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Solvency II – work on the finishing line
Janka Schuld
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Session Number: TBR15
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
1. Solvency II – An Introduction
2. Hot Topics on Solvency II
Agenda
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Solvency II – An Introduction
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Solvency II - an integrated approach
Supervisory Reporting/Publications
Processes, Controls, Data, IT
Governance & Risk Strategy Framework Processes & organisation
Process- and IT-
Environment
Dataquality
Data-Guidelines
Datasecurity
Organisation-structure
Functions
Fit & Proper
Risk Strategy
ORSA Capital-
allocation
Limit- system
Risk-Control-Process
Risk Report
Solvency Financial Condition
Report
and
Regular Supervisory
Reporting
Deadlines
Approval Process and Supervisory Dialogue
Business strategy, Controlling
Capital requirements
Calculation of SCR and MCR
Use of internal models
Solvency balance sheet & Own Funds
Calculation of SCR on group
level
Valuation of Assets, & Liabilities
Determination of
available own funds
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
The 4 Level Lamfalussy process
Level 1
Level 2
Level 3
Level 4
Framework Directive Framework legislation is proposed by the Commission and adopted by the Council and Parliament.
Lev
el o
f d
eta
il
Implementing Measures Preparation of more detailed implementing measures by the Commission to supplement the Level 1 framework legislation.
Technical Implementing Standards Technical implementing standards and Guidelines are proposed by EIOPA and adopted by the Commission to ensure a consistent implementation.
Enforcement of Directive Check of consistently application by the Commission in close cooperation with the member states and the regulatory authorities.
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Status of Implementation and Timetable
Consultation of Draft Implementing Measures
QIS 5 (EU) Results
Pre-Test Reporting
GDV Field test QIS 6*
Technical Standards & Guidance
Q1-2011 2013 Q2-2011 Q3-2011 Q4-2011 2012 2014 Q4-2010
Omnibus II-Directive Transitional Measures (10 year process) L
eve
l 1
Le
vel 2
L
eve
l 3
Reporting Consultation
Le
vel 4
Introduced into national legislation
Consultation Draft VAG**
Pre-Consultation EIOPA Consultation
Implementation
Implementation SII Preparation of Insurance industry for implementation of Solvency II
SII-Directive
* Results of QIS6 should be considered in processes of Level 2 and Level 3 (GDV) ** German Insurance Supervision Act
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Timetable Implementation Discussion about „Soft landing“ in 2013
Pro
po
sal
Pa
rlia
me
nt
Pro
po
sal
EU
Co
un
cil
1. Jan 2013
Implementing plan
National trans-position
Transitional provisions, Delegated Acts*
Presentation of implementing plan
Reporting
1. Jun 2013
Pro
po
sal
EU
KO
M 1. Jan 2013
Entry into force S2-Directive
Entry into force S2-Directive
Transitional provisions*
1. Jan 2014
Transitional provisions*
Transitional provisions
National transposition
Applications for approval from supervisors Approval of
super-visor
31. Dez 2012
National transposition
31. März 2013 1. Apr 2013
*Proposals of different Members of Parliament
Assessment of approval applications from supervisor
1. Jan2014 31. Dez 2012
31. Dez 2012
Solvency I
Solvency I
Entry into force S2-Directive
31. Dez 2012
Reporting
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Transitional Measures* are still under discussion
*according to Omnibus 2 Compromise EU Parliament
• Third Country Equivalence (5 years + 1 year)
• Classification of Own Funds (up to 10 years)
• Public Solvency II reporting (SFCR) (up to 2 years)
• Increase of equity shock (over 7 years)
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
The Standard Formulae approach
Market Non-Life
Premium Reserve
Lapse
Currency
Property
Default Life
EL BSCR
SCR
SCR cred Op. Risk
SCR health
EL Adjustment
SCR health
Health
SLT Health*
Spread
Interest rate
Equity
Conc.
Intangibles
CAT Non-SLT
Health
Mortality
Longevity
Disability Morbidity
Lapse
Expense
Revision
Prem. & Reserve
Expenses
Disability Morbidity
Lapse
Mortality
Longevity
Revision
Illiquidity
CAT
CAT
Lapse
= Adjustment for the risk mitigating effect of future profit sharing
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Composition of the SCR for Europe as a Whole
102%
12%
28%
8%
30% 32%
0%
148%
8%
57%
1%
100%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
BSCR structure (solo)
For undertakings writing health business underwriting is 63 % on average.
