Transcript Slide 1

Risk Management Practices in
Solvency II
Dr. Onur ACAR
Risk Manager
Mapfre Genel Insurance
What is Solvency II?
• It is the proposed new EU legislation which will govern the capital
requirements of insurance companies.
• Disadvantages of Solvency I which entered into force in 1970s:
– Capital is not adequately directed to risks
– Rules conflict with good risk management
– A lack of harmonisation across the EU
• Solvency II is an opportunity for a better and more appropriate risk based
solvency regime
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Solvency II : 3 Pillars
• It is not only a capital calculation system but it is based on 3 Pillars:
- Pillar I, which focuses on quantitative requirements
- Pillar II, which focuses on qualitative requirements and supervisory
activities
- Pillar III, which addresses supervisory and public disclosure of financial
and other information
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Solvency II: 3 Pillar Approach
SOLVENCY II
PILLAR 1
Quantitative
requirements
PILLAR 2
Qualitative
Requirements
PILLAR 3
Market discipline
 SCR and MCR
 Governance
 Financial reporting
 Technical reserves
 Supervisory review
 Transparency
 Own funds
GROUP ISSUES
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Aims of Solvency II
• Strong, effective policyholder protection with optimal capital allocation
• Proportionate, risk-based approach to supervision with appropriate
treatment both for small and large companies
• To incentivise more sophisticated risk management tools
• To increase competition within the EU insurance markets and the global
competitiveness of the EU insurers
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Where do we stand in the Solvency II process?
2005
2006
2007
CEIOPS work on
Pillars II and III
QIS 1
QIS 2
2009
2010
Directive
Adoption
(Council &
Parliament)
Directive Development
(Commission)
CEIOPS work on Pillar I
2008
CEIOPS
advice on
Proportionality
& Groups
QIS 3
Level 2 & 3
(EC & CEIOPS)
CEIOPS advice on
Implementing Measures
QIS 4
2012
2011
CEIOPS work
on L3
QIS5
Industry gets prepared
Transposition
1 Jan 2014 ?
Risk-based economic model
• A risk-based economic model implies an increased accuracy of the
solvency assessment, closer to the true risk profile of the insurance
company.
• The main principles of a true economic risk-based model are:
- A Total Balance Sheet approach: market consistent valuation of all
assets and liabilities in the balance sheet
- Addressing risk diversification effects: within the same risk, between
risks, between companies, between geographical areas
- Addressing risk mitigation effects: reinsurance and ART
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Solvency II: Capital Requirement Levels
Solvency Capital Requirement (SCR)
Internal
Model
Level of SCR
Standard
Approach
Ladder of
Intervention
Level of MCR
Target Capital that an entity should aim to
meet under normal operating conditions
Dropping below SCR does not necessarily
require immediate supervisory intervention
Minimum Capital Requirement (MCR)
Market consistent
Value of
Liabilities
Reflects a level of capital below which
ultimate supervisory action could be
triggered
Ladder of Intervention
An appropriate ladder of intervention if the
available capital falls below SCR
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SCR CALCULATION
SCR
BSCR
Adj.
SCRmarket
Mktfx
Mktprop
Mktint
SCRhealth
SCRdef
Health
Health
Health
SLT
NonSLT
CAT
HealthMort
Health
Health
Prem&Res
CAT
HealthLong
Health
SCRop
SCRlife
Life
LifeMort
Mort
LifeLong
LifeDis/Morb
NSLTLapse
Mkteq
Health
SCRnon-life
SCRintang
NLPrem&Res
NLLapse
NLCAT
LifeLapse
DisMorb
Mktsp
Health
LifeExp
SLTLapse
Mktconc
Mktilliq
HealthExp
HealthRev
LifeRev
LifeCat
= adjustment for the risk
mitigating effect of
future profit sharing
System of Governance in Solvency II
System of Governance
Management body
Fit and proper requirements
Risk Management
Risk management function
Internal Control
Compliance function
Internal Audit
Internal audit function
Actuarial Function
Own Risk and Solvency Assessment (ORSA)
The functions included in the system of governance are considered to be key
functions and consequently also important and critical functions.
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System of Governance in Solvency II
• The system of governance should:
– be proportionate to the nature, scale and complexity of the operations of
the insurer
– include an adequate transparent organisational structure with a clear
allocation and appropriate segregation of responsibilities and an effective
system for ensuring the transmission of information
– be subject to regular internal review
• Governance is crucial because:
– Solvency II is a flexible system
– There are risks that cannot be properly quantified
– There are internal models
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Governance – Management Body
Management Body
Fit and Proper Requirements
Management body has the ultimate
responsability to establish an effective system
of governance which provide for sound and
prudent management of the business.
Internal Control
Internal Audit
Actuarial Function
Risk Management
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Governance – Fit and Proper Requirements
Management Body
Fit and Proper Requirements
Internal Control
All persons who effectively run the undertaking
or have other key functions should be fit and
proper.
