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Solvency II professional knowledge presentation training 27032013

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This presentation contains basic knowledge needed to understand Solvency II.

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Solvency II professional knowledge presentation training 27032013

  1. 1. FINAL COPY Solvency II Training Professional Knowledge Leonhardt Wohlschlager 26/03/2013
  2. 2. FINAL COPY Introduction Training General information
  3. 3. FINAL COPY 3 Objectives for 2 days [General information – Introduction Training] Big picture Solvency II Project Knowledge © CGI 2013. All rights reserved Solvency II Capital requirement Benefits Processes Risk definition Governance Market solutions Skills centre Reference People Toolkit Incidents & Losses Pillars Definitions CGI Risk & Regulatory – Training Solvency II – Professional Knowledge No. 3
  4. 4. FINAL COPY Basic terms are the Solvency Capital Requirement, standard formula and internal model. Solvency Capital Requirement: The amount of capital to be held by an insurer to meet the Pillar I requirements under the Solvency II regime. It is expected that the SCR may be derived using either an approved internal model or the standard formula. Standard Internal Simpli-fication full Standard formula: In the context of the Solvency II regime, a set of calculations prescribed by the regulator for generating the Solvency Capital Requirement. The standard formula is intended to be able to be used by a very wide range of undertakings. Internal model: Risk management system of an insurer for the analysis of the overall risk situation of the insurance undertaking, to quantify risks and/or to determine the capital requirement on the basis of the company specific risk profile. © CGI 2013. All rights reserved No. 4 Definitions and Terms [General information – Introduction Training] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Internal model standard formula and partial internal model standard formula with undertaking-specific parameters standard formula
  5. 5. FINAL COPY Why Solvency? General information
  6. 6. FINAL COPY What is the customer interested in? [General information – Why Solvency II?] How do we realize Compliance with minimum implementation and operation costs? How do we fulfill our periodical repording duties in time? How can we initially decrease operational costs and effort per annum and finally further decrease it? What is the impact of the Solvency II requirements on the individual business departments? How do we realize Solvency II Compliance? CGI Risk Regulatory – Training Solvency II – Professional © CGI 2013. All rights reserved Knowledge No. 6
  7. 7. FINAL COPY Industry Drivers! [General information – Why Solvency II?] Solvency II addresses risk across the three pillars – solvency capital, general regulatory principles and financial disclosure and solvency All Insurers with a European presence must meet Solvency II regulations by 2013, or face review and penalties by the regulator All firms can improve their competitive positioning in the market with improvements across the three pillars Get a grip on risk and deliver not only compliance, but also improved business processes © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 7
  8. 8. FINAL COPY © CGI 2013. All rights reserved No. 8 Analyst’s views [General information – Why Solvency II?] Analyst’s views: Gartner states that “Solvency II will lead to major changes for European insurers and will affect most core insurance processes, including product development, underwriting, marketing and sales.” Ovum states that: “the move [to Solvency II] provides CIOs with a golden opportunity to transform the information management landscape in their business and provide a sharper competitive edge.” The same analyst quotes that “This is likely to be the largest IT project since Y2K.” Firms need a partner they trust to deliver and respond to future changes
  9. 9. FINAL COPY Understanding the customer’s requirements [General information – Why Solvency II?] Solvency II (SII) is a “no fail” programme with challenging timelines. SII programmes face a number of challenges that if not managed correctly put significant pressures on both cost and deadlines: • Requirements are constantly emerging – e.g. QIS results and changing rules on asset eligibility for ORSA. • Data management requirements are complex and people intensive. • As SII is new to the industry delivery planning is not based on prior experience. • There are many stakeholders and business functions involved across LBU/LoBs which adds complexity and means careful co-ordination and management is required. • The large scope of work within an immovable timeframe requires a heavy resource profile which incurs additional management overhead. • There is a need to prove the conceptual design before spending money on full production systems. © CGI 2013. All rights reserved No. 9 “something someone has said, does not need to be a direct quote because of ambiguity in reference” Position of a person with this requirement01
  10. 10. FINAL COPY Financial Crisis News General information
  11. 11. FINAL COPY Financial markets are complex. The insurance industry has not been immune to the effects of the financial crisis as insurers have significant asset bases that were affected by the depressed market values of assets. ‘The economic crisis has triggered a phase of profound reflections for all — European institutions and industry — on the lessons to be learned from the financial crisis. A key lesson is that financial supervision must be improved.’ (Insurance Europe, formerly CEA, Comité Européen des Assurances) ‘EU legislators should not water down the Solvency II directive or postpone the legislative process. This would be like terminating a marathon at the 40 kilometer mark.’ (CRO Forum) ‘The crisis originated and developed in the banking sector, subsequently spreading to the insurance sector. Our main lesson of the current events is that Solvency II must be adopted. […] The crisis has highlighted needs for a further refinement of the existing Solvency II calibrations, both at module and sub-module levels. […] As in the financial sector at large, governance, risk management, and internal controls in the insurance sector need to be strengthened. […]’ (European Insurance and Occupational Pensions Authority, formerly CEIOPS) Source: CRO Forum /Press Release: Financial Crisis strongly reinforces the case for Solvency II 24/10/2008; CEA /Solvency II CEA Key Messages on Level 2 Implementing Measures; CEIOPS /Lessons learned from the crisis (Solvency II and beyond) 2009/; legend: CRO – Chief Risk Officer © CGI 2013. All rights reserved No. 11 Financial crisis and Solvency II [General information – Financial Crisis News] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  12. 12. FINAL COPY Solvency II News today [General information – Financial Crisis News, Germany specific] R.ecent headlines from daily press, legislation and jurisdiction create an image about the responses of the insurance industry to Solvency II. Solvency II in 2016? New rules for insurance regulation are expected to arrive later! CGI Risk Regulatory – Training Solvency II – Professional Knowledge Source: Nov. 2012 © CGI 2013. All rights reserved No. 12
  13. 13. FINAL COPY Risk Management General information
  14. 14. FINAL COPY After this section you have general knowledge about: © CGI 2013. All rights reserved No. 14 Overview [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Risk fundamentals Definition of risk Key components of risk Risk measures Solvency II risk types Mitigation and transfer
  15. 15. FINAL COPY The overall management of an insurer includes: Design, pricing, marketing and underwriting of insurance policies Selection of assets backing the policies Estimation of the size and volatility of the liabilities associated with the policies Determination of the insurers’ capital needs © CGI 2013. All rights reserved No. 15 Risk Fundamentals [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Claims Management Adequate disclosure and communication process to key stakeholders Future financial condition analysis which provides a multi-scenario view
  16. 16. FINAL COPY There are many definitions of Risk. The one below was published in 2004 by Standards Australia and Standards New Zealand on Risk Management. ‘A risk is often specified in terms of an event or circumstance and the consequences that may flow from it.’ ‘Risk is measured in terms of a combination of the consequences of an event […] and their likelihood […].’ ‘Risk may have a positive [then it is often called a chance] or negative impact.’ ‘See ISO/IEC Guide 51, for issues related to safety.’ Source: Standards Australia/Standards New Zealand 4360:2004, p. 4 © CGI 2013. All rights reserved No. 16 Definition of Risk [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  17. 17. FINAL COPY Perils, assets, incidents and losses define a risk, quantifiable as product of probability and extent of loss. Definition: – Particular set of circumstance/ events, risk source Perils examples: – Credit default – Insured liability events Asset Loss © CGI 2013. All rights reserved No. 17 Key components of risk [General information – Risk Management] Peril Incident Definition: – Financial negative outcome or impact of an event Loss examples: – Storm catastrophe that leads to claims of 4 m. Euro. – Loss of 0,1 m. Euro due to a delay in orders confirmations due to an inaccurate procedure CGI Risk Regulatory – Training Solvency II – Professional Knowledge Definition: – Asset that is vulnerable to a certain type of threat Asset examples: – Insured object – IT component Definition: – Occurrence of an event which could eventually generate losses Event examples : – Natural disaster – Damage to physical assets due to a flooding Definition: Probability of loss occurring X extent of loss if loss occurs
  18. 18. FINAL COPY © CGI 2013. All rights reserved No. 18 Example of Risk [General information – Risk Management] Peril Asset Incident Loss Accident Car Mr. Smith damaged Mrs. Dupont’s Bentley in Admiraliteitsstraat. Damage was insured and accounts for 5.500 £. CGI Risk Regulatory – Training Solvency II – Professional Knowledge Car damage: Expected risk value is 2.546 £. Assumption: Decision-maker risk-neutral
