10 November Leading business advisers. Solvency II Breakfast Briefing
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1 Solvency II Breakfast Briefing 10 November 2015 Leading business advisers
2 Glenn Gillard - Partner Opening Remarks 2
3 Tax in Solvency II Nathan Powell Tax Director
4 Solvency II Where tax fits in Free assets Own Funds MCR SCR Loss absorbing capacity of DT Tax as a component of operational risk Assets at Market Value Current tax liabilities/dtls Liabilities at economic value Risk Margin Current tax assets/ DTAs Best Estimate Liabilities Tax in BEL Need to consider each of these areas: At solo entity level At group level Unlikely to be relevant other than for life companies with OBB 1 At ring fenced fund level
5 Tax in the base balance sheet UK GAAP to SII adjustments have deferred tax impacts Deferred tax Normal reporting balance sheet Tax effect of adjusting other assets & liabs Deferred tax Solvency II balance sheet Based on solo entity accounts GAAP (e.g. UK GAAP or IFRS) Best estimate liabilities Risk margin DAC and DIR Intangibles Claims equalisation reserves DTA recognition using IAS12 principles Netting DTAs & DTLs Tier 3 assets: SCR coverage Fungibility 2
6 Tax in the SCR Loss absorbing capacity of deferred tax LADT Loss absorbing capacity of deferred tax: Pre-tax SCR Post-tax SCR Reduces the SCR By the value of tax relief on a loss equal to the pre-tax SCR Subject to DTA recognition criteria using IAS12 principles What is the composition of the loss? How much capacity is there to recover the tax loss? 3
7 Tax in the SCR Potential sources of capacity DTLs in the base balance sheet SII net assets Impact of shock Post shock net assets Carry back relief Group relief capacity Forecast future profits on new business Release of risk margin Increasing LADT Actual DT 4
8 Overseas branches Where does the shock loss arise? Composition of the shock loss Insurer (Ireland) Shock loss and future profits may not arise in the same jurisdiction Limitation on loss carry forward in other jurisdictions Double tax relief France Spain Germany Tax branch profit in insurer Claims equalisation reserves 5
9 Pillar 3 Public Disclosures Carol Lynch Director Audit and Advisory
10 Public Disclosure Policy The public disclosure policy should include: a) identification of the persons/functions responsible for preparing and reviewing the information publicly disclosed; b) the processes for completion of the disclosure requirements; c) the processes for review and approval by the AMSB of the SFCR; d) identification of the information already available in the public domain that the insurance or reinsurance undertaking believes is equivalent in nature and scope to the information requirements in the SFCR; e) specific information that the insurance or reinsurance undertaking intends not to disclose under the circumstances set out in Article 53(1) of Solvency II Directive; f) additional information that the undertaking has decided to voluntarily disclose under Article 54 (2) of Solvency II Directive Deloitte Touche Tohmatsu
11 Quantitative Reporting Forms Lead up to Annual 2016 reporting Category QRTs Solo QRTs FSTs Public Disclosure Day 1 Quarterly Annual Quarterly Annual Annual General Information Balance Sheet Assets Technical Provisions SCR MCR Own Funds Reinsurance Variation Analysis A) Sub - Total (1) B) ECB Templates C) Ring Fenced Funds D) TPs (transitional measures) E) Third Country Branch F) Financial Stability Templates G) Group Specific Templates H) Total Templates (Sum A:G) In addition to this companies have to submit NSTs from Q Deloitte Touche Tohmatsu
12 Solvency II Information available for the public Code Formerly Contents Solo Group S BS-C1 Balance Sheet X X S Cover - A1A Premiums, claims & expenses by LOB X X S Cover A1A Premiums, claims & expenses by Country X X S TP-F1 Life & Health SLT Technical provisions X S TP-E1 Non-Life technical provisions X S TP-E2 Non-Life claims X S Impact of LTG & transitional measures X X S OF-B1 Own funds X X S SCR-B2A SCR - Only Standard Formula (SF) X X S SCR-B2B SCR - SF and Partial Internal Model X X S SCR-B2C SCR - Internal Model X X S MCR-B4A MCR - Non-composite X S MCR-B4B MCR - Composite X S G01 Undertakings in the scope of the group X Deloitte Touche Tohmatsu12
13 Solvency II : information available for the public How can Solvency II public information be used? Some key information available. Detailed Solvency II balance sheet (incl. deferred tax asset, profits from future premiums) Premiums, claims and expenses per LOB and for the largest territories Impact of LTG and transitional measures on TP, Own Funds and Solvency requirement Impact of reinsurance on TP 9 years triangle of gross claims paid Capital add on already added Key components of the SCR (largest risks, diversification, loss-absorbing capacity of technical provisions, loss-absorbing capacity of deferred taxes) can be used to assess Benefits in adding diversification Appropriateness of the reinsurance program Risk profile Level of reserving where local GAAP defers from Solvency II Loss ratio per LOB Combined ratio per LOB Deloitte Touche Tohmatsu 13
