Solvency II UpdateSolvency II Update

Christopher Critchlow BSc FIAChief Executive

10 November 2010

Agenda

QIS5 Issues arising and outcomes Next steps: Pillar 2

QIS5

Study to assess calibration of specification to the market 5th study completed 31 October 2010 Developed in response to problems raised in previous QIS

exercises CEIOPS to review and report April 2011 Incorporates both qualitative and quantitative aspects

QIS5 – Balance sheet

Market value

of assets

Best

estimate

liability

incl. CoG

Reinsurance recoverables

Net asset value

Technical provisions

(market consistent

exit value)

Own funds

Risk margin

SCR (MCR)

Surplus

QIS5 - Issues

Time limits => approach was approximate Parallels with ICAs Lack of availability of technically skilled resources Spreadsheets not well-constructed Market consistent valuation of options and guarantees

Historic (simple, cost-effective) Price to market (complex, expensive)

QIS5 – Issues (cont)

Deficits / surplus in OPS EPIFP Ring-fenced funds Projecting the SCR, risk margin Loss absorbency, management actions Modelling systems

QIS5 – Outcomes

Depends on basis of base liability estimate BIG generalisations but:

Peak 1 => decrease in free assets RBS => increase in free assets

Still whole mass of issues to resolve Overweight on technical specification on some areas Underweight on specification for others Still much left to finalise

QIS5 – Outcomes

Lots to negotiate in Europe QIS6 to get a solid baseline Is 1 January 2013 still achievable?

Next steps – Pillar 2

ORSA

Operational issues

Business plans and strategy

Regulatory requirements

Pillar 1: capital resources

Risk appetite

Scenario tests

Black-swansDashboard information

Board decisions

ORSA: Article 45 (1)

1. As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment.

That assessment shall include at least the following:

(a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business

strategy of the undertaking;(b) the compliance, on a continuous basis, with the capital requirements, ….. and with the requirements regarding technical provisions……; (c) the significance with which the risk profile of the undertaking

concerned deviates from the assumptions underlying the [SCR] …., calculated with the standard formula ….. or with its partial or full

internal model ….

Article 45 (2)

2. For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed.

The undertaking shall demonstrate the methods used in that assessment.

Article 45 (3)

3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration.

Article 45 (4)

4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking.

Article 45 (5)

5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile.

Article 45 (6)

6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article 35.

Article 45 (7)

7. The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

Implications?

ORSA becomes central to the management of an insurance business

Business decisions cannot be taken without reference to impact on ORSA

Full scenario tests and sensitivities need to be undertaken

Dashboard information is key Integrate with operational aspects of the business and

the plans for the future

Consider how an ORSA might look

Base Pillar 1 results Business strategy Specific and operational risks Scenario tests Overall capital requirements Risk appetite Summary of key risks and

management actions to be taken Business decisions to be taken Impact on ORSA and capital

Finally…..

See QIS5 / 6 as number-work providing a framework to assess impact of business decisions

Hard part comes with Pillar 2 Begin designing ORSA and business decision making

process