  19. 19. FINAL COPY From the actuarial perspective, there is special attention to the volatility, uncertainty and extreme events of risk for each peril. Definition Risk Measure is a function of the probability distribution of losses. Function Risk Measure is used to determine either the total capital requirement or an indicated capital requirement for a component. Risk Measures can be visualised with data in a Normal distribution. A bell curve (normally distri-buted random variable) can be described by mean (expectation) and standard deviation. Examples Value at Risk (VaR) that is used to determine the solvency capital require-ment, is a quantile of a distribution. The 99,5th percentile of the distribution is the value for which there is a probability of exceedence of 0,5%. The volatility is a measure for price variation of a financial instrument over time. The risk margin represents the value of the deviation risk of the actual outcome compared with the best estimate. Extreme events such as an earthquake catastrophe lead to a Chi-Quadrat curve. © CGI 2013. All rights reserved No. 19 Risk Measures Summary [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  20. 20. FINAL COPY In order to calculate the economic capital (= SCR) one needs to aggregate all PL probability distributions. © CGI 2013. All rights reserved No. 20 Aggregation of loss distributions [General information – Risk Management] Source: European Union /DIRECTIVE 2009/138/EC/; legend: PL – Profit Loss Distribution, EL – Expected loss (mean) CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  21. 21. FINAL COPY Economic Capital [General information – Risk Management] The SCR is the capital required to cover a ruin probability based on risk evaluation (VaR), confidence level in a 1 year time horizon. © CGI 2013. All rights reserved No. 21 Frequency of occurence Loss distribution Value X (VaR) EXPECTED LOSS (Technical provisions) UNEXPECTED LOSS (Economic capital) P = 0,005 (Risk appetite*) Economic Capital = SCR (Unexpected loss) Mean (Expected loss) = Risk provisions Source: European Union /DIRECTIVE 2009/138/EC/; legend: Risk appetite is a business term, usually called confidence level in maths. CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  22. 22. FINAL COPY The main Solvency II risk types include the underwriting risk (health, life, non-life), the market, counterparty default and intangible assets risk. Market Health Default Life Non-life Intang Legend: Adj – Adjustment, CAT – Catastrophe, Op – Operational risk, SLT – similar to life techniques © CGI 2013. All rights reserved No. 22 Solvency II Risk Types [General information – Risk Management] SCR Adj BSCR Op CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  23. 23. FINAL COPY The main Solvency II risks are called risk modules ... Underwriting risk The risk of a change in value due to a deviation of the actual claims payments from the expected amount of claims payments (including expenses). From the nature of the administration of risk within the company, one can distinguish between risks of claims which have already happened in the past – the reserve risk, and the risk of claims which will happen in the future – the premium risk. Examples: life underwriting risk, windstorm underwriting risk Market risk The risk of changes in values caused by market prices of financial instruments or volatilities of market prices differing from their expected values. Exposure to market risk is measured by the impact of movements in the level of financial variables such as stock prices, interest rates, real estate prices and exchange rates. Example: interest rate risk Source: CEA /Solvency II Glossary 2013/; European Commission /QIS5 Technical Specifications 2010/ p. 90 ff.; legend: risk types that were used in QIS5 © CGI 2013. All rights reserved No. 23 Solvency II Risk Types [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  24. 24. FINAL COPY … as they are taken into account to determine the Solvency Capital Requirement. Counterparty default risk The risk of possible losses due to unexpected default, or deterioration in the credit standing, of the counterparties and debtors of undertakings. Example: reinsurance counterparty risk Intangible assets risk The risk of a change in value derived from a decreasing price of an intangible asset in the active market and from unexpected lack of liquidity of the active market that may result in an additional impact on prices, or due to internal risks inherent to the specific nature of the intangibles. Goodwill is excluded. Example: Risk of price decrease of patents due to revolutionary innovations Source: CEA /Solvency II Glossary 2013/; European Commission /QIS5 Technical Specifications 2010/ p. 90 ff.; legend: risk types that were used in QIS5 © CGI 2013. All rights reserved No. 24 Solvency II Risk Types [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  25. 25. FINAL COPY In order to lessen the risk, the insurer applies various risk instruments. For the underwriting risk, it is usually reinsurance and, alternatively, ART, for operational risk, insurers use internal controls. Definition The insurers’ steps to lessen the risk associated with its business. Examples Purchase of reinsurance Alternative risk transfer (ART) securitization of a portion of its asset or liability portfolio hedging of financial guarantees with derivates instruments product design active risk management. Source: European Commission /QIS5 Technical Specifications 2010/ 90 ff. © CGI 2013. All rights reserved No. 25 Mitigation and Transfer [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  26. 26. FINAL COPY An overall generalized model for risk management can be drawn as follows. In case of underwriting risk incidents, insurers use the term ‘claims’ for loss. © CGI 2013. All rights reserved No. 26 Mitigation and Transfer [General information – Risk Management] Incident From 0 to N incidents Risk Action plan ERMS From 1 to N ERMS From 0 to N action plans CGI Risk Regulatory – Training Solvency II – Professional Knowledge Planed or ongoing action: Ex: Documentation of a procedure, training, Set up of an automated control ERMS = Element of the Risk Management System: current elements in place: Ex : IT controls, procedures, internal audit control plan Real cases; occurrence of a risk A finalized action plan can be changed into an ERMS: Ex : A published procedure becomes an ERMS Legend: ERM – Enterprise Risk Management, ERMS – Enterprise Risk Management Systems
  27. 27. FINAL COPY Define the term risk! Of which components consists a risk? Take an example! For which risk modules does one have to calculate solvency capital, e.g. STEC (= short term economic capital), according to the Solvency II regime? How much is the risk appetite, that is proposed by the Solvency II Directive? Explain the steps to calculate the Economic Capital! © CGI 2013. All rights reserved No. 27 Exercises [General information – Risk Management] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  28. 28. FINAL COPY Solvency II Data Reference Model Specific information
  29. 29. FINAL COPY After this section you have specific knowledge about: Solvency II projects SCR calculation process industrialization Solvency II Data Model Calculation chain for SCR Non Life Benefits of our data reference model Partner © CGI 2013. All rights reserved No. 29 Overview [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  30. 30. FINAL COPY SCR Calculation Process Industrialisation [Specific information – Solvency II Data Reference Model] We have designed a data reference model to industrialize the process of SCR calculation. Solvency II requirements (Directive + Consultation Papers) LMC Solvency II and Basel II Project © CGI 2013. All rights reserved Internal Model, data reference, LBC Project Implementation CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 30 • Allianz • Groupama • … This is where our model provides: A Roadmap to reach the industrialization objective A detailed view of each process and step A detailed view of data required Best practices for aggregation and treatments Data Quality preset of deliverables
  31. 31. FINAL COPY Data Model Overview [Specific information – Solvency II Data Reference Model] The data model has some Solvency II specific key dimensions. © CGI 2013. All rights reserved Agregates for all Risk families CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 31 QIS 4 and QIS 5 compliant Fits internal model or standard formula requirement
  32. 32. FINAL COPY A Catalyst for SII Development [Specific information – Solvency II Data Reference Model] To help through all these steps, our data reference model sustains processes and data required for SCR computation. Collect Data for each Calculate by Risk family (Assets, market, L, © CGI 2013. All rights reserved Risk Family Aggregate Data, Preprocess, transform, pre/post analyze NL,..) FFiinnaall aaggggrreeggaattiioonn CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 32 Identify Data (dependent from models, risks, QIS stage,…) SShhaarree//AAnnaallyyzzee
  33. 33. FINAL COPY Internal Model Flows Mapping [Specific information – Solvency II Data Reference Model] The model includes a generic description of internal models flows and mapping: CAT and Non Life. © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 33
  34. 34. FINAL COPY Process Specification [Specific information – Solvency II Data Reference Model] The model presents the related sub processes and details them. © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 34
  35. 35. FINAL COPY Detailed View of Process 1 [Specific information – Solvency II Data Reference Model] For example, the steps of large claims data preparation for DWH can be described as follows: L1: Claims data extract from DWH (150k criterion) A1: Co-insurance rate application to get the company part L2: Manual release of data organization table A2: mapping data update L3: success of local brokerage data identification L4: data enrichment with A2 mapping A3: enriched and aggregated data input in DWH L5: data are ready for triangles A4: triangles setting L6: success of triangles constitution A5: triangles are calculated for descriptive statistics triangles calculations L7: triangles calculations taking into account L8 exclusions A6: business analysts can modify previously calculated data L8: business analysts can exclude some development indicators. Statistic data have to be automatically calculated. R1: Data to input in DWH have the right format to be copied/pasted in the appropriate templates © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 35 L3
  36. 36. FINAL COPY 2006 100 110 150 160 165 165 165 2007 95 105 120 130 130 131 2008 110 120 135 137 140 2009 120 135 150 165 2010 125 130 150 2011 154 165 2012 143 © CGI 2013. All rights reserved Development year N N+1 N+2 N+3 N+4 N+5 N+6 N N+1 N+2 N+3 N+4 N+5 N+6 Min 95 105 120 130 130 131 165 Average 121 127,5 141 148 145 148 165 Max 154 165 150 165 165 165 165 No. 36 Loss triangle and statistic data [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Statistics Subscription year
  37. 37. FINAL COPY Loss triangle and development coefficients [Specific information – Solvency II Data Reference Model] Subscription year © CGI 2013. All rights reserved No. 37 Development year N/A N ⇒ N+1 N+1 ⇒ N+2 N2 ⇒ N+3 N+3 ⇒ N+4 CGI Risk Regulatory – Training Solvency II – Professional Knowledge N+4 ⇒ N+5 N+5 ⇒ N+6 2006 N/A 10,00% 36,36% 6,67% 3,13% 0,00% 0,00% 2007 N/A 10,53% 14,29% 8,33% 0,00% 0,77% 2008 N/A 9,09% 12,50% 1,48% 2,19% 2009 N/A 12,50% 11,11% 10,00% 2010 N/A 4,00% 15,38% 2011 N/A 7,14% 2012 N/A Average N/A 8,88% 17,93% 6,62% 1,77% 0,38% 0,00%
  38. 38. FINAL COPY Forecasts using development coefficients [Specific information – Solvency II Data Reference Model] 1 Development year 2006 100 110 150 160 165 165 165 2007 95 105 120 130 130 131 131 2008 110 120 135 137 140 140 140 2009 120 135 150 165 165 165 165 2010 125 130 150 150 150 150 150 2011 154 165 165 165 165 165 165 2012 143 155,69 183,61 195,76 199,23 200 200 © CGI 2013. All rights reserved No. 38 N N+1 N+2 N+3 N+4 N+5 N+6 CGI Risk Regulatory – Training Solvency II – Professional Knowledge Subscription year
  39. 39. FINAL COPY © CGI 2013. All rights reserved No. 39 Gross loss triangle of Generali [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Source: Generali (ed.) /Annual Report 2011/
  40. 40. FINAL COPY Detailed View of Process 1 [Specific information – Solvency II Data Reference Model] The overall view of the whole calculation chain for SCR Non Life Triangles Step 1 Step 2 © CGI 2013. All rights reserved Triangles CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 40 Non Life Premium and reserve Source Data (Systems) Catastrophe Source Data (Systems) Triangles Triangles TTrriiaanngglleess Triangles Intermediate data storage Intermediate data storage Non Life Premium and reserve Risk Non Life Catastrophe Risk NON LIFE SOLVENCY II CAPITAL REQUIREMENT TTrriiaanngglleess Triangles Triangles Triangles
  41. 41. FINAL COPY SCRNL Premium Reserve Risk [Specific information – Solvency II Data Reference Model] In Step 2 the calculation chain for SCR Non Life is focused (1/2). © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 41 Intermediate data storage On the left side is a picture of a UML data model for SCR Non Life Premium and Reserve risk storage. On the right side is a picture of a UML data model for SCR Non Life Premium and Reserve risk calculation.
