financial services         Solvency II       Programme:   Still fit for purpose?Highlights from our General          insur...
ForewordIt’s been a rollercoaster ride for all those involved in tryingto implement Solvency II, but perhaps some of the g...
Contents                            Executive summary                                    4                            The ...
4 | sOlvency ii PrOGraMMe: still fit for purpose?                                                       Executive summary ...
sOlvency ii PrOGraMMe: still fit for purpose? | 5Polarised views on the merits ofcapital allocation                       ...
6 | SoLvENCy II PRoGRAMME: Still fit for purpose?                                                          The Strategic v...
SolvEnCy	II	PRoGRAMME:	Still	fit	for	purpose? | 7KPMG ViewWe believe that in order for the internal    •	 	               ...
8 | sOlvency ii PrOGraMMe: still fit for purpose?                                                        The Operational v...
SoLvEnCy II PRoGRAMME: Still fit for purpose? | 9At the more granular level the number of actuaries employed hasnever been...
10 | sOlvency ii PrOGraMMe: still fit for purpose?                                                            The Finance ...
sOlvency ii PrOGraMMe: still fit for purpose? | 11    Business planning                                            KPMG Vi...
12 | sOlvency ii PrOGraMMe: still fit for purpose?                                                           The Actuarial...
sOlvency ii PrOGraMMe: still fit for purpose? | 13    Figure 9 – Has the 1-year view requirement changed business manageme...
14 | sOlvency ii PrOGraMMe: still fit for purpose?                                                       3. Alignment betw...
sOlvency ii PrOGraMMe: still fit for purpose? | 15Providing an opinion on U/W guidelines                         • Early d...
16 | sOlvency ii PrOGraMMe: still fit for purpose?                                                       Beyond Solvency I...
sOlvency ii PrOGraMMe: still fit for purpose? | 17examples of where we believe firms          Optimising the Three Lines  ...
18 | sOlvency ii PrOGraMMe: still fit for purpose?                                                        Figure 15 – Evol...
sOlvency ii PrOGraMMe: still fit for purpose? | 19                           Conclusions                           Our sur...
Contact usFor further information regarding any of the topics discussed please contact any one of the authors.Roger Jackso...
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2012 05 03 Kpmg Solvency Ii Still Fit For Purpose

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2012 05 03 Kpmg Solvency Ii Still Fit For Purpose

  1. 1. financial services Solvency II Programme: Still fit for purpose?Highlights from our General insurance survey April 2012 kpmg.co.uk/solvencyii
  2. 2. ForewordIt’s been a rollercoaster ride for all those involved in tryingto implement Solvency II, but perhaps some of the greatestuncertainties and challenges have been, and remain tobe, around the Solvency II balance sheet, internal modeland actuarial function. Hence, we felt the time was right toestablish how firms are currently addressing some of theseissues that are still prevalent.Twenty companies participated in this survey and I wouldlike to thank them for taking the time to respond. I hopethat the results and the KPMG views expressed will helpyou address some of the key challenges as you worktowards Solvency II compliance and extracting valuefrom the process.Roger JacksonPartner, Solvency II, Risk Consulting Lead© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  3. 3. Contents Executive summary 4 The Strategic view 6 The Operational view 8 The Finance view 10 The Actuarial view 12 Beyond Solvency II 16 Conclusions 19© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  4. 4. 4 | sOlvency ii PrOGraMMe: still fit for purpose? Executive summary for most firms solvency ii projects Until this happens, business decisions are entering their final stage, will continue to be based on current focussing on improving data quality reporting bases, rather than the solvency and processes. However, our general ii basis. Hence, if any real benefit is to insurance survey provides a wake- be gained from the new solvency ii up call that technical issues remain basis, and the internal model to which and that these issues urgently need it is aligned, a timely and transparent to be resolved if firms want to see: conversion from one to the other will be Boards that are truly engaged; finance necessary. This conversion will also need functions that are able to manage the to consider implications on business business incorporating solvency ii planning, ensuring alignment between accounting; and actuarial functions the planning process and capital that are perceived as vital to the sound reporting requirements. management of insurance operations. Little consistency in Governance The key messages emerging from structures and co-ordination of the survey are: the Actuarial Function Demonstrating a level playing field With no clear regulatory guidance there will be key to engaging Boards to is little consistency in the Governance truly use internal models in support structures that firms have implemented of strategic business decisions around the actuarial function. solvency ii has significantly increased The two most prominent