Preparing for Solvency II.ppt

lushannaidoomiriambell preparingforsolvencyii 19november2009 confidential agenda executivesummarywhysolvencyii structure threepillarapproachriskmanagementownriskandsolvencyassessment orsa implementingsiicasestudynextstepsquestions executivesummary theprinciplesofsolvencyiihavealreadybeenagreedandthetechnicaldetailsarecurrentlybeingdebatedplannedtotakeeffectfrom31october2012siiisnotjustatechnicalcomplianceexerciseforactuaries butariskmanagementtooltobeownedandimplementedbytheboardandseniormanagementtobesiireadywithinthenextthreeyearsrequiresaconsiderableamountofwork andcompaniesshouldhavealreadystartedtheirimplementationprogrammes whysolvencyii section2 setthroughtwodirectivesinthe1970sarules basedframework combinationofminimumcapitallevels restrictionson risky activitiesandtightregulatorycontrolthesolvencymarginisbasedonaprescriptiveformulaappliedtothetechnicalreservesandvalueatriskvaluationofassetsandliabilitiesisnotbasedonamarket consistentapproachbutratheronconservativeestimatessupervisionbasedonconfidentialinformationanddiscreet guidance solvencyrequirementsarebasedonfactorswhichdonotreflectthesociety sriskprofilemarginforprudenceintheliabilityvaluationisnotprescribedandvariesbetweensocietiesdeterminedusinglocalstatutoryaccountsrestrictivemaximumadmittedexposuretocertainassetclassesinconsistenttreatmentbetweeneucountries currentsolvencyiframework anditsshortcomings introduced30yearsago solvencyiisnowoutdatedandnotappropriateforthecurrentmarketcomplexity improveprotectionofferedtomembersintroducerisk based marketconsistentapproachtosolvencycapitalassessmentencourageandincentivisesocietiestounderstandandmanagetheirrisksensureconsistencybetweenfinancialmarkets inlinewithbaselii establishconsistentandcomparableregulatoryframeworkacrosstheeuenhancedtransparencyandpublicdisclosure measureofsolvencywhichisdirectlylinkedtotheriskprofileofthesocietyrecognitionofriskmitigationtools subjecttospecifiedprinciplessocietiesarerewardedforgoodriskmanagementandcontrolstotalbalancesheetbased aimstocapturetherisksonboththeassetandliabilitysideprinciples ratherthanrules basedchoiceofcalculationmethodprincipleofproportionalitysingledirectivetoapplytoall1societies insurersandreinsurersacrosstheeu 1 excludes societiesandinsurerswithgrossannualpremiumincome 5mmandtechnicalprovisions 25mm occupationalpensionschemes solvencyiiobjectives newfeaturesintroducedbysolvencyii solvencyiiaimsfortransparencyandconsistency preparesadvicefortheeuropeancommissionandcollectsfeedbackfromindustryparticipantsrespondstothecallsforadviceandproducesconsultationpapers draftversionsarecirculatedwiththeindustryandstakeholdersforcommentpossibleapproachesareroad testedthroughanumberofquantitativeimpactstudies qis preparesframeworkdirectiveandimpactassessmentrequestsadvicefromceiopsthroughcallsforadvicebothwillbebasedontheadviceandtheqisresultsreportsprovidedbyceiops participantsincludeabiafscroforumcfoforumallinsurancecompaniescommentondraftconsultationpapersandonthedraftresponsestothecallsforadvicesubmitresultsoftheimpactstudiestonationalregulators nationalregulatorssubmitconsolidatedresultstoceiops thesolvencyiiframeworkisbeingdevelopedincloseco operationwiththeeuropeaninsuranceindustry ceiops committeeofeuropeaninsuranceandoccupationalpensionsupervisors europeancommission industryparticipants structure threepillarapproach section3 solvencyiiwilladoptathreepillarapproach source europeancommission amendedframeworkforconsultationonsolvencyii april2006 markt 2515 06 quantitativerequirement holisticrequirement disclosure pillar1 pillar2 pillar3 methodforthecalculationofreservessolvencycapitalrequirement scrminimumcapitalrequirement mcrvaluationofassets internalmodelapprovalsystemofgovernancesupervisoryreviewprocesssupervisoryinterventions supervisorydisclosurepublicdisclosure solvencyii pillar1 calculationmethods pillar1 valuationofassetsandliabilitiesbasedonthetotalbalancesheetapproach marketvalueofassets reserves solvencycapitalrequirement scr freeassets marketriskcreditriskoperationalriskunderwritingrisk pillar1 solvencyiioffersarangeofmethodsfordemonstratingadequatefinancialresources whilethestandardformulaprovidesthebenchmark 1 inthelargeeuropeanmarkets de fr uketc source oliverwymanestimate 2 societiesandinsurerswithgrossannualpremiumincome 5mmandtechnicalprovisions 25mm occupationalpensionschemes degreeofproportionality large groups selectedothers largemajorityofinsurers potentiallyincludingsubsidiariesoflargegroups mainlyverysmall purelynationalinsurers exemptedinsurers2 simplifiedstandardformula standardformula standardformula ownparameters