Transcript Solvens II

Solvency II
Part 3: Other pillars
Vesa Ronkainen
Insurance Supervisory Authority, Finland
30.11.2006
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Contents
• 1. Pillar 2
• 2. Pillar 3
• 3. Group and cross-sectional issues
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3rd Wave
2nd Wave
1st Wave
CALLS FOR ADVICE
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1. INTERNAL CONTROL AND RISK MANAGEMENT
2. SUPERVISORY REVIEW PROCESS (GENERAL)
3. SUPERVISORY REVIEW PROCESS (QUANTITATIVE TOOLS)
4. TRANSPARENCY OF SUPERVISORY ACTION
5. INVESTMENT MANAGEMENT RULES
6. ASSET-LIABILITY MANAGEMENT
7. TECHNICAL PROVISIONS IN LIFE ASSURANCE
8. TECHNICAL PROVISIONS IN NON-LIFE INSURANCE
9. SAFETY MEASURES
10. SOLVENCY CAPITAL REQUIREMENT: STANDARD FORMULA (LIFE AND NON-LIFE)
11. SOLVENCY CAPITAL REQUIREMENT: INTERNAL MODELS (LIFE AND NON-LIFE)
AND THEIR VALIDATION
12. REINSURANCE (AND OTHER RISK MITIGATION TECHNIQUES)
13. QUANTITATIVE IMPACT STUDY AND DATA RELATED ISSUES
14. POWERS OF THE SUPERVISORY AUTHORITIES
15. SOLVENCY CONTROL LEVELS
16. FIT AND PROPER CRITERIA
17. PEER REVIEWS
18. GROUP AND CROSS-SECTORAL ISSUES
19. ELIGIBLE ELEMENTS TO COVER THE CAPITAL REQUIREMENTS
20. COOPERATION BETWEEN SUPERVISORY AUTHORITIES
21. SUPERVISORY REPORTING AND PUBLIC DISCLOSURE
22. PROCYCLICALITY
23. SMALL UNDERTAKINGS
CEIOPS advises the Commission to reflect high level
principles on governance in the Directive.
• The system of governance must provide for a sound and prudent
management of the business. This implies an appropriate
organisational structure, set of responsibilities and 'fit and proper'
requirements, effective processes to identify, assess, manage,
monitor and report the risks, as well as an appropriate and
understood system of internal control, suitable reporting
arrangements, and an audit framework.
• Ultimate responsibility for ensuring that a firm is well run and
adequately manages its risks rests with its Board of Directors.
• Insurers are required to disclose information about the structure
of their system of governance.
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1. Pillar 2: Risk management (RM)
• RM is about understanding the nature (i.e. causes, effects,
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likelihood) and scale of the risks faced, and the Board deciding
on acceptable levels for these risks, risk tolerances and
resilience strategies
RM is an ongoing process, in which the Board of Directors,
senior management and personnel are all involved in their
respective roles
The object of RM is to have an active influence on the risk
profile as determined by the process of risk identification,
measurement and management.
RM strategies, policies and processes, reflecting all material
risks, should be set, monitored and reviewed on a regular basis
Insurers should have in place their own strategies for solvency
capital and all material risks to which they are exposed, as well
as for their risk mitigation and transfer arrangements
1. Pillar 2: Risk management (cont)
• Insurers are required to establish a RM function
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appropriate to the nature, scale and complexity of their
activities
RM function should be separate from operational
functions. It should monitor positions and report those in
a timely fashion
Systematic identification of risks includes early
recognition, prioritisation and regular, structured
recording (cf the IAA risk classification)
Risk measurement, forward-looking stress tests,
contingency plans are also necessary
Cf Enterprise Risk Management, eg COSO ERM
1. Pillar 2: Internal control (IC)
• IC is a system of continuing processes (including Board,
management, personnel) to ensure that
- strategies, policies and procedures are implemented and
applied effectively and efficiently
- financial and non-financial information is reliable
- regulation is complied with.
