Where we are in Solvency II

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Where we are in Solvency II key milestones

• CEIOPS implementing measures
• End October final advice wave 1 2
• ? Importance to have a concrete proposal on the
  illiquidity premium
• Nov Dec 2009
• 3rd Wave (4 weeks consultation period)
• Main topics
• Own funds (participations, quantitative limits,
  ring fenced funds)
• Equity risk sub module
• Calibration
• Centralized risk management

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Solvency II - QIS 5

• August November 2010 QIS 5
• July 2010 Spread sheet for the test
• June 2010 Publish final technical specification
  
• March 2010 QIS 5 technical specification and
  comprehensive calibration paper
• Calibration CEIOPS report
• March/June 2010 Consultation EIOPC, EP and
  industry EC in the driving seat
• December 2010 national Sup ? Central data base
• April 2011 Final QIS 5 report

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European Stress testing for the 30 major insurers

• Probably still in 2009
• CEIOPS Stress testing task force is well advanced
  in the development of the stress test structure
• not too complex
• scenarios translated in shocks
• will cover equities, commodities, real estate,
  foreign exchange, default risk, spreads
• no correlations
• Valuation basis still to be determined, depending
  from the timing

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Solvency II - Level 2 implementing measures

• Three key messages from CEIOPS
• Implementing measures need to be conform to Level
  1 text
• Need to take into account the lessons learnt from
  the crisis e.g. calibration, specific group
  risks
• Element of cross sectoral consistency needs to
  be well monitored as banking framework is not
  based on a market consistent valuation rather
  than a mixed model

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Solvency II Implementing measures main concerns
wave 2

• Classification and Eligibility of own funds (CP
  46)
• Requirements for Tier 1 capital are more
  restrictive than those agreed in the Directive
• Useful less of hybrid capital instruments is
  largely ignored
• Maturity of capital instrument should not be
  directly related to the insurers liabilities
• Concept of grandfathering is currently missing
  should be adequately reflected in the
  implementing measures
• Cross sector consistency for the determination of
  eligible own funds is desirable
• Assessment of group Solvency
• Risk of un-harmonized treatment for participants
  by local supervisors
• A quick decision on equivalent territories is
  vital
• Risk of non-recognition of diversification
  benefits with third countries
• Confusion around the concepts of diversification,
  solvency and fungibility/transferability
• Group-specific risks such as reputational risk,
  contagion risk and the impact of intra-group
  transactions, represent opportunity losses, hence
  do not require additional capital

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Solvency II Implementing measures main concerns
wave 2

• Valuation of technical provisions (CP 40, and 42)
  
• CP 40 swap rates should be the preferred
  risk-free rate
• CP 40 a liquidity premium should be recognized
  for certain lines of business
• CP 42 risk margin should not be artificially
  high
• CP 42 an empty reference entity does not reflect
  market valuation principles
• CP 42 diversification across lines of business
  should be recognized
• Calibration SCR (CPs 48, 49, 51, 53 and 54)
• The proposed calibrated factors should be
  economically justified
• Internal Models (CP 56)
• Minimum standards for internal models should also
  apply to standard model
• A common approval process for internal model at
  group and subsidiary level is required

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Solvency II - Framework Directive

• A review of the Directive should be made to
  assess scope and impact of compromise
• e.g. centralysed risk management (sub section 6)
• The transposition exercise is a risk element in
  the process which should be monitored

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Solvency II System of Governance (CP 33)

• Agreement on main outlines of the advice
• Level of details in level 1, 2 3
• Important to take into account other existing
  directives or certain elements such as
  outsourcing
• Responsibility of risk management is to set the
  overall Enterprise Risk Management Framework and
  to oversee the operators of the company to
  ensure alignment with the framework
• Risk governance
• Risk appetite (overall specific risk limits)
• Risk assessment valuation methodology
• Risk control framework (focus on operational
  risk)
• Governance with respect to insurance groups not
  addressed

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Solvency II System of Governance

• Overlap in roles responsibilities between the
  actuarial function the risk management function
  ? need clarification
• Discussion on concept a scope of independence of
  the actuarial function
• Importance of the integration in the day to day
  operations business decision
• ? Consequence overlap with risk management
  finance functions
• Actuaries play various roles including in pricing
• The independence should be applied on the
  valuation role ? express an opinion to the board
  on certain matters such as reliability adequacy
  of the technical provisions
• No agreement on the fact that the actuarial
  function shall rely on European technical
  standards developed a body of representatives of
  different stakeholders

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Sub section 6 Supervision of Groups Solvency
for groups with centralized Risk Management

• Understanding of the Subsection 6
• The subsection allows companies to submit an
  application for
• permission to be subject to Articles 236 and 238.
  these articles
• govern a strengthened cooperation and decision
  process
• (obligation to inform the college and procedure
  for final decision
• on the issue) in two specific cases
• Determination of the SCR for the subsidiary of a
  group (including the capital add-on) normally
  governed by Article 229 (Group internal model)
• Non compliance with the SCR treated by Article
  136 at solo level.

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Sub section 6 Supervision of Groups Solvency
for groups with centralized Risk Management

• To be eligible for this permission the following
  conditions must
• fulfilled (article 234)
• The subsidiaries concerned are included in the
  scope of group supervision
• The following conditions met
• The risk management processes and internal
  control mechanism of the parent cover the
  subsidiary
• The supervisory authorities concerned are
  satisfied as regards the prudent management of
  the subsidiary by the parent
• The group supervisor has agreed on the
  preparation of a single document covering the
  ORSA on Solo and Group levels
• The group supervisor has agreed on the
  preparation of a single solvency and financial
  condition report for the whole group
• A procedure consequence of the permission to
  subject subsidiaries to
• Articles 236 238 is that it neutralizes the
  possibility for sub-group
• supervision in jurisdictions other than that of
  the parent company jurisdiction
• (Article 214)