Regulação no sector Segurador - PwC · Regulação no sector Segurador Solvency II Strategic implications & international trends Garvan O’Neill. Solvency II is the most significant

Regulação no sector SeguradorSolvency IIStrategic implications & international trends

Garvan O’Neill

Solvency II is the most significant single change ever faced by Europe’sinsurance companies

How well prepared are Insurers and their regulators ??

Slide 3PricewaterhouseCoopers12 de Dezembro de 2006

Agenda

Solvency II – Overview and key driversInternational trends • UK • Switzerland• Sweden• OthersStrategic implications• Implications for Companies• Implications for RegulatorsNext steps for Insurers

Strategic implications & international trends


Key drivers behind Solvency II

• Deficiencies in current solvency frameworkNo risk-based capital requirementsRisk Management practices have little influence on capital requirementsNo consideration of the composition of the assets held in the capital calculationNo consideration of other significant risks (e.g. operational, legal)

• Increased recognition of the importance of global insurance industry

• Solvency developments in other FS areas (i.e. Basel for banking etc.)

Overview and key drivers


EU - Solvency II

International trends

• Introduce in 2010/11 an EU harmonised prudential solvency standard that allows comparability and is transparent and coherent

• Principles based regime - not detailed rules• Solvency position will be based on market-consistently valued

assets and liabilities • Allows standard and internal risk models -expects risk

interdependencies to be explicitly modelled thereby incentivizing use of own internal models

• Based on three pillar approach similar to Basel II



Overview of Solvency II structure

Technical provisions

Investment rules and ALM

Capital rules

Internal controls and sound risk managementSupervisory intervention

PILLAR I

Disclosure• Frequent• Forward-looking• Relevant

SUPERVISORY REVIEW DISCLOSURE

REQUIREMENTS

Solvency II

QUANTITATIVE

REQUIREMENTS

PILLAR II PILLAR III

The Three Pillar Approach

MORE COMPLEX THAN BANKING DUE TO INDUSTRY CHARACTERISTICS



Timescales

2005 2006 2007 2008 2009 2010

3 waves of ECCalls for Advice

Draft Framework Directive Published

Quantitative Impact Studies (QIS I, II, III,…)

Full Implementation

Detailed rules(Level 2)

FurtherCalls for Advice


Most recent QIS II high level findings


• Achieved representation of 50% market share across 23 countries

• No indication of solvency shortfall amongst respondents

• Overall solvency ratios fell but greater than 100%

• Slight preference for cost of capital

• Highlighted clear need for additional guidance on assumptions to be used






UK – risk based system already introduced

• January 2005 – introduction of a risk-orientated system of supervision

• Financial resources must take account of all significant risks and liabilities

• Requires insurers to identify their specific risks, have an appropriate control environment in place to manage those risks and monitor the enforcement of controls.

• Final level of capital is based on the Enhanced Capital Requirement (mathematical) and the Individual Capital Assessment (a self assessed capital requirement based on risk profile)


Switzerland – moving towards Solvency II type model

• By 2008, all insurers must perform the Swiss Solvency Test (SST)calculations and solvency target must be met after 2011

• Principles based system and is similar to Solvency II • SST is based on market - consistently valued assets and

liabilities• 3 pillar structure• Insurers must calculate two capital numbers: minimum

capital (statutory solvency) and target capital (market valued solvency)

• There is a mixture of standard models (market, credit and insurance risks) and internal models (target capital)

• Reinsurance can be fully taken into account



Sweden – new “traffic light system”

• In 1999, Swedish Government established a commission to review restrictions on assets covering technical provisions (TP) and rules for available solvency margin. Reports presented in 2003.

• New Traffic- Light System introduced designed to increase transparency, enhance incentives to manage risks and defines criteria for Regulatory intervention in companies with a weakened capital.

• Three interdependent components:

- Realistic valuation of insurance liabilities (TP)

- Amended asset restrictions and valuation of assets covering TP

- Assessment of risks as a safety margin• The underlying model was developed in co-operation with the industry this

year through preliminary tests.

• The Regulator expects a full-fledged version to be available for 2006/07.



Other unilateral regulatory developments

Netherlands

• Risk based system being considered but currently postponed

Germany

• Focus on Pillar II controls frameworks and evaluation thereof

Ireland

• Development of risk based system for more complex players within the scope of the reinsurance directive



Strategic implications



Strategic implications for companies

• Possible re-evaluation of lines of products and prices• Examine extent of integration of risk management framework

with business processes • Consider creation of Economic Capital Models• Establish financial and resourcing costs of conversion – Basel

II experience



Product pricing/design

• Product pricing strategy and development will need to be considered in more detail by insurers (i.e. ensure risk/ reward is balanced)

• Different products have different characteristics and Solvency II will bring greater transparency into the elements that drive risks making some products more capital intensive

• Capital strain will increase for firms concentrated in certain lines of business• Life: unit linked products with guarantees may become more attractive to

insurers than long term with-profits products with high guarantees• Non-life: some commercial lines/assumed reinsurance products could lead

to re-rating, exclusions and market withdrawals



Integration of risk management framework and business process

Solvency II system will reward organisations with:• Integrated risk management frameworks • Well developed reporting technologies and systems• Clean and accessible historic data sets• Strong awareness of all risks - operational risk (risk inventory)• A focus on core competencies• Controls designed to identify volatility in markets to promote

mitigation• An adjusted risk strategy to risk bearing capacity



Economic capital modeling• Sophisticated internal risk models can bring competitive advantage• “Standard model approach” for small to medium sized entities, who have

difficulty in meeting cost of building internal models, need to perform cost/ benefit evaluation

• Trade off between simplicity and conservatism –Standard Model Approach is not company specific and thus insurers likely to need to maintain greater capital



Strategic implications for regulators

• Increasingly complex and demanding regulatory landscape

• Resource challenge for regulators in smaller territories

• Challenge of consistency across Europe and within markets –currently a potentially tilted playing field



Main challenges and unresolved issues

Challenges:• Level of industry engagement• Gaining necessary skills and expertises• Cost/ benefit analysis• Solvency arbitrage and consistencyUnresolved issues:• Pillar I• Home versus host regulatory responsibilities (evolution/ revolution)• Proportionality for small and medium sized enterprises



Next steps for insurers – Solvency II

• Understand better the implications of Solvency II• Inform business units and functions• Start to develop a list of activities (i.e. Project Office etc.)• Integrate with business planning process and current projects

(SOX, IFRS and IT upgrades)

Strategic Implications


Next steps for insurers – Solvency II

• Embed within strategic decision making process

• Develop management information - Including key risk

indicators, solvency reporting, ongoing monitoring of company performance

• Internal audit/ QA/ Control loops



Key messages

• Insurers need to understand and influence the debate NOW: - July 2007 will be much too late

• Solution will NOT be Group delivered (unlike IFRS) –consideration at local territory level is key

• Planning for Solvency II will avoid business disruption and may offer competitive advantage



Concluding remarks

• Industry’s overall solvency position may not have a change significantly but the way business is conducted will change dramatically

• The adoption of an integrated risk approach will see insurers with a conservative investment strategy and less concentrated product structure maintaining less capital than their peers.

• The same is true of those with effective risk mitigation systemsbuilt into their internal models.

• Insurers in UK and Switzerland have derived benefits from risk based regulation


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Regulação no sector Segurador - PwC · Regulação no sector Segurador Solvency II Strategic implications & international trends Garvan O’Neill. Solvency II is the most significant