14 External Audit In July 2015, EIOPA published a Note "Need for high quality public disclosure: Solvency II Report on solvency and financial condition and the potential role of external audit. EIOPA is of the view that main elements of the SFCR (balance sheet, own funds and capital requirements) of all insurance and reinsurance companies could fall within the scope of an external audit. How likely is the possibility that all or part of Solvency II reporting will be subject to assurance on a mandatory basis? Regulation issued Regulation drafted Almost sure Most likely Unlikely Country SFCR RSR Balance Sheet (and related QRTs) SCR and MCR Level of Assurance UK Yes Yes Yes Reasonable Ireland Yes Reasonable France Yes Yes Yes Reasonable Germany Yes Reasonable Italy Yes No indication Spain Yes Yes Limited Denmark Yes No indication Belgium Yes Yes Yes Yes Reasonable Deloitte Touche Tohmatsu
15 CBI Exemptions from Solvency II Quarterly Reporting Policy Notice published 21 October 2015 Low impact PRISM rating as at 31 December 2014 are exempted from submitting the following templates on a quarterly basis, in relation to any quarter ended between 1 January 2016 and 31 December 2016: S Collective investment undertakings - look-through approach S Open derivatives Medium-Low impact PRISM rating as at 31 December 2014 are exempted from submitting the following template on a quarterly basis, in relation to any quarter ended between 1 January 2016 and 31 December 2016: S Collective investment undertakings - look-through approach Solvency II reporting currency NST Deloitte & Touche
16 Pillar 3 Next steps Approval of reporting and disclosure policies Reviews and sign offs Link between the reports and data sources Reporting under different bases Transfer from project to BAU Deloitte Touche Tohmatsu
17 ORSA/FLAOR Carmel Niven, Senior Manager Darren Shaughnessy, Manager
18 New for 2015 CBI Feedback May 2015 Further Deloitte insights 18
19 Understanding and implementing the requirements for ORSA/FLAOR Sources of Regulatory Requirements The main sources of the ORSA requirements are: Solvency II Directive (Articles 36, 45 and 246) Delegated Acts (Articles 262 and 306) EIOPA Guidelines on Own Risk and Solvency Assessment CBI Guidelines on Preparing for Solvency II Forward Looking Assessment of Own Risks CBI s Feedback Statement on the Domestic Actuarial Regime and Related Governance Requirements under Solvency II (CP92) The slides which follow provide a summary of our interpretation of the requirements for ORSA. We recommend that you refer to the Directive, Delegated Acts, and the relevant guidelines to develop your understanding of the regulatory requirements. 13
20 New for 2015 onwards Requirements at a glance PRISM Rating High, Medium- High, Groups above threshold Medium-Low, Low own solvency needs only own solvency needs only; use CBI reporting tool own solvency needs; continuous compliance assessment with reg. capital and TP; deviation between risk profile and SCR and valuation and recognition bases. Solvency II own solvency needs; valuation and recognition bases; use CBI reporting tool 14
21 New for 2015 (All) Regulatory requirements for FLAOR/ORSA Valuation and recognition bases of the overall solvency needs (EIOPA Guideline 9, CBI Guideline 10) Explain how the use of different recognition and valuation bases ensures better consideration of its specific risk profile, approved risk tolerance limits and business strategy while complying with the requirement for a sound and prudent management of the business. Quantitatively estimate impact using different recognition and valuation basis on the overall solvency needs CBI preparatory phase requirement on a best efforts basis starting in Considerations The quantitative estimate of the impact should include all balance sheet effects. Diversification effects (correlations) between risks should also be considered. 15
22 New for 2015 (High/Medium High Prism rating) Regulatory requirements for FLAOR/ORSA Regulatory capital requirements (EIOPA Guideline 10, CBI Guideline 13) The assessment as to whether the undertaking would comply on a continuous basis with Solvency II regulatory capital requirements should take into account at least: the potential future material changes in risk profile; the quantity and quality of own funds over the whole of its business planning period; the composition of own funds across tiers and how this may change as a result of redemption, repayment and maturity dates during its business planning period. Recognition and valuation bases should be in line with Solvency II principles; Each undertaking decide reasonable methods, assumptions, parameters, dependencies and levels of confidence to be used; Proportionate stress test scope and frequency; Future own fund requirements should consider: Considerations Capital management including projected changes and contingency plans; Interaction between capital management and its risk profile; Ability to raise own funds of appropriate quality and in an appropriate timescale if required; How average duration of own funds relates to average duration of insurance liabilities and future own funds needs; Identify and assess compensating measures and actions to restore or improve capital adequacy or its cash flow position after future stress events. 16
