Solvency II Briefing 7 October Leading business advisers 2015 Deloitte

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1 Solvency II Briefing 7 October 2015 Leading business advisers

2 Donal Lehane Partner

3 Agenda 1 Actuarial Function by Sinead Kiernan, Director 2 Standard Formula Appropriateness by Eamon Howlin, Senior Manager; and Maaz Mushir, Manager 3 Data Management by John Kilbride, Director 3

4 Actuarial Function Sinéad Kiernan Director

5 Introduction Actuarial Function Outsourcing the Actuarial Function 2015 Requirements CP92 Feedback Statement 5

6 Introduction Actuarial Function The Actuarial Function is a Key Function under Solvency II. Companies will be required to comply with all requirements for the actuarial function under Solvency II as well as any additional requirements as specified by the CBI s requirements relating to the Domestic Actuarial Regime Under Solvency II. The Central Bank s consultation paper Domestic Actuarial Regime Under Solvency II Consultation was published by the Central Bank on 2 April The Central Bank s feedback statement was published on 6 October. Additional requirements introduced by the Central Bank are in green text. 6

7 Understanding and implementing the requirements for the Actuarial Function Sources of Regulatory Requirements The main sources of the Actuarial Function requirements are: Solvency II Directive (Article 48) Delegated Acts (Articles 272 and 308) EIOPA Guidelines on System of Governance CBI Guidelines on Preparing for Solvency II System of Governance CBI s Consultation Paper 92 and Feedback Statement Domestic Actuarial Regime and Related Governance Requirements under Solvency II The slides which follow provide a summary of our interpretation of the requirements for the Actuarial Function. We recommend that you refer to the Directive, Delegated Acts, and the relevant guidelines to develop your understanding of the regulatory requirements. 7 ORSA Briefing

8 Introduction Actuarial Function Outsourcing the Actuarial Function 2015 Requirements CP92 Feedback Statement 8

9 Actuarial Function Responsibilities Technical Provisions Co-ordinate calculation of technical provisions; Inform the Board of the adequacy of calculation; Provide opinion & accompanying report to the CBI; Actuarial Function (HoAF) Underwriting Reinsurance Prepare opinion on overall underwriting policy; Prepare opinion on adequacy of reinsurance arrangements; Actuarial Function Report Risk Management Contribute to effective risk management system; Provide opinion to the Board on range of risks & adequacy of the scenarios considered as part of the ORSA; 9 Sources: SII Directive, Delegated Acts, CP92

10 Actuarial Function Head of Actuarial Function Actuarial Function (HoAF) 1. The actuarial function shall be carried out by persons who: a) have knowledge of actuarial and financial mathematics, commensurate with the nature, scale and complexity of the risks inherent in the business, and b) are able to demonstrate their relevant experience with applicable professional and other standards, as outlined in Article 48 (2) of the 2009 Solvency II Directive. 2. Head of Actuarial Function: a) Person with responsibility for Key Function b) One individual within the undertaking c) PCF role under Fitness & Probity regime 10 Sources: SII Directive, CP92

11 Actuarial Function Technical Provisions Actuarial Function (HoAF) Technical Provisions Underwriting Reinsurance Risk Management Co-ordinate the calculation of Technical Provisions Ensure appropriateness of methodologies, models and assumptions Comparison to current SAO regime Similar Comparison to current appointed actuary regime Similar Assess sufficiency & quality of data Similar Similar Procedures are sufficiently supported by IT systems Compare best estimate against experience Conclude on adequacy and reliability of calculation Identify sources and degree of uncertainty New Similar Similar Similar New Similar (for assumption setting) Similar New Disclose use of material judgments Similar Similar Perform sensitivity analysis Similar New Provide opinion & accompanying report to CBI Similar Similar (provide to Board) 11 There are several similarities between the above requirements and the current SAO and AA regimes, however we note that the definition of technical provisions is different under Solvency II. Sources: SII Directive, Delegated Acts, ESAP2 Working Draft, CP92

