2. Purpose
LMAG May 2016
• These slides were originally presented to the London Market
Actuaries Group (LMAG) on 26 May 2016.
• The slides collate information published by the PRA as follows:
– Letter to firms titled ‘Continued soft market conditions in the UK
general insurance sector’ dated 4 December 2015
– ‘Solvency II: Changes to internal models used by UK insurance
firms’ – CP19/16, published on 5 May 2016.
• These slides also contain updates from the PRA on other
relevant areas.
• Readers should continue to refer to the PRA section of the Bank
of England website and liaise with their usual supervisory
contact.
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3. Contents
LMAG May 2016
• Current conditions & trends in the market
• Model Change
• SIMR and Actuarial Function
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5. ‘Dear CEO’ Letter of 4 December 2015
Current conditions & trends in the market
5
• Soft market conditions
– continued low interest rates
– absence of significant natural catastrophes
– abundance of (re)insurance capacity
• Underwriting
we expect comprehensive board engagement to ensure:
– adequate information to understand pricing trends
– monitor and report accumulations…by geography, product or total
– governance around new products and markets (e.g. cyber)
6. ‘Dear CEO’ Letter of 4 December 2015 (cont)
Current conditions & trends in the market
6
• Reinsurance
– understand the risk transfer taking place
– economic impact reflected in planning, capital and reserving
– appreciate wider associated risks
– appropriate recognition in financial and regulatory statements
– appropriate treatment when considering capital requirements
7. ‘Dear CEO’ Letter of 4 December 2015 (cont)
Current conditions & trends in the market
7
• Reserving
– robust approach to setting provisions
– demonstrate independent challenge
– have regard to underwriting, reserving and economic cycles
– feedback loops between underwriting, claims and reserving
• and to profit and loss attribution for internal models
8. Why does technical price matter?
Current conditions & trends in the market
• Links between pricing, reserving and capital should be consistent
– for instance an optimistic view on pricing can result in an optimistic
view of reserves and capital
Set Planning
Targets
Pricing /
Exposure
Monitoring
Reserving
Portfolio
Planning
Strategy,
Capital,
Reinsurance
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9. Reserving Reviews
Current conditions & trends in the market
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• PRA Reserving Adequacy Framework - Overview
Numbers
Governance
Process
Methodology
Data
10. PRA Reserving Adequacy Framework - Governance
Current conditions & trends in the market
10
– Is the right expertise and regular involvement from the top in place for reserving?
11. PRA Reserving Adequacy Framework - Process
Current conditions & trends in the market
11
– Is there a rigorous and expansive reserving process in place?
12. PRA Reserving Adequacy Framework - Methodology
Current conditions & trends in the market
12
– Does the firm’s reserving account for key risks with sufficient technical depth?
13. PRA Reserving Adequacy Framework - Data
Current conditions & trends in the market
14
– Is the integrity of data upheld such that it may be relied upon in the firm’s reserving
analysis?
15. Approved Internal Models
Model change
15
• The PRA approved 20 internal models as at 26 May 2016
• Input into the approval of a further 4 Non-UK firms with a UK
subsidiary
• Most if not all will apply for a model change this year
16. Consultation Papers
Model change
16
• On 5th May PRA issued two consultation papers
– CP19/16 ‘Solvency II: Changes to internal models used by UK
insurance firms
– CP20/16 ‘Solvency II: consolidation of Directors’ letters
• Internal model change policy
– available on the Bank website
– consultation closes on 5 August
17. Model Change Application process
Model change
17
• Same PRA process for model change & extension of scope
• Encourage early engagement with supervisory contact
– scope & timing of application
– reason for & impact of model change
• Similarities to IMAP
– possibility of a pre-application process in some cases
– assessment of completeness
• Primary focus of assessment are areas that have changed
18. Model Change Applications
Model change
18
• Propose ideally no more than one model change application a
year except under exceptional circumstances.
• Quality of application
– sign-off by the board
– validation
– model outputs
• Version control & ability to unwind changes
• Possibility that the model change application is not approved or
is delayed due to poor quality application
• Other considerations
– business transactions
– delays in implementation of changes
19. Content of an application
Model change
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Article 2 &7 of the Commission
Implementing Regulation EU 2015/460
PRA expects the following will be useful
- Cover letter & confirmation that the
application is complete
- Evidence that the model change
application has been signed-off by the
board
- Documents set out in Article 2 where
their content would be affected by the
major change, together with an indication
of the changes made to them
− Model change log
− updated Common Application Package
(CAP) indicating clearly which items of
evidence have changed since last PRA
approval
- A detailed description of the qualitative
and quantitative impacts of the major
change to the approved internal model
and its results
- A description of the changes that have
been made from the latest approved
model
- Documentary evidence setting out how
the internal model fulfils the relevant
internal model tests and standards
− Justification for the model change(s)
− Evidence that the model change(s) have
been independently validated
This list is not exhaustive!
20. Model Change Policy
Model change
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• Central role in wider governance of a firm’s internal model
• Spectrum of approved model change policies
• Highlight a few consideration when drafting / changing MCP
– major change indicators - threshold level, justification
– scope – sufficiently broad, exclusions
– accumulations of minor changes
• absolute values
• resetting accumulations
22. Outline of SIMR regime
SIMR and Actuarial Function
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• Chief Actuary is now a controlled function, subject to PRA
approval, fit and proper assessment and conduct rules.
• Chief Actuary remains responsible for work that is delegated and
we expect them to supervise, monitor and question underlying
work
• Firms should consider the need for additional key functions
• Firms must maintain a governance map
• Scope of Responsibility documents should clearly articulate what
responsibilities SIMFs hold (note 7/9/16 deadline for submission)
• Outsourcing must be overseen by a suitable senior manager,
such as someone in another controlled function
23. Application of SIMR regime
SIMR and Actuarial Function
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• Firms should decide how to organise their own functions,
including the use of external providers.
• Considerations for Key Functions include:
– the allocation of responsibilities should be clear
– it should be clear where critical decisions are made and individuals
should be accountable for these.
– conflicts of interest should be identified and managed
– they should be free from influence from other teams / Board
– avoid dominance by any one individual
– advice given in a timely way and not just retrospectively
– reporting of significant issues to the Board in a clear & relevant
manner
24. Actuarial Function requirements
SIMR and Actuarial Function
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> Objective: expert actuarial advice to the Board
• Design of structure and process, address conflicts of interest
• Appropriate competencies and resourcing
• Specific tasks:
– technical provisions
– opinion on Underwriting Policy
– opinion on adequacy of Reinsurance
– contribution to Risk Management (capital calculations and ORSA)
• Reporting and Use
25. Actuarial Function – PRA approach
SIMR and Actuarial Function
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• Will be reviewing actuarial function work this year onwards.
– we are keen to engage with firms.
– selection of firms and timings is not final.
• We are also engaging with Lloyd’s.
• We plan to give feedback to firms as we carry out reviews and
also collect general emerging themes to feed back to industry at
a later point.
26. Actuarial Function – areas to consider
SIMR and Actuarial Function
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• Consider the level of independence needed
• Design an appropriate process for validation of TPs,
proportionate to the risks, including feedback loops
• Consider how to communicate the work and who to, so that it can
be used in decision making.
• We’d expect to see meaningful conclusions and
recommendations made.
