July 31, 2015
Financial Services Agency
Results of Field Tests of Economic Value-Based Solvency Regime
The Financial Services Agency (FSA) has conducted field tests covering all insurance companies, with a view to introducing an economic value-based solvency regime, and has summarized the results as follows.
In May 2011, the FSA announced its first field tests of the economic value-based solvency regime.
In June 2014, it announced the implementation of its second field tests and requested all insurance companies (43 life insurance companies and 53 non-life insurance companies) to implement them.
As we have completed the work of compiling and analyzing the replies, we are publishing a summary of the survey results.
To grasp the status of preparations of insurance companies as well as to identify practical issues and problems that may arise in the process of calculation by requesting all insurance companies to calculate the value of their insurance liabilities based on economic value.
III. Summary of the results
(1) Although the field tests were more wide-ranging with inclusion of calculations by multiple methods than the previous test, all the companies targeted replied regarding the results of the calculations. In addition, it was recognized that interests in the economic value-based solvency regime and risk management remain strong among insurance companies and that they are making progress in developing systems for such calculation.
(2) On the other hand, the questionnaire results from individual companies suggested that sufficient preparation time would be necessary for the actual introduction of the regime, and that there are many issues to be solved from the perspectives of system establishment and burdens on practical operations, etc. Furthermore, some companies requested the development of a scheme that takes into consideration the differences in the corresponding systems of each company, etc., including the use of internal models.
2. The economic value-based calculation of insurance liabilities
(1) The economic value-based insurance liabilities were not significantly divergent from insurance liabilities based on the current regulatory requirements, even under the current low-interest rate environment. However, there were different trends between companies due to differences in the structure of insurance policies in force, etc. Therefore, it is necessary to continue to fully examine the impact of the method of establishing discount rates, etc. on insurance liabilities in the future.
(2) All companies were requested to calculate the costs of options and guarantees. It was recognized that comparability would become a major issue especially when using an internal model approach, due to reasons such as the use of a stochastic method as well as the complexity of the method of generating interest rate scenarios. It is considered necessary to examine matters such as what kind of methods will be appropriate in the future.
3. The risk amount
(1) In the field tests, a 99.5% confidence level VaR was used. However, it is necessary to continue examining issues such as the following:
- The appropriateness of 99.5% confidence level VaR
- Comparison with methods other than VaR such as TVaR
(2) Regarding the method of measuring risk, the “measurement of the amount of risk in light of actual conditions such as each company’s product details, portfolio held and risk management methods” and “simplicity and comparability” are often in a trade-off relationship. Therefore, how to strike a balance between the two, including the treatment of internal models, continues to be a matter for consideration.
IV. Direction of Future Examination
1. As described above, a variety of issues and challenges were recognized in the field tests, as in the previous tests. Based on the results, it is necessary for the FSA to conduct further examination toward the establishment of a specific framework concerning the economic value-based solvency regime.
2. Debate on the economic value-based solvency regime has been proceeding internationally too. For example, the IAIS is conducting ICS field tests, and preparation for the introduction of “Solvency II” is under way in Europe. Furthermore, in the accounting system, the International Accounting Standards Board (IASB) is examining IFRS 4 “Insurance Contracts.” Under such circumstances and while paying attention to the nature of the Japanese insurance market, it is considered important to establish a regulatory framework that is suited to our country.
3. The introduction of the economic value-based solvency regime requires corresponding revisions to the business management and risk management methods that have until now been used by insurance companies. Therefore, the FSA will make steady efforts to establish a new framework through dialogue with relevant parties in various situations, so as to ensure a smooth introduction.
Financial Services Agency Tel: +81 (0)3-3506-6000 (main)
Insurance Business Division, Supervisory Bureau
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