SOLVENCY II

September, 2010

Solvency II

Solvency is a set of directives for insurance companies involving the companies’ vision, their risk appetite, governance methodology, data quality and new rules of risk management that is translated to Capital Requirements

Solvency II is a big shift in the management culture of the Insurance Industry. It places risk management at the core of insurance companies activities.

Solvency II is a modus vivendi, not just one set of reports. It is a give and take way of doing business between companies and regulators.

It will be dynamic and will be developed with time.

Risk = Capital

Assets

(Detailed Rules orMarketValue)

Technical Provisions

SCR

FreeCapital

MCR

Insurance risk

Market risk

Credit risk

Other risks

Capital Requirement

Operational risk

The Influence of Solvency II According to IBM

SOLVENCY IIThe Three Pillars

September, 2010

Solvency II Three Pillars - Pillar I

• The focus of the Pillar I framework is capital adequacy and how to calculate it Technical Provisions

• Represents the current amount a company would have to pay for an immediate transfer of its obligations to a third party

• Future cash-flows from obligations towards policyholders and beneficiaries of insurance contracts valued using best estimate assumptions

Solvency Capital Requirement (SCR) • Capital to be held by the company in order to ensure that ruin occurs no

more often than once in every 200 cases• Corresponds to the Value-at-Risk of the net assets of the firm subject to a

confidence level of 99.5% over a one-year period• Can be calculated:

– Standard formula given by the regulators – Internal model developed by the company

• MCR– Level of capital below which authorisation could ultimately be

withdrawn – MCR = Max(absolute MCR, calculated MCR)

Solvency II Three Pillars - Pillar II

• Pillar 2 focus are the requirements for governance, risk management and supervision• Overall Governance

Internal controls and risk management Enterprise-wide visibility to key information Consistent risk management

• Development of a risk strategy Definition of risk tolerance and risk appetite ORSA own risk and solvency assessment

• SRP Supervisory Review Process

Solvency II Three Pillars - Pillar III

• The focus of Pillar 3 is transparency Regulatory reporting Transparent market disclosure Providing consistent information on a timely basis

Task Definition and Timetable

Roles, Responsibilities and Accountability

Governance

Project Schedule

Gap Analysis

Vision Definition

Goals Internal Models or Standard Formula

Risk AppetiteRisk Tolerance

Solvency II Directives

Vision Definition

• Our goals, how do we intent to implement the compliance requests• Risk appetite and risk tolerance definition• What are the issues we expect to have a positive impact on the

business • In which subjects we want to limit ourselves to pure and simple

compliance• The main question: Standard formula or internal models

How much will it cost us the past of internal models How much it will cost us not to use internal models

SOLVENCY IIConsultation Papers and

Directives

September, 2010

Consultation Papers – First waveTitle of Consultation Paper (CP) # of CP # of Pages of

CP

Pillar # of feed back papers

Technical Provisions – Elements of actuarial and statistical methodologies for the calculation of the best estimate

26 13 I 24

Technical Provisions – Lines of business on the basis of which (re)insurance obligations are to be segmented

27 10 I 23

SCR Standard Formula – Counterparty default risk module 28 29 I 23

Own funds – Supervisory approval of ancillary own funds 29 15 I 18

Technical Provisions – Treatment of future premiums 30 11 I 24

SCR Standard Formula – Allowance of financial mitigation techniques

31 12 I 21

Technical Provisions – Assumptions about future management actions

32 11 I 22

System of Governance 33 67 II 32

Transparency and Accountability 34 16 III 17

Valuation of assets and “other liabilities” 35 37 I 23

Special Purpose Vehicles 36 34 II 15

The procedure to be followed for the approval of an internal model: General provisions and some specificities related to partial internal model

