Solvency II
A Work in Progress
CAE Meeting, Zurich
Alessa Quane
November 29, 2007
Agenda
I.
Introduction & Timing Update
II.
Implications for Firms & Actuaries
III.
Directive Issues under Debate
IV.
QIS 3 Results
V.
Conclusions
Page 2
Soundbites
“This is an ambitious proposal that will completely overhaul the way we ensure
the financial soundness of our insurers.” – Charlie McCreevy, European
Commissioner for Internal Market and Services
“We are setting a world-leading standard that requires insurers to focus on
managing all the risks they face and enables them to operate much more
efficiently. It’s good news for consumers, for the insurance industry and the
EU economy as a whole” - Charlie McCreevy, European Commissioner for Internal
Market and Services
“Solvency II is not just about capital. It is a change of behavior.” – Thomas
Steffan, Chairman of CEIOPS
“The purpose of Solvency II is not necessarily to strengthen the industry’s
capital base, but more to ensure that sufficient regulatory and internal risk
management controls are in place to enable management and regulators to
more fully understand and control the dynamics of the industry’s risk profile.”
– Simon Harris, Moody’s Team Managing Director for European Insurance.
Page 3
Three Pillars of Solvency II
Surplus
Disclosure
Requirements
Surplus
Add-Ons
SCR
SCR
MCR
MCR
Assets
Assets
Risk Margin
Risk Margin
Liabilities
Liabilities
Firm Analysis
Supervisory Analysis
Page 4
Solvency II Timetable
2005
2007
2006
2008
Directive Development
Directive
Adoption
QIS 1
QIS 4
QIS 2
QIS 3
2009
2010
Framework
Directive
Published
2011
2012
Full
Implementation
Further QIS
SCR/MCR
Own Funds
Groups
Simplifications
Page 5
Implications for Firms
I.
Require more formal approach to governance demonstrating
that insurers are aware of the risks affecting their business
and that they have embedded this awareness in the daily
running of the business.
II.
Cost of compliance is likely to be significant and will be a
large change for many jurisdictions.
III.
Likely to be “winners” and “losers” due to the solvency
standards changing.
IV.
Move toward risk sensitive pricing as data begins to improve
at a more granular level to support internal modeling. This
will lead to great segmentation and value driven products.
V.
Further fuel the rating agencies shift in focus onto companies’
risk management frameworks and desire for disclosure.
Page 6
Implications for Actuaries
I.
Require more complex analysis and systematic approaches
to risk management. This will increase the demand for
actuaries and risk management personnel.
II.
Need to more closely coordinate with finance, risk
management and other business functions.
III.
Better explanation of assumptions, sensitivities, limitations
and methods underlying the computations and results to
senior management who will be relying on this information
throughout the risk embedding process.
IV.
Increase in the development of advanced analytical tools and
systems capable of providing a more informed basis for
control and decision-making.
Page 7
Highlighted Concerns with Directive
I.
Non-EU supervisors and group proposals
I.
Equivalence of regimes
II.
Level playing field for EU vs non-EU groups
III.
Application of a consistent economic assessment of available and required
capital to all businesses, both EEA and non-EEA
II.
Structure and calibration of the MCR
I.
Ladder of intervention
II.
Consistent framework
III.
Geographic diversification
I.
Credit should be considered
II.
Legal entity vs risk exposure
III.
Group support
Page 8
Goals of QIS 3
I.
Obtain further information about the practicality and suitability of
the calculations involved and alternatives tested.
II.
Obtain quantitative information about the possible impact on
balance sheets and the amount of capital required if the approach
and calibration as set out in QIS3 were to be adopted as the
standard.
III.
Collect information about the suitability of the suggested
calibration for the calculation of the SCR and MCR.
IV.
Initial test on the effect of applying the specification to insurance
groups.
Page 9
Participation in QIS 3
28 out of 30 member states participated
1027 solo entities – increase of 100% over QIS2
51 groups participated
Type of Firm
Small
Medium
Large
Total
Life
116
135
79
330
Non-Life
254
194
63
511
Reinsurer
12
10
6
28
Composite
40
79
39
158
Total
422
418
187
1027
Mutuals thereof
118
99
34
251
Health thereof
16
30
10
56
Page 10
Participation in QIS 3
Country
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Slovakia
Slovenia
Spain
Sweden
Life
6
1
2
3
1
31
4
8
41
60
1
4
2
16
29
1
3
6
2
14
3
9
14
3
2
15
14
Non-Life
10
6
4
2
3
38
3
11
52
110
0
3
5
16
26
1
8
7
2
44
16
15
14
0
2
57
13
Reinsurance
0
0
0
0
0
0
0
0
2
9
0
0
0
7
0
0
0
3
0
0
0
0
0
0
2
2
0
Composite
11
8
0
0
8
0
0
0
59
0
0
6
0
0
18
0
0
0
1
0
0
0
5
2
5
34
0
Total
27
15
6
5
12
69
7
19
154
179
1
13
7
39
73
2
11
16
5
58
19
24
33
5
11
108
27
United Kingdom
35
43
3
1
82
Total
330
511
28
158
1027
Page 11
Participation in QIS 3
Average market share coverage was 69% for life, 63% for non-life and 79%
for health
Internal Model submissions included:
Number of
Models
Life
Non-Life
Composite
Full
54
56
15
Full and
Partial
55
65
15
Represents 13% of firms, by submission numbers
Page 12
Financial Impact Based on QIS 3
I.
