Solvency II Solvency II The Challenges of Solvency II
Gain-Line & Solvency II Solvency II is the biggest ever exercise in bringing together insurers and re-insurers under one regulatory regime. • Solvency II is a set of principles and guidelines leading to best practice in risk management; Solvency II Programme • It is an Enterprise Wide initiative that will impact all areas of the business; • It is an Enterprise-Wide initiative that will impact all areas of the business; • Early adopters are helping the FSA set the bar for what is required in the M Market; k t • Numerous approaches are being adopted across the market and it not a case of one size fits all ; f i fi ll • The range and diversity of insurance operations means that a Solvency II solution will vary from company to company; l i ill f • The eventual solution in each case will depend on a range of inputs from a number of different disciplines. Slide 2
Who Are Gain-Line The Gain-Line Group is a consortium of specialist companies who have come together to deliver a solution for Solvency II Solvency II Programme Slide 3
Gain-Line & Solvency II There are many stakeholders with differing priorities that need to be integral to the Solvency II Programme • Chief Actuary – centralised and consistent modelling approach for all actuarial ensuring realistic ‘what-if’ and Solvency II Programme CA CIO scenario planning; i l i • Chief Risk Officer – enterprise wide consistent risk CEO management standards and transparent risk modelling a age e t sta a s a t a spa e t s o e g approach; CFO CRO • Chief Information Officer – robust IT governance with a consistent approach to data controls & quality; • Chief Financial Officer – faster reporting timetable with a consistent approach to financial and management information; • Chief Executive Officer – enhanced business performance through risk-based decision making and more efficient allocation of capital. Slide 4
Solvency II Components Programmes will be challenged to align a variety of different functions as Solvency II will impact all elements of the Business Governance & Oversight G & O i h Governance, Compliance & Comms Documentation, Comms & Training External Reporting p g ramme Standard Formula Office) Balance Sheet & Portfolio Management rogramme O Portfolio P tf li cy II Prog Calculation Kernel Management T echnical Provisions Solvenc (inc P Assets & Asset Liability Management (ALM) Internal Model/Risk Management Risk Management ORSA and the 6 T ORSA d h 6 T ests Data Quality & Governance Systems & Data Systems & Data Solvency II Data Repository y p y IT Systems & Processes Slide 5
FSA Guidance Highlighted below are extracts from the FSA’s guidance as to why firms must meet the minimum requirements S Systems of Governance t f G Solvency II Programme “ Solvency II requires four functions to be established as part of a firm’s system of governance, with each one performing at least the required specific tasks and activities as outlined in the Directive (Level 1 text) and supplemented by further requirements and guidance at Levels 2 and 3. These are: requirements and guidance at Levels 2 and 3. These are: • risk management; • compliance • internal audit; and • actuarial • actuarial. • Insurers will be able to consider for themselves how to organise and staff these functions to effectively achieve the outcomes expected, with this analysis driven by their Board; • Resource should be proportionate - for example, larger, more complex firms are likely to require more resource to achieve the required outcomes than smaller, simpler insurers. It may be that very small firms consider it appropriate for a single person or organisational unit to carry out more than one function (with the exception of the internal audit function, which the Level 1 text requires to be ‘independent’); , q p ); • Alongside these functions, the system of governance under Solvency II also sets out obligations in areas such as fit and proper requirements (for persons who effectively run the firm or have other key functions), outsourcing, a firm’s own risk and solvency assessment (ORSA) and internal control; • Senior management engagement with this area of Solvency II is essential for a firm to • Senior management engagement with this area of Solvency II is essential for a firm to establish an appropriate and compliant system of governance. The Supervisory Review Process under Solvency II will incorporate the firm’s system of governance as a key area of focus for supervisory authorities’ review – the FSA in the UK. “ Slide 6
