Solvency Management

Minimum Continuing Capital and Surplus Requirements (MCCSR)

Life Insurance Capital Adequacy Test (LICAT)

Insurance Ordinance (HKIO)

Risk-Based Capital Framework (HKRBC)

Solvency I

China Risk Oriented Solvency System (C-ROSS)

China Risk Oriented Solvency System (C-ROSS) Phase II

Canadian GAAP (IFRS 4)

IFRS 17

{CA-LICAT-1.3}

 HKFRS 4

HKFRS 17

CGAAP (IFRS 4)

IFRS 17

LICAT Ratios

• Total Ratio
  =  (Available Capital
    + Surplus Allowance
    + Eligible Deposits)
     / Base Solvency Buffer
• Core Ratio
  = (Tier 1 Capital
  + 70% of Surplus Allowance
  + 70% of Eligible Deposits)
  / Base Solvency Buffer

{CA-LICAT-1.1.1}

Solvency Ratio
= Available Capital / Minimum Capital

• Overall Solvency Ratio
  = Overall capital / Minimum capital
• Core Solvency Ratio
  = Core capital / Minimum capital

• Total Ratio ≥ 90%
• Core Ratio ≥ 55%

{CA-A-4-2}

• Overall Solvency Ratio ≥ 100%
• Core Solvency Ratio ≥ 50%

• Total Ratio ≥ 100%
• Core Ratio ≥ 70%

{CA-A-4-2}

• Overall Solvency Ratio ≥ 120%
• Core Solvency Ratio ≥ 60%

$5 million

{CA-LICAT-1.5}

Canadian GAAP

• All under China GAAP except reserves.
• Reserves are calculated under C-ROSS

Surplus Allowance = the net risk adjustment

• risk adjustment for non-financial risks
• net of all reinsurance

{CA-LICAT-1.1.3}

Eligible Deposits =

• collateral and letters of credit placed by unregistered reinsurers, plus
• claims fluctuation reserves

{CA-LICAT-1.1.4}

Base Solvency Buffer:

• is equal to the sum of the aggregate capital requirement net of credits, for each of geographic regions, multiplied by a scalar of 1.0. {CA-LICAT-1.1.5}

\(\gamma \times (\sum_{}^{}{K_\text{Non-Par}}+\sum_{i}^{}{(K_\text{Par i}-CP_i)}-\sum_{j}^{}{CA_j}-CG+SFG+OR)\)

where:

• γ is the scalar (=1.0)
• ∑K_Non-Par is the sum of the requirements K calculated for the non-participating block in each geographic region
• The second sum is taken over all qualifying participating blocks, and the third sum is taken over all qualifying adjustable products
• K_{Par i} is the standalone adjusted diversified requirement K for qualifying participating block i
• CP_i is the par credit for participating block i
• CA_j is the adjustable credit for adjustable product j
• CG is the total of all credits for policyholder deposits and group insurance business
• SFG is the capital requirement for segregated fund guarantee risk
• OR is the capital requirement for operational risk

The aggregate capital requirement within a geographic region comprises requirements for each of the following five risk components:

1. credit risk;
2. market risk;
3. insurance risk;
4. segregated funds guarantee risk; and
5. operational risk.

Aggregate requirements are reduced by:

• credits for:
  • qualifying in-force participating and adjustable products, and
  • risk diversification.
• risk mitigation arrangements

{CA-LICAT-1.1.5}

• Under GMM or VFA, BEL = Reported BEL – (RA + CSM)
• Under PAA, BEL = Reported BEL

{CA-LICAT-1.4.4}

• BEL = PV of FCF + TVOG
• Dividend and interest credited should be above prescribed minimum level.

\(\text{RM}=MC_\text{Insurance}\times\dfrac{F^{-1}(x\%)}{F^{-1}(99.5\%)}\)

or other approved approaches.

