Solvency II, Basel III

Solvency II: Compliance, Improved Risk Management and Increased Performance

Insurance companies will need to be Solvency II compliant by October 2012. In order to meet this deadline, risk managers are under pressure to quickly understand the directive and build compliant strategies to meet the mandate, which includes capital management, risk management strategy and regulatory reporting. At the same time, there is internal pressure to improve overall risk assessment, as well as products and services profitability.

I may assist to quantify a firm’s unique risk profile, including operational risk, market risk, counterparty risk, insurance risk and business risk for Solvency II compliance and improved business strategy.


Capital Calculation (Pillar I)

Ability to calculate the Minimum Capital Requirement (MCR) and Solvency Capital Requirement (SCR) which involves all types of risks insurers face, including insurance risk, market risk, credit risk and operational risk.

Risk Management Assessment (Pillar 2)

Pillar 2 requires Own Risk and Solvency Assessment (ORSA) which aims to accurately capture a firm’s unique risk profile. I may assist with enterprise risk management framework for ORSA requirements by helping to design multi-year financial projections, advanced modeling capabilities and a complete framework to deal with scenarios and stress testing.

Reporting (Pillar 3)

Monitoring that regulatory reports are delivered acording to the regulatory requirements.

Advanced Risk Management

Assisting with integrated business reporting that enables to analyse many dimentions, such as product/policy type, counterparty type, asset class, country, industry and
other criteria and enables to manage assets, liabilities and their interaction as a whole.



Basel III: New Capital and Liquidity Standards

Basel III proposes many new capital, leverage and liquidity standards to strengthen the regulation, supervision and risk management of the banking sector. The capital standards and new capital buffers will require banks to hold more capital and higher quality of capital than under current Basel II rules. The new leverage and liquidity ratios introduce a non-risk based measure to supplement the risk-based minimum capital requirements and measures to ensurethat adequate funding is maintained in case of crisis.


The new regulations raise the quality, consistency and transparency of the capital base and strenghten the risk coverage of the capital framework.

Regulatory Requirements

Higher Minimum Tier 1 Capital Requirement

»» Tier 1 Capital Ratio: increases from 4% to 6%
»» The ratio will be set at 4.5% from 1 January 2013, 5.5% from 1 January 2014 and 6% from 1 January 2015
»» Predominance of common equity will now reach 82.3% of Tier 1 capital, inclusive of capital conservation buffer

New Capital Conservation Buffer
 
»» Used to absorb losses during periods of financial and economic stress
»» Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirement to 7% (4.5% common equity requirement and the 2.5% capital conservation buffer)
»» The capital conservation buffer must be met exclusively with common equity
»» Banks that do not maintain the capital conservation buffer will face restrictions on payouts of dividends, share buybacks and bonuses


Countercyclical Capital Buffer

»» A countercyclical buffer within a range of 0% - 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances
»» When in effect, this is an extension to the conservation buffer

Higher Minimum Tier 1 Common Equity Requirement


»» Tier 1 Common Equity Requirement: increase from 2% to 4.5%
»» The ratio will be set at 3.5% from 1 January 2013, 4% from 1 January 2014 and 4.5% from 1 January 2015

Liquidity Standard

»» Liquidity Coverage Ratio (LCR): to ensure that sufficient high quality liquid resources are available for one month survival in case of a stress scenario. Introduced 1 January 2015
»» Net Stable Funding Ratio (NSFR): to promote resiliency over longer-term time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis
»» Additional liquidity monitoring metrics focused on maturity

Leverage Ratio

»» A supplemental 3% non-risk based leverage ratio which serves as a backstop to the measures outlined above
»» Parallel run between 2013-2017; migration to Pillar 1 from 2018

Minimum Total Capital Ratio

»» Remains at 8%
»» The addition of the capital conservation buffer increases the total amount of capital a bank must hold to 10.5% of risk-weighted assets, of which 8.5% must be tier 1 capital
»» Tier 2 capital instruments will be harmonized; tier 3 capital will be phased out.