solvency ii: implementation challenges & experiences learned aa - solvency ii.pdf · solvency...
Post on 01-Sep-2018
219 Views
Preview:
TRANSCRIPT
Solvency II:Implementation Challenges & Experiences Learned
Appointed Actuary Symposium
Actuarial Society of Hong Kong (ASHK)
Jonathan Zhao - Actuarial Services Practice Leader, Asia Pacific
3 November 2010
Agenda
► Solvency II introduction & recap
► Implementation procedures
► Experiences & lessons from QIS 5
► Looking ahead
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 2
Solvency II introduction & recap
► Solvency II introduction & recap
► Implementation procedures
► Experiences & lessons from QIS 5
► Looking ahead
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 3
Solvency II introduction & recapBackground
► Solvency II is the proposed new Europe-wide framework for prudential supervision of insurance
► Aims to address problems with Solvency I- Outdated system
- Insufficiently risk-sensitive
- Does not reflect best practice
- Difficulties in supervising multinational, diversified groups
► A fundamental change to Solvency requirements:- Principles based approach to supervision
- Market consistent approach for valuing liabilities
- Capital requirements linked to risk profile
- Convergence of economic capital and regulatory capital
- Major focus on risk management
- Significant disclosure requirements
- Capital add-ons for deficiencies
- Links to other reporting measures
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 4
2009 2010 2011 2012
Re
gu
lato
ryti
me
tab
le
Level 2 advice to Commission
L2 drafting (Commission and EIOPC)
QIS5 feedback
European
Member States
IMAP dry run (June 2010 to October 2011)
QIS5May 2009 –Framework DirectiveApproved
Impact study of L2 (Commission)
Legislative
process
Develop guidance under Level 3
IMAP by April 2012 Full implementationInteractive – firms & FSA
CEIOPS/ >EIOPA >
Transposition into domestic law and
regulation
Imp
lem
en
tati
on
act
ivit
y
Build and test
Implementation
EmbedRoad Map
design
Detailed Implementation
design
Vision& Gap
analysis
Implementation –31 December 2012
October 2011 –Level 2 DirectiveApproved
UK
Planning for implementation in 30 countries and associated territories
We a
re
he
re
Solvency II introduction & recap Regulatory timeline and implementation activities
Internal Model Application Process (IMAP) submission
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 5
A risk oriented framework
Risk
Quantifications
Risk
Management
Risk
Transparency
Pillar 1
QuantitativeCapital
Requirements
Solvency CapitalRequirements (SCR)
Minimum CapitalRequirements (MCR)
Pillar 2
Supervisory activities
RiskGovernance
Pillar 3
Supervisory reporting& public disclosure
Transparency& Disclosure
Solvency II introduction & recap Frame work – 3 Pillar Approach
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 6
Pillar 1
Technical
Provisions
MCR
Minimum
Capital
Requirement
SCR
Solvency
Capital
Requirement
Model
Approval
Risk
Management
Own Risk and
Solvency
Assessment
(ORSA)
Supervisory
powers &
processes
Disclosure-
Solvency &
Financial
Condition
Report
Market
Discipline
Pillar 1 Pillar 3Pillar 2
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 7
Solvency II – Pillar 1Market consistent balance sheet
The starting point for Solvency II is an economic, market-consistent approach to the valuation of assets and liabilities. Alignment as far as possible between Solvency II and IFRS 4 Phase II.
