Solvency II Conference. 29 November 2011

Transcription

1 Solvency II Conference 29 November 2011

2 Agenda Topic Opening Remarks Update on Solvency II Programme European Context and Local Perspective Overview of Pillar 1 Coffee Break Move to Breakout Rooms Breakout 1: Standard Formula Life Breakout 2: Standard Formula Non-Life & USPs Breakout 3: Internal Models Q&A Panel Closing Remarks Speaker Fiona Muldoon Deirdre Mullally Gareth Colgan Graham Cherry Julia Moore & Tony Ward Dermot Marron

3 Agenda Topic Opening Remarks Update on Solvency II Programme European Context and Local Perspective Overview of Pillar 1 Coffee Break Move to Breakout Rooms Breakout 1: Standard Formula Life Breakout 2: Standard Formula Non-Life & USPs Breakout 3: Internal Models Q&A Panel Closing Remarks Speaker Fiona Muldoon Deirdre Mullally Gareth Colgan Graham Cherry Julia Moore & Tony Ward Dermot Marron

4 Agenda Update on the European Timetable Implications for Ireland s Insurance Industry Overview of Survey Results on State of Readiness for Solvency II Key areas of interaction between the Central Bank and Industry on SII during 2012

5 Update on the European Timetable Q Q Q Q Q Q Q Q Q Q Q Draft implementing measures, L2 for Solvency II Omnibus II - Vote in EP plenary - Feb 13 th Omnibus II - Adopted: April/May Level 2 Adoption : May Public consultation on Level 3 Members States to transpose Solvency II Interim Reporting to supervisors by undertakings Submission of Implementation plans to National Supervisors Submission of formal Internal Model applications and other approvals Entry into force of Solvency II

6 Proposals in current versions of Omnibus II Transposition date: Council 31 st Mar 2013 ECON (EP) 1 st Jan 2013 Implementation date: Council and ECON 1 st Jan 2014 Commission 1 st Jan 2014 Interim reporting (without powers): Council: implementation plan 1 st Jun 2013 Parliament: reporting of calculations 1 st Jan/1 st Jul

7 Implications of the revised schedule for Ireland It doesn t mean that Industry has an extra year to prepare for SII Consultation on the draft Directive regulations likely to be in Q is a transition year between SI and SII Work towards ability to undertake reporting under Solvency II during 2013 Within your Solvency II plans use the European timeline dates as assumptions and plan accordingly

8 Agenda Update on the European Timetable Implications for Ireland s Insurance Industry Overview of Survey Results on State of Readiness for Solvency II Central Bank of Ireland s progress throughout 2011 Key areas of interaction between the Central Bank and Industry on SII during 2012

9 State of Readiness for SII Overview of recent Industry Survey results Survey conducted in September this year Questionnaire issued to all undertakings 216 number of undertakings responded with a completed survey 29 number responded that they were not preparing for SII Approximately 40 undertakings did not respond to the survey

10 Please indicate whether you represent a solo organisation or an organisation which is part of a group. Group: 36% Solo: 64% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

11 Which of the stages best represents your current Solvency II preparations? Implementation/execution phase: 39% Gap analysis between current regime and Solvency II completed: 20% Programme initiated: 41% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

12 Please identify the Solvency II 'sponsor' within your organisation. Other: 54% No sponsor appointed: 7% CIO/CTO (or equivalent): COO (or equivalent): 0% 1% CRO (or equivalent): CFO: 4% 5% CEO: 30% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

13 Please identify the individual responsible for roll-out within your organisation. Other: 66% No one appointed: 4% CIO/CTO (or equivalent): COO (or equivalent): 0% 2% CRO (or equivalent): CFO: CEO: 6% 13% 9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

14 Please identify the top three factors which you feel are essential for successful implementation of Solvency II within your organisation. Adequate system of governance Adequate resources/adequate budgeting Clarity of requirements & timelines Achievement of deadlines with tight timeframes Internal model approval Meet SCR/MCR requirements Appropriate SCR to reflect nature, scale and complexity Board & management support & commitment Communications & training Consistency within the EU Development of ORSA