partialinternalmodel fullinternalmodel complexityofsolvencymeasurement expectednumberofgroupswithinternalmodelsby2012 5 10permarket1 mostfriendlysocieties pillar2 supervision pillar2encompassesthekeytenetsofsolvencyii pillar2 supervisoryreviewaimsatidentificationofrisksnotcapturedbypillar1 systemofgovernanceorganisationalstructureandcapabilities e g properriskmanagement internalauditandactuarialfunctions orsa ownriskandsolvencyassessment companiesinfrastructureandprocessesforconductingcontinuousevaluationofrisksintheirbusiness supervisoryreviewprocessprocessesandframeworktoensurethatsocietiescomplywithrequirementssupervisoryinterventionscapitaladd onsetc 1 2 3 pillar3 disclosure pillar3laysoutthesociety sreportingrequirements pillar3 disclosureaimstoimproveriskdisclosureandtheconfidentialdisclosuretosupervisors publicdisclosureannualreporting includingbusinessperformance governance riskmanagementandvaluationapproaches capitalmanagementdescriptionamountsofmcr scrandownfund includingstructureandqualityassessment explanationofanynon compliancewithscrandmcr includingamountsinformationtobeprovidedforsupervisorypurposesinformationthatallowsthesupervisortoassessoverallbusinessperformancesystemsofgovernancerisksinthebusiness includingriskmanagementsystemsandactivitiesthecapitalstructureofthebusiness 1 2 riskmanagement section4 solvencyiiisnotjustaboutriskmeasurementandquantification ratheritisabouteffectivegovernanceandriskmanagement recentstudieshaveconcludedthatseniormanagementdecisionsandqualityofgroupriskcontrolsarepotentiallymoreimportantforthelongtermhealthofacompanythanholdingadequatecapitalcompaniesshouldthereforeconsiderthedevelopmentofacomprehensiveriskmanagementsystemamajorpriorityundersii riskmanagementtheprincipaltenetofsolvencyii ceiops siiadvisorstotheeuropeancommission march2009 riskmanagementdevelopingariskmanagementsystem peopleandprocessesworkingtogethertoidentify assessandmanagerisksmostcompanieshaveasysteminplaceextensivedevelopmentofexistingframeworkneededtomeetsiistandards riskmanagement approach decisionmakingandstrategy riskidentificationandassessment riskmitigationandcontrol reportingandmonitoring riskmanagementdevelopingariskmanagementsystem approach clearriskmanagementphilosophysetoutobjectives expectationsandconstraintsriskmanagementstructures roles responsibilitiesarticulateriskappetiteandrisktoleranceidentifytoolstomeasurerisk riskmanagement riskidentificationandassessment riskmitigationandcontrol reportingandmonitoring approach decisionmakingandstrategy riskmanagementdevelopingariskmanagementsystem riskidentificationandassessment identificationanddescriptionofsignificantriskscauseofriskandconsequencesriskmodelling analysisriskcategorisationaccordingtofrequencyandseverityriskscoringsystemresultsshowninriskregister riskmanagement riskidentificationandassessment riskmitigationandcontrol reportingandmonitoring approach decisionmakingandstrategy riskmanagementdevelopingariskmanagementsystem riskmitigationandcontrol actionplantobringriskswithinlimitssetoutinapproachdesiredriskscoreassignmentofriskresponsibilitiestoappropriateindividualresultsshowninriskregister riskmanagement riskidentificationandassessment riskmitigationandcontrol reportingandmonitoring approach decisionmakingandstrategy riskmanagementdevelopingariskmanagementsystem reportingandmonitoring riskdashboardcentralcontrolmechanismtodrivebusinessdecisionssnapshotofmajorrisksandeffectivenessofriskcontrolscurrentandemergingkeyriskskeyriskindicatorsandriskhotspots riskmanagement riskidentificationandassessment riskmitigationandcontrol reportingandmonitoring approach decisionmakingandstrategy riskmanagementdevelopingariskmanagementsystem riskdashboardexample threatscenarios concentrations actionpointtrackingandkeyprojects trendsanalysis euro uk investmentgradecreditspreads bp e g credittrends analysise g 5placesthisimpactsmostactionpoints keyprojects focusonredandamberareas 100 carlimit riskappetitemonitoring lifeinsuranceuk lifeinsuranceeur p cuk p ceur retailbanking 134 185 140 195 177 137 187 140 188 179 ear q1 262 365 312 365 370 282 375 310 364 376 ear q2 earlimit car q1 car q2 onlinebanking 103 101 197 196 green amber red 0 95 95 100 earnings capitalatriskvs limits 300 ear caras limit mm 400 300 400 400 200 150 200 150 200 200 100 totalgroup 934 932 1 871 1 903 1 000 2 000 actionpointtracking actionpointagendaredandamberear carconcentrationsoutsidelimitsetc 10 0 33 r a g ear earningsatrisk 120 150 105 current145 a g a r afr ec ftsedropsby20 ukyieldcurvedownby2 housingmarketfallsby15 uklapseratedoubles largestsinglenamedefaults capitalatrisk 