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1、,Lushan NaidooMiriam Bell,Preparing for Solvency II,19 November 2009,CONFIDENTIAL|,Agenda,Executive SummaryWhy Solvency II?Structure three pillar approachRisk ManagementOwn Risk and Solvency Assessment(ORSA)Implementing SIICase StudyNext StepsQuestions,Executive summary,The principles of Solvency II
2、 have already been agreed and the technical details are currently being debatedPlanned to take effect from 31 October 2012SII is not just a technical compliance exercise for actuaries,but a risk management tool to be owned and implemented by the Board and senior managementTo be SII ready within the
3、next three years requires a considerable amount of work,and companies should have already started their implementation programmes,Why Solvency II?,Section 2,Set through two directives in the 1970sA rules-based framework:Combination of minimum capital levels,restrictions on“risky”activities and tight
4、 regulatory controlThe solvency margin is based on a prescriptive formula applied to the technical reserves and value at riskValuation of assets and liabilities is not based on a market-consistent approach but rather on conservative estimatesSupervision based on confidential information and discreet
5、“guidance”,Solvency requirements are based on factors which do not reflect the societys risk profileMargin for prudence in the liability valuation is not prescribed and varies between societiesDetermined using local statutory accountsRestrictiveMaximum admitted exposure to certain asset classesIncon
6、sistent treatment between EU countries,Current Solvency I framework,and its shortcomings,Introduced 30 years ago,Solvency I is now outdated and not appropriate for the current market complexity,Improve protection offered to membersIntroduce risk-based,market consistent approach to solvency capital a
7、ssessmentEncourage and incentivise societies to understand and manage their risksEnsure consistency between financial markets(in line with Basel II)Establish consistent and comparable regulatory framework across the EUEnhanced transparency and public disclosure,Measure of solvency which is directly
8、linked to the risk profile of the societyRecognition of risk mitigation tools,subject to specified principlesSocieties are rewarded for good risk management and controlsTotal balance sheet based aims to capture the risks on both the asset and liability sidePrinciples-rather than rules-basedChoice of
9、 calculation methodPrinciple of proportionality Single directive to apply to all1 societies,insurers and reinsurers across the EU,1.Excludes:Societies and Insurers with gross annual premium income 5 MM and technical provisions 25 MM,occupational pension schemes,Solvency II objectives,New features in
10、troduced by Solvency II,Solvency II aims for transparency and consistency,Prepares advice for the European Commission and collects feedback from industry participantsResponds to the calls for advice and produces consultation papers.Draft versions are circulated with the industry and stakeholders for
11、 commentPossible approaches are road-tested through a number of Quantitative Impact Studies(QIS),Prepares framework directive and impact assessmentRequests advice from CEIOPS through Calls for AdviceBoth will be based on the advice and the QIS results reports provided by CEIOPS,Participants includeA
12、BIAFSCRO ForumCFO ForumAll insurance companiesComment on draft consultation papers and on the draft responses to the Calls for AdviceSubmit results of the impact studies to national regulators.National regulators submit consolidated results to CEIOPS,The Solvency II framework is being developed in c
13、lose co-operation with the European insurance industry,CEIOPS(Committee of European Insurance and Occupational Pension Supervisors),European Commission,Industry participants,Structure three pillar approach,Section 3,Solvency II will adopt a three pillar approach,Source:European Commission:“Amended f
14、ramework for consultation on Solvency II”,April 2006.MARKT/2515/06,Quantitative requirement,Holistic requirement,Disclosure,Pillar 1,Pillar 2,Pillar 3,Method for the calculation of reservesSolvency Capital Requirement SCRMinimum Capital Requirement MCRValuation of assets,Internal model approvalSyste
15、m of governanceSupervisory review processSupervisory interventions,Supervisory disclosurePublic disclosure,Solvency II,Pillar 1:Calculation methods,Pillar 1:Valuation of assets and liabilities based on the total balance sheet approach,Market Value of Assets,Reserves,Solvency Capital Requirement(SCR)
16、,Free Assets,Market RiskCredit RiskOperational RiskUnderwriting Risk,Pillar 1:Solvency II offers a range of methods for demonstrating adequate financial resources,while the standard formula provides the benchmark,1.in the large European markets(DE,FR,UK etc.)(Source:Oliver Wyman estimate)2.Societies
17、 and Insurers with gross annual premium income 5 MM and technical provisions 25 MM,occupational pension schemes,Degree of proportionality,(Large)groups;selected others,Large majority of insurers,potentially including subsidiaries of large groups,Mainly very small,purely national insurers,Exempted in