No significant overall change in terms of the composition or size of
the balance sheet compared with Solvency I at a European level
II.
Technical provisions tend to decrease due to the implicit prudence
in the current regime thereby increasing available capital
III.
98% of firms would not find it necessary to raise additional capital
to meet the MCR
IV.
QIS3 solvency ratio is lower than the current solvency ratio for
most participating firms
V.
The proposed regime does not require extra capital in the
European insurance market as a whole.
Page 13
Assessment of the SCR
I.
CEIOPS believes that there is general satisfaction with the proposed
correlation matrix. General consensus for a geographic diversification
benefit to be included.
II.
Diversification effects through the correlation matrix were 20% on
average.
III.
Many firms want the expected profit/loss element returned to the
calculation.
IV.
Subjectivity of the cat risk scenarios is inappropriate and needs to be
reviewed
V.
Non-life underwriting risk results were excessive compared to internal
model results.
VI.
Operational Risk
I.
Opposition to the 100% correlation with the other risk factors
II.
No incentive to develop adequate risk management systems
III.
Suggestion that administrative costs could be a more appropriate measure
than premiums
Page 14
Composition of Non-Life SCR
Source: CEIOPS’ Report on its Third Quantitative Impact Study for Solvency II
Page 15
SCR Comparison with Internal Models
I.
Internal models generally produce a higher charge for credit risk
than the SCR module
II.
For non-life insurance, internal models produce significantly lower
total SCRs than the standard formula, with an average reduction
of 25%
III.
No clear pattern as to whether internal models produce a lower or
higher operational risk charge than the standard formula
Page 16
Assessment of the MCR
Calibration target is 80-90% value at risk over a one-year time horizon
Non-life firms’ results under both alternatives were broadly consistent
with the calibration target. For alternative 1, the MCR nowhere
exceeded 70% of the SCR
Source: CEIOPS’ Report on its Third Quantitative Impact Study for Solvency II
Page 17
Assessment of the MCR
Problematic interaction with the SCR for life and composite firms due to
the loss absorbing capacity of future discretionary benefits
methodology
Source: CEIOPS’ Report on its Third Quantitative Impact Study for Solvency II
Page 18
Own Funds
95% of capital was designated as Tier 1 with the average proportion
over the industry being 94%
For those firms with Tier 2 capital, the average proportion was less
than 25% in almost all countries
For those firms with Tier 3 capital, the average proportion was less
than 20% for life firms and less than 33% for non-life firms in
almost every country
Page 19
Areas for Further Work
I.
Technical Provisions
I.
More guidance on calculation of the risk margin
II.
Possible simplifications or proxies to make up for a lack of data
II.
SCR
I.
Segmentation
II.
Calibration of non-life underwriting risk
III.
Granularity of equity risk shocks
IV.
Treatment of unrated entities
V.
Possible simplification of the concentration risk component and impact on
firms in smaller countries with fewer market options
VI.
Clarification of replacement cost in the counterparty default risk module
and treatment of intragroup reinsurance
VII.
Inclusion of expected profits
VIII.
Exclusion of free assets in the market risk module
Page 20
Areas for Further Work
III.
MCR
Testing of additional approaches to enable a choice between the MCR being a
stand alone capital requirement and having it as a percentage of the SCR
IV.
Value of Assets
Clarification on valuation of participations (look-through vs market value)
V.
Own Funds
Guidance on classification of eligible elements
VI.
Groups
Non-comparable data has been supplied and clarification is therefore needed in
order to draw conclusions on these issues
I.
Scope of consolidation
II.
Group coverage
III.
Internal model results
IV.
Consideration of the rules to which cross sector and non-EEA entities are
subject as well as the extent to which surplus assets are transferable
Page 21
Conclusions
Industry needs to provide detailed input on key issues to assist the
Council of Ministers and the European Parliament better
understand how the Solvency II regime will work in practice.
Industry needs to support CEIOPS work on the development of
QIS4 and further quantitative surveys to assist in developing the
implementing measures of Solvency II.
Actuaries need to stay abreast of the topics and add their expertise
to the debate. In addition, we need to acquire the necessary skills
to assist our management in meeting the demands that Solvency II
will thrust upon on our firms.
Page 22