Governance, Risk Management & USE (GRMU) Workshop 2 & 3 July 2012

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Agenda

Introduction & update

ORSA

GRMU Follow-up activity

Model Scope & Model Change

Table discussions

Q3 & Q4 2012 GRMU activity

Next Steps

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Introduction & UPDATE

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Agent Ratings Summary at end June 2012

76%

24%0%

By agent By Materiality

(2012 ICA)

Rating Summary Green Will meet provided that

Amber Will not meet unless

Red Will not meet unless with material concerns/FAP rejected

88%

12%0%

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Open gaps reported and projected by agents

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Some GRMU sub categories are closing later than others

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ORSA

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Own risk and solvency assessment feedback First submission

Coverage of regulatory requirements

ORSA Policy

Short term capital planning

Senior Mgt/Board involvement

Recognition of progress and work to complete

Process will take time to embed

Good practice still being defined

Basic information not always included

Syndicate level information

Conclusions from process

Stress & Scenario testing

Forward looking perspective

Assessment of capital

Links to risk appetite/monitoring

Reliance on underlying documentation

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Recap on ORSA Guidance

Key Principles of May 2012 guidance:

Syndicate focus

Clear conclusions and management actions

Detailed capital assessment

Stressed risk and capital profile

Board approval

Clear use of the ORSA in management

decision making

Format and length

Long term plan contained in December 2011 ORSA will require affirmation in the September 2012 SBF

Our on-going discussions of ORSA feedback with relevant agents has evidenced continued positive development

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ORSA – What next?

Those resubmitting at end of June will receive an updated FAP review sheet in July/August

Resubmission reviews will focus on the critical and material issues raised as part of the FAP review

Re-affirmation required to support final SBF submission in September, or re-submission if major changes have occurred

Embedding/Knowledge of ORSA to be picked up as part of Use Test/Embedding activity through remainder of year

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Was the ORSA Guidance helpful in meeting the FAP feedback?

A. Yes – ORSA guidance is clear and we have dealt with all feedback

B. Yes – ORSA guidance is clear but we are still working on developing the ORSA in line with feedback

C. No – ORSA guidance was lacking in a number of areas but we have continued to develop the ORSA in line with individual feedback

D. No - Guidance and feedback has been insufficient to help develop the ORSA

2 July results

3 July results

30%

A

63%

B

8%

C0%D

30%

A

50%

B

20%

C0%D

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Which area of ORSA development is still causing the most problems?

A. Risk appetite

B. Stress & Scenario Testing

C. Forward looking assessment

D. Senior Management engagement

E. Something else

2 July results

3 July results

20%

A

9%

B

56%

C

11%

D

4%

E

5%

A

20%

B

52%

C

11%

D

11%

E

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GRMU follow-up activity

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2011 Follow-up Reviews 2011 GRMU Review Reports Followed-up during Q2

Final Follow-up Reports issued during June and July

Expectation of closure of all material recommendations – contribute to determination of remaining ‘gaps’

Remaining items carried forward to Business as Usual

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MODEL SCOPE & Model change

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Model Scope and Model Change walkthroughs

All agents met during June/ early July

Definite improvement in policies following FAP reviews – most feedback now resolved

Individual agent feedback following the walkthroughs will be provided during June and July. However:

Some uncertainty regarding Level 3 regulatory requirements

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MODEL SCOPE

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Lloyd’s – LIM scope

Lloyd’s Corporation

Lloyd’s TP Review

Governance & Assurance

Syndicates

Risk Monitoring & ORSA Lloyd’s Internal Model

SBF

Syndicate SCR Benchmark

Allocate member capital

LIM CCK LCM

Risk appetite monitoring and capital planning

Corporation Operational Risk management

Op scenario analysis

Lloyd’s Society SCR

Lloyd’s Society Economic Capital

Other risk & capital reports

Emerging risk management

Review and monitoring of syndicate TPs

LIM Reporting

LIRM (inc ESG)