Own
Funds
Best estimate liability
Risk margin
MCR
Free
Surplus
Assets
Technical provisions
SCR
Solvency II Balance Sheet
Best estimate liability
Risk margin
MCR
Assets
Technical provisions
SCR
Balance Sheet
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 8
► Assets are valued at market value
► Technical provisions = BEL + Risk MarginBest Estimate Liability (BEL)
► Best estimate of all future cash flows discounted at a risk free rate with adjustment for illiquidity premium
► Risk free rate is derived from swap rates less an adjustment for credit risk (10bps), level of illiquidity premium various by contract type (50bps – 100bps)
+ Risk Margin
► Cost of capital method will 6% factor used for QIS 5, IFRS 4 Phase II suggested 3 methods (CI, CTE and CoC)
► Capital requirements► SCR = first regulatory intervention point (VaR @99.5%
CI over 1 year) – Standard Formula or Internal Model
► MCR = final regulatory intervention point
(VaR @85% CI over 1 year)
► Framework directive has also set MCR to a minimum of
25% and a maximum of 45% of the SCR
Solvency II – Pillar I Structure of standard formula for SCR
► SCR intangibles risk module introduced for QIS 5.
► SCR illiquidity premium sub-module introduced for QIS 5.
► Health risk module split between SLT (similar to life techniques) and NonSLT – some reduction in QIS5 for certain correlations between sub-module risks. Health CAT risk introduced (as per Final Advice although the CAT risk is now aggregated across SLT and NonSLT).
► A lapse risk module for Non Life business has been introduced to recognise the impact if policy take-up rates were lower than expected.
AdjOperational
RiskBSCR
= included in the adjustment for the risk mitigating ef fect of future prof it sharing
SLT
Health
Mortality
Longevity
Disability
Morbidity
Lapse
Expenses
Revision
Interest
rate
Equity
Property
Spread
Currency
Con-
centration
Non-SLT
Health
Premium
Reserve
Lapse
Health
CAT Mortality
Longevity
Disability
Morbidity
Lapse
Expenses
Revision
Premium
Reserve
Lapse
Market Health Default Life Non-Life Intangibles
SCR = BSCR + Adj + Op Risk
Illiquidity CAT
CAT
Basic SCR correlations Market Default Life Health Non-Life
Market 1
Default 0.25 1
Life 0.25 0.25 1
Health 0.25 0.25 0.25 1
Non-Life 0.25 0.5 0 0 1
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 9
Solvency II - Pillar 2
Technical
Provisions
MCR
Minimum
Capital
Requirement
SCR
Solvency
Capital
Requirement
Model
Approval
Risk
Management
Own Risk and
Solvency
Assessment
(ORSA)
Supervisory
powers &
processes
Disclosure-
Solvency &
Financial
Condition
Report
Market
Discipline
Pillar 1 Pillar 3Pillar 2
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 10
Pillar 2 Requirements
► The key requirement of Pillar 2 is for firms to have a
system of governance to “provide for sound and prudent
management of the business”.
► This system of governance “shall at least include an
adequate transparent organisational structure with a
clear allocation and appropriate segregation of
responsibilities and an effective system for ensuring the
transmission of information”.
► Supporting this requirement are six key “aspects” based
on conditions and functions which the Directive expects
Firms to address and have in place:
Conditions
► Fitness and Propriety
► Outsourcing
► Internal Control
Functions
► Risk Management Function
► Internal Audit Function
► Actuarial Function
Evidencing Successful Pillar 2 Implementation
Governance
► Clear and documented delegation of authority
cascading through the organisation with appropriate
spans of control and suitable persons holding roles
► Suitable allocation of function responsibility that
avoids duplication
► Clear articulation of committee responsibilities split
between “doing” and “oversight” and “assurance”.
► Policies that set out how the business is overseen and
controlled and that reflect the current reality
► Risk information to support individuals and
committees in their roles across the lines of defence
Own Risk and Solvency Assessment (ORSA)
► A demonstrable strategy and appetite for risk that is
cascaded down through the organisation
► A process for identifying all the risks to the business,
quantifying them across a range of outcomes
controlling them and reporting within them within the
governance arrangements set out
► A dynamic approach to using risk information within
the business on a timely basisPillar 2 can be split in two – Governance and ORSA
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 11
Pillar 2Own Risk and Solvency Assessment
The ORSA is the regular practice of assessing overall
capital needs with a view to the firm’s specific risk profile
that forms part of the risk management system. It is:
► an internal assessment process and as such should
be embedded in strategic decisions, and
► a supervisory tool for the supervisory authorities.