Prescribed level spot rates by region:

• 5.3% for Canada, the United States and the United Kingdom,
• 3.6% for Europe other than the United Kingdom,
• 1.8% for Japan, and
• 5.3% for other locations.

{CA-LICAT-6.1}

Generated by the discount rate generator.

• Not level.

\(\text{RC}=\sqrt{\text{RC}_{\text{vol}}^{2}+\text{RC}_{\text{cat}}^{2}}+\text{RC}_{\text{level}}+\text{RC}_{\text{trend}}\)

Not applicable to products where insurer bears no risk and has no liability for claims:

• segregated fund guarantee products
• investment contracts
• “Administrative Services Only” insurance contracts

{CA-LICAT-6.0}

\(\text{RC}_\text{mortality}=\sqrt{\text{RC}_{\text{vol}}^{2}+\text{RC}_{\text{cat}}^{2}}+\text{RC}_{\text{level}}+\text{RC}_{\text{trend}}\)

• Aggregation: Yes. All products with mortality risk are designated to be either life supported or death supported.
  • death supported if \(\text{BEL}_\text{Stress}>\text{BEL}_\text{Base}\), life supported otherwise.
• Discount Rate: Either financial statement liability discount rates or prescribed discount rates.

{CA-LICAT-6.2.1}

calculated using Best Estimate Assumptions (BEA).

RC for Mortality Risk

\(\text{RC}_\text{mortality}\)

\(\text{RC}_\text{mortality}=\sqrt{\text{RC}_{\text{vol}}^{2}+\text{RC}_{\text{cat}}^{2}}+\text{RC}_{\text{level}}+\text{RC}_{\text{trend}}\)

{CA-LICAT-6.2}

Requiring aggregation. All products with mortality risk are designated to be either life supported or death supported.

• death supported if \(\text{BEL}_\text{Stress}>\text{BEL}_\text{Base}\), life supported otherwise.

{CA-LICAT-6.2.1}

Either financial statement liability discount rates or prescribed discount rates. {CA-LICAT-6.2.1}

RC for Level Risk

\(\text{RC}_\text{level}\)

Life supported business:

\(q’=(1+x)\times q\), where \(x=min(25\%,11\%+20\%\times r)\), \(r=\dfrac{\text{Volatility Component}}{\text{Net Expected Claims}_{(t+12, t+24)}}\)

Death supported business:

\(q’=(1-15\%)\times q\) for all time t

{CA-LICAT-6.2.2}

RC for Trend Risk

\(\text{RC}_\text{trend}\)

Life supported business: \(q’=(1-75\%)\times q\) for time \((t, t+12\times 25)\), for 25 years

Death supported business: \(q’=(1+75\%)\times q\) for all time t

{CA-LICAT-6.2.3}

RC for Volatility Risk

\(\text{RC}_\text{vol}\)

Level: calculated by sets of like products, basic death vs. AD&D, individual vs. group

Volatility Risk Component:

\(\sqrt{\sum_{\text{Basic Death}}{\text{RC}^2}}+\sqrt{\sum_{\text{AD&D}}{\text{RC}^2}}\)

where \(\text{RC}=2.7\times A\times (1-\dfrac{V}{F})\),

where \(A=\sqrt{\sum{q(1-q)b^2}}\)

Approximation of \(\boldsymbol{A}\) with known σ of the net death benefit amounts:

\(A\approx \sqrt{\dfrac{C\times\sum{b^2}}{F}}\)

Approximation of \(\boldsymbol{A}\) with unknown σ of the net death benefit amounts:

1. \(A\approx \dfrac{A_C\times \sqrt{N_C}}{C_C}\times\sqrt{C}\times\sqrt{max(\dfrac{F}{n},\dfrac{C}{N})}\)
   • For traditional employer-sponsored group insurance policies,
     the comparison set factor \(A_C\times\dfrac{\sqrt{N_C}}{C_C}\) can be replaced with 1.75
2. \(A \approx \sqrt{C}\times\sqrt{b_\text{min}+b_\text{max}-\dfrac{b_\text{min}-b_\text{max}}{F/n}}\)
   • \(A \approx \sqrt{C\times b_\text{max}}\)