Syndicate SCR Review

Par

amet

eris

atio

n P

roce

ss External Disclosure

SFCR

RTS

Quantitative Reporting

Lloyd’s Risk Governance Framework

Internal Audit & Independent Review – assurance on processes and controls

Par

amet

eris

atio

n

Syndicate Reporting

Solvency II reports

Feedback into Risk Strategy and Risk Appetite

Feedback into Internal Model development

Feedback

Syndicate Business Planning

Internal Risk Reporting

Lloyd’s ORSA

Lloyd’s Risk Reports

DATA

SRC: Syndicate risk monitoring

CRC: Corporation Risk Monitoring

FRC: Financial Risk Monitoring

LRC

: Ris

k O

vers

ight

Syndicate Returns

SCR

Technical Provisions

Set capital uplifts

Syndicate operations

Syndicate performance monitoring

Strategy & Risk Appetite

Syndicate Internal Models

Review and Approve SBFs

Lloyd’s Strategy & Risk Appetite

Set Franchise Standards

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Themes from Model Scope walkthroughs

Some diversity in agents’ scopes

Diverse definitions for the inclusion of ‘Parameters’ in scope

Implications for model change

Rationale and documentation supporting scope design is often absent

External models

Cat Models

ESGs

Scope Extensions

Agents’ governance may be similar to Major Change but clarity needed in policies that extension is not a ‘change’

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Given we have already mandated inclusion of Cat and ESG models, should Lloyd’s mandate additional elements of model scope to try to bring more consistency/ equity, e.g. Liquidity risk?

A. Yes.

B. No.

2 July results

3 July results 56%

A

44%

B

49%

A

51%

B

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MODEL CHANGE

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Major Changes – Diversity in approach Draft Level 2 text:

‘Major changes to the internal model will need prior supervisory approval…’

Major Change Threshold

Quantitative indicators, but what about qualitative? – sound governance is needed

SCR trigger level application to:

Last agreed 1 year (as a minimum)

Differing methods of applying the Major Change Trigger

Risk category

SCR sensitivity post change

Syndicate specific basis

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‘Back-testing’ will be necessary

Draft Level 3 text:

‘A way for undertakings to “back-test” the scope of their model change policy in general and the definition of major changes in particular could be to evaluate the model change policy in the light of past model changes.’

FSA feedback

A number of agents have undertaken some form of back-testing and documented it in their policies

Particularly useful for:

Justifying the Major change to SCR threshold

Providing worked examples of what might constitute a Model Change (Major/ Minor) or Model Extension

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Parameter Change – Further guidance awaited

Draft Level 3 text:

‘The regular update of parameters will fall into the scope of a model change.’

Lloyd’s has provided feedback to EIOPA on this - final guidance is awaited

Differing definitions of Parameter Change

Data / Methodology / Assumptions

Maybe a concession to group parameter changes to alleviate burden of gross aggregation

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Risk Profile Change Draft Level 3 text:

‘ The model change policy will for instance, but not limited to, cover changes in the following areas….:

Nature, scale and complexity of the risk profile (including material changes in business model, business strategy, products and lines of business, emerging risks, asset management policy and any other relevant changes to the risk profile).’

Differing definitions of Risk Profile Change, in so far as it means ‘Model Change’

Data / Methodology

A change to risk profile will likely necessitate a change to parameters – treatment of both is therefore subject to further guidance

We will develop our approach to link model change and SBF change

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Aggregating Minor Changes - most common area of discussion during walkthroughs Draft Level 2 text:

‘…Minor changes to the internal model shall be communicated in a summarised report that describes both the quantitative and qualitative impacts of each change and the cumulative quantitative and qualitative effects of the changes on the approved internal model.’

Clear that further guidance is needed in this area

Our current thinking:

Accumulate from last agreed SCR (may be up to a year, depending on interim Major Change approvals)

Aggregate on an absolute, or gross basis (+5% and -5% = 10%)

Aggregate across change types

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Documenting Changes – an area for development

Given nascent process, many agents have yet to establish adequate template documentation for change requests and model change logs

Possible 2 step process, especially in larger agents

1- Request for resource to investigate benefits/ effect of change

2- Request for actual change

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Reporting changes to Lloyd’s Lloyd’s 2012 SCR Guidance:

Scope and Change Policies to be ‘live’ following July SCR to allow a supplementary paper to be provided with September SCR setting out Major changes

Assessments of change between July and September SCR should be organised between model changes and adjustments to model inputs (e.g. planned premium income)

