Evaluatie 16 december 2010 Out of the box actuaries and risk professionals
Agenda Introduction results Demo: manage process using E2S Appendix 1: detailed results non-life 2
Introduction Planning and participation April-June 2008: QIS4 in Europe (2007 figures) June-August 2009: RiSK2008 in NL (2008 figures) August-October 2010: in Europe (2009 figures) 400 350 300 SII Proportioneel Aantal verzekeraars 250 200 150 100 Onder Richtlijn 50 0 QIS1 QIS2 QIS3 QIS4 RiSK Deelname aan? Totaal Source: presentation DNB on SII symposium December 2009 3 3
Introduction Three pillar approach 1 Pillar I Calculations on quantitative requirements MCR / SCR Solvency II 2 3 Pillar III Report to supervisors and public 4
1. Introduction SII activities Inrichten Risk Mgmt Ctee (RMC) 2010 2011 2012 Komt minimaal eens per kwartaal bijeen Reguliere risico 2009 2. Rapportages Q4 2010 Q4 2011 Q2 2011 Q4 2012 Q1 2012 Q2 2012 Q3 3. Self Assessment & Gap-analyse 4. Implementatieplan SII (nwe ontwikkelingen) Inrichten risico- 5. beheersysteem en risicobeheerfuncties 6. Risicostrategie & Risk appetite 7. Documentatie risicobeleid Ongoing business 8. Generale repetitie ORSA 9. Sturen op waarde en risico 0. Definitief format SFCR & RTS 10 juni 2010 De Kwalitatieve Vereisten 2012 Q2 2012 Q3 55
Introduction Required risk reporting in pillar 1 and pillar 3 Risk Governance Kwantitatieve risico s Kwalitatieve risico s Risk Appetite Risicolimieten Risicostrategie Beleid per risicotype en beheersingsinstrument SCR solvency ratio MCR solvency ratio SCR per risicotype Stress tests Visie van management op operationele en strategische risico s Risk Maps met 3-5 jaars horizon Risico rapportage (risk monitoring) 6
Introduction Required risk management system in pillar 2 Incidenten & Opgetreden Gebeurtenissen Rollen en gedelegeerde authoriteiten Risicoprofiel & Kwantificatie Analyse Beleid Voorspellen van events Commissies 7 7
Introduction Required reporting templates in pillar 3 All reporting templates in CP58 proposals that relate to Standard Model will be fully supported by Easy2Solve platform SFCR: Solvency & Financial Condition Report RTS: Report to Supervisors Executive summary A. Business and performance B. System of governance C. Risk management D. Regulatory balance sheet E. Capital management Undertakings with an approved internal model 8
Introduction Main challenges Pillar 1 calculations complex and error-sensitive Pillar 1 calculations () are error-sensitive, complex and time-consuming core sheet consists of 27 worksheets Many functionalities not used 12 Helper tabs developed to support calculations (e.g. non-life CAT risk, concentration risk, counterparty risk etc) Integrated RM on every organisation dimension (pillar 2) Insurance companies need to set up risk management system and perform own risk and solvency assessments Supportive tooling will be needed to monitor risk limit adherence and to effectively operate risk management cycle on every dimension Pillar 3 reporting templates not final yet Required reporting under pillar 3 not clear yet For steering purposes insurance companies will need to construct quarterly or monthly risk reports already using methodology Already report all output that is defined 9 9
Introduction Solvency II infrastructure 2009 Overview of the Solvency II Software Market: There Is No One-Size-Fits-All Solution Unfortunately, no application on the market addresses all the three pillars of Solvency II. 2010 Unique integrated GRC platform in the market that addresses all three pillars Pillar 1 Pillar 2 Pillar 3 Triple A Tool to manage, review or perform / Pillar 1 calculations Used by roughly 40 Dutch insurers to complete or review their study Easy2comply platform with integrated links to templates to monitor risk limits related to pillar 1 calculations Globally used by firms to manage SOx, operational risks, Basel II, local laws Enables high frequency reporting and limit monitoring on basis Standard and CP58 related reporting templates included 10 10
Introduction Demo 1 DEMO 1 http://www.youtube.com/watch?v=m8gnnkpysmu Themasessie 16 juli 2010: Solvency II en 11 11
Introduction How does Easy2Solve address the pillar 2 challenges? Incidenten & Opgetreden Gebeurtenissen Rollen en gedelegeerde authoriteiten Risicoprofiel & Kwantificatie Analyse Beleid Voorspellen van events Commissies 12
Introduction How does Easy2Solve address the pillar 2 challenges? Risks Identification, planning, monitoring & reporting Culture & leadership Organization Strategic, tactical & operational steering processes Applications Legal Functions Primary & secondary processes Data Change Roles Planning, control & reporting processes ICT infra Controls Organizational, process, data, application, ICT, social, legal, physical, cultural & personal 13