  42. 42. FINAL COPY SCRNLCatastrophe Risk [Specific information – Solvency II Data Reference Model] In Step 2 the calculation chain for SCR Non Life is focused (2/2). On the left side is a picture of a UML data model for SCR Catastrophe risk storage. On the right side is a picture of a UML data model for SCR Catastrophe risk calculation. © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 42 Intermediate data storage
  43. 43. FINAL COPY SCR NL Premium, Reserve Risk Catastrophe Intermediate Data [Specific information – Solvency II Data Reference Model] This diagram is a schematic view of the different storage tables needed for the calculation of the SCR Non Life Premium and reserve risk. Solvency II Non Life Basic Data © CGI 2013. All rights reserved • Volume measures for premium risk • Overall standard deviation • A function of the standard deviation • SCR Non Life Premium and Reserve risk • SCR Non Life Catastrophe risk Date CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 43 • Written Premiums • Earned Premiums • Earned Exposures • Total paid losses and Allocated Adjustment Expenses (ALAE) • Paid losses and ALAE on closed claims • Loss and ALAE case reserve • Salvage and Subrogation Recoveries on Total Paid Losses Paid ALAE • ALAE case reserves • Paid Annuities • Annuity case Reserves • Total Number of Reported Claims • Total Number of Closed Claims • Number of Closed Claimed with no Loss Payment • Number of Reopened Claims • Expected Written Premiums • Expected Earned Premiums • Best Estimate of Claims Outstandings • Volume measures for premium risk by lob • Volume measures for reserve risk by lob • Overall volume measures by lob • Overall standard deviation by lob • Standard deviation for Premium Risk by lob • Standard deviation for Reserve Risk by lob • Volume measures for premium risk by lob and country • Volume measures for reserve risk by lob and country • Loss Ratio • Earned Premiums • Written Premiums • Total Paid Claims • Total Claim Reserve • Total Claims Recoveries • Reinsurance Code • Description in English • Description in local language • Description in English • Description in local language • LOB Code • LOB description in English • LOB description in local language • Identification Date • Fiscal Period Description • Fiscal Period Code • Company Code • Country Code • Sub LOB Code • Sub LOB description in English • Sub LOB description in local language • Exposure description in English • Exposure description in local language • Claim type Code • Claim type description in English • Claim type description in local language Non Life Volume and standard deviation Global Non Life Volume and standard deviation by LOB Solvency II Non Life Historical Data Non Life Volume measures by LOB and Country Reinsurance code Valuation Date Company Country Sub LOB Claim type Line Of Business Fiscal Period
  44. 44. FINAL COPY SCR NL Premium, Reserve Risk Catastrophe Intermediate Data [Specific information – Solvency II Data Reference Model] This diagram is a schematic view of the different calculation steps of the SCR Non Life Premium and Reserve risk. © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 44
  45. 45. FINAL COPY Non Life facts overview (UML) [Specific information – Solvency II Data Reference Model] This diagram represents all relevant non-life data. © CGI 2013. All rights reserved CGI Risk Regulatory – Training Solvency II – Professional Knowledge No. 45
  46. 46. FINAL COPY Our data reference model brings several benefits. It allows our customer to: Steer the IT project by providing a common framework for discussion between business and IT participants Design a model by providing sources of data and proposition of current processes for all risks families (though only Assets/Credits, Cat and Non-Life have been fully modelized) Build Implement a solution by providing best practices recommendations of implementation (in a SAP BI environment) Optimize the « Run Use » of the solution Reportings Controlling supports © CGI 2013. All rights reserved No. 46 Data Reference Model Benefits [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  47. 47. FINAL COPY The chart provides a General view of an infrastructure for Data processing and management under Solvency II regime. © CGI 2013. All rights reserved No. 47 Solvency II Data Processing Management Infrastructure [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  48. 48. FINAL COPY Our Data reference model serves as an accelerator to design build our clients’ Solvency II architecture. © CGI 2013. All rights reserved No. 48 Data Reference Model as Accelerator [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  49. 49. FINAL COPY We are finalizing the Reference data model with our partner Prima Solutions. Founded in 2000 Prima Solutions operates globally from offices in Paris, London, Chicago and Tokyo. Combination of standards, software and services which allows for structured processing of enterprise information enabling greater control and data integrity across their organization. Three main products : Prima Repository: suite of components for insurance applications Prima Vanilla: Services for Contract/Policy management applications Prima IBCS: object-oriented insurance model suite Prima Solutions’ technology promotes Reusability and renewed Business and Technical Agility. CGI, now part of CGI, and Prima work together to adapt Insurance standard's model (IBCS) in order to fit Solvency II requirements. © CGI 2013. All rights reserved No. 49 Our Solvency II partner [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  50. 50. FINAL COPY Brainstorming: Worin bestehenden die Unterstützungspotenziale der CGI im Hinblick auf Säule-1-Projekte? © CGI 2013. All rights reserved No. 50 Brainstorming [Specific information – Solvency II Data Reference Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  51. 51. FINAL COPY Reinsurance General information
  52. 52. FINAL COPY After this section you have general knowledge about: Reasons for reinsurance Types of Reinsurance Reinsurance and Risk Profile Reinsurance Credit Risk © CGI 2013. All rights reserved No. 52 Overview [General information – Reinsurance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  53. 53. FINAL COPY Reinsurance – a Law to Business Translation [General information – Reinsurance] “The cedent cedes the cession to the cessionary.” © CGI 2013. All rights reserved No. 53 CGI Risk Regulatory – Training Solvency II – Professional Knowledge In law you say. Insurer transfers risk to reinsurer.