Governance the complexity of technical modelling models reflect a trade-off between ensuring within firms. However, these models alignment in the view of risk within the continue to rely on expert judgment actuarial function (all the actuarial function and assumptions for which statistical under one roof) and minimising possible validation is unlikely to ever provide the conflicts of interest (capital actuaries’ certainty required by some stakeholders report to a separate Board member). – for instance tail correlations that are Our view is that there are significant intended to reflect how multiple parts benefits to aligning the main actuarial of the business will perform following functions under one coordinated an adverse event. function holder, whilst providing a in the absence of credible statistics, we strengthened 3 lines-of-defence believe market wide analysis that is able validation framework that is transparent to demonstrate a level playing field for and provides sufficient challenge. key assumptions is required if Boards Real concern regarding the calculation are truly to engage and use internal of the 1-year view and the risk margin models for business decisions. Our survey suggests wide-spread Lack of awareness in Finance around concern regarding the calculation of the technical issues 1-year view as well as the risk margin. The technical details within the solvency Whilst more research is required, ii Balance sheet continue to largely be communication with the finance understood within the actuarial rather function will be critical over the coming than finance functions. it is critical that months if actuaries are to retain a strong finance functions gain awareness and presence in managing the business.Stefan Claus an understanding of the intricacies of Transparency, and removing complexityDirector, General Insurance the new accounting basis if a firm is to where it cannot be shown to provideCapital Management realise any benefit. additional insight, will be important to ensure success.© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  5. 5. sOlvency ii PrOGraMMe: still fit for purpose? | 5Polarised views on the merits ofcapital allocation Our survey highlights numerous Now is the time to issues not all of which may beOur survey highlighted polarised relevant to your firm. However, refocus, reprioritiseviews on the merits of capital allocation with at least one further year to or reaffirm yourand hence whether it is an area to implementation, and with thefocus resource. release of the FSA’s new IMAP Solvency II Programme approach, now is the time to takeOur view is that provided the process stock and reflect whether the activities!for allocation is aligned to the Board’s priorities and the focus of yourrisk appetite and a sound, consistent Solvency II programme continuemethodology, then capital allocation to be appropriate.Tackling difficultcan facilitate behaviours that are technical issues now will assistbeneficial to the business. Board buy-in and enhance credibilityHowever, this can be very difficult to further down the road.achieve in practice as it requires theright business culture together witha pragmatic view towards how toallocate capital. © 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of , the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  6. 6. 6 | SoLvENCy II PRoGRAMME: Still fit for purpose? The Strategic view As Solvency II implementation incorporated within a particular plan…more analysis, moves into its final phase, Boards (the ‘Risk view’). This usually involvesincluding market are increasingly focusing on the assessing the business plan against business implications and the Board’s risk appetite, where thisstudies are required to appreciating the important role has been articulated in terms of a risk of the internal model in assessing distribution from an earnings and/orensure Management business plan scenarios and capital perspective. This informationBoards gain comfort determining strategic direction. can then be used to inform the decision around the optimal business planover the results of The results of our survey show that and hence the strategic direction of the firms are expecting to increasingly firm. Indeed, Figure 1 shows that mosttheir internal model use their internal models as part of firms in our survey are seeing the capital the business planning process, see model as a key driver in the planning Figure 1 below, by typically providing process and therefore strategy. a more explicit view on the risks Figure 1 – Internal Model influence over the Business Plan 100% Percentage of Companies 80% 60% 6% 40% 20% – Now Post Solvency II Not at all Reasonable Consideration Minor Key Driver in Planning Process Source: KPMG LLP (UK) 2012 Before internal models can accounting basis is necessary. However, be properly incorporated into the this is contrary to the view of some business planning process several finance functions (the ‘Finance view’), implementation issues will need to be who are struggling to implement the addressed. The business plan will be Solvency II accounting basis and view on a GAAP or IFRS basis reflecting the this new basis as purely a regulatory investor view, in order to get to the ‘Risk exercise in a similar way to the current view’ a conversion to the Solvency II FSA Returns. Paul Merrey Solvency II Strategy© 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity.