12 Actuarial Function Underwriting Opinion Actuarial Function (HoAF) Technical Provisions Underwriting Reinsurance Opinion on Underwriting Policy Prepare opinion on overall underwriting policy Assess sufficiency of premiums in totality. AA currently provides opinion on sufficiency of new business premiums in total. Assess variability surrounding expected profitability and consistency of variability with risk appetite Review response to changing experience Conclude on risk of anti-selection Assess consistency of the underwriting policy with other policies Risk Management Assess consistency of underwriting assumptions with those used for technical provisions and reinsurance Comment on relationship between business plan and risk appetite 12 There are no requirements related to Underwriting Opinion in the current SAO regime, all of the above requirements are therefore considered New requirements. However, the AURR requirement in the current SAO regime is related to the analysis underlying the Opinion on Underwriting Policy. Most of the requirements are new under AA regime. Sources: SII Directive, Delegated Acts, ESAP2 Working Draft, CP92

13 Actuarial Function Reinsurance Opinion Actuarial Function (HoAF) Technical Provisions Underwriting Reinsurance Risk Management Opinion on adequacy of reinsurance arrangements Prepare opinion on adequacy of reinsurance arrangements, outlining any concerns Provide recommendations to improve reinsurance arrangements, including advantages and disadvantages of any alternatives Assess consistency with risk appetite, risk profile, underwriting policy and technical provisions Assess credit standing of reinsurance counterparties Assess response under stress tests, e.g. for catastrophe claims, risk aggregations Appropriateness of the calculation of amounts recoverable from reinsurance contracts and special purpose vehicles There are no requirements related to Reinsurance Opinion in the current SAO and AA regimes, all of the above requirements are therefore considered New requirements. 13 Sources: SII Directive, Delegated Acts, ESAP2 Working Draft, CP92

14 Actuarial Function Risk Management Technical Provisions Contribution to effective risk management system Description of areas of material contribution to risk management, including contribution to risk modelling underlying calculation of capital requirements. Actuarial Function (HoAF) Underwriting Reinsurance Provide recommendations for future improvements Opinion to the Board on range of risks and adequacy of scenarios, including financial projections, considered as part of each ORSA process FCR report currently required under AA regime Risk Management There are no requirements related to Risk Management in the current SAO regime, all of the above requirements are therefore considered New requirements. However, we would note that as part of the current SAO regime, the Signing Actuary is required to consider material risks around the best estimate of reserves. 14 Sources: SII Directive, Delegated Acts, ESAP2 Working Draft, CP92

15 Actuarial Function Board considerations Challenge of the Actuarial Function Report Education Best estimate > volatility Risk margin SCR target capital Capital coverage ratio on a Solvency I vs Solvency II basis Insights provided by the actuary Changes over time Materiality Presentation New communication challenges 15

16 Introduction Actuarial Function Outsourcing the Actuarial Function 2015 Requirements CP92 Feedback Statement 16

17 Outsourcing the Actuarial Function Maintaining responsibility 1. Key functions under Solvency II, e.g. Actuarial Function, can be outsourced in line with the Board approved outsourcing policy. 2. Responsibility for the function cannot be outsourced and a designated person from within the company must assume overall responsibility for the outsourced function. This designated person will be PCF role and must: a) Be notified to the CBI; b) Be fit and proper as assessed by the CBI; c) Possess sufficient knowledge and experience regarding the outsourced function to be able to challenge the person and results. 3. This PCF should ensure close interaction with the outsourced actuarial function in order to ensure effective oversight and challenge as required under the guidelines. 4. Companies who currently outsource their annual reserve reviews should reassess their relationship with their actuarial service provider, including ownership of the relationship, to ensure it is fit for purpose under Solvency II. 17

