Transcript Key Themes FY08

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The role of the actuary under
Solvency II regime
ALAC
Date 20 February 2008
What will we talk about ?
 Solvency II brief update
 The actuarial profession is a stakeholder in the
Solvency II project
 The Proposal for Directive and the Actuarial
Function
 The actuary before and after Solvency II
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The Solvency II project
Main Framework
 Proposal for Directive on Solvency II – 10 July 2007
 Issues Paper CEIOPS : Risk Management and
other Corporate Issues – 17 July 2007
 QIS3 results
 QIS4 preparation
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The Directive : Solvency II balance sheet
Free
capital
Adjusted SCR
Market value
of assets
Solvency Capital Requirement
Factor based approach or internal
model
SCR
Minimum Capital Requirement
MCR
Factor based approach
Risk margin for unhedgeable
risks
Cost of capital approach
Risk margin
Best
estimate
liability
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The Directive : quantitative requirements
 Valuation - Art. 73
– Full fair value / No own credit risk standing
 Technical provisions – Art. 74-84
– Current exit value
– BE+ risk margin CoC (≠ hedgeable risks)
– Proxies
 Own funds – Art. 85-98
– Basic / Ancillary = off balance sheet (subject to supervisory
approval, for amount and valuation method)
– Tiers and sub-tiers
– Limits: SCR covered ≥ ⅓ tier 1 , ≤ ⅓ tier 3
MCR: 100% basic OF, ≥ ½ tier 1
– Level 2 list
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The Directive : quantitative requirements
 SCR – Art. 99-124 + Annex IV
– 99.5% VaR one-year, going concern, on-going monitoring
– Unexpected losses on existing business
– Structure of std formula, correlations and calibration/
module
– Full modelling freedom
– Partial models: / sub-module and/or /major business unit
 MCR – Art. 125-128
– Simple and auditable, breach = unacceptable risk
– 80%-90% VaR one-year
– ≥ 1 M€ non-life, reins, ≥ 2 M€ life, ≥ quarterly calc.
 Prudent person approach – Art. 129-132
– Freedom to invest
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The Directive : qualitative requirements
System of
governance
Fit and proper
ORSA
Actuarial function
Organisation (responsabilities, information)
Internal control
Risk management
Internal audit
Outsourcing
Written
policy,
annual
review
ORSA: new?
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CEIOPS vision
 CEIOPS-PII-11/07 Issues Paper on “Risk Management and
Other Corporate Issues” of 17 July 2007
– Information on CEIOPS’ possible further work on the
subject
– Principle based view on
 General principles such as Organisational structure, fit and
proper management, Risk management system, Internal
control, Actuarial function,
 Types of risks such as Strategic risk, Insurance specific risk,
Market risk, Credit risk, Concentration risk, Liquidity risk,
Operational risk, Reputational risk, and correlation effects
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Recent events
 QIS3 results
 QIS4 Technical Specifications
 Public Hearing European Parliament (18 December
2007)
 Public Hearing European Commission (28 January
2008)
 Stakeholder meeting European Commission (11
February 2008)
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Next steps
 End Consultation QIS4 Tehnical Specifications (15
February 2008)
 Launch QIS4 (1 April 2008)
 Answers industry (1 August 2008)
 Vote Parliament expected before summer (?)
 Solvency II for Pension Funds
– Findings started and 2008 to come to first positions
– Still a lot of divergence in views in Europe
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The actuarial profession is a
stakeholder in the Solvency II project
Groupe Consultatif is a Stakeholder
 GC covers the European actuarial associations
since 1978
 Gives advice to European Commission and CEIOPS
on technical matters in insurance, pensions,
investment and financial risks and coordinates
professional framework (e.g. mutual recognition
agreement)
 Detailed information on www.gcactuaries.org
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Who is the GC ?