  7. 7. SolvEnCy II PRoGRAMME: Still fit for purpose? | 7KPMG ViewWe believe that in order for the internal • Develop a clearly articulated Risk model to inform the strategic view, Strategy that links corporate Boards of Non-Life firms will need to: strategy, risk appetite and • nsure they are comfortable with E performance management, thereby the results of their internal model for providing guidance to Divisions, the purposes of informing them on defining the boundaries within risk appetite. More analysis, including which they can take on risk and market studies, may be required as enhancing the understanding and a result. communication of risk and capital • tart viewing Solvency II accounting S management throughout Divisions as a basis for risk management in and with external stakeholders. addition to a regulatory exercise. To do so, Boards will need to be able to quickly switch between the Finance view, through the lens of GAAP/IFRS accounting, and the Risk view, via Solvency II accounting. This is likely to be more challenging for Non- Life firms, as Life firms have had to consider the twin bases of GAAP/IFRS and Embedded value for several years now.© 2012 KPMG LLP a UK ,limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm ofthe KPMG network ofindependent memberfirms affiliated with KPMGInternational Cooperative, a Swiss entity.
  8. 8. 8 | sOlvency ii PrOGraMMe: still fit for purpose? The Operational view…differing views increased pressure to embed internal models within the business has resulted This eases co-ordination & consistency and can help with establishing a singleremain as to the in many firms seeking to align Pricing, version of risk. However, according to reserving and capital Modelling our survey, a significant number of firmsoptimum governance actuaries under one executive Officer are uncomfortable at the increasedstructure around the (see figure 2). risk arising from conflicts of interest, preferring instead to ensure that capitalActuarial Function actuaries are more closely aligned with the risk function. Figure 2 – reporting structures for Reserving, Pricing and Capital Modelling actuaries 64% 18% 18% CEO/CFO/CRO/Chief Actuary CFO/CEO CRO/COO CFO CRO/CUO CFO/CRO Reserving Pricing Capital Reserving Pricing Capital Reserving Pricing Capital source: KPMG llP (UK) 2012 KPMG View…the perfect There are significant benefits to aligning avoiding conflicts of interest can beopportunity to the main actuarial functions under one achieved by:off-shore many co-ordinated function holder. Particularly • Ensuring actuarial roles within the as the best in class insurers use pricing actuarial function are confined to theSolvency II calculation models not only to inform management assessment of risk rather than risk on expected profitability of the in-forceand reporting aspects portfolio, but also to collate exposure taking (for instance, ensuring Pricing actuaries restrict their activities to that is used in capital-setting. developing pricing tools and monitoring exposure); and • Providing a validation framework that is transparent and ensures sufficient challenge.Mark WinlowPartner, UK Head of General Insurance© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  9. 9. SoLvEnCy II PRoGRAMME: Still fit for purpose? | 9At the more granular level the number of actuaries employed hasnever been higher, and our survey suggests that this is unlikelyto fall (see Figure 3). Furthermore, additional and more technicalreporting mean that our respondents forecast that actuarialresource will continue to be required at current levels for theforeseeable future. Indeed we are seeing an increase in actuarialsupport within finance functions that reflects the increasedtechnical nature of the Solvency II balance sheet.Figure 3 – Resource Adjustmentfollowing Solveny II Implementation 21% 11% 68% Maintain Reduce Headcount Increase HeadcountSource: KPMG LLP (UK) 2012KPMG ViewFor those firms who’s management donot perceive any benefit from SolvencyII other than achieving regulatorycapital, we expect strong challenge ofthe actuarial cost base. In fact, manyBoards may feel the current rigouraround establishing robust processesand documenting these processesmay provide the perfect opportunityto off-shore many Solvency IIcalculations and reportingaspects, with the aim to loweroverall actuarial expense whilstmaintaining the equivalentlevel of resource and quality. © 2012 KPMG LLP a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of , the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity.