18 Introduction Actuarial Function Outsourcing the Actuarial Function 2015 Requirements CP92 Additional Requirements 18

19 Next Steps Requirements for 2015 All companies are required to comply with the CBI s preparatory guidelines from 1 January The CBI has confirmed that, in line with guideline 40, an actuarial report should be submitted by the actuarial function of a low or medium-low undertaking to the board of directors in This report should document all tasks that have been undertaken by the actuarial function in 2015 including their results, clearly identifying any deficiencies and giving recommendations as to how such deficiencies should be remedied. All areas of the actuarial function should be covered: o Co-ordinate the calculation of Solvency II technical provisions; o Provide an opinion on the underwriting policy; o Provide an opinion on the adequacy of reinsurance arrangements; o Comply with all other requirements of article

20 Next Steps Requirements for 2015 YE As at 2015 YE all companies are required to have complied with the CBI s preparatory guidelines regarding the Actuarial Function. Therefore, by 31 December 2015 it is expected that all companies will have complied with the requirements for an Actuarial Function under Solvency II excluding additional requirements from CP 92. Heads of Actuarial Function need PCF approval by 1 January Companies will be required to calculate Solvency II technical provisions as at 31 December 2015 as part of the Solvency II Day 1 QRT reporting with a valuation date of 31 December Additionally, companies will be required to provide an Statement of Actuarial opinion to the Central Bank of Ireland under Solvency I. 20

21 Introduction Actuarial Function Outsourcing the Actuarial Function 2015 Requirements CP92 Feedback Statement 21

22 CP92 Feedback Statement 6 October 2015 Key changes and clarifications General Requirements Outsourcing The CBI has clarified that the HoAF role may be outsourced for low, medium low and medium high undertakings, but for high impact undertakings this must be an internal role. Role Some respondents queried wither the role of HoAF must be held by an actuary. The CBI has amended the requirements to state that it expects that the HoAF be a member of a recognised actuarial association and have the appropriate level of experience commensurate with the requirements of the role and the sophistication of the methodologies and techniques appropriately employed by the undertaking. ORSA 22 The ORSA must address at least the following areas The range of risks and the adequacy of stress scenarios considered as part of the ORSA process; The appropriateness of the financial projections included within the ORSA process; Whether the undertaking is continuously complying with the requirements regarding the calculation of TPs and potential risks arising from the uncertainties connected to this calculation. The CBI has confirmed that it won t prescribe a form for the ORSA opinion

23 CP92 Feedback Statement 6 October 2015 Key changes and clarifications Actuarial Opinion on Technical Provisions Independence Respondents asked whether the HoAF should be separate from the person calculating the TPs. The CBI has clarified that the Actuarial Function is not excluded from calculating the TPs In cases where both calculation and validation of technical provisions is done by the actuarial function the undertaking should have in place processes and procedures in order to avoid conflicts of interest and ensure appropriate independence. Aggregate vs LoB The CBI has clarified that the AOTP should be on a Solvency II Line of Business Level. Form of AOTP The CBI will issue the form of the AOTP with the final Requirements. 23

24 CP92 Feedback Statement 6 October 2015 Key changes and clarifications Actuarial Report on Technical Provisions Risk Margin Scope of HoAF role around SCR had been unclear wording now amended; A description of how the SCR, as calculated by the undertaking, has been adjusted and projected in order to calculate the Risk Margin, including a justification of any approximation methods used in the projection. Claims Handling CP92 referred to the HoAF s opinion on the stability of the claims handling process over time. This has been amended to a consideration of the stability of business processes and claims handling processes over time. Timing At least a summary of the ARTP should be provided to the Board at the same time as the AOTPs. Reserving Committee The CBI has clarified that this applies only to high impact non-life companies. Reserving Policy A typo has been removed as follows: [the policy will include the] undertaking s approach to 24 calculating TPs and the related objectives.