{CA-LICAT-6.2.4}

RC for Catastrophe Risk

\(\text{RC}_\text{cat}\)

For basic death products:

\(\text{NOP}_\text{DEATHS}’=r\times\text{NOP}_\text{DEATHS})\)

For AD&D products:

\(\text{NOP}_\text{DEATHS}’=20\% \times r\times\text{NOP}_\text{DEATHS})\)

where \(r\) is determined by geographic region:

{CA-LICAT-6.2.5}

RC for Longevity Risk

\(\text{RC}_\text{longevity}\)

\(\text{RC}_\text{longevity}=\text{RC}_\text{level}+\text{RC}_\text{trend}\)

{CA-LICAT-6.3}

RC for Level Risk

\(\text{RC}_\text{level}\)

Shock factors differ across registered or non-registered annuities.

{CA-LICAT-6.3.1}

RC for Trend Risk

\(\text{RC}_\text{trend}\)

\(q’=(1+75\%)\times q\) for all time t

{CA-LICAT-6.3.2}

RC for Morbidity Risk

\(\text{RC}_\text{morbidity}\)

\(\text{RC}_\text{morbidity}=\sqrt{\text{RC}_{\text{vol}}^{2}+\text{RC}_{\text{cat}}^{2}}+\text{RC}_{\text{level}}+\text{RC}_{\text{trend}}\)

{CA-LICAT-6.4}

Active versus disabled.

{CA-LICAT-6.4.1}

Depends on whether incidence and termination rate assumptions are used to determine liabilities.

• If yes, then percentage shocks are applied to incidence and termination rates.
• If not, then percentage shocks are applied to adjusted net premiums.

{CA-LICAT-6.4}

RC for Level Risk

\(\text{RC}_\text{level}\)

Policies with active status:

Percentage shocks are applied to morbidity incidence rate at each age.

Policies with disabled status:

Percentage shocks are applied to morbidity total termination rate at each age.

{CA-LICAT-6.4.1}

RC for Trend Risk

\(\text{RC}_\text{trend}\)

Annual morbidity improvement rate assumption = 0%, i.e. 100 % decrease in Annual morbidity improvement rate assumption.

{CA-LICAT-6.4.2}

RC for Volatility Risk

\(\text{RC}_\text{vol}\)

• Applied to first-year incident rates for active lives, termination rates remain unchanged.
• Shocks are applied by individual/group, by product type.

{CA-LICAT-6.4.3}

RC for Catastrophe Risk

\(\text{RC}_\text{cat}\)

• Applied to first year incidence rates for all active lives.
• \(q’=(1+r)\times q\)
• Not applied to incidence rates for group medical or dental insurance, or to individual or group travel or credit insurance.

{CA-LICAT-6.4.4}

RC for Lapse Risk

\(\text{RC}_\text{Lapse}\)

\(\text{RC}_\text{Lapse}=\sqrt{\text{RC}_{\text{vol}}^{2}+\text{RC}_{\text{cat}}^{2}}+\text{RC}_{\text{level+trend}}\)

Note: \(q_w’=min((1+r)\times q_w, 97.5\%)\)

{CA-LICAT-6.5}

• partition into lapse-supported / lapse-sensitive business.
• Test each individual set by applying the level, trend and volatility shocks combined to determine if the set is lapse supported or lapse sensitive.

