Solvency Assessment Research Articles

Why insurance regulators need to require sensitivity settings of internal models for their approval

According to the Solvency II directive, insurers can use internal models for solvency assessment, but regulators must approve these models. Sensitivity analysis is a crucial part of the approval process. However, the directive lacks clarity on the required sensitivity analysis. Various techniques exist in literature to assess the impact of model assumptions on output, each revealing different aspects of model behaviour. In this letter, we suggest a minimum standard for regulators to ensure model quality. We propose complementary sensitivity settings for internal model development, governance, and approval. Implementing these settings enhances the explainability of approved models and their reliability.

Insurance industry in the scope of sustainable development

Subject. This article discusses the role of insurance sector in promoting the ESG agenda and sustainable development issue. Objectives. The article aims to determine the role of insurance in the sustainable development concept, consider the core principles of the green agenda, proposed by the UN and corresponding associations founded by it and supported in the financial sector, and review the European insurance and reinsurance companies' activities in terms of obligations arising from the sustainable insurance requirements. Methods. For the study, I used the methods of systems and comparative analyses, synthesis, and comparison. Conclusions. The insurance industry, together with other financial and non-financial institutions, supports the worldwide reduction of greenhouse gas emissions and contributes to the goal of limiting global warming to 1.5?C above pre-industrial levels. United by this target, the industry is currently moving through a voluntary regime of ESG-oriented topics to a more regulated and compulsory one that provides for more sophisticated reporting rules, disclosure, and transparency. ESG principles change insurers' risk appetite concerning both underwriting and investment aspects, making companies more sensitive to climate-related risks that, as a consequence, leads to revision of existing own risk and solvency assessments models. The path to sustainable insurance has already become visible and is performed via cut of investments from carbon-intensive industries, change of underwriting principles in terms of exit from not-green products and decrease of own emissions. At the same time, the growing awareness defines the place of climate risk in own risk and solvency assessment models.

Implementing Enterprise Risk Management in Life Insurance

This paper discusses a framework for ERM with particular emphasis on the life insurance industry. The ERM framework involves eight key features ranging from governance aspects to risk management policy, risk tolerance, own risk and solvency assessment, capital assessment on economic and supervisory basis and continuity analysis. Given that the life insurance industry is a regulated industry the supervisory role is an important feature of the ERM framework. The paper highlights the different stages of ERM maturity starting with a compliance orientation and the highest stage with linkage to strategy and value creation. The insurance industry is currently somewhere in between but there are a lot of dijferences in the maturity of ERM within the industry. Embedding ERM is a significant challenge for the industry with quantification of economic capital, embedding risk management into decision making and dealing with operational risk being some of the primary ones that the life insurance industry is facing. Actuaries have played an important role in risk management of insurance companies for several years and their skills are well suited to take leading roles in ERM. This will however require them to not only possess technical skills but also rise to the challenge of dealing with non-quantifiable risks, change management and communication with senior management and board. ERM combines the three key elements of insurance risk, capital and value. By integrating these elements insurers are able to enhance performance assessment at a more granular level reflecting the risks underlying the business and identifying opportunities of taking more risk to create shareholder value.

ASSESSMENT OF FINANCIAL CAPACITY OF TERRITORIAL COMMUNITIES

Considered structural sectoral reforms taking place in Ukraine in the process of decentralization are aimed at forming viable territorial communities that are able to solve social problems to meet the needs of residents of administrative-territorial units, taking into account socio-economic, environmental, geographical, cultural, historical and other factors of their development. At the same time, the issues of obtaining financial results from the introduction of tax and budget decentralization, budget financing of expenditures guaranteed by the state remain relevant. Assessment of indicators in these areas will allow to determine the level of financial potential and risks for the functioning and development of spheres of life of local governments. The outlined indicators of assessing the financial capacity of local budgets are based on the analysis of budget indicators of territorial communities and aim to identify problematic issues that hinder the socio-economic development of administrative territories and the inability of local authorities to perform their own and delegated powers. Among the factors influencing the indicators of indicators of local government solvency assessment, the system of horizontal budget equalization and the methodology for determining the local budget tax capacity index need to be improved. Standardization of indicators for assessing the financial capacity of local communities will increase the effectiveness of existing methodologies for measuring them. The updated mechanism for assessing the financial autonomy and independence of local budgets is based on a deeper analysis of financial indicators of local budgets, which requires further study.

