Icelandic experience of QIS3

1
Icelandic experience of QIS3 What to be
expected in QIS4 and nearest future?
securities market
credit market
insurance market
pension- market
Solvency II and Risk Management13th November
2007Sigurdur Freyr JónatanssonThe Financial
Supervisory Authority (FME) Iceland
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Contents

• An overview of the Icelandic market
• The history of participation in QIS
• The experience in QIS3
• Few points of improvement in QIS4
• The developments in the near future

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The non-life market

• The 3 largest companies have yearly premiums
  around or just under 100 m EUR
• They write insurance in all main classes 50 in
  motor
• One smaller company in all main classes
• One specialised liability insurer with business
  only in the UK

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The life insurance market

• 4 small companies
• 3 have close links to non-life insurers
• 1 company is owned by a bank
• Foreign companies have had around 33 market
  share
• The ratio of life insurance premiums as a
  percentage of GDP is amongst the lowest in Europe
• Pension funds cover large part of the disability
  risk

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Recent developments (1)

• Increased investment in equities
• Reduced holdings in bonds
• Reduced loans

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Recent developments (2)

• Increased activity abroad
• Subsidiaries and participation
• Norway (a company owned by an Icelandic insurance
  company)
• Sweden (a company owned by an owner of an
  Icelandic insurance company financial
  conglomorate)
• Finland (participation in an insurance company by
  an owner of an Icelandic insurance company)
• Activity on the basis of freedom to provide
  services
• UK
• FME has increased cooperation with other
  supervisors

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Previous QISs

• QIS1
• 3 non-life companies participated
• QIS2
• 2 non-life companies participated
• QIS2 was not a success as regards the quality of
  the submissions, therefore the FME decided to
  increase assistance to companies

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QIS3

• During April and May the FME held several
  meetings with companies on different aspects of
  QIS3
• Market risk, counterparty default risk and
  balance sheet items
• Life technical provisions and life underwriting
  risk
• Non-life technical provisions and non-life
  underwriting risk
• Group issues
• Additional questionnaires
• Meeting with some companies in June where
  specific guidance was given

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QIS3 Participation

• All non-life insurance companies participated
• Two life insurance companies participated
• One group gave results which could be used in a
  report, however group issues where not given
  priority
• In general the quality of submissions was higher
  in QIS3 than in QIS2.

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The experience in QIS3 Technical provisions

• Life insurance is mainly term insurance treated
  as a yearly renewable contracts
• As payments are made almost immediately the
  claims provisions are very short term
• Therefore the helper tab did not give any risk
  margin
• Is there a risk margin for simple companies like
  this?
• There were no problems in non-life

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The experience in QIS3 Market risk

• Equity risk has a very high impact and could
  become a problem in the future
• Concentration risk did also have high impact
• Generally the companies were able to do the
  calculations but it takes time.
• The same people as is responsible for the annual
  accounts and reports to the FME

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The experience in QIS3 Counterparty default risk

• This module did not receive much attention
• FME believes that further guidance must be given
  to smaller companies on how to rate their
  counterparts
• Could become more important in the future if the
  market risk can be reduced by risk mitigation

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The experience in QIS3 Life underwriting risk

• Both companies used the factor based proxies
• The main risk is mortality risk but it should be
  further defined how to calculate disability and
  morbidity risk
• It is unsure whether there are enough resources
  to calculate the stress scenarios

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The experience in QIS3 Non life underwriting
risk

• The impact of this risk is high
• Some insurance classes have been operated with
  loss in recent years the companies have had
  their profits based on financial income
• The national catastrophe event was defined by the
  FME

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The experience in QIS3 Capital

• The solvency margin of Icelandic companies is
  usually based on items that can be classified as
  tier 1 (equity items)
• In the few cases of uncertainty a guidance was
  given by the FME

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The experience in QIS3 MCR

• There were no interplay problems with the modular
  approach, as there is no significant profit
  sharing
• The big question for the Icelandic companies is
  how asset risk will be treated in the final MCR

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The experience in QIS3 Groups

• The problem was that group issues were saved to
  last
• The companies have to be clear on whether they
  are calculating market risk on the basis of the
  group or the parent company
• A general issue is that after IFRS solo accounts
  are becoming more scarce and less reliable

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Improvements in QIS4 (1)

• Due to higher importance of the groups issues
  they should be given higher priority
• FME will hold a meeting for the companies which
  will give an overview of
• Current legal environment for groups supervision
• Proposed changes in the Solvency II directive
• A guidance for QIS4
• The group awareness will hopefully increase

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Improvements in QIS4 (2)

• The best method for calculating risk margin in
  life insurance?
• Counterparty default risk has to be given higher
  attention
• In general companies must be aware of the
  resources needed
• This time of year is not perhaps the best, but
  ...
• The results of QIS3 show that QIS4 is of high
  importance

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The future what to be expected? (1)

• The largest non-life companies are very close to
  being medium-sized
• Therefore they do not need simple proxies to
  calculate the technical provisions no incentive
  to produce market data
• What is the situation of smaller companies or new
  entrants?

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The future what to be expected? (2)

• More risk mitigation of market risk or internal
  modelling?
• Higher risk appetite means either higher capital
  requirements or higher demands to risk management
• The recent experience of high investment returns
  but loss on non-life insurance activity seems to
  increase capital requirements
• This is different from Solvency I where an
  increase in premiums increases solvency
  requirements

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For more informationwww.fme.iswww.ceiops.org
securities market
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insurance market
pension- market