15 How do you monitor and track progress against your Solvency II implementation plan? Conduct gap analysis Progress reports at board meetings Fortnightly Solvency II working group meetings Detailed project plan reviewed at weekly/fortnightly meetings Guidance from external consultants Updates from captive managers

16 How confident are you that you will be sufficiently prepared to meet the Solvency II requirements by 31/12/2012? Not confident at all: 0% Not very confident: 1% Quite confident: 73% Very confident: 25% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

17 Please indicate which method of internal communications is used within your organisation (for the purpose of Solvency II). Other: 49% No defined communication programme: 16% Broad-based communication programme: 33% Internal newsletter: 1% Intranet page: 3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

18 Please indicate the level of training provided within your organisation for the purposes of Solvency II. No defined training programme: 16% A combination of the above: 49% Training in specific areas for key staff: 20% Broad-based training programme for all staff impacted by SII: 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

19 What is your assessment of the level of understanding of the Board of Directors (including INEDs) regarding Solvency II? Detailed level of knowledge: 8% Satisfactory level of knowledge: 88% Basic level of knowledge: 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

20 What is your approach to providing education & training to the Board of Directors (and INEDs) regarding Solvency II? Other: 14% No formal programme in place: 2% External training provided for Directors/INEDs: 4% Internal training provided for Directors/INEDs 15% Presentations on Solvency II at Board meetings: 64% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

21 Please rank your top three aims in implementing Solvency II. Compliance with all regulatory requirements Optimise use of capital Minimise cost of implementation Internal model approval Enhanced risk management Improvements in internal controls & governance Development of ORSA Central Bank to develop a better understanding of the company

22 Which area are you most concerned about for your organisation in preparing for the implementation of Solvency II? Other: 41% Training and culture change across the organisation: Changes in supervisory requirements and practices: Challenging timescales: Internal model approval: Consistency of approach across European supervisors: Cost of implementation: 4% 18% 10% 8% 10% 12% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

23 Which area are you most concerned about for your organisation in preparing for the implementation of Solvency II? Other: All of the possible answers A combination of the possible answers Lack of clarity around proportionality regime for captives Uncertainty surrounding implementation date Delays to release of regulations

24 How confident are you that the Central Bank will be sufficiently prepared to undertake the Supervisory Review required under Solvency II effectively and appropriately for your organisation? Not confident at all: 0% Not very confident: 6% Quite confident: 83% Very confident: 11% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

25 Do you intend to use the Standard Formula for the calculation of the SCR? No: 15% Yes: 85% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

26 Do you intend to apply to use Undertaking Specific Parameters (USPs) within your organisation? Unsure: 30% No: 66% Yes: 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

27 What is your approach to building the new systems required for IT & Disclosure to meet the new reporting requirements? Use current reporting system and make changes/updates to factor in the revised SII requirements: 82% Develop a new system based on Solvency II reporting and disclosure requirements: 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

28 How confident are you that the existing governance structure within your organisation complies with the Solvency II requirements? Not confident at all: 0% Not very confident: 21% Quite confident: 65% Very confident: 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

29 What are the key changes which you propose to implement to your governance structure to comply with the Solvency II requirements? Development & adoption of written policy documents to formally document the governance structure Update/enhance existing governance structure To be determined

30 Have you defined the approach that your company will take to carry out the ORSA process? In the process of defining the approach: 44% No: 49% Yes: 7% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

31 Conclusions which can be drawn from the SII Industry Readiness survey Move to execute phase in the project Define the approach that your organisation will take towards completing the ORSA process Engage with and contribute to the current public consultations on QRT, Narrative Reporting and ORSA

32 Key Areas of Focus for the Central Bank in 2012 Industry Readiness and External Communication After Omnibus II is agreed, issue guidelines/conduct consultation workshops with Industry to set out our expectations of Industry during 2013 and beyond Continue to engage with Industry bodies Continued execution of the communication plan

