Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-09T03:41:20.716Z Has data issue: false hasContentIssue false
  • English
  • Français

Comparing Solvency II and Life and General Insurance Capital approaches to capital determination of a life portfolio in the presence of stress scenarios

Published online by Cambridge University Press:  08 February 2018

Kangjing Tan  and
Aaron Bruhn
Kangjing Tan
Affiliation:
College of Business and Economics, Australian National University, Canberra, ACT 0200, Australia
Aaron Bruhn*
Affiliation:
College of Business and Economics, Australian National University, Canberra, ACT 0200, Australia
*
*Correspondence to: Aaron Bruhn, College of Business and Economics, Australian National University, Canberra, ACT 0200, Australia. Tel: +612 61254904; E-mail: aaron.bruhn@anu.edu.au
Get access Rights & Permissions [Opens in a new window]

Abstract

The European-centric Solvency II and Australian-centric Life and General Insurance Capital regimes are two examples of risk-based approaches to capital determination and risk management for life insurers. Both consist of a three-pillar structure covering capital, risk management and disclosure requirements. We apply the capital requirements of each regime to three synthetic sets of insurance policies, including a risk, annuity and combined portfolios, and consider the impact on capital arising from three separate and relatively severe stress events. Results highlight the relatively capital intensive nature of annuities, the differences between different capital regimes, the significance of solvency II’s matching adjustment and the robustness of each regime to both pandemic and economic stresses. Results also highlight the nature of diversification benefits from within each capital regime, on overall capital requirements.