  54. 54. FINAL COPY There are two main objectives to purchase reinsurance. One is the genuine transfer of risk, the other can be described as a risk transfer for the purposes of managing or spreading risk over time or achieving strategic business objectives. Genuine risk transfer reasons primarily include: Limiting large or catastrophic claims Limiting total claims Strategic or financial objectives include: Increasing new business capacity Investment Risk Transfer Financial Results Management A mixture of both objectives can provide for: Gaining Product Expertise Underwriting Advice Divesting a Product Line © CGI 2013. All rights reserved No. 54 Reasons for Reinsurance [General information – Reinsurance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  55. 55. FINAL COPY Reinsurance covers typically have two different types: proportional or non-proportional. Proportional reinsurance covers are quota share or surplus covers, while non-proportional covers comprise excess-of- loss or stop-loss contracts. Both types are often, mixed or aggregated. Example “Proportional reinsurance”: © CGI 2013. All rights reserved No. 55 Types of Reinsurance [General information – Reinsurance] Purchase a policy Pay premium Transfer portion of premium Another Insurance company CGI Risk Regulatory – Training Solvency II – Professional Knowledge Individual/Common Person Or Group of Individuals/ Industries Insurance Company Reinsurance Company Insured Insurer Reinsurer
  56. 56. FINAL COPY Reinsurance contracts typically have significant impacts on the company’s aggregate risk profile. … usually with the effect of reducing risk, and those are important considerations for the capital requirement of an insurance company. While proportional reinsurance reduces the overall (nominal) risk in a linear way, non-proportional covers the large losses, thereby reducing the company’s net exposure to large loss or catastrophic events. © CGI 2013. All rights reserved No. 56 Reinsurance and Risk Profile [General information – Reinsurance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  57. 57. FINAL COPY Reinsurance arrangements often generate a long-term relationship between cedant and reinsurer. The stability of the relationship crucially depends upon the financial strength of the reinsurer. To recognize the credit risks on the reinsurance recoverable, a factor 0 can be applied to the full amount of capital relief derived from having a reinsurance arrangement in place. The factor 0 may vary depending upon: • Financial stability of the reinsurer • Amount of collateral being posted • Nature of the reinsurance (i.e. short versus long tail) • Concentration risk © CGI 2013. All rights reserved No. 57 Reinsurance Credit Risk [General information – Reinsurance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  58. 58. FINAL COPY Solvency II Regulation General information
  59. 59. FINAL COPY After this section you have general knowledge about: © CGI 2013. All rights reserved No. 59 Overview [General information – Solvency II Regulation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Three Pillars Timelines Solvency II Related regulatory
  60. 60. FINAL COPY Pillar 1 comprises quantitative requirements, Pillar 2 the supervisory review process and Pillar 3 the disclosure requirements. Pillar 1 Technical Provisions Standard Model MCR SCR Own Funds QIS © CGI 2013. All rights reserved Pillar 2 Governance Supervisor Review Process Risk Management ORSA Pillar 3 Disclosure Report to Supervisor Solvency and Financial Condition Report No. 60 Three Pillars [General information – Solvency II Regulation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  61. 61. FINAL COPY The three pillars conclude high data quality ... © CGI 2013. All rights reserved No. 61 Three Pillars [General information – Solvency II Regulation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Pillar 1: Measuring the financial position and capital adequacy (SCR, Minimum Capital Requirement, reserves, integration of all quantifiable risks, capital rules, investment rules, asset liability management) Pillar 2: Integration of all non-quantifiable risks, Own Risk and Solvency Assessment (ORSA), supervisory intervention (e.g. ACAM, BAFIN etc.) Pillar 3: Disclosure Solvency Financial Condition Report Market discipline Source: European Commission /QIS5 Technical Specifications 2010/
  62. 62. FINAL COPY Three Pillars [General information – Solvency II Regulation] … and robust controls. Pillar 1: Quantitative Requirements © CGI 2013. All rights reserved Pillar 2: Supervisory Review Process Pillar 3: Disclosure Requirements No. 62 •Technical Provisions •Investment rules and ALM •Capital rules •Own Risk and Solvency Assessment (ORSA) •Supervisory Intervention •Disclosure Solvency Financial Condition Report •Market Discipline Robust Internal controls around risk data collection and storage Risk assessments based on accurate, complete and appropriate historical data Accuracy and consistency between capital calculation data and wider reporting data Source: European Commission /QIS5 Technical Specifications 2010/ CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  63. 63. FINAL COPY On 31st December 2013 every insurer is supposed to comply with the Solvency II regulation. 2013 Directive transposition, QIS 5 report 2010 Scoping Delivery: Directive transposition, QIS 5 2009 Scoping: Directive transposition, Scoping of activities, Organization and planning of the project, Risk Management 2008 Studies: Directive negotiation, CEIOPS works on pillar I II, QIS 4 2007 Studies: Directive negotiation, CEIOPS works on pillar I II, QIS participation, QIS 3, Impact Studies, Lobbying © CGI 2013. All rights reserved No. 63 Timelines Solvency II [General information – Solvency II Regulation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge 2013 Delivery, transposition
  64. 64. FINAL COPY Timelines Solvency II [General information – Solvency II Regulation] There are just 31 months left till the first quarterly reporting. 2013 2014 2015 2012 IRSG: „18 months between assurance of reporting requirements till the full implementation of S II are necessary.“* 31 months till the 1. quarterly reporting Q3/Q4 Solvency II put into national law 1.1.2015: Solvency II Go-Live May 2015: Hand-in QRTs Q1 and country reports Q2: EIOPA sends final proposals and finalizes guidelines * Source: EIOPA Insurance and Reinsurance Stakeholder Group – Opinion Consultation – Reporting Package; Nov. 2012 CGI Risk Regulatory – Training Solvency II – Professional Knowledge © CGI 2013. All rights reserved No. 64
  65. 65. FINAL COPY As well other regulatory has to be taken into account. International Financial Reporting Standards National legislation (e.g. MaRisk(VA), HGB, AktG for Germany) © CGI 2013. All rights reserved No. 65 Related regulatory [General information – Solvency II Regulation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  66. 66. FINAL COPY Technical Provisions Specific information
  67. 67. FINAL COPY After this section you have specific knowledge about: © CGI 2013. All rights reserved No. 67 Overview [General information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Proportionality Best estimate Risk Margin Reinsurance recoverables Frequency of calculations
  68. 68. FINAL COPY The principle of proportionality allows a reduction of complexity of the valuation methodology. The purpose and role of a proportionality assessment is interlinked with the selection of an appropiate valuation methodology. It then considers the notion of estimation uncertainty and why this is central to proportionality assessment. The assessment of proportionality of the selected valuation methodology to the nature, scale and complexity of the underlying risks is an integral part of this process. Three elements of such an assessment are: Step 1: assess nature, scale and complexity of underlying risks Step 2: check whether valuation methodology is proportionate to risks as assessed in step 1, having regard to the degree of model error resulting Step 3: Back test and validate the assessment carried out in step 1 2 Source: CEIOPS /Technical Provisions 2009/ p. 9 ff. © CGI 2013. All rights reserved No. 68 Proportionality [Specific information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  69. 69. FINAL COPY The best estimate represents the discounted probability-weighted average of future cash flows (also called present value). Simplified methods are used for the valuation of the best estimate element of technical provisions in the context of a proportionality assessment. The principle of proportionality provides an adequate framework to ensure that undertakings apply appropriate methodologies for the valuation of technical provisions, including the use of simplified techniques. © CGI 2013. All rights reserved No. 69 Best estimate [Specific information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  70. 70. FINAL COPY The risk margin represents the value of the deviation risk of the actual outcome compared with the best estimate. For the calculation of the risk margin, EIOPA states that the risk margin shall be calculated per line of business. The calculation of the risk margin per line of business shall in general be carried out according to the following steps: 1. Project the SCRs throughout the lifetime of the (re)insurance obligations 2. Apply the Cost-of-Capital rate to the projected yearly SCRs 3. Discount with the risk-free interest rate curve 4. Accumulate the amounts over all future years © CGI 2013. All rights reserved No. 70 Risk Margin [Specific information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  71. 71. FINAL COPY The calculation of the amount of recoverables from reinsurance contract of life insurance business should be based on policy-by-policy approach. Reinsurance recoverables = gross provisions – net provisions The steps to integrate the derived net valuations of technical provisions into the Solvency II Framework are: • Step 1: Derive valuation of technical provisions net of reinsurance • Step 2: Determine reinsurance recoverables as difference between gross and net valuations • Step 3: Assess whether valuation of reinsurance recoverables is compatible with Article 81. © CGI 2013. All rights reserved No. 71 Reinsurance recoverables [Specific information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  72. 72. FINAL COPY In Solvency II evaluation principles for the calculation of the technical provisions, such as the best estimate and risk margin, are applied. Solvency II reserves (technical provisions) = best estimate + risk margin – Best estimate: discounted probabili-ty- weighted average of future cash Risk 1 Risk 2 Risk 3 Legend: European Union /DIRECTIVE 2009/138/EC/ p. 45 f.; CEA /Solvency II CEA Key Messages on Level 2, legend: PV – present value. * The probability-weighted average of future cash flows is as well often refered to as mean, the discounted one as expected present value of future cash flows. © CGI 2013. All rights reserved No. 72 Risk Evaluation [Specific information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge flows (also called PV)* – Risk margin: to ensure that technical provisions are equivalent to amount that insurance under-takings would be expected to require in order to take over and meet the insurance liabilities. Valuation principles – Prudent under Solvency I – market-consistent under Solvency II Solvency I Solvency II Margin requirement (simplified example) Premiums (Non life) Mathematical reserves (life) X 16% = Margin Non Life + X 4% = Margin Life Total Margin Margin requirement Internal model Probability Ruin Results
