EIOPA s Public Consultation Guidelines for the Preparation of Solvency II - System of Governance & ORSA. 9 April 2013

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2 EIOPA s Public Consultation Guidelines for the Preparation of Solvency II - System of Governance & ORSA 9 April

3 Agenda 1. Objectives 4 2. Introduction The Consultation Process & Background 5-6 PRA s Communication plan 7 Overview of the Guidelines & Key messages 8-10 Applicability and EIOPA s Cover Note 11 Applicability of Guidelines on firms and groups 12 Thresholds applicable only in the preparatory period 13 Connection to Pillar I SII requirements 14 EIOPA expects the PRA to System of Governance 16 Potential benefits & what is not expected Guidelines summarised What you need to know System of Governance ORSA 22 Potential benefits & what is not expected Guidelines summarised What you need to know ORSA Next steps & questions

4 Objectives Brief industry on the content in EIOPA s proposed preparedness guidelines for the System of Governance and ORSA. Describe the consultation process including timeframes. Outline how the PRA will engage with industry to further identify potential issues. Provide and opportunity for you to raise questions you may have. 4

5 Introduction the consultation process The purpose of the Guidelines (GLs) - within the four consultation papers - is to support both National Competent Authorities (NCAs) and firms in their preparation for the Solvency II (SII) requirements. The papers are made up of a number of GLs that are principles-based and outcomes-focused. The GLs cover the areas that EIOPA considers fundamental to ensure effective preparation for SII and that seek convergence in preparations by Member States starting from 1 January The GLs cover areas that are considered to be the most stable of the SII package: Systems of Governance (SoG); Forward looking assessment of the undertaking s own risks (based on the ORSA principles) ; Submission of information to NCAs; Pre-application for Internal Models. Consultation opening date: 27 th March, closing date: 19 th June ( Firms may respond to the consultation either via the ABI or directly to EIOPA. The final version of the GLs are expected to be published in Sept/Oct NCAs will have to confirm to EIOPA whether they comply or intend to comply with each of these GLs, with reasons for noncompliance, within two months of publication. 5

6 Introduction - background September 2012 October 2012 November 2012 December 2012 December 2012 March 2013 March 2013 The trialogue discussions have been suspended pending the impact assessment on the long-term guarantees package. EIOPA wrote to the EC warning of a fragmented approach to supervision pending SII implementation unless some action was taken to deliver consistency in approach. Commissioner Barnier responded that EIOPA should seek to build on the preparatory work already undertaken by firms. EIOPA issued an Opinion that it had power to develop GLs ahead of SII implementation. EIOPA developed the draft GLs in conjunction with input from the appropriate EIOPA committees. EIOPA Board of Supervisors agreed the draft GLs can be consulted upon. Omnibus II Directive and Level 2 EIOPA is working under the assumption that these measures will be available in time for NCAs and firms to prepare for the submission of the ORSA, and of quantitative and qualitative information in In which case, EIOPA would prepare technical specifications and provide guidance on the calculation of technical provisions and the standard formula. This assumption is based on the OMDII negotiations and the availability of the delegated acts. EIOPA will review the deadlines for the submission of information at the end of

7 Introduction PRA communication plan We are planning to hold meetings with external stakeholders throughout the EIOPA Consultation. There will be follow-up workshops and meetings with nominated industry representatives to gain technical input in early May. A plenary session to provide feedback to industry will be in late May. Other ad hoc external-facing activity will be conducted, as required. Your technical input will inform the PRA s decision on our approach to comply, intend to comply or explain. Information will be available at Firms should address any queries to 7