18、surers2,Simplified standard formula,Standard formula,Standard formula,own parameters,Partial internal model,Full internal model,Complexity of solvency measurement,Expected number of groups with internal models by 2012:5-10 per market1,Most friendly societies,Pillar 2:Supervision,Pillar 2 encompasses
19、 the key tenets of Solvency II,PILLAR 2:Supervisory reviewAims at identification of risks not captured by Pillar 1,System of governanceOrganisational structure and capabilities(e.g.proper Risk Management,Internal Audit and Actuarial functions)ORSA Own Risk and Solvency Assessment(companies infrastru
20、cture and processes for conducting continuous evaluation of risks in their business)Supervisory review processProcesses and framework to ensure that societies comply with requirementsSupervisory interventionsCapital add-ons etc.,1,2,3,Pillar 3:Disclosure,Pillar 3 lays out the Societys reporting requ
21、irements,PILLAR 3:DisclosureAims to improve risk disclosure and the confidential disclosure to supervisors,Public disclosureAnnual reporting(including business performance,governance,risk management and valuation approaches)Capital management descriptionAmounts of MCR,SCR and own fund(including stru
22、cture and quality assessment)Explanation of any non-compliance with SCR and MCR,including amountsInformation to be provided for supervisory purposesInformation that allows the supervisor to assessOverall business performanceSystems of governanceRisks in the business,including risk management systems
23、 and activitiesThe capital structure of the business,1,2,Risk Management,Section 4,“Solvency II is not just about risk measurement and quantification,rather it is about effective governance and risk management”Recent studies have concluded that senior management decisions and quality of group risk c
24、ontrols are potentially more important for the long term health of a company than holding adequate capital Companies should therefore consider the development of a comprehensive risk management system a major priority under SII,Risk Management The principal tenet of Solvency II,CEIOPS(SII Advisors t
25、o the European Commission),March 2009,Risk Management Developing a risk management system,People and processes working together to identify,assess and manage risksMost companies have a system in placeExtensive development of existing framework needed to meet SII standards,Risk Management,Approach,De
26、cision Makingand Strategy,Risk IdentificationandAssessment,RiskMitigationand Control,ReportingandMonitoring,Risk Management Developing a risk management system Approach,Clear Risk management philosophySet out objectives,expectations and constraintsRisk management structures,roles,responsibilitiesArt
27、iculate risk appetite and risk toleranceIdentify tools to measure risk,Risk Management,Risk IdentificationandAssessment,RiskMitigationand Control,ReportingandMonitoring,Approach,Decision Makingand Strategy,Risk Management Developing a risk management system Risk Identification andAssessment,Identifi
28、cation and description of significant risksCause of risk and consequencesRisk modelling/analysisRisk categorisation according to frequency and severityRisk scoring systemResults shown in risk register,Risk Management,Risk IdentificationandAssessment,RiskMitigationand Control,ReportingandMonitoring,A
29、pproach,Decision Makingand Strategy,Risk Management Developing a risk management system Risk Mitigation and Control,Action plan to bring risks within limits set out in approachDesired risk scoreAssignment of risk responsibilities to appropriate individualResults shown in risk register,Risk Managemen
30、t,Risk IdentificationandAssessment,RiskMitigationand Control,ReportingandMonitoring,Approach,Decision Makingand Strategy,Risk Management Developing a risk management system Reporting and Monitoring,Risk dashboardCentral control mechanism to drive business decisionsSnapshot of major risks and effecti
31、veness of risk controlsCurrent and emerging key risksKey risk indicators and risk hotspots,Risk Management,Risk IdentificationandAssessment,RiskMitigationand Control,ReportingandMonitoring,Approach,Decision Makingand Strategy,Risk ManagementDeveloping a risk management system Risk Dashboard example,
32、Threat scenarios,Concentrations,Action point tracking and key projects,Trends analysis,EURO,UK(),Investment grade credit spreads(bp),E.g.Credit Trends,Analysis e.g.5 places this impacts mostAction points,Key Projects,Focus on Red and Amber areas,100%+,CAR limit,Risk appetite monitoring,Life Insuranc
33、e UK,Life Insurance EUR,P&C UK,P&C EUR,Retail Banking,134,185,140,195,177,137,187,140,188,179,EAR(Q1),262,365,312,365,370,282,375,310,364,376,EAR(Q2),EAR limit,CAR(Q1),CAR(Q2),Online Banking,103,101,197,196,Green,Amber,Red,0-95%,95-100%,Earnings/Capital at risk vs.limits,300,EAR/CAR as%limit:,MM,400
