003

Tommy Pichet, FSA, FIA, FSAT, FRM

How to Improve Liability Risk Charge and Capital Adequacy Ratio under the Thailand RBC Framework

Presented by Tommy Pichet 30th of November 2012

Life Insurance Forum 2012

Tommy Pichet, FSA, FIA, FSAT, FRM

Agenda 1.

2.

3.

4.

Current RBC formula CSV Floor and CAR impact Reinsurance and CAR impact Flooring GPV for LRC

Tommy Pichet, FSA, FIA, FSAT, FRM

1. Current RBC formula

Tommy Pichet, FSA, FIA, FSAT, FRM

Capital Adequacy Ratio Capital Adequacy Ratio = Asset – Liability

Risk Charge =

Asset – Liability MRC + CRC + ConRC + LRC

Where MRC = market risk charge CRC = credit risk charge ConRC = concentration risk charge LRC = liability risk charge

Tommy Pichet, FSA, FIA, FSAT, FRM

Components of CAR Asset

Bond Stock

Total Available Capital

Liabilities

Policy Reserve – GPV@75%

Liability Risk Charge

GPV Reserve

Capital Adequacy Ratio Capital Required

Cash Surrender Value Market Risk Charge

Thai RBC Implemented on 1Sep11

Interest Risk Charge Equity Risk Charge Property Risk Charge

Credit Risk Charge

Other Risk Charge

Diversification Concentration Risk Charge

Assets Reinsurance

Tommy Pichet, FSA, FIA, FSAT, FRM

Locked up Capital • Capital Adequacy Liability (CAL) = Policy Reserve (PR) + Liability Risk Charge (LRC)

Policy Reserve

Required Capital

75th Percentile 95th Percentile

Tommy Pichet, FSA, FIA, FSAT, FRM

Locked up Capital 100 90 80 70

Liability Risk Charge

60

Policy Reserve

50

Capital Adequacy Liability

40 30 20 10

CA

L

90 % G PV

@

25 % G PV

@

50 % @ G PV

@ G PV

(G PV @

95 %

75 %

)

0

Tommy Pichet, FSA, FIA, FSAT, FRM

Interpretation of Regulation Policy Reserve (PR): PR = GPV@75%

Liability Risk charge (LRC): LRC = Max(GPV’@95% - GPV’@75%,CSV – PR) Where GPV@75% = Gross of reinsurance gross premium valuation at a confidence level of 75% GPV’@75% = Net of reinsurance gross premium valuation at a confidence level of 75% GPV’@95% = Net of reinsurance gross premium valuation at a confidence level of 75% CSV = Cash surrender value

CSV compared to Policy Reserve and CAL

Tommy Pichet, FSA, FIA, FSAT, FRM

120 CSV

100 LRC LRC

GPV’@95%

LRC

GPV’@95%

CSV

GPV’@95%

80 CSV

60 GPV’@75%

40

Policy Reserve

GPV’@75%

GPV’@75% Policy Reserve

Policy Reserve

20 0 Scenario 1

Scenario 2

Scenario 3

Tommy Pichet, FSA, FIA, FSAT, FRM

Treatment of CSV in LRC Formula Current formula Policy Reserve = GPV@75% LRC = max ( GPV`@95% – GPV`@75%, CSV – Policy Reserve ) Scenario

1

Current Formula Policy Reserve

LRC

GPV 75%

GPV 95%

CSV

2

Policy Reserve

LRC

GPV 75%

GPV 95%

CSV

Policy Reserve

3

GPV 75%

LRC

GPV 95%

CSV

Tommy Pichet, FSA, FIA, FSAT, FRM

2. CSV Floor and CAR Impact

CSV compared to Policy Reserve and CAL

Tommy Pichet, FSA, FIA, FSAT, FRM

120 CSV Policy Reserve

100

LRC LRC

GPV’@95%

LRC

GPV’@95%

CSV

GPV’@95%

80 CSV

60 GPV’@75%

40

Policy Reserve

GPV’@75%

GPV’@75% Policy Reserve

Policy Reserve

20 0 Scenario 1

Scenario 2

Scenario 3

Tommy Pichet, FSA, FIA, FSAT, FRM

Treatment of CSV in LRC Formula CSV Floor (summary) Policy Reserve = GPV@75% + max ( CSV – GPV’@95% , 0 ) LRC = max ( GPV’@95% – GPV’@75% , CSV – Policy Reserve ) Scenario

