local knowledge. global power. 1. 2 where we are in solvency ii – key milestones ceiops –...

Local knowledge. Global power. 1


Where we are in Solvency II – key milestones

CEIOPS – implementing measures:

End October: final advice wave 1 & 2

Importance to have a concrete proposal on the illiquidity premium

Nov – Dec 2009

• 3rd Wave (4 weeks consultation period)

• Main topics

• Own funds (participations, quantitative limits, ring fenced funds)

• Equity risk sub module

• Calibration

• Centralized risk management


Solvency II - QIS 5

- August – November 2010: QIS 5

- July 2010: Spread sheet for the test

- June 2010: Publish final technical specification

- March 2010: QIS 5 technical specification and

comprehensive calibration paper

Calibration – CEIOPS report

- March/June 2010: Consultation EIOPC, EP and

industry – EC in the driving seat

- December 2010: national Sup Central data base

- April 2011: Final QIS 5 report


European Stress testing for the 30 major insurers

- Probably still in 2009

- CEIOPS Stress testing task force is well advanced in the development of the stress test structure

• not too complex

• scenarios translated in shocks

• will cover: equities, commodities, real estate, foreign exchange, default risk, spreads

• no correlations

- Valuation basis still to be determined, depending from the timing


Solvency II - Level 2 implementing measures

Three key messages from CEIOPS:

1. Implementing measures need to be conform to Level 1 text

2. Need to take into account the lessons learnt from the crisis: e.g. calibration, specific group risks

3. Element of cross sectoral consistency – needs to be well monitored as banking framework is not based on a market consistent valuation rather than a mixed model


Solvency II: Implementing measures main concerns wave 2

- Classification and Eligibility of own funds (CP 46)

- Requirements for Tier 1 capital are more restrictive than those agreed in the Directive

- Useful less of hybrid capital instruments is largely ignored- Maturity of capital instrument should not be directly related to the insurer’s

liabilities - Concept of grandfathering is currently missing: should be adequately

reflected in the implementing measures- Cross sector consistency for the determination of eligible own funds is

desirable

- Assessment of group Solvency

- Risk of un-harmonized treatment for participants by local supervisors- A quick decision on equivalent territories is vital - Risk of non-recognition of diversification benefits with third countries- Confusion around the concepts of diversification, solvency and

fungibility/transferability - Group-specific risks such as reputational risk, contagion risk and the

impact of intra-group transactions, represent opportunity losses, hence do not require additional capital


Solvency II: Implementing measures main concerns wave 2

- Valuation of technical provisions (CP 40, and 42)

- CP 40: swap rates should be the preferred risk-free rate- CP 40: a liquidity premium should be recognized for certain lines of

business- CP 42: risk margin should not be artificially high- CP 42: an empty reference entity does not reflect market valuation

principles- CP 42: diversification across lines of business should be recognized

- Calibration – SCR (CPs 48, 49, 51, 53 and 54)

- The proposed calibrated factors should be economically justified

- Internal Models (CP 56)

- Minimum standards for internal models should also apply to standard model

- A common approval process for internal model at group and subsidiary level is required


Solvency II - Framework Directive

- A review of the Directive should be made to assess scope and

impact of compromise

e.g. centralysed risk management (sub section 6)

- The transposition exercise is a risk element in the process which should be monitored


Solvency II – System of Governance (CP 33)

- Agreement on main outlines of the advice

- Level of details in level 1, 2 & 3

- Important to take into account other existing directives or certain elements such as outsourcing

- Responsibility of risk management is to set the overall Enterprise Risk Management Framework and to oversee the operators of the company to ensure alignment with the framework

- Risk governance

- Risk appetite (overall & specific risk limits)

- Risk assessment & valuation methodology

- Risk control framework (focus on operational risk)

- Governance with respect to insurance groups not addressed


Solvency II – System of Governance

- Overlap in roles & responsibilities between the actuarial function & the risk management function need clarification

- Discussion on concept a scope of independence of the actuarial function

- Importance of the integration in the day to day operations & business decision

Consequence: overlap with risk management & finance functions

- Actuaries play various roles including in pricing

- The independence should be applied on the valuation role express an opinion to the board on certain matters such as reliability & adequacy of the technical provisions

- No agreement on the fact that the actuarial function shall rely on European technical standards developed a body of representatives of different stakeholders


Sub section 6 – Supervision of Groups Solvency for groups with centralized Risk Management

Understanding of the Subsection 6

The subsection allows companies to submit an application for permission to be subject to Articles 236 and 238. these articles govern a strengthened cooperation and decision process (obligation to inform the college and procedure for final decision on the issue) in two specific cases:

- Determination of the SCR for the subsidiary of a group (including the capital add-on) normally governed by Article 229 (Group internal model)

- Non compliance with the SCR treated by Article 136 at solo level.


Sub section 6 – Supervision of Groups Solvency for groups with centralized Risk Management

To be eligible for this permission the following conditions mustfulfilled (article 234):

a. The subsidiaries concerned are included in the scope of group supervisionb. The following conditions met:

• The risk management processes and internal control mechanism of the parent cover the subsidiary

• The supervisory authorities concerned are satisfied as regards the prudent management of the subsidiary by the parent

c. The group supervisor has agreed on the preparation of a single document covering the ORSA on Solo and Group levels

d. The group supervisor has agreed on the preparation of a single solvency and financial condition report for the whole group

A procedure consequence of the permission to subject subsidiaries to Articles 236 & 238 is that it neutralizes the possibility for sub-group supervision in jurisdictions other than that of the parent company jurisdiction (Article 214)

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