• The Board of Directors has overall and ultimate
responsibility for ensuring that an adequate and effective
system of IC is established, maintained and monitored,
as well as for establishing integrity and appropriate
culture in the firm
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1. Pillar 2: Internal control (cont)
• IC covers all levels of the firm, including outsourcing
• Appropriate allocation of responsibilities and segregation
of duties is necessary
• Ongoing, effective and comprehensive control (of nature
and scope appropriate to the business) should be
established
• The control function should be carried out by competent,
operationally independent and appropriately trained staff
• Important areas include reporting, effective audit function,
information and communication technology
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1. Pillar 2: Supervisory review
process (SRP)
• The supervisory authority should evaluate, on an ongoing
basis, the risk profile, adequacy of financial resources and
prudent conduct of insurance undertakings (forward-looking
analysis)
• SRP should include both quantitative and qualitative elements,
and should be conducted both off-site and on-site.
• The supervisor should obtain the necessary information to
conduct effective monitoring and to evaluate the condition of
insurers as well as of the insurance market. The supervisory
authority ought not replicate the role of the undertaking's
management nor the internal control function.
• The supervisor carries out on-site inspections e.g. to examine
the business, internal controls and financial conditions of a firm
and its compliance with regulation (including, where
appropriate, entities which perform outsourced functions)
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1. Pillar 2: SRP (cont)
• Supervisors should employ appropriate
monitoring tools, including notification
requirements, which enable deteriorating
financial conditions in insurance firms to be
identified and remedied.
• The supervisory authority takes actions that are
timely, based on clear criteria and are suitable to
achieve the objectives of insurance regulation.
• Quantitative tools are part of supervision.
Therefore, supervisors should be able to
prescribe the use of this kind of quantitative
tools.
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1. Pillar 2: Transparency of
supervisory action
• The relevant IAIS core principles concerning
transparency should be made operational, i.e.
- regulations
- administrative principles
- aggregate information of industry
- objectives and internal organisation of the supervisor
- etc
should be available to the public
• Any significant findings and remedial action required of
the firm by the supervisor should be communicated
appropriately to the Board of Directors.
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1. Pillar 2: Supervisory powers
• The powers that enable the supervisor to
- protect policyholders’ and beneficiaries’ interests;
- monitor the solvency; and
- enforce EU and national specific regulations.
• The powers are the tools of the supervisor to
implement the SRP and the measures that can
be taken as a result of it.
• For instance:
- Direct access to relevant information in a firm
- To be able to check the complicance with the
legislation and regulations
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1. Pillar 2: Supervisory powers (cont)
- To check the financial position, risk profile, technical
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provisions, assets etc of the firm, and to require corrective
actions when necessary for policy-holder protection (e.g.
regarding capital, risk profile, business activities of the firm)
To have powers to address management problems in
situations where the governance of a firm is considered
demonstrably unsatisfactory from a prudential viewpoint
To assess the level of compliance with the market conduct
requirements
To be able to take preventive measures that are timely,
suitable and necessary from the supervisory point of view
To take ultimate action if an insurer breaches the MCR
(withdraw the license, transfer or wind-up the portfolio)
2. Pillar 3
• A general concept for public disclosure should
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enhance market transparency, wellfunctioning of
financial markets and market discipline.
Compatibility with the IAIS enhanced disclosure
standards, IFRS, Basel II is a goal
Double reporting to be avoided
Reporting will increase and become more
important in the future
Clear differentiation between public and
confidential information is necessary
CEIOPS will develop common reporting formats
3. Group and cross-sector issues
• Group-level supervision and cross-sectoral issues are
becoming increasingly important (insurance groups and
financial conglomerates)
• Group supervisor and its role (resposibilities, powers)
needs to be defined in the directive
• Group-level SCR will be developed
• Many questions are still open (cf Consultation Paper 14
at www.ceiops.org)
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