Propose CSV in LRC Policy Reserve

1

GPV 75%

LRC

GPV 95%

CSV

2

Policy Reserve

LRC

GPV 75%

GPV 95%

CSV

Policy Reserve

3

GPV 75%

LRC

Policy Reserve

GPV 95%

CSV

Tommy Pichet, FSA, FIA, FSAT, FRM

Treatment of CSV in LRC Formula CSV Floor Scenario 1 : CSV < Policy Reserve Policy Reserve = GPV@75% ;if CSV < GPV’@95% LRC = GPV’@95% – GPV’@75% CAL = GPV’@95% – (GPV’@75% - GPV@75%) Scenario

Propose CSV in LRC Policy Reserve

1

GPV 75%

LRC

GPV 95%

CSV

Tommy Pichet, FSA, FIA, FSAT, FRM

Treatment of CSV in LRC Formula CSV Floor Scenario 2 : Policy Reserve < CSV < GPV’@95% Policy Reserve = GPV@75% LRC = GPV’@95% – GPV’@75% ; if GPV’@75% < GPV@75% CAL = GPV’@95% – (GPV’@75% - GPV@75%)

Scenario

2

Propose CSV in LRC Policy Reserve

LRC

GPV 75%

GPV 95%

CSV

Tommy Pichet, FSA, FIA, FSAT, FRM

Treatment of CSV in LRC Formula CSV Floor Scenario 3 : CSV > GPV’@95% Policy Reserve = GPV@75% + max ( CSV – GPV’@95% , 0 ) LRC = CSV – GPV@75% ; if GPV@75% < GPV’@75% CAL = CSV

Scenario

Propose CSV in LRC Policy Reserve

3

GPV 75%

LRC

Policy Reserve

GPV 95%

CSV

Tommy Pichet, FSA, FIA, FSAT, FRM

3. Reinsurance and CAR Impact

Tommy Pichet, FSA, FIA, FSAT, FRM

Reinsurance Asset/Liability •

Reinsurance Asset/Liability = Net of reinsurance policy reserve – Gross of reinsurance policy reserve

•

Within the RBC context: Reinsurance Policy reserve = GPV’@75% - GPV@75%

Tommy Pichet, FSA, FIA, FSAT, FRM

Current Treatment of Reinsurance •

If GPV’@75% - GPV@75% < 0 then • Reinsurance Asset • Currently treated as “Other Asset” (RBC form 3.2)

•

If GPV’@75% - GPV@75% > 0 then • Reinsurance Liability • Alternative treatments • Treated as “Other Liability” • Treated as part of “Policy Reserve”

Tommy Pichet, FSA, FIA, FSAT, FRM CSV compared to (Gross & Net) Policy Reserve and CAL

120 CSV

100 GPV’@95%

GPV’@95%

CSV

GPV’@95%

80 GPV@75%

GPV@75%

60

GPV@75%

CSV

GPV’@75%

40

GPV’@75%

GPV’@75%

20 0 Scenario 1

Scenario 2

Scenario 3

Tommy Pichet, FSA, FIA, FSAT, FRM

Reinsurance Liability - Summary 120 CSV

100 LRC LRC

GPV’@95%

GPV’@95%

LRC

GPV’@95%

CSV

80 Reinsurance (Other) Liability GPV@75%

GPV@75%

60

Reinsurance (Other) Liability GPV@75%

Reinsurance (Other) Liability

CSV

GPV’@75%

GPV’@75%

GPV’@75%

40 Policy Reserves

Policy Reserves

Policy Reserves

20 0 Scenario 1

Scenario 2

Scenario 3

Tommy Pichet, FSA, FIA, FSAT, FRM

Combined CSV Floor and Reinsurance Policy Impact

Tommy Pichet, FSA, FIA, FSAT, FRM

Combined CSV Floor and Reinsurance Policy Reserve •

• •

•

In order to remove the double count of reinsurance (other) liabilities, we need an additional term in the policy reserve formula This moves the reinsurance (other) liability into the policy reserve Policy reserve = GPV@75% + max ( CSV – GPV`@95% , 0 ) + max (GPV`@75 - GPV@75%,0) LRC = max ( GPV`@95% – GPV`@75% , CSV – PR ) = GPV`@95% – GPV`@75% (for all cases)

