1. Individual Capital Assessments – so what? Mohammad Khan The 3 rd Younger Members Convention 29-30 November 2004, The Chesford Grange Hotel, Kenilworth

2. Individual Capital Assessments (ICA)  What is capital?  ICA quick review  Is the ICA useful?  Lessons learnt  What do you do when the regulator knocks at your door?

3. What is capital?

4. ICA Quick Review - 1 Internal Capital Assessment (ICA) ICA ICG Individual Capital Guidance (ICG) set by the FSA Regulatory capital requirements (formula based) RMM ECR

5. ICA Quick Review - 2 - Exemptions Exemption from: Run-off companies (with Part IV permission)ECR Mutuals (not subject to insurance directive)ECR UK branches of EEA and Swiss firmsECR, ICA Note: UK branches of non-EEA, non-Swiss firms:  ECR to be met for Worldwide business

6. ICA Quick Review – 3 – What are the risks? Credit risk Market risk Insurance risk “if another party fails to perform its obligations or fails to perform them in a timely fashion” “adverse variation in costs or returns resulting from a change in market price or rate” “inherent uncertainties as to the occurrence, amount and timing of insurance liabilities” Group risk Liquidity risk Operational risk “risk arising from membership of a group of firms” “risk that… though solvent … does not have sufficient financial resources available to meet its obligations as they fall due or… only at excessive cost” “risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events”

7. ICA Quick Review - 4 CP190 and CP04/07 is not just about Models Need to embed Capital Management into organisation Regulatory timescales are short Is not a threat but an opportunity for good capital management

8. Is the ICA useful? – 1  Yes…  …but depends on how you view it…

9. Is the ICA useful? – 2 – Capital Management Process Risk management practices Capital management RAPMPlanning Products and pricing Investment and reinsurance Stakeholder communication Risk appetite Planning Determine capital requirements Allocation of capital Risk assessment

10. Is the ICA useful? - 3  Why go to all this bother?

11. Is the ICA useful? – 4 - Significant and increasing pressures require all insurance companies to manage capital more effectively Immediate Pressures  Continuing low interest rate environment  Increases in business failures and recent asset quality concerns / writedowns  Stock market volatility  Quantification of overall risks  Effective usage of capital  New Economic Capital Requirement  Integrated Prudential Sourcebook Longer-term pressures that require action now  Stakeholder expectations –Delivering price benefits to customers –Rating agencies demanding greater transparency –Global consolidation in financial services  Regulatory Focus –Significant management, process, and behavioural change needed – Prudential Sourcebook  IAS –Greater volatility of earnings

12. Is the ICA useful? – 5 – A number of economic capital specific challenges How to deal with surplus capital? How to deal with reputational capital? How to deal with capital held as acquisition war-chest? Value management framework Risk management framework Economic capital How to deal with geographical risk diversification? How to deal with risk diversification across risk classes? How to deal with differences between economic, actual and regulatory capital?

13. Lessons Learnt – 1  It’s not easy  It requires the buy in of many people in the organisation, not just management

14. Lessons Learnt – 2 – Who is involved? Partial Involvement Tax Sales & Marketing ITAccounting Risk Mgmt Core Involvement Board & Senior Management Underwriters/ Account Managers Reins Finance TreasuryClaimsActuaries Others - External parties ConsultantsFSA Rating Agencies Reinsurers

15. Lessons Learnt – 3 – What’s the process?  It takes time  There was a lot to do

16. Lessons Learnt - 4 – Ideal ICA? ECR Risk register Planning Business processesAnalysis Management information Allowance for other risks Adverse scenarios ICG FSA discussion Modelling S&S testin g Economic Capital Model ICA Solvency monitoring ECR, ICA, ICG Capital manageme nt MI

17. What do you do when the regulator knocks at your door? - 1  Panic?  Pray?  Pretend you are not there?  Show them your whizzy model?  Show them a fully documented framework with integrated controls and processes?

18. What do you do when the regulator knocks at your door? - 2  PREPARE BEFORE THEY KNOCK