AISAM-Comment Template IAIS- Capital requirements - final

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• Publié par: Nizur
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• Langue: English

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Member and Observer Comments on IAIS Draft Paper Draft Guidance paper on capital requirements (Comments due by 30 August 2007) 1 Name ParagraphComment Resolution reference AISAM General Theproportionality principle should be more clearly reflected also throughout this paper and be properly addressed, as any global framework should allow for simplified approaches taking into account the materiality of the risks. AISAM Title We suggest changing the title into Guidance paper onregulatory capital requirements AISAM 9in relationWe understand that capital available is defined as “capital resources” to 6, 11, 16,in the document. As this terminology is more clear and precise, and, 41, 50, keyfrom our perspective, more neutral, we suggest that the word “capital” features 1&3in §6 line 3, § 7 line 1, § 10 last line, throughout § 11, § 16 line 1, § 41 line 4, § 50 line 1 and in the key features 1 and 3 is replaced by the expression “capital resources”. AISAM 17The requirement for an ORSA to consider both a going concern and a winding up perspective should be carefully considered. For example, the Solvency II project has as a starting point the going concern, not the winding up approach. The winding up approach included in the ORSA should not be used to endanger the basic Solvency II assumptions of 1 in 200 years on a one year observation basis. We further propose changing the wording of the beginning of the paragraph as follows: “In the context of its own risk and solvency assessmentand if the own risk and solvency assessment is relevant as regards the scale, nature or complexity of the insured business, the insurer would be expected to consider […]” Indeed, we consider that the relevance and also the comprehensiveness of the ORSA should be appraised according to the scale, nature or complexity of the business of the insurer. AISAM 18We consider that this paragraph has a limited added value and suggest deleting it AISAM Keyfeature AISAMstrongly supports supervisors adopting an escalating ladder 3 approachto supervisory intervention where the scope and powers available for intervention increase as the financial situation of the undertaking deteriorates. An example is Solvency II where an important element is the supervisory ladder of intervention between the Standard Capital Requirement (SCR) and the Minimum Capital Requirement (MCR). AISAM believes that the approach should be principle based rather than rules based. Key feature 3 could be interpreted as being rules based, i.e. recommending a range of solvency control features, which when triggered “must” resultin predetermined supervisory actions. This could result in inappropriate actions as it is impossible to determine in advance what the most appropriate actions are. AISAM strongly believes that a principles based approach should be adopted with these principles (and indicative supervisory actions) being disclosed.

1 Please provide comments of a more critical nature on scope and content,together with alternate drafting suggestions

AISAM 24Footnote 11 is acceptable since the intervention of the supervisor is possibleif the capital resources are expected to breach the PCR in the immediateIt should however not be considered as a free future. passport for capital addons which should remain in any case exceptional. AISAM 25The breach of MCR should enable supervisors to invoke ultimate supervisory intervention, but only if this is appropriate. The actual extent of the intervention should be that which best protects the interests of policyholders, which in practice is likely to depend upon the individual circumstances of the company in question. st AISAM 27We propose changing the wording of the 1bullet point: “measures to address capitalresourcelevels such as requesting capital and business plans for restoration ofcapital resources at required solvencylevels, […]” Before invoking the actions outlined in paragraph 27, undertakings should be given every opportunity to rectify their position. In the first instance, supervisors should request that the company produce a restorative plan and perhaps perform more frequent reporting. AISAM strongly disagrees with supervisors having the ability to “hire and fire” management team members (unless they fail the “fit and proper” requirements), especially where the undertaking has capital in excess of the MCR. Such powers would be excessive and could be misused. We consider that it should not be the purpose of supervisors to change the insurer’s management. AISAM 28We consider that the wording “while keeping barriers to entry at an appropriate level” could be misinterpreted and needs to be clarified. AISAM 34In line with our comments on §17, we propose changing the wording of the first sentence: “In the context of its overall enterprise risk management frameworkand if the ORSA is relevant as regards the scale, nature or complexity of the insured business, an insurer may performits ORSA and have risk and capital management processes in place to […]” AISAM 34The concept of economic capital is introduced without a definition and without reference to where a definition may be found. AISAM 36In line with our previous comments, we propose changing the wording of the following sentence “Each insurermay manageits financial position relative to its ORSA,and if the ORSA is relevant as regards the scale, nature or complexity of the insured business, and having regard for the regulatory capital requirements […]” AISAM 38& 39Key feature 1 defines the capital requirements over a defined time horizon; we understand therefore that the PCR is enough to enable the insurer to meet its obligations on a runoff basis and not on a going concern, unless we misunderstand the expression ‘going concern basis’. We understand ‘Going concern’ to mean that the PCR should be enough to face an adverse event (related to a time horizon and a level of safety) and to go on writing new business. AISAM 43In paragraph 43 it is stated that where the standard approach “does not fully reflect” the risk profile of the insurer the supervisor should have the flexibility to increase the regulatory capital requirement. AISAM disagrees with this as by definition a “one size fits all” standard approach can never “fully reflect” an individual undertaking’s risk exposure. It should only be in cases where the standard approach materially understates the capital requirement that a capital addon would be appropriate. The standard approach should be designed such that capital addons are neither routinely nor commonly applied. This is in line with the suggested proposal in Solvency II . Furthermore, any modification of the capital requirements should not be arbitrary but must be substantiated.

In any case, we propose to introduce the concept of entity specific parameters within the standard formula. Indeed, the use of entity specific parameters within the standard formula should enable the improvement of the calibration of the capital requirements. This adjustment could lead to higher or lower solvency capital requirements.

We propose the following wording: ”Hence, in cases where the standard approach does not fully reflect the risk profile of the insurer, the supervisor should have the flexibility torequire (or accept) an increasing (or decreasing) regulatory capital requirementcompared with the capital requirement calculated by the standard approach.These changes should rely on the use of entity specific parameters in the standard formula.” Following this proposal, we suggest finding an example where the risk can be lower than with the standard formula calibration. AISAM Keyfeature Weconsider that this part has a limited added value and suggest 5 and § 46deleting it. AISAM Part6 Adiagram or a map with a classification of risks could be useful in enhancing understanding of the risks to be addressed. AISAM 50We suggest changing the wording of the first sentence: “Capital resourcesnot be the most appropriate maysolution/answerfor a particular risk (such as liquidity risk) and it may be more appropriate […]” AISAM Keyfeature Itshould be made clear that technical provisions and capital 6 requirementshave clear and distinct roles. Technical provisions should not be expected to include implicit margins for the unexpected. AISAM Part6.2 Wewelcome these paragraphs and want to underline the clarity and the usefulness of this part. AISAM Part6.2 Wesuggest splitting this part into 2 subparts: 6.2.1 Principles;with paragraphs 52 and 53 6.3.1 Illustration with the risk related to the reserving ( see also figure 2 which is an illustration for the reserve risk)