 Chairman : Ad Kok (Netherlands)
 Vice Chairmen : Peter Prieler (Austria)/Bruce Maxwell (Ireland)
 Committees
– General Purposes and Freedoms : Malcolm Campbel
(Sweden)
– Education : Ron Hermis (Netherlands)
– Investment and Financial Risk : Falco Valkenburg
(Netherlands)
– Pensions : Philip Shier (Ireland)
– Insurance : Karel Goossens (Belgium)
 Groupe’s Secretary : Michael Lucas
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The profession and the Solvency II project
 The actuarial organisations have since the beginning actively




participated in the consultation
The Groupe Consultatif is working together with CEIOPS
The International Actuarial Association is in contact with
International Association of Insurance Supervisors and
International Accounting Standard Board
The Groupe Consultatif has regular contacts with DG Internal
Markets and is commenting on Proposal for Directive (amongst
others about the Actuarial Function)
The Groupe Consultatif supports the European Parliament and
its “rapporteurs” - Peter Skinner. The GC is preparing a
hearing in the Parliament
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The profession and the Solvency II project
 The Groupe Consultatif has organised a Solvency II project
over the last 3 years with the active participation of more than
30 colleagues from several countries in Europe and led by Rolf
Stölting
 The Groupe Consultatif has decided to mirror the Solvency II
structure in CEIOPS which decided end June to change to 4
expert groups
Financial
Requirements
P. de Chatillon
Internal
Models
P. Sharma
Internal Governance, …
G. Bernandino
Groups
Supervision
P. Brady
Non Life
A. Olesen
Life
S. Creedon
Hans-Peter
Würmli
E. Kivisaari
H. Van Broekhoven
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The profession and the Solvency II project
 The Project Team is publishing a SII Newsletter on a regular basis
(see web site)
 The Project Team is keeping a permanent inventory of documentation
(see web site)
 The Project Team has recently produced :
– Additional comments on the Proposal for Directive
– A feedback on convergence of supervision with IORP
– Interventions on the Stakeholder meeting on the Choice of the
Risk Neutral Discount Rate and the Renewal of Premiums
– Comments on QIS4 Technical Specifications
 Detailed information on www.gcactuaries.org
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The profession and the Solvency II project
 The Project Team is preparing :
– A comparison between SII and IFRS balance sheet
– A methodology paper on Best Estimate for Technical Provisions
non Life
– A proposal for the Solvency II report
 The SII project is governed by a Terms of Reference
– New Project Manager to be elected in 2008
 The Groupe Consultatif is co-chairing a Coordination Groupe
for Proxies
– Coordination of local working groupes on the approach of proxies
for the BE technical provisions in Non Life, Life and Workmen’s
Compensation
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The European context : Coordination Group
 Steer and coordinate the work of national expert groups in the
work on proxies
 Develop harmonised approaches to the calculation of BE
 Report including testing proposal for proxies under QIS 4 –
December 2007 (focus on non life)
Ceiops
Groupe Consultatif
COORDINATION GROUP
BE
BG
DE
FR
IE
IT
NL
NO
PT
SE
SI
UK
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The Belgian context
 A Belgian expert group has been created at the
request of CBFA
CBFA
Assuralia
KVBA
ARAB
COORDINATION GROUP
WG
Non Life
WG
Life
WG
Workmen’s
Compensation
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The Belgian CG
 Coordination Group in Belgium
– Including
Chandelle F, Cortese E, De Vos P, Kaiser L
Goossens K (Chair)
– Working groups installed and coming together
Non Life
Life
WC
Corlier F
Janssen E
Van Camp E
Vanderheyden P
Ozkan F
Schouteten S
Vandenbosch G
Wuiame S
Maes JM
Meganck A
Mellery X
Piccaluga R
– First objective : input Interim Report on Proxies
– Continued efforts : coordination platform
– Extended comments on QIS4
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The Proposal for Directive and the
Actuarial Function
The Proposal for a Directive and the Actuarial
Function
 The Proposal for a Directive defines an Actuarial Function
 Article 47 is part of Title I - Chapter IV (Conditions Governing
Business) – Section 2 (System of Governance) and introduces
the Actuarial Function
– “1. Insurance and reinsurance undertakings shall provide
for an effective actuarial function … “
– Use of the term “Function” avoids reference to a “qualified
person”
– Effective ?
 At several places there is reference to actuarial methods
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Technical provisions under SII
 Proposal for Directive Section 2 – Art 74 to 84
– Based on current exit value
– Market consistent
– Best Estimate (BE) + Risk Margin (RM)
 To be valued seperatly
 If future cash-flows can be replicated by financial instruments
for which the market value is directly observable, the
corresponding value can be used
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The Proposal for a Directive and the Actuarial
Function
 To undertake 9 tasks of which 6 concern the
technical provisions
“(a) to coordinate the calculation of the technical provision ;
(b) to ensure the appropriateness of the methodologies and
underlying models used as well as the assumptions made in the
calculation of technical provisions ;
(c) to assess the sufficiency and quality of the data used in the
calculation of the technical provisions ;
(d) to compare the best estimate against experience ;
(e) to inform the administrative or management body of the
reliability and adequacy of the calculation of the technical
provisions ;”
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The Proposal for a Directive and the Actuarial
Function
 Also when data is missing …
“(f) to oversee the calculation of technical provisions in the cases
set out in Article 80”
Article 80 :
“If insurance and reinsurance undertakings have insufficient data of
appropriate quality to apply a reliable actuarial method to a subset
of their insurance or reinsurance obligations, or amounts
recoverable from reinsurance contracts and special purpose
vehicles, a case-by-case approach may be taken with respect to
the calculation of the best estimate.”
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The Proposal for a Directive and the Actuarial
Function
 Or to consider underwriting or reinsurance …
“(g) to express an opinion on the overall underwriting policy;
(h) to express an opinion on the adequacy of reinsurance
arrangements”
– Pricing and the respect of it ?
– Also the lack of reinsurance ?
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The Proposal for a Directive and the Actuarial
Function
 AND to contribute to risk modelling !