25 CP92 Feedback Statement 6 October 2015 Key changes and clarifications Peer Review ORSA The CBI has no plans to include the ORSA opinion within the scope of the review. Timing The current Peer Review cycle will not recommence on implementation of these requirements. Rotation Undertakings shall not commission the same Reviewing Actuary, or another actuary from the same firm, for more than three consecutive peer reviews. Independence The Board of the undertaking shall be satisfied, and be in a position to demonstrate, that the RA is appropriately independent to perform the role. Independent calculations An independent recalculation of the TPs is not necessary but a justification should be provided if a recalculation is not performed. For material non-life Lines of Business a recalculation of the TPs is expected. 25

26 CP92 Feedback Statement 6 October 2015 Key changes and clarification Fitness & Probity The Role of the Head of the Actuarial Function (the HoAF ) will be a PCF role and the Central Bank is in the process of completing the due requirements to make the HoAF a PCF role. The CBI has commented that where a person in situ in an insurance undertaking (on or before 31 December 2015) is performing the role of HoAF (irrespective of the title provided to that role) then, as per the Central Bank Reform Act 2010, that person will not have to apply for approval for that PCF role upon the commencement of the amending F&P Regulations. The Central Bank will issue guidance regarding F&P changes under Solvency II.. 26

27 Standard Formula Appropriateness Eamon Howlin, Senior Manager and Maaz Mushir, Manager

28 Standard Formula Appropriateness Regulatory requirements for FLAOR/ORSA Deviation from assumptions underlying the SCR calculation (EIOPA Guideline 12, CBI Guideline 15) The undertaking should asses whether its risk profile deviates from the assumptions underlying the Solvency II SCR calculated with the standard formula and whether these deviations are significant. The undertaking may as a first step perform a qualitative analysis and if that indicates that the deviation is not significant, a quantitative assessment is not required. Paper describing standard formula assumptions published by EIOPA Differences due to risks not considered and; risks that are either under or overestimated by the standard formula compared to risk profile Assessment process expected to include: Analysis of risk profile and why standard formula is appropriate; Analysis of sensitivity of standard formula to changes in risk profile; Assessment of the sensitivities of SCR to main parameters, including USPs; Appropriateness of standard formula parameters; Justification for simplifications; How results of standard formula are used in decision making process. Unlikely to directly compare SF SCR and ORSA capital e.g. may include different items, calculated on different bases, different confidence levels or different time horizons. 28 Solvency II Considerations

29 Assessing appropriateness of Standard Formula - Introduction SF is not just a default option it requires justification What is EIOPA trying to achieve through asking firms to assess the appropriateness of Standard Formula? Standard does not mean one size fits all What is a significant deviation? What if there is a significant deviation? Solvency II

30 Assessing appropriateness of Standard Formula - Introduction SF is not just a default option it requires justification What is a significant deviation? Article 37 (Directive) Capital Add-on Following the supervisory review process supervisory authorities may in exceptional circumstances set a capital add-on for an insurance or reinsurance undertaking by a decision stating the reasons. That possibility shall exist only in the following cases: (a) the supervisory authority concludes that the risk profile of the insurance or reinsurance undertaking deviates significantly from the assumptions underlying the Solvency Capital Requirement, as calculated using the standard formula in accordance with Chapter VI, Section 4, Subsection 2 and: Article 279 (Delegated acts) Add-ons in relation to deviations from Solvency Capital Requirement assumptions: Where the modified Solvency Capital Requirement as calculated under Article 282(a) exceeds the Solvency Capital Requirement as calculated under 282(b) by 10 percent or more, supervisory authorities shall conclude that the risk profile of the insurance or reinsurance undertaking deviates significantly from the assumptions underlying the Solvency Capital Requirement within the meaning of Article 37(1)(a) and (b) of Directive 2009/138/EC, unless they have strong evidence that this is not the case on the basis of the factors set out in article 276. Where the modified Solvency Capital Requirement as calculated in Article 282(a) exceeds the Solvency Capital Requirement as calculated in 282(b) by 15 percent or more, supervisory authorities shall conclude that the risk profile of the insurance or reinsurance undertaking deviates significantly from the assumptions underlying the Solvency Capital Requirement within the meaning of Article 37(1)(a) and (b) of Directive 2009/138/EC. Solvency II

