1 Faculty of Actuaries Edinburgh, 1 October 2007 The Challenge of Solvency II Karel VAN HULLE Head...
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Transcript of 1 Faculty of Actuaries Edinburgh, 1 October 2007 The Challenge of Solvency II Karel VAN HULLE Head...
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Faculty of ActuariesFaculty of Actuaries
Edinburgh, 1 October 2007Edinburgh, 1 October 2007
The Challenge of The Challenge of Solvency IISolvency II
Karel VAN HULLEHead of Unit, Insurance and Pensions, DG Markt,
European Commission
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• « Not everything what can be counted counts – and not everything what counts can be counted »
Albert Einstein
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Proposal for a Framework DirectiveProposal for a Framework DirectiveJuly 10th 2007July 10th 2007
Recast
&
Codification
Codification &
New Articles
+ Solvency II14 existing Insurance Directives (direct
insurance, reinsurance, groups etc.)
= 1 Directive ‘EU Insurance sourcebook’
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Solvency II – 4 Principal ObjectivesSolvency II – 4 Principal Objectives
• Deepen the Single Market
• Enhance policyholder protection
• Improve (international) competitiveness of EU insurers
• Further Better Regulation
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• Introduces an economic risk based approach that Introduces an economic risk based approach that will reward good risk management and enhance will reward good risk management and enhance policyholder protectionpolicyholder protection
• Places emphasis on the responsibility of the Places emphasis on the responsibility of the senior management to manage their business senior management to manage their business responsibly responsibly
• Fosters and demands greater supervisory Fosters and demands greater supervisory convergence across the Communityconvergence across the Community
The new regime…The new regime…
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Legislative Process - Lamfalussy
Level 1: Framework Directive
Level 2: Implementing Measures
Level 3: Convergent implementation assisted by close co-operation between national
authorities
Level 4: Rigorous enforcement of Community legislation by the Commission
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Many players & stakeholders in the process…Many players & stakeholders in the process…
• Commission Proposal for a Directive following consultation & dialogue with– Industry– Professionals (e.g. Groupe Consultatif)– CEIOPS– Member State Experts
• European Parliament and Council of Ministers negotiate and have final say over law
• Implementation by national authorities and 1000s of insurers in Europe
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• Key element of Better Regulation• QIS 3 April – June 2007• Analysis and conclusions from QIS3 will be
published in November 2007• Results will feed into negotiations, changes to
high-level framework if necessary• QIS 4 will take place between April and July
2008 following public consultation with all stakeholders
• Results of QIS4 will feed into development of implementing measures
Quantitative Impact StudiesQuantitative Impact Studies
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Solvency II timetable for 2007-2012
Directive development (Commission)
CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training &
development
2006 2007 2008 2009 2010 2011 2012
Directive adoption(Council & Parliament)
Implementation(Member states)
QIS 2
July 2007 Solvency II Directive published
QIS 3
Commission preparatory work on possible implementing measures
and impact assessment
Adoption of Implementing
measures
QIS 4
2012 Solvency II enters into force
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Solvency II – Content & TargetsSolvency II uses the “three-pillar approach” found in Basel II
Underwriting Risk
Market-/ALM Risk
Credit Risk
Operational Risk
Risk category
Solvency requirements
Pillar I
Quantitative Supervisory
Calculation of a risk adequate capital need on the basis of company individual risk profiles
Incentives to develop internal systems to measure and manage risks
Cover- und Capital investment directives
Integrated Solo-Plus supervision and Supervision of reinsurance companies
Supervisory process
Pillar II
Qualitative Supervisory
Assessment of the Risk management and control systems and processes Supervisory of:
Risk categories RI Program Internal Risk Model Stress tests and
sensitivities Asset-Liability
Mismatch Mgmt. assessment
„Fit and Proper“
Peer Reviews of other Supervisory Bodies
Market transparency
Pillar III
Strengthening of Marketmechanism
Disclosure requirements Risks Sensitivity and
scenario analysis of assets and technical provisions
Results of the quantitative and qualitative supervisory Assessment
….. Still widely undefined,
ongoing dialog with the IASB
Trend: Fair Value Reporting
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From Solvency I to a Solvency II Balance Sheet
Economic View“The overall objective of prudential regulation must be to ensure that an insurer maintains, at all times, financial resources which are adequate, both as to amount and quality, to ensure there is no significant risk that its liabilities cannot be met as they fall due.” (CP20, 2.2)
„OLD“ „NEW“
Statu
ary Valu
e of A
ssets
Statuary
Value of
Liabilities.
Required
Capital
Ratio of required to available capitalM
arket Valu
e of A
ssets Best
Estimate of
Liabilities.
Risk-Margin
Technical Provisions
Solvency CapitalRequirement
Ratio of required to available capital
AvailableCapital
AvailableCapital
MinimumCapitalRequirement
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Solvency II – ChallengesSolvency II – Challenges
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Pillar IPillar I
• The introduction of market consistent valuation of assets and liabilities and economically based capital requirements will require insurers:– to accurately assess their current financial position
using modern financial mathematical and actuarial techniques and to better manage their asset-liability mis-match risk
– to fully understand the economic effects of the risk mitigation techniques they use such as reinsurance, securitisation and derivatives
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• The introduction of qualitative risk management standards covering all risks, not just those captured by the Pillar 1 requirements will require insurers:– to ensure that risk assessment and risk management
play a central role in their system of governance– to explain to their supervisors how they manage and
control the risks they run and how they determine their own capital needs
Pillar IIPillar II
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Actuarial Function
The acturial function shall be carried out by persons sufficient knowledge of actuarial and financial mathematics and able where appropriate, to demonstrate their relevant experience and expertise with applicable professional and other standards
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• Coordinate the calculation of technical provisions;• Ensure the appropriateness of the methodologies and underlying
models used as well as the assumptions made in the calculation of technical provisions;
• Assess the sufficiency and quality of the data used in the calculation of technical provisions;
• Compare best estimates against experience;• Inform the administrative or management body of the reliability
and adequacy of the calculation of technical provisions;• Oversee the calculation of technical provisions;• Express an opinion on the overall underwriting policy;• Express an opinion on the adequacy of reinsurance
arrangements;• Contribute to the effective implementation of the risk
management system.
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• The introduction of new disclosure requirements bringing market discipline to bear on insurers will require insurers:– to explain to shareholders, rating agencies and
analysts clearly and accurately how their risk profile and risk appetite fits in with their overall business strategy
– to explain to external stakeholders how they assess and manage risk, particularly those insurers using an internal model to calculate capital requirements
Pillar IIIPillar III
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• Insurers wishing to use the new approach to group supervision will be required:– to monitor, manage and control risk at group level, and
in particular diversification effects across both legal entities and lines of business in their risk management processes and practices
– to manage their capital needs and investments holistically rather than in a piece-meal fashion on a legal entity basis
Group supervisionGroup supervision
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ConclusionConclusion
• Solvency II is all about improving risk management and rewarding already existing good practice– Updating risk management processes and
practices in any company takes time– Insurers need to start preparing now, if they do not
want to be caught out when Solvency II comes into force
– The future belongs to those who prepare for it today