8 Introduction - Overview of the Guidelines Guideline Paper Systems of Governance Develop Articles 40 to 49, 92, 132 and 256 of the SII Directive. Scope # GL s General governance, fit and proper requirements, risk management, the prudent person principle, governance of own funds, internal controls, internal audit function, actuarial function, outsourcing, and group specific governance requirements. There is also explanatory text for these GLs. (1) 57 Forward looking assessment of the undertaking s own risks Develop Articles 45 and 246 (on group specific aspects) of the SII Directive Three main aspects regarding the assessment of: 1. overall solvency needs. 2. whether the undertaking would comply on a continuous basis with the SII regulatory capital requirements and the requirements regarding the calculation of TPs. 3. deviations from the assumptions underlying the solvency capital requirement calculation. It is also proposed that firms and groups submit a report of the ORSA to the PRA within two weeks of the undertaking having concluded their assessment. There is also explanatory text for these GLs. (1) 25 Note: The GLs focus on preparedness through being outcomes-focused and principles-based, and develop the provisions of Level 1 in the absence of Level 2. (1) The explanatory text is available on the EIOPA website ( but does not form part of the GLs and hence is not part of the comply or explain mechanism or the public consultation process. 8

9 Introduction - Overview of the Guidelines cont d Guideline Paper Submission of information to NCAs Develop Articles 35 and 254 of the SII Directive. Preapplication for Internal Models Develop Articles 112, 113, 115, 116, 120 to 126, 230 and 231 of the SII Directive Scope # GLs The GLs reflect a subset of the reporting templates and of the narrative reporting required under SII. The intention is for NCAs and firms to put in place and test the systems that will be needed to comply with SII reporting requirements, and to analyse and improve over time the quality of data produced. For the preparatory phase to be fully effective, EIOPA consider it appropriate to include quarterly quantitative submissions as well as annual. The GLs proposed cover most aspects of the internal model framework, including model changes, use test, expert judgement, methodological consistency, probability distribution forecast, profit and loss attribution, calibration approximations, validation, documentation, external models and data, and the functioning of colleges. They aim to increase convergence of supervisory practices. There is also explanatory text for these GLs. (1) (1) The explanatory text is available on the EIOPA website ( but does not form part of the GLs and hence is not part of the comply or explain mechanism or the public consultation process. 9

10 Key messages Firms will continue to be regulated and supervised under the existing SI-based regime. The GLs are preparatory, and not early implementation of SII. It is important to consider the GLs together with the Cover Note which details the approach to the interpretation and application of the GLs. There are thresholds that apply to some aspects (submission of information and ORSA) during, and only during, the preparatory period. As and when European legislation is finalised, firms will need to review their SII plans and amend them as appropriate. We expect firms to have regard to the interim guidelines and take appropriate steps to prepare for SII. We will set out our supervisory approach further once the final guidelines are released in September/October. Note: The PRA will decide whether the UK will comply or intends to comply with each of the GLs. Until that point firms should assume that all guidelines apply. 10

11 Introduction - applicability and EIOPA s Cover Note The GLs need to be read in conjunction with the Cover Note, which sets out how the GLs are to be applied: 1. In a manner that is proportionate in the context of the preparatory phase; and 2. With some phasing-in in the application of the GLs. 1. Proportionality Proportionality is achieved through: the GLs being principles-based or drafted with a view to the outcome or supervisory objective that should be met. the level of detail and scope of the GLs, reflecting the fact that the GLs are issued to prepare for SII, not for its full application. 2. Phasing-in Flexibility in application of the GLs is achieved by EIOPA through general and specific phasing-in and the use of temporary thresholds during the preparatory period. Note: NCAs can go beyond the provisions in the GLs if that is appropriate for their circumstances and to the extent that it is consistent with Union law. 11

