AIRMIC CONFERENCE
Solvency II, What does it really mean?
Sue Loney
Casualty Underwriting Director, RSA
Angus Jordan
UK MI & Solvency II Director, RSA
Seamus Gallagher
Director of Consulting, Willis Global Captive Practice
Nigel Goodlad
Managing Director, Willis Management (Malta) Limited
AGENDA
 What is Solvency II?
 RSA’s approach to Solvency II compliance
 Willis - Solvency II impact on Captives
From what you know at the
moment about the increased
level of disclosure, the greater
uniformity of reporting and
potential impacts for captives,
“Is SII a good thing for a
Risk Manager"?
What is Solvency II?
By Angus Jordan
RSA, UK MI & Solvency II Director
• Pan-European regulatory regime for capital
adequacy - effective from Jan 2016
• Evaluation of capital levels tailored to the
risks within the organisation
• Requires firms to have in place an effective
risk management and governance system
What is
Solvency II?
Better risk based
• Change to the basis of calculating insurance
management
of Capital
liabilities for all insurers with assets and
liabilities valued on a market consistent basis
• Firms can use either a standard formula or a
bespoke internal model to calculate capital
requirements
Greater clarity for
customers and investors
• Internal models subjected to stringent tests
before approval and must be integrated to
the business
• Increase in regulatory reporting
requirements both in terms of content and
reduced timescales
6
Standard Formula (SF)
• The Standard Formula is being developed by the
European Commission and EIOPA
• Generic “one size fits all” model geared towards
smaller businesses
• To date there have been issues with overly
What is
Solvency II?
prudent calibrations
• Overly complex although simpler than using an
internal model. Anticipate higher capital
requirements because it does not properly allow
for diversification
Companies may calculate
solvency capital requirements
using a standard formula
The Formula!
1   ( net ,s ) M ( net ,s ) 
2
NPs 
where
1   ( gross,s ) M ( gross,s ) 
2


 M ( gross ,s )  1  Fm 2 , a s  bs   Fm 2 , a s   a s  Fm , a s  bs   Fm , a s 

M ( net ,s )  
  b  1  F a  b 

m ,
s
s
 s


 ( net ,s )