Introduction How does Easy2Solve address the pillar 2 challenges? Financial and Operational Risks Identification, planning, monitoring & reporting Steering Strategic, tactical & operational steering processes Mngmt reports Trans actions Primary & secondary processes Pillar 2 including ORSA Data Output to Pillar 3 Planning, control & reporting processes RTS / public Controls Organizational, process, data, application, ICT, social, legal, physical, cultural & personal 14
Agenda Introduction results Demo: manage process using E2S Appendix 1: detailed results non-life 15
scope Available solvency components Themasessie 16 juli 2010: Solvency II en 16 16
scope Available solvency: changes compared to QIS4 / RiSK2008 Allowance for liquidity premiums in discount rates Intangibles no longer fully set to zero Adjust reinsurance recoverables for credit risk Changes to risk margin methodology Allowance for diversification between homogeneous groups (mainly impact on P&C business) Inclusion of risk margin for unavoidable market risks More strict limits for eligibility of hybrid capital (tier 2 / tier 3) Themasessie 16 juli 2010: Solvency II en 17 17
scope Calculation of SCR: required solvency 4 new sub risk types: -Intangible Assets -Lapse Non-life -Lapse Health -Illiquidity Premiums Themasessie 16 juli 2010: Solvency II en 18 18
scope Required SCR: changes compared to QIS4 / RiSK2008 Correlations More heavy correlations Insurance risks Changes in parameters (e.g. lower longevity tests) More enhanced structure non-life risks to allow for impact of reinsurance Allowance undertaking specific parameters for non-life risks Allowance for lapse risks for non-life risks Marktrisico Lower stress tests for interest rate risk and equity risk Including impact of liquidity premiums Treatment of mortgages Counterparty risk Adjust methodology to allow for credit exposure on risk mitigation by reinsurers Other capital charges Concentration risk Lower thresholds Avoid double counting with counterparty risk Inclusion of intangible asset risk module More room to include tax relief in SCR Themasessie 16 juli 2010: Solvency II en 19 19
results Non-Life Themasessie 16 juli 2010: Solvency II en 20 20
results non-life Scope 10 Small insurers: GWP < 10m 6 Medium insurers: 10m < GWP < 100m 8 Large insurers: GWP > 100m 21 21
results non-life Premium figures small insurers Breakdown gross written premium (small insurers) Other Third party liability millions Transport Fire Motor (liability & other) Health (incl. disability) 1 2 3 4 5 6 7 8 9 10 Small insurers 22 22
results non-life Premium figures medium insurers Breakdown gross written premium (medium insurers) Other Third party liability millions Transport Fire Motor (liability & other) 11 12 13 14 15 16 17 Health (incl. disability) Medium insurers 23 23
results non-life Premium figures large insurers Breakdown gross written premium (large insurers) Other Third party liability millions Transport Fire Motor (liability & other) 18 19 20 21 22 23 24 25 Large insurers Health (incl. disability) 24 24
results non-life Solvency ratio vs Wft millions 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% Average solvency ratio Small insurers Medium insurers Large insurers SI ratio SII ratio Decrease in solvency ratio of 150%-200% after moving from Wft to Large insurers benefit from diversification, but have relatively low SII ratio under study because: Prudence in reserves in most cases already included in Wft available solvency Negative impact of deferred costs on available solvency due to volmacht business More weighted towards more risky lines of business (e.g. GTPL) Make more efficient use of reinsurance which results in higher SCR 25 25
results non-life Solvency ratio vs Wft (2) Small Medium Large Amounts relative to SI capital Available Capital based on SII (%SI) 554% 331% 345% SCR (%SI) 176% 246% 211% MCR (%SI) 92% 95% 77% Solvency ratio SI solvency ratio 475% 262% 256% S2 solvency ratio 271% 146% 144% SCR decomposition SCR U/W risk 48% 62% 67% SCR market risk 38% 23% 22% SCR operational risk 4% 5% 7% SCR other risks 10% 11% 4% 100% 100% 100% Adjustment 9% 5% 9% Net SCR 91% 95% 91% SCR as a percentage of Solvency I varies between 175% and 250% Large insurance companies relatively more exposed to underwriting risks Average tax relief (%SCR) varies between 5% and 10% but big variation (see slide further on) 26 26
results non-life Solvency ratio vs Wft: small insurers 2000% Solvency ratio (small insurers) millions 1500% 1000% 500% SI ratio SII ratio 0% 1 2 3 4 5 6 7 8 9 10 Small insurers Large decrease in solvency for insurance companies 4 and 8 related to: increase in SCR, as a result of monoline nature and limited ability to diversify their risks 27 27
results non-life Solvency ratio vs Wft: medium insurers millions 600% 500% 400% 300% 200% 100% 0% Solvency ratio (medium insurers) 11 12 13 14 15 16 17 Medium companies SI ratio SII ratio Large decrease in solvency for insurance companies 12, 16 and 17 related to: increase in SCR, as a result of large exposure to industrial risks 28 28