12 Applicability of GLs on firms and groups GL Paper Legal start date/ Preparation commences All firms Subset of firms All groups Subset of groups SoG 1 January Preparation commences (1) for GL57 only ORSA 1 January Preparation commences (4) for GLs 3, 14, 15 and 16 only (5) for GLs 3, 14, 15 and 16 only Submission of information Reporting policy Narrative submissions annual Quantitative submissions annual Quantitative submissions quarterly 1 January January 2014 First reporting date 31 December 2014 (3) First reporting date 31 December 2014 (3) First reporting date 30 September 2015 (3) for GL33 only (4) (4) (6) for GL33 only (5) (5) (5) IM Pre-application 1 January 2014 (1) (1) (1) Firms/groups seeking internal models approval (2) Firms subject to narrative reporting (3) On the basis SII is implemented on 1 January 2016, otherwise start date will move in line with delay (4) Firms accounting for 80% of market share at end 2012 (5) Groups (with European subsidiaries outside the UK) with total assets over 12bn at end 2012 (6) Firms accounting for 50% of market share at end

13 Thresholds applicable only in the preparatory period These are set out in detail in GLs 3-11 of the Submission of Information consultation paper. Annual submissions Life solo firms Firms accounting for 80% of market share by TPs Quarterly submissions Firms accounting for 50% of market share by TPs ORSA performance of an assessment Firms accounting for 80% of market share by TPs Non-life solo firms Firms accounting for 80% of market share by gross non-life premiums Firms accounting for 50% of market share by gross non-life premiums Firms accounting for 80% of market share by gross non-life premiums Groups Total assets > 12bn Total assets > 12bn Total assets > 12bn 13

14 Connection to Pillar I SII requirements EIOPA has set out in paragraph 4.12 of the Cover Note: connection between the areas covered by the GLs and the pillar one requirements to be introduced by SII, which are not within the scope of these GLs undertakings will need to calculate the balance sheet, including technical provisions and determine their solvency position under pillar 1 requirements. This connection applies in particular to: The quantitative and qualitative information to be submitted on the calculation of pillar one requirements; Aspects of the actuarial function, including calculation and validation of certain balance sheet items, such as technical provisions; Aspects of the prudent person principle, with regard to the investment of assets; With regard to [ORSA], the assessment of whether the undertaking would comply on a continuous basis with the SII regulatory capital requirements and the requirements regarding the calculation of technical provisions; and the assessment of deviation from the assumptions underlying the SCR calculation. 14

15 EIOPA expects the PRA to 1. Make every effort to comply with the final GLs, as outlined in Article 16(3) of the EIOPA Regulation. 2. Develop a comply or intend to comply response, with reasons for non-compliance, addressing each GL within 2 months after the final GLs are released. There are two dimensions to address when considering complying with the GLs. To comply the PRA needs to: a) Require firms to meet the specified outcomes of individual GLs. This ensures that firms take steps towards implementing the relevant aspects of the regulatory framework addressed in the GLs so that, when SII is applicable, its requirements can be fully complied with. b) Set up the necessary procedures to enable the PRA to review and evaluate the quality of the information provided, and it is likely to be appropriate to discuss it with firms regarding the progress being made. 3. Send EIOPA a progress report on the application of the GLs each year at the calendar year end. The progress reports will not be publicly disclosed. The GLs are addressed to NCAs. Therefore, PRA would have to consider how they would apply them to firms. There are a number of mechanisms that are permissible within the scope of the Cover Note and the GLs that may help achieve this, and we need to evaluate these options in more detail. It will also be necessary to ensure that any necessary procedures can be developed to enable the PRA to review and evaluate the quality of the information provided to them. 15

16 System of Governance Potential Benefits View EIOPA s expectations early The GLs clarify what the SII target is, giving firms a clearer objective for their preparations. As a result, it will be easier for firms to identify what actions they need to take to ensure they can meet these requirements when SII comes into effect. Reaffirm transition plans - A clear transition plan will enable firms to ensure they have the necessary resources and time to put in place any changes required in governance structures, processes, policies and staffing. Test-runs and feedback - Taking active steps towards preparedness will help ensure that firms can test-run proposed changes to their governance system, including interdependencies between Pillar 1 and Pillar 3 requirements, and receive feedback from supervisors where appropriate. 16