31 Assessing appropriateness of Standard Formula Framework Identification of all risks Rank risks Immaterial Risks Is the risk captured in Standard Formula Y N Qualitative assessment Is the risk quantifiable? Y N Y N Quantitative Assessment Remedial action as necessary Reporting and documentation Solvency II

32 Assessing appropriateness of Standard Formula Framework Key messages: Identify all risks company is exposed to. These should already be documented in the risk register. Identify risks that are immaterial either individually or in combination with other risks. Rank the remaining risks. A qualitative approach may be taken to rank risks, but a quantitative approach is preferable. Rank risks Qualitative assessment Identification of all risks Is the risk captured in Standard Formula Y Immaterial Risks N Is the risk quantifiable? Y N Y N Quantitative Assessment Remedial action as necessary Reporting and documentation Solvency II

33 Assessing appropriateness of Standard Formula Framework Key messages: Perform qualitative assessment for all risks captured within Standard Formula. Refer to EIOPA s publication on assumptions underlying the Standard Formula to assist in identifying risks not captured within the Standard Formula. Qualitative assessment includes Relevance of data used to calibrate SF to insurer s risk profile Risk ranking Justification of simplifications Materiality considerations Analysis of how SF results are used in decision making Y Rank risks Qualitative assessment Identification of all risks Is the risk captured in Standard Formula N Y Quantitative Assessment Immaterial Risks N Y Is the risk quantifiable? Remedial action as necessary Reporting and documentation N Solvency II

34 Assessing appropriateness of Standard Formula Framework Key messages: Perform a quantitative assessment if the qualitative assessment indicates potential for material deviation or if the risk is material. Quantitative assessment of risk includes: Sensitivity of SF to changes in risk profile, including risk mitigation Sensitivity of SF to parameter changes Appropriateness of parameters, including aggregation Assessing consistency of parameters The detail of the assessment should be proportional to the significance of the risk (i.e. more rigour for more significant risks). Y Rank risks Qualitative assessment Identification of all risks Is the risk captured in Standard Formula N Y Quantitative Assessment Immaterial Risks N Y Is the risk quantifiable? Remedial action as necessary Reporting and documentation N Solvency II

35 Assessing appropriateness of Standard Formula Framework Key messages: For risks not captured within the Standard Formula, assess whether the risks are quantifiable. Perform quantitative assessment for quantifiable risks. Document and manage nonquantifiable risks. Rank risks Identification of all risks Is the risk captured in Standard Formula Y Immaterial Risks N Qualitative assessment Is the risk quantifiable? Y N Y N Quantitative Assessment Remedial action as necessary Reporting and documentation Solvency II

36 Assessing appropriateness of Standard Formula Examples of indicators for inappropriateness Life insurers Mass lapse Asset volatility Longevity risk Contract boundaries PPOs Reinsurance CAT Risk Non life insurers Concentration, default, and spread risk for sovereign bonds Regulatory risk Operational risk Contagion risk Solvency II

37 Assessing appropriateness of Standard Formula Example sovereign bonds Zero capital charge on sovereign bonds for Concentration risk Default risk Spread risk Several insurers have captured this risk as part of their ORSA Difficult to calibrate a 1-in-200 scenario for this risk Solvency II

38 Assessing appropriateness of Standard Formula Example operational risk The underlying assumptions for the operational risk module are as follows: The overall assumption in the operational risk module is that a standardised level of risk management is present. For unit-linked businesses the characteristics are similar to those of other life products. Therefore, the parameters will evolve in line with the life parameter. In relation to the expense volume measure for unit-linked business, it is assumed that acquisition expenses are exclusively relating to insurance intermediaries, which do not give rise to any operational risk. The main challenge is to make an assertion on these assumptions without any benchmarking. Standard Formula Advantages Easily understood Simple and easy to apply Cheap implementation Standard Formula Limitations Could understate capital Could provide a false sense of security Not aligned to risk profile of the company Limited business applications and benefits Solvency II

