Pillar 2

[SA2 Student]

Hi,

I thought I had this sorted in my mind but think I've confused myself!!!

Under Pillar 1 I would view the total capital required as a combination of:

1. Liabilities (math reserves (peak 1)/realistic liabs (peak 2))
2. A solvency margin

The assets to cover 1 I would classify as policyholer assets while the assets used to cover 2 I would classify as shareholder.

Is the capital required from the ICA/ICG meant to be the sum of these??

Thanks

 

[ram2410]

Hi,

I thought I had this sorted in my mind but think I've confused myself!!!

Under Pillar 1 I would view the total capital required as a combination of:

1. Liabilities (math reserves (peak 1)/realistic liabs (peak 2))
2. A solvency margin

The assets to cover 1 I would classify as policyholer assets while the assets used to cover 2 I would classify as shareholder.

Is the capital required from the ICA/ICG meant to be the sum of these??

Thanks

I'm not an expert at this, but this is how I understand it;

Liabilities: Peak 1 Math Res

Regulatory required capital (Pillar 1/Pillar 2): Max of CRR and ICG. This represents how much capital on top of your liabilities a company will need to hold to meet FSA/INSPRU requirements.

Trust this helps.

 

[Student2010]

Hi,

I am also unsure where Pillar 2 slotted in - was it in addition to Pillar 1 or was the regulatory capital requirement the maximum of the two?

In particular, when calculating EV how is this then split between free surplus and required capital? My thinking is:

Assets equal to math reserves are used to calc PVIF
Assets that are in excess of regulatory capital are Free Surplus (not needed for Pillar 1 or 2)
And so remaining assets are Required Capital? i.e. ones that are needed to cover ICA + LTICR/RCR/RCM

If anyone can straighten this out that would be great -
Is pillar one added to pillar 2?
How does this feed into EV calcs?

Thanks a lot

 

[ram2410]

Hi,

I am also unsure where Pillar 2 slotted in - was it in addition to Pillar 1 or was the regulatory capital requirement the maximum of the two?

In particular, when calculating EV how is this then split between free surplus and required capital? My thinking is:

Assets equal to math reserves are used to calc PVIF
Assets that are in excess of regulatory capital are Free Surplus (not needed for Pillar 1 or 2)
And so remaining assets are Required Capital? i.e. ones that are needed to cover ICA + LTICR/RCR/RCM

If anyone can straighten this out that would be great -
Is pillar one added to pillar 2?
How does this feed into EV calcs?

Thanks a lot

I still think the required capital is the max of CRR and ICG. If your required capital is the addition of CRR and ICG, you probably be double counting capital required to withstand stress test (i.e. RCR / RCM with some ICA stress/scenario tests)? Any tutor out there can confirm/invalidate this?

If this is correct, then the max of CRR and ICG should feed into EV calculations.

Also, as far as I can see, required capital isn't shown explicitly on an EEV/MCEV annual report - see Aviva's below (page 304).

http://www.aviva.com/library/pdfs/reports/2009/aviva-report-2009.pdf

The required capital in the report is net of cost of required capital - but the actual required capital is not shown or shown only as a % of EU Minimum (no idea what this is).

So if the required capital is the ICG, the company still isn't giving any private capital requirement information away to the public/competitors.

 

[Mark Willder]

I am also unsure where Pillar 2 slotted in - was it in addition to Pillar 1 or was the regulatory capital requirement the maximum of the two?

An insurer will need enough capital to cover the larger of the Pillar 1 and Pillar 2 requirements. Pillar 1 and Pillar 2 are not aded together.

For some companies the Pillar 1 capital requirements are bigger than the Pillar 2 capital requirements. For other insurers its the other way around.

The results of the Pillar 2 calculation are confidential (only the FSA and the company itself sees them). As a result, any published regulatory capital figures wil refer to Pillar 1, eg for EV figures in the published accounts we would use Pillar 1 reserves and solvency capital.

I think this ties in with what has been said by other contributions here, but I hope it helps clarify things.

Best wishes

Mark