Tommy Pichet, FSA, FIA, FSAT, FRM

CSV floor and Reinsurance Policy Reserve Impact – Summary 120 CSV Policy Reserves

100 LRC

GPV’@95%

LRC

GPV’@95%

CSV

LRC

GPV’@95%

80 Policy Reserves (reinsurance) GPV@75%

GPV@75%

60

Policy Reserves (reinsurance) GPV@75%

Policy Reserves (reinsurance)

CSV

GPV’@75%

GPV’@75%

GPV’@75%

40 Policy Reserves

Policy Reserves

Policy Reserves

20 0 Scenario 1

Scenario 2

Scenario 3

Tommy Pichet, FSA, FIA, FSAT, FRM

CSV floor and Reinsurance Asset Impact – Summary 120

CSV Policy Reserves

100 LRC

GPV’@95%

80

LRC GPV@75%

GPV’@95%

Reinsurance (Other) Asset

60

CSV LRC GPV@75%

GPV’@95% GPV@75%

Reinsurance (Other) Asset

Reinsurance (Other) Asset

CSV

GPV’@75%

40

Policy Reserve

GPV’@75%

Policy Reserve

GPV’@75%

20 0 Scenario 4

Scenario 5

Scenario 6

Policy Reserve

Tommy Pichet, FSA, FIA, FSAT, FRM

Impact on CAR ratio Comparison of CAR with different treatments 700%

Solvency Ratio

600% 500% 400% 300% 200% 100%

Original CSV Floor CSV Floor + Reins Liability

0% -1.00% -0.75% -0.50% -0.25% 0.00% 0.25% 0.50% 0.75% 1.00% Parallel Shift in Yield Curve

Tommy Pichet, FSA, FIA, FSAT, FRM

4. Flooring GPV for LRC and CAR Impact

Tommy Pichet, FSA, FIA, FSAT, FRM

Interpretation of PR and LRC formula

Policy reserve PR = GPV@75% • GPV is gross of reinsurance • Floored at zero at a product category level

Liability risk charge LRC = Max(GPV’@95% - GPV’@75%,CSV – PR) • GPV is net of reinsurance • Does not specify flooring of GPV for LRC

Tommy Pichet, FSA, FIA, FSAT, FRM

Flooring Practices No Flooring No Flooring PR No Flooring LRC

Consistent with Solvency II Not allowed in RBC, flooring PR is required

Current Method 1 Flooring PR No Flooring LRC

Current Method 2 Flooring PR Flooring LRC

“Default” interpretation of RBC regulation

Permitted under RBC regulation, but probably not commonly used

Tommy Pichet, FSA, FIA, FSAT, FRM

Impact of Flooring Practice Product Class 1 2 Total

No Floor

No Floor at Zero Floor at Zero GPV@75% GPV@95% GPV@75% GPV@95% 30 70 30 70 -10 -5 0 0 20 65 30 70

No Floor

No Flooring

20

65

Floor

30

Floor

70

Liability Risk Charge

40

45 Current Method 1

Current Method 2

Tommy Pichet, FSA, FIA, FSAT, FRM

Impact of Flooring Practice No Floor at Zero Floor at Zero Product Class GPV@75% GPV@95% GPV@75% GPV@95% 1 30 70 30 70 2 -10 -5 0 0 Total 20 65 30 70 Policy Reserve 20 30 LRC 45 40 Assets 100

Thai RBC

Methodology Policy Reserve Available Capital LRC CAR% Locked up Capital No Flooring 20 80 45 178% 65 Current 1 30 70 45 156% 75 Current 2 30 70 40 175% 70

