• PINS Part A3.10 PINS Part A3.10 Insurance concentration risk component

    Inserted by QFCRA RM/2013-1 and amended by Editorial changes (as from 1st January 2015).

    • PINS A3.10.1 PINS A3.10.1 Application of pt A3.10

      This Part applies to general insurance business.

      Note For a QFC insurer that carries on long-term insurance business, the capital charge relating to possible insurance concentration risk is included in the long-term insurance risk component in Part A3.9.

      Inserted by QFCRA RM/2013-1 and amended by Editorial changes (as from 1st January 2015).

      • PINS A3.10.1 Guidance

        1 An insurer is exposed to the possibility of very large losses arising from its portfolio as a result of exposures to extreme events such as natural catastrophes, man-made disasters and other non-natural perils. While such events occur rarely, their financial impact on an insurer can be significant and can result in insolvency.
        2 The insurance concentration risk component is calculated as the insurer's maximum event retention (after taking into account acceptable reinsurance recoveries) plus the cost of 1 reinstatement of those reinsurance arrangements if the reinstatement reinsurance cover has not been pre-paid by the insurer.
        3. Specialist insurers, such as providers of medical indemnity, may not necessarily be exposed to large losses due to the aggregation of claims linked to a single catastrophe-type event like a pandemic. However, these insurers may still be exposed to insurance concentration risks and large losses arising from groups of claims relating to a common dependent source. For example, a medical insurer covering thousands of lives through a company scheme may face a large number of claims arising from employees' class action relating to a faulty medical procedure.
        Inserted by QFCRA RM/2013-1 (as from 1st January 2015).

    • A3.10.2 Insurance concentration risk component

      (1) The insurance concentration risk component for an insurer is:
      MER + CoR (if any) − RP (if any)
      where:

      MER has the meaning given in rule A3.10.3.

      CoR or cost of reinstatement, in relation to an extreme event, means:
      (a) the rate that an insurer has, under contract, agreed to pay the reinsurer concerned to reinstate the reinsurance cover relating to the extreme event; or
      (b) if the insurer has not agreed on the rate for the reinsurance cover — the insurer's estimate of the cost of reinstating that cover based on current reinsurance market conditions (but no less than the original rate of reinsurance cover).
      RP or reinstatement premiums, for an insurer that also writes reinsurance, means the amount of inward reinstatement premiums from cedants in respect of catastrophe reinsurance cover if the insurer has a binding netting arrangement with the cedant.
      (2) An insurer must seek advice from its approved actuary about estimating its MER if the insurer:
      (a) issues policies that do not have a maximum amount insured;
      (b) insures risks in multiple lines of business; or
      (c) has a complex portfolio of insurance risks.
      Amended by QFCRA RM/2015-1 (as from 1st July 2015).

    • PINS A3.10.3 Maximum event retention

      (1) MER or maximum event retention, in relation to an extreme event, is the maximum amount of loss to which the insurer will be exposed due to an accumulation of exposures, after netting out any potential reinsurance recoveries.

      Guidance

      An insurer should at a minimum calculate an MER that relates to an accumulation of exposures to a single extreme event. However, the Regulatory Authority may require an insurer with a complex portfolio of insurance risks to use a whole-of-portfolio estimation approach.
      (2) In calculating its MER, an insurer must:
      (a) set the amount based on the accumulation of exposures of the insurer to a single extreme event;
      (b) assume a return period of 1 in 250 years (or greater), where the return period is the expected average period within which the extreme event will re-occur; and
      (c) take into account:
      (i) its risk profile and risk tolerance;
      (ii) its claims history (using available internal and external data);
      (iii) the capital resources available to it;
      (iv) its current and future solvency needs;
      (v) its reinsurance programme;
      (vi) the classes of insurance business underwritten by it; and
      (vii) the areas where it conducts business.
      (3) If an insurer is exposed to more than 1 extreme event, its MER is the largest of the MERs calculated by the insurer for those events.
      (4) Despite anything in this rule, the Regulatory Authority may require the insurer to make adjustments in calculating its MER.
      Inserted by QFCRA RM/2013-1 (as from 1st January 2015).