Ashley Patel

The challenges in preparing for Solvency II

Adequate financial resources

Supervisory Review Process

Disclosure

Timeline

Questions for you

Solvency II – Three-pillar approach

New focus for supervisorLevel of harmonisation

Group supervision

More pressure from capital markets, investors and

shareholders

Market-consistent valuation of assets and liabilitiesEconomic Capital

Validation of internal models

Quantitative capital requirements

Technical provisionsMinimum capital requirement

(MCR)Solvency Capital Requirement

(SCR)

Qualitative supervisory review process

Corporate GovernancePrinciples for internal control

and risk managementORSACapital add-ons?

Disclosures

Enhance market discipline through public disclosures

Annual FCR and Solvency reports

Provide additional (non-public information to the supervisors

Pillar 1: Pillar 2: Pillar 3:

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

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 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!

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)

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

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

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

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?

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 youThank you