Overview Of Solvency Ii Ashley Patel ( Global Fpollp)


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Overview on Solvency II
Pillar 1

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Overview Of Solvency Ii Ashley Patel ( Global Fpollp)

  1. 1. Ashley Patel
  2. 2. <ul><li>The challenges in preparing for Solvency II </li></ul><ul><li>Adequate financial resources </li></ul><ul><li>Supervisory Review Process </li></ul><ul><li>Disclosure </li></ul><ul><li>Timeline </li></ul><ul><li>Questions for you </li></ul>
  3. 3. Solvency II – Three-pillar approach New focus for supervisor Level of harmonisation Group supervision More pressure from capital markets, investors and shareholders Market-consistent valuation of assets and liabilities Economic Capital Validation of internal models <ul><li>Quantitative capital requirements </li></ul><ul><ul><li>Technical provisions </li></ul></ul><ul><ul><li>Minimum capital requirement (MCR) </li></ul></ul><ul><ul><li>Solvency Capital Requirement (SCR) </li></ul></ul><ul><li>Qualitative supervisory review process </li></ul><ul><ul><li>Corporate Governance </li></ul></ul><ul><ul><li>Principles for internal control and risk management </li></ul></ul><ul><ul><li>ORSA </li></ul></ul><ul><ul><li>Capital add-ons? </li></ul></ul><ul><li>Disclosures </li></ul><ul><ul><li>Enhance market discipline through public disclosures </li></ul></ul><ul><ul><li>Annual FCR and Solvency reports </li></ul></ul><ul><ul><li>Provide additional (non-public information to the supervisors </li></ul></ul>Pillar 1: Pillar 2: Pillar 3:
  4. 4. <ul><li>Governance – ORSA, Risk Management, Systems. </li></ul><ul><li>Supervision of insurance firms – Risk based, prospective approach, proportionality </li></ul><ul><li>Burden of Proof </li></ul><ul><li>Demonstrating Adequate Financial Resources – Pillar 1 </li></ul><ul><li>Use and Approval of Internal Models – Use Test, Data </li></ul><ul><li>Disclosure </li></ul>
  5. 5. <ul><li>Technical Provisions </li></ul><ul><ul><li>Best estimate </li></ul></ul><ul><ul><li>Risk margin </li></ul></ul><ul><li>Solvency Capital Requirement (SCR): </li></ul><ul><ul><li>Firms should hold capital to cover a 1/200 event (99.5% confidence level) over a 1 year horizon </li></ul></ul><ul><ul><li>Enables undertakings to absorb significant losses </li></ul></ul><ul><ul><li>Breach -> supervisory action </li></ul></ul><ul><li>Minimum Capital Requirement (MCR): </li></ul><ul><ul><li>Unacceptable capital level below this point </li></ul></ul><ul><ul><li>Should result in a proportion of the SCR (25-45%) </li></ul></ul><ul><ul><li>High quality capital </li></ul></ul><ul><ul><li>Breach -> potential withdrawal of licence </li></ul></ul>
  6. 8. <ul><li>Pillar 2 is very important from a supervisory perspective </li></ul><ul><li>SII seeks to promote high and consistent risk management standards </li></ul><ul><li>Art 43 requires firms to </li></ul><ul><ul><li>Have effective risk management systems </li></ul></ul><ul><ul><li>Consider all risk exposures, both current and possible </li></ul></ul><ul><ul><li>Have a risk management system that is fully integrated into the organisation </li></ul></ul><ul><li>It is not just about the SCR! </li></ul>
  7. 9. <ul><li>Own Risk and Solvency Assessment (ORSA): </li></ul><ul><ul><li>Art. 44 requires firms to assess the level of risk in their business and the level of solvency required to mitigate those risks </li></ul></ul><ul><li>Other issues : </li></ul><ul><ul><li>Outsourcing (Art. 38) </li></ul></ul><ul><ul><li>Responsibility of management body (Art.40) </li></ul></ul><ul><ul><li>General Governance – Requirements set out (Art. 41) </li></ul></ul><ul><ul><li>Fit & Proper – Requirements set out (Art. 42) </li></ul></ul><ul><ul><li>Internal control system requirement (Art. 46) </li></ul></ul><ul><ul><li>Internal Audit requirement (Art. 46) </li></ul></ul><ul><ul><li>Actuarial Function requirement (Art. 47) </li></ul></ul>
  8. 10. <ul><li>Adoption of new information and control infrastructure </li></ul><ul><li>Embedding this new infrastructure in the business </li></ul><ul><li>Verifying and documenting the new procedures </li></ul><ul><li>Demonstrating to the Financial Regulator that the internal model is used in the governance, risk and capital management processes of the firm (Use Test) </li></ul><ul><li>Doing the above for a small firm </li></ul>
  9. 11. <ul><li>Harnessing market discipline for supervisory purposes </li></ul><ul><li>Supervisory Disclosure (Art. 31, 52) </li></ul><ul><ul><li>Laws, regulations </li></ul></ul><ul><ul><li>SRP methodologies </li></ul></ul><ul><ul><li>Exercise of options </li></ul></ul><ul><ul><li>Capital Add-ons </li></ul></ul><ul><li>Company Disclosures (Art. 51,53-56,256) </li></ul><ul><ul><li>Solvency and Financial Condition Report </li></ul></ul><ul><ul><li>Very detailed report </li></ul></ul>
  10. 12. <ul><li>Risk Based Approach – Probability vs Impact </li></ul><ul><li>Off-site and On-Site Review </li></ul><ul><li>Emphasis on On-Site Review </li></ul><ul><ul><li>Convergence in approach </li></ul></ul><ul><ul><li>Directly assess compliance </li></ul></ul><ul><ul><li>Presentations, interviews, file review </li></ul></ul><ul><ul><li>Supervisory Actions </li></ul></ul><ul><li>Stress Testing </li></ul>
  11. 15. <ul><li>Do you really understand what Solvency II is about? </li></ul><ul><li>Have you completed your gap analysis? </li></ul><ul><li>What operational, business and strategic issues does Solvency II create? </li></ul><ul><li>Will your firm be ready for Solvency II? </li></ul><ul><li>What questions will the Financial Regulator ask you? </li></ul><ul><li>What clarity do you need on Solvency II? </li></ul>
  12. 16. <ul><li>Many challenges in preparation for Solvency II </li></ul><ul><li>Preparations should not focus on Pillar I requirements </li></ul><ul><li>Pillars II and III are very important </li></ul><ul><li>Different approach to supervision </li></ul><ul><li>Undertakings should ensure clarity on Solvency II </li></ul>
  13. 17. Thank you Thank you