Solvency - FINAL Summary
-
Upload
saifuliza-omar -
Category
Documents
-
view
220 -
download
0
Transcript of Solvency - FINAL Summary
-
8/4/2019 Solvency - FINAL Summary
1/23
For :
PROF. DATO DR. KAMARUDDINSHARIFBy:NOORHAYATI MAAMOR - ZP00767
ZUBYDAH HAMZAH ZP00708
-
8/4/2019 Solvency - FINAL Summary
2/23
10.1 Introduction
10.2 The Need For Solvency
10.3 The Principle of Solvency10.4 Traditional Approaches to Insurance
Solvency
10.5 Risk-Based Capital
Malaysian context
-
8/4/2019 Solvency - FINAL Summary
3/23
RatiosMethod
Risk-
Based
Method
-
8/4/2019 Solvency - FINAL Summary
4/23
One form of prudential
regulation aimed at
ensuring that regulated
entities operate safely and
soundly.
Includes requirements for
minimum risk managementstandards, requirements for
fitness and propriety of
managers and owners, and
requirements for sensitivity
analysis to forecast the
effect of plausible scenarios
Solvency requirement is a key regulatory toolin contemporary Takaful regulation, especiallyin view of the increasing complexities of
Takaful business and operations.
-
8/4/2019 Solvency - FINAL Summary
5/23
Ratio-based Approaches:-Solvency margins calculated on thebasis of ratios of premiums, claimand liabilities
relatively easy to handle;
requirements vary with level ofbusiness;
arbitrary values; usually identical treatment of
different classes of business; various forms of risk not captured
(exchanged rate, marketfluctuation, etc);
no consideration of individualcases.
Risk-based Approaches:-Assessment of the capital adequacyof individual insurers on a risk-adjusted based (in analogy to BaselII)
technically much more demanding;
expensive experts required;
classification of capital into two ormore tier of different quality;
identification of different risk
classes; capital requirement based on
defined probability of failure;
use of internal risk model or of astandard model.
-
8/4/2019 Solvency - FINAL Summary
6/23
1. To increase the likelihood that a Takaful undertaking wouldbe able to meet all its contractual obligations andcommitments;
2. To act as an early warning system for regulatoryintervention and immediate corrective action, taking intoaccount that the supervisory authority may sometimes have
access only to incomplete information, and that evencorrective actions may take time to generate the desiredimpact;
3. To provide a buffer so that even if the Takaful participants
are to suffer a loss in the event of failure of a Takafulundertaking, the impact can be limited orreduced; and
4. To foster confidence amongst the general public, inparticular Takaful participants, in the financial stability ofthe Takaful sector
THE NEED FOR SOLVENCY REQUIREMENTS
-
8/4/2019 Solvency - FINAL Summary
7/23
1. Assets and liabilities are measured according to prescribed valuation rules;examples it is likely that some assets would be excluded or revaluedownwards for solvency purposes, reducing the amount of surplusavailable and the true regulatory surplus would be only the amount bywhich the available excess of assets over liabilities exceeded the requiredmargin of solvency or regulatory capital requirement.
Relationship between shareholder surplus and regulatory surplus
The view for shareholders. ..and for the regulator
2. Continuous requirement.
THE PRINCIPLE OF SOLVENCY
Assets
Liabilities Liabilities
Shareholdersequity
Regulatorycapital
Regulatory surplus
Regulatory capitalrequirement
Valuation adjustments
-
8/4/2019 Solvency - FINAL Summary
8/23
TRADITIONAL APPROACHES TOINSURANCE SOLVENCY
Insensitive toward the capital an institution required
for its business
Motor damage predictable
Others losses are large ie latent diseases or
environmental pollution
Minimum
paid-up
capital
requirements
Ratios to premiums, claims or liabilities ie 20%
If based on premiums, extra risk takers subjected to
lower solvency requirements
Does not capture other risks ie exchange rate, credit
risks, market risks.
