Solvency II
Andrew Mawdsley
Overview
• The challenges in preparing for Solvency II
• Adequate financial resources
• Supervisory Review Process
• Disclosure
• Timeline
• Questions for you
Solvency II – Three-pillar approach
Pillar 1:
Quantitative
capital requirements
 Technical provisions
 Minimum capital requirement
(MCR)
 Solvency Capital Requirement
(SCR)
Market-consistent valuation of
assets and liabilities
Economic Capital
Validation of internal models
Pillar 2:




Qualitative
supervisory review process
Corporate Governance
Principles for internal control
and risk management
ORSA
Capital add-ons?
New focus for supervisor
Level of harmonisation
Group supervision
Pillar 3:
Disclosures
 Enhance market discipline
through public disclosures
 Annual FCR and Solvency
reports
 Provide additional (non-public
information to the supervisors
More pressure from capital
markets, investors and
shareholders
The Challenge Ahead
• Governance – ORSA, Risk Management, Systems.
• Supervision of insurance firms – Risk based, prospective
approach, proportionality
• Burden of Proof
• Demonstrating Adequate Financial Resources – Pillar 1
• Use and Approval of Internal Models – Use Test, Data
• Disclosure
Pillar 1 – Demonstrating Adequate Financial
Resources
•
Technical Provisions
– Best estimate
– Risk margin
•
Solvency Capital Requirement (SCR):
– Firms should hold capital to cover a 1/200 event (99.5% confidence level)
over a 1 year horizon
– Enables undertakings to absorb significant losses
– Breach → supervisory action
•
Minimum Capital Requirement (MCR):
–
–
–
–
Unacceptable capital level below this point
Should result in a proportion of the SCR (25-45%)
High quality capital
Breach → potential withdrawal of licence
Pillar 1
Standard Formula
Pillar 2 – Risk Management System
• Pillar 2 is very important from a supervisory perspective
• SII seeks to promote high and consistent risk
management standards
• Art 43 requires firms to
– Have effective risk management systems
– Consider all risk exposures, both current and possible
– Have a risk management system that is fully integrated
into the organisation
It is not just about the SCR!
Pillar 2
• Own Risk and Solvency Assessment (ORSA):
– Art. 44 requires firms to assess the level of risk in their business
and the level of solvency required to mitigate those risks
• Other issues:
–
–
–
–
–
–
–
Outsourcing (Art. 38)
Responsibility of management body (Art.40)
General Governance – Requirements set out (Art. 41)
Fit & Proper – Requirements set out (Art. 42)
Internal control system requirement (Art. 46)
Internal Audit requirement (Art. 46)
Actuarial Function requirement (Art. 47)
Pillar 2 - Challenges
• Adoption of new information and control infrastructure
• Embedding this new infrastructure in the business
• Verifying and documenting the new procedures
• Demonstrating to the Financial Regulator that the
internal model is used in the governance, risk and
capital management processes of the firm (Use Test)
• Doing the above for a small firm
Pillar 3 - Disclosure
Harnessing market discipline for supervisory purposes
• Supervisory Disclosure (Art. 31, 52)
–
–
–
–
Laws, regulations
SRP methodologies
Exercise of options
Capital Add-ons
• Company Disclosures (Art. 51,53-56,256)
– Solvency and Financial Condition Report
– Very detailed report
Supervisory Review Process
• Risk Based Approach – Probability vs Impact
• Off-site and On-Site Review
• Emphasis on On-Site Review
–
–
–
–
Convergence in approach
Directly assess compliance
Presentations, interviews, file review
Supervisory Actions
• Stress Testing
Getting to Solvency II
QIS5
Plans to
meet gaps
Gap
Analysis
Decision on
Internal
Model
Planning
and
Budgets
Implementation
Timeline
Questions for you?
• Do you really understand what Solvency II is about?
• Have you completed your gap analysis?
• What operational, business and strategic issues does
Solvency II create?
• Will your firm be ready for Solvency II?
• What questions will the Financial Regulator ask you?
• What clarity do you need on Solvency II?
Conclusion
• Many challenges in preparation for Solvency II
• Preparations should not focus on Pillar I requirements
• Pillars II and III are very important
• Different approach to supervision
• Undertakings should ensure clarity on Solvency II
Thank
Thank you
you