33 Key Areas of Focus for the Central Bank in 2012 Internal Models Continue with Internal Model pre-application process Put internal procedures and processes in place to enable acceptance of Internal Model formal applications from 1 June 2013 (may be earlier than this for Groups) Supervisory Review Processes Ongoing development of CB s supervisory review processes under SII

34 Key Areas of Focus for the Central Bank in 2012 Supervisory Review Processes contd. Liase with Industry on ORSA reporting approach for undertakings Training Progress ongoing internal SII training programme for Supervisory staff

35 Key Areas of Focus for the Central Bank in 2012 contd. Data, Disclosure and Reporting Design, build and test reporting system to meet SII reporting requirements European Co-ordination and EIOPA Continue to contribute at EIOPA Committees and Working Groups

36 Key Areas of Focus for the Central Bank in 2012 contd. Transposition & Legislation Dept of Finance to run a consultation process on the draft SII Directive regulations Develop alternative regime for non-solvency II undertakings

37 Conclusions Agreement amongst stakeholders that full implementation of SII for undertakings will be The details of the transition year (2013) are yet to be finalised Keep momentum and focus on SII implementation, work towards interim reporting requirements and approvals in 2013 as well as the ultimate full implementation requirements in 2014.

38 Agenda Topic Opening Remarks Update on Solvency II Programme European Context and Local Perspective Overview of Pillar 1 Coffee Break Move to Breakout Rooms Breakout 1: Standard Formula Life Breakout 2: Standard Formula Non-Life & USPs Breakout 3: Internal Models Q&A Panel Closing Remarks Speaker Fiona Muldoon Deirdre Mullally Gareth Colgan Graham Cherry Julia Moore & Tony Ward Dermot Marron

39 Overview of Pillar 1 Post QIS5 activity Technical provisions Own funds MCR SCR Simplifications Transitionals Final comments

40 Caveat Level 1 is not finalised Level 2 is not finalised Level 3 is not finalised Current drafts

41 Since QIS5 Number of shortcomings or difficulties Technical Provisions Long-term guarantees LTG WG (Commission) SCR CAT risk Cat TF (EIOPA) Non-life calibrations JWG (EIOPA)

42 The Balance Sheet Solvency II balance sheet and technical provisions Assets Free assets Shareholder funds SCR MCR Other liabilities Risk margin Own funds Best estimate Technical provisions

43 Valuations Market consistent economic valuation Compatible with IFRS to extent possible Level 2 specific references Level 3 technical standards paper

44 TP Overview Technical Provisions Hedgeable Non-Hedgeable Market Valuation Best Estimate + Risk Margin Discounted at the Risk Free Rate

45 TPs as a whole Future cash flows can be replicated reliably Replication by financial instruments Financial instruments have reliable market values which are observable

46 TPs as a whole Replicate reliably: Uncertainty in amount and timing in all possible scenarios Observable and reliable market values Active markets Deep, liquid and transparent

47 TPs as a whole Cash-flows which cannot be reliably replicated: Policyholder behaviours Risks whose specific pattern in the undertaking cannot be replicated Expenses incurred in servicing obligations

48 Technical Provisions principles Amount undertakings would have to pay if they were to transfer their insurance liabilities immediately to another undertaking Non-hedgeable: Best estimate + Risk Margin Best estimate Probability weighted expected present value of future cash flows Risk margin Margin for assuming the risk of insurance liabilities of the undertaking to run-off

49 Technical Provisions principles Discounted value of all future cash flows All future income and outgo Prudent, reliable and objective manner Up-to-date credible information, realistic assumptions Prescribed risk-free rates Assumptions / validation / expert judgement / data Reinsurance recoverables calculated separately

50 Technical Provisions Risk free structure Matching premium Counter cyclical premium Contract boundaries Simplifications

