Transcript Title of the presentation….

Own Solvency and Risk Assessment
Jarl Kure
Malta 9 April 2010
Page 1
CEIOPS
The foundation of Solvency II
Insurance supervision: solo
and groups
Pillar 1




Quantitative
requirements
Technical provisions (BE
and risk margin)
2 capital requirements
(MCR and SCR –SF/IM)
Prudent person
investment rule
Own funds (3 tiers)
Total balance sheet
approach
Market-consistent
valuation
Validation of internal
models
Pillar 2


Qualitative
requirements
Internal control and risk
management (incl. ORSA)
Supervisory review
process (qualit. & quant Add-ons)
Focus on undertaking’s
responsibility
Convergence of
supervisory practices
Pillar 3
Reporting



Supervisory reporting
Public disclosure
Market discipline
Convergence of
supervisory reporting
More pressure from rating
agencies, capital markets
Page 2
CEIOPS
Solvency II Road Map for 2007-2013
2006
2007
Development of
Directive
(Commission)
2008
2009
Negotiation & adoption
of Directive Proposal
(Council & Parliament)
2011
2010
2012
Preparation of the implementation
(Member States)
CEIOPS: Work on the technical details for implementing measures/
supervisory convergence/Level 3 guidance/Binding technical standards
Commission: Preparation of
implementing measures
July 2007
Directive Proposal
QIS 2
QIS 3
November 2009
Directive adopted
QIS 4
April-July 2008
Adoption of
implementing
measures
2010
Omnibus Directive II
QIS 5
August-Nov
2010
Page 3
CEIOPS
Level 2 or level 3 for ORSA
• Solvency II directive : EC may adopt Level 2 measures
• CEIOPS plans to issue level 3 guidance in 2011 after
public consultation
• Reporting requirement of ORSA is Level 2
Page 4
CEIOPS
What is the ORSA?
• Basically telling undertakings: your turn
Page 5
CEIOPS
Overall aim
• Outcome is to derive internal solvency needs
• Matching of the own funds to the risk profile should
promote a strong culture of the risk management
• High level organisational commitment
Page 6
CEIOPS
The framework
• The ORSA must become part of the risk management
system of every insurance undertaking
• This assessment requires insurance undertakings to
properly determine their overall solvency needs for
short and long term risk
Page 7
CEIOPS
ORSA and Internal Models
• The ORSA does NOT require an undertaking to develop
or apply a full or partial internal model.
• However, if the undertaking already uses an approved
full or partial internal model for the calculation of the
SCR, the output of the model shall be used in
determining the ORSA
Page 8
CEIOPS
Five principles to follow
• 1. The ORSA is the responsibility of the undertaking and
should be regularly reviewed and approved by the
undertaking's administrative, management or
supervisory body
• 2. The ORSA should encompass all material risks that
may have an impact on the undertaking's ability to meet
its obligations under insurance contracts
Page 9
CEIOPS
Five principles to follow
• 3 The ORSA should be based on adequate measurement
and assessment processes and form an integral part of
the management process and decision making
framework of the undertaking
• 4 The ORSA should be forward-looking, taking into
account the undertaking's business plans and
projections.
• 5 The ORSA process and outcome should be
appropriately evidenced and internally documented as
well as independently assessed.
Page 10
CEIOPS
ORSA vs. SCR, MCR and Capital add on
• The ORSA does NOT create a third solvency capital
requirement
• No automatic Capital add-on, e.g. if quantitative ORSA
amount is above SCR
Page 11
CEIOPS
Why is ORSA important to supervisors
• Within the Supervisory Review Process the ORSA
contributes to a qualitative view of the management’s
ability in to assess, measure and manage its own
business and the inherent risks within its organisation
• During the Supervisory Review Process supervisors may
challenge the bases for the ORSA and undertakings
should be prepared to explain the rationale
Page 12
CEIOPS
Reporting of the ORSA – CEIOPS advice
• A statement explaining how regularly the ORSA is
reviewed and approved by the undertaking's
administrative, management or supervisory body;
• A statement explaining how the undertaking has
determined its own solvency needs given its risk profile
and how its capital management activities take into
account its risk management system
• A description of how the ORSA process and outcome is
appropriately evidenced and internally documented as
well as independently reviewed.
Page 13
CEIOPS
SFCR vs. RTS
CEIOPS advice:
• Public (SFCR) Processes
• Quantitative Outcome just to the supervisor
Page 14
CEIOPS
Proportionality
• All undertakings - including smaller ones - have to be
able to understand their own financial condition and
solvency position. That is to determine their overall
solvency needs irrespective of the supervisory
solvency capital requirements
• The level of complexity and sophistication required of
undertakings for the ORSA depends to a large extent
on the specific risk profile of the undertaking
• The ORSA does not subject undertakings to
qualitative measures that are disproportionate to their
risk profiles and the methods and approaches they
use
Page 15
CEIOPS
CEIOPS
Prepareness necessarry?
• Level 3 guidance expected – but will not include detailed
recipes
• See Issues Paper from May 2008 (CEIOPS-IGSRR-09/08)
• Gap analysis needed
• Any cultural changes necessary
To be prepared for Solvency II end 2012 industry might need to
prepare soon
Page 16
Thank you
[email protected]
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