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Overview on Solvency II Pillar 1Pillar2 Pillar3
Citation preview
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