The ORSA can be defined as the entirety of the processes
and procedures employed to identify, assess, monitor,
manage, and report the short and long term risks that the
business faces or may face and to determine the own funds
necessary to ensure that its overall solvency needs are met
at all times.
The ORSA aims at enhancing awareness of the
interrelationships between the risks the business is
currently exposed to, or may face in the long term, and the
internal capital needs that follow from this risk exposure.
The ORSA needs to be supported by an effective and
robust escalation process paying particular attention to
► Functional escalation
► Risk exposures
and the linkages to decision making
“3 lines of defence” model
– a possible approach to meet Solvency II
requirements
Risk Management Systems
Executive
Committee
Supported
by Risk
Taking
Business
Units
Strategy, risk appetite and policy
Board
1st Line
Risk Ownership
2nd Line
Risk Control and
Monitoring
3rd Line
Independent
Assurance
Own Risk and Solvency Assessment
Audit
Committee
Supported
by Internal
Audit
Internal Control Framework
The ORSA process for assessing and monitoring
overall solvency builds on the Pillar I SCR calculation by articulating the
firm’s view of required capital. It should form an integral part of the
business planning of the organisation. A key challenge will be
integrating the appropriate modelling approaches into the risk
framework and ORSA.
Oversight
Committee
Supported by Compliance,
Actuarial, Risk
Management and Risk
Modelling Functions
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 12
Solvency II - Pillar 3
Technical
Provisions
MCR
Minimum
Capital
Requirement
SCR
Solvency
Capital
Requirement
Model Approval
Risk
Management
Own Risk and
Solvency
Assessment
(ORSA)
Supervisory
powers &
processes
Disclosure
- Solvency
& Financial
Condition
Report
Market
Discipline
Pillar 1 Pillar 3Pillar 2
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 13
Pillar 3 Overview
Three aspects:
► RTS and SFCR will contain a qualitative report, including quantitative data and quantitative reporting templates
► Proportionality principle: detail of information is in line with nature, scale and complexity
of risks inherent in the business
► Need a written disclosure policy approved by the management body to ensure
appropriate governance procedures and practices so that information is complete,
consistent and accurate (on an ongoing basis)
► There are provisions to avoid competitors of the undertaking gaining significant undue
advantage – non-disclosure of information in specific cases need to be explicitly
mentioned (along with reasons) in the SFCR
► In the SFCR, you may refer to or make use of equivalent information available
elsewhere in the public domain (although CEIOPS do not consider it appropriate to
refer through hyperlinks to other documents - rather reference if further information is
provided elsewhere)
Disclosures by
regulators
Solvency and Financial condition report - SFCR
Public disclosures – at least annually
Report to Supervisor – RTS
Information to submit to regulator
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 14
Implementation procedures
► Solvency II introduction & recap
► Implementation procedures
► Experiences & lessons from QIS 5
► Looking ahead
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 15
2009 2010 2011 2012
QIS5 feedback
IMAP dry run (June 2010 to October 2011)
QIS5May 2009 –Framework DirectiveApproved
IMAP by April 2012 Full implementation
Transposition into domestic law and
regulation
Imp
lem
en
tati
on
act
ivit
y
Build and test
Implementation
EmbedRoad Map
design
Detailed Implementation
plan and activities
Vision& Gap
analysis
Implementation –31 December 2012
Planning for implementation in 30 countries and associated territories
Some key questions regarding your Solvency II implementation
Internal Model Application Process (IMAP) submission
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 16
► What level of detail does your implementation plan go to? (e.g., high-level road map and detail activity plan)
► Does your plan build on the output from the gap analysis and identified solutions to mitigate all deficiencies?
► Has your plan been reviewed and approved by the governance committee, with agreed budget, headcounts, and timeline that are realistic?
► What do you plan to do next with your plan?