37 50 II 27

Title of Consultation Paper (CP)# of CP # of Pages of

CPPillar

Procedure to be followed for the approval of a group internal model 37A 21 IITechnical Provisions - Best Estimate 39 67 ITechnical Provisions - Risk Free Interest Rate 40 45 ITechnical Provisions - Calculation as a whole 41 12 ITechnical Provisions - Risk Margin 42 54 ITechnical Provisions  - Standards for Data Quality 43 20 ITechnical Provisions - Counterparty Default Adjustment 44 10 ITechnical Provisions - Simplifications 45 55 IOwn Funds - Classification and Eligibility 46 42 ISCR Standard Formula - Market Risk 47 41 ISCR Standard Formula - Non-life Underwriting Risk 48 49 ISCR Standard Formula - Life Underwriting Risk 49 51 ISCR Standard Formula - Health Underwriting Risk 50 52 ISCR Standard Formula - Counterparty Default Risk 51 36 ISCR Standard Formula - Reinsurance Mitigation 52 13 ISCR Standard Formula - Operational Risk 53 20 ISCR Standard Formula - Loss Absorbing Capacity of Technical Provisions 54 38 ISCR Standard Formula - MCR calculation 55 20 ITests and Standards for Internal Model Approval 56 202 IICapital add-on 57 73 IISupervisory Reporting and Disclosure 58 143 IIIRemuneration 59 14 IIGroup Solvency Assessment 60 56 IIIntra-group Transactions and Risk Concentration 61 16 IICooperation and Colleges of Supervisors 62 39 II

Consultation Papers – Third wave

Title of Consultation Paper (CP)# of CP # of Pages of

CPPillar

Repackaged loans investments 63 23 I

Extension of Recovery Period 64 20 I

Partial Internal Models 65 105 I

Group Solvency for Groups with centralised risk - management 66 30 I

Treatment of Participations 67 29 I

Treatment of ring fenced Funds 68 25 I

Design of the Equity risk sub-module 69 47 I

Calibration of the market risk sub-module 70 51 I

Calibration of the non-life underwriting risk 71 I

Calibration of the health- underwriting risk 72 I

Calibration of the MCR 73 15 I

Correlation parameters 74 28 I

Undertaking Specific Parameters for SCR 75 72 I

Simplifications for Technical Provisions 76 110 I

Simplification for SCR 77 31 I

Simplifications for Captives 79 24 I

2004-2009Submitted Papers

Date Document title

12.10.2010 3 3 L Task Force Report on PRIPs

31.08.2010 CEIOPS Cover letter /  - 172, 227 260 CEIOPS Advice to the European Commission Equivalence assessments to be undertaken in relation to Articles and of the Solvency II Directive

02.08.2010 CEIOPS general message as to EC Green Paper on Pensions

30.06.2010 JCFC Letter to EC on Annual notification of Financial Conglomerates /   ( 2010)List of financial conglomerates June

15.06.2010 CEIOPS Cover letter on Catastrophe Task Force Report /  CEIOPS Catastrophe Task Force Report on Standardised Scenarios for the Catastrophe Risk Modudule in the Standard Formula

15.04.2010 2 CEIOPS main background document for Level advice as to calibration

08.04.2010 2 CEIOPS Cover Letter on final set of Solvency II final L advice to EC /  2 CEIOPS Feedback statement on the final set of Solvency II final L advice to EC

' 2 : CEIOPS Advice for L Implementing Measures on SII Calibration of the MCR / ' CEIOPS Resolutions on Comments Received

' 2 : CEIOPS Advice for L Implementing Measures on SII Calibration of Health Underwriting Risk / ' CEIOPS Resolutions on Comments Received

' 2 : - CEIOPS Advice for L Implementing Measures on SII Calibration of Non life Underwriting Risk / ' CEIOPS Resolutions on Comments Received

01.04.2010  CEIOPS Cover Letter to EC /' 2 : 3 . 172, 227 260CEIOPS Advice for L Implementing Measures on SII Technical Criteria for assessing rd country equivalence in relation to art and / 

' CEIOPS Resolutions on comments received03.03.2010 Task Force Report on the Liquidity Premium /  CEIOPS Cover Letter

