Standard formula appropriateness for life
Title
of the event
– (Arial 28pt bold)
and general
insurers
Subtitle for event – (Arial 28pt)
James Orr
Date
(Arial
Head
of16pt)
Department,
General Insurance Actuaries
Agenda
1. Key Messages
2. Timeline
3. PRA’s approach to assessing appropriateness
4. Outputs of 2014 data request exercise
5. Options for where SF does not capture risk profile
2
The standard formula solvency capital requirement
Solvency Capital Requirement
(SCR)
3
Key messages
•
Standard formula should fit a significant proportion of UK firms
•
Lots of moving parts on the balance sheet, simplistic comparison to ICA is
not the full picture. The PRA does not expect large capital inflows or
outflows to result from Solvency II implementation
•
The PRA does not promote or encourage the use of an internal model
where the standard formula is a good fit
•
The Directive requires firms to identify areas where your business
materially deviates from the standard formula SCR assumptions. This is
your responsibility
•
The ORSA allows you to demonstrate assessment of appropriateness
•
We will review all firms for standard formula appropriateness before
Solvency II implementation
4
Timeline
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Implementation
1 January 2016
Transposition
31 March 2015
CP23/14
published
15/10/14 detail
on other
approvals
applications
Firms start to
apply for
approvals
including USPs
2016
Other approvals
granted or declined by
the PRA
2015 data request*
PRA
assessments of
priority SF firms
PRA assess appropriateness of all other standard formula firms
Ongoing 2014
ORSA reviews
2015 ORSA reviews and 2014 feedback
Firm and PRA
continuous
evaluation of
standard
formula
appropriateness
Firms to assess appropriateness
*firms not subject to interim reporting requirement
PRA communication to firms
PRA decision/activity
Firm activity
5
PRA approach to assessing SF SCR appropriateness
The PRA has identified the priority firms for review by end Q1 2015
High-level review of all other firms through 2015
Review will be based on quantitative deviations and qualitative information
including the ORSA
Proportionate approach, noting idiosyncratic nature of some firms
Responsibility rests with the firm to identify standard formula appropriateness
6
Outputs of the 2014 ICAS-SCR data collection exercise
High response rate from data request – over 90% of live writers
Life insurers
•
Standard formula firms are
reporting a larger decrease in SCR
capital requirements than general
insurers but only a minor drop in
capital resources
•
Matching adjustment, volatility
adjustment and transitionals create
significant movement and
uncertainty in overall capital
position
General insurers
•
Standard formula firms capital
resources and requirements largely
in line with ICG figures under the
current regime
7
Risk areas for Life firms – PRA focus
Longevity:
Firms with particular sector focus where their portfolio might be
considered to have unusual concentrations e.g. deferred,
enhanced or impaired annuities
Some examples of
potential
indicators of
inappropriateness:
Risk areas that may
form part of
standard formula
reviews
Equity:
Firms pursuing an active investment strategy or with a
concentrated equity portfolio
Credit:
Firms hold a variety of credit risky assets that may not be well
represented by the average portfolio of corporate bonds assumed
within the Standard Formula
Operational:
Firms with significant outsourcing arrangements and / or a range
of legacy systems
Pension risk
8
General insurers – Transition from ICG to SF-SCR
SF firms - SF SCR vs ICG (pre-diversification) £m
6,000
5,000
4,000
3,000
2,000
1,000
0
SF SCR
ICG
9
Standard formula appropriateness for general insurers
Non-Life underwriting risk:
Where deviations from underlying assumptions are significant
Potential
indicators of
inappropriateness:
PPOs:
Should be modelled in the life underwriting sub-module (longevity
risk). Long term solution may be to consider use of partial internal
model – where proportionate to do so
Risk areas that may
form part of a
general insurer’s
standard formula
reviews
Cat Risk:
Firms with non-standard portfolios with a large element of nonEuropean economic area (EEA) catastrophe risk or with large
deductibles or complex outwards reinsurance programmes
Credit Risk:
Reinsurance counterparty risk
Pension Risk
10
Options where the standard formula does not
capture risk profile
Regular
dialogue
•
•
•
Undertaking Specific Parameters
Partial internal model
•
•
•
Capital add-on, which may lead to:
Partial internal model
Full internal model
Full
PRA initiated
action
•
Firm Dialogue and supervisory review
ORSA review and post-ORSA action
plan
Full
Firm initiated
action
•
•
•
Full
Partial internal models
Partial internal models (PIMs) must meet requirements of the Directive
set out in Articles 112, 113 and standards in Articles 120-125
•
Do not need to be overly complex
•
Agree with the PRA the scope of a PIM and set out a timetable to
develop it. The PRA appreciates the time needed to build a model
12
Capital add-ons
The PRA will determine the requirement for capital add-ons ahead of
Solvency II implementation
•
Can be applied for governance and risk profile deviations including
where the standard formula is not appropriate and a model is required
•
May be used in conjunction with other measures – they are temporary
•
Reviewable
•
Ultimately made public
13
Summary
•
Standard formula should fit a significant proportion of UK firms
•
Lots of moving parts on the balance sheet, simplistic comparison to ICA is
not the full picture. The PRA is not expecting large capital outflows to
result from Solvency II implementation
•
The PRA does not promote or encourage the use of an Internal Model
where the standard formula is a good fit
•
The Directive requires you to identify areas where your business
materially deviates from the standard formula SCR assumptions. This is
the firm’s responsibility
•
The ORSA allows you to demonstrate assessment of appropriateness
•
Capital add-ons, where needed, will be used appropriately
14