Bonitet korporativnog preduzeća

Modern business is characterized by turbulence and unpredictability. The position of a company is influenced by internal and external factors. Management has significant opportunities to influence internal factors while it cannot influence external ones. The prerequisite for quality management is timely insight into the strengths and weaknesses of the company. In order for a corporate company to be successful, it is necessary to analyze all elements that guarantee general material stability, good reputation and prospects, as well as a good competitive position in the market, good development and production programs that guarantee a long life cycle and its right strategy. Solvency refers to business analysis that aims to determine and assess the quality of business. It shows how successful a certain company is, so it serves to assess the current financial situation as well as to assess future business and development. The aim of the research is to point out the importance of solvency assessment and to explain how information is collected so that it can be used to avoid business risks.

Market reactions to enterprise risk management adoption, incorporation by rating agencies, and ORSA Act passage

AbstractPrior literature on Enterprise Risk Management's (ERM) value implications focuses on cost–benefit analyses of implementing an ERM program. We take a novel approach by examining the implementation dynamics and study whether the timing of firms' adoption affects ERM's value implication. We find that firms experienced positive (negative) abnormal returns when adopting ERM following (before) 2005 when Standard & Poor's (S&P) issued their ERM‐related rating criteria. We also find evidence that ERM firms experienced positive abnormal market reactions to this rating criteria change by S&P but find no evidence for the following change by A.M. Best. In addition, our study documents that the market rewarded ERM adopters and penalized nonadopters after November 2011 on key dates leading to the passage of the Own Risk Solvency Assessment (ORSA) Act when there was less uncertainty regarding ultimate passage of the Act. Overall, our results imply that the capital market's view on ERM is shaped by rating agency and regulatory changes. Our findings are also consistent with the view that investors gain a greater understanding of ERM over time.

Solvency Evaluation Model of Insurance Company Based on Stochastic Differential Equation

Solvency assessment is the core content of insurance supervision. In this paper, from the perspective of capital flow, the insurance company’s capital flow is regarded as a dynamic system, the stochastic differential equations model is established to describe its flow characteristics, and the existence of positive equilibrium point of the system is proved, as well as the conditions of stability at equilibrium point, that is, the requirements of the insurance company’s solvency. Furthermore, by using the numerical simulation method, we get the strategy of insurance companies to deal with the solvency shortage when facing the change of external environment, and the strategy of insurance company to deal with solvency shortage is obtained.

Multi-year analysis of solvency capital in life insurance

With the commencement of the Solvency II directive, insurers in the European Union need to provide a projection of their solvency figures into the future (as part of the Own Risk and Solvency Assessment, ORSA). This is a highly complex task since future solvency figures depend on the development of numerous (stochastic) risk factors. The required evaluations are numerically challenging, which in practice forces companies to limit their analyses to only a few selected deterministic scenarios. These deterministic scenarios clearly cannot describe the full probability distribution of a company’s future solvency situation. The focus of this paper is on financial guarantees in participating life insurance products. In particular, we study two major types of interest rate guarantees in life insurance, a maturity guarantee and a (path-dependent) cliquet-style guarantee. In order to derive entire probability distributions of future solvency ratios, we limit the model framework to two sources of risk (a Hull–White model for interest rates and a geometric Brownian motion for stocks). This partly leads to closed-form solutions of the market-consistent valuation of the liabilities, ensures higher accuracy in computations and less numerical effort. Furthermore, the model allows for a detailed analysis of the impact of the different types of interest rate guarantees on the future solvency situation. Our results suggest that the type of guarantee has a significant impact on the long-term solvency of the company.