Keywords

SolvencyLAGICCapitalLife insurance
Type
Paper
Information
Annals of Actuarial Science , Volume 13 , Issue 1 , March 2019 , pp. 36 - 66
Copyright
© Institute and Faculty of Actuaries 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Australian Bureau of Statistics (2014). Australian Life Tables. Available online at the address http://www.abs.gov.au/ausstats/abs@.nsf/mf/3302.0.55.001 [accessed 29-Sept-2015].Google Scholar
Actuaries Institute (2013). The Practice of Life Insurance in Australia – Part A, 2nd edition. The Institute of Actuaries of Australia, Sydney.Google Scholar
Australian Prudential Regulatory Authority (APRA) (2007). APRA’s Pandemic Stress Test of the Insurance Industry APRA Insight, Volume 3. APRA, Sydney.Google Scholar
Australian Prudential Regulatory Authority (APRA) (2012). Regulatory impact statement – life and general insurance capital review. Available online at the address http://www.apra.gov.au/Policy/Documents/Regulation-Impact-Statement-LAGIC.pdf [accessed 18-Mar-2015].Google Scholar
Australian Prudential Regulatory Authority (APRA) (2013 a). Prudential Standard LPS 110 – Capital Adequacy. Available online at the address http://www.apra.gov.au/lifs/PrudentialFramework/Documents/LPS-110-Capital-Adequacy-January-2013.pdf [accessed 29-May-2015].Google Scholar
Australian Prudential Regulatory Authority (APRA) (2013 b). Prudential Standard LPS 114 – Capital Adequacy: Asset Risk Charge. Available online at the address http://www.apra.gov.au/lifs/PrudentialFramework/Documents/LPS-114-Capital-Adequacy-Asset-Risk-Charge-January-2013.pdf [accessed 29-May-2015].Google Scholar
Australian Prudential Regulatory Authority (APRA) (2013 c). Prudential Standard LPS 115 – Capital Adequacy: Insurance Risk Charge. Available online at the address http://www.apra.gov.au/lifs/PrudentialFramework/Documents/LPS-115-Capital-Adequacy-Insurance-Risk-Charge-January-2013.pdf [accessed 29-May-2015]. Google Scholar
Australian Prudential Regulatory Authority (APRA) (2013 d). Prudential Standard LPS 117 – Capital Adequacy: Asset Concentration Risk Charge. Available online at the address http://www.apra.gov.au/lifs/PrudentialFramework/Documents/LPS-117-Capital-Adequacy-Asset-Concentration-Risk-Charge-January-2013.pdf [accessed 29-May-2015].Google Scholar
Australian Prudential Regulatory Authority (APRA) (2013 e). Prudential Standard LPS 118 – Capital Adequacy: Operational Risk Charge. Available online at the address http://www.apra.gov.au/lifs/PrudentialFramework/Documents/LPS-118-Capital-Adequacy-Operational-Risk-Charge-January-2013.pdf [accessed 29-May-2015].Google Scholar
Association of Superannuation Funds of Australia (ASFA) (2014). ASFA Retirement Standard. Available online at the address http://www.superannuation.asn.au/resources/retirement-standard [accessed 29-Sept-2015].Google Scholar
Bellis, C., Lyon, R., Klugman, J. & Shepherd, J. (2010). Understanding Actuarial Management: The Actuarial Control Cycle, 2nd edition. The Institute of Actuaries of Australia, Sydney.Google Scholar
Berry, P., Tsui, L. & Jones, G. (2010). Our new “old” problem – pricing longevity risk in Australia. Presentation to the Institute of Actuaries 5th Financial Services Forum, Sydney, 13–14 May.Google Scholar
Browne, B., Bruhn, A. & Huynh, A. (2013). Potential consequences of pandemic risks. Health and Ageing Newsletter, no. 28, April, The Geneva Association.Google Scholar
Comité Européen des Assurances (CEA) (2007). Solvency II – understanding the process. Available online at the address http://www.gdv.de/wp-content/uploads/2007/07/PD36_CEA_Paper_engl.pdf [accessed 22-Apr-2015].Google Scholar
Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) (2006 a). QIS 1 summary report. Available online at the address http://ec.europa.eu/finance/insurance/docs/solvency/impactassess/annex-c04_en.pdf [accessed 22Apr-2015].Google Scholar
Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) (2006 b). QIS2 summary report. Available online at the address http://ec.europa.eu/finance/insurance/docs/solvency/impactassess/annex-c05_en.pdf [accessed 22-Apr-2015].Google Scholar
Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) (2007). QIS 3 report. Available online at the address https://www.knf.gov.pl/Images/Badanie_QIS3_-_raport_europejski_tcm75-2483.pdf [accessed 22-Apr-2015].Google Scholar
Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) (2008). QIS 4 summary report. Available online at the address http://www.plesner.com/resources/1111.pdf [accessed 22-Apr-2015].Google Scholar
Central Bank of Ireland (2013). Address by Deputy Governor Matthew Elderfield to the European Insurance Forum. Available online at the address https://www.centralbank.ie/press-area/speeches/Pages/MatthewElderfieldEuropeanInsuranceForum2013.aspx [accessed 22-Apr-2015].Google Scholar
