Insurance Groups Supervision

1
Insurance Groups Supervision

• Istambul
• 8 February 2008

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Insurance Groups Supervision Dir. 98/78

• Abbreviations
• ? sum
• ? belonging to ? not belonging to
• ins. insurer, insurance
• K capital (O.F. and K are taken as
  synonymous)
• KR capital requirements
• MCR minimum capital requirement
• O.F. own funds
• SCR solvency capital requirement
• TP technical provisions

3
Insurance Groups Supervision Dir. 98/78

• Plan
• 1. Why insurance group regulation -and
  co-operation between involved supervisors- are
  necessary
• 2. How Dir. 98/78 (and Dir. 2002/87) deals with
  the issue insurance groups (and financial
  conglomerates) regulation
• 3. Solvency 2 a brief overview

4
Why insurance groups regulation is necessary.

Example of an insurer with O.F. requirements
20 of TP (net of reinsurance)
O.F. 35
Assets235
O.F. requirements 40
TP 200
the insurers O.F. are unsufficient
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creation of an insurance subsidiary
Assets A205
O.F. A 35
Insurer A creates a subsidiary an insurer B
TP A 200
O.F. requirements 40
30

• Shares B

A mother insurer
with a view to transferring half of its TP to B
B subsidiary insurer
Assets brought by A
30
O.F. B 30
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creation of an insurance subsidiary
Assets A105
O.F. A 35
A transfers to B half of its TP, the assets
that are covering these TP
TP A100
KR of A 20
30
A
B
Assets initially brought by A
O.F. B 30
30100
KR of B 20
TP B 100
Assets brought to cover the TP
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or of a reinsurance subsidiary
The pattern is similar if As subsidiary B is a
reinsurer to which A cedes (e.g.) half of its TP
KR of A 20(req. 20 of net TP)
KR of B 20
Insurer A
Assets105
O.F. A 35
Reinsurer B
TP A 200
O.F. B 30
30100
Credit on B100
TP ceded by A100
30
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a creation that, in the absence of group
regulation, diminishes the regulatory own funds
requirement

• The insufficiency of own funds is thus wrongly
   resolved  by the creation of a subsidiary
  where neither have the actual own funds
  increased in any way, nor have the risks been
  reduced.Whence the need for a group regulation.

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What should be defined by a group regulation

• A group regulation should inter alia define-
  what are the group own funds requirements-
  what are the group available, or admissible own
  funds

O.F. requirements of A B ?
O.F. requirements of A 20
O.F. requirements of B 20
Adm. O.F. of A B ?
Admissible O.F. of A 35
Admissible O.F. of B 30
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Why is co-operation between group supervisors
necessary

• the group (adjusted) solvency is then the
  difference between- the admissible O.F. of the
  group, and - the O.F. requirements of the
  group.If A and B are supervised by different
  supervisors e.g. A and B are in different
  countries these supervisor will have to
  co-operate, in order to (as a minimum) calculate
  the O.F. requirements of AB, and admissible
  O.F. of AB.

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Insurance Groups Supervision Dir. 98/78

• Plan
• 1. Why insurance group regulation -and
  co-operation between involved supervisors- are
  necessary
• 2. How Dir. 98/78 (and Dir. 2002/87) deals with
  the issue insurance groups (and financial
  conglomerates) regulation
• 3. Solvency 2 a brief overview

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How Dir. 98/78 deals with the issue

• Dir. 98/78 proposes 3 methods
• - deduction and aggregation method
• - requirement deduction method
• - accounting consolidation-based methodWe
  propose to concentrate on the 3rd one, because-
  it seems to be the most used in the EU- in
  Solvency 2, the treatment of groups also used a
  consolidation-based method

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How Dir. 98/78 deals with the issue the
consolidation-based method

• As a general wayi) admissible O.F.
  consolidated O.F., minus possible non
  transferable O.F.ii) O.F. requirements
• ? of requirements of each controlled entity
• requirements are reduced to their proportional
  part for non controlled entities

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Ex. a 100 owned subsidiary

• example of A holding 100 of B

group A B
ins. A
O.F.100
ins. B
KR30
KR60
c o n s o l i d a t e d
KR60
O.F.50
KR30
O.F.
100
90
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ex. a 70 owned subsidiary

• example of A holding 70 of B

group A B
ins. A
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minoritary interests
O.F.100
ins. B
KR30
KR60
c o n s o l i d a t e d
KR60
O.F.50
KR30
O.F.
115
90
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ex. a 30 owned participation

• Minoritary participations A holds 30 of B

group A B
ins. A
30 of the KR of B are added
O.F.100
ins. B
9
KR60
c o n s o l i d a t e d
KR60
O.F.50
KR30
O.F.
100
69
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- case of holdings in the banking sector -
case of non transferable own funds

• - Case of banking subsidiaries and
  participations the previous patterns apply.-
  Case of non transferable own funds it may be
  that some O.F. cannot serve outside of their
  entity, e.g.? minority interests? subordinated
  loans? surplus funds / profit reserves, that
  can only either cover the losses of the entity,
  or be distributed to the policyholders...

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non transferable own funds

• These O.F. are said to be  non transferable .
  Since they cannot guarantee the solvency of the
  mother etc company, but only the solvency of the
  entity to which they belong, they are admitted
  only to the extent of the required capital of
  that entity.In other words, the surplus of
  non transferable O.F. to the KR of the
  subsidiary cannot be regarded as K at group level

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non transferable O.F. consolidated O.F., vs
ConsolidatedA B
A
B
Shares and other O.F. of A
Shares and other O.F.
Shares ?100 to A
20
Other O.F., that do not belong to A, and are
not transferable
100 60
60
Other O.F. of B, that ? to A
100
20
vs admissible O.F.
but admissible A B
A
B
20
100
KR40
100
60
40

• The  non transferable  O.F. are admitted only
  to the extent that is necessary to cover the KR
  of their entity

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Solvency 2

• Plan
• 1. Why insurance group regulation -and
  co-operation between involved supervisors- are
  necessary
• 2. How Dir. 98/78 (and Dir. 2002/87) deals with
  the issue insurance groups (and financial
  conglomerates) regulation
• 3. Solvency 2 a brief overview

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S2 a brief overview
As a general wayi) admissible O.F.
consolidated O.F., minus non transferable O.F.
(if any quite similar to Solvency 1)ii)
O.F. requirements- some solo requirements are
not kept at group level- others are not merely
added, in order to take account of
diversification benefits

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S2 a brief overview

• e.g. A is a motor insurer, B is a health
  insurer, A holds 100 of B, the
  correlation ratio between motor and health risks
  is set to be equal to 25

group A B
ins. A
O.F.35
O.F.35
ins. B
groupSCR24,5
SCR20
O.F.15
MCR10
SCR10
MCR7
no MCR
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Thank you for your attention

?
Questions
Contacts helene.denis_at_acam-france.frfrancois.
tempe_at_acam-france.fr