17 System of Governance What is not expected Fully implemented SII governance systems in 2014 Firms are not expected to achieve the GLs immediately, but rather prepare through developing and/or adapting their current governance systems, processes and structures so that they are SII compliant by the time the Directive is transposed. Changes to investments or capital A firm s preparation for SII SoG GLs is not expected to lead to changes to a firm s investment portfolios, capital structure or other Pillar 1 aspects. Overlooking Pillar 1 dependencies Preparations related to aspects of the SoG GLs that require finalised SII Pillar 1 specifications are not expected. 17

18 System of Governance GLs summarised There are 57 GLs proposed. The PRA is required to ensure that firms (including groups) take the appropriate steps to put processes and systems in place and document them. The PRA is also required to review and evaluate the quality of information provided by firms. How that is achieved in a way that is not too burdensome on firms and supervisors will be considered in the coming months. Chapter General governance Fit and Proper Risk Management Prudent Person Principle Internal Controls Content of guidelines (extract) Interaction of the Board with committees, senior management and key functions Alignment of operational structure with strategic objectives and operations of firm AMSB should collectively possess required qualifications, experience and knowledge Implementation of key functions AMSB and key functions required to be fit and proper AMSB governance over risk appetite, risk tolerance limits and RMS effectiveness RM policy requirements RM function tasks Underwriting and reserving. Operational risk, risk mitigation, reinsurance, ALM, investment risk, liquidity risk, Investment risk management Governance of non-routine investment activities Unit-linked and index-linked best interest of policyholders Assets not admitted for trading on regulated financial market Derivatives; Securitised instruments Staff awareness of Internal controls Internal Control activities commensurate to risks Monitoring and reporting so that Board is provided with necessary information 18

19 System of Governance GLs summarised (cont d) Chapter Internal Audit Actuarial Function Outsourcing Group Governance Content of guidelines (extract) Independence of internal audit function Requirements of internal audit policy Requirements of internal audit plan Recommendations and timeframe for remedying faults Tasks of actuarial function and managing conflicts of interest TP Valuation models reflecting key drivers of firm s risks Data quality governance Testing against experience reporting to Board Underwriting and reinsurance arrangements Fit and proper requirements for outsourcing of key functions Documentation of whether outsourced functions are critical and important Outsourcing requirements for Insurance intermediaries Intra-group outsourcing governance Outsourcing policy requirements Allocation of responsibility for group governance requirements Governance requirements for entity fulfilling group governance Scope of risks at solo and group level to be assessed Group risk management requirements Application of group internal model to entities in group Note: Firms and groups above the threshold for submission of annual information are also required to provide narrative information on certain aspects of governance 19

20 What you need to know: System of Governance Although the SoG GLs largely reflect current principles in the Handbook, they also build upon and/or go further than current requirements in a number of areas, including: Role of the Board The Board should have appropriate interaction with any committee it establishes as well as senior management and other key functions, requesting information proactively and challenging when necessary. Key functions SII introduces additional requirements for key functions as detailed in the Directive. During the interim period firms are expected to progress on the implementation of these functions. Risk management A firm s risk management policy should cover specified requirements with respect to underwriting and reserving risk, operational risk, reinsurance and other risk mitigation techniques, strategic and reputational risk, asset liability management, investment risk, liquidity risk and credit risk. 20

21 What you need to know: cont d Prudent Person Principle Firms should develop their own set of key risk indicators for purposes of making investment decisions, and not solely depend on risk assessments by financial institutions, asset managers and rating agencies. Before undertaking non-routine investments a firm should assess its ability to perform and manage these investments as well as their impact on the risk profile of firm. Investments of Unit-linked and Index-linked contracts should be selected in the best interests of the policyholders. The firm should implement, manage, monitor and control procedures in relation to investments that are not admitted to trading on a regulated financial market. Actuarial function Calculation of technical provisions should comply with requirements set out in Articles 76 to 85 of the SII Directive. Any conflicts of interest that arise out of the tasks undertaken by the actuarial function should be addressed. 21