  10. 10. 10 | sOlvency ii PrOGraMMe: still fit for purpose? The Finance view…black box or overly Financial reporting in addition, finance functions will expect credible explanations (forcomplex models based The current focus of the finance instance reflecting changes in the function is in the development of claims or economic environment) onsolely on theoretical stable processes and controls for movements over time – black box or financial reporting under solvency ii.statistics can only Typically, firms are identifying overly complex models based solely on theoretical statistics can only harm theharm the credibility necessary data requirements and credibility of the solvency ii information leveraging newly built models to with the finance department and seniorof the Solvency II supply the additional requirements management in the insurer. such as risk margins.information One of the main challenges we are seeing in the market relates to analysing KPMG View movements in own funds and the Our survey highlighted considerable scr in sufficient detail to provide concern in the industry on the decision-useful information to both calculation of certain key solvency ii the management of the company and to Balance sheet items – such as risk external investors. Ultimately the cfO margins (see figure 4). We believe early is responsible for this analysis, both in communication between the actuarial terms of external reporting through the and finance teams on underlying issues publicly-available solvency ii reports and concerns is vital to avoid conflict and through management information, and tension between these and will have a lead role in explaining departments later on. and reconciling this information. Figure 4 – Approach to calculating the Risk Margin (Future SCRs) Percentage of companies 100% 80% 60% 40% 20% – full calculation individual risks Using a Other or sub risks proportional approach (say or reserves) source: KPMG llP (UK) 2012Danny ClarkPartner, Solvency II Pillar 3 Lead© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  11. 11. sOlvency ii PrOGraMMe: still fit for purpose? | 11 Business planning KPMG View …one business plan Business planning in most firms Where insurers have a business plan that is not aligned to the model best estimate, for business steering relies on a top-down view driven by the Board as well as a bottom-up they need to consider the implications and target-setting and now to avoid adverse surprises and assessment supported by actuaries. Whilst lloyd’s requires its syndicates increased complexity later on. a different business to align these two views, there is To maintain this stance insurers will plan underlying no such requirement elsewhere. need to ensure their business planning systems can cater for a set of data to the internal model Outside of lloyd’s we see a number derive targets, whilst a slightly different of firms with one business plan for data set will be used to derive technical business steering and target-setting provisions on a solvency ii basis. and a different business plan underlying their internal model. Where business plans and actuarial estimates are not aligned we believe The most common differences arise there will be regulatory pressure to where firms have excluded extreme provide transparency as to how firms events from their business plan used have bridged this gap – ensuring that for steering, but have included these explanations for the bridge are credible events within their internal model, and monitored regularly over the and hence true “best estimate” . course of the year. Figure 5 – Best Estimate of Profitability under the Model Adjusted to Fit the Business Plan 70% 60%Percentage of companies 50% 40% 30% 20% 10% – scaling of adjusting of scaling of Other attritional loss Premium rates reinsurance estimates recoveries source: KPMG llP (UK) 2012 © 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of , the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  12. 12. 