Required
minimum
solvency
margins
Takaful an obvious example, as its investment universe is limited
-
8/4/2019 Solvency - FINAL Summary
9/23
TRADITIONAL APPROACHES TOINSURANCE SOLVENCY
Great reliance on conservative judgment of
actuaries
Now, greater role valuation of liabilities
Solvency reqs complicated protection and
savings element
Life
insurance
IAIS/IFSB note that in light of the specific
structure of takaful operator, modifications is
required
Takaful
-
8/4/2019 Solvency - FINAL Summary
10/23
RISK-BASED CAPITAL
Used by rating agencies ie S&Ps, AM Best,
Moodys and Fitch
Ratings depend on capital adequacy on risk-
adjusted basis
Basel Accords Classification of capital into tiers of different quality
Consistent rules on assets and liabilities calculation
Identification of different classes of risks
Setting of capital requirements based on prob. Of failure
Internally developed capital models
Regulators active role in risk assessments
-
8/4/2019 Solvency - FINAL Summary
11/23
Dominated by large no. of small companies
Intense & inefficient competition
Insurers operates in tight margins
Spending money in capital models
Skilled resources
Creation and assessment of models
DIFFICULTIES OF RISK-BASED CAPITAL IMPLEMENTATION
-
8/4/2019 Solvency - FINAL Summary
12/23
RegulatoryCapital
Assets
Takaful Model allows forcapital to be contributed tothe risk fund in the form ofqard hassan
THE NATURE OF CAPITAL FOR TAKAFUL
Assets
Liabilities
Assets
Liabilities
Qard
Operators fund Risk fund
Deficit Qard
Operatorsfu
nd
Operatorsfund
Combined
Risk
fund
Risk
fund
Assets
Qard
Liabilities
Liabilities
Qard
Qard hassanasset and liability
cancel out
RegulatoryCapital
-
8/4/2019 Solvency - FINAL Summary
13/23
Takaful Operator may consider:
Capital in the operators fund that is available for transfer
as qard hassan but has not actually been transferred
Calls on participants for additional contributions
-
8/4/2019 Solvency - FINAL Summary
14/23
Resolutions of BNMs SAC
In the event that the reserves are not sufficient to cover deficits in theParticipants Special Account (PSA), then the takaful operator mustcover the deficits by giving financial help from the shareholders fundby way of qard hasan. (38th Meeting)
SAC approved the Central Bank of Malaysias proposal to impose onthe takaful operators the responsibility for the solvency of takafulfunds and to secure the benefits and savings of the participantsthrough asset injection from the shareholders funds into the takafulfunds to cover any deficit that occurs based on the reason given. Thesecurity and injection of asset may be implemented by the takaful
operator based on commitment to donate (iltizam bit tabarru`), i.e.,the operator undertakes to give donation to cover all the claims(liabilities) on the takaful fund in the case of deficit. (46th Meeting)
Source: BNM
-
8/4/2019 Solvency - FINAL Summary
15/23
Different tiers of capital
The Basel Committee convention capital is divided intotiers of quality
Top quality paid-up share capital plus premiums, pluscumulative retained earnings
Low quality preference shares and subordinated debtinstruments, for takaful, potential qard hassan and theability to make calls
-
8/4/2019 Solvency - FINAL Summary
16/23
Solvency Requirements
Categorization of Risks by IAIS (International Association ofInsurance Supervisors)
Underwriting
Premiums charged inadequate to meet liabilities
Credit
Failures of counterparties to meet obligations
Market
Assets failing to realize values assigned
Liquidity
Institution being solvent and unable to mobilize liquidity
Operational
Inadequate or failed internal process, systems or
people
For takaful, the risk thatfees received are lessthan the managementexpenses
-
8/4/2019 Solvency - FINAL Summary
17/23
DISCUSSIONS
-
8/4/2019 Solvency - FINAL Summary
18/23
THE ROLE OF WAKALAH IN STRENGTHENING THECAPITAL ADEQUACY & SOLVENCY OF TAKAFUL FUNDS
Under the wakalah contract, the contractual responsibilitiesof the takaful operator are as a trustee (amin) and not as aguarantor (kafil).
The takaful operator is not responsible in the case of anyloss of deficit in the takaful funds in the course of thetakaful operation, unless such losses or deficits are causedby negligence or fraud of the operator.
Therefore, it can be said that solvency is not the directresponsibility of the takaful operator, but rather that of thetakaful fund or ultimately the takaful participants.
-
8/4/2019 Solvency - FINAL Summary
19/23
IMPOSITION OF DUTY TO GIVE FINANCIALSUPPORT ON THE OPERATOR ?
The policy basis for imposing the responsibility for solvencyon the operator reflects the current environment in takafulbusiness, i.e.:
Takaful operators are licensed Islamic financial institutions ina regulated industry; Takaful operators market their takaful products to theparticipants with the understanding that claims can be metfrom the takaful funds, and that they are expert in managing
the funds; Takaful operators make profits from their duty and expertisein the management of the takaful funds, and this shouldinclude solvency valuation and management;
-
8/4/2019 Solvency - FINAL Summary
20/23
CROSS SUBSIDY BETWEEN VARIOUS TAKAFUL FUNDS?
The SAC disallowed the practice of using the surplus orreserves from one takaful fund to crosssubsidise the deficit inanother takaful fund because:
The risk profiles and nature of liabilities in each fund aredifferent. The participants in each fund may not have agreedto take different or higher risk profiles into their scheme The original intent of the participants in the tabarru`contract is to be considered in determining whethercrosssubsidy is intended to be covered by the fund or not
If there is no express provision for crosssubsidy in the termsof the tabarru`, then crosssubsidy is not allowed, because theparticipants are understood to intend to provide only for thosewith similar risk profile in their scheme only.
-
8/4/2019 Solvency - FINAL Summary
21/23
CROSS SUBSIDY BETWEEN VARIOUS TAKAFUL FUNDS?
Another mechanism to overcome the problem of deficits intakaful funds that is being considered by some takafuloperators or perhaps the regulator is the practice of
crosssubsidy between various takaful funds. In this mechanism, the surplus or available reserve of a typeof takaful fund / scheme will be used to cover any deficit inanother takaful fund / scheme under the management of thetakaful operator. The idea is, to try to cover the deficit from the participants
tabarru funds first, regardless of the type of fund or its riskprofile, before resorting to the injection of asset or fund fromthe operator by way of qard.
-
8/4/2019 Solvency - FINAL Summary
22/23
ENHANCED SOLVENCY FRAMEWORK FOR TAKAFUL
Source : Global Islamic Finance Forum 2010
-
8/4/2019 Solvency - FINAL Summary
23/23
THE END