Icelandic experience of QIS3 – What to be expected in QIS4 and nearest future? credit market securities market pension- market insurance market Solvency II and Risk Management 13th November 2007 Sigurdur Freyr Jónatansson The Financial Supervisory Authority (FME) Iceland

2 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

3 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

4 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

5 Recent developments (1)  Increased investment in equities  Reduced holdings in bonds  Reduced loans

6 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

7 Previous QIS’s  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

8 QIS3  During April and May the FME held several meetings with companies on different aspects of QIS3 1.Market risk, counterparty default risk and balance sheet items 2.Life technical provisions and life underwriting risk 3.Non-life technical provisions and non-life underwriting risk 4.Group issues 5.Additional questionnaires  Meeting with some companies in June where specific guidance was given

9 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.

10 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

11 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

12 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

13 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

14 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

15 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

16 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

17 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

18 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

19 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

20 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?

21 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

For more information: credit market securities market pension- market insurance market