34、,300,400,400,200,150,200,150,200,200,100,Total group,934,932,1,871,1,903,1,000,2,000,Action Point Tracking,Action point agendaRed and amber EAR/CAR Concentrations outside limitsEtc.,10%,0%,33%,R,A,G,EaR,Earnings at Risk,120%,150%,105%,Current 145%,A,G,A,R,AFR/EC(%),FTSE drops by 20%,UK yield curve d
35、own by 2%,Housing market falls by 15%,UK lapse rate doubles,Largest single name defaults,Capital at Risk,700,0,2,400,(%Expec Earnings)MM,R,100%,FTSE drops by 20%,UK yield curve down by 2%,Housing market falls by 15%,UK lapse rate doubles,Largest single name defaults,Natural catastrophe,Natural catas
36、trophe,1%,3.5%,1.5%,3.8%,Out-standings,Limit,Earnings at risk,Parentrating,3,700,12,200,05,JP Morgan Chase,2,400,4,200,04,Deutsche Bank AG,1,600,2,200,01,Allianz,900,1,700,06,Volkswagen AG,Counter-parties,GroupWARR,4,4,9,13,Capital at risk,1.1%,2.5%,1.8%,3%,Green,Amber,Red,Capital at Risk(%),Earning
37、s at Risk(%),5%+,2-5%,0-2%,5%+,2-5%,0-2%,Analysis e.g.Limit breachesRemedial actions,Name level(equity and credit)SectoralGeographical,etc.,Risk Management Developing a risk management system Decision making and strategy,Companies need to demonstrate to FSA that their risk management system meets th
38、e required standardsRisk dashboard must enable quick and effective decision-makingRefinement of approachRisk management is a process and not an end in itself,Risk Management,Risk IdentificationandAssessment,RiskMitigationand Control,ReportingandMonitoring,Approach,Decision Makingand Strategy,Risk Ma
39、nagement Developing a risk management system The softer aspects,Logical organisational structure with clearly defined roles and responsibilitiesDocumentation of processesEffective communication and reporting systemsRisk-based company culture firmly embedded within company,Risk Management,Approach,De
40、cision Makingand Strategy,Risk IdentificationandAssessment,RiskMitigationand Control,ReportingandMonitoring,Own Risk and Solvency Assessment(ORSA),Section 5,Own Risk and Solvency Assessment(ORSA),Defined as“the entirety of the processes and procedures employed to identify,assess,monitor,manage and r
41、eport the short and long-term risks a(re)insurance undertaking faces or may face to determine the own funds necessary to ensure that the undertakings overall solvency needs are met at all times”In simple termsa companys solvency assessment based on its opinion and understanding of its risksTakes int
42、o account risks that may not be part of the SCR calculationDoes not require an internal modelNot intended to create an additional capital requirementShould follow the Principle of ProportionalityORSA results should be used in business decision-making and companies must demonstrate this to FSA,Implem
43、enting SII,Section 6,With draft advice on level 2 implementing measures published,the industry is more active than ever in its Solvency II preparations,Setting up and conducting Solvency II readiness programmesMost large insurance groupsGap analyses concluded,programme set up and being executedMediu
44、m-sized insurersMany in the middle of conducting gap analyses to structure their Solvency II readiness programmesFriendly societiesMany in the process of gap analyses and QIS4 calculations,More focus on understanding business impact of Solvency II Quantitative impact of level 2 implementing measures
45、 being assessedAdvanced insurers start thinking about what Solvency II means for their business modelFriendly societies consider and pursue business benefits,In addition to gap analysis,vision and ambition setting should be the starting point for a Solvency II readiness programme,Define vision and a
46、mbition for Solvency II implementationBased on anticipated business impactConsidering the tools required to manage the business going forwardReview existing capabilities and projectsGap analysis against Solvency II requirements and visionDefinition of development needs and prioritiesProgramme plan a
47、nd business case,8-10 weeks,6-9 months,18-24 months,After 2012,Refinement and further development,Embed and implement,Design and development,Vision setting,gap analysis,programme planning,Ongoing dialogue with regulator to prepare regulatory approval,Jargon buster!,Vision and ambition setting Where
48、does the society want to be in terms of SII compliance?Areas where anticipate business benefits be more than SII compliant otherwise achieve basic complianceInternal model vs.standard formula,Results of gap analysis used to create a programme plan to plug gapsIdentify workstreams,resource requiremen
49、ts and time planBroken down into relevant areas e.g.programme mgmt,ORSA,data and systems,Gap analysis used to highlight gaps between where now and where need to be to attainambitionCover all key areas of SII requirementsMeasurement and methodology e.g.individual risks,risk appetiteOperational implem
50、entation e.g.data,systems,documentationOrganisation and governance e.g.monitoring and control,committees Use test and business applications e.g.solvency,product designInterviews with key personnel within society,Case studyDisguised client example,Section 7,Client vision for Solvency II-compliant Man