700 0 2 400 expecearnings mm r 100 ftsedropsby20 ukyieldcurvedownby2 housingmarketfallsby15 uklapseratedoubles largestsinglenamedefaults naturalcatastrophe naturalcatastrophe 1 3 5 1 5 3 8 out standings limit earningsatrisk parentrating 3 700 12 200 05 jpmorganchase 2 400 4 200 04 deutschebankag 1 600 2 200 01 allianz 900 1 700 06 volkswagenag counter parties groupwarr 4 4 9 13 capitalatrisk 1 1 2 5 1 8 3 green amber red capitalatrisk earningsatrisk 5 2 5 0 2 5 2 5 0 2 analysise g limitbreachesremedialactions namelevel equityandcredit sectoralgeographical etc riskmanagementdevelopingariskmanagementsystem decisionmakingandstrategy companiesneedtodemonstratetofsathattheirriskmanagementsystemmeetstherequiredstandardsriskdashboardmustenablequickandeffectivedecision makingrefinementofapproachriskmanagementisaprocessandnotanendinitself riskmanagement riskidentificationandassessment riskmitigationandcontrol reportingandmonitoring approach decisionmakingandstrategy riskmanagementdevelopingariskmanagementsystem thesofteraspects logicalorganisationalstructurewithclearlydefinedrolesandresponsibilitiesdocumentationofprocesseseffectivecommunicationandreportingsystemsrisk basedcompanyculturefirmlyembeddedwithincompany riskmanagement approach decisionmakingandstrategy riskidentificationandassessment riskmitigationandcontrol reportingandmonitoring ownriskandsolvencyassessment orsa section5 ownriskandsolvencyassessment orsa definedas theentiretyoftheprocessesandproceduresemployedtoidentify assess monitor manageandreporttheshortandlong termrisksa re insuranceundertakingfacesormayfacetodeterminetheownfundsnecessarytoensurethattheundertaking soverallsolvencyneedsaremetatalltimes insimpleterms acompany ssolvencyassessmentbasedonitsopinionandunderstandingofitsriskstakesintoaccountrisksthatmaynotbepartofthescrcalculationdoesnotrequireaninternalmodelnotintendedtocreateanadditionalcapitalrequirementshouldfollowtheprincipleofproportionalityorsaresultsshouldbeusedinbusinessdecision makingandcompaniesmustdemonstratethistofsa implementingsii section6 withdraftadviceonlevel2implementingmeasurespublished theindustryismoreactivethaneverinitssolvencyiipreparations settingupandconductingsolvencyiireadinessprogrammesmostlargeinsurancegroupsgapanalysesconcluded programmesetupandbeingexecutedmedium sizedinsurersmanyinthemiddleofconductinggapanalysestostructuretheirsolvencyiireadinessprogrammesfriendlysocietiesmanyintheprocessofgapanalysesandqis4calculations morefocusonunderstandingbusinessimpactofsolvencyiiquantitativeimpactoflevel2implementingmeasuresbeingassessedadvancedinsurersstartthinkingaboutwhatsolvencyiimeansfortheirbusinessmodelfriendlysocietiesconsiderandpursuebusinessbenefits inadditiontogapanalysis visionandambitionsettingshouldbethestartingpointforasolvencyiireadinessprogramme definevisionandambitionforsolvencyiiimplementationbasedonanticipatedbusinessimpactconsideringthetoolsrequiredtomanagethebusinessgoingforwardreviewexistingcapabilitiesandprojectsgapanalysisagainstsolvencyiirequirementsandvisiondefinitionofdevelopmentneedsandprioritiesprogrammeplanandbusinesscase 8 10weeks 6 9months 18 24months after2012 refinementandfurtherdevelopment embedandimplement designanddevelopment visionsetting gapanalysis programmeplanning ongoingdialoguewithregulatortoprepareregulatoryapproval jargonbuster visionandambitionsettingwheredoesthesocietywanttobeintermsofsiicompliance areaswhereanticipatebusinessbenefitsbemorethansiicompliantotherwiseachievebasiccomplianceinternalmodelvs standardformula resultsofgapanalysisusedtocreateaprogrammeplantopluggapsidentifyworkstreams resourcerequirementsandtimeplanbrokendownintorelevantarease g programmemgmt orsa dataandsystems gapanalysisusedtohighlightgapsbetweenwherenowandwhereneedtobetoattainambitioncoverallkeyareasofsiirequirementsmeasurementandmethodologye g individualrisks riskappetiteoperationalimplementatione g data systems documentationorganisationandgovernancee g monitoringandcontrol committeesusetestandbusinessapplicationse g solvency productdesigninterviewswithkeypersonnelwithinsociety casestudydisguisedclientexample section7 clientvisionforsolvencyii compliantmanagementinformationdashboard tomakethesolvencyiiambitiontangibleitiskeytoshowhowcoremetricsanddecisiontoolswillchangeearlyon disguisedclientexample newperformancemetric corerisksandtrendstobereportedon alsoinorsa riskappetitedimensionstobetracked solvencycapitalrequirement solvencyiiscrascorecapitalmetric capturingthebusinessbenefitsofsolvencyiirequiresaclearbusinesscase disguisedclientexample significantincreaseincontributiontooverheads investment annualpro