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PwC
Solvency II
*connected thinking
Solvency II GAP-analysis: practical experience (life and non-life business)
PricewaterhouseCoopers Slide 2
Decide ambition level for Solvency II
Business use
Optimizing reinsurance
Capital allokation
Asset & Liability management
Investment optimization
Dynamic strategies
Risk limits
Risk based P/L and performance
Product development and pricing
Link to the ORSA and business
strategy test/scenarios
Discussions with rating agencies
All risks
Life risk
Non-life risk
Health risk
Marked risk
Default risk
Operational risk
Whole company
Legal entities
Business lines
Products
Territory
Standard model, Total eller partiel
Full intern model
Partial intern model
Only examples
Standard model
PricewaterhouseCoopers
17th of August 2009
Page 3
Preliminary time plan
October
Phase 1
Full scoping exercise
Phase 2
Review
Phase 3
Report / Presentation
September
Week 36
Aug 31 – Sep 4
Week 42
Oct 12 – Oct 16
Week 38
Sep 14 – Sep 18
Week 39
Sep 21 – Sep 25
Week 40
Sep 28 – Oct 2
Week 41
Oct 5 – Oct 9
• A one day workshop with all key stakeholders
• Agreement on areas of detailed review
- Technical requirements
- Internal capital model
- Governance and Risk management framework
- Technology and reporting
• A half day resource planning and scoping exercise
Week 37
Sep 7 – Sep 11
• Interviews
• Review of documentation
• Review of models and methods
• Benchmarking and analysis
Based on agreed scope
• Confirm findings with key stakeholders
• Issue final report including recommendations
• Presentation
Week 43
Oct 19 – Oct 23
PricewaterhouseCoopers
17th of August 2009
Page 4
Our approach – Phase 1 – Scoping
Approach Method
Day 1
• PwC presents an overview of the Solvency II regulation as well as
opportunities and challenges.
• PwC presents the project plan to all key stakeholders
• The company to present an overview of its business as well as
risk management and governance frameworks.
Day 2
• Decision regarding the scope, priorities and time plan for the gap
analysis.
• Designation of key people, documentation, IT systems, models
and other items that will be included in the review.
Day 1
• A one day workshop
Day 2
• A half day planning meeting
Results – Phase 1 Resources and Time Scale
• Decision on the review areas by territory (documents, IT-systems,
models, etc.)
• Definition of what will be a successful project
• Understand the areas the company already would like to improve
on.
• Confirm project structure and roles – the company/ PwC
• Identification of people to be interviewed as well as a confirmed
interview schedule.
The Company
• The company to allocate one person to support the interviewing
process and gathering the necessary documentation.
Day 1
• All key internal stakeholders including e.g. Risk Management,
Actuarial, Finance, Asset Management and IT
Day2
• Resource responsible for areas mentioned above.
PwC
• Core team
Time scale
Day 1
• Beginning of September for example week 36
Day 2
• Approximately one week later.
Phase 1
Scoping
PricewaterhouseCoopers
17th of August 2009
Page 5
Proposed Review area The following details may be reviewed:
I. Technical requirements
(excl internal capital model)
Technical provisions
Valuation of assets and other liabilities (non-insurance)
MCR
SCR
Own funds
Data requirements and methodologies
II. Internal capital model Scope of model (countries, risks, portfolios etc)
Model structure
Model assumptions
Validation process
Calculations and reasonability of results
Model documentation
Back testing of the model
Sign-off processes
Risk ranking powers of the model
Link to core business processes e.g. business plan, risk register and MI
III. Governance and Risk
management framework
Risk policies
Risk reporting
Risk strategy
Own risk and solvency assessment (ORSA)
Organization
Senior management responsibilities
Terms of reference for committees
Fit and proper requirements
Outsourcing
Operational procedures and internal control framework
IV. Technology and reporting IT infrastructure
Data management
Systems security and controls
System integration between territories
Management reporting
Internal reporting
External reporting
Our approach – Phase 1 – ScopingPhase 1
Scoping
PricewaterhouseCoopers
17th of August 2009
Page 6
Our approach – Phase 2 – Review
Approach Method
• Conduct the review as per agreed scope
• Identify areas for improvement in order to comply with Solvency II
Our approach will take into account:
• PwC Solvency II gap analysis will be based on the Solvency II
Directive, QIS Information, CEIOPS Consultation papers and
feedback from organizations such as CEA, Group Consultatif and
the CRO Forum.
• Lessons learned from previous gap analysis in Scandinavia and
Europe. Moreover, we can reference to experience with ICAS in
the UK, Solvency 1,5 in Denmark as well as previous Basel II
experience.
• Use of PwC’s internally developed gap analysis tool
• Interviews - before each interview an agenda is sent out al least
24 hours before the interview.
• Interviews are documented and reviewed by the person that was
interviewed.
• Review of available documentation
• Review of models and methods
• Benchmarking against best practice
Results – Phase 2 Resources and timescale
• Assessment of the completeness and accuracy of current
documentation such as policies, model descriptions, functional
descriptions. Check whether it is in line with current market best
practices.
• Assessment of risk management and governance framework.
• Benchmark modeling of all relevant risk types according to market
best practice.
• Assess how the calculation of the SCR, Best Estimate and market
valuation of assets complies with the requirements according to
the Solvency II regulation.
• Assessment of the capital base.
• Overall assessment of the appropriateness of the IT architecture
from a Solvency II perspective.
