Solvency II. Challenges facing the insurance market. Tim Edwards. October 2010

Transcription

1 Solvency II Challenges facing the insurance market Tim Edwards October 2010

2 Agenda Solvency II basics and current status Specifics for the UK market, context of the European and global markets How the UK market is shaping up Challenges for UK firms Pillar 1 calculations Challenges for UK firms Pillar 2 requirements Challenges for UK firms Pillar 3 compliance

3 This is an ambitious proposal that will completely overhaul the way we ensure the financial soundness of our insurers. We are setting a world-leading standard that requires insurers to focus on managing all the risks they face and enables them to operate much more efficiently. Charlie McCreevy Internal Market and Services Commissioner Speaking at the launch of the Solvency II draft Framework Directive Solvency II is not just about capital. It is a change of behaviour Thomas Steffen Chairman of the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS)

4 Solvency II in a box Largest ever regulatory change for insurance firms within Europe Applies to all insurers in EU (including captives, branches) Objective is to place risk management at the heart of all insurance companies - it is a risk-based economic capital approach Not a just technical actuarial calculation It has a heavy emphasis on the governance framework and great implications for the Board and senior management Harmonisation intended to enhance provision of services across EU Regulatory regimes around the world are following Solvency II closely and many are planning to seek official recognition of regulatory equivalence from the EU

5 Solvency II Three pillars framework PILLAR I Quantitative requirements Assets and Liabilities market consistent valuation Investments Solvency Capital Requirement (SCR): European Standard Formula; or Internal Model Minimum Capital Requirement (MCR) Own Funds PILLAR II Supervisor review System of governance Own risk and solvency assessment (ORSA) Supervisory review process Supervisory intervention including capital add-on Disclosure PILLAR III Public Disclosure annual solvency & financial condition report Information to be provided for supervisory purposes

6 Political landscape Lamfalussy process Level 1 Framework Directive for Solvency II Level 2 Regulation (implementing measures) Level 3 Supervisory Guidance Level 4 Enforcement

7 Solvency II Outline timelines Level 1 Level 2 Level 3 Business cycles QIS5 3 rd country equivalence Cycle 1 Cycle 2 Cycle 3 Q Q Q Q Q Q Q Q Q Q Q Q CEIOPS final advice Publication in Official Journal Draft tech spec & calibration paper General criteria COM consults with EIOPC & other stakeholders incl. industry then prepares & adopts L2 proposals Final spec & spreadsheet QIS5 CEIOPS draft guidelines EU member states transpose into law Oct 2010 COM submits Level 2 package to its Impact Assessment Committee EIOPC issues opinion EP checks adherence to Level 1 mandate QIS5 results & CEIOPS report Translation (at least 6 months) Apr 2011 Deadline for CEIOPS to publish QIS5 report Mar 2010 Deadline for CEIOPS to publish final advice on general criteria Initial wave of individual assessments CEIOPS final guidelines Oct 2011 COM revised deadline for final Level 2 measures leaves only 12 months for transposition. However, the majority are likely to be regulations which become immediately enforceable as law in all member states without requiring transposition. EU member states transpose into law Dec 2011 Deadline for CEIOPS to publish final guidelines (proposed EU supervisory authority may have power to make them binding law) Jun 2012 Deadline for adoption of individual decisions Q Solvency II in force 31 Oct 2012 Dec 2012 SFCR may be required Revised date (to be confirmed) 31 Dec 2012 CEIOPS Committee of European Insurance & Occupational Pensions Supervisors COM EU Commission EIOPA European Insurance & Occupational Pension Authority EP European Parliament

8 UK insurance market key challenges There are roughly 500 UK insurers within scope of Solvency II but there will be uncertainty as to who is within scope until a very late stage There remains political uncertainty as to the actual implementation date, and any transitional arrangements that might be available Solvency II represents a huge challenge for regulators a complete rewrite of the rulebook, and at a time when, in the UK, the FSA itself is facing structural change And the existing regime remains in place until the point Solvency II goes live Solvency II is a Group supervisory regime so supervisors across Europe, and wider, will have to work together and share responsibility for decision-making Of the 500 UK firms within scope, around 400 intend to use the new European Standard Formula to calculate their solvency capital but the vast majority have not taken part in the tests to calibrate the new regime (QIS1-4) and QIS5 participation is uncertain Of the 110 firms intending to apply for internal model approval (representing over 90% of the market by size), time is running out to be ready, and most are behind schedule But Solvency II isn t impossible there are firms, across the industry, who will be ready, and who will be well placed to benefit. This makes it harder still for those who are lagging behind.