results non-life Solvency ratio vs Wft: large insurers millions 600% 500% 400% 300% 200% 100% 0% Solvency ratio (large insurers) 18 19 20 21 22 23 24 25 Large insurers SI ratio SII ratio ratio relatively low compared to small/medium peers because many large insurance companies already include prudence in Wft solvency Deviation in solvency ratio is mainly due to the selected reinsurance coverage Companies 21, 22 have selected relatively low top layer of their cat reinsurance programmes 29 29
results non-life Tax relief in SCR Adjustment percentage 25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurers Large variation observed in tax credit recognised in SCR Huge impact on results 30 30
results non-life Risk margin 20,00% Risk Margin as % of BE liabilities (all insurers) 15,00% 10,00% 5,00% 0,00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Small, medium and large insurers Risk margin for large insurance companies varies steadily between 4%-7% Risk margin (%BE) decreased by 1%-3% in absolute terms compared to RiSK2008 as a result of allowance for diversification between lines of business 31 31
results non-life vs RiSK2008 Solvency margin % 500% 400% 300% 200% 100% Risk 2008 2009 0% Small insurers Medium insurers Large insurers Type of insurer Solvency margin has not changed materially from RiSK2008 to Available solvency increased due to retained earnings in 2009 and the combined effect of the following changes in methodology ( vs RiSK2008) Allowance for liquidity premium in discount rates (positive impact) Allowance for diversification between lines of business in risk margin (positive impact) Allowance for credit risk in reinsurance assets (negative impact) SCR has increased on average by 10%-15% compared to RiSK2008 32 32
results Life Themasessie 16 juli 2010: Solvency II en 33 33
results life Scope in terms of best estimate provisions Breakdown total best estimate provisions (55 bn) 17,28% 39,41% Insurance with profit participation Index-linked and unit-linked insurance Other life insurance 43,30% Benchmark based on 10 life insurance companies Total reserve in scope equals 55bn 34 34
results life Breakdown of provisions 120% 100% 80% 60% 40% 20% 0% Allocation best estimate provisions 1 2 3 4 5 6 7 8 9 10 Insurers Other life insurance Index-linked and unitlinked insurance Insurance with profit participation Different profiles of insurance companies may be used to benchmark outcomes Companies 1 4: insurance companies with large diversified portfolios Companies 6,7,8,10: mainly term insurance and unit-linked business Company 5 has mainly written with profit business Company 9: mainly group pension business 35 35
results life Solvency ratio vs Wft 700% Solvency ratio 600% 500% SI ratio SII ratio 400% 300% 200% 100% 0% 1 2 3 4 5 6 7 8 9 10 11 Insurers Average decrease in solvency ratio of 100% after moving from Wft to Increase in available solvency for term insurance / UL portfolios Decrease in available solvency for traditional business Required solvency increases depending on nature of the business 36 36
results life Solvency ratio vs Wft (2) Amounts relative to SI capital Available Capital based on SII (%SI) 330% SCR (%SI) 224% MCR (%SI) 68% Solvency ratio SI solvency ratio 237% S2 solvency ratio 138% SCR decomposition SCR Life Risk 27,8% SCR Market Risk 64,6% SCR Operational Risk 3,2% SCR Counterparty Risk 4,4% SCR Total 100,0% Adjustment 19,8% Net SCR 80,2% SCR is more than twice required Wft solvency SCR strongly dominated by market risks Average tax relief (%SCR) around 20% 37 37
results life Tax relief in SCR Adjustment percentage 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% 1 2 3 4 5 6 7 8 9 10 Insurers Tax relief (%SCR) much higher than for non-life insurance companies Life insurance companies generally have higher deferred tax liabilities on their market value balance sheet 38 38
results life Available solvency vs Wft 60% 40% 20% [Available Solvency -/- Wft ] / Wft Available Solvency 0% -20% 1 2 3 4 5 6 7 8 9 10-40% -60% -80% -100% -120% Insurers Movement in available solvency depends on type of business Increases in case of large exposure to term insurance / UL business Decreases in case of traditional and with profit business 39 39
results life Required solvency vs Wft 600% 500% 400% 300% 200% 100% Required SCR / Wft required solvency 0% 1 2 3 4 5 6 7 8 9 10 Insurers 40 40
results life SCR decomposition per risk type SCR breakdown to risk 120% 100% 80% 60% 40% 20% 0% 1 2 3 4 5 6 7 8 9 10 Operational risk Life risk Credit default risk Market risk Insurers Market risk is dominant risk type in most cases Life risk is dominant for companies 7 and 8 as a result of their relatively large term insurance portfolios 41 41