“to contribute to the effective implementation of the risk
management system referred to in Article 43, in particular with
respect to the risk modelling underlying the calculation of the
capital requirements set out in Chapter VI, Sections 4 and 5 and
the assessment referred to in Article 44.”
– Article 43 is about Risk Management
– Article 44 is about the Own Risk and Solvency Assessment
– Chapter VI, Sections 4 and 5 : the Solvency Capital and the
Minimum Capital Requirement
– The Actuarial Function is explicitly involved in the Risk and
Solvency analysis
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The Proposal for a Directive and the Actuarial
Function
 Who is going to fulfil the function ?
“2. The actuarial function shall be carried out by persons with
sufficient knowledge of actuarial and financial mathematics and
able where appropriate, to demonstrate their relevant experience
and expertise with applicable professional and other standards.”
– Qualified actuaries can apply but not exclusively
– The profession organises already and has to further develop
professional and ethical standards
 Actuarial professional bodies under the guidance of the Groupe
Consultatif and the International Actuarial Association is respecting
mutual recognition standards
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The Proposal for a Directive and the Actuarial
Function
 Risk Management is crucial
– It requires an effective system comprising strategies, processes
and reporting
– It is integrated into the organisational structure
– The system covers the risks included in the SCR but also the
risks which are not or not fully included
– It complies with the “prudent person” principle for investments
– It is covered by a Risk Management Function
– It is responsible for the design, the test and validation, the
documentation, the analysis and the reporting of results of
internal models
– Application of standard formula also …
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The Proposal for a Directive and the Actuarial
Function
 The concept of ORSA (Own Risk and Solvency
Assessment)
– Is part of Risk Management
– Takes into account the specific risk profile, the risk
tolerance limits and the business strategy
– Monitors compliance with the capital requirements
– Is enabled by processes to identify and measure risks
– Goes together with recalibration of models that lead to
SCR
– Takes into account the strategic decisions
– Is regularly performed or when significant change in risk
profile
– Is communicated to supervisory authorities
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CEIOPS and the Actuarial Function
 CEIOPS-PII-11/07 Issues Paper on “Risk Management and
Other Corporate Issues” of 17 July 2007
– Information on CEIOPS’ possible further work on the
subject
– Comments expected by 17 October 2007
– Principle based view on
 General principles such as Organisational structure, fit and
proper management, Risk management system, Internal
control, Actuarial function,
 Types of risks such as Strategic risk, Insurance specific risk,
Market risk, Credit risk, Concentration risk, Liquidity risk,
Operational risk, Reputational risk, and correlation effects
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CEIOPS and the Actuarial Function
 The CEIOPS sees tasks for the Actuarial Function
such as making an assessment of :
– The overall underwriting policy
– The claims management procedures
– The methods used and assumptions made in the calculation of
technical provisions
– The sufficiency and quality of data used in the calculation of
technical provisions
– The impact of management actions included in the technical
provisions
– The overall investment policy and management
– The overall reinsurance and risk mitigation
– The IT systems used in actuarial procedures
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CEIOPS and the Actuarial Function
 The CEIOPS gives a view on qualitative aspects :
– The Actuarial Function requires understanding of the stochastic
nature of insurance and risks inherent in assets and liabilities
– Actuarial methods are used to assess risks, determine adequacy
of premiums, and establish technical provisions
– The assessment of the Actuarial Function does not imply
responsability for the issues
– The Actuarial Function produces an annual report
– The Actuarial Function monitors the measures implemented in the
pursuit of the recommandations
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CEIOPS and the Actuarial Function
 The CEIOPS (re)introduces the risk modelling
function
– Such a function must be in place when internal models are used
– It develops and documents all features of the internal model
– It is responsible for the integration of the actuarial model with the
risk management system
– It ensures the “use test”
– This does not compare with Proposal for a Directive
– It is not clear if actuarial function can be combined
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European Parliament and the Actuarial Function
 In first instance the European Parliament has
agreed with article 47
 Recent feed back seems to re-open discussion
– Different functions in pillar II
– Problem of Actuarial Function
 Lack of actuarial resources
 Additional cost for smaller companies
– GC has reacted and is supported by European
Commission (DG Internal Markets)
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The Future of the Actuary
The actuary pre- and post SII
 SII is a mile stone for the development of the actuarial world
– New concepts, multiple discussion groupes, research and
development
– Actuaries are in the middle of the events as neutral
professionals
 SII offers opportunities
– Shape the actuarial function
– Prove of added value in risk modelling and risk
management
 Prepare to take the opportunities
– Contribute to change
– Organise professional environment
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The actuary pre- and post SII
 Challenges to be addressed
– Meet the expectations of the environment
– Increase number of professionals
– Open to other experts in the same field (financial
mathematics, risk modellers, …)
– Organise to take on the responsibilities
 Challenges are similar in your company to those in
the “political” world
– Together we are stronger
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 Karel Goossens
– +32 2 663 87 00
– +32 475 55 14 47
– [email protected]
Thank you for your attention
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