  73. 73. FINAL COPY Equity capital includes free surplus and SCR. Liabilities Liabilities Risk Margin Economic view: Ruin is the moment where liabilities exceed assets Solvency Capital Requirement (SCR): Capital required to cover a ruin probability based on: risk evaluation (VaR), confidence level (99,5%) and a time horizon of 1 year. © CGI 2013. All rights reserved No. 73 Risk Evaluation under Solvency II [Specific information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Assets Assets Market Value as counterpart of SCR/MCR and technical provisions Equity Capital Risk Margin Free Surplus Best Estimate Market consistent evaluation MCR Best Estimate Market consistent evaluation SCR Source: European Union /DIRECTIVE 2009/138/EC/ p. 77 f.; for more details see the so-called QIS5 spreadsheet ‘I.Valuation’
  74. 74. FINAL COPY According to the Directive the SCR should be calculated at least once a year and the MCR at least quarterly. Insurance and reinsurance undertakings shall calculate the Solvency Capital Requirement at least once a year and report the result of that calculation to the supervisory authorities. Insurance and reinsurance undertakings shall calculate the Minimum Capital Requirement at least quarterly and report the results of that calculation to supervisory authorities. Since the objective of the quarterly MCR calculation is to ascertain whether or not the MCR has been breached, the own funds eligible to cover the MCR should also be calculated in parallel on a quarterly basis. Source: European Union /DIRECTIVE 2009/138/EC/ p. 60 © CGI 2013. All rights reserved No. 74 Frequency of calculation [Specific information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  75. 75. FINAL COPY SCR Calculation Specific information
  76. 76. FINAL COPY After this section you have specific knowledge about: SCR Methods and Formulas Principle of Proportionality © CGI 2013. All rights reserved No. 76 Overview [Specific information – Pillar I – SCR Calculation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  77. 77. FINAL COPY There a number of ways to calculate capital for solvency and regulatory purposes with regard to one specific risk module. Here are five common and not so common methods used for calculating the Solvency Capital Requirement (SCR): Those models and methods are “BLACK BOXES” in our data reference model. We feed them and extract from them, no more, no less. © CGI 2013. All rights reserved No. 77 SCR Methods Formulas [Specific information – Pillar I – SCR Calculation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Examples Covariance matrix Replicating portfolios Least squares Monte Carlo Curve-fitting Nested stochastic
  78. 78. FINAL COPY Proportionality is as well applied for the SCR calculation. In particular, this Directive should not be too burdensome for insurance undertakings that specialise in providing specific types of insurance or services to specific customer segments, and it should recognise that specialising in this way can be a valuable tool for efficiently and effectively managing risk. In order to achieve that objective, as well as the proper application of the proportionality principle, provision should also be made specifically to allow undertakings to use their own data to calibrate the parameters in the underwriting risk modules of the standard formula of the Solvency Capital Requirement. © CGI 2013. All rights reserved No. 78 Principle of Proportionality [Specific information – Pillar I – SCR Calculation] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  79. 79. FINAL COPY Standard Formula Specific information
  80. 80. FINAL COPY After this section you have specific knowledge about: Solvency II Standard Formula Solvency II Risk Types Non-life Underwriting Risk Types © CGI 2013. All rights reserved No. 80 Overview [General information – Pillar I – Technical Provisions] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Market Risk Types Life Risk Types Health-specific Risk Types Operational Risk
  81. 81. FINAL COPY The SCR finally accumulates the Basic Solvency Capital Requirement (SCR), the SCR for operational risk and the adjustment as input data. SCR= BSCR + SCROp + Adj The standard formula is the method undertakings are expected to use to calculate the SCR when they do not have their own internal model. The standard formula should therefore be suitable for calculation, in particular by smaller firms. In QIS2 there are two methods for the standard formula being tested. Both take a modular approach to the assessment of capital i.e. the capital requirement is calculated for each risk factor separately and an overall capital requirement is then calculated using assumed correlation between the various risk factors. © CGI 2013. All rights reserved No. 81 Standard Formula [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  82. 82. FINAL COPY The calculation of the Solvency Capital Requirement according to the standard formula is divided into modules as follows … Market Health Default Life Non-life Intang Interest rate SLT Health CAT Non-SLT Health © CGI 2013. All rights reserved No. 82 Solvency II Risk Types [Specific information – Pillar I – Standard Formula] SCR Adj BSCR Op Premium Res. Longevity CGI Risk Regulatory – Training Solvency II – Professional Knowledge Mortality Longevity Disability Lapse Expenses Revision Equity Property Spread Currency Concentration Illiquidity Lapse Mortality Disability Lapse Expenses Revision CAT Premium Res. Lapse CAT included in the adjust-ment for the loss absor-bing capacity of technical provisions under the mo-dular approach = Source: European Commission /QIS5 Technical Specifications 2010/ 90; legend: Adj – Adjustment, CAT – Catastrophe, Op – Operational risk, SLT – similar to life techniques
  83. 83. FINAL COPY The non-life underwriting risk module consists of the non-life premium risk, non-life reserve risk ... Premium risk The risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing, frequency and severity of insured events. Premium risk relates to policies to be written (including renewals) during the period, and to unexpired risks on existing contracts. Premium risk includes the risk that premium provisions turn out to be insufficient to compensate claims or need to be increased. Reserve risk The risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing and amount of claim settlements. Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 197 ff. © CGI 2013. All rights reserved No. 83 Non-life Underwriting Risk Types [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  84. 84. FINAL COPY … non-life catastrophe risk and lapse sub-modules. Catastrophe risk The risk of loss, or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events Lapse risk The risks of a change in value caused by deviations from the actual rate of policy lapses from their expected rates. Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 197 ff. © CGI 2013. All rights reserved No. 84 Non-life Underwriting Risk Types [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  85. 85. FINAL COPY The market risk module consist of interest risk, equity risk, property risk, spread risk … Interest rate risk The risk of loss, or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events Equity risk The risk of a change in value caused by deviations of the actual market values of equities and/or income from equities from their expected values. Property risk Property risk arises as a result of sensitivity of assets, liabilities and financial investments to the level or volatility of market prices of property. Spread risk The risk of a change in value due to a deviation of the actual market price of credit risk from the expected price of credit risk. Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 110 ff.; 116 © CGI 2013. All rights reserved No. 85 Market Risk Types [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  86. 86. FINAL COPY … concentration risk and illiquidity risk. Concentration risk The exposure to increased losses associated with inadequately diversified portfolios of assets and/or obligations. Concentration risk for an insurer may arise with respect to investments in a geographical area, economic sector, or individual investments, or due to a concentration of business written within a geographical area, of a policy type, or of underlying risks covered. Illiquidity The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Liquidity risk may arise due to illiquidity of the assets held to meet the cash flow requirements (commonly referred to as asset, market, or trading liquidity risk), but also due to insufficient funds being available to meet cash flow requirements (funding liquidity risk). From a more theoretical point of view liquidity risk on a day-today basis could also be understood as a change in value due to a deviation of the actual cash flow requirements from the expected cash flow requirements, being the cost of being over- or under capitalised. Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 110 ff. © CGI 2013. All rights reserved No. 86 Market Risk Types [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  87. 87. FINAL COPY The life risk module consist of mortality risk, longevity risk, disability risk ... Mortality risk Type of biometric risk. A change in value caused by the actual mortality rate being higher than the one expected. An increase in the frequency of the death of insured persons may for example result in higher claim patterns than charged for in the premiums. Longevity risk Type of biometric risk. A change in value caused by the actual mortality rate being lower than the one expected. Longevity risk affects contracts where benefits are based upon the likelihood of survival, i.e. annuities, pensions, pure endowments, and specific types of health contracts. Disability risk A change of value caused by a deviation of the actual randomness in the rate of insured persons that are incapable to perform one or more duties of their occupation due to a physical or mental condition, compared to the expected randomness. Disability risk only relates to cover against loss of income, contrary to morbidity risk, relating to cover other than loss of income, e.g. medical expenses. Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 149 ff. © CGI 2013. All rights reserved No. 87 Life Risk Types [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  88. 88. FINAL COPY … lapse risk, expenses risk, revision risk and CAT risk. Lapse risk The risks of a change in value caused by deviations from the actual rate of policy lapses from their expected rates. Expenses risk The capital charge for expense risk is intended to reflect the uncertainty in expense parameters as a result of changes in the level, trend or volatility the expenses incurred. Revision risk In the context of the life underwriting risk module, revision risk is intended to capture the risk of adverse variation of an annuity’s amount, as a result of an unanticipated revision of the claims process. CAT risk The risk that a single event, or series of events, of major magnitude, usually over a short period (often 72 hours), leads to a significant deviation in actual claims from the total expected claims. Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 149 ff. © CGI 2013. All rights reserved No. 88 Life Risk Types [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  89. 