Solvency II Solvency II The Challenges of Solvency II Gain-Line - - PowerPoint PPT Presentation

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 Programme

• Solvency II is a set of principles and guidelines leading to best practice in risk

management;

• 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 k t Market;

• Numerous approaches are being adopted across the market and it not a case

f i fi ll

• The range and diversity of insurance operations means that a Solvency II

l i ill f

• f one size fits all;

solution will vary from company to company;

• The eventual solution in each case will depend on a range of inputs from a

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number of different disciplines.

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

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Gain-Line & Solvency II

There are many stakeholders with differing priorities that need to be integral to the Solvency II Programme

Solvency II Programme

• Chief Actuary – centralised and consistent modelling

approach for all actuarial ensuring realistic ‘what-if’ and i l i

CA CIO

scenario planning;

• Chief Risk Officer – enterprise wide consistent risk

management standards and transparent risk modelling

CEO CRO

a age e t sta a s a t a spa e t s o e g approach;

• Chief Information Officer – robust IT governance

CFO

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

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decision making and more efficient allocation of capital.

Solvency II Components

Programmes will be challenged to align a variety of different functions as Solvency II will impact all elements of the Business

G & O i h Governance & Oversight Documentation, Comms & Training

Governance, Compliance & Comms

External Reporting

ramme

Office) p g Standard Formula Portfolio Management

Balance Sheet & P tf li cy II Prog

rogramme O Calculation Kernel

Portfolio Management

T echnical Provisions

Solvenc

(inc P Internal Model/Risk Management ORSA d h 6 T

Risk Management

Assets & Asset Liability Management (ALM) ORSA and the 6 T ests Data Quality & Governance Solvency II Data Repository

Systems & Data

Slide 5 y p y IT Systems & Processes

Systems & Data

FSA Guidance

Highlighted below are extracts from the FSA’s guidance as to why firms must meet the minimum requirements S t f G Solvency II Programme Systems of Governance “ 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
• r 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
• bligations 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;

E l ti P d St t i Pl i

• Escalation Procedures;
• Strategic Planning;
• Decision Making Processes;
• Outsourcing;
• Function Interactions;
• Internal Controls;
• Reporting Arrangements;
• Actuarial;
• Reporting Arrangements;
• 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,

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strategic decision making and integration into BAU.

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

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use.

The Risk Management Framework

“Systemic” / Interdependent Risk

Governance E.g.: Risks & Controls Financial markets risk

Scenario Analysis

Contingency Planning ‐ Operational ‐ Market changing events

ERM Framework Elements

Governance

• Accountability

1st li Li M

Review & Assurance Currency fluctuations Quantification Market changing events Emerging Risk Management Linkage to Strategy

• 1st line: Line Management
• 2nd line: Review & Challenge
• 3rd line: Independent assurance /

challenge

• Structure
• Decision making (inc. Delegation)

Risks & Controls Id tifi ti & A t

Regulatory Risk

• Identification & Assessment
• Systems & controls i.e.:
• Policy and approach
• Core processes & systems
• Risk appetite set

Review & Assurance

• MI / KPI’s

S i l i & t t ti

Regularly d t d

Disclosure

Regulatory Risk

Governance Risks & Controls Review & Assurance Quantification

Group & Capital Risk

Governance Risks & Controls Review & Assurance

Liquidity Risk

Governance Ri k & C t l

O ti l Ri k

• Scenario analysis & stress testing
• Review & challenge
• Independent assurance

Quantification

• Base Level (solvency / regulatory)
• Economic
• Stress testing / tolerance levels
• C ntin all refined risk a

etite

updated, clearly documented

& Reporting

Quantification Risks & Controls Review & Assurance Quantification

Operational Risk

Governance Risks & Controls Review & Assurance Quantification

Market Risk

Governance Risks & Controls Review & Assurance

Credit Risk

Governance

• Continually refined risk appetite

Quantification Governance Risks & Controls Review & Assurance Quantification

Insurance Risk

Governance Risks & Controls Review & Assurance Quantification

Pillar 3

Disclosure & Market Discipline

Pillar 2

ORSA & Supervisory Review

Q

Pillar 1

MCR, SCR, Capital Model, etc

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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

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firm, and should be based on historical information but must be forward looking by incorporation of the business plan.