9 Some of the key challenges which are impacting firms across the industry Strategic impact Many firms are now beginning to consider the big strategic decisions that will stem from the capital implications of Solvency II. We are seeing that many firms are now beginning to set up Strategy work-streams to look into areas such as potential tax, product type and asset restructuring to identify and minimise inefficiencies QIS 5 Uncertain requirements Resources Time pressures There is a clear message from the FSA that best efforts will not be enough for QIS 5 and there is a much higher expectation in terms of the quality of the submissions required. Firms are finding QIS5 very complex and time-consuming. Results may be unreliable. Requirements are complex, changing and there is a lack of clear implementation specification. For example firms are working on producing their pre-application submissions but do not have clear guidance on exactly what the FSA is looking for. The same uncertainty and lack of concrete guidance is affecting firms with regards to the development of the ORSA for the pre-application process. There also is evidence of significant divergence of views within the senior teams of some firms on the scale of work required under Solvency II and the approach to take. Limited skilled resources in core areas and competing resource requirements while at the same time there is a very high volume of work developing (including documentation, MI and potentially disclosure) There is a risk that the time pressures on Internal Model Application Process (IMAP) means that firms may develop models too quickly without completely understanding their full and long-term implications. This may lead to unreliable models and impaired decision-making. Some firms will risk not obtaining internal model approval in full or on time with potential impact on regulatory capital requirements.

10 Pillar I: quantitative requirements Progressive levels of sophistication in capital assessment Full internal models Risk sensitivity Standard formula with undertaking specific parameters (USPs) Partial internal models Standard formula with simplifications Standard formula Complexity

11 Working towards Solvency II Internal Models IMAP: Under Solvency II, insurers have the option to apply for approval to use their own internal model, as an alternative to the new European Standard Formula, for the purpose of calculating their SCR. To achieve approval, the internal model must: Calculate the SCR appropriately, at point of application and on an ongoing basis Be an important element of a satisfactory system of risk management and governance Satisfy the various specific internal model requirements per the Directive and later Level 2 implementing measures and Level 3 guidance / binding technical standards The IMAP process is broadly the same for all firms looking to go internal model Time is short FSA have asked insurers to prepare to apply from Q There are already signs that this is unrealistic for many PAQC is running at least 2-3 months later on average than originally expected Only 25% of IMAP firms will have started pre-application by mid-october 2010

12 Internal Models demand and challenge ahead Demand for internal models is particularly high in the UK because: Internal models have been part of the UK regulatory regime for several years, so there is an established tradition The UK actuarial profession, which leads internal model development for insurers, is (rightly) highly regarded, promotes a professional culture of knowledge-sharing, and so has driven internal model use The UK insurance industry in unusual, especially in European terms a substantial number of smaller and medium-sized firms write complex international or global business, for which the standard formula is unlikely to provide an appropriate capital requirement

13 Groups considerations Of 110 IMAP firms, at least 80 are lead or part of a Group that involves other supervisory authorities FSA has touchpoints with well over 100 other authorities IMAP activity will require a huge amount of cooperation between EEA supervisors Where there are two or more EEA supervisors involved in a Group, there has to be a College (cf CEIOPS CP80 for legal explanation of pre-sii arrangements) College will work closely and continuously on a shared work programme Group will be interested in solo issues, and solo supervisors will be interested in Group issues Single Group application will need to reference solo activities as well as Group Decisions including the final IMAP verdict will be made by the College Role of EIOPA yet to be confirmed but likely to include monitoring of Colleges, ensuring consistent decision-making and arbitration (binding?) where College is not in agreement over decisions

14 FSA IMAP key activity Contents of Application Application will follow a consistent format. FSA have unpacked the Contents of Application per CEIOPS CP37 into 80+ sub-categories even the headings show the scale of challenge for firms

15 In summary There is a vast programme to be planned, scoped, designed, delivered - within two years (following slides recreated from a presentation to the UK insurance industry by FSA IMAP team, August 2010)

16 Implementation began with DP08/4, September 2008 Identify S2 key exec, start to pull together implementation plans and consider internal model intentions

17 The best firms had identified how they intended to implement S2 by end of 2008, and had started to consider resourcing implications, model scope, design and architecture

18 Some firms have reached a stage where their model plans have shape and structure. All firms, of course, have much more to do

19 And 2012 is getting close and closer...

20 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. Design: hb06441