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CONTACT DETAILS
Physical Address:
Riverwalk Office Park, Block B
41 Matroosberg Road (Corner Garsfontein and
Matroosberg Roads) Ashlea Gardens,
Extension 6
Menlo Park
Pretoria
South Africa
0081
Postal Address:
P.O. Box 35655
Menlo Park
0102
Switchboard: +27 12 428 8000
Facsimile: +27 12 347 0221
Email: (for general queries)
(for SAM SA QIS1 related queries)
Website: www.fsb.co.za
Table of contents
INTRODUCTION 6
SECTION 1 – VALUATION 7
V.1. Assets and Liabilities other than Technical Provisions 7
V.1.1. Valuation approach 7
V.1.2. Guidance for marking to market and marking to model 8
V.1.3. Requirements for the SA QIS1 valuation process 9
V.1.4. IFRS Solvency adjustments for valuation of assets and liabilities other than technical provisions under SA QIS1 10
V.2. Technical Provisions 20
V.2.1. Segmentation 21
V.2.2. Best estimate 25
V.2.2.1. Methodology for the calculation of the best estimate 25
V.2.2.2. Assumptions underlying the calculation of the best estimate 40
V.2.2.3. Recoverables 44
V.2.3. Discount rates 50
V.2.4. Calculation of technical provisions as a whole 55
V.2.5. Risk margin 57
V.2.6. Proportionality 69
V.2.6.1. Possible simplifications for life insurance 76
V.2.6.2. Possible simplifications for non-life insurance 80
V.2.6.3. Possible simplifications for reinsurance recoverables 86
SECTION 2 – SCR – STANDARD FORMULA 91
SCR.1. Overall structure of the SCR 91
SCR.1.1. SCR General remarks 91
SCR.1.2. SCR Calculation Structure 95
SCR.2. Loss absorbing capacity of technical provisions and deferred taxes 98
SCR.2.1. Definition of future discretionary benefits 98
SCR.2.2. Gross and net SCR calculations 98
SCR.2.3. Calculation of the adjustment for loss absorbency of technical provisions and deferred taxes 99
SCR.3. SCR Operational risk 102
SCR.4. SCR Intangible asset risk module 105
SCR.5. SCR market risk module 106
SCR.5.2. Introduction 106
SCR.5.3. Scenario-based calculations 109
SCR.5.4. Look-through approach 109
SCR.5.5. Interest rate risk (Mktint) 109
SCR.5.6. Equity risk (Mkteq) 113
SCR.5.7. Property risk (Mktprop) 115
SCR.5.8. Currency risk (Mktfx) 117
SCR.5.9. Spread/Credit Default risk (Mktsp/Mktcred) 119
SCR.5.10. Market risk concentrations (Mktconc) 130
SCR.5.11. Illiquidity premium risk (Mktip) 135
SCR.5.12. Treatment of risks associated to SPV notes held by an insurer 136
SCR.6. SCR Counterparty risk module 137
SCR.6.1. Introduction 137
SCR.6.2. Calculation of capital requirement for type 1 exposures 139
SCR.6.3. Loss-given-default for risk mitigating contracts 141
SCR.6.4. Loss-given-default for type 1 exposures other than risk mitigating contracts 144
SCR.6.5. Calculation of capital requirement for type 2 exposures 144
SCR.6.6. Treatment of risk mitigation techniques 145
SCR.6.7. Simplifications 147
SCR.7. SCR Life underwriting risk module 150
SCR.7.1. Structure of the life underwriting risk module 150
SCR.7.2. Mortality risk (Lifemort) 152
SCR.7.3. Longevity risk (Lifelong) 154
SCR.7.4. Disability-morbidity risk (Lifedis) 156
SCR.7.5. Lapse risk (Lifelapse) 159
SCR.7.6. Expense risk (Lifeexp) 164
SCR.7.7. Revision risk (Liferev) 166
SCR.7.8. Catastrophe risk sub-module (LifeCAT) 167
SCR.8. Health underwriting risk 169
SCR.8.1. Structure of the health underwriting risk module 169
SCR.8.2. SLT Health (Similar to Life Techniques) underwriting risk sub-module 172
SCR.8.3. Non-SLT Health (Not Similar to Life Techniques) underwriting risk sub-module 180
SCR.8.4. Health risk equalization systems 188
SCR.8.5. Health catastrophe risk sub-module 188
SCR.9. Non-life underwriting risk 198
SCR.9.1. Non-life underwriting risk module (SCRnl) 198
SCR.9.2. Non-life premium & reserve risk (NLpr) 200
SCR.9.3. Lapse risk (NLLapse) 212
SCR.9.4. Non life CAT risk sub - module 215
SCR.10. User specific parameters 250
SCR.10.1. Subset of standard parameters that may be replaced by insurer-specific parameters 250
SCR.10.2. The supervisory approval of insurer-specific parameters 250
SCR.10.3. Requirements on the data used to calculate insurer-specific parameters 250
SCR.10.4. The standardised methods to calculate insurer-specific parameters 251
SCR.10.5. Premium Risk 252
SCR.10.6. Reserve Risk 258
SCR.10.7. Shock for revision risk 262
SCR.11. Ring- fenced funds 266
SCR.12. Financial Risk mitigation 267
SCR.12.1. Scope 267
