CAIRCARTACWORLD BANK Caribbean Insurance Supervisors Initiative

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                           CAIR/CARTAC/WORLD
BANKCaribbean Insurance Supervisors Initiative 

• Risk Based Capital
• David Congram
• June 18, 2009

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Agenda

• Background
• Framework
• Capital Methodology
• Some Examples

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TT Current Environment

• Different Regulatory Valuation Reporting Methods
• All companies reporting under IFRS.
• Application of IFRS 4 for insurance - continuing
  the existing company accounting policy.
• A common International Insurance accounting
  approach will not be implemented until Phase II.
  Likely not until 2013.
• The requirement of the Statutory Fund is that
  liabilities are covered. There is no Capital
  Requirement

4
Current valuation methods

• Valn Method Liabilities
• CRVM 2.2
• Zillmer 18.6
• FPT .9
• NLP 1.8
• Fund Balance 9.0
• PPM 55.2
• CALM 9.8
• Other 1.7
• Group 1.0
• Total 100.0

• Valn Method No of Cos using
• Net Premium  6
• CRVM (US Method)  1
• Gross Premium Method 4
• Fund Value  4
• PV of Annuities  2
• CALM / PPM 4

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Capital Liability Framework
Liabilities and Capital
Total Assets Available
Available Capital
Target Required Capital
Assets Required for Total Balance Sheet
Solvency
Min Req Capital
Buffer
Risk Margins
Assets Required for Liabilities
Liabilities
Best Estimate Insurance Obligations
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Capital Adequacy Ratio

• Capital Available divided by Capital Required
• For example, if
• Capital Available 200 million
• Capital Required 100 million
• Then the Capital Adequacy Ratio is 200

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Capital Available

• Divided into Tiers
• Tier I is the Core Capital and is unrestricted
• Common shareholders' equity
• Retained earnings and Life surplus
• Tier II is Supplementary Capital
• Tier 2 capital is constrained by amount of Tier 1
  Capital.
• Other types of capital

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Capital Available
Shareholder Capital, Retained Earnings and
Participating Surplus
Tier One
In-admissible Assets Financial Subsidiaries
Deductions
Deficiencies and unrealized
Tier Two
Preference Shares Deficiencies and unrealized
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Capital Available Life
Shareholder Capital, Retained Earnings and
Participating Surplus
Tier One 951
In-admissible Assets Financial Subsidiaries
Deductions 726
Deficiencies and unrealized
5,950 1,108
Tier Two 507
Preference Shares Deficiencies and unrealized
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Required Capital

• Risks on the Asset side of the balance sheet
• Risks on the Liability side of the balance sheet
• Interrelation of Assets and Liabilities

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Asset Classes and Risk Components
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Required Capital For Liabilities- Long Term
Business

• Risks Considered for Life products
• Mortality assumptions
• Morbidity assumptions
• Lapse rate assumptions
• Interest rate margin pricing assumptions
• Risks Considered for Non-Life products
• Inadequacy in Unearned Premium provisions
• Variation in outstanding claims provisions
• Exposure to catastrophes

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Findings
Required Capital Life
Required compared to liabilities 30
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Findings
Distribution of Capital required for Investment
Risk
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Findings - Concentration

• Concentration involving instances of 10 of
  Adjusted Capital Resources
• Number of companies 9
• Number of instances 14
• Assets excluded from Adjusted Capital Resources
• Below 5 7
• 5 - 10 2
• 10 - 20 3
• 20 - 30 5
• Above 30 4
• ___
• 21
• A number of situations arose where Adjusted
  Capital Resources did not exceed the on demand
  liabilities of the company.

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Findings Liability volatility
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Findings Currency positions

• 11 out of 21 Companies submitting had open
  currency risk at December 2007

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Findings Mortality Component
Net Average Factor is based on direct and assumed
amount at risk Mortality component as of Net
Caribbean PPM Liability 73bp
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Findings Lapse Component Adjustable
Lapse component as of Net Caribbean PPM 40 bp
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Findings
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Findings
Required Capital Non Life
Required compared to premium 24
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Findings

• Premium Risk Component

Required compared to premium is 10.5
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Findings

• Claim Risk Component

Required compared to premium is 2.5
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Capital Liability Framework
Liabilities and Capital
Total Assets Available
Available Capital
Target Required Capital
Assets Required for Total Balance Sheet
Solvency
Min Req Capital
Buffer
Risk Margins
Assets Required for Liabilities
Liabilities
Best Estimate Insurance Obligations
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Conclusion

• Risk Capital provides real insight for
  supervision
• Allows the assessment of different perspectives
• Quality of capital to absorb shocks
• Insight into the nature of the investments
  supporting liabilities
• Nature of the liabilities undertaken