The standard formula of Solvency II: a critical discussion

Establishing a standard formula (SF) for the regulation of European insurance companies is a Herculean task. It has to acknowledge very different business models and national peculiarities. In addition, regulatory authorities—as a stakeholder on their own—have a number of supervisory objectives the SF should incentivize. With the intervention of the SF in economic activities, the principle of equal treatment must be maintained. The large circle of users makes its procedural simplicity indispensable to ensure that it is applied and implemented in a proportionate manner. Above all, the SF should be risk-sensitive. Compared to Solvency I, the SF of Solvency II is considered a significant improvement, as many of the aforementioned desiderata have been much better realized. The following analysis and survey of model-theoretical aspects of the SF shows that these improvements could be achieved above all with regard to epistemic uncertainties. The stochastic model underneath the SF is still subject to considerable uncertainties; so that the probability functional of the SF is exposed to significant model risk. As part of the Own Risk and Solvency Assessment (ORSA), insurance companies must prove the adequacy of the SF for their company. The vague prior knowledge represented by the stochastic component of the SF is not sufficient for an SF intrinsic validation of the aleatoric component.

INSOLVENCY OF INSURANCE COMPANIES IN UKRAINE: DETECTION AND PROGNOSTICATION

The paper demonstrates the results of research on the problems of insurance company insolvency. The outcomes describe the basic principles of detection and using the early warning system in Ukraine. The paper shows the necessity to reorganize the basic principles of the detection of local insolvent insurers. The study also determines the groups of persons who are directly or indirectly interested in the insurer's solvency assessment. This work presents the system of insurance companies' insolvency indicators, which help to identify insolvency at the early stages. The paper distinguishes precautionary, delayed, internal, and external insolvency indicators of insurers. The study divides the values of insurer's insolvency indicators into "yellow" and "red" zones to increase the flexibility of using various instruments for influencing by the regulator depending on the level of danger of the insurance company. This work argues for taking timely measures to the threat of insolvency of the insurance companies by the insurance supervisor.Key words: insolvency, instability of the insurers, solvency, early warning system, insurance market.

Utility-Consistent Valuation Schemes for the Own Risk and Solvency Assessment of Life Insurance Companies

Abstract In this paper, we construct new valuation schemes for the liabilities and economic capital of insurance companies. Specifically, we first build a ‘SAHARA’ valuation framework based on Symmetric Asymptotic Hyperbolic Absolute Risk Aversion utility functions. Then, we construct a ‘SAHARA-CPT’ framework that incorporates the previous utility function as a value function and that is based on Cumulative Prospect Theory. The process used for assessing a life insurance company’s own funds consists in replacing the market-consistent parametrization with a utility-consistent parametrization that accounts for the risk aversion of the market and the long-term duration of the company’s commitments. Our illustrations show that this approach leads to a lower value of the Own Risk and Solvency Assessment and to a lower volatility of own funds. The framework that is based on cumulative prospect theory has the advantage over the expected utility theory framework that it considers a precautionary overweighting of extreme events, as a tradeoff for additional model complexity.

Enterprise risk management and Solvency II: the system of governance and the Own Risk and Solvency Assessment

PurposeThe purpose of this paper is to analyze how enterprise risk management (ERM), the system of governance and the Own Risk and Solvency Assessment (ORSA) have been boosted with the entry of Solvency II.Design/methodology/approachFor this analysis, the authors have undertaken a survey of chief risk officers (CROs) working in Spanish insurance companies.FindingsThe results show that Solvency II has definitely promoted ERM in the European insurance industry and improved the system of governance of the insurance companies, and that the perceived value of the ORSA for the companies is higher than the cost. It is clear that the quality of ERM implemented by companies is higher in those that face more complex risks and with greater interdependencies – that is, larger companies, foreign insurers and insurers with several lines of business – but is unaffected by the legal form of the entity (mutual/corporation).Originality/valueThis study conducts primary research with surveys of CROs and develops a measure of the quality of ERM implemented by insurance companies.

