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					Solvency II


Open Forum 4th March 2008
Michael Aitchison
Solvency II : Agenda
 What is Solvency II

 Change Context

 Aims

 Key Features

 Implementation

 Impact & Benefits
Solvency II: What is it?
 Solvency II is:
 A European Commission Directive that will provide
 a far reaching new model for the supervision and
 regulation of insurance companies. The Directive
 will lead to the adoption or more sophisticated risk
 and capital management techniques across the EU
 built on a foundation of modern market-based
 valuation of assets and liabilities.

 “At the same time, we see Solvency 2 as a
 contribution to the emergence of a world-wide
 standard.” Commissioner Charlie McCreevy
   Insurance Industry Context: All Change
   Please!
 Recent implementation of revised shareholder reporting in
  IFRS Phase I. IFRS Phase 2 to follow.

 Continued need for supplementary reporting on an
  embedded value basis, due to stakeholder preference

 Development of European Embedded Value, and Market
  Consistent Embedded Value reporting in quest for
  consistency and shared standards

 FSA has developed the ICA assessment – stepping stone
  to S2?
Solvency II: Aims
 Increase confidence in the insurance industry
 Deliver a more competitive single market
 Increase efficiency in the use of capital: higher
  returns
 Facilitate more streamlined supervision of
  insurance groups
Solvency II: Key Features
 3 Pillar Structure (cf. Basel 2)
 Market Consistent Valuation of Assets & Liabilities
 SCR & MCR: risk responsive capital requirements
 Focus on improved risk & capital management, including
  use of Internal Models
Solvency II – 3 Pillars


 Pillar 1: Asset and liability valuation standards;
  Minimum Capital Requirement; Solvency
  Capital Requirement
 Pillar 2: Supervisory Review Process
       More interactive relationship with regulator
       Enhanced focus on risk management
 Pillar 3: enhanced public disclosure and
  confidential supervisory reporting
       Harness market discipline to encourage good practice
Solvency II: proposed Pillar 1
   “The overall objective of prudential regulation must be to ensure that an insurer
    maintains, at all times, financial resources which are adequate, both as to amount
    and quality, to ensure there is no significant risk that its liabilities cannot be met as
    they fall due.” (CP20, 2.2)
Solvency II – Capital Requirements

   The Solvency Capital Requirement (SCR) should deliver a level of capital
    that enables an insurance undertaking to absorb significant unforeseen
    losses and gives reasonable assurance to policyholders that payments
    will be made as they fall due.
          Standard Formula
          Internal Model


   The Minimum Capital Requirement (MCR) is the minimum regulatory
    capital requirement, the breach of which would trigger major regulatory
    intervention.
          Relationship to SCR


   Ladder of regulatory intervention
          Extension Ladder!
SCR – QIS4 specificaton




               thanks to Towers Perrin for the
                          diagram
Solvency II – Group Issues


 How to evaluate diversification benefit at Group
  level
 Ability/Obligation to pass resources around a
  Group
 „Sum of solo‟ approach gives no credit
 Group Internal Model approval if credit taken?
 Non-EEA group companies
Solvency II – Implementation


 Timetable
 QIS
 Internal Model Approval
  Solvency II – Implementation Timetable
 2005        2006           2007          2008       2009           2010      2011/2

Directive Development         Directive Adoption             Implementation
    (Commission)            (Council & Parliament)          (Member States)

CEIOPS work on Pillar I
                                                   CEIOPS works on
     CEIOPS work on                              implementing measures
      Pillar II and III

    QIS1   QIS2           QIS3            QIS4       Further QIS?

                      Model calibration

                                    - Impact assessment
                    Priorities
                                    - Group issues
Solvency II – Quantitative Impact Studies


 Part of extensive and open consultation
  process
 QIS4 running now
 Participants quantify the capital requirements
  based on QIS specification rules
           Consultation was run on the specification
           IAS 19 basis for employee benefits


 Outcome will shape detail of ultimate
  implementation
Solvency II – Internal Model Approval

Supervisory objectives

 better risk management, which also improves
  policyholder protection,

 continual upgrading and encouragement of innovation
  in risk management methodology and

 improved risk sensitivity of the SCR, especially for
  undertakings with non-standard risk profiles.
Solvency II – Internal Model Approval

Conceptual framework
   Base methodology / „actuarial model‟:
      Statistical quality test
      Are the data and methodology underlying both internal and regulatory applications sound
        and sufficiently reliable to support both satisfactorily?

   Internal risk management:
       Use test
       Is the actuarial model genuinely relevant for and used within risk management?

   Regulatory capital requirement:
      Calibration test
      Is the SCR computed by the undertaking a fair, unbiased estimate of the risk as measured
        by the common SCR target criterion?

   The combination of the actuarial model and the risk management function built on top of it is
    called the 'internal model in a wider, risk management sense' (CfA 11.14).
Solvency II – Internal Model Framework
                                          Governance & Policies




                                       Policy                           Governance
                                       Risk Strategy                   Accountability
                                       Risk Appetite




                                                       Internalising
 Actuarial Models                                                                        Reporting
 Projection & Analysis Models
                                   Annual: planning, forecasting, budgeting              Risk Monitoring
 Risk Maps                                                                               Risk Analysis
 Economic Capital                  BAU: pricing, capital management                      Risk Reporting
 Sensitivity Measures & Analysis




                                                   External Factors
                                      financial markets, competition, tax & regulation
Solvency II – Impact & Benefits
 Best practice risk and capital management
     In particular:
         Risk management - processes and controls
         Capital management - eligible capital and quality of capital
 Improved market perception: enhanced reputation for risk
  management

 Reduced capital requirements + improved return on capital

 Enhanced management information to support more optimal
  management decisions

 Reduced costs: Operational efficiencies from better risk
  management
Solvency II


Open Forum 4th March 2008
Michael Aitchison

				
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