Solvency II the path to 2016

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1 Solvency II the path to 2016 Financial Services Faculty webinar 21 January 2014 BUSINESS WITH CONFIDENCE icaew.com

2 Introduction Janine Hawes Insurance Director and technical leader on Solvency II KPMG Neil Coulson Partner and Insurance Specialist PKF Littlejohn BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

3 Agenda Solvency II where are we now? Janine Hawes, KPMG Requirements up to 2016 Neil Coulson, PKF Littlejohn Q&A BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

4 Ask a question Participate in today s webinar send us a question Audio problems if you experience poor sound quality you may benefit from selecting Use Telephone from your Audio Mode settings BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

5 Solvency II where are we now? Janine Hawes, KPMG BUSINESS WITH CONFIDENCE icaew.com

6 Agenda Solvency II where are we now? 2013 developments and timetable Solvency II timeline Preparatory Guidelines Omnibus 2 developments Long-term guarantees Equivalence Transitional measures 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 6

7 2013 developments and timetable Solvency II Effective date Long-term guarantees (LTG) Omnibus 2 EIOPA Preparatory Guidelines Equivalence Transitional measures 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 7

8 2013 developments and timetable: Key dates Omnibus 2 Nov 2013 Political Trilogue agreement March Feb 2014 EP plenary vote and publication Spring 2014 Published in Official Journal Solvency II one possible timeline 31 March 2015: Solvency II transposition 1 January 2016: Solvency II implementation Aug 2014 Nov/Dec 2014 Feb/Mar 2015 Equivalence decisions Oct 2014 to Sept 2015 Q Draft delegated acts Council/EP objection period ends (+ 3 months if objections) Commission post level 2 Consultation on first draft Implementing Technical Standards (ITS) Commission endorses first wave ITS Q2/3 2015? Level 3 guidelines finalised? 1 Jan 2016 Solvency II implementation date Long-term guarantees (LTG) Equivalence Solvency II Effective date Omnibus 2 Transitional measures EIOPA Preparatory Guidelines 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 8

9 EIOPA Preparatory Guidelines Governance Apply from 1 January 2014 Main challenges: Reporting timescales, including FLAOR Resources Governance and approval processes Application of thresholds solo/group Inconsistency across groups Supervisor expectations Forward looking assessment of own risk Reporting Long-term guarantees (LTG) Temporary equivalence (TE) Solvency II Effective date Long-term guarantees (LTG) Equivalence Internal model pre-application Solvency II Effective date Omnibus 2 Transitional measures EIOPA Preparatory Guidelines Transitional measures EIOPA Preparatory Guidelines 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 9

10 Agenda Solvency II where are we now? 2013 developments and timetable Solvency II timeline Preparatory Guidelines Omnibus 2 developments Long-term guarantees Equivalence Transitional measures 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 10

11 Omnibus 2 developments: LTGA Extrapolation of risk-free rate Omnibus 2 proposal: Extrapolate from last liquid point to ultimate forward rate Detail to follow in Level 2 Solvency II Effective date Last liquid point Ultimate forward rate Rate of convergence Long-term guarantees (LTG) Omnibus 2 EIOPA Preparatory Guidelines Equivalence Transitional measures 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 11

12 Omnibus 2 developments: LTGA Matching adjustment Omnibus 2 proposal: Credit quality relaxations Still some asset restrictions Fundamental spread floor increased Maximum credit increased to 65%/70% (EIOPA 25%) Calibration in Level 2 Cannot use with volatility adjustment or interest rate transitional Regulator approval required Long-term guarantees (LTG) Equivalence Solvency II Effective date Omnibus 2 Transitional measures EIOPA Preparatory Guidelines 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 12

13 Omnibus 2 developments: LTGA Volatility adjustment Omnibus 2 proposal: Cap increased significantly to 65% (EIOPA 20%) No capital requirement Detail to follow in Level 2 Notional portfolio composition Credit risk deduction Cannot use with matching adjustment Prior regulatory approval may be required Long-term guarantees (LTG) Can be withdrawn Equivalence Solvency II Effective date Omnibus 2 Transitional measures EIOPA Preparatory Guidelines 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 13

14 Omnibus 2 developments: LTGA Transitional measures Omnibus 2 proposal: Contracts written prior to Solvency II Interest rate Not with matching adjustment Excludes items included in volatility adjustment calculation Technical provisions May be applied to homogenous risk groups Recalculation possible every 2 years 16 years Long-term guarantees (LTG) Equivalence Solvency II Effective date Omnibus 2 Transitional measures EIOPA Preparatory Guidelines 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 14

15 Omnibus 2 developments: LTGA Disclosure Omnibus 2 proposal: For all of the above: Disclose publicly its use and impact Solvency restoration plans annually if SCR breach without use Long-term guarantees (LTG) Solvency II Effective date Omnibus 2 EIOPA Preparatory Guidelines Equivalence Transitional measures 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 15

16 Equivalence Full Reinsurance, subsidiary within EEA group, worldwide group Bermuda/Switzerland? Temporary 5 years (plus 1) Australia/Chile/China/Hong Kong/Israel/Mexico/ Singapore/South Africa Provisional Solvency II Effective date 10 years (plus 10) Pragmatic approach for USA (and others not seeking equivalence) Long-term guarantees (LTG) Omnibus 2 EIOPA Preparatory Guidelines Equivalence Transitional measures 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 16