Key Features
► Horizontal & vertical workstreams
to drive aligned business
requirements and a complete
business case
► Dedicated technical challenge and
support at all levels of the program
► A well defined SII governance/program structure will ensure rapid decision-making, and effective execution of the SII implementation plan
Design Authority TeamProgram Directorate
Program Management Office
Steering Committee
Program Management
Technical Review Panel
Program Governance
Internal Model Optimisation Risk & ORSA Reporting &
Disclosures
Product Pricing
and Development
Process & Controls
Technology/Data and Tools
Documentation
En
ab
ling
Wo
rkstr
ea
ms
Change Management
Workstreams
Illustrative SII governance and program structure –’making it happen’
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 17
1512
16
10
42
4
1
2
3
6
3
5
3
1
0
5
10
15
20
25
30
Analyst Senior Analyst Assistant Manager Manager Senior Manager Director
Current team Open positions SII resources required
Resourcing for SII and understanding its implications on existing headcount
SII headcount
means a x%
growth
Considerations on resourcing:
► Where to hire resources from?
► Internal vs. external use of resources and its cost implications?
► Impact on existing headcount and integrating new resources into business as usually activities?
► Speed at which resources can be obtained? Impact on SII programme?
► When do the resources need to be brought it? All at a point in time? Spread over time?
Page 18 Appointed Actuary Symposium: Actuarial Society of Hong Kong
Example of Detailed Road Map – Risk Modelling &
Reporting
5
1H 2010 Business As Usual2H 20121H 20121H 2011 2H 20112H 20102H 2009
SII Reporting Methodology
Overall SII Reporting
Framework
1
2
ALM Modeling 7
10
Define and document required enhancement to models to meet requirements
ESG
Financial Reporting
Infrastructures 9
Ph
ase 1
-
Un
de
rsta
nd
&
Desig
n S
II
Rep
ort
ing
Metr
ics
& M
od
eli
ng
Req
uir
em
en
ts
Ph
ase 2
–S
II
Rep
ort
ing
Imp
lem
en
tati
on
an
d T
esti
ng
Ph
ase 3
-
Tra
ns
itio
n f
rom
Develo
pm
en
t to
Pro
du
cti
on
Economic Scenario Generator (ESG) 4
Validation, documentation &
User Testing
ALM Model 3
Asset Valuation Implementation 6
8
11SII Reporting Full Testing & Dry
Runs
SII Reporting System Go
Live
12
13System launched
Complete QIS5
External Audit Process being Carried OutInternal Finalisation of Models &
External Model Audit
QIS5 Solo delivery by Oct 2010
Implementation of the internal model
Complete design and implement of valuation processes and reporting
Parallel runs of Q1 ~ Q3 2012
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 19
Example of Detailed Road Map – Risk Management
1H 2010 Business As Usual2H 20121H 20121H 2011 2H 20112H 20102H 2009
Define and Determine
Risk Appetite
Set Risk Tolerances per
Major Risk Category
Define Independent Review of
ORSA 12
Definition of Risk Appetite
Completed
Allocation of Risk Tolerances per
Major Risk Category Completed
Definition of Independent
Review of ORSA
Completed
Define Management Response to
Risk Identification and Appetite
Definition of Management Response to
Risk Management Completed
Revie
w o
f R
isk
Ap
pe
tite
&
To
lera
nc
e L
imit
s
Build ORSA Report Formats
Rev
iew
of
Go
ve
rna
nc
eR
evie
w o
f O
RS
A
Define and Design Process 8Design of ORSA
Process
Completed
Embed Risk Management
Changes
Build Process
Catalogue
Identify and Assess Operational Risks
Assessment of other Risk categories 10
9Final Documentation of
Operational Risks
Completed
Embedding Change Management Programs Completed
Final Documentation of
Other Risk Categories Completed
Define Control Activities to
Address Risk Management
requirements
Definition of Control Activities
Completed
6
7
5
12
3
4
11
Assess / Update Governance
Manuals, Terms of Reference and Role
Definitions
Annually
review
and
update
as
required
Use Test
13 Use Test Complete
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 20
The biggest issue/difficulty faced by company in its Solvency II implementation
► Resource, resource, resource !!!
