solvency ii – work on the finishing linesolvency ii – work on the finishing line . janka schuld...

Solvency II – work on the finishing line

Janka Schuld

Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/

Session Number: TBR15



1. Solvency II – An Introduction

2. Hot Topics on Solvency II

Agenda



Solvency II – An Introduction



Solvency II - an integrated approach

Supervisory Reporting/Publications

Processes, Controls, Data, IT

Governance & Risk Strategy Framework Processes & organisation

Process- and IT-

Environment

Dataquality

Data-Guidelines

Datasecurity

Organisation-structure

Functions

Fit & Proper

Risk Strategy

ORSA Capital-

allocation

Limit- system

Risk-Control-Process

Risk Report

Solvency Financial Condition

Report

and

Regular Supervisory

Reporting

Deadlines

Approval Process and Supervisory Dialogue

Business strategy, Controlling

Capital requirements

Calculation of SCR and MCR

Use of internal models

Solvency balance sheet & Own Funds

Calculation of SCR on group

level

Valuation of Assets, & Liabilities

Determination of

available own funds



The 4 Level Lamfalussy process

Level 1

Level 2

Level 3

Level 4

Framework Directive Framework legislation is proposed by the Commission and adopted by the Council and Parliament.

Lev

el o

f d

eta

il

Implementing Measures Preparation of more detailed implementing measures by the Commission to supplement the Level 1 framework legislation.

Technical Implementing Standards Technical implementing standards and Guidelines are proposed by EIOPA and adopted by the Commission to ensure a consistent implementation.

Enforcement of Directive Check of consistently application by the Commission in close cooperation with the member states and the regulatory authorities.



Status of Implementation and Timetable

Consultation of Draft Implementing Measures

QIS 5 (EU) Results

Pre-Test Reporting

GDV Field test QIS 6*

Technical Standards & Guidance

Q1-2011 2013 Q2-2011 Q3-2011 Q4-2011 2012 2014 Q4-2010

Omnibus II-Directive Transitional Measures (10 year process) L

eve

l 1

Le

vel 2

L

eve

l 3

Reporting Consultation

Le

vel 4

Introduced into national legislation

Consultation Draft VAG**

Pre-Consultation EIOPA Consultation

Implementation

Implementation SII Preparation of Insurance industry for implementation of Solvency II

SII-Directive

* Results of QIS6 should be considered in processes of Level 2 and Level 3 (GDV) ** German Insurance Supervision Act



Timetable Implementation Discussion about „Soft landing“ in 2013

Pro

po

sal

Pa

rlia

me

nt

Pro

po

sal

EU

Co

un

cil

1. Jan 2013

Implementing plan

National trans-position

Transitional provisions, Delegated Acts*

Presentation of implementing plan

Reporting

1. Jun 2013

Pro

po

sal

EU

KO

M 1. Jan 2013

Entry into force S2-Directive


Transitional provisions*

1. Jan 2014

Transitional provisions*

Transitional provisions

National transposition

Applications for approval from supervisors Approval of

super-visor

31. Dez 2012

National transposition

31. März 2013 1. Apr 2013

*Proposals of different Members of Parliament

Assessment of approval applications from supervisor

1. Jan2014 31. Dez 2012

31. Dez 2012

Solvency I

Solvency I


31. Dez 2012

Reporting



Transitional Measures* are still under discussion

*according to Omnibus 2 Compromise EU Parliament

• Third Country Equivalence (5 years + 1 year)

• Classification of Own Funds (up to 10 years)

• Public Solvency II reporting (SFCR) (up to 2 years)

• Increase of equity shock (over 7 years)



The Standard Formulae approach

Market Non-Life

Premium Reserve

Lapse

Currency

Property

Default Life

EL BSCR

SCR

SCR cred Op. Risk

SCR health

EL Adjustment

SCR health

Health

SLT Health*

Spread

Interest rate

Equity

Conc.

Intangibles

CAT Non-SLT

Health

Mortality

Longevity

Disability Morbidity

Lapse

Expense

Revision

Prem. & Reserve

Expenses


Lapse

Mortality

Longevity

Revision

Illiquidity

CAT

CAT

Lapse

= Adjustment for the risk mitigating effect of future profit sharing



Composition of the SCR for Europe as a Whole

102%

12%

28%

8%

30% 32%

0%

148%

8%

57%

1%

100%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

BSCR structure (solo)

For undertakings writing health business underwriting is 63 % on average.