SCR.12.2. Conditions for using financial risk mitigation techniques 267
SCR.12.3. Basis Risk 268
SCR.12.4. Shared financial risk mitigation 268
SCR.12.5. Rolling and dynamic hedging 268
SCR.12.6. Credit quality of the counterparty 269
SCR.12.7. Credit derivatives 270
SCR.12.8. Collateral 271
SCR.12.9. Segregation of assets 271
SCR.13. Insurance risk mitigation 272
SCR.13.1. Scope 272
SCR.13.2. Conditions for using insurance risk mitigation techniques 272
SCR.13.3. Basis Risk 272
SCR.13.4. Credit quality of the counterparty 273
SCR.14. First Party Captive simplifications 274
SCR.14.1. Scope for application of simplifications 274
SCR.14.2. Simplifications for first party captives only 275
SCR.14.3. Simplifications applicable on ceding insurers to captive reinsurers 277
SCR.15. Participations 278
SCR.15.1. Introduction 278
SCR.15.2. Valuation 278
SCR.15.3. Solvency Capital requirement Standard formula 280
SCR.15.4. Treatment of participations in insurance or reinsurers 281
SECTION 3 – Internal Model 283
SECTION 4 – Minimum Capital Requirement 284
MCR.1. Introduction 284
MCR.2. Overall MCR calculation 284
MCR.3. Linear formula – General considerations 285
MCR.4. Linear formula component for non-life insurance or reinsurance obligations 286
MCR.5. Linear formula component for life insurance or reinsurance obligations 287
MCR.6. Linear formula component for composite insurers 288
SECTION 5 – OWN FUNDS 291
OF.1. Introduction 291
OF.2. Classification of own funds into tiers and list of capital items: 291
OF.2.1. Tier 1 – List of own-funds items 291
OF.2.2. Tier 1 Basic Own-Funds – Criteria for classification 292
OF.2.3. Reserves the use of which is restricted 294
OF.2.4. Expected profits included in future premiums 295
OF.2.5. Tier 2 Basic own-funds – List of own-funds items 297
OF.2.6. Tier 2 Basic own-funds – Criteria for Classification 297
OF.2.7. Tier 3 Basic own-funds– List of own-funds items 298
OF.2.8. Tier 3 Basic own-funds– Criteria 298
OF.2.9. Tier 2 Ancillary own-funds 299
OF.2.10. Tier 3 Ancillary own-funds 300
OF.3. Eligibility of own funds 300
OF.4. Transitional provisions 300
OF.4.1. Criteria for grandfathering into Tier 1 301
OF.4.2. Criteria for grandfathering into Tier 2 302
OF.4.3. Limits for grandfathering 302
SECTION 6 – GROUPS 303
INTRODUCTION
The first South African Quantitative Impact study (SA QIS1) is applicable to all long-term and short-term insurers[1]. Completion of SA QIS1 is voluntary[2] but it is in each insurer’s best interest to complete the QIS to determine its readiness and progress in its preparation for the future Solvency Assessment and Management (SAM) regime. In addition, as described in the published Internal Model Approval Process (IMAP) document, the completion of quantitative impact studies will be a prerequisite for insurers wishing to participate in the internal model pre-assessment phases.
The purpose of SA QIS1 is to assist in the development of the proposed SAM regime including the calibration of parameters for the standard formula to calculate the solvency capital requirement. In some cases alternative methods are tested to inform the decision-making process. The QIS will also be used to identify areas where further work may be required as well as areas that may be difficult to complete in practice and may need simplification. The contents of SA QIS1 by no means pre-empt the final regime; we stress that SA QIS1 is a test exercise and that the final regulatory requirements are still under development.
The reporting date to be used for SA QIS1 is 31 December 2010, or (on application to the FSB) the closest year-end for which information is available. The results of SA QIS1 do not need to be audited. The submission needs to be signed-off by the public officer although evidence that the board were involved or took note of this exercise would be preferable. A spreadsheet will be made available in which the results of the calculations (as described in this technical specification) must be completed. This spreadsheet, together with the answers to questions included in the qualitative questionnaire[3] should be submitted electronically (i.e. in Excel and Word format) to the FSB at by latest close of business Friday 16 September 2011. Late submissions will not be included in the analysis of the results.
SA QIS1 needs to be completed on a solo entity basis only i.e.no group results are required.
