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Solvency II Technical Provisions

Robert Treen, Grant Alderman and Amy Goodwin7 May 2013

© 2013 Towers Watson. All rights reserved.

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Introduction

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Overview of SII Technical ProvisionsOverview of SII Technical Provisions

ResQ ImplementationResQ Implementation

Igloo ImplementationIgloo Implementation

Overview of SII Technical Provisions



Overview of SII Technical Provisions

l Changes to financial reporting standards under Solvency II (and also IFRS 4 phase 2) will lead to significant changes to the production of balance sheets and, in particular, the valuation of technical provisions

l Principles based approachl Assets and liabilities should be FAIRLY valued

– The amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm’s length transaction

l Principle of proportionality– Proportionate to the nature, complexity and scale of the risks inherent in the

business of an insurance or reinsurance undertakingl Calculations should be on a going-concern basis


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The Balance Sheet

Assets Liabilities Capital© 2013 Towers Watson. All rights reserved.

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The Balance Sheet

Assets Liabilities

Capital

Capital

Investments

RI assets

Premium Debtors

Other

TechnicalProvisions

Other

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TechnicalProvisions

The Balance Sheet

Assets Liabilities

Capital

Capital

Investments

RI assets

Premium Debtors

Other

Provisionfor lossesand loss

adjustmentexpenses

Other

Provisionfor unearned

premiums


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TechnicalProvisions

The Solvency II Balance Sheet

Assets Liabilities

Capital

Capital

Investments

RI assets

Premium Debtors

Other


adjustmentexpenses

Other


premiums


8



Assets Liabilities

RI assets

Premium Debtors


adjustmentexpenses


premiums


9




10

Liabilities

Assets

Provision for losses and

loss adjustmentexpenses


premiums

Premium Debtors

RI assets




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Liabilities

Assets




premiums

Premium Debtors

RI assets RI assets

Premium Debtors

Basis

Gross PremiumProvision

Gross Claims Provision

l Best Estimatel Removal of UPRl Probability-weighted average

of all possible outcomesl Legal obligations basis




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Liabilities

Assets




premiums

Premium Debtors

RI assets RI assets

Premium Debtors

Basis

l Inclusion of risk margin


RI assets

Premium Debtors




Risk Margin

Constituents




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Liabilities

Assets




premiums

Premium Debtors

RI assets RI assets

Premium Debtors

Basis


RI assets

Premium Debtors




Risk Margin

RI assets

Premium Debtors



Risk Margin

Constituents Discounting

l Allowance for time-value money




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Liabilities

Assets




premiums

Premium Debtors

RI assets RI assets

Premium Debtors

Basis

l Future premiums allowed for in liability cashflows


RI assets

Premium Debtors




Risk Margin

RI assets

Premium Debtors



Risk Margin

Constituents Discounting



Risk Margin

RI assets

Shift from Assets


Technical ProvisionsPotential Impact


15Source: Lloyd’s Solvency II – Technical Provisions under Solvency II detailed guidance – March 2011 Update

100%

88.9%


What are the challenges?


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l It’s not conceptually difficult.

l Most of the techniques are not new.

What isn't challenging

l It is time-consuming, messy and tedious.

What is challenging




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Reserving Classes

Reserving Currencies

Allocate to SII Currencies Calculations

Aggregate over

Currencies

Aggregate over Classes SII Classes SII Currencies

Res 1

Res 2

Res 20

USD

CAD

GBP

All to GDP

AUD

CAD

EUR

GBP

JPY

OTH

USD

Cashflows

Discounting

Binary Events

Expenses

Risk Margin

Medical Expenses

Income protection

Misc Non-life

AUD

CAD

EUR

GBP

JPY

OTH

USD

AUD

AUD

AUDGross

RINet

DirectProportional

Non-Proportional

All to GBP

∑

∑




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l Auditablel Flexiblel Repeatablel Efficientl Understandable

We would like a process that is

ResQ Implementation



Overview of ResQ Custom Methods


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l For Underwriting Year reserves, a conversion to Earned, Unearned (UK GAAP) and Legally Obliged basis within ResQ

Custom Method 1 –Data Conversion

l Allocation of Claims Reserves and Future Premiums to SII Reporting currency

Custom Method 2 –Currency Allocation

l SII TPs calculated within ResQ using “Custom Methods”l Underwriting Year or Accident Year data as the starting pointl Initial reserving performed at Reporting Currency

l Conversion to cashflow basis for discounting

l Inclusion of SII adjustments

Custom Method 3 –SII Technical Provisions


ResQ Custom Method Structure


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Method 1 Method 2 Method 3Reporting Legally Allocate to CalculateCurrency Obliged SII Currency SII TPs

Pure GBP Pure GBP

AUD AUDGBP Conversion

JPY JPY

Other GBP Other GBP

USD Conversion USD

CAD Conversion CAD

EUR Conversion EUR

ResQDemo of Custom Methods (Beta Versions)



Next Steps…


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Future DevelopmentsFuture Developments

l Automating the population of key inputs and assumptions

l Automating the population of key inputs and assumptions

l Aggregating cashflows for Risk Margin calculation

l Aggregating cashflows for Risk Margin calculation

l Exporting results and summaries to Excel

l Exporting results and summaries to Excel

l Extending allocation capabilities to produce:l Results at SII

Class for reporting purposes

l Results at Lloyd’s Risk Code level to support TPD returns

l Extending allocation capabilities to produce:l Results at SII

Class for reporting purposes

l Results at Lloyd’s Risk Code level to support TPD returns

Igloo Implementation



Why Igloo?


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l Data may already be in Igloo

l Easy to feed inl Flexibilityl Easy to update

Inputs

l Diagnosticsl Flexible reports

Outputs

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