► Understand the scale and complexity of the SII project and reflecting it realistically in
the time, resource and cost estimate
► Deciding the appropriate detail action plans for both short term and medium to long
term activities, including the key workstream leaders and SII program structure
► Allowing flexibility to cope with surprises arising from the Level 2 Implementing
Measures and Level 3 Guidance
► Allowing for hand-offs and dependencies between workstreams and different
department
► Other
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 21
Experiences & lessons from QIS 5
► Solvency II introduction & recap
► Implementation procedures
► Experiences & lessons from QIS 5
► Looking ahead
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 22
Experiences & lessons from QIS 5QIS 5 Overview
Overview
► The final QIS5 Technical Specification was issued on 6 July 2010 after discussions on the Draft Specification with selected stakeholders (CEA, AMICE, CRO Forum, CFO Forum, ECIROA, FERMA and Groupe Consultatif).
► The Commission has emphasized the importance of dealing with all areas of the exercise comprehensively, and is expecting high quality submissions from firms on which to base its decisions.
► A number of key changes from the draft technical spec:
► Changes in calibrations – generally less favourable compared to QIS4, but more favourable compared to CEIOPS Consultation Papers / Final Advice.
► Changes in methodology – additional sub-modules proposed and refinements in methodology for existing (sub)modules compared to QIS4.
► The technical specifications should not be seen as the final outcome as the intention is to publish the Level 2 implementing measures once the results of QIS5 are known.
► Results not required to be submitted to OCI.QIS5 provides an ideal checkpoint for Solvency II programmes to:
► Educate stakeholders with quantitative evidence of the potential impacts, informing lobbying activity.
► Review and realign Solvency II plans based on your experience of performing QIS5.
► Extending the dialogue between local operating companies and European parent.
QIS5 objectives
► To provide detailed information on the quantitative impact of future Level 2 implementing measures .
► To encourage industry preparation and to:
► Identify areas where internal processes, procedures and infrastructure may need to be enhanced and encourage improvements to data collection processes
► To provide a starting point for an ongoing dialogue in preparation for the new supervisory system.
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 23
Experiences & lessons from QIS 5 Issues & Challenges - Overview
Key issues and challenges encountered while carrying out QIS 5 exercise:
► Application of contract boundary condition.
► Calculation of expected profits in future premiums (“EPIFP”).
► Calculation of risk margin.
► Severity of standard formula currency risk stress.
► System and resource limitations.
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 24
Experiences & lessons from QIS 5 Issues & Challenges – Contract Boundary
► Definition of contract boundary as per QIS 5 Technical Specifications:
► where an undertaking has the unilateral right to terminate the contract; or
► where an undertaking has the unilateral right to reject premiums; or
► where an undertaking has the unilateral right to amend premiums or benefits,
at some point in the future, then any cash flows pertaining to time period after that date should not be included in the liability calculations.
► For insurers in the region, yearly renewable business likely to be affected.
► Likely to affect the BEL negatively as these business tend to have a negative BEL value.
► Current debate on application of contract boundary unit-linked contracts.
► Companies might calculate (submit) two set of results (one follow QIS 5 guidance exactly, and one follow their interpretation) given the definition of contract boundary is unclear
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 25
Experiences & lessons from QIS 5 Issues & Challenges – EPIFP Calculation
► QIS 5 introduces the concept of expected profits in future premiums (“EPIFP”).
► Explicit recognition of expected profits built into future cash flows on best estimate basis.
► EPIFP value is to be included as Tier 1 capital for Own Funds calculations.
