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!@. #. Individual Capital Assessment David King 8 th September 2004. Contents. Regulatory Requirements: Pillar 1 vs Pillar 2 ICA: Implementation Progress ICA: Assumptions ICA: Implications. Regulatory Requirements: Pillar 1 vs Pillar 2. Pillar 1 vs Pillar 2 Capital Requirements.

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Presentation Transcript
contents
Contents
  • Regulatory Requirements: Pillar 1 vs Pillar 2
  • ICA: Implementation Progress
  • ICA: Assumptions
  • ICA: Implications
slide3

Regulatory Requirements:

Pillar 1 vs Pillar 2

pillar 1 vs pillar 2 capital requirements
Pillar 1 vs Pillar 2 Capital Requirements

Pillar 2 Surplus

Market Value Assets

Realistic Value Assets

Realistic Surplus

Admissible assets

Regulatory Surplus

ICA

Risk Capital Margin

WPICC

Long-term Insurance Capital Requirement

Realistic Value Liabilities

Market (Fair) Value Liabilities

Resilience Capital Requirement

Mathematical reserves

Regulatory Peak

Realistic Peak

Pillar 1

Pillar 2

  • WPICC is set so that regulatory surplus equals realistic surplus if the former is higher; zero otherwise
  • If realistic assets equal admissible assets, WPICC is the amount of capital to bring the regulatory peak up to the realistic level
risks covered peak 1 vs peak 2 vs ica
Risks Covered: Peak 1 vs Peak 2 vs ICA

Market Risk

Market Risk

Market Risk

Credit Risk

Credit Risk

Credit Risk

Insurance Risk

Mortality

Persistency

Expenses

Insurance Risk

Mortality

Persistency

Expenses

Insurance Risk

Mortality

Persistency

Expenses

Operational Risk

Operational Risk

Operational Risk

Liquidity Risk

Liquidity Risk

Liquidity Risk

Group Risk

Group Risk

Group Risk

Peak 1

(LTICR + RCR + WPICC)

Peak 2 (RCM)

ICA

capital requirement rules peak 1
Capital Requirement Rules: Peak 1

Resilience CapitalRequirement

Long-Term InsuranceCapital Requirement

calculation of capital resource requirements crr
Calculation of Capital Resource Requirements (CRR)
  • PRU 2.1.35 defines a firm’s CRR to be:
  • Resilience Capital Requirement
  • + Long-Term Insurance Capital Requirement
  • + With-Profit Insurance Capital Component
  • FSA will issue Individual Capital Guidance (FSA’s view of appropriate capital resources for a firm), based on the firm’s ICA
  • To compare ICA with CRR, adjustment is needed for any differences in valuing assets and liabilities under Pillar 2. Possible approach:
  • Adjusted ICA = ICA – Max (0, Realistic Value Reserves – Market Value Liabilities)
  • – (Market Value Assets – Realistic Value Assets)
  • Additional capital required as a result of ICA is
  • Max (0, Adjusted ICA – CRR)
typical ica stress tests vs rcm
Typical ICA Stress Tests vs RCM

* Based on 10-year gilts

typical correlation assumptions
Typical Correlation Assumptions
  • Typically, companies are reporting diversification benefits of around 25-30%
top ten management actions from ica
Top Ten Management Actions From ICA
  • Ensure the firm’s ICA calculation is consistent with its risk policies
  • Collect and analyse company/market data to justify volatilities and correlations
  • Build management information systems to understand risk exposures
  • Understand key drivers of ICA and develop mitigations to reduce capital requirements
  • Develop analysis of change in ICA over the period
  • Take ownership of calibration of the ESG
  • External review of ICA to negotiate Pillar 1 waivers
  • Develop management information to ensure ICA known at all times
  • Price new business to reflect ICA capital costs
  • Manage business on the basis of risk based capital