Their professional qualifications, knowledge
and experience should be adequate to enable
sound and prudent management (fit)
Internal Audit
They should be of good repute (proper)
Actuarial Function
Risk Management
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Governance – Internal Control
Management Body
Fit and Proper Requirements
Internal Control
Internal Audit
Actuarial Function
Risk Management
Companies should have an effective internal
control function that should include:
administrative and accounting procedures
appropriate reporting arrangements at all
levels of the company
a compliance function
Compliance function should include:
advising the management body on
compliance with laws, regulations and
administrative provisions
an assessment of the possible impact of any
changes in the legal environment on the
operations of the company
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Governance – Internal Audit
Management Body
Fit and Proper Requirements
Internal Control
Companies should have an effective internal
audit function that should:
include an evaluation of the adequacy and
effectiveness of the internal control system
and other elements of the system of
governance.
be objective and independent from the
operational functions.
Internal Audit
Actuarial Function
Any findings and recommendations of the
internal audit should be reported to the
management body which should determine
what actions are to be taken.
Risk Management
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Governance – Actuarial Function
Management Body
Companies should have an effective actuarial
function to:
Fit and Proper Requirements
Internal Control
Internal Audit
Actuarial Function
ensure the appropriateness of the
methodologies and models used in the
calculation of technical provisions
inform the management body regarding the
reliability and adequacy of the calculation of
technical provisions
express an opinion on the overall
underwriting and reinsurance policy
contribute to the effective implementation
of the risk management system
Risk Management
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Governance – Risk Management
Management Body
Fit and Proper Requirements
Companies should have an effective risk
management system comprising strategies,
processes and procedures necessary to
identify, measure, monitor, manage and
report the risks they face.
Internal Control
It needs to be integrated into the decision
making process of the company.
Internal Audit
The management body should have the
ultimate responsibility for ensuring
that the implemented risk management
system is suitable, effective and
proportionate to the nature, scale and
complexity of the risks.
Actuarial Function
Risk Management
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Tasks of the Risk Management Function
•
•
•
•
•
Assisting the management body in the effective operation of the risk
management system
Monitoring the risk management system
Maintaining an organisation-wide and aggregated view on the risk profile
of the company
Reporting details on risk exposures and advising the management body
with regard to risk management matters
Identifying and assessing emerging risks
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Risks To Be Covered by Risk Management
Underwriting Risk
Market Risk
Credit Risk
The risk of loss in the value
of insurance liabilities, due
to inadequate pricing and
provisioning assumptions
The risk of loss in the
financial situation resulting
from fluctuations in the level
and in the volatility of market
prices of assets, liabilities
and financial instruments
Operational Risk
Liquidity Risk
Concentration Risk
The risk of loss arising from
inadequate or failed internal
processes, personnel or
systems, or from external
events
The risk that the company is
unable to realise
investments and other
assets in order to settle its
financial obligations when
they fall due
All risk exposures with a
loss potential which is large
enough to threaten the
financial position of the
company
The risk of loss in the
financial situation, resulting
from fluctuations in the
credit standing of
counterparties or issuers of
securities
Effective Risk Management System
Clearly defined and well
documented
Adequate written policies
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
Risk management strategy should include:
risk management objectives
key risk management principles
general risk appetite
assignment of risk management
responsibilities across all the
activities of the company
It should be consistent with the company’s
overall business strategy.
Appropriate management
reporting
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Effective Risk Management System
Clearly defined and well
documented
Adequate written policies
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
Appropriate management
reporting
Written risk management policies should include:
definition and categorisation of the
material risks faced by the company
definition of acceptable risk limits
implementation of risk strategy and
control mechanisms
Written policies should at least cover:
underwriting and reserving
asset–liability management (ALM)
investments
liquidity and concentration risk
management
operational risk management
reinsurance
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Effective Risk Management System
Clearly defined and well
documented
Adequate written policies
Main risk management strategies and
policies should be approved by the
management body.
Processes and procedures should include:
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
risk identification
risk assessment
risk measurement
risk monitoring
risk reporting
Appropriate management
reporting
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Effective Risk Management System
Clearly defined and well
documented
Adequate written policies
Information on the risk management system
should be actively and continuously
monitored and managed by the
management body and by all relevant staff
Appropriate processes and
procedures
Appropriate reporting and
feedback loops
Appropriate management
reporting
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Effective Risk Management System
Clearly defined and well
documented
Adequate written policies
Material risks faced by the company and
the effectiveness of the risk management
system should be reported to the
management body
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
Appropriate reporting to
the management
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Supervision of the
Risk Management System
• The company is required to demonstrate to the supervisor that it has an
effective risk management system which is:
– capable of identifying, monitoring and mitigating both current and
future risks in line with its risk tolerance levels. Stress testing and
scenario analysis can be used to determine the effect of these risks.
– an integral part of its business strategy
– subject to regular internal review by the management body
– proportionate to the nature, scale and complexity of its business
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Supervision of the
Risk Management System
• The disclosure to the supervisor could include:
–
–
–
–
material risks and their potential effects
any perceived emerging risks to the company’s solvency position
the scope and nature of risk and capital measurement systems
the structure and organisation of the relevant risk and capital
management systems
– details of organisational structure and staff responsible for the risk
management system
– qualitative measures for risks which are not quantifiable, such as
liquidity risk and operational risk
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Thank you …
Onur Acar, Ph.D.
Mapfre Genel Sigorta
Risk Manager