results life Risk margin Risk margin as % of BE liabilities 25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 10 Insurers Risk margin (%BE) varies between 2%-6% for majority of life insurance companies 42 42
results life vs RiSK2008 Solvency ratio 250% 200% 150% 100% 50% Risk 2008 2009 0% Average SCR Ratio Available solvency increased materially due to the allowance for liquidity premium in discount rates (positive impact) SCR has increased on average by 20% compared to RiSK2008 43 43
Agenda Introduction results Demo: manage process using E2S Appendix 1: detailed results non-life 44
Demo: manage process using E2S 1 Pillar I Calculations on quantitative requirements MCR / SCR Solvency II 2 3 Pillar III Report to supervisors and public How to complete correct template? How to comply with legal requirements to set up adequate Solvency II reporting process? 45
Demo: manage process using E2S Steps used to check actuarial soundness of 1) Using tooling to perform study Fill input variables in Triple A tooling Manage complexities with input variables Perform all kinds of predefined analytical controls Tool automatically exports data to template of CEIOPS / EC 1. WFT accounts 2. Helpertabs 3. Scenarios tool Output 4. Other inputs 2) Use tooling for checking purposes Import CEIOPS template into tooling Tooling will perform all kinds of analytical controls Use outcomes for risk monitoring in GRC environment 46 46
Demo: manage process using E2S Demo 2 DEMO 2 http://www.youtube.com/watch?v=bxxzd6zr3wu Themasessie 16 juli 2010: Solvency II en 47 47
Demo: manage process using E2S Steps used to check actuarial soundness of All kinds of analytical controls performed User of tooling gets immediate view about quality of the study 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Analytical Controls 20% 20% 20% 60% Huidige grondslagen balans vs balans WFT staten 10% 70% Ingevulde Premies vs Premies WFT staten 30% 10% 60% Solvency I solvabiliteit vs solvabiliteit WFT staten Overeenkomend Bij benadering overeeenkomend Niet overeenkomend 40% 10% 50% Marktwaarde balans vs input Marktrisico s 5% 15% 80% Marktwaarde balans vs input Tegenpartijrisico 10% 25% 65% Marktwaarde balans vs input Renterisico en Spreadrisico 30% 20% 50% Marktwaarde balans vs opslitsing balans en best estimate voorziening 48
Demo: manage process using E2S 1 Pillar I Calculations on quantitative requirements MCR / SCR Solvency II 2 3 Pillar III Report to supervisors and public How to complete correct template? How to comply with legal requirements to set up adequate Solvency II reporting process? 49
Demo: manage process using E2S Demo 3 DEMO3 http://www.youtube.com/watch?v=48540_nkfwu Themasessie 16 juli 2010: Solvency II en 50 50
Appendix 1: Detailed results Non-Life 51
results non-life Available solvency 60% 50% 40% 30% 20% 10% 0% -10% -20% [Available Solvency -/- Wft ] / Wft Available Solvency 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 52 52
results non-life Available solvency: small insurers Available capital (small insurers) millions SI available capital SII available capital 1 2 3 4 5 6 7 8 9 10 Small insurers 53 53
results non-life Available solvency: medium insurers Available capital (medium insurers) millions SI available capital SII available capital 11 12 13 14 15 16 17 Medium insurers 54 54
results non-life Available solvency: large insurers Available capital (large insurers) millions SI available capital SII available capital 18 19 20 21 22 23 24 25 Large insurers 55 55
results non-life Required solvency: small insurers Change in required capital (small insurers) millions S1 required capital S2 SCR S2 MCR 1 2 3 4 5 6 7 8 9 10 Small insurers 56 56
results non-life Required solvency: medium insurers Change in required capital (medium insurers) millions S1 required capital S2 SCR S2 MCR 11 12 13 14 15 16 17 Medium insurers 57 57
results non-life Required solvency: large insurers Change in required capital (large insurers) millions S1 required capital SCR MCR 18 19 20 21 22 23 24 25 Large insurers 58 58
results non-life SCR decomposition small insurers SCR breakdown to risk type (small insurers) millions Operational risk Underwriting risk - Non-life Underwriting risk - Health Counterparty default risk Market Risk 1 2 3 4 5 6 7 8 9 10 Small insurers 59 59
results non-life SCR decomposition medium insurers SCR breakdown to risk type (medium insurers) millions Operational risk Underwriting risk - Non-life Underwriting risk - Health Counterparty default risk Market Risk 11 12 13 14 15 16 17 Medium insurers 60 60
results non-life SCR decomposition large insurers SCR breakdown to risk type (large insurers) millions Operational risk Underwriting risk - Non-life Underwriting risk - Health Counterparty default risk Market Risk 18 19 20 21 22 23 24 25 Large insurers 61 61