Flexible Resources Associates Solvency 2
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Flexible Resources Associates Solvency 2

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An ovierview of solvency 1 & 2 frameworks and background history

An ovierview of solvency 1 & 2 frameworks and background history

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Flexible Resources Associates Solvency 2 Flexible Resources Associates Solvency 2 Presentation Transcript

  • Will supply the right person... Solvency II 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 1
  • Solvency II initiated by the European Commission (EC) in 2000 to implement a fundamental change to the current European insurance solvency framework. It is intended that Solvency II, which will be based on the Basel II three-pillar approach, will produce a more consistent solvency standard across insurers and across the European region whilst also resulting in capital requirements that are more reflective of the risks being run by insurers. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 2
  • Solvency II The EC requested that the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) act as an advisor in the development of the Solvency II regime. In particular, the EC asked CEIOPS to advise on calibrating the solvency standard and the economic consequences on the insurance industry, financial markets and policyholders through a series of quantitative impact studies (QIS). The results from the QIS, which comprise solvency calculations on a specified basis provided voluntarily by insurers from around the EU, will form a key input into the EC’s proposal for the Solvency II Directive. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 3
  • Solvency II Although the Solvency II project is still in the development phase, the general framework is already clear and a draft framework Directive has been published. However, the implementation of Solvency II should not be seen purely as a compliance exercise, but instead a tremendous opportunity to build a more effective way of running a company. Insurers who embrace this idea early on stand to gain a significant competitive advantage. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 4
  • Solvency II Background The existing Solvency I framework in the European Union is based on the need for insurers to maintain assets that are sufficient to cover prudent technical provisions, with a minimum level of required capital derived from a simple formula. These calculations are often made using assumptions that contain unquantifiable levels of prudence and which are not easily comparable between companies or across territories. The result is a solvency standard that has little sensitivity to the nature and scale of the risks being run by the insurer and offers limited transparency over financial strength. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 5
  • Solvency II Background The European Commission (EC) therefore initiated the Solvency II project in 2000 to implement a fundamental change to the current European insurance solvency framework. It is intended that Solvency II, which will be based on the Basel II three pillar approach, will produce a more consistent solvency standard across insurers and the European region, while also resulting in capital requirements that are a better reflection of the risks being run by insurers. The Solvency II standards will be developed following the Lamfalussy process. The new laws are planned to be in force in 2012. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 6
  • Solvency II Flexible Resources Associates gives tailored, practical support and advice to insurers across Europe to help them prepare for Solvency II. We provide support to insurers by: •helping to gain a clear understanding of the implications of Solvency II and monitoring developments. •supporting participation in the quantitative impact studies . •planning, designing and reviewing internal models •providing software capabilities, including stochastic modelling capabilities •giving advice on embedding risk management frameworks and internal models in the decision making processes of the Board and senior management. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 7
  • Solvency II Flexible Resources Associates has also provided support and advice to various stakeholders involved in the development of Solvency II. The EC requested that the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) act as an advisor on the development of the Solvency II standard. In particular, the EC asked CEIOPS to advise on calibrating the solvency standard and the economic consequences on the insurance industry, financial markets and policyholders through a series of quantitative impact studies (QIS). The results from the QIS, which comprise solvency calculations on a specified basis provided voluntarily by insurers from around the EU, will form a key input into the EC’s proposal for the Solvency II Directive. 2008 sees the third wave of quantitative impact studies (QIS4). Although the Solvency II project is still in the development phase, the general framework is already clear and a draft framework Directive was published on 10 July 2007. This draft is now being discussed by the European Parliament and Council of Ministers. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 8
  • Solvency II Framework 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 9
  • Solvency II Pillar 1 Technical provisions should be sufficient, on a market- consistent basis, to run-off the liabilities or transfer them to another insurer. Risk margins for non-hedge able risks in the technical provisions are based on a cost-of-capital approach with cost of capital defined as the cost of financing future Solvency Capital Requirements (SCRs) to support the business. The Minimum Capital Requirement (MCR) is to be calculated in a clear and simple manner that is calibrated to between 80% and 90% value-at-risk over a one-year time horizon, subject to specified minimum floors. The MCR represents a trigger point for mandatory supervisory intervention and would need to be covered by eligible resources within one year of the effective date of the Solvency II legislation. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 10
  • Solvency II Pillar 1 The SCR is calibrated to a 99.5% value-at-risk measure over a one-year time horizon and represents capital to protect against adverse events that may occur over the next 12 months. Standard formulae (including standard stress tests and correlations) or internal models may be used to calculate the SCR, although internal models will need to be approved by the relevant supervisory authority. Supervisory intervention would increase as capital coverage fell from the SCR to the MCR. If the firm failed to maintain available financial resources to cover the SCR it would have to notify the supervisory authority immediately and submit a recovery plan. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 11
  • Solvency II Pillar 2 will involve supervisory review of a firm’s risk management systems and controls including a review of the SCR and the firm’s Own Risk and Solvency Assessment (ORSA). The ORSA is an assessment of the firm’s capital needs taking into account the specific risk profile and strategy of the firm. IT analyses areas in which the SCR does not fully reflect this risk profile. IT also requires a multi-year projection of available capital and capital required. Perceived deficiencies in the ORSA may result in additional capital requirements. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 12
  • Solvency II Pillar 3 revolves around the disclosure of a firm’s financial condition and the draft Directive indicates detailed disclosure requirements including descriptions of the firm’s business, governance procedures, risk exposures and valuation bases. Breaches of the MCR and significant breaches of the SCR are also required to be disclosed. Around this general framework, there continues to be a number of technical and practical issues that remain to be resolved. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 13
  • Solvency II Pillar 3 In particular, the feedback from CEIOPS on the results of QIS3 highlighted the following areas as being significant issues for further consideration in future impact studies: •The MCR format and calibration •The approach to equity risk •The treatment of the risk absorbing properties of future discretionary bonuses •The allowance for operational risk •the treatment of group diversification and capital transferability •the treatment of taxation •the need for greater guidance on how to perform the calculations. As a result of these and other outstanding issues, it is expected that the final formulae for the MCR, the SCR and the other detailed implementing measures will not be published until the second half of 2009. The relevant laws are, however, intended to be in force by 31 October 2012. 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 14
  • Solvency II Please call or email Corporate Services. Flexible Resources Associates Registered Office: Enterprise House, 21 Buckle Street, London, E1 8NN, United Kingdom. Company No. 05634821, Registered in England & Wales. DUNNS ID: 348355780. UK DDI: + 44 (0) 207 1177 594. UK FAX: + 44 (0) 207 1177 595. Email: sales@flexibleresources.co.uk Website: www.flexibleresources.co.uk 10/07/2009 PROVIDERS OF STRATEGIC STAFFING 15