Accounting Standards and Insurer Solvency Assessment

Accounting Standards and Insurer Solvency Assessment

Анализ и диагностика бизнес-рисков компании: прогнозирование и контроль вероятности банкротства

The article discusses the author’s methodology and analytical tools for assessing business risks and forecasting the business continuity (probability of bankruptcy) of companies with the possibility of its implementation in a computer environment. The proposed methodology consists of four stages: assessment of financial results; solvency assessment; identification, calculation and assessment of financial risks of the company's business continuity; forecasting changes in the level of risk of business continuity using the developed calculator for calculating risk factors indicators. This technique is recommended for use in audit and consulting activities to assess the continuity of the audited companies, to justify the choice of borrowing companies, bidders and traders, as well as in internal audit systems, internal control, financial control of business processes.

Liquidity and solvency assessment of an insurance company

Methods. The results are obtained through the use of methods: analysis – in the study of the basic theoretical, methodological approaches to assessing liquidity and solvency of an insurance organization; abstraction – in determining essential characteristics of liquidity and solvency; formalization – when determining the liquidity ratio; generalization – when establishing the relationship between the concepts of «liquidity» and «solvency» and their quantification for insurance companies.Results. The key differences between the categories of «liquidity» and «solvency» are characterized. It is substantiated that liquidity should be considered as a multilevel system of categories that integrates, in particular, the concept of assets liquidity, balance sheet liquidity, liquidity of a company on the whole. The existing classification of assets by the liquidity reduction degree and liabilities according to the term of maturity has been supplemented and deepened, taking into account insurer’s asset and liabilities specifics. It is noted that there is no agreement on the number and name of liquidity ratios in scientific publications, that leads to an artificial increase in the number of indicators and complicates the process of an insurance organization liquidity assessing. In addition, not all the researchers consider the availability of an insurance component in their publications. The necessity to specify and further systematize the indicators of liquidity and solvency assessment of an insurance organization is substantiated. Novelty. The formula for determining the balance sheet liquidity ratio has been improved, taking into account the essential characteristics of liquidity, namely the assets value and the time of their conversion, the magnitude of liabilities and their maturity. The author’s systematization of liquidity and solvency assessment indicators of an insurance company is offered, taking into account the national scientists publications. Practical value. The existing indicators are organized by authors into three groups, which gives a clear idea of the insurance company liquidity, the liquidity of the insurance activity and the insurer solvency.

Development of Borrowers’ Solvency Assessment Model: Logistic Regression Application

Borrowers’ solvency assessment models can not only increase company’s profit, but also potentially decrease the impact from the negative economic consequences of the crisis. However, there is no consensus on such models. Considering the flaws in the scientific literature, the main aim of this article was to develop the borrowers’ solvency assessment model, which can be applied in practice. The most appropriate method for developing such models was found to be logistic regression, and this research goal is to identify the best modelling approach to achieve the highest borrowers’ solvency predictability. By implementing the best-chosen model, a nonbank lending company could provide a 42.5% lower total borrowers risk of default than without implementing such a model. Depending on the risk policy of the non-bank lending company, three methodologies were developed based on different assumptions about the significance of type 1 error and type 2 error in the company to determine the exact cut-off value

Accounting Standards and Insurer Solvency Assessment

Accounting Standards and Insurer Solvency Assessment

Оценка заёмщиков микрокредитов нечётким методом максиминной свёртки

The problem of timely repayment of loans at all times has been and continues to be actual for commercial banks. Overcoming this problem substantially depends on the quality of the solvency assessment of potential borrowers, which is carried out by experts on the basis of retrospective information. In the microcredit system, the assessment of the borrower's credit history is usually carried out by an expert who mainly relies on his heuristic knowledge and intuition, which usually extols subjective considerations that do not have sufficient grounds. In practice, the opinions of different analysts or those responsible for making credit decisions often differ, especially if controversial situations are considered that have many acceptable alternative solutions. As a result, in assessing the solvency of potential microloan borrowers, the subjective opinion of the expert and the incompetent or deliberate interpretation of the information resulting in the adoption of decisions that are detrimental to the microfinance organization are overweight. To increase the degree of objectivity, the paper discusses an approach to assessing the responsibility and solvency of microloan borrowers, based on the use of the fuzzy method of maximin convolution. This approach, given the poorly structured personal data of applicants, allows them to be flexibly and quickly assessed for the provision of microloans. The qualitative assessment criteria applied in this case are weighed based on expert opinions regarding the priority of each of them. An important advantage of the proposed model is that it is simple, convenient to use and able to adapt to the requirements of various micro-financial organizations.