89. FINAL COPY The health risk module consists of SLT and Non-SLT health underwriting risk. Similar to Life Techniques (SLT) Health underwriting risk SLT Health underwriting risk arises from the underwriting of health (re)insurance obligations, pursued on a similar technical basis to life insurance, and is associated with both the perils covered and processes used in the conduct of the business. Non-SLT Health underwriting risk Non-SLT Health underwriting risk arises from the underwriting of health (re)insurance obligations, not pursued on a similar technical basis to that of life insurance, following from both the perils covered and processes used in the conduct of business. Non-SLT Health underwriting risk also includes the risk resulting from uncertainty included in assumptions about exercise of policyholder options like renewal or termination options. Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 166 ff. © CGI 2013. All rights reserved No. 89 Health-specific Risk Types [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  90. 90. FINAL COPY Operational risk is the risk that processes, people and systems causes incidents that lead to losses. Operational Risk is the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses. Related terms are Business risk, Compliance risk, Expense risk, Legal risk, Management risk, Model risk, Reputational risk, Strategic risk. Operational risks relate to operational loss events caused by internal or external reasons, excluding all ‘financial’ risks that a company has taken on in the expectation of a financial return. Source: CEA /Solvency II CEA Key Messages on Level 2 © CGI 2013. All rights reserved No. 90 Operational Risk [Specific information – Pillar I – Standard Formula] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  91. 91. FINAL COPY Internal Model Specific information
  92. 92. FINAL COPY After this section you have specific knowledge about: © CGI 2013. All rights reserved No. 92 Overview [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Use Test Governance Statistical Quality Standards Profit/Loss Attribution Validation Documentation Standards
  93. 93. FINAL COPY One of the main aspects for an undertaking to qualify for an internal model approach to determine regulatory capital requirements is … The following elements must be taken into account when assessing the use of the internal model: Impact on policyholders Impact on risk management and use of policies, especially on risk mitigation, ALM, risk appetite, risk strategy, reinsurance program design, limit system, analysis of new products Impact on capital management, capital measurement and allocation Whether the scale of use of the internal model reflecs the nature, scale and complexity of the risks inherent to the business of the undertaking Impact of the level playing field between undertakings Consistency between supervisory authorities’ decisions © CGI 2013. All rights reserved No. 93 Use Test (1/2) [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  94. 94. FINAL COPY … that it demonstrates to its supervisory authority that there is sufficient discipline in its internal model development and application … There are several approaches that can be considered regarding the assessment of compliance with the use test: Detailed list of uses that the undertaking must use the internal model for Principle-based assessment Case-by-case analysis of each application The following areas are highlighted as particularly important within the undertaking’s system of governance: System of governance Risk-management system Descision-making process Economic capital assessment Economic capital allocation Solvency capital assessment Solvency capital allocation © CGI 2013. All rights reserved No. 94 Use Test (2/2) [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  95. 95. FINAL COPY … such that it is widely used and plays an important role in the course of conducting its regular business, particularly in Risk Management. Overall requirements for internal-model governance High-level internal-model governance Detailed internal-model governance © CGI 2013. All rights reserved No. 95 Governance [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  96. 96. FINAL COPY With regard to the internal model, some statistical quality standards have to be hit. Probability distribution forecast Requirements for probability distribution forecast Based on adequate applicable and relevant actuarial and statistical techniques Consistent with the methods used to calculate technical provisions Based upon current and credible information Based on realistic assumptions © CGI 2013. All rights reserved No. 96 Statistical Quality Standards [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  97. 97. FINAL COPY An undertaking shall regularly review the source and cause of profit and loss for each major business unit. The review of the causes and sources of profits and losses should be geared to the categorisation of risks. This will allow the undertaking to demonstrate that the sources are classified according to the risks the (re)insurance undertaking takes into account and which reflect the risk profile of the undertaking. © CGI 2013. All rights reserved No. 97 Profit/Loss Attribution [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  98. 98. FINAL COPY Validation is a set of tools and processes used by the undertaking to gain confidence over the results, design, workings and other processes within the internal model. These tools and processes are both quantitative as well qualitative. Example of the areas of the internal model that need to be validated must include at least: Data Methods Assumptions Expert judgement Documentation Systems / IT Model governance Use test © CGI 2013. All rights reserved No. 98 Validation [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  99. 99. FINAL COPY If documentation is not kept timely and up to date, the undertaking is not protected from key-person risk, which is one of the main reasons that documentation is held. The documentation of an internal model shall be thorough, sufficiently, detailed and complete to satisfy the criterion that an independant knowledgeable third party could form a sound judgement as to the reliability of the internal model and could understand the reasoning and the underlying design and operational details of the internal model. The documentation must describe the drawbacks and weaknesses of the model, including the circumstances under which the model does not work effectively. © CGI 2013. All rights reserved No. 99 Documentation Standards [Specific information – Pillar I – Internal Model] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  100. 100. FINAL COPY MCR Specific information
  101. 101. FINAL COPY After this section you have specific knowledge about: Overall structure Segmentation of the linear formula Overall MCR calculation Quarterly calculation Linear formula’s components © CGI 2013. All rights reserved No. 101 Overview [Specific information – Pillar I – MCR] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  102. 102. FINAL COPY A Linear Formula i.e. a simple factor-based combination of basic volume measures combined with a cap of 45% and a floor of 25% of the SCR. A Linear Formula i.e. a simple factor-based combination of basic volume measures combined with a cap of 45% and a floor of 25% of the SCR (calculated using either the standard formula or an internal model) to ensure a proper ladder of supervisory intervention. The cap and the floor together are the ‘corridor’. In the final step an absolute floor is applied to the result of the above calculation. If an undertaking has an approved internal model, then the corridor used for calculating its MCR is determined by the internal SCR result. © CGI 2013. All rights reserved No. 102 Overall structure [Specific information – Pillar I – MCR] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  103. 103. FINAL COPY The MCR linear formula is divided between life activities and non-life activities. A second split is made between the technical nature of insurance obligations resulting in four components of the linear formula. Non-life activities practiced on a non-life Non-life activities technically similar to life Life actvities practiced on a life technical basis Life activities – supplementary obligations practiced on a non-life technical basis © CGI 2013. All rights reserved No. 103 Segmentation of the linear formula (1/3) [Specific information – Pillar I – MCR] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  104. 104. FINAL COPY The MCR parameter of non-life activities is calculated as follows: 1.Non-life activities practiced on a non-life technical basis should be calculated as the sum over all lines of business of the higher of the following two results: a fixed percentage (αlob) of net technical provisions, reflecting underwriting risk for long-term business a fixed percentage (βlob) of net written premiums, reflecting underwriting risk for short-term business 2.Non-life ativities technically similar to life a fixed percentage (αi) of net technical provisions, at an appropriate granularity, to reflect long-term risks relating to life business a fixed percentage of net capital-at-risk (α) © CGI 2013. All rights reserved No. 104 Segmentation of the linear formula (2/3) [Specific information – Pillar I – MCR] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  105. 105. FINAL COPY The MCR parameter of life activities is calculated as follows: 3. Life activities practiced on a life technical basis a fixed percentage (αi) of net technical provisions, at an appropriate granularity, to reflect long-term risks relating to life business a fixed percentage of net capital-at-risk (α) 4. Life activities – supplementary obligations practiced on a non-life technical basis a fixed precentage (αlob) of net technical provisions, reflecting underwriting risk for long-term business a fixed percentage (βlob) of net written premiums, reflecting underwriting risk foe short-term business © CGI 2013. All rights reserved No. 105 Segmentation of the linear formula (3/3) [Specific information – Pillar I – MCR] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  106. 106. FINAL COPY The MCR of an undertaking should be calculated as follows: MCR = max {MCRcombined: AMCR} MCRcombined the MCR of the undertaking is i.e. the linear formula result subject to a floor of 25% and a cap of 45% of the SCR. AMCR is the absolute floor of the MCR. The combined MCR of an undertaking is calculated as follows: MCRcombined = {min[max(MCRlinear;0.25 x (SCR));0,45 x (SCR)]} MCRlinear is calculated as the sum of four components, whose calculation is as follows: MCRlinear = MCRa + MCRb + MCRc + MCRd © CGI 2013. All rights reserved No. 106 Overall MCR calculation (1/2) [Specific information – Pillar I – MCR] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  107. 107. FINAL COPY The MCR of an undertaking should be calculated as follows: MCRlinear = MCRa + MCRb + MCRc + MCRd MCRa is the linear formula component for non-life business activities on a non-life technical basis MCRb is the linear formula component for non-life business activities technically similar to life MCRc is the linear formula component for life business activities on a life technical basis MCRd is the linear formula component for life business supplementary non-life activities © CGI 2013. All rights reserved No. 107 Overall MCR calculation (2/2) [Specific information – Pillar I – MCR] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  108. 108. FINAL COPY Own Funds Specific information