► Methodology for calculating EPIFP:
► Calculate technical provisions (ex-risk margin) using best estimate assumptions. [A]
► Calculate technical provisions (ex-risk margin) assuming no future premiums are received. [B]
► Technical provision (ex-risk margin) from [B] less that from [A] is the EPIFP value (if negative, EPIFP set to zero).
► In calculating [B], benefit levels are adjusted to be consistent with assumption of no future premiums. This adjustment not trivial as use of retrospectively or prospectively calculated surrender benefits will include elements of past or future profits.
► Severity of issue depend on reliance on EPIFP to meet the required capital requirements.
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 26
Experiences & lessons from QIS 5 Issues & Challenges – Risk Margin Calculation
► Recall - risk margin calculation is a cost of capital approach, where the capital is the projected SCR. Projected SCR to include:
► unavoidable market risk;
► life underwriting risk;
► counterparty default risk relating to reinsurance and SPV reinsurance arrangements; and
► operational risk.
► Projection of the SCR requires nested stochastic calculations – stresses to be applied for each future time period.
► Possible modeling solutions being explored include replicating portfolios and formula fitting techniques.
► Meanwhile, QIS 5 technical specifications set out a number of simplifications. Hierarchy of simplifications:
► full calculation of projected required SCR (no simplification used);
► approximate only certain risks in some of the required SCR;
► approximate whole SCR for each future year;
► approximate all future required SCR “at once”;
► approximate risk margin as a percentage of the best estimate liabilities.
► In deciding simplification to be used, need to consider the information, resources and modeling capability available.
► May impact the capital position of the firm as risk margin could be a material value.
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 27
Experiences & lessons from QIS 5 Issues & Challenges – Currency Risk Stress
► Standard formula stress for currency stress is an increase and decrease of 25% in net foreign currency exposure.
► This calibration may not be suitable for the Hong Kong dollar /United States dollar relationship given the close relationship of the two currencies in recent history.
► Some participants are viewing this as being too penal.
► Likely to have a significant impact on the SCR calculations.
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 28
Experiences & lessons from QIS 5 Issues & Challenges – System and Resource
► System limitations:
► Data systems not able to support the extraction of data at the expected level of granularity required for Solvency II Pillar 1 compliance.
► Example – historical and forecast premium information by line of business.
► Modeling capabilities not sufficiently refined to model key liability and asset portfolio features.
► Example – dynamic policyholder behavior and equivalent scenario.
► Resource limitations:
► Lack of buy-in from management due to submission to OCI not required.
► Possible solutions: educate stakeholders; build relevant Solvency II features into business as usual activities.
► Lack of personnel with the relevant knowledge/experience.
► Possible solutions: tap knowledge of colleagues in European HQ; start recruiting and training now; engage consultants for specific modules.
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 29
Looking ahead
► Solvency II introduction & recap
► Implementation procedures
► Experiences & lessons from QIS 5
► Looking ahead
Page 30 Appointed Actuary Symposium: Actuarial Society of Hong Kong
Looking aheadExpected Implementation Challenges as SII Progress
Use test
► This will be one of the most challenging
areas of the new regime
► The impact will be far reaching and as a
result the implementation challenges will be
significant
Significant business changes
► In the end state of Solvency II, there will be
significant changes to the models,
management information, data, infrastructure
and procedures
► There are commercial and profitability
implications arising out of implementation
Links to other projects
► Solvency II can potentially link directly or
impact on projects already ongoing.
► Ensuring that work done in these
workstreams is leveraged appropriately to
ensure no duplication of effort will be a key
role of the Solvency II Steering Group.
Cultural changes
► Changes in the culture would be required to
reflect new metrics and processes
► There is a necessity to manage the business
to different metrics consistently across the
group…
► …and to reward people on the basis of these
new metrics.
Implementation
challenges
Appointed Actuary Symposium: Actuarial Society of Hong KongPage 31
3 September 2009 Training MaterialsPage 32
Looking aheadImpact from IFRS 4 Phase II
3 November 2010
Thank YouAppointed Actuary Symposium
top related