17 Omnibus 2 developments: Transitional arrangements Repackaged loans Back-book - Interest rate -Technical provisions Own funds Run-off firms Reporting deadlines SCR noncompliance Standard formula asset stresses Long-term guarantees (LTG) Solvency II Effective date Omnibus 2 EIOPA Preparatory Guidelines Equivalence Transitional measures 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 17

18 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

19 Requirements up to 2016 Neil Coulson, PKF Littlejohn BUSINESS WITH CONFIDENCE icaew.com

20 Governance - requirements Build on current requirements Applies for all entities Already best practice Similar for fit & proper, segregation, reporting lines More granular Proportionality Additional requirements Risk management & appetite Own funds requirements more detailed than GENPRU Prudent person principles for investments Actuarial function Internal audit Solo & group relationship

21 Governance preparatory steps Gap analysis Document systems, procedures & responsibilities Establish risk management systems & appetite Establish own fund and investment principles (prudent person) Address new requirements including: Actuarial function (allocate responsibilities & reporting including data quality, underwriting policy & reinsurance arrangements) Internal audit function (independence, policy, plan, reporting) Clarify group & solo responsibilities PRA will discuss & monitor

22 ORSA - requirements Applies to all entities Two ORSAs required before full implementation show evolution PRA not prescribe format But must address all known risks including unquantifiable Forward looking consistent with current PRA requirements Start from ICAS for 2014 For 2015 compare to Standard Formula (plus model if applicable) Look beyond one year Stress & scenario test - monitor deviations from assumptions Monitor continuous solvency compliance from 2015 (for 80% of market)

23 ORSA - preparation Develop systems to assess, measure, monitor & document risks Process to define methodology for producing ORSA Board involvement in developing, approving & communicating ORSA Use in the business Link to capital management Decide level of communication Decide on style & proportionality of ORSA and how it will evolve Will an additional more detailed ORSA be required for regulator Firm to choose timing of ORSA Liaise with PRA regarding groups

24 Reporting in 2014/15 (if above threshold) Annual : due 22 weeks solo or 28 weeks group Quarterly : due 8 weeks solo or 14 weeks group Annual QRT (21 forms, including analysis into currencies and class of business): balance sheet, assets (detailed lists), technical provisions, own funds, MCR, SCR, additional group info Quarterly QRT (10 forms): As for annual except no SCR & less supporting templates Annual Narrative: governance, fit & proper, risk management, internal control, own funds management, solvency valuation, reporting policy, group governance & valuations (overlap with ORSA)

25 Reporting in 2014/15 Which entities are in scope for reporting threshold in 2014/15 PRA will confirm with firms in January 2014 Thresholds All groups with total assets above 12 billion require annual and quarterly reports Solo life (by local market share by technical provisions): 80% for annual & 50% for quarterly reports only separately report largest ring-fenced fund Solo non-life (by local market share by gross non-life premiums): 80% for annual & 50% for quarterly reports

26 Reporting preparation Reporting required using XBRL Data validation checks expected to be applied Linkage between IMAP process and reporting Reporting requirements for 2016 still to be finalised Prepare for many more forms in 2016 than for preparatory phase Prepare for accelerated reporting timelines in the future Future audit requirement still to be finalised PRA may require some audit in future even if not required by EIOPA

27 Reporting preparation timeline 2014 Preparing Identify requirements for you and monitor developments/transition to full requirements Prepare for reporting: data gap analysis, production timelines, dry runs, including S2 balance sheet and capital calculations (including models if applicable) 2015 Annual reporting Q1 & Q2: First annual reporting under preparatory guidelines as at (threshold entities) Q3 & Q4: Prepare for first full annual reporting as at (all) 2015 Quarterly reporting Q1 to Q3 Prepare for first quarterly reporting under preparatory guidelines as at Q4 First quarterly reporting under preparatory guidelines (threshold entities) Q4 Prepare for first full quarterly reporting as at (all)

28 This seminar and the accompanying handouts cover topics only in general terms and are intended to give a wide audience an outline understanding of issues relating to accounting applicable to entities in general, and therefore cannot be relied upon to cover specific situations; applications of the principles would depend on the particular circumstances involved. Furthermore, responses given in the seminar to questions are only based on an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting, or refraining from acting, on any of the contents. We would be pleased to advise you on the application of the principles demonstrated at the seminar, or on any other matters, to your specific circumstances, but in the absence of such specific advice, we cannot be responsible or held liable. PKF Littlejohn LLP is a member firm of the PKF International network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member or correspondent firm or firms. PKF Littlejohn

29 Any questions? BUSINESS WITH CONFIDENCE icaew.com

30 Ask a question Participate in today s webinar send us a question Click here to expand question box BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

31 Questions & answers Janine Hawes Insurance Director and technical leader on Solvency II KPMG Solvency II where are we now? Neil Coulson Partner and Insurance Specialist PKF Littlejohn Requirements up to 2016 BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

32 Future events Webinars To be announced icaew.com/webinars Events 21 Feb - Restoring trust in benchmarks icaew.com/fsfevents BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

33 Join the Financial Services Faculty Support at you finder tips Regular technical guidance, updates and information Professional representation Key industry events Exclusive website access icaew.com/fsf BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

34 THANK YOU FOR ATTENDING Contact the Financial Services Faculty. +44 (0) icaew.com/fsf Previous webinars icaew.com/fsfwebinars Please take the time to fill out our short survey BUSINESS WITH CONFIDENCE icaew.com ICAEW 2014

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