Key Deliverables The Key Deliverables for the Governance & Compliance workstream are highlighted below • T erms of Reference – project overview that includes project objectives, key sponsors and stakeholders, steering and reference committees and timescales; • Governance Approach – overall approach to governance to include:- - Reporting Lines; - Risk & MI Reporting; - Escalation Procedures; E l ti P d - Strategic Planning; St t i Pl i - Decision Making Processes; - Outsourcing; - Function Interactions; - Internal Controls; - Reporting Arrangements; - Reporting Arrangements; - Actuarial; - Actuarial; - Policies for Approved Persons; - Internal Audit; - Risk Management Processes; - Business Continuity. • Compliance Approach – overall approach to compliance to include the interaction and context with the ORSA, Use-T est, SCR in relation to changes to the risk profile, strategic decision making and integration into BAU. Slide 7
ERM Under Solvency II Highlighted below are extracts from the FSA’s guidance as to why firms must meet the minimum requirements • Clear responsibility at senior level for risk management ensuring its use in managing the business, including influence on key decisions; • Full integration of risk and capital management – must be emmbedded sufficiently to pass the ‘ Use Test ’; • The ORSA is an integral part of managing the business against the chosen strategy and strategic decision making; g g • Risk appetite is clearly articulated and widely understood as the parameters to manage the business changes are proactive and based upon the risk and capital framework; the business – changes are proactive and based upon the risk and capital framework; • The risk and capital framework is clearly documented and evidenced in advance of its use. Slide 8
The Risk Management Framework ERM Framework Elements “Systemic” / Interdependent Risk Scenario Analysis Contingency Planning ‐ Operational Governance Governance E.g.: ‐ Market changing events • Accountability Risks & Controls Financial markets risk - 1 st line: Line Management 1 st li Li M Review & Assurance Currency fluctuations - 2 nd line: Review & Challenge Emerging Risk Management - 3 rd line: Independent assurance / Quantification Market changing events Linkage to Strategy challenge • Structure • Decision making (inc. Delegation) Risks & Controls Regulatory Risk Regulatory Risk • Identification & Assessment Id tifi ti & A t • Systems & controls i.e.: Governance • Policy and approach Risks & Controls Group & Capital Risk • Core processes & systems Review & Assurance • Risk appetite set Governance Risks & Controls Liquidity Risk Quantification Review & Assurance Disclosure Review & Assurance Regularly • MI / KPI’s Governance • Scenario analysis & stress testing S i l i & t t ti Operational Risk O ti l Ri k Ri k & C Risks & Controls t l updated, d t d & Quantification • Review & challenge Review & Assurance clearly Governance • Independent assurance Risks & Controls documented Reporting Market Risk Quantification Review & Assurance Quantification Governance • Base Level (solvency / regulatory) Risks & Controls • Economic Quantification Credit Risk • Stress testing / tolerance levels Review & Assurance • Continually refined risk appetite • C ntin all refined risk a etite Governance Governance Risks & Controls Quantification Insurance Risk Review & Assurance Governance Risks & Controls Quantification Review & Assurance Q Quantification Pillar 1 Pillar 2 Pillar 3 MCR, SCR, Capital Model, etc ORSA & Supervisory Review Disclosure & Market Discipline Slide 9
Key Deliverables The Key Deliverables for the Risk Management workstream are highlighted below • Risk Strategy – documentation of a firm’s risk strategy, defining objectives, key principles, risk appetite and assignment of responsibilities; • Risk Profile – documentation of the current risk profile and amendment of the risk register (if appropriate) and the inclusion of other risks (e.g. market, counterparty); • Risk Appetite – documentation of the Board’s appetite to risk and to ensure appropriate policies and procedures are in place for management of the risk; pp p p p p g ; • Risk Management Framework – the actual processes to manage existing and emerging risks in the business; emerging risks in the business; • The ORSA – should assess the solvency needs, risk profile and risk tolerances of the firm, and should be based on historical information but must be forward looking by incorporation of the business plan. Slide 10
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