{CA-LICAT-6.5.1}

RC for Level and Trend Risk

\(\text{RC}_\text{level+trend}\)

• The direction of a shock is determined by comparing cash surrender values net of surrender charges.
• \(q_w’=(1\pm 30\%)q_w\)

{CA-LICAT-6.5.2}

RC for Volatility Risk

\(\text{RC}_\text{vol}\)

• Applied to first-year lapse rates.
• \(q_w’=(1\pm 30\%)q_w\) for t ∈ [t+1, t+12]

• The lapse volatility shock may be quantified as:
  PV of cash flows (lapses shocked ± 60% in first year) – PV of cash flows (lapses shocked ± 30% in first year)

{CA-LICAT-6.5.3}

RC for Catastrophe Risk

\(\text{RC}_\text{cat}\)

• Applied to first-year lapse rates.
• For lapse-sensitive products, \(q’=(1+20\%)\times q\) for t ∈ [t+1, t+12]
• For lapse-supported products, \(q’=(1-60\%)\times q\) for t ∈ [t+1, t+12]

{CA-LICAT-6.4.4}

RC for Expense Risk

\(\text{RC}_\text{Expense}\)

–

{CA-LICAT-6.6}

• All maintenance expenses that are estimated (including non-commission premium and claim expenses).
• Expenses that are contractually guaranteed by third parties are excluded from the shocks.

{CA-LICAT-6.6}

• Expense shocks are applied to maintenance expenses.
• \(e’=(1+20\%)e\) for t ∈ [t+1, t+12]
• \(e’=(1+10\%)e\) for t ∈ (t+12, ∞)

{CA-LICAT-6.6.1}

The sum of:

• Business volume required capital;
• Large increase in business volume required capital; and
• General required capital.

{CA-LICAT-8.1}

• determined by applying a factor to the following in the past 12 months:
  • premiums received, and
  • account values/liabilities for deposit-type products

{CA-LICAT-8.2.1}

For direct premiums received, calculated separately by:

• Individual Life (including Universal Life);
• Group Life (including Universal Life); and
• Other (excluding annuities).

For assumed reinsurance premiums received, calculated by:

• for all products combined

For investment-type products and annuities, calculated by:

• Segregated funds with guarantees (account values);
• Liabilities for annuities in payout period, and annuity liability equivalents for longevity risk transfer arrangements;
• Universal life account values; and
• Account values of mutual funds, GICs, other investment-type products and segregated funds without guarantees, and liabilities for annuities in accumulation period.

{CA-LICAT-8.2.2}

General required capital has two components.

• RC for proxy 1 & 2 below
• RC for proxy 3 below

{CA-LICAT-8.2.3}

• credits are applied to specific components of the mortality and morbidity requirements.
• calculated net of registered reinsurance.
• no within-risk diversification benefits between similar risks in participating blocks and non-participating blocks.

{CA-LICAT-11.1}

\(\text{RC}_\text{Aggregate}=\sqrt{\text{RC}_\text{L}^2+\text{RC}_\text{D}^2-1.5\times\text{RC}_\text{L}\times\text{RC}_\text{Aggregate}}\)

where:

• RC_L is the sum of the individual risk charges for mortality level risk and mortality trend risk for life supported business
• RC_D is the sum of the individual risk charges for mortality level risk and mortality trend risk for death supported business
• The aggregate component for level and trend mortality risk assumes a correlation factor of -75% between life and death supported business.

{CA-LICAT-11.1.1}

at product group level.

{CA-LICAT-11.1.2}

• A credit is given for diversification across geographic regions in the level risk component of the mortality and morbidity requirements.

Credit = 0.5 × (L₀ − L₁)

{CA-LICAT-11.1.3}

What aspects are considered?

• availability: whether the capital element is fully paid in, and the extent to which it is available to absorb losses;
• permanence: the period for which the capital element is available to absorb losses;
• absence of encumbrances and mandatory servicing costs: the extent to which the capital element is free from mandatory payments or encumbrances;
• subordination: the extent to, and the circumstances under which the capital element is subordinated to the rights of policyholders and general creditors of the insurer in an insolvency or winding-up.

