A Report of the CAS Underwriting Risk Working Party
3.4 Observations Regarding Solvency II 9
In the course of our work, we considered certain features of the Solvency II Standard Formula 10 as they compare to RBC. 3.4.1 Quantitative Assessment of Required Capital Solvency II prescribes a formulaic calculation of the required solvency capital, which all companies may adopt. This is called the Standard Formula. Alternatively, a company can develop its own model (internal model) or calibrate the parameters of the standard formula so that they are more appropriate for that company (partial internal model). The use of internal models or partial internal models is subject to regulatory approval. Our work focused on the Standard Formula. 3.4.2 Own-Risk Solvency Assessment (ORSA) In addition to the required solvency capital assessment, Solvency II requires a self-assessment of the economic capital required to run the business (own-risk solvency assessment or ORSA). This includes a qualitative assessment of risk, which examines an entity’s exposure to various risk factors and discusses the risk management processes in place at the company. Our work focused on the Standard Formula, and not on ORSA. 3.4.3 Calibration of the Standard formula In the case of Solvency II, calibration of parameters uses data provided voluntarily, as a full set of industry data is not available as it is in the U.S. The promulgators of Solvency II examined several statistical approaches to calibrate the standard parameters, and these were augmented by expert judgment. 3.4.4 Alternate Valuation of Technical Provisions (Loss Reserves) Under Solvency II, loss reserves are evaluated on a discounted basis. An explicit margin, termed a risk margin, is incorporated into the valuation. RBC is part of U.S. statutory financial reporting, so loss reserves are normally 11 presented on the balance sheet on an undiscounted basis. Within the RBC system, however, there is credit for
This section discusses only certain features of Solvency II as those relate to RBC. The discussion is not a complete analysis of Solvency II and is not a complete comparison of RBC to Solvency II. 10 https://eiopa.europa.eu/fileadmin/tx_dam/files/consultations/QIS/QIS5/Spreadsheets&IT-Tools/10.06update/QIS5-V6-20101006.xls 11 Certain exceptions exist for workers compensation line of business and other cases with permission by state regulators. 9
Casualty Actuarial Society E-Forum, Winter 2012-Volume 1
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