  (2gross,s )  M (2gross,s )   1  Fm 2 2 , a s  bs   Fm2 2 , a s 



   a s2  Fm , a s  bs   Fm , a s   2bs  M ( gross,s )  1  Fm  2 , a s  bs  


  b 2  1  F a  b   M 2

m ,
s
s
( net , s )
 s


1/ 2

7
Stochastic Model
Trials
1
Probability
What is
Solvency II?
1,000
25,000
Impact
£30m
£40m
£50m
£100m
Internal Model (IM)
• In our case that means basing a model on our
existing Individual Capital Assessment (ICA) models
already implemented throughout the RSA Group
• Tailored to the company’s business and risk profile
• Anticipate that IM will result in lower capital
requirements – although there are a number of
minimum floors to consider
• Model will have to be integrated into the business at
an entity level
Alternatively companies may
calculate solvency capital
requirements using a bespoke
internal model
Process managed via an Internal Model Approval Process (IMAP), which is still
developing in many locations. This shouldn’t be underestimated in its rigour and
requirements in terms of both time and amount of documentation.
ANNUAL REPORTS
Regular Supervisory Report (RSR)
What is
Solvency II?
Akin to the existing ICA report. This is not public and holds more detailed disclosures enabling
analysis of our Solvency position - @ 250 pages per entity here alone!
Own Risk and Solvency Assessment (ORSA)
As part of the risk management system this report gives an assessment of solvency needs of
the specific undertaking, demonstrate compliance with the SCR and monitor assumptions in the
SCR against actual risk profile. This is not public
Solvency and Financial Conditions Report (SFCR)
This is a new public report disclosing information regarding our solvency position – around
another 100 pages here
(Annual) Quantitative Reporting Templates (QRT’s)
56 forms, some multiplied by each LoB for Claims and major currency development triangles
NEW QUARTERLY REPORTS ARE INTRODUCED
Quarterly Quantitative Templates (QRT’s)
Again by Entity. Another 17 forms here
9
Requires firms to have in place an effective risk management and
governance system
10
RSA’s approach to
Solvency II compliance
By Angus Jordan
RSA, UK MI & Solvency II Director
• Set up a Group Programme sponsored by both the
Group Risk and Finance Directors, with series of
Regional Programmes – not just in the EEA!
• Proactive involvement with EIOPA, the PRA, the ABI
and our College of Regulators
• Embedded the Risk Management system further in
the business with explicit Risk Appetites and Risk
Tolerances applied
How has RSA runs
it’s programme to
implement
Solvency II?
• Participated in all 5 Quantitative Impact Studies (QIS)
and we are now engaged in the EIOPA Stress tests
• Undertook an Entity Simplification programme,
removing 18 Regulated Insurance Entities
• We are applying for Internal Model Approval for the
principal entities but not necessarily in all cases
• Significant investment in Technology programmes –
mostly about automating production of reconciled
data in a timely enough manner. (Like many others,
took the opportunity to invest in wider reporting
processes)
12
PROGRAMME HAS BEEN RUNNING SINCE
2010
• Long way down the line of Remediation
(notwithstanding the lack of clarity at times partial
mothball along the way) ... but not yet finished
Where are we
now?
• Re-running Gap Analysis activity against updated text
• Already seeing considerable changes in the UK, with
the PRA now looking at what we have termed "ICA
Plus" type reporting
• Engaged in active discussions in connection with
IMAP, theoretical decision of lead regulator but the
reality is that we have to talk and present to multiple
regulators, even though we run a central model
• Many elements now moving into BAU process, with
the Reporting going through varying stages of testing
and dry runs under increasingly tighter and SII
Compliant timetables
13
Where are we
now?
IMAP
2014
2015
SII
2016
2017
EIOPA
• Annual QRT of 2014
year end data to be
delivered in July 2015
• Quarterly QRT’s for Q3
2015
• First full Annual
reporting Q1 2017
based on Year End
2016 data
14
SII IMPACT ON
CAPTIVES
Seamus Gallagher, Director of Consulting,
Willis Global Captive Practice
Nigel Goodlad, Managing Director,
Willis Management (Malta) Limited
OUTLINE
 Which captives are affected?
 What is required of EU captive owners and by when?
 Impact on Capital, Governance and Reporting (Pillars 1, 2 and 3)
 How prepared are captive owners?
 Which areas are causing concern?
 Ways of mitigating capital requirements
 What support can you expect from your captive manager?
 Is SII positive or negative for captive owners?
16 16
EU CAPTIVES
Which captives
are affected?
 Directly subject to Solvency II regulation in each
EU domicile
 Reinsurance to unrated reinsurers in non-SII
equivalent domiciles will be penalised by large
counterparty charge in SII capital formula
OFFSHORE CAPTIVES (predominantly
favoured by AIRMIC members)
 Not directly affected as most domiciles have opted
out of SII (but are introducing other forms of riskbased capital rules)
 Will offshore regulation be seen as “too light”
compared to SII? Probably not:
- Still need to conform to IAIS Core Principles,
but perhaps with more proportional approach
being taken by regulators
17
2014
What
is
required of EU
captive owners
and by when?
2015
2016
Required:
Required:
Required:
Forward Looking
Assessment of Own Risk
(FLAOR)
Implementation of
Functions:
Pillar 1 (Capital):
System of Governance
and Risk Management
Optional:
Updated Standard Model
Calculation of Capital
Requirements
(recommended)
•
•
•
•
Actuarial
Risk
Compliance
Internal Audit
Implementation of
Forward Looking
Assessment
of Own Risk (FLAOR)
Preparation for Pillar 3
Reporting
Requirements
• Capital and Solvency
Calculations in
accordance with
technical specifications
Pillar 2 (Governance):
• Implementation of
System of Governance
• Actuarial Function
• Risk Function
• Compliance Function
• Internal Audit Function
• Own Risk and Solvency
Assessment (ORSA)
Pillar 3 (Reporting):
• Reporting on quarterly
basis for MCR and SCR
Capital Requirements
18
Solvency II
example
capital analysis
SCR
6,066
Adj
0
Market
BSCR
5,541
Default
17
2,233
Operational
525
Non-Life Underwriting
4,071
Interest rate
16
Premium & Reserve
3,111
Currency
Catastrophe
1,961
0
Spread
0
Concentration
0
Illiquidity
5
Capital Available
Capital Requirement
Excess/ (Shortfall)
Solvency ratio
Solvency I
11,561
4,375
7,186
264%
MQIS5
11,432
6,066
5,366
188%
19 19
FLAOR – As
part of Pillar 2
Risk Management Function
Where does the
FLAOR fit in the
overall Solvency II
project?
Risk Management
Strategy & Appetite
Capital Management
Decisions
Board of Directors
UW Policy
Reinsurance
Policy
Op Risk
Policy
Strategic
Risk Policy
Liquidity
Risk Policy
ALM Policy
Investment
Policy
FLAOR
Process
Controls
Risk Register
FLAOR | 20
INDUSTRY EXPERIENCE
Capital Impact
(Pillar 1)

