2 9 J AN UARY Solvency II: Landed

Transcription

1 2 9 J AN UARY Solvency II: Landed

2 Index: Introduction Page 1 A Reminder Page 2 Landed! Page 3-4 So it s done?... Page 4 Solvency II implications for advisers Page 5 AKG Financial Analytics Ltd (AKG) 2016 Introduction In February 2013 AKG published Solvency II An Introductory Guide for Advisers. At that point Solvency II had a time line set to result in: : Phasing in of Solvency II 2014: Entry into force of Solvency II. Undertakings able to use approved internal models for calculation of SCR (Solvency Capital Requirement). However, a number of delays pushed the actual go live date back to 1 January Solvency II replaces a regime not surprisingly known now as Solvency I. By way of simple characteristics comparison: SOLVENCY I Prudent valuation of liabilities reflects local accounting practices Simplistic capital requirements Asset risk managed by quantitative restrictions rather than capital SOLVENCY II Risk based approach Three pillar approach Overall risk management Structure of EU insurance supervision AKG has made every effort to ensure the accuracy of the content of this update note and to ensure that the information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this note and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service. No provision for risk review Covers entire insurance industry Pg. 1

3 A Reminder To elaborate on these Solvency II characteristics, (which have remained consistent throughout its genesis), but still at a relatively high level, Solvency II can be further summarised as follows: The Solvency II directive (Directive 2009/138/EC) is a consolidation of 13 separate directives for insurers covering their capital requirements and related supervision. It seeks to introduce a more risk-based approach using market-consistent methods for valuing the assets and liabilities of insurance companies utilising, where possible, actual market prices or market value techniques to establish what a fair market value would be. Solvency II is based on and reinforces the principles of risk management and its role in ensuring capital adequacy for insurers. ACCORDING TO THE EUROPEAN COMMISSION, THE OBJECTIVES OF SOLVENCY II ARE TO: Eliminate the differences between the national rules the member states apply to (re)insurance companies Improve the operation of the single market by establishing coordinated rules regarding the supervision of insurance groups Protect creditors by establishing procedures for the reorganisation and winding up of insurance undertakings. LIKE BASEL II (FOR THE BANKING SECTOR), IT IS FOUNDED ON 3 PILLARS: Pillar 1 contains the quantitative requirements for ensuring financial strength Pillar 2 establishes the requirements for governance, risk management and effective supervision of insurers Pillar 3 relates to disclosure and transparency. Pg. 2

4 Landed! So it is now January 2016 and Solvency II has (finally) landed! There are those who at different times thought Solvency II would never actually see the light of day or that, when it did, it would represent more of an artificial fudge than any sort of regulatory step change. In reality, whilst suffering significant delays and additional complexity in substance and negotiation, Solvency II has come into being and is a major change in the regulatory paradigm for insurers. WHAT DOES LANDING LOOK LIKE FOR UK? In broad terms insurers in the UK are now running and reporting their business on a Solvency II basis. Preparation and practice has been taking place for some time and in the latter stages (2015) this has included the approval of full or partial internal models (the bespoke lens, constructed specifically for an insurer s own business, through which these insurers can quantify and understand their business and the risks within it) by the Prudential Regulation Authority (PRA) and initial waves of new reporting. Full or partial internal models currently apply for the following firms in the UK, with other UK insurers, covered by Solvency II, making use of the Standard Formula approach (this being the generic methodology that most firms across the EU are expected to use to calculate their solvency capital requirement). UK INTERNAL OR PARTIAL INTERNAL MODEL FIRMS (APPROVED AS AT START DEC 2015): Amlin Plc Aspen Insurance UK Ltd Aviva Plc British Gas Insurance Ltd Just Retirement Ltd Legal & General Group Plc Markel International Insurance Company Ltd MBIA UK Insurance Ltd The National Farmers Union Mutual Insurance Society Ltd Pacific Life Re Ltd Pension Insurance Corporation Plc Phoenix Group Prudential Plc QBE European Operations Plc RSA Insurance Group Plc Scottish Widows Group Society of Lloyd s Standard Life Plc Unum European Holding Company Ltd Other insurers operating in the UK, but within European groups, may apply an internal model at a group level. For example, the AXA Group, whose lead regulator is in France and hence does not appear in this UK listing. Pg. 3

