Transcript No Slide Title

Solvency II Update
Christopher Critchlow BSc FIA
Chief Executive
10 November 2010
Agenda
n QIS5
n Issues arising and outcomes
n Next steps: Pillar 2
QIS5
n Study to assess calibration of specification to the market
n 5th study completed 31 October 2010
n Developed in response to problems raised in previous QIS
exercises
n CEIOPS to review and report April 2011
n Incorporates both qualitative and quantitative aspects
QIS5 – Balance sheet
Surplus
Reinsurance recoverables
Own funds
Net asset value
SCR (MCR)
Risk margin
Market value
of assets
Technical
provisions
(market
consistent
exit
value)
Best
estimate
liability
incl. CoG
QIS5 - Issues
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Time limits => approach was approximate
Parallels with ICAs
Lack of availability of technically skilled resources
Spreadsheets not well-constructed
Market consistent valuation of options and guarantees
n Historic (simple, cost-effective)
n Price to market (complex, expensive)
QIS5 – Issues (cont)
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Deficits / surplus in OPS
EPIFP
Ring-fenced funds
Projecting the SCR, risk margin
Loss absorbency, management actions
Modelling systems
QIS5 – Outcomes
n Depends on basis of base liability estimate
n BIG generalisations but:
n Peak 1 => decrease in free assets
n RBS => increase in free assets
n Still whole mass of issues to resolve
n Overweight on technical specification on some areas
n Underweight on specification for others
n Still much left to finalise
QIS5 – Outcomes
n Lots to negotiate in Europe
n QIS6 to get a solid baseline
n Is 1 January 2013 still achievable?
Next steps – Pillar 2
Black-swans
Dashboard
information
Board
decisions
Risk appetite
Pillar 1: capital
resources
ORSA
Scenario tests
Operational
issues
Business
plans and
strategy
Regulatory
requirements
ORSA: Article 45 (1)
1.
As part of its risk-management system every insurance undertaking and
reinsurance undertaking shall conduct its own risk and solvency
assessment.
That assessment shall include at least the following:
(a)
(b)
(c)
the overall solvency needs taking into account the specific risk
profile, approved risk tolerance limits and the business strategy of
the undertaking;
the compliance, on a continuous basis, with the capital requirements,
….. and with the requirements regarding technical provisions……;
the significance with which the risk profile of the undertaking
concerned deviates from the assumptions underlying the [SCR] ….,
calculated with the standard formula ….. or with its partial or full
internal model ….
Article 45 (2)
2. For the purposes of paragraph 1(a), the undertaking
concerned shall have in place processes which are
proportionate to the nature, scale and complexity of
the risks inherent in its business and which enable it
to properly identify and assess the risks it faces in the
short and long term and to which it is or could be
exposed.
The undertaking shall demonstrate the methods used in
that assessment.
Article 45 (3)
3. In the case referred to in paragraph 1(c), when an
internal model is used, the assessment shall be
performed together with the recalibration that transforms
the internal risk numbers into the Solvency Capital
Requirement risk measure and calibration.
Article 45 (4)
4. The own-risk and solvency assessment shall be an
integral part of the business strategy and shall be taken
into account on an ongoing basis in the strategic
decisions of the undertaking.
Article 45 (5)
5. Insurance and reinsurance undertakings shall perform
the assessment referred to in paragraph 1 regularly and
without any delay following any significant change in
their risk profile.
Article 45 (6)
6. The insurance and reinsurance undertakings shall inform
the supervisory authorities of the results of each own-risk
and solvency assessment as part of the information
reported under Article 35.
Article 45 (7)
7. The own-risk and solvency assessment shall not serve to
calculate a capital requirement. The Solvency Capital
Requirement shall be adjusted only in accordance with
Articles 37, 231 to 233 and 238.
Implications?
n ORSA becomes central to the management of an
insurance business
n Business decisions cannot be taken without reference to
impact on ORSA
n Full scenario tests and sensitivities need to be
undertaken
n Dashboard information is key
n Integrate with operational aspects of the business and
the plans for the future
Consider how an ORSA might look
Base Pillar 1 results
Business strategy
Specific and operational risks
Scenario tests
Overall capital requirements
Risk appetite
Summary of key risks and
management actions to be taken
n Business decisions to be taken
n Impact on ORSA and capital
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Finally…..
n See QIS5 / 6 as number-work providing a framework to
assess impact of business decisions
n Hard part comes with Pillar 2
n Begin designing ORSA and business decision making
process