Hot Topics on Solvency II



Illiquidity Premium

Illiquidity Premium (as in QIS5)

Now divided in 2 components (Level 2 Draft)

Matching Premium Counter-cyclical Premium

Reflects the width of spreads of the undertaking´s bonds

Calculation: difference between the average spread over the basic risk- free

interest rate of the assets of the assigned portfolio of assets the average fundamental spread over the

basic risk-free interest rate of the asset of the assigned portfolio of assets

(both parts weighted with the products of the duration of the assets and the value of the assets)

To prevent the pro-cyclical behaviour of the undertakings

Based on a two-step approach:

1. EIOPA determines whether there is a

stressed finacial market 2. EIOPA determines the size of the counter-

cyclical premium from the spread on the assets included a representative portfolio



Health Gross Technical Provisions EIOPA Report on the Fifth Quantitative Impact Study (QIS5) for Solvency II

5% 11%

14%

70%

Split of health gross technical provisions für solo

undertakings

Worker´s compensation

Income protection

Medical expenses

SLT health

• Segmentation

− Criteria for segmentation in non-life and life business open for interpretation

− Classification of disability and morbidity business into life and health not always clear

− Undertakings running workers’ compensation business criticised lack of clarity on segmentation and implementation

• Contract boundary

− Definition of contract boundary is unclear

− Definition does on represent economic reality

− Not in line with IFRS definition



Health Underwriting Risk

health SCR

health

Health

SLT Health CAT Non-SLT Health

Mortality

Longevity


Lapse

Expense

Revision

Prem. & Reserve

Lapse

1 2 3



Health Similar to Life Techniques (SLT) Summary of EIOPA´S QIS5 – Report

• Shock for income protection in disability submodul is considered as too high

• Lapse risk is too complex (separation of contracts with positive and negative surrender strain)

• In Level 2 IM lapse shocks have been increased (permanent lapse rates 20% to 50%, mass lapse event 30% to 40%

3% 11%

76%

19%

11% 7%

26%

100%

0%

20%

40%

60%

80%

100%

120%

140%

Health SLT Underwriting Risk Composition (solo)

QIS5 QIS4 Solvency I 176% 290% 217%

Coverage Ratio of German Health Insurers Especially long lasting SLT business is heavily influenced by the market interest rates.

SLT Health 1



Health Non-Similar to Life Techniques (NSLT) Summary of EIOPA´S QIS5 – Report

• Lapse risk is considered as immaterial and was not calculated by many insurers

• Difficult to appropriately account for more than one

non-proportional reinsurance treaty

• Joint working group (JWG) established by EIOPA for recalibration of standard parameters for premium and reserve risk

Premium Risk Reserve Risk

QIS 5 JWG QIS 5 JWG

Medical expense 4% 5% 10% 5,3%

Income protection 8,5% 8,5% 14% 13,9%

Workers compensation 5,5% 8% 11% 11,4%

Non-SLT Health 2



Health Catastrophe Risk Sub-Module Summary of EIOPA´S QIS5 – Report

• Appropriateness of scenarios to

local market is criticized

• Risk module regarded as too severe for some undertakings

• Approach is considered as complex and criteria are considered as hard to meet

• Guidelines and recommendation on application of health catastrophe risk are currently discussed (Level 3 Guidelines)

26%

62%

19% 7%

100%

0%

20%

40%

60%

80%

100%

120%

Mass Pandemic Concentration Diversification Health Cat

Health Cat composition (solo)

CAT 3



ORSA and Reporting are considered as significant challenges for Solvency II implementation

• … of the participants consider ORSA as the most significant challenge for a successful implementation of Solvency II.

• Reporting and ORSA were mentioned mostly as significant challenges

Sourc: PwC-Survey „Getting set for Solvency II“, November 2010

37%



ORSA (Own Risk and Solvency Assessment) is an integrated risk management approach

• Business objectives • Risk strategy • Strategy options valuations • Capital strategy and capital plan • Financial plan • Strategic asset allocation • Reinsurance/hedge • Mgt. actions • Projection horizons • Actual vs Plan

Risk identification & assessment

•Risk identification • Qualitative assessments • Controls assessment • Risk ranking and classification • Risk profile • Risk management policy

• Eco. balance sheet • Techn. provisions • Risk parameters and assumptions • Own fund classif. and assessment • Stress/ scen. Testing • Internal cap. requirements • Regulatory cap. requirements

• Regular monitoring of risk profile • Solvency monitoring and mgt • Risk appetite/ tolerance • Frequency of assessment • Support for strategic decisions • Evidence of risk governance processes • Disclosure

Decision making

External Environment

• Business context • Emerging risks • Long-term risks • Macro economic environment • Regulatory framework • Legal framework • Social trends

Solv. assessment und management

Business strategy



Key components of ORSA

Thank you for your attention.


PricewaterhouseCoopers Asia Actuarial Services (Singapore) Pte Ltd 8 Cross Street #17-00, PwC Building Singapore 048424 [email protected] www.pwc.com/sg/en

Janka Schuld Aktuar (DAV) Manager

solvency ii – work on the finishing linesolvency ii – work on the finishing line . janka schuld...

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