Systems & Data

The reality facing organisations, is that they may or may not have the data, but the ones that do, do not always know what to do with it…

“Those people who do not read books, have no , advantage over those who cannot read at all”…. Mark T wain…early 1900s “Decision makers who cannot use their data h d have no advantage over those with no data at all”…. Current Comparison

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Systems & Data

Different organisations have different priorities for data within the Solvency II context

16.0% 18.0% % 10.0% 12.0% 14.0% 2.0% 4.0% 6.0% 8.0% 0.0% ata Quality

• vernance

Warehouse ata y/Directory preadsheet Control ntation, e.g. ernal Model ata Lineage g Business s Change al Reporting

• licy

/SFCR/RTS D Data G Data W D Dictionary Sp Documen

• f the Inte

Da Facilitating Process Externa Po ORSA/

Slide 12 Source – Xchanging Survey, February 2011

FSA Guidance

Highlighted below are extracts from the FSA’s guidance as to why firms must meet the minimum requirements S t & D t Solvency II Programme Systems & Data “5.24 The Directive sets out high-level requirements for the statistical quality standards

underlying the model. This requirement aims to ensure that the methodology underlying the model is sound. The standards apply to:

• the methodology used to select, fit and, where appropriate, combine statistical

the methodology used to select, fit and, where appropriate, combine statistical distributions (probability distribution forecasts);

• data quality;
• model dependencies and diversification effects;
• risk mitigation techniques;
• the treatment of financial guarantees and options; and
• the treatment of financial guarantees and options; and
• future management actions.

5.25 Firms seeking internal model approval will need to have accurate, complete and appropriate data, as well as be able to justify assumptions and judgment. 5.26 High quality data is essential for modelling. Firms should pay particular attention to this requirement as experience under the FSA’s existing regime has indicated that the current quality of data in many UK firms may fall short of both existing and Solvency II

• requirements. We recommend that firms review the following for internal and external

q g sources of data:

• Data collection processes to make sure all data items required are collected;
• Data resolution to ensure data is stored and accessible at a level appropriate for the

design of the internal Model; Model;

• The quality of data to ensure data items are correct and validated as far as possible;
• Access to data, to ensure it can be easily and accurately retrieved by relevant users.

“ Slide 13

Data Policy & Governance

The Data Policy should define the complete needs of all data and all data users across the

• rganisation

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Systems & Data

An approach to managing the various key areas is given below Solvency II Programme

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Key Deliverables

The Key Deliverables for the Systems & Data workstream are highlighted below

• Data Policy/Governance – a robust data policy/governance document which defines

the data policy, key data owners and the link between deliverables;

• Data Dictionary – a repository which defines all of the key data elements required

for Solvency II and a definition of each data element;

• Data Directory – a definitive repository of each model input into the standard of

internal model;

• Data Controls & Flow Diagrams – a DFD must be created for each input into the

standard or internal model and cross reference the Data Dictionary; standard or internal model and cross reference the Data Dictionary;

• Data Controls Register – a complete register of all controls (categorised) applied to

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the data as it transfers through the organisation.

In Summary…

Solvency II Programme

• Solvency II, uniquely, effects all areas of an organisation;
• Programmes need to be structured in such a way to address this;
• ‘C Level’ Executives are accountable for Solvency II;
• C-Level Executives are accountable for Solvency II;
• Data is central to the concept of Solvency II;
• Different organisations will have different requirements dependent upon the

systems/legacy landscape; systems/legacy landscape;

• Minimum standards and requirements must be delivered.

Kesh Sharma – Director of Magellan Consultancy Services Part of the

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Part of the kesh.sharma@magellancs.com