39 Assessing appropriateness of Standard Formula Example operational risk Entities could build their own operational risk model incorporating any internal controls/mitigation techniques Risk types based ORIC* or Basel groupings. ORIC risk groupings are specific to insurers, whereas Basel risk groupings are specific to banks. Parameters based on judgements of relevant business experts Companies will need explicit assumptions regarding frequency, severity and correlation *Operational Risk Insurance Consortium, formed by Association of British Insurers (ABI). Solvency II

40 Assessing appropriateness of Standard Formula Framework Based on the results of the assessment companies could: Align risk profile to Standard Formula Monitor and control risks that cannot be quantified Mitigate risk through avoidance, transfer or diversification Address the shortcomings of standard formula by increasing capital targets and tolerances (Solvency Coverage Ratio) Move to partial internal model, internal model or undertaking specific parameters Take additional actions based on the outcome of the ORSA process Y Rank risks Qualitative assessment Identification of all risks Is the risk captured in Standard Formula N Y Quantitative Assessment Immaterial Risks N Y Is the risk quantifiable? Remedial action as necessary N Reporting and documentation Solvency II

41 Assessing appropriateness of Standard Formula Framework Key messages: Full details of the assessment are not necessary in the ORSA main report but should be part of the ORSA record. The process followed for assessing appropriateness of SF, and the results of each element of the assessment, both qualitative and quantitative, should to be documented in the ORSA main report. Documentation should include remedial actions, if any. If relevant, highlight any particular circumstances that could result in significant deviations in the future. Y Rank risks Qualitative assessment Identification of all risks Is the risk captured in Standard Formula N Y Quantitative Assessment Immaterial Risks N Y Is the risk quantifiable? Remedial action as necessary N Reporting and documentation Solvency II

42 Data Management John Kilbride Director

43 Solvency II Data Management 4 Key Building Blocks to Compliance Solvency II

44 Solvency II Data Management What are the sample project deliverables? Initiate Design Develop Implement Operate Data Governance Model Data Policy Project Definition Scope & Objectives Deliverables & Quality Roadmap & Phasing Resource & Budget Data Architecture & Strategy Define Architecture Principles As Is Assessment As Is Data Audit Drivers/Gap Analysis Regulatory Translation Directive / level 2 Standards for Data Quality Organisational Design Roles & Responsibilities Governance Committees Governance & Control Process To Be Target Maturity Levels To Be Architecture Org & process Design Map High Level E2E functional Flows Controls & Monitoring definition System/ Tool selection BI Requirements & Design Data Dictionary ID materiality criteria Prioritise data flows Governance & People Systems, Process & Controls Reporting & Metrics Data Lineage, Mapping & Control & Documentation Map detailed data flows Develop Technical & Business controls EUC controls Process & People Develop Issue identification and Remediation process Update job specifications BI & Data Metrics Identify DQ Indicators Develop Reports / BI Data Industrialisation Value chain SLAs IT & System Readiness SIT / UAT E2E Dry Run Integrate into up and downstream SII process e.g. SCR / QRT Testing with External Providers Operational Readiness Implement Operating Model including Data Function, R&R, process and Tools Roll out documentation /procedures Business User / Model Office Testing Training & Development Sustain Monitor & Control Review policy, process and procedures Monitor SLA with external parties Embed Cultural change DWH / ETL / DQ tools Solvency II

45 Solvency II The Data & IT Value Chain Deloitte Solvency II Vendor Survey Solvency II

46 Solvency II - The Data Integration Challenge How to differentiate Solvency II vendor solutions for data integration? Solvency II

47 Solvency II - The Pillar 3 Challenge How to differentiate Solvency II vendor solutions for Pillar 3 reporting? Solvency II

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