IFA.Solvency2

The topic of Solvency 2 is covered lightly in chapter 25 of a different paper, Odo.FinReg. And an even smaller part of that topic is covered here. This syllabus reading is only 3 pages (p49-51) of a 103-page paper on Solvency 2. The relevant sections are 6.4 & 6.5, and cover something called ENID or Events not in Data. You can think of these as a high severity, low probability events that might not be part of your historical data, but should be considered in setting final reserve levels. (Example: Include a load for the possibility of an earthquake even if there has never been an earthquake in your data.)

Including ENID in reserves strikes me as overly conservative, but I wouldn't worry too much about it. Remember that Solvency 2 is the capital framework for insurers in the European Union, so it's a low importance topic relative to the rest of the Exam 6 syllabus.   Forum

Pop Quiz

What is Solvency 2? (This is from Odo.FinReg)

BattleTable

Questions held out from most recent exam: #26. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Fall #17)	defn & purpose: - of ENID	ENID loading: - considerations	benefits to identification: - of ENID

In Plain English!

The Basics of ENID (Events Not In Data)

My judgment is that you only need to know how to answer 2 or 3 questions:

Question 1: what is the proposed definition of ENID (sometimes referred to as the purpose of ENID)

• The usual definition, given in the summary at the top of this wiki article is "high-severity, low-probability" events. (Sometimes called "binary events")
• The proposed definition is:
  • the balancing amount required to bring the best estimate of loss reserves before ENID up to an amount allowing for all possible future outcomes
• Super-Simple Example: Suppose your best estimate of reserves using standard methods is 10m. You don't have any earthquake events in your data, but your local psychic tells you an earthquake is imminent in the next 5 years. If you add 1m to your reserves for a total of 11m, then your ENID would be 1m.

Question 2: describe how ENID can be identified

• Bring together parties who understand the insurer's exposure. Their discussion should include factors affecting:

• future settlements of past events
• potential future claims relating to current exposures

• Specifically, you might consider: catastrophes, court awards, legislative changes

A comment in the text that struck me is that this balancing amount related to ENID does not have to be a positive load. For example, it's possible that a pending court award would favor the insurer, so the "load" might actually be a negative amount thus lowering the reserves.

One final basic question regarding ENIDs is as follows:

Question 3: why might it be benefical for an insurer to attempt to identify ENIDs

• Identifying all possible ENIDs sounds like an impossible exercise. Any number of unforeseeable freak events may occur in the relevant time horizon. Still, the exercise of at least attempting to consider various specific ENIDs may be beneficial for several reasons:

- may increase awareness of potential risks by senior management

- may assist in calculation of loading using frequency/severity methods

- may increase regulator confidence in company's risk management (due to insights gleaned from the explicit consideration of specific ENIDs)

2018.Fall Q17

This exam question was the first one on the ENID material:

E 2018.Fall #17

The official answer to part (a) was confusing and Alice thinks this is another example where the people creating the questions don't properly understand the source material themselves. The question asks for the definition of ENID and the purpose of ENID loading.

• In the source reading, the 1st paragraph gives the definition or meaning of ENID as: loss-generating events that are high severity and low probability. That should be sufficient, but both sample answers contain the statement that the event is not in the historical data. This latter statement was not part of the text definition. Did they accept an answer that did not mention this? They don't say.

• I find the first sample answer for the definition of ENID particularly dumb. It's just a restatement of the meaning of the ENID acronym (Events Not in Data). The examiner's report says, and I quote:
  • "an event for which the insurer does not have historical data"

• Also in the source reading, the proposed definition of ENID is what the examiners call the purpose of ENID loading. You could probably figure out what the examiners intended to ask, but the wording of the question is sloppy. (The wording in the source reading is also sloppy because the terms ENID and ENID loading are conflated.)

There is discussion of this in the forum. See here then scroll up.

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Potential Exam Question

A good ENID question might be to combine it with the Solvency 2 material from chapter 25 of Odo.FinReg.

Hypothetical exam question for 3.0 points:

a.   (0.5 points)

What is Solvency 2?

b.   (0.75 points)

What are the 3 pillars of Solvency 2?

c.   (0.5 points)

What is the proposed definition for ENID?

d.   (0.75 points)

Describe how ENID can be identified.

e.   (0.5 points)

How is ENID related to the Solvency 2 framework?

Answer:

a.   see Pop Quiz answer at the bottom of this article

b.   QGT

• Quantitative: sets SCR & MCR (Solvency CapReq & Minimum CapReq)
• Governance: supervisory activities (internal control & risk management, supervisory review process)
• Transparency: supervisory reporting & public disclosure

c.   see above

d.   see above

e.   This a more open-ended question. I would say it relates to the Quantitative and Governance pillars of Solvency 2. It relates to the Quantitative pillar because it involves a numerical adjustment to the reserve levels. It relates to the Governance pillar because the ENID discussion would have brought together people from different areas of the company, and this discussion would raise general awareness of risks. A greater awareness of risks may impact risk strategies and overall governance.

BattleCodes

Memorize:

• usual and proposed definitions for ENID
• how ENID can be identified
• why it might be beneficial for insurers to attempt to consider various specific ENIDs

Conceptual:

• You should understand that ENID is a subtopic of Solvency 2. (Solvency 2 is discussed in chapter 25 of Odo.FinReg)

Calculational:

• none

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  Forum

POP QUIZ ANSWERS

Solvency 2 is a principles-based insurance regulatory system TO DETERMINE the required capital levels of insurance companies IN the European Union.