Challenger (2016). Analyst Pack FY16. Available online at the address http://www.challenger.com.au/group/Part_5_-_Analyst_Pack_FY16.pdf [accessed 6-Jan-2017].Google Scholar
European Insurance and Occupational Pensions Authority (EIOPA) (2011). QIS 4 summary report. Available online at the address http://www.plesner.com/resources/1111.pdf [accessed 22-Apr-2015].Google Scholar
European Insurance and Occupational Pensions Authority (EIOPA) (2014). The underlying assumptions in the standard formula for the Solvency Capital Requirement calculation. EIOPA-14-322. Available online at the address https://eiopa.europa.eu/Publications/Standards/EIOPA-14-322_Underlying_Assumptions.pdf [accessed 17-Oct-2016].Google Scholar
European Commission (2013). Press Release: Commissioner Barnier welcomes trilogue agreement by Council and Parliament on the “Omnibus II” Directive. Available online at the address http://europa.eu/rapid/press-release_MEMO-13-992_en.htm [accessed 22-Apr-2015].Google Scholar
European Commission (2014). Press Release: Omnibus II vote: a big step towards a safer and more competitive insurance industry. Available online at the address http://europa.eu/rapid/press-release_STATEMENT-14-61_en.htm [accessed 22-Apr-2015].Google Scholar
European Commission (2015). Press Release: Solvency II overview – frequently asked questions. Available online at the address http://europa.eu/rapid/press-release_MEMO-15-3120_en.htm [accessed 24-Apr-2015].Google Scholar
The European Commission (2015). Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). Official Journal of the European Union, L12/1, pp. 1–797.Google Scholar
The European Parliament and the Council of the European Union (2002). Directive 2002/83/EC Of The European parliament and of the council of 5 November 2002 concerning life assurance. Official Journal of the European Communities, L345/1, pp. 1–51.Google Scholar
The European Parliament and the Council of the European Union (2009). Directive 2009/138/EC of the European Parliament and of the council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). Official Journal of the European Union, L335/1, pp. 1–155.Google Scholar
Financial Services Council (FSC) (2012). Graduation of the 2004-2008 lump sum investigation data. Available online at the address https://www.actuaries.asn.au/Library/Reports/2012/2004-2008%20LS%20Graduation%20Report%20-%20FINAL.pdf [accessed 29-Sept-2015].Google Scholar
Gilling, M. (2013). Anti-selective lapse effects in YRT business. Paper presented to the Actuaries Institute Summit, Sydney, 20–21 May.Google Scholar
International Association of Insurance Supervisors (2015). Glossary. Available online at the address http://iaisweb.org/index.cfm?event=getPage&nodeId=25241 [accessed 12-Apr-2015].Google Scholar
Jean, S., Eom, S.-M. & Henriquez, P. (2011). Solvency II update – QIS5 results. The Financial Reporter, June, 85.Google Scholar
Johnson, N.P. & Mueller, J. (2002). Updating the accounts: global mortality of the 1918–1920 “Spanish” influenza pandemic. Bulletin of the History of Medicine, 76(1), 105–115.Google Scholar
Monetary Authority of Singapore (2014). Review on risk-based capital framework for insurers in Singapore (“RBC 2 Review”) – second consultation. Available online at the address http://www.mas.gov.sg/~/media/resource/publications/consult_papers/2014/Consultation%20Paper_RBC%202_2014.pdf [accessed 22-Apr-2015].Google Scholar
Mulquiney, P. & Miller, H. (2013). How to extrapolate the yield curve. Actuaries, August, pp. 35–37.Google Scholar
O’Donovan, G.D. (2014). Solvency II: Stakeholder Communications and Change Management, 2nd edition. Gower Publishing, Farnham, Surrey, UK.Google Scholar
Rozar, T., Rushing, S. & Willeat, S. (2010). Report on the lapse and mortality experience of post-level premium period term plans, Society of Actuaries, Schaumburg, IL.Google Scholar
Sandstrom, A. (2010). Handbook of Solvency for Actuaries and Risk Managers (Theory and Practice). Chapman and Hall/CRC, London.Google Scholar
Society of Actuaries Ireland (2013). Solvency II for Beginners. Available online at the address https://web.actuaries.ie/events/2013/05/solvency-ii-beginners [accessed 24-Apr-2015].Google Scholar
Standard & Poor’s, (30 April 2015). Default, transition, and recovery: 2014 Annual Global Corporate Default Study and Rating Transitions, Ratings Direct. McGraw Hill Financial. Available online at the address https://www.standardandpoors.com/en_US/delegate/getPDF?articleId=1664056&type=COMMENTS&subType=REGULATORY [accessed 29-September-2015].Google Scholar
Swiss Re (2012). Facing the interest rate challenge. In J.V. Cordova & K. Karl (Eds.), Sigma, 4th edition, (pp. 1–44). Swiss Re, Zurich, Switzerland.Google Scholar