ANÁLISIS COMPARATIVO DE LOS EFECTOS CONTAMINANTES DE LA ACTIVIDAD MINERA

The supervisor establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and material risks.

Description Since 2005, long-term insurers are required to perform the DST, in accordance with the Actuarial Guidance Note on Dynamic Solvency Testing (AGN 7) issued by the ASHK. The Appointed Actuary is required to determine the projected solvency position of an insurer in the next three financial years or a longer period under the base scenario, six prescribed simple scenarios, and three compound scenarios.

The base scenario is defined by the assumptions used by the insurer to predict its

financial position over the forecast period. Usually, the base scenario is consistent with the insurer’s business plan.

In each of the six prescribed simple scenarios, AGN7 prescribes testing based on changes in a number of parameters covering:

 A deterioration of mortality and morbidity experience  A change in lapse rates resulting in a deterioration of results

 A decrease in interest rates and an equity and real estate value drop  An increase in interest rates and an equity and real estate value drop  A high growth rate of new business with a corresponding increase in general

expenses

 A low growth rate, without corresponding decrease in general expenses.

The actuary has to consider at least three company specific compound scenarios so that in total at least nine adverse scenarios and the base scenario are tested independently and reported annually.

The DST is considered to show a satisfactory financial position for the insurer if:  Under the base scenario, it meets the minimum regulatory capital requirement; and  Throughout the forecast period and under all tested prescribed and compound

scenarios, the assets exceed liabilities throughout the forecast period.

The quantification of the financial position can take into account assumed management actions, subject to the effectiveness of the insurer’s management information systems, the historical record of promptness and willingness to take difficult decisions, and the external environment assumed in the scenario. In addition, the financial position should take into account assumed regulatory actions and rating agency actions. (AGN7)

In addition to the annual DST review, stress tests are also carried out quarterly. Ad-hoc stress tests are conducted when there are adverse market conditions for both long-term and general insurers (please refer also to ICP17). On asset-liability management, insurers have to test the resilience of the asset portfolio in a range of market scenarios and investment conditions, and assess the impact on their solvency position. (p5&p33 of

GN13)

GN10 on Corporate Governance contains elements of ERM requirements. Amongst these are to:

 devise and implement a comprehensive risk management policy;  adopt a prudent underwriting policy;

 employ suitable methodologies and assumptions to compute and make provisions for its insurance liabilities;

 have a written investment policy appropriate for its capital, surplus, type of business and liquidity needs;

 make adequate reinsurance arrangements and periodically review the collectibility of the reinsurance recoverables; and

 have ongoing internal and external audit functions of a nature and scope appropriate to the nature and scale of its business.

There are no explicit requirements for insurers to establish and maintain a risk tolerance statement covering all material risks and defined risk tolerance limits; to make use of risk tolerance levels in business strategies; and embed defined risk tolerance limits in day-to- day operations via its risk management policies and procedures.

There are no explicit requirements for an insurer to perform its ORSA regularly, including the:

 assessment of the adequacy of its risk management and current, and likely future, solvency position; under the responsibility of the Board and Senior Management; and

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requirements and any additional capital needs;

 analysis of its ability to continue in business, and the risk management and financial resources required to do so over a longer time horizon; and

 continuity analysis to address a combination of quantitative and qualitative elements in the medium and longer-term business strategy of the insurer and include

projections of its future financial position and analysis of its ability to meet future regulatory capital requirements.

The ORSA has to encompass all reasonably foreseeable and material risks, including at a minimum underwriting, credit, market, operational and liquidity risks and additional risks arising due to membership of a group; as well as for the insurer to

 determine the overall financial resources it needs;

 manage its business given its own risk tolerance and business plans, and to demonstrate that supervisory requirements are met;

 base its risk management actions on consideration of its economic capital, regulatory capital requirements and financial resources, including its ORSA.

There are no requirements or guidance for insurance groups and subsidiaries of insurance groups that:

 the measurement of risks are to be based on a consistent economic assessment of the total balance sheet;

 the management of risk has to take into account risks arising from all parts of an insurance group including non-insurance entities (regulated or unregulated) and partly-owned entities;

 the direct and indirect interrelationships between its members, e.g., via capital and risk transfer instruments are taken into account;

 constrains in capital mobility are take into account in the ERM framework;

 a risk management policy is in place which outlines the way in which it manages all the risks that are relevant and material at insurance group level;

 the insurance legal entity’s risk management policy includes all the risks it faces as a result of its membership of a group; and

 an insurance legal entity’s risk tolerance statement should define risk limits taking into account group risks.

Under the proposed RBC framework, the capital requirement for each insurer will take into account the various risks that an insurer faces and insurers will be required to develop an ERM framework and ORSA system.

Supervisory practice

The latest review of the DST reports has shown that some long-term insurers are sensitive to changes in the interest rate and/or equity prices. Proposed management actions include capital injection, financial reinsurance arrangement, reduction in new business, reduction in expenses, dividend cut, and re-pricing of certain products. The solvency positions of these insurers have then been under close monitoring, including the submission of daily/weekly solvency reports.

The most recent stress test carried out by general insurers in July 2013 revealed that all insurers were able to withstand a drop of 15 percent in property value. The stress test carried out in June 2013 revealed that some insurers could not pass the test under extreme adverse scenario (40 percent drop in listed equities value plus 15 percent drop in bonds value). Out of these insurers, a majority were already under liquidation or run-off. Further analysis into the remaining insurers revealed that their listed equities and bonds

were of very good quality, and the marginal shortfall would not pose real or immediate risk.

Although the IA has yet to adopt a RBC framework, it pays attention to the risks to which an insurer may be exposed to, taking into account the business nature of the insurer, the macroeconomic and overall financial climate, as well as the political environment.

Assessment Partly observed.

Comments The ICO has only set out capital adequacy requirements. It has not provided for ERM or ORSA requirements, which are integral parts of a risk-based regime. Risk management is addressed separately through the DSTs. Under the DST, insurers writing long-term business are required to capture certain elements of an ORSA. However, for general insurers and for insurance groups, there are no ORSA requirements. In addition, there are currently no explicit requirements on insurers to:

a) implement an ERM framework for solvency purposes. Currently, the asset-liability management guidance note focuses on investment risks while GN10 defines risk management practices as high level principles;

b) adopt a risk management policy that details how all relevant and material risks are managed on a regulatory and economic basis; and

c) establish and maintain a risk tolerance statement and risk tolerance limits which take into account all relevant and material categories of risk.

It is recommended that the proposed RBC framework includes explicit ERM requirements applicable to all insurers. This would include the requirement to articulate a risk tolerance statement with associated risk tolerance limits, the ability for insurers to measure risks based on a consistent economic assessment, and an explicit requirement for insurers to conduct an ORSA on both a regulatory and economic basis. The requirements should be formulated also for insurance groups and subsidiaries of insurance groups.

Since the DST that is currently being conducted by long-term insurers contains a number of elements of an ORSA, the authorities may wish to consider extending the DST

requirements to bring it more in line with a full ORSA: for example by requiring all insurers and insurance groups to conduct a DST, by requiring multi-year solvency assessment on an economic basis and by linking it more explicitly to an overarching ERM framework.

The authorities are also encouraged to consider extending the DST to general insurers and to annually review the set of scenarios being used.