5 UP AND RUNNING : KEY DATES TIMETABLE FROM THE OFF The timeline for regulatory submission for the first days of Solvency II is as follows: January Application of the Solvency II regime 31 March Last S1 Submission for 31/12 y/e Firms 20 May SII Day 1 Returns for Solo Firms 26 May SII Q1 Quarterly Returns for Solo Firms 1 July SII Day 1 Returns for Group Firms 7 July SII Q1 Quarterly Returns for Group Firms 25 August SII Q2 Quarterly Returns for Solo Firms 6 October SII Q2 Quarterly Returns for Group Firms 25 November SII Q3 Quarterly Returns for Solo Firms So it s done?... 6 January SII Q3 Quarterly Returns for Group Firms 25 February SII Q4 Quarterly Returns for Solo Firms 7 April SII Q4 Quarterly Returns for Group Firms 19 May SII Annual Returns for Solo Firms 30 June SII Annual Returns for Group Firms (Source: PRA) It is true to say that for insurers lots of key things, beyond simple Solvency II preparation, have already been done. Not least a number of capital management changes including the raising and incorporation of additional capital, changing /unwinding of reinsurance arrangements and financial instruments (that would not be beneficial under the new regime), divesting of non-core books or lines of business for which risks became too great or were inefficient in combination from a Solvency II perspective and even wholesale group restructurings (merging multiple companies within groups) for, at least in part, significant Solvency II capital advantage. However other elements remain to be completed. FOR INSURERS Ongoing reporting and adjustment: For insurers there will be no simple sigh of relief and moving on to non Solvency II projects. 2016, whilst seeing the arrival of Solvency II, only really marks a phase. There will be more to do. It is perhaps best characterised as a template, which now built, has been launched for use. But it now needs ongoing population and evolution. This is particularly true in respect to the understanding and reporting of assets. The focus on assets look through, which in today s low yield world increasingly includes a wider basket of alternative assets, will be a growing feature of the regime in coming years. Pg. 4 FOR REGULATORS With deeper oversight: Lots more scrutiny is now possible for the regulator and that will drive significant activity for 2016 and beyond. Essentially as the regulator digests a wealth of more focused data to drive analytical capabilities (with new tools and models) and inform deeper regulatory supervision and potentially interventions. Whilst this will take some years to settle down and bed in it marks a major change from this supervisory/regulatory perspective. At the same time more regulatory stress testing and capital modelling by the regulator will feature in a concerted workload in FOR OTHERS SUCH AS ASSET MANAGERS More to do on the reporting side of assets: Linked clearly to the asset requirements for insurers, asset managers will also have more to do as outsourcing requests and reviews come into force and there is significant likelihood of changed contracts and relationships, where they are found to be wanting in their appetite or ability to efficiently provide the requisite look though asset data. There remains a tangible issue for asset managers, some of whom have been slow to appreciate and accommodate Solvency II requirements in respect of asset reporting for their insurer partners.

6 Solvency II implications for advisers For financial advisers, who clearly have key relationships with insurers, it is a question of awareness, as per AKG s Guide in February 13. For advisers it should not be so much a case of worrying about Solvency II as it is of understanding the Solvency II context and therefore not being surprised by it throwing up noise. For AKG a lot of attention to date has been focused on monitoring companies preparations for Solvency II and considering from this external independent perspective how the changes affect each organisation s financial strength. It would be fair to say that whilst not easy, this exercise has been particularly interesting. How insurers have progressed through at times an uncertain and shifting environment of requirements and timetable has been fascinating. However in the UK, AKG s view as of January 2016 is that the insurer population is: a) prepared, in general terms, and b) has absorbed the changes in terms of broadly maintaining its financial strength. As a result, whilst digesting lots of change and changed information (to date and over the coming year) AKG has been able to maintain a consistent rating output for market use. Despite lots of work behind the scenes, AKG s approach has therefore absorbed Solvency II without any disruption for assessment users to date. Going forward, whilst some metrics and applicable format might be changed as a result, users can expect a common and consistent AKG experience. The fundamental financial strength of insurers is not changed by Solvency II but some of its composition and communication (for example in changed capital surplus and solvency coverage ratios on the new Solvency II basis) may be. And, whilst it has come at a cost, ultimately Solvency II improves the identification of risk and capital requirements within insurer businesses for their benefit, in assisting their regulator(s) and ultimately to the advantage of advisers clients. Pg. 5

7 AKG Financial Analytics Ltd Anderton House, 92 South Street Dorking, Surrey RH4 2EW +44 (0) AKG is an independent organisation specialising in the provision of assessment, ratings, information and consultancy to the financial services industry AKG Financial Analytics Ltd ISSUED 29 January 2016