The Company
• Interviews with CEO, CFO, Chief Actuary, Risk Management,
Compliance, Asset Management, IT, business internal audit. 1,5
hour per interview.
• Short meetings or telephone/email contact to confirm findings with
interviewed staff
• Weekly status meetings with the company’s contact person.
PwC
• Two PwC team members participate in the interviews.
Time scale
• 4 weeks (week 38 to week 41)
Phase 2
Review
PricewaterhouseCoopers
17th of August 2009
Page 7
Our approach – Phase 2 – ExamplesPhase 2
Review
Interviews (indicative list)
• CEO
• CFO
• Chief actuary / actuaries
• Chief Risk Officer
• Risk analysts
• Chief Investment Officer /IT staff
• Head of business units
• Head of Compliance
• Chief Investment Officer
• Product managers
• Legal Counsel
• Reinsurance responsible
• Internal audit
Documentation (indicative list)
• Legal structure
• Functional descriptions
• Job descriptions
• Policies and instructions
- Investment policy, reinsurance policy, risk policies, etc.
• Documentation of provisioning techniques
• Minutes from different committees such as risk,
ALM, investment as well as board minutes.
• Documentation of the IT system
• Public reports
- Solvency reporting, financial statements
• Risk reporting to CRO. CFO, CEO and board.
• Documentation of internal models (if available)
PricewaterhouseCoopers
17th of August 2009
Page 8
Our approach – Phase 3 – Reporting
Approach Method
• Summary and reporting of:
- Identified areas that do not comply with the upcoming regulation
- Recommendations including ”quick wins”
- Prioritization of activities
- Suggested high level activities and responsibilities for continued
work with Solvency II.
• Confirm findings and recommendations with relevant persons
within the company
• Highlight areas that will need to be improved for Solvency II
compliancy.
• Highlight areas where the future Solvency II program can realize
benefits within the business
• Prioritize findings
• Develop recommendations for activities
• Propose high level activities for Nordea’ Solvency II program set
up
• Produce final report and recommendations
• Second opinion on final report and presentation by European pool
of Insurance and Solvency II experts.
Results – Phase 3 Resources and time scale
• Final report with conclusions and recommendations
• Presentation before the company’s project sponsor and key staff
The Company
• 3 hour review together with PwC
PwC
• Core team
Time scale
• End of October (week 42 and 43)
Step 3
Reporting
PricewaterhouseCoopers
17th of August 2009
Page 9
Our approach - Gap analysis tool – example reports
The requirements of Solvency II have been catalogued and
transformed into a questionnaire and database software: the
Solvency II Gap analysis tool. This is used by our
consultants during the analysis process.
The Gap analysis tool can help with:
• Systematic identification of gaps and needs for action
• Production of configurable result reports
• Creating a structured framework for identifying issues
which must be addressed to decision makers in a timely
manner
The tool is very flexible, and can be adapted to our specific
requirements.
PwC has also developed a reporting package that is tailored
to the gap analysis tool and ensures that the deliverables
are uniform and consistent..
PricewaterhouseCoopers
17th of August 2009
Page 10
Benefits of using the Gap analysis tool
The Gap analysis tool can deliver a number of core benefits which include:
• Early identification of any potential gaps in relation to the Solvency II Directive
• A structured approach and a logical flow through the Directive
• Ensuring the right questions are asked and that the review is comprehensive and complete
• Remove duplication
• Prioritisation of issues, to allow efficient allocation of resources
• Intelligent navigation through dependencies
• Central administration
- quality assurance with regard to content/functionality
- uniform firm-wide approach of Solvency II projects
• Flexibility in application across businesses
PricewaterhouseCoopers
17th of August 2009
Page 11
Impact of findings on key areas of the business [Illustrative]
PricewaterhouseCoopers
7 October 2007
Slide 12
Overview of learning points
from previous Solvency II projects
PricewaterhouseCoopers
7 October 2007
Slide 13
Key considerations (1/2)
Effect on the balance sheet
• How will the new valuation principles affect our balance sheet and solvency situation?
• Do we need more capital?
Risk assessment
• Are all material risks covered in our internal risk assessment?
• Can we manage and continuously report risks on an individual and aggregated level?
Ambition level for SCR
• Do we want to use our internal model to calculate SCR?
• Which risks do we want to calculate?
• All business lines?
PricewaterhouseCoopers
7 October 2007
Slide 14
Key considerations (2/2)
Information to senior management and board
• What result did we get in the latest QIS?
• In which areas should we bring up our views?
Effect on the strategy and organisation
• Will Solvency II affect our business strategy, both within and outside EU?
• Will Solvency II affect our operational structure and organisation?
• Do we have the proper resources and expertise?
Solvency II project
• How much is the implementation of Solvency II going to cost?
• How can we manage these costs in an effective way?
• When should we establish a project group?
PricewaterhouseCoopers
7 October 2007
Slide 15
Challenges
• Integration of capital management with business and risk management
• IT and data
• Lack of management and board buy-in
• Lack of qualified resources
- Actuarial
- Risk management
- General Solvency II expertise
• Effective implementation of Solvency II
• Realisation of valuable synergies between Solvency II and IFRS Phase II
PricewaterhouseCoopers
7 October 2007
Slide 16
Key success factors when deciding ambition level for SCR
• Business case for internal model
• Understanding why an internal model approach is chosen or not
• Identifying challenges with the chosen set-up
• Senior management understanding and buy-in