23 New for 2015 (High/Medium High Prism rating) Regulatory requirements for FLAOR/ORSA Technical Provisions (EIOPA Guideline 11, CBI Guideline 14) The actuarial function of the undertaking should: Provide input as to whether the undertaking would comply continuously with the requirements regarding the calculation of technical provisions and: Identify potential risks connected to this calculation. Considerations Assessment requires processes and procedures relating to regular review of technical provision calculation to be in place. The input has to be in line with the information contained in the annual report of the actuarial function. 17
24 New for 2015 (High/Medium High Prism rating) Regulatory requirements for FLAOR/ORSA Deviation from assumptions underlying the SCR calculation (EIOPA Guideline 12, CBI Guideline 15) The undertaking should asses whether its risk profile deviates from the assumptions underlying the Solvency II SCR calculated with the standard formula and whether these deviations are significant. The undertaking may as a first step perform a qualitative analysis and if that indicates that the deviation is not significant, a quantitative assessment is not required. Paper describing standard formula assumptions published by EIOPA Differences due to risks not considered and; risks that are either under or overestimated by the standard formula compared to risk profile Assessment process expected to include: Analysis of risk profile and why standard formula is appropriate; Analysis of sensitivity of standard formula to changes in risk profile; Assessment of the sensitivities of SCR to main parameters, including USPs; Appropriateness of standard formula parameters; Justification for simplifications; How results of standard formula are used in decision making process. Unlikely to directly compare SF SCR and ORSA capital e.g. 18 Considerations may include different items, calculated on different bases, different confidence levels or different time horizons.
25 CP92 Feedback Statement 6 October 2015 Key changes and clarifications ORSA HoAF to provide opinion to the Board on each ORSA process addressing at least the following areas The range of risks and the adequacy of stress scenarios considered as part of the ORSA process; The appropriateness of the financial projections included within the ORSA process; Whether the undertaking is continuously complying with the requirements regarding the calculation of TPs and potential risks arising from the uncertainties connected to this calculation. Applies to any ORSA process conducted in 2016 and onwards Opinion to be provided to Board at same time as results of the ORSA process The CBI has confirmed that it won t prescribe a form for the ORSA opinion 19
26 New for 2015 CBI Feedback May 2015 Further Deloitte insights 26
27 CBI Dear CEO letter FLAOR Feedback May 2015 Board Ownership CBI Feedback Board Ownership In some cases, Board acting as a reviewer of the FLAOR. The FLAOR process must be: actively considered by the Board; top-down; embedded within the undertaking. Considerations and Suggested Actions Describe role of Board and involvement in process e.g. Agree FLAOR policy; Review and challenge key assumptions, risks, stresses and scenarios; Review and challenge of results and actions. Evidence board involvement Document challenge, for example include summary of board challenges as appendix to FLAOR report; Conclusions and actions from ORSA are suggested/approved by board. 20
28 CBI Dear CEO letter FLAOR Feedback May 2015 Assessment of Key Risks Consideration must be given to all material risks Risks not captured by SCR; quantifiable and non-quantifiable; Appropriate mitigants must be described. CBI Feedback Assessment of Key Risks Considerations and Suggested Actions Describe process for identifying and monitoring key risks e.g. Workshops or regular meetings involving key stakeholders; Use of dashboards, heat maps or other methods to monitor material risks. Don t ignore risks that are difficult to quantify or are non-quantifiable e.g. Inflation risk; Legal environment risk; Operational risk; Group risk; Key person risk; Reputation risk; Dominant Leader risk; Liquidity risk; Pension risk; Strategic risk; Contagion risk. If any risk cannot be quantified, then describe the mitigating actions you are taking e.g. Policies and procedures in place to monitor/mitigate the risks. 21
