ª institute of actuaries of australia 1015... · ª institute of actuaries of australia. ... mcr -...

17th17th

7 – 10 November 2010 � Sheraton Mirage, Gold Coast

Solvency II – How insurance companies are changing in Europe

Matt Hodson Institute of Actuaries of Australia


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Solvency II - Some numbers….300+

563000

1 million5000+100+

8….66….119….286….330+66


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Agenda► Background to SII

► Contrast with APRA regime

► Solvency II process so far

► Solvency II major themes:– What they are– Impact on insurance companies


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Background to Solvency II► What –Proposed new Europe-wide framework for the

prudential supervision of insurance

► Why – Solvency I outdated

► Who – EU insurers, Multi-nationals with EU hubs, EU insurers with material non-EU hubs

► How – ‘Lamfalussy’ process, with extensive industry consultation

► When–End 2012, but work ongoing now


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Solvency II - 3 Pillars….

Technical provisions

MCR -Minimum Capital

Requirement

SCR -Solvency Capital

Requirement

Model approval and operation

Supervisory activities

Governance test

Use test

Reliance test

ORSA – Own Risk and Solvency

Assessment

Supervisory reporting

and public disclosure

Transparencyand additional

private supervisory disclosure

Pillar 1 Pillar 2 Pillar 3

Risk Quantification Risk Management Risk Disclosure


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Quick comparison to APRA regime►Same :

- Pillars, principles, direction

►Similar :- Internal Model Approval Process, (some)

calibration of standard formula, timing and deadlines

►Different : - Process, Detail, Emphasis (?)


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What has typically happened so far?►Gap analysis vs Solvency II requirements :

….‘what do we do now vs what do we know we will need to do?’

►‘Implementation plans’ completed

►Workgroups assembled within insurance companies

►Work commenced on closing the gaps…

....so most companies know what needs to be done and how their companies may change operationally as a result of Solvency II


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What are the big themes that have emerged so far?

►ORSA and Risk Management

►Economic Modelling Enhancements

►New regulatory and financial disclosures

►Use of economic capital model


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Use Test

Reporting

Model Enhancements

ORSA

The themes overlap in many areas……..


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Big themes explored – ORSA and Risk Management

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 a (re) insurance undertaking faces or may face and to determine the own funds necessary to ensure that the undertaking’s overall solvency needs are met at all times.

...ORSA is more detailed than the internal model and SCR…..


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Risks not considered by standard formula

Aspects varying between business and regulatory (SCR) models

Own Risk and Solvency Assessment (ORSA)

Liquidity risk

Reputational risk

Strategic risk

Time horizon

Confidence level

Managementactions

Stress and scenario tests

RisksLiquidity, Reputational and Strategic risk not

included in standard formula.

Time horizonThe time horizon may differ from regulatory

capital by internal model

Confidence levelA different confidence level to the SCR model

may be used,

Management actionsactions that could influence the risk profile

Stress and scenario testsIn business planning for internal purposes

Firms using models will be required to integrate these into the ORSA


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How are insurance companies changing?►Response cuts across many functions

►Burden of proof on risk management and risk governance

►Formalising a number of risk and governance processes

►Revisiting, formalising, embedding, risk appetites and risk tolerances

►Formalising a process for understanding own capital

►Brand new focus on non-modelled risks

►Reports drafted by large groups for populating by Legal Entities worldwide

►Role of the actuarial function more prescriptive

►Processes for shared agreements formalised as part of Solvency II


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Big themes explored – Economic modelling enhancements

► CP 56 sets out 6 Model tests:- Use Test- Statistical Quality Test- Calibration Standards- Profit and Loss Attribution- Validation Standards- Documentation (including external models and data)

► Lots of detail


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How are insurance companies changing?►Response focus on recruiting risk modellers/actuaries with the right skills

►Significant effort in building new or improving current models

►Global cohesion of modelling efforts for international groups

► Investment in systems and data warehouse architecture

► Internal audit functions involved in drafting and implementing validation policy

► Focus on speed of updating models and link to ORSA and Use Test

►Challenging key judgemental assumptions

►Engaging with external model providers

….inextricably linked to other initiatives and major themes


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Use of economic capital model

► ‘Acid Test’ of model approval

► 9 Principles + Foundation principle

► Emphasis on pressure from the business to improve models

► Links to all other major themes


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How are insurance companies changing?

► Key role of senior management and board in Use Test

► Key decision processes changing or formalising

► All cashflows important – not just insurance

► Regular review and practical examples of model uses

► Dialogue regarding potential uses –► Pressure from the business for improved models► Scope and limitations of model formalised► Regulators and senior management discussions


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New regulatory and financial disclosures –three primary outputs

► A Solvency and Financial Condition Report (‘SFCR’)► A watered-down version of APRA FCR? ► Actuary does not have to produce the whole SFCR

► A Report to Supervisor (‘RTS’) ► Business and risk disclosures including forward looking information ► More comprehensive than APRA regime?► Greater focus on forward looking and commercially sensitive information

► New regulatory forms based on SII valuation principles

Processes will need to be developed / amended to deal with new requirements


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How are insurance companies changing?

► Response typically led by the finance and risk functions, but other inputs required

► Gap analysis - S2 requirements vs what is currently provided to regulator

► IFRS conversion and SII implementation considered in tandem

► Reserving approach ‘changed’

► SII reporting classes will likely differ to current

► Processes redesigned to capture data for new regulatory forms

► Processes to produce, review and approve narrative reports and disclosures

► Disclosure policy to be developed


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Summary – Implementation challenges……


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Board

Internal audit

Human resource

Risk

Governance

IT & Systems & Data

Investment manage-ment

Disclosures

Distribution channels

Pricing

Valuation

Finance and tax

Potential touch points


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Questions?

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