  109. 109. FINAL COPY After this section you have specific knowledge about: Basic Own Funds Ancillary Own Funds © CGI 2013. All rights reserved No. 109 Overview [Specific information – Pillar I – Own Funds] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  110. 110. FINAL COPY Raising Own Funds involves issuing capital instruments to investors (including to an entity within a group) who assume risk in return for yield. The following features need to be taken in consideration in addition to the characteristics of permanent availability and subordination: Sufficient duration Free from requirements / incentives to redeem the instrument Absence of mandatory fixed charges Absence of encumbrances Tier 1 Own Funds should display the following key features: Subordination Loss absorbency Sufficient duration Free form requirements or incentives to redeem Free from mandatory fixed charges Absence of encumbrances © CGI 2013. All rights reserved No. 110 Basic Own Funds [Specific information – Pillar I – Own Funds] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  111. 111. FINAL COPY For classification in Tier 2, ancillary Own Fund items must be callable on demand to absorb losses on a going-concern basis, as well as in a winding-up. Ancillary own fund items classified in Tier 2 should be callable own funds of the highest quality and demonstrably absorb unexpected losses to enable an undertaking to continue as a going concern. Hybrid capital instruments and subordinated liabilities, to the extent that they are classified in Tier 1, would also be classified as Tier 2 ancillary own funds. © CGI 2013. All rights reserved No. 111 Ancillary Own Funds [Specific information – Pillar I – Own Funds] CGI Risk Regulatory – Training Solvency II – Professional Knowledge Ancillary fund
  112. 112. FINAL COPY Qualitative Impact Study (QIS) Specific information
  113. 113. FINAL COPY After this section you have specific knowledge about: Lamfalussy Process Conclusions QIS1 Conclusions QIS2 Conclusions QIS3 Conclusions QIS4 Conclusions QIS5 © CGI 2013. All rights reserved No. 113 Overview [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  114. 114. FINAL COPY In order to accelerate the EU legislation process... . Level 1: The European Commission has drafted, discussed and adapted the Directive The European Parliament adopted Directive 2009/138/EG of the European Parliament and the European Council of the 25th November 2009 on the 22nd April 2009. The European Council has finally adopted it on 10th November 2009. Directive was published on the 17th December 2009 in the Official Journal of the European Union and came into force on 6th January 2010. It must be implemented into national law on 31st December 2014. Level 2: Based on the directive technical details in the form of implementing Directives and implementing regulations of the Commission in cooperation with the market participants and the committees are fixed. Level 3: At level 3 work has to be done on implementing provisions and on specifications of the implementing regulations, defined at level 2. CEIOPS gives recommendations on interpretations. Common standards are drafted. A comparison of authorities’ practices takes place. Objective is unified use. © CGI 2013. All rights reserved No. 114 Lamfalussy Process (1/2) [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  115. 115. FINAL COPY … the Lamfalussy process has been applied to the whole financial sector since 2002. Level 4: At level 4 the implementation in the member states is monitored by the European Commission or EFTA. © CGI 2013. All rights reserved No. 115 Lamfalussy Process (2/2) [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  116. 116. FINAL COPY QIS 1 focused on the level of prudence in the current technical provisions, benchmarking them against some predefined confidence levels. This could give a rough indication of the impact of the proposed rules on the required provisions. Due to time constraints and the novelty of the approaches tested, the figures presented by the undertakings are only an indication. The best estimate plus risk margin tends to be less than the provisions on current bases, and that the risk margins tend to be small, for most undertakings and classes of business. This impact study also provides a good insight into the methodoCGIl issues that the requested calculations provide. For life undertakings the calculation of future bonuses was handled very differently by undertakings, in part because of differing national regulations. The stochastic modeling of financial guarantees and the calculation of risk margins gave problems for a significant number of life undertakings, nonethless the problems varied with the country. Life undertakings especially requested more guidance. For non-life the undertakings applied very differing approaches, though the outcomes tended to be similar nonetheless. © CGI 2013. All rights reserved No. 116 Conclusions QIS 1 [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  117. 117. FINAL COPY QIS 2 was about testing a possible methodology so that the results may not accurately represent the underlying risks. Using the QIS 2 methodology and parameters, the technical provisions generally decrease and the capital requirements increase, but the available capital also increases. Overall the ratio of available capital to required capital decreases for most life participants in eleven national markets, but remains above 100%. In another six the ratio increases for most life undertakings. For a number of life undertakings the placeholder SCR is near to or even less than zero. For thirteen national markets all of the majority of the respondents had an MCR which was less than 75% of the placeholder SCR. For national supervisors reported a substantial number of participants with an MCR/SCR ratio of more than 75%. There is some evidence that, using the QIS2 methodology and parameters, small undertakings and mutuals may be affected more than large undertakings and proprietary undertakings. © CGI 2013. All rights reserved No. 117 Conclusions QIS 2 [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  118. 118. FINAL COPY Some risk modules and correlations seem too be prudent (e.g. market risk, non-life underwriting risk, size factor). It is noted that the level of prudence in placeholder and alternative methods were not always equal. Concerns were expressed by undertakings in most countries about the high size of number of the correlations within the market risk component, particularly those between equities and property, and between equities and interest-rate. Several participants noted that the transparancy of the Solvency II process could be improved by disclosing the rationale for the QIS calibration assumptions. It was commented by a number of undertakings that the time period between the release of the QIS2 technical specification and Excel spreadsheet and the deadline was too short. For QIS3, more transparant and user-friendly technical specification, calibration, and spreadsheets were requested. Additional guidance regarding practical approximations would be helpful for smaller undertakings. © CGI 2013. All rights reserved No. 118 Conclusions QIS 2 [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  119. 119. FINAL COPY For QIS3 calculations company accounts were used as a source of inputs, usually complemented by supervisory reporting and actuarial models for valuing technical provisions. The QIS3 spreadsheet provided for a choice to use 2006 or 2005 data. 89% of submissions were based on 2006, the rest on 2005 figures. While many participants considered their data to be fairly accurate and reliable, this view was not fully shared by some supervisors. One supervisor expressed strong doubts about the reliability after having identified significant errors in the participants’ calculations and due to the omission of essential input data. Another supervisor asked participants whether their results would meet the quality requirements of an annual statement of accounts – about half of the participating non-life insurers answered this question in the negative or had reservations regarding parts of their portfolios. In general, accuracy and reliability are considered to be higher for larger insurance firms and ‘QIS veterans’ with dedicated actuarial and financial staff. © CGI 2013. All rights reserved No. 119 Conclusions QIS 3 [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  120. 120. FINAL COPY QIS4 has confirmed the support from industry and supervisors for the modular structure of the standard formula and would welcome more tranparency. QIS4 has confirmed the support from industry and supervisors for the modular structure of the standard formula for the calculation of the capital requirements. This modular structure is composed of different risk modules and sub-modules, for each of which a capital requirement needs to be calculated. These modules and sub-modules are then combined through correlation factors, through which diversification effects are taken into account. As diversification effects are difficult to calculate, the calibration of the correlation factors has been subject to many comments. Undertakings would also welcome more transparency on the calibration of the various (sub-) modules. © CGI 2013. All rights reserved No. 120 Conclusions QIS 4 [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  121. 121. FINAL COPY There is broad support both from industry and supervisors towards the modular approach design in Solvency II. There is broad support both from industry and supervisors towards the modular approach design in Solvency II. Also the aggregation approach has been well received. The system allows, through the use of correlations among and within the different modules, for the recognition of diversification effects to acknowledge that all risks cannot materialize simultaneously. When looking at the correlations tested, and the changes within the correlations made by CEIOPS as compared to QIS4, very few comments were received. No major trends could be identified. In terms of the composition of the SCR, market risk has the highest weight within the standard formula, particularly for life undertakings (67%). For non-life the main driver remains the non-life underwriting risk sub-module (50%). © CGI 2013. All rights reserved No. 121 Conclusions QIS 5 [Specific information – Pillar I – QIS] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  122. 122. FINAL COPY Governance Specific information