НАПРАВЛЕНИЯ АНАЛИЗА ПЛАТЕЖЕСПОСОБНОСТИ

Цель: статья посвящена обоснованию направлений комплексного экономического анализа платежеспособности организации с использованием данных бухгалтерской отчетности и внутренней информации исследуемой организации. Платежеспособность свидетельствует о наличии денежных средств и их эквивалентов полностью и в срок погасить обязательства организации и прежде всего его текущие обязательства. Комплексный экономический анализ платежеспособности позволяет выявить как избыток, так и недостаток денежных средств, что влияет на финансовое состояние организации. В условиях рыночной экономики свободные денежные средства должны находиться в обороте и обеспечивать возможность получения экономической выгоды, которая станет в будущем залогом реализации инвестиционной, социальной политики и т.д. Определение дефицита денежных средств позволяет по результатам анализа своевременно принять обоснованные управленческие решения, направленные на ликвидацию угрозы возможного банкротства. Обсуждение: в статье представлены подходы ведущих ученых к пониманию платежеспособности, факторов на нее влияющих, роли коэффициентного метода анализа отчетности. Обоснованы этапы, показатели, оценки платежеспособности. В настоящее время не существует единого подхода к методике анализа платежеспособности организации, одной из составляющей которой является параметрический и информационный аспекты. Применение различных информационных ресурсов в процессе анализа позволяет расширить систему показателей, характеризующих платежеспособность, и тем самым более объективно оценить возможности организации в погашении своих обязательств. Результаты: автором обоснована система показателей оценки платежеспособности организации, базирующая на данных внешней и внутренней отчетности, приведена методика анализа исследуемой организации, дана интерпретация результатов анализа. В статье дана методика расчета показателей по данным бухгалтерского баланса, отчета о движении денежных средств, данных аналитического и бухгалтерского учета. Результаты анализа по указанным направлениям позволяют ответить на вопрос о величине коэффициентов ликвидности, притоках и оттоках денежных средств по видам операций, достаточности денежных средств, эффективности их использования, равномерности и ритмичности их движения.

Оцінка платоспроможності страхових організацій Республіки Білорусь.

Sustainable development of insurance organizations aimed at ensuring their solvency in order to protect the interests of policyholders is the main priority of the insurance market of the Republic of Belarus. The most important indicator characterizing the reliability and stability of the insurance market is the solvency of the insurance company. The subject of the study is the process of assessing the solvency of insurance organizations. The goal is to analyze the current practice of assessing the solvency of insurance organizations in the Republic of Belarus. The tools to maintain solvency of insurance companies of the Republic of Belarus are insurance rates, insurance reserves, investments and reinsurance. The practical application of these tools in the activities of insurance organizations of the Republic of Belarus is considered. In accordance with the Instruction on the criteria and procedure for assessing the solvency of insurance organizations, the solvency of an insurance company is the estimated value, within which the insurer, based on the specifics of the concluded contracts and the volume of insurance obligations assumed, should have its own capital free from any future obligations, with the exception of rights of claim of property owners. Solvency assessment involves a comparison of the actual and standard sizes of the solvency margin, which are based on the financial statements of the insurance organization. The process of assessing the solvency of insurance organizations of the Republic of Belarus also includes the calculation and monitoring of compliance with safe functioning standards. It is concluded that the Republic of Belarus uses a combined approach to assessing the solvency of insurance organizations, which provides for two areas: a comparison of the actual and standard sizes of the solvency margin and an assessment of the implementation of safe functioning standards. The solvency assessment process should take into account all aspects of the insurance organization and allow the analysis of factors affecting its solvency. Factors should take into account both the conditions typical for all participants in the insurance market and the particularities of a particular insurance organization.