Pillar 1

Question 1

Describe Pillar 1 in general

Answer 1

1. for Public solvency information in supervisory returns
2. Produced annually
3. Prescriptive rules

Question 2

What are the 2 types of Pillar 1 firm?

Answer 2

1. Realistic basis life firm (>£500m WP liabs or smaller firm but opted to be realistic)
2. Regulatory basis only life firm

Question 3

What’s the difference between peak 1 and 2?

Answer 3

1 = statutory valuation satisfying minimum EU standards
2 = 'realistic' valuation requiring market consistent assessment of all benefits including G's and O's

Question 4

what’s difference between peak 1 reg and real calcs?

Answer 4

firms have different rules

Question 5

what are rules on assets in peak 1?

Answer 5

only admissible assets
maximum amts on assets non Govt. or local authority (reduce concentration risk)
Express max amts as % of math res + cap req

Question 6

How to value these admissible assets under peak 1:
1. quoted investments
(debt securities/bonds/capital market instruments/shares/variable yield assets/units in UCITS or CIS investing only in admissible assets/approved derivatives)
2. loans assuming amount can be recovered
3. land/buildings
4. tangible fixed assets
5. cash and deposits

Answer 6

1. quoted investments = bid price
2. loans assuming amount can be recovered = face value
3. land/buildings = qualified valuer on open market sale basis
4. tangible fixed assets = depreciate on straight line basis
5. cash and deposits = face value

Question 7

What are not included in admissible assets?

Answer 7

1. Holdings that may give rise to significant liabilities or onerous duties
2. Nature presents unacceptable custody risk
3. Realisability can’t be relied upon with confidence
4. Sufficiently objective and verifiable basis of valuation doesn’t exist

Question 8

8 points on peak 1 math res requirements

Answer 8

1. Prospective prudent valuations including MAD’s
2. Avoid future valuation strain
3. individual policy res>=Gteed SV (if gtee exists)
4. Sometimes pol res could be <= 97.5% risk adjusted (ie. reduced to allow for defauly possibility) yields on back assets

Question 9

What additional capital needs to be held above math res for peak 1?

Answer 9

LTICR for both types - multiply measures of capital at risk by fixed percentages
RCR in reg basis - assessment of market risk based on prescribed equity/property/fixed interest shocks

Question 10

What is the MCR in peak 1 for realistic and reg life firms?

What is BCRR and how much is it?

Answer 10

Realistic firm = max(BCRR, LTICR)
Reg = max(BCRR, LTICR + RCR)
BCRR = base capital resource requirement = 3.7m euro

Question 11

In peak 2, what are the assets that can be included?

Answer 11

1. Admissible assets backing with-profits business (not the np business)
2. Excess admissible assets - those above exposure limits for peak 1
3. MV inadmissible derivatives in WP fund
   4 PVFP non-par business in WP fund
4. Support assets - those helf outside the fund to support with-profits business

Question 12

Explain how to calculate mathematical reserves in peak 2

Answer 12

1. Market consistent valuation
2. Stochastic techniques
3. Economic assumptions = market consistent
4. Non-economic = best estimate
5. Base reserves = total asset shares
6. Need to add on future policy related liabilities e.g. guarantee costs
7. Management actions can be allowed for as long as consistent with PPFM and realistic amount of time given since ‘shock’
8. Policyholder actions may also be allowed for

Question 13

Give 2 examples of management actions and 1 of policyholder actions that could be allowed for in RBS

Answer 13

Dynamic reversionary bonuses
Equity backing ratios varying with economic conditions
Lapses varying with attractiveness of guarantees under different economic conditions

Question 14

What are the RCM stresses, what can be allowed for?

Answer 14

Fall/rise in equity/property/lapses/fixed interest yields values
widening of credit spreads
allowance for impact of credit risk on reinsurance exposures
Allow for management actions as long as realistic time after shock event

Question 15

How is the WPICC calculated?

Answer 15

Peak 1 free assets = Assets - (math res + lticr + rcr)
Peak 2 free assets = Assets - (math res + rcm)
If Peak 1 free assets > Peak 2 free assets then WPICC is used to bring the Peak 1 into line with Peak 2.
ie. WPICC = max(0, Peak 1 free assets - Peak 2 free assets)
So afterwards:
Peak 1 Liabs = Math Res + LTICR + RCR + WPICC
Peak 1 Free Surplus = Assets1 - Peak 1 Liabs = Assets2 - Peak 2 Liabs

Question 16

What is the ECR (enhanced capital requirement)

Answer 16

lticr + wpicc

Question 17

What is the CRR (capital resource requirement)

Answer 17

max (MCR, ECR)
Where MCR is:
Realistic firm = max(BCRR, LTICR)
Reg = max(BCRR, LTICR + RCR)

so Real is max(bcrr, lticr + wpicc)
or Reg is max(bcrr, lticr+rcr, lticr+wpicc)

Question 18

What must a firm demonstrate in terms of capital under Pillar 1?

Answer 18

1. They have sufficient capital resources to meet the CRR

2. Capital is of sufficient quality

Question 19

What are the different tiers so we can define capital of sufficient quality, in pillar 1? Why hold different tiers?

Answer 19

1. Core tier 1 - Permanent share capital, profit/loss account and other reserves, fund for future appropriations
2. Other tier 1 - perpetual non-cumulative preference shares
3. upper tier 2 - perpetual preference shares, perpetual subordinated debt and securities
4. Lower tier 2 - fixed term preference shares, fixed term subordinate securities

Ensures capital held of sufficient quality, reduces risk of insolvency in adverse scenarios