- 20% were below 75% of the SCR

Impact of Quantitative Impact
Study 5 (QIS5) on capital
levels
ECIROA 2011 study – 132 EU captives reviewed:
- 30% were below 100% of the Solvency Capital
Requirement (SCR)
EIOPA 2011 – survey of 175 captives found that
they “performed well”
WILLIS EXPERIENCE
 QIS5’s completed in late 2010 on a small sample:
- Almost 50% were projected to have a capital
shortfall, but many have addressed this since
- Property captives fared worse than liability captives
due to impact of SII capital formula on typical
captive structures (large gross lines with very
substantial reinsurance)
2121
Governance
Impact
(Pillar 2)
 Captive owners must convince regulators that
governance arrangements are adequate
 Principle of proportionality will be applied by
regulators:
- All have accepted outsourcing of most tasks to
captive managers (with appropriate board oversight)
- Some have acknowledged that certain captives are
not complex and low-risk and the framework can be
proportionate to this
 Additional workload will increase costs
 Captive owners are required to assess and
understand risks, to document and implement
governance frameworks
 Preparation of FLAOR’s and ORSA’s requires
some input from captive owners, but not
unduly onerous with managers’ help
22 22
Reporting
Impact
(Pillar 3)
 Reporting requirements are inevitably more
onerous for a risk-based capital regime (60+
reporting templates), but again proportionality
implies that less complex captives will have
fewer templates to complete:0
- for example, reporting for a monoline captive
with simple investment arrangements will not be
overly demanding
 Captive managers are implementing systems
to automate the reporting process - this
granularity could help captives in the long run
23 23
How prepared
are captive
owners?
 Well informed by captive managers and
good understanding of what SII is about
 Expect increased activity to ensure
conformance as Jan 1 2016 date looms
 Most have started in earnest on QIS5 capital
adequacy assessments and many have
taken action in response to the findings
 Work in relation to Pillar 2, governance
arrangements, is in progress
 In relation to Pillar 3, reporting, managers
are undertaking gap analyses on client data
to assess current versus required reporting
24 24
Which areas
are causing
concern?
 SII principles and processes are generally
acknowledged and accepted
 The need to implement systems and process
with attendant costs is understood
 Extensive reporting requirements are a
concern, but expectation is that captive
manager will provide almost all of the
services, subject to proper board oversight
 Questions have been raised that public
disclosure of reporting could entail
requirements that are not fully known at this
stage
 Potential capital impact may be the most
immediate concern
25 25
 Move from EU to Offshore
Ways of
mitigating
capital
requirements
o Industry indications imply moves are negligible to date
o No Willis clients have moved offshore due to SII, although
some have restructured
o Poor economy has driven strategic reviews, not SII in
isolation
 Restructure Reinsurance
o Counterparty Default Risk charge can be punitive unless
addressed
o Applying minimum ratings for counterparties (e.g.
minimum A- rating) or use additional reinsurers to diversify
can dramatically reduce default charge
o For particularly large exposures, e.g. where high limits are
written on property insurance, replacing captive
reinsurance arrangements with net lines to captive without
reinsurance – removes any counterparty concerns
 Restructure Investments
o Low-risk investments (e.g. AAA rated, bond or money-
market type instruments) achieve larger capital credit
 Restructure Capital
o More creative use of Tier 2 and 3 options, for example
unpaid capital
o Up to 50%/15% of the SCR can be in Tier 2/Tier 3 funds
26 26
What support
can you expect
from your
captive
manager?
 Captive managers work in tandem with boards –
developing and implementing policies and
frameworks and ensuring continued management
of the compliance programmes
 Captive boards are ultimately responsible for
compliance, but with proper oversight can delegate
most tasks to the captive managers
 Captive managers can normally be expected to
provide all SII services except Internal Audit
27 27
Is SII positive
or negative for
captives?
 Provided that the new regulatory framework is
proportionate to the nature, scale and complexity of
captives, SII should ensure that captives are
appropriately capitalised with enhanced oversight
and governance
 SII regulations will require EU captive owners to
invest more time assessing, understanding and
managing risks, but most of the work can be
outsourced to captive managers subject to boards
retaining ultimate oversight and responsibility
 Regulators in many captive domiciles (not just in
the EU) are implementing more robust risk-based
capitalisation and governance frameworks, which
should ultimately benefit the captive industry
provided that they are not unduly onerous
28 28
From what you know at the
moment about the increased
level of disclosure, the greater
uniformity of reporting and
potential impacts for Captives,
“Is SII a good thing for a
Risk Manager"?
Q&A
Thank you!