Tommy Pichet, FSA, FIA, FSAT, FRM

Sample: Impact on Locked up Capital Assets =

100

GPV Calculations

CAR Calculations

Product Class 1 2 Total

No Floor at Zero GPV@75% GPV@95% 50 70 -10 5 40 75

Floor at Zero GPV@75% GPV@95% 50 70 0 5 50 75

Methodology No Flooring Current 1 Current 2

Policy Reserve Available Capital 40 60 50 50 50 50

LRC 35 35 25

CAR% 171% 143% 200%

Locked up Capital 75 85 75

Product Class 1 2 Total

No Floor at Zero GPV@75% GPV@95% 30 70 -10 -5 20 65

Floor at Zero GPV@75% GPV@95% 30 70 0 0 30 70

Methodology No Flooring Current 1 Current 2

Policy Reserve Available Capital 20 80 30 70 30 70

LRC 45 45 40

CAR% 178% 156% 175%

Locked up Capital 65 75 70

Product Class 1 2 Total

No Floor at Zero GPV@75% GPV@95% 60 70 10 15 70 85

Floor at Zero GPV@75% GPV@95% 60 70 10 15 70 85

Methodology No Flooring Current 1 Current 2

Policy Reserve Available Capital 70 30 70 30 70 30

LRC 15 15 15

CAR% 200% 200% 200%

Locked up Capital 85 85 85

Product Class 1 2 Total

No Floor at Zero GPV@75% GPV@95% -10 30 -10 5 -20 35

Floor at Zero GPV@75% GPV@95% 0 30 0 5 0 35

Methodology No Flooring Current 1 Current 2

Policy Reserve Available Capital -20 120 0 100 0 100

LRC 55 55 35

CAR% 218% 182% 286%

Locked up Capital 35 55 35

Product Class 1 2 Total

No Floor at Zero GPV@75% GPV@95% -50 -5 -10 80 -60 75

Floor at Zero GPV@75% GPV@95% 0 0 0 80 0 80

Methodology No Flooring Current 1 Current 2

Policy Reserve Available Capital -60 160 0 100 0 100

LRC 135 135 80

CAR% 119% 74% 125%

Locked up Capital 75 135 80

Product Class 1 2 Total

No Floor at Zero GPV@75% GPV@95% -10 -5 -10 -5 -20 -10

Floor at Zero GPV@75% GPV@95% 0 0 0 0 0 0

Methodology No Flooring Current 1 Current 2

Policy Reserve Available Capital -20 120 0 100 0 100

LRC 10 10 0

CAR% 1200% 1000% N/A

Locked up Capital -10 10 0

Scenario 1

Scenario 2

Scenario 3

Scenario 4

Scenario 5

Scenario 6

Tommy Pichet, FSA, FIA, FSAT, FRM

Summary: Impact on Locked up Capital Methodology No Flooring Current 1 Current 2

Locked up Capital Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 75 65 85 35 75 -10 85 75 85 55 135 10 75 70 85 35 80 0

•

The locked up capital is appropriately measured in all scenarios only for current method 2.

•

The locked up capital for the current method 1 overstates the locked up capital amount required to meet liabilities at a 95% level.

•

The locked up capital for the “no flooring” method can lead to a negative locked up capital when there is a negative GPV at both 75% and 95% level.

Tommy Pichet, FSA, FIA, FSAT, FRM

Summary: Impact on Locked up Capital In all scenarios, the locked up capital is No Flooring No Flooring PR

No Flooring LRC

Current Method 2

≤ Flooring PR Flooring LRC

Current Method 1

≤ Flooring PR No Flooring LRC

Tommy Pichet, FSA, FIA, FSAT, FRM

Summary 1.

2.

3.

4.

Current RBC formula CSV Floor and CAR impact Reinsurance and CAR impact Flooring GPV for LRC

Tommy Pichet, FSA, FIA, FSAT, FRM

Q&A

Tommy Pichet, FSA, FIA, FSAT, FRM

Thank You