Icelandic experience of QIS 3 What to be

Icelandic experience of QIS 3 – What to be expected in QIS 4 and nearest future? Solvency II and Risk Management 13 th November 2007 Sigurdur Freyr Jónatansson The Financial Supervisory Authority (FME) Iceland securities market credit market pensionmarket insurance market

Contents § § § An overview of the Icelandic market The history of participation in QIS The experience in QIS 3 Few points of improvement in QIS 4 The developments in the near future 2

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 3

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 4

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

Recent developments (2) § § Increased activity abroad Subsidiaries and participation § § Activity on the basis of freedom to provide services § § 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) UK FME has increased cooperation with other supervisors 6

Previous QIS’s § QIS 1 § § QIS 2 § § 3 non-life companies participated 2 non-life companies participated QIS 2 was not a success as regards the quality of the submissions, therefore the FME decided to increase assistance to companies 7

QIS 3 § During April and May the FME held several meetings with companies on different aspects of QIS 3 1. 2. 3. 4. 5. § 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 8

QIS 3 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 QIS 3 than in QIS 2. 9

The experience in QIS 3 – 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 10

The experience in QIS 3 – 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 11

The experience in QIS 3 – 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 12

The experience in QIS 3 – 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 whethere are enough resources to calculate the stress scenarios 13

The experience in QIS 3 – 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 14

The experience in QIS 3 – 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 15

The experience in QIS 3 – 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 16

The experience in QIS 3 – 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 17

Improvements in QIS 4 (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 QIS 4 The group awareness will hopefully increase 18

Improvements in QIS 4 (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 QIS 3 show that QIS 4 is of high importance 19

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? 20

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 21

For more information: www. fme. is www. ceiops. org securities market credit market pensionmarket insurance market