29 CBI Dear CEO letter FLAOR Feedback May 2015 Assessment of Overall Solvency Needs CBI Feedback Assessment of Overall Solvency Needs Overall solvency needs assessment constitutes undertaking s own view of material risks which it faces; Assessment should allow for any limitations of the SCR in respect of the undertaking; Undertakings should use the overall solvency needs assessment process to establish and justify an appropriate capital level for the undertaking. Identify all material risks to undertaking. Assessment may be quantitative and qualitative. Considerations and Suggested Actions Assess effectiveness of risk management practices, systems and controls including risk mitigation techniques e.g. reinsurance. Assess adequacy of system of governance. Identify appropriate stresses and scenarios considering their likelihood. Link strategic decision making and solvency needs. Include capital target arising from assessment 22
30 CBI Dear CEO letter FLAOR Feedback May 2015 Assessment of Continuous Compliance with the SCR Level of reliance on SF/IM was very high; CBI Feedback Continuous compliance Assessment of how risk profile deviates from the assumptions underlying the SCR calculation should be fully discussed in the 2015 FLAOR reports. Assessment of compliance on continuous basis with Solvency II regulatory capital and technical provision requirements starting in 2015 for High/Medium High impact undertakings. Considerations and Suggested Actions Appropriateness of Standard Formula Framework outlined earlier Continuous compliance with technical provision requirements Process for regular review of TPs outlining Roles and responsibilities detail of review Frequency of review Triggers for more detailed review Continuous compliance with regulatory capital requirements Consider composition, quality and quantity of own funds Consider changes in risk profile 23
31 CBI Dear CEO letter FLAOR Feedback May 2015 Time Horizon Too short term; CBI Feedback Time Horizon Should include a medium-term or long-term perspective as appropriate. Considerations and Suggested Actions Ensure that time period considered is appropriate; clearly defined. Consider risks could face in the longer-term. Consider changes to the risk profile and business strategy over the projection period. Suggest align projection time horizon to business planning time horizon. 24
32 New for 2015 CBI Feedback May 2015 Further Deloitte insights 32
33 Deloitte insights from FLAOR reviews Variety of approaches taken in 2014 FLAOR reports Some observations under the following headings Executive Summary Risk profile Risk management system Methodologies Current Solvency Projected Solvency 0 Executive Summary Helpful to include to provide overview of approach to ORSA. Highlight conclusions, key action points and owners of actions. 1 Risk profile Some FLAORs only had very high level references to key risks Provide summary of key risks, quantification of key risks, mitigation of such risks and refer to relevant sections of supporting documents for detail Include overview of company, current financial position and planned business strategy to provide context to risk profile Include summary of risk tolerance limits, linking them to the Risk Appetite Statement and current tolerance levels 25 ORSA Briefing
34 Deloitte insights from FLAOR reviews 2 Risk management system Summarise risk management framework and any changes over year Provide overview of FLAOR process Discuss procedures and controls for managing non-quantifiable risks Consider governance of risks who owns, monitors, manages them 3 Methodologies Model used Most companies used standard formula with limited or no discussion of its appropriateness Where alternative economic capital models used there was generally detail on its appropriateness relative to standard formula Stresses/scenarios Explain how they are identified Limited number of stresses/scenarios in some cases Comment on likelihood of stresses/scenarios Key assumptions Limited discussion of key assumptions and justification of use of expert judgment 26 ORSA Briefing
35 Deloitte insights from FLAOR reviews 4 Current Solvency Varied level of analysis of current solvency position Consider the sensitivity of results to assumptions Limited discussion and justification of strategic SCR coverage ratio where used 5 Projected Solvency In some cases limited to projection of business plan Consider appropriate stresses and scenarios Link to strategic decision making and capital management Consider action plans for scenarios where solvency ratio <100% (or too close to 100%) 27 ORSA Briefing
36 39 Closing Comments / Q&A
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