29.01.2010 3 2 CEIOPS Cover Letter on rd set of Solvency II final L advice to EC /  3 2 CEIOPS Feedback statement on the rd set of Solvency II final L advice to EC

' 2 : / CEIOPS Advice for L Implementing Measures on SII Simplifications Specifications for captives / ' CEIOPS Resolutions on Comments Received ( . 79)former Consultation Paper no

' 2 : CEIOPS Advice for L Implementing Measures on SII Simplified calculations in the standard formula /' CEIOPS Resolutions on Comments Received ( . 77)former Consultation Paper no

' 2 : CEIOPS Advice for L Implementing Measures on SII Simplified methods and techniques to calculate technical provisions / ' CEIOPS Resolutions on Comments Received ( . 76)former Consultation Paper no

' 2 : CEIOPS Advice for L Implementing Measures on SII Undertaking specific parameters / ' CEIOPS Resolutions on Comments Received ( . 75)former Consultation Paper no

' 2 : - CEIOPS Advice for L Implementing Measures on SII SCR Standard Formula Correlations / ' CEIOPS Resolutions on Comments Received ( . 74)former Consultation Paper no  - Annex IA

' 2 : CEIOPS Advice for L Implementing Measures on SII Calibration of Market Risk Module / ' CEIOPS Resolutions on Comments Received ( . 70)former Consultation Paper no

' 2 : -CEIOPS Advice for L Implementing Measures on SII Equity risk sub module / ' CEIOPS Resolutions on Comments Received ( . 69)former Consultation Paper no - Annex IA

' 2 : - CEIOPS Advice for L Implementing Measures on SII Ring Fenced Funds / ' CEIOPS Resolutions on Comments Received ( . 68)former Consultation Paper no

' 2 : CEIOPS Advice for L Implementing Measures on SII Treatement of participations / ' CEIOPS Resolutions on Comments Received ( . 67)former Consultation Paper no

- Annex IA' 2 : CEIOPS Advice for L Implementing Measures on SII Supervision of Group Solvency for Groups with Centralised Risk Management /

' CEIOPS Resolutions on Comments Received ( . 66)former Consultation Paper no' 2 : CEIOPS Advice for L Implementing Measures on SII Partial internal models / ' CEIOPS Resolutions on Comments Received ( . 65)former Consultation Paper no

- Annex IA' 2 : CEIOPS Advice for L Implementing Measures on SII Extension of the Recovery Period / ' EIOPS Resolutions on Comments Received 

( . 64)former Consultation Paper no - Annex IA

' 2 : CEIOPS Advice for L Implementing Measures on SII Repackaged Loans Investment / ' CEIOPS Resolutions on Comments Received ( . 63)former Consultation Paper no

RISKSMarket Risks

Credit Risks

Operational Risks

Liquidity

Professional Negligence

Fraud

Concentration Risk

Portfolio Retentio

n

Catastrophe

Asset – Liabilitie

s RiskRecession

Financial and Economical

Situation

Investment Risk

Underwriting Risk

Mortality Risk

Morbidity Risk

Longevity

Disability Risk

Lapse Risk

• Shares Risk• Interest-rate Risk• Exchange-rate Risk• Real-estate Risk

SOLVENCY II Governance

• Clear definition of: Roles Responsibilities Accountability

• Board members, sub-committees of the board, senior management• ‘Fit’ and ‘Proper’ requirements• Regular internal review of governance• Structure• Documentation

Governance

• Governance structure must include SII-prescribed functions Risk Management Internal Control Compliance Internal Audit Actuarial

Pillar II Governance Structure

• Documentation required of governance policies and processes Emerging risks – processes to identify and manage Loss events - record, monitor, report and analyse trends Key risks - measure, track, manage and report all key risks Own Risk Self Assessments (ORSA) through Risk & Control Self

Assessments Audits - automatic generation and distribution of audits, record audit

findings, create actions, monitor and track progress Data - collection of quality and consistent data for all reporting purposes

Pillar II Governance Documentation

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