially in the EU. The solvency margin is the amount of regulatory capital an insurance undertaking is obliged to hold against unforeseen events. Solvency margin requirements have been in place since the 1970s and it was acknowledged in the third generation Insurance Directives adopted in the 1990s.
Current Turkish Implementation • Two types of calculation ; 1- Solvency Margin • Premium principle • Claim principle • Required capital is the higher of amounts determined according to premium and claim principle.
Current Turkish Implementation 2-RBC Method Risk Based Accounts: • Asset Risk • Reinsurance Risk • Off Balance Sheet Risk • Excessive Premium Increase Risk • Underwriting Risk In the required capital calculation to be determined as per the second method, the asset risk, reinsurance risk, excessive premium increase risk, outstanding claim provision risk, underwriting risk and interest rate and currency risk of the companies are taken into consideration.
RBC Model of Turkey • Example: In calculating the asset risk, asset account items are calculated with their risk weights indicated below; a) Cash0.000 * relevant amount b)Banks0.010 * relevant amount c)Government Bonds (Including Eurobond)0.000 * relevant amount • Receivables from Reverse Repo Transactions0.000 * relevant amount Performed In Exchange of State Borrowing Notes e)Stocks Pertaining to Own Capital Group0.250 * relevant amount and Other Variable Revenue Financial Assets GRAND TOTAL = REQUIRED CAPITAL
How to Calculate Equity? • Equity means the total of; a) paid capital b) profit reserves c) capital reserves d) total of previous years' profits and the period profit after tax, e) equalization provision, f) sub-ordinated debts * Obtained by excluding the tangible assets and all foreseeable liabilities from the companies’ assets, minus the amount derived by deducting the losses of previous years and the period loss, if any.
Required Capital Required Capital is the highest one of Solvency Margin Method or RBC Method.
Capital Adequacy Indicators of Turkish Insurance Sector *:Generally, RBC method results more elevated in non-life and Solvency Margin results higher in life branches.
Solvency II Studies in TurkeyQuantitative Impact Studies (QIS) in Turkey • Solvency II Committee was established by Treasury on March 2009 in order to inform the insurance sector on Solvency II. • The aim of the Committee is to inform the sector, to engage the sector’s attention to Solvency II and to assess the impact of Solvency II on companies.
Quantitative Impact Studies (QIS) in Turkey • The Committee pioneered to the sector for completing the QIS 4 studies and prepared manuals which describe how the QIS 4 solo spreadsheet should be filled.
A pilot study for the sector • QIS 4 was a pilot study for the Turkish insurance sector; across the companies only ten of them took part in the QIS-4 studies. • Ten companies, of which 5 operate in life, 4 non-life and 1 in reinsurance participated in those studies.
A pilot study for the sector • After the completion of the QIS 4 studies, companies reported their results to the Treasury with regard to Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR). • Next, a comparison was made between the QIS 4 solvency requirement and the requirement defined in the current legislation regarding solvency.
Future Plans • The Committee will work intensely on the pillar 2 and 3 of Solvency II. • A detailed notification on QIS; the experiences of the ten participant companies and the whole Solvency II system will be made to the sector.
According to the road map, similar studies are planned to be done for all of the companies in the sector for QIS 5. These ten participant companies will guide to the sector during the next studies. The manuals will also be helpful for the companies.