Simplifications included in this technical specification are for the purposes of completing SA QIS1 and will not necessarily be incorporated in the same way in the final legislation.
Since the first draft of the South African primary legislation is not yet publicly available, references to sections of the Solvency II Directive have been retained in this document.
SECTION 1 – VALUATION
V.1. Assets and Liabilities other than Technical Provisions
V.1. The reporting date to be used by all participants should be 31 December 2010 (or closest year-end, after approval by the FSB).
V.1.1. Valuation approach
V.2. The primary objective for valuation as set out in Article 75 of the Framework Solvency II Directive (Directive 2009/138/EC) requires an economic, market-consistent approach to the valuation of assets and liabilities. According to the risk-based approach of SAM, when valuing balance sheet items on an economic basis, insurers should consider the risks that arise from holding a balance sheet item, using assumptions that market participants would use in valuing the asset or the liability.
V.3. According to this approach, insurers and reinsurers value assets and liabilities as follows:
i. Assets should be valued at the amount for which they could be exchanged between knowledgeable willing parties in an arm's length transaction;
ii. Liabilities should be valued at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm's length transaction.
When valuing financial liabilities under point (ii) no subsequent adjustment to take account of the change in own credit standing of the insurers or reinsurer should be made.
V.4. Valuation of all assets and liabilities, other than technical provisions should be carried out, unless otherwise stated in conformity with International Financial Report Standards (IFRS) as prescribed by the International Accounting Standards Board (IASB). They are therefore considered a suitable proxy to the extent they reflect the economic valuation principles of SAM. Therefore the underlying principles (definition of assets and liabilities, recognition and derecognition criteria) stipulated in IFRS are also considered adequate, unless stated otherwise and should therefore be applied to the SAM balance sheet.
V.5. When creating the SAM balance sheet for the purpose of the SA QIS1, unless stated otherwise, it is only those values which are economic and which are consistent with the additional guidance specified in this document which should be used.
V.6. In particular, in those cases where the proposed valuation approach under IFRS does not result in economic values reference should be made to the additional guidance in subsection V.1.4. onwards where a comprehensive overview of IFRS and SAM valuation principles is presented.
V.7. Furthermore valuation should consider the individual balance sheet item. The assessment whether an item is considered separable and sellable under SAM should be made during valuation. The “Going Concern” principle and the principle that no valuation discrimination is created between those insurers and reinsurers that have grown through acquisition and those which have grown organically should be considered as underlying assumptions.
V.8. The concept of materiality should be applied as follows:
“Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively; influence the economic decisions of users taken on the basis of the SAM financial reports.” Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size, nature or potential size of the item, or a combination of those, could be the determining factor.”
V.9. Figures which do not provide for an economic value can only be used within the SAM balance sheet under exceptional situations where the balance sheet item is not significant from the point of view of reflecting the financial position or performance of an (re)insurer or the quantitative difference between the use of accounting and SAM valuation rules is not material taking into account the concept stipulated in the previous paragraph.
V.10. On this basis, the following hierarchy of high level principles for valuation of assets and liabilities under SA QIS1 should be used:
i. Insurers must use a mark to market approach in order to measure the economic value of assets and liabilities, based on readily available prices in orderly transactions that are sourced independently (quoted market prices in active markets). This is considered the default approach.
ii. Where marking to market is not possible, mark to model techniques should be used (any valuation technique which has to be benchmarked, extrapolated or otherwise calculated as far as possible from a market input). Insurers will maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Nevertheless the main objective remains, to determine the amount at which the assets and liabilities could be exchanged between knowledgeable willing parties in an arm´s length transaction (an economic value according to Article 75 of the Solvency II Framework Directive).
V.1.2. Guidance for marking to market and marking to model
V.11. Regarding the application of fair value measurement insurers might take into account Guidance issued by the IASB (e.g. definition of active markets, characteristics of inactive markets), when following the principles and definitions stipulated, as long as no deviation from the “economic valuation” principle results out of the application of this guidance.
V.12. It is understood that, when marking to market or marking to model, insurers will verify market prices or model inputs for accuracy and relevance and have in place appropriate processes for collecting and treating information and for considering valuation adjustments. Where an existing market value is not considered appropriate for the purpose of an economic valuation, with the result that valuation models are used, insurers should provide a comparison of the impact of the valuation using models and the valuations using market value
V.13. Subsection V.1.4 includes tentative views on the extent to which IFRS figures could be used as a reasonable proxy for economic valuations under SAM.
V.14. These tentative views are developed in the tables included below in this subsection (see V.1.4: IFRS solvency adjustment for valuation of assets and other liabilities under SA QIS1). These tables identify items where IFRS valuation rules might be considered consistent with economic valuation, and where adjustments to IFRS are needed which are intended to bring the IFRS treatment closer to an economic valuation approach because the IFRS rules in a particular area are not considered consistent.