22 ORSA Potential Benefits Reaffirm existing best practice on risk and capital management - The ORSA GLs largely reflect principles of good risk and capital management which underpin the ICAS and are set out in the PRA Handbook. Develop processes for implementing the ORSA Although reflecting best practice, the ORSA GLs do introduce new requirements along several dimensions. A clear plan for developing and testing the ORSA will enable firms to ensure they have the necessary resources and time to put in place any changes required in governance structures, processes, policies and staffing. Test-run the ORSA and integrate into decision-making Dry-runs of the ORSA will enable firms to assess interdependencies between pillar 1/2/3 requirements, move towards integration in planning and work out any problems before implementation. 22

23 ORSA What is not expected A full ORSA is not necessarily expected of all firms in The interim ORSA is for preparedness, and so firms are expected to take active steps, where they have not already done so, towards developing their ORSA starting in In addition, many firms will not be expected to address GLs 14-16, as they will not meet the threshold defined by EIOPA. Changes to a firm s regulatory capital requirements, investment portfolios, capital structure or other Pillar 1 aspects is not expected. The preparation of governance systems, processes or structures that require SII Pillar 1 specifications is not fully expected if these have yet to be agreed upon in the European Union. 23

24 ORSA GLs summarised Chapter Threshold Board role in ORSA; ORSA role in decision-making Documentation ORSA Content of guidelines (extract) Statement of threshold calculation Statement of what requirements apply to threshold firms Role of Board in setting policy and challenging results Use of ORSA in strategic planning and decision-making ORSA policy contents ORSA record contents ORSA internal report communication to staff ORSA supervisory report contents and submission to NSA Stress and scenario tests Forward-looking perspective Applies to all firms and must submit at least annually Valuation basis for ORSA Use of valuation basis other than SII Continuous compliance with regulatory capital requirements Applies to threshold firms only Forward looking basis Capital management and stress/scenario tests 24

25 ORSA GLs cont d Chapter Compliance with S2 technical provisioning requirements Deviations of risk profile from assumptions underlying the SCR Group ORSA Content of guidelines (extract) Applies to threshold firms only Link to Art. 45 of Directive Applies to threshold firms only Does not apply to IMAP firms Link to Art 45 of Directive Scope of group ORSA in regard to entities Reporting of group ORSA to supervisor Contents of group ORSA, including of management and alignment of solo and group strategies Group ORSA record Group ORSA report to supervisor Single report for group Internal model at group level Calculation of group solvency requirement 3 rd country branches Impact of third-country business on ORSA 25

26 What you need to know: ORSA The interim ORSA build upon the principles underlying the ICAS and other prudential requirements in the Handbook, but extends them on a preparedness basis only along various dimensions, including: Own solvency needs assessment (OSN) All firms will be required to conduct an OSN assessment that is forward-looking, reflecting the business planning horizon of the firm, and incorporating an assessment of all material risks to which the firm is exposed. An ORSA report is to be submitted within 2 weeks of completion. Continuous compliance with regulatory capital requirements (SCR) (Only threshold) firms will be required to assess on a forward-looking basis, taking into account capital management and incorporating results from relevant stress tests/scenario analyses, their [potential] ability to continuously comply with the SII regulatory capital requirements. Deviations between risk profile and assumptions underlying calculation of SCR (Only threshold but excluding IMAP) firms will be required to assess whether their risk profile deviates significantly from the assumptions underlying the calculation of their solvency capital requirement. Compliance with SII technical provisioning requirements (Only threshold) firms will be required, as part of their forward-looking assessment, to ensure that the AF provides input regarding the firm s ability to continuously comply with the requirements regarding the calculation of technical provisions. 26

27 Next steps: Familiarise yourself with the guidelines and understand the impact on you. Address any questions you have and flag the impact of the guidelines to the Policy team at the address below. The questions and comments we receive will help the PRA to understand the impact of the guidelines and will inform our response to the EIOPA Consultation. 27

28 Questions? 28

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