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Hot Topics on Solvency II
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Illiquidity Premium
Illiquidity Premium (as in QIS5)
Now divided in 2 components (Level 2 Draft)
Matching Premium Counter-cyclical Premium
Reflects the width of spreads of the undertaking´s bonds
Calculation: difference between the average spread over the basic risk- free
interest rate of the assets of the assigned portfolio of assets the average fundamental spread over the
basic risk-free interest rate of the asset of the assigned portfolio of assets
(both parts weighted with the products of the duration of the assets and the value of the assets)
To prevent the pro-cyclical behaviour of the undertakings
Based on a two-step approach:
1. EIOPA determines whether there is a
stressed finacial market 2. EIOPA determines the size of the counter-
cyclical premium from the spread on the assets included a representative portfolio
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Health Gross Technical Provisions EIOPA Report on the Fifth Quantitative Impact Study (QIS5) for Solvency II
5% 11%
14%
70%
Split of health gross technical provisions für solo
undertakings
Worker´s compensation
Income protection
Medical expenses
SLT health
• Segmentation
− Criteria for segmentation in non-life and life business open for interpretation
− Classification of disability and morbidity business into life and health not always clear
− Undertakings running workers’ compensation business criticised lack of clarity on segmentation and implementation
• Contract boundary
− Definition of contract boundary is unclear
− Definition does on represent economic reality
− Not in line with IFRS definition
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Health Underwriting Risk
health SCR
health
Health
SLT Health CAT Non-SLT Health
Mortality
Longevity
Disability Morbidity
Lapse
Expense
Revision
Prem. & Reserve
Lapse
1 2 3
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Health Similar to Life Techniques (SLT) Summary of EIOPA´S QIS5 – Report
• Shock for income protection in disability submodul is considered as too high
• Lapse risk is too complex (separation of contracts with positive and negative surrender strain)
• In Level 2 IM lapse shocks have been increased (permanent lapse rates 20% to 50%, mass lapse event 30% to 40%
3% 11%
76%
19%
11% 7%
26%
100%
0%
20%
40%
60%
80%
100%
120%
140%
Health SLT Underwriting Risk Composition (solo)
QIS5 QIS4 Solvency I 176% 290% 217%
Coverage Ratio of German Health Insurers Especially long lasting SLT business is heavily influenced by the market interest rates.
SLT Health 1
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Health Non-Similar to Life Techniques (NSLT) Summary of EIOPA´S QIS5 – Report
• Lapse risk is considered as immaterial and was not calculated by many insurers
• Difficult to appropriately account for more than one
non-proportional reinsurance treaty
• Joint working group (JWG) established by EIOPA for recalibration of standard parameters for premium and reserve risk
Premium Risk Reserve Risk
QIS 5 JWG QIS 5 JWG
Medical expense 4% 5% 10% 5,3%
Income protection 8,5% 8,5% 14% 13,9%
Workers compensation 5,5% 8% 11% 11,4%
Non-SLT Health 2
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Health Catastrophe Risk Sub-Module Summary of EIOPA´S QIS5 – Report
• Appropriateness of scenarios to
local market is criticized
• Risk module regarded as too severe for some undertakings
• Approach is considered as complex and criteria are considered as hard to meet
• Guidelines and recommendation on application of health catastrophe risk are currently discussed (Level 3 Guidelines)
26%
62%
19% 7%
100%
0%
20%
40%
60%
80%
100%
120%
Mass Pandemic Concentration Diversification Health Cat
Health Cat composition (solo)
CAT 3
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
ORSA and Reporting are considered as significant challenges for Solvency II implementation
• … of the participants consider ORSA as the most significant challenge for a successful implementation of Solvency II.
• Reporting and ORSA were mentioned mostly as significant challenges
Sourc: PwC-Survey „Getting set for Solvency II“, November 2010
37%
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
ORSA (Own Risk and Solvency Assessment) is an integrated risk management approach
• Business objectives • Risk strategy • Strategy options valuations • Capital strategy and capital plan • Financial plan • Strategic asset allocation • Reinsurance/hedge • Mgt. actions • Projection horizons • Actual vs Plan
Risk identification & assessment
•Risk identification • Qualitative assessments • Controls assessment • Risk ranking and classification • Risk profile • Risk management policy
• Eco. balance sheet • Techn. provisions • Risk parameters and assumptions • Own fund classif. and assessment • Stress/ scen. Testing • Internal cap. requirements • Regulatory cap. requirements
• Regular monitoring of risk profile • Solvency monitoring and mgt • Risk appetite/ tolerance • Frequency of assessment • Support for strategic decisions • Evidence of risk governance processes • Disclosure
Decision making
External Environment
• Business context • Emerging risks • Long-term risks • Macro economic environment • Regulatory framework • Legal framework • Social trends
Solv. assessment und management
Business strategy
Solvency II – work on the finishing line
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
Key components of ORSA
Thank you for your attention.
Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/
PricewaterhouseCoopers Asia Actuarial Services (Singapore) Pte Ltd 8 Cross Street #17-00, PwC Building Singapore 048424 [email protected] www.pwc.com/sg/en
Janka Schuld Aktuar (DAV) Manager