Risk Assessment and Evaluation of Solvency in Main Areas of Risk

1. Underwriting Risk
    
   1. The Life underwriting risk module in the solvency template reflects the risk arising from life insurance and fund accumulation obligations, in relation to the perils covered and the processes used in the conduct of business. The module calculates the Solvency Capital Requirement for underwriting risks based on a factor of capital at risk and technical provisions adjusted for reinsurance.
       
   2. The Non-Life underwriting risk reflects the risk arising from property and liability insurance obligations, in relation to the perils covered and the processes used in the conduct of business. The module calculates the Solvency Capital Requirement in the template based on a higher factor of gross premium or technical provisions adjusted for reinsurance.
      
       

2. Market and Liquidity Risk (Investment) Risk

   The market risk shall reflect the risk arising from the level or volatility of market prices of financial instruments which have an impact upon the value of the assets and liabilities of the Company. It shall properly reflect the structural mismatch between assets and liabilities, in particular with respect to the duration thereof. In the template, the Solvency Capital Requirement for this module is calculated as a combination of the capital requirements for the following sub-modules:

    
   1. The sensitivity of the values of assets, liabilities and financial instruments to changes in the term structure of interest rates, or in the volatility of interest rates (interest rate risk);
       
   2. The sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of market prices of equities (equity risk);
       
   3. The sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of market prices of real estate (real estate risk);
       
   4. The sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of credit spreads over the risk-free interest rate term structure (spread risk); and
       
   5. Additional risks to a Company, either stemming from lack of diversification in the asset portfolio, or from large exposure to default risk by a single issuer of securities or a group of related issuers (concentration risk)
      
       

3. Credit Risk

   The counterparty default risk module in the template reflects possible losses due to unexpected default, or deterioration in the credit standing of the counter-parties and debtors of the Company. The counterparty default risk covers reinsurance arrangements, securitizations and derivatives, cash at bank, cash equivalent, other deposits, unpaid but called up capital, guarantees, letter of credit and receivables from intermediaries and policyholder loans.

4. Operational Risk

   The capital requirement for operational risk shall reflect operational risks to the extent they are not already reflected in other risk components. That requirement shall be calibrated to ensure that all quantifiable risks to which a Company is exposed are taken into account. The template calculates the capital based on a higher factor of earned premium or technical provisions.

1. Risk Management is defined as the process of identification, evaluation and economically effective mitigation of past, present or future events or their impact that cause a Company to deviate from its stated objectives whether positively or negatively. These events can impact both the asset and liability side of the Company's balance sheet, the Company's profit and loss account, its cash flows, its earning capacity, profitability, ability to continue as a going concern, reputation and its intellectual and technological capital.
    
2. Risk management should be well integrated into the organizational structure and decision making processes and should include the following:
    
   1. A clear Risk Appetite set by the Board of Directors;
       
   2. An entity-wide assessment of risks across all risk types, including emerging risks; and
       
   3. Management information that is timely, consistent and accurate and used for internal and external reporting.
       
3. The nature and extent of the systems and controls which a Company needs to maintain will depend upon a variety of factors including:
    
   1. The nature, size and complexity of its business;
       
   2. The diversity of its operations, including geographical diversity;
       
   3. Past experience and historical performance;
       
   4. The volume and size of its transactions; and
       
   5. The degree of risk associated with each area of its operations.
       
4. The Company shall regularly review its management of risk in the context of relevant internal and external factors and changes in these factors.
    
5. The risk management strategy shall cover not only the identification, assessment, control and monitoring of risks but also contingency plans to deal with risks should they materialize, or adverse developments in important areas of risk. This will be augmented by stress and scenario testing tailored to the risk characteristics of the Company including:
    
   1. The Company shall have in place an effective risk management framework consisting of strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report the risks on a continuous basis, at an individual and at an aggregated level, to which they are or could be exposed, as well as their interdependencies. The risk management system shall be effective and well integrated into the organizational structure and in the decisionmaking processes of the Company with proper consideration of the persons who effectively run the Company or have other key functions.
       
   2. The risk management system shall cover the risks to be included in the calculation of the Solvency Capital Requirement, namely:
       
      1. Underwriting Risk;
          
      2. Market and Liquidity (Investment) Risk;
          
      3. Credit Risk; and
          
      4. Operational Risk.
          
   3. Moreover it shall cover the risks which are not or not fully included in the calculation thereof. The risk management system shall cover at least the following areas:
       
      1. Underwriting and reserving;
          
      2. Asset-liability management;
          
      3. Investment, in particular derivatives and similar commitments;
          
      4. Liquidity and concentration risk management;
          
      5. Operational risk management; and
          
      6. Reinsurance and other risk-mitigation techniques.
          
   4. With regard to investment risk, the Company shall demonstrate that it complies with the “prudent person” principle in addition to adherence to Section (4) of these regulations (Determining the Company's assets that meet the accrued insurance liabilities).
       
   5. The Company shall establish a risk management function which shall be structured in such a way as to facilitate the implementation of the risk management system.