51 Risk free structure Normal construction Swaps (or gilts) adjusted for credit and basis risk Extrapolation Ultimate forward rate Entry point Speed of convergence

52 Consequences Technical provisions Interest rate risk sub-module Risk margin Material residual risk other than interest

53 Technical Provisions Matching premium What? Why? Applies under restricted conditions Undertaking specific Permanent feature

54 Technical Provisions - Counter cyclical premium Replaces illiquidity premium Additional component of risk-free in times of stressed financial markets Applies to all technical provisions Prescribed by EIOPA

55 Technical Provisions - Contract boundaries QIS5 treatments inconsistent and uncertain Some new key phrases Unilateral right Fully reflects the risk L3 timetable Graham will discuss some elements Implications for EPIFP

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57 Own Funds Limits MCR Tier 1 & Tier 2 only MCR must consist of >= 80% Tier 1 T3 Basic OF & Ancillary OF cannot contribute to MCR SCR Tier 1 >= 50% Tier 3 <= 15% Hybrid capital instruments <=20% Tier 1

58 Own Funds Tiers depending on attributes New hybrid Tier 1 rule on duration appropriate margin Reconciliation reserve EPIFP

59 Own Funds Ancillary OF need approval 3 months proposed (Level 3) Range of criteria in L2 L3 ITS criteria to be applied consistently L3 GL procedure in practice

60 MCR Basic formulae a little simpler - linear MCR linear = MCR linear,nl + MCR linear,l MCR linear,nl = s α s TP s + β s P s 4 MCR linear,l = 1 α s TP s CAR Revised calibrations in train

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62 SCR summary of changes Non-life Non-life calibrations P & R risk Non-life CAT rules Mass lapse

63 SCR summary of changes Both Interest rate risk Spread risk bonds & structured products Equity risk dampener Solvency ratio concentration & counterparty Mass lapse Loss absorbing capacity

64 Simplifications Application of proportionality principle Specific SCR simplifications Specific captive simplifications Technical provisions simplifications Incomplete list of examples

65 Transitionals Solvency 1 OF items good for 10 years Discount rate transition of 7 years Comparative reporting Opening assets, liabilities, MCR and SCR Main differences from closing Solvency 1 valuations

66 Crisis? What crisis? Pillar 1 Member States' central government and central banks denominated and funded in the domestic currency of that central government and the central bank shall be assigned a risk factor FUPi of 0 % Pillar 2 Shall include the insurance or reinsurance undertakings' own assessment of the credit risk of counterparties of the investments, including where the counterparties are central governments;

67 Other items Look through principle Underlying assets of collective investment vehicles Also to indirect exposures to market risk Material indirect exposures to underwriting and c party risk (if in ITS) L3 public consultation Implementing Technical Standards Guidelines Current public consultations

68 Agenda Topic Opening Remarks Update on Solvency II Programme European Context and Local Perspective Overview of Pillar 1 Speaker Fiona Muldoon TBD Gareth Colgan Coffee Break Move to Breakout Rooms Breakout 1: Standard Formula Life Breakout 2: Standard Formula Non-Life & USPs Breakout 3: Internal Models Graham Cherry Julia Moore & Tony Ward Dermot Marron Q&A Panel Closing Remarks

69 Breakout Sessions Breakout Session Presenter Location Colour Coding Standard Formula- Life Graham Cherry Ascot Suite Red Standard Formula Non-Life & USP s Julia Moore Tony Ward Aston Suite (this room) Yellow Internal Models Dermot Marron Annesley Suite Blue

70 Agenda Topic Opening Remarks Update on Solvency II Programme European Context and Local Perspective Overview of Pillar 1 Speaker Fiona Muldoon TBD Gareth Colgan Coffee Break Move to Breakout Rooms Breakout 1: Standard Formula Life Breakout 2: Standard Formula Non-Life & USPs Breakout 3: Internal Models Graham Cherry Julia Moore & Tony Ward Dermot Marron Q&A Panel Closing Remarks