Lloyd’s will define a process for business as usual reporting of all model changes with effect from 1 January 2013

Reporting to Lloyd’s

We will publish a template for reporting of Major and Minor changes and Scope Extensions

Initial handling by current Account Manager - they will co-ordinate further review by SMEs

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Other Themes

Diverse range of opinion of how many Major and Minor Changes are expected

Diverse range of development of approaches – consistent with levels of development and use of capital models

Adequate governance needed around all changes

All changes will need to be reported as either Major or Minor

Changes to Model Scope and Change Policies will also require approval

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Do you have analysis to support your currently defined SCR threshold for a major change – ‘Back-testing’?

A. Yes.

B. No.

3 July results

2 July results

55%

A

45%

B

36%

A

64%

B

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How many Major model changes do you anticipate?

A. More than 2 per year

B. Between 1 and 2 per year

C. Less than 1 per year

D. Less than 1 every 2 years 3 July results

2 July results

10%

A

39%

B

41%

C

10%

D

16%

A

40%

B

40%

C

4%

D

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How many Minor model changes do you anticipate under the current version of your Model Change Policy?

A. Less than 10 per quarter

B. 10 to 50 per quarter

C. 50 to 100 per quarter

D. More than 100 per quarter

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3 July results

2 July results 67%

A

31%

B0%

C

2%

D

64%

A

31%

B

2%

C

2%

D

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How many Minor model changes would you expect if you had to assume all parameter changes are included (but assuming some grouping of related parameters)?

A. Less than 10 per quarter

B. 10 to 50 per quarter

C. 50 to 100 per quarter

D. More than 100 per quarter 3 July results

2 July results

33%

A

44%

B

7%

C

16%

D

28%

A

47%

B

12%

C

14%

D

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What do you consider to be a reasonable Service Standard for Lloyd’s consideration of Major Model Changes?

A. Within 6 months (EIOPA quoted limit)

B. 3-6 months

C. 1-3 months

D. Less than 1 month

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3 July results

2 July results

5%

A0%B

30%

C

66%

D

2%

A

7%

B

30%

C

61%

D

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At what stage are you at in implementing your approach to model change?

A. Still being designed

B. Fully designed but needs implementing

C. Partially implemented

D. Fully implemented and ready for first change

E. Fully implemented and we have changes going through the process

3 July results

2 July results

0%A

30%

B

16%

C

19%

D

35%

E

0%A

17%

B

21%

C

30%

D

32%

E

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Group Discussions

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Suggested topics for discussion

Rationale for model scope

Change trigger levels and back-testing

Aggregation of minor changes

Parameter updates/risk profile changes

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Q3 & Q4 2012 GRMU ACTIVITY

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Q3 Activity

Individual agent feedback on Model Scope and Model Change Walkthrough

Further consideration of Market Guidance on Model Scope and Model Change

predicated by the need for clarity on the Solvency II regulations/ Level 3 text in this area

Remaining final follow-up review reports issued

Review of Operational Risk Methodology in July SCRs

Review of resubmitted ORSAs and Evidence Templates

Planning for Use Test and embedding reviews

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Q4: Use Test & Embedding reviews Two key elements to review

Review of documentation supporting Use Test compliance

Interviews with directors (and possibly other staff)

As far as possible we will use documentation already provided

Where necessary, additional documentation will be requested during Q3

Interviews expected to start in September

We will endeavour to co-ordinate these meetings with similar plans by FSA

Interviews likely to last 60-90 mins and focus on:

Individual’s knowledge of Solvency II and agent’s approach to it

Changes brought about by the Solvency II project

Knowledge and understanding of new MI and of accountability for risk management

Use of MI in decisions

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next steps

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Next Steps Slides will be made available on lloyds.com after both workshops

ORSA resubmissions for some agents received 29 June

Feedback to be provided during July/August

GRMU evidence template re-reviews on-going

Individual agent model change feedback to be provided during July (but subject to future change as above)

We will endeavour to issue further market guidance on model scope and model change once more clarity is available through the Solvency II text

Other upcoming sessions:

Documentation & Final Application – 17 & 18 July and then none currently scheduled until November on SREP

Any additional sessions you would like to see?

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