  123. 123. FINAL COPY After this section you have specific knowledge about: Effective Governance Transparency Governance Principles Structural Requirements © CGI 2013. All rights reserved No. 123 Overview [Specific information – Pillar II – Governance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  124. 124. FINAL COPY Effective Governance and Transparency [Specific information – Pillar II – Governance] Insurer should have an effective governance and a transparent organizational structure. Insurer should have an „effective governance in order to allow a solid and careful business management.“ It „contains an adequate and transparent organisational structure with clear and segregated responsibilities and an effective system to provide the information.“ Idea and objective: Qualitative self-control of the insurers Source: European Union /DIRECTIVE 2009/138/EC/ © CGI 2013. All rights reserved No. 124 CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  125. 125. FINAL COPY Further the undertaking’s system of governance should: Establish, implement and maintain effective cooperation, internal reporting and communication Be robust with a clear and well-defined organisational structure that has well defined consistent and documented lines within the undertaking Ensure that important members in the organisation posses sufficient professional qualifications, knowledge and experience in the relevant areas of the business Ensure it employs personnel with the skills, knowledge and expertise necessary to discharge properly the responsibilities allocated to them Ensure all personnel are aware of the procedures for the proper discharge of their responsibilities Establish, implement and maintain decision-making procedures Ensure that any performance of multiple tasks by individuals does not and is not likely to prevent the persons concerned from discharging any particular function soundly, honestly and professionally Establish information systems that produce sufficient, reliable, consistent, timely and relevent information concerning all business activities, the commitments assumed and the risks to which the undertaking is exposed Maintain adequate and orderly records of its business and internal organisation. Safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question. © CGI 2013. All rights reserved No. 125 Governance principles [Specific information – Pillar II – Governance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  126. 126. FINAL COPY The SII Directive requires the following structure: Risk management system [Art. 44] Compliance: Internal control [Art. 46] Internal Audit [Art. 47] Actuarial function [Art. 48] * Source: European Union /DIRECTIVE 2009/138/EC/ © CGI 2013. All rights reserved No. 126 Structural Requirements (1/2) [Specific information – Pillar II – Governance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  127. 127. FINAL COPY In more detail risk management and internal control structure requires the following: Risk Management System Underwriting and reserving Asset-liability management Investment Liquidity and concentration risk management Operational risk management Reinsurance and other risk-mitigation techniques Internal Control A system of effective internal control is a critical component of undertaking management. Internal control is not a procedure or policy performed at a certain point in time, but rather a set of continually operating processes involving the administrative, management or supervisory body and all levels of personnel. Source: European Union /DIRECTIVE 2009/138/EC/ © CGI 2013. All rights reserved No. 127 Structural Requirements (2/2) [Specific information – Pillar II – Governance] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  128. 128. FINAL COPY ORSA Specific information
  129. 129. FINAL COPY After this section you have specific knowledge about: Principles Requirements Evaluation Follow-up © CGI 2013. All rights reserved No. 129 Overview [Specific information – Pillar II – ORSA] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  130. 130. FINAL COPY ORSA is an essential component of the governance system (pillar 2) of insurance companies. They shall regularly evaluate their specific risk profile and solvency status. ‘As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its Own Risk and Solvency Assessment.’ Source: European Union /DIRECTIVE 2009/138/EC/ p. 34-35 © CGI 2013. All rights reserved No. 130 Overview [Specific information – Pillar II – ORSA] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  131. 131. FINAL COPY The ORSA process has to ensure that the process meets the requirements of Art. 44 (Risk management) of the EU Directive and is also proportionate to the nature, scale and complexity of its risks. ORSA should be an integral part of risk management and regularly provide the overall solvency needs (starting from risk profile, risk tolerance limits, business strategy) Assets necessary to cover the liabilities including technical provisions Regulatory capital requirements MCR and SCR Internal capital needs the compliance, on a continuous basis, with the capital requirements (as well technical reserves) Assessment of risk profile (if eligible funds cover MCR and SCR on a continuous basis), e.g. difference between actual capital need and SCR the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down ORSA results must be reported to the national regulatory authority. Source: CEIOPS /Own Risk and Solvency Assessment (ORSA) 2008/ p. 7-12; European Union /DIRECTIVE 2009/138/EC/ p. 34-35 © CGI 2013. All rights reserved No. 131 Requirements [Specific information – Pillar II – ORSA] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  132. 132. FINAL COPY The insurer should have regard to the following principles when conducting its ORSA: The ORSA is the responsibility of the insurer and should be regularly reviewed and approved by the insurer’s administrative or management body. The ORSA should encompass all material risks that may have an impact on the insurer’s ability to meet its obligations under insurance contracts. The ORSA should be based on adequate measurement and assessment processes and form an integral part of the management process and decision making framework of the insurer. The ORSA should be forward-looking, taking into account the insurer’s business plans and projections. The ORSA process and outcome should be appropriately evidenced and internally documented as well as independently assessed. Source: CEIOPS /Own Risk and Solvency Assessment (ORSA) 2008/ p. 13 © CGI 2013. All rights reserved No. 132 Principles [Specific information – Pillar II – ORSA] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  133. 133. FINAL COPY Guidance items are specifying the principles. ‘The undertaking’s administrative or management body should approve and regularly review the assumptions, including any management actions, and parameters used in the ORSA and should also sign-off the results as it has the ultimate responsibility for the adequacy of the ORSA.’ ‘The following risks are examples of risks not considered in the standard formula, but which should be considered in the ORSA, if they are material for the undertaking: a) Liquidity risk; b) Reputational risk; c) Strategic risk.’ ‘The ORSA should be proportionate in its sophistication and depth to the nature, scale and complexity of the undertaking’s business.’ ‘The assessment should reflect both the undertaking's desire to fulfil its business objectives and its responsibility to meet liabilities to policyholders. This means that the ORSA should demonstrate that the undertaking holds sufficient financial resources to be able to make planned investments and take on new business (within an appropriate planning horizon).’ ‘Documentation should at a minimum include: a) A description of the areas that are included in the ORSA; b) A description of the process of conducting the ORSA and the responsibilities of key personnel involved in the process […]’ Source: CEIOPS /Own Risk and Solvency Assessment (ORSA) 2008/ p. 14 ff. © CGI 2013. All rights reserved No. 133 Guidance Examples [Specific information – Pillar II – ORSA] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  134. 134. FINAL COPY Disclosure Specific information
  135. 135. FINAL COPY After this section you have specific knowledge about: Report to Supervisor Solvency and Financial Condition Report © CGI 2013. All rights reserved No. 135 Overview [Specific information – Pillar II – Disclosure] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  136. 136. FINAL COPY The Report to Supervisor will contain all the regularly reported information necessary for the purposes of supervision. The Report to Supervisor will contain all the regularly reported information necessary for the purposes of supervision, within a private document sent to the supervisory authority. This section sets out the envisaged structure, frequency and contents of the RTS. The Report to Supervisor is a stand-alone document, which does not require reference to any other document in order to be understood by the supervisor. The information should be specifically aimed at the supervisor, including all elements set out in the SFCR. Consistent with the structure of the SFCR, the structure of the qualitative RTS is another area where the proposals from CEIOPS. © CGI 2013. All rights reserved No. 136 Report to Supervisor (RTS) [Specific information – Pillar III – Disclosure] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  137. 137. FINAL COPY Solvency and Financial Condition Report (1/2) [Specific information – Pillar III – Disclosure] The detail of information to be disclosed should be commensurate with the nature, scale and complexity of the risks inherent in the business of the undertaking concerned. Structure SFCR Business and Performance Business and external environment Performance from underwriting activities Performance from investment activities Operating / other income and expenses Any other disclosures © CGI 2013. All rights reserved No. 137 CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  138. 138. FINAL COPY Solvency and Financial Condition Report (2/2) [Specific information – Pillar III – Disclosure] The report should comprise: System of Governance General governance arrangements Fit and proper Risk management system ORSA Internal control system Internal audit function Actuarial function Outsourcing Risk Profile Regulatory Balance Sheet Capital Management Quantitative reporting templates © CGI 2013. All rights reserved No. 138 CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  139. 139. FINAL COPY Pillar 3 reporting requirements [Specific information – Pillar III – Disclosure] Specifically, the following requirements must be met: Solvency and Financial Condition Report (SFCR) © CGI 2013. All rights reserved Quantitative Reporting Templates (QRT) Report to Supervisors (RSR) Target group Public/ insured Supervisor public/insured (partly) Supervisor Contents • Business and Performance •Governance system • Risk profile • Regulatory Balance Sheet • Capital management •MCR • SCR • Technical Provisions • Assets • Own Funds • Business and Performance • Governance system • Risk profile • Regulatory Balance Sheet • Capital Management Information Quantitative and qualitative Quantitative Quantitative and qualitative Reporting cycle Yearly Quarterly (supervisor)/ yearly (supervisor/insured public) 5 years (complete report) Source: CEIOPS ’Advice for Level 2 Implementing Measures on Solvency II: Supervisory Reporting and Public Disclosure Requirements (former Consultation Paper 58), Oct. 2009
  140. 140. FINAL COPY To which stakeholders are reports to be delivered, in which cycles? How many QRT reports does one have to produces in Solvency II? What drives the complexity of report generation? How can we support the client in report generating? © CGI 2013. All rights reserved No. 140 Excercises [Specific information – Pillar III – Disclosure] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  141. 141. FINAL COPY Insight into core S-II documents Specific information
  142. 142. FINAL COPY • Solvency II Directive Technical Specifications CEIOPS (EIOPA) Consultation Papers Annual Reports Data Reference Model Solvency II Sales Toolkit SAS SOREG Solution Spec © CGI 2013. All rights reserved No. 142 Core Documents [Specific information – Insights into core S-II documents] CGI Risk Regulatory – Training Solvency II – Professional Knowledge
  143. 143. FINAL COPY Solvency II Project at Allianz Specific information

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