Transcript AFM Pillar 2 and ORSA FINAL with no notes

Pillar 2 and Pillar 3 of Solvency II
Kathryn Morgan
The Association of Financial Mutuals
4 April 2011
What we need Solvency II to deliver
• Good quality capital
• Technical provisions that reflect the reality of the
liabilities
• Robust solvency capital requirement (SCR) standard
formula calibrations that reflect the true economic
cost of the risks
• Strong requirements on forward looking risk
identification and management
• Strong emphasis on enhanced transparency of firms’
financial positions and risk management approaches
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Solvency II - Pillar 2 and 3
Three-pillar approach
Pillar 1:
Pillar 2:
Pillar 3:
Quantitative
capital requirements
Qualitative
supervisory review
Market
discipline


Technical provisions
Minimum capital
requirement (MCR)
 Solvency Capital
Requirement (SCR)
 Investment rules
Market-consistent
valuation
Validation of internal
models


Principles for internal
control and risk
management
Supervisory review
process
New focus for supervisor
Level of harmonisation



Transparency
Disclosure
Support of risk-based
supervision through
market mechanisms
More pressure from
capital markets
More pressure from rating
agencies
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Solvency II - Pillar 2 and 3
Pillar 2
Pillar 3
4 functions:
Reporting
• Risk management
• RSR
• Compliance
• SFCR
• Internal audit
• Actuarial
Plus the ORSA
And the supervisory review process
(SRP), general governance, fit and
proper, outsourcing, internal control and
capital add-ons.
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Own risk and solvency assessment (ORSA): Policy
Level 1
Articles 45, 35 and 246
Level 2
Some commentary on risk management
system and reporting
Level 3
Pre-consultation paper: December 2010
May 2008 issues paper
Five key principles:
management responsibility
risk coverage
forward looking
integrated into the business
documentation and validation
CEIOPS advice to
Commission
(formerly CP58)
Two main external reports:
Solvency & Financial Condition Report
(SFCR) – publicly disclosed
Report to supervisors (RSR) – NOT publicly
disclosed
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ORSA: Overview
Report: sign off by
management body
Management body
• Objectives/purpose
• Solo/group
• Scope
• Ownership
• Embedding/use
• Granularity
• Frequency
Report
• Strategy
• Business plan
• Statement of risk appetite
• Governance and systems of
risk management
• Risk tolerance: capacity, limits
etc
• Assumptions
• ORSA vs SCR
• Results/analysis
• Use of ORSA for decisions
• Sign off
Process
• Methodology
• Roles and responsibilities
• Data capture and flows
• Validation
• Dependencies: SFCR & RSR
• Systems and controls
• Change control
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Useful links
• EIOPA papers https://eiopa.europa.eu/
• Pillar 5 ones are (submissions to the EC):
– System of governance (2009, ex CP33)
– Transparency and accountability (2009, ex CP34)
– Valuation of assets and other liabilities (2009, ex CP35)
– Special purpose vehicles (SPVs) (2009, ex CP36)
– Capital add-ons (2009, ex CP57)
– Reporting and disclosure (2009, ex CP58)
– Remuneration (2009, ex CP59)
– Extension of the recovery period (2010, ex CP 64)
• Issues papers (Consultations) :
– ORSA – May 2008
– SRP and reporting – August 2008
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More information can be found on our dedicated web pages:
www.fsa.gov.uk/solvency2
Email us:
[email protected]
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