Available capital =
   Admitted Assets
– Admitted Liability

Gross Tier 1 Capital =
   Tier 1 Capital Instruments
+ Tier 1 Elements other than Capital Instruments

Tier 1 Elements other than Capital Instruments = 
   Contributed Surplus
+ Adjusted Retained Earnings
+ Volatility adjustment for changes in cost of guarantee liabilities
+ Adjusted Accumulated Other Comprehensive Income (AOCI)
+ Participating account
+ Non-participating account (mutual companies)
+ Tier 1 elements, other than capital instruments (*)
+ Tax adjustments and amounts recoverable on surrender (*)

…

…

{CA-LICAT-2.1.1}

Capital Requirement

HK:

• Minimum Capital Requirements (MCR): Tier 1 Capital ≥ MCR
• Prescribed Capital Requirements (PCR):
  • (Tier 1 Capital + Tier 2 Capital) ≥ PCR
  • PCR = max ($2 mill, 4% × mathematical reserves + 0.3% × capital at risk)

HK-Cap.41O-3 (a)

HK-Cap.41O-4

HK-Cap.41O-3 (b)

HK-Cap.41O-5

HK-Cap.41F-10

CA:

• Minimum Total Ratio > 100%
• Minimum Core Ratio > 70%
• Supervisory Target Total Ratio > 100%
• Supervisory Target Core Ratio > 70%

CA-LICAT-1.1.1

Calculation of Solvency Margin

(HK)

For long term class A and long term class B, the first calculation:

4% × MATH_RES_BF_DEDN_IF × r, where:

• \(r=max(85\%, \dfrac{\text{MATH_RES_AF_DEDN_IF}_{LYE}}{\text{MATH_RES_BF_DEDN_IF}_\text{LYE}}\)

• MATH_RES_BF_DEDN_IF: Mathematical reserves @LYE before reins deduction
• MATH_RES_AF_DEDN_IF: Mathematical reserves @LYE after reins deduction

For long term class A and long term class B, the second calculation:

• 0.3% × ∑|CaR_i| × r, where r = :
  • \(max(50\%,\dfrac{\sum{\text{CaR}_i}_{\text{,LYE,Net}}}{\sum{\text{CaR}_i}_{\text{, LYE, Gross}}})\)
• 0.1% for TERM valid for T ∈ (0, 12*3)
• 0.15% for TERM valid for T ∈ (12*3, POS+12*5)

CaR_i: capital at risk for contract i.

TERM: a term life provides for benefits payable only on death within a specified period.

T ∈ (0, 12*3): For contracts starting from point-of-sale and within 36 months after POS

For long term class C:

• If investment risks are associated, then under the first calculation.
• If:
  • no investment risks are associated, and
  • POL_TERM_Y > 5, and
  • management expenses have a fixed upper limit, then under the first calculation (factor = 1%)
• otherwise, SOLV_MARG = 0.

For long term class D and long term class F:

• under the first calculation.

For long term class E:

• 1% × assets of the relevant tontine.

For long term class I:

• the aggregate of SOLV_MARG of retirement scheme business

highest tier (tier 1) regulatory capital:

• is fully paid-up;
• able to absorb losses first on a going-concern basis and in winding-up;
• is perpetual and not having any terms or conditions;

HK-Cap.41O-7

HK-Cap.41O-S1

tier 2 regulatory capital:

• is fully paid-up;
• has an initial maturity of at least 5 years;
• may be callable within the first 5 years from the date of issue;

Valuation of Interest Rate

(VIR)

VIR = “blended yield” between min(a, b, c) and d, floored by d

• a) 50% × [current national government bond yield] + 50% × [average monthly national government bond yields over the past 36 months]
• b) 6% + 0.25 × max((a) – 6%, 0)
• c) 7.5%
• d) 97.5% of existing asset portfolio yield after prudent adjustments

Own Risk and Solvency Assessment is:

• a tool to enhance an insurer’s understanding of the interrelationships between its risk profile and capital needs.
• a dynamic forward-looking process, stress and scenario testing

{CA-E-19-1}, {CA-E-19-2}

{CA-E-19-3}, {CA-E-19-4}

{CA-E-19-5}, {CA-E-19-Appendix}