12 | sOlvency ii PrOGraMMe: still fit for purpose? The Actuarial view 1.The 1-Year View & Risk Margin Whether this will form part of a wider in Financial Statements trend remains to be seen. firms that stated they had no concerns Our survey suggests continued in the calculation of the 1-year view did concerns on the modelling of the 1-year so on the basis that the results were not view and risk margins. The current used for any business decisions. in all trend for most of our participants was cases those firms admitted they would a move towards more simplified and be concerned if these results were to be transparent methodologies. However, used in any meaningful way. in all cases, two insurers stated that in the medium the 1-year view has not had any impact term they intend to adopt more complex on the way any aspects of the general approaches as they and their Board insurance business is managed. become familiar with the concepts. Figure 6 – Which method do you use to establish the 1-year view of risk capital requirements? Percentage of companies 50% 40% 30% 20% 10% – emergence Mertz- actuary-in- Other pattern Wutherich the-Box approach source: KPMG llP (UK) 2012 Figure 7 – Have results of the 1-year view been discussed with business? Percentage of companies 100% 80% 60% 40% 20% – no yes source: KPMG llP (UK) 2012 Figure 8 – Concerns on the calculation of 1-year view? Percentage of companies 100% 80% 60% 40% 20% –Gavin Dunkerley no concerns yesSenior Advisor, General Insurance source: KPMG llP (UK) 2012© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  13. 13. sOlvency ii PrOGraMMe: still fit for purpose? | 13 Figure 9 – Has the 1-year view requirement changed business management? KPMG View The range of return periods and thePercentage of companies 100% 80% fact that several firms are still deciding on return periods indicates either a 60% considerable difference in risk appetites 40% or that firms are still developing 20% their appetite for ruin. – no yes We believe that considerable effort source: KPMG llP (UK) 2012 is still required across the industry to ensure that capital allocation methods and assumptions coherently link to KPMG View 2. Capital allocations a firm’s risk appetite (for instance complex models should only be used and risk appetite reflecting the Board’s concerns if they are sufficiently transparent, around earnings rather than capital). sufficiently well understood and can be Our survey indicates a significant as internal models are embedded shown to better reflect the underlying range of return periods and methods for and their uses expanded we would risks. some approaches to the 1-year allocating capital. less than a quarter expect to see increasing sophistication view frequently fail all three criteria; of those surveyed were basing their of methodologies and more granular hence it is not surprising that some allocation on the regulatory minimum. allocation within a framework of in the market are reappraising their capital adequacy that includes target methods. We believe this is a positive and perhaps unallocated surplus. step, as only by engaging and ensuring other departments buy-in to the changes will actuaries continue to have a strong influence on an insurer’s operations. Figure 10 – Return Period used for Capital Allocation when reporting to the Board 32% 47% 1 in 200 21% combination Other source: KPMG llP (UK) 2012 Figure 11 – Calculating the Diversified Risk Capital Components Percentage of companies 100% 80% 60% 40% 20% – no concerns standalone Tvar co-var Other risk components source: KPMG llP (UK) 2012 © 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of , the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  14. 14. 14 | sOlvency ii PrOGraMMe: still fit for purpose? 3. Alignment between Pricing KPMG View and Capital Modelling in the short term we believe: firms will need to demonstrate that • More firms will provide regular the internal model changes as their monitoring to the Board on the rate risk profile changes. current best adequacy – providing monthly comparison practice amongst the largest firms between plan loss ratios and the estimated would suggest this is considered loss ratio of the current portfolio based on an annual basis. on the pricing models; and However, as our survey shows, a • Those firms already reporting these number of firms are also reporting statistics will look to increase whether the new business written the coverage of lines of business is consistent with their plan figures reported, and build more transparent – thereby highlighting inconsistencies feedback loops (setting out in detail as between plan and the actual portfolio. to what is required – impact on pricing This is typically reported on a monthly and/ or business planning). or quarterly basis. in the medium term we expect firms to not only use differences in expected loss ratios, but also to use the exposure information from the actuarial pricing teams to inform and update the capital model. Figure 12 – Consistency between Underlying Pricing Models and Assumptions in Risk Capital Model 10% 37% no check 37% explicit: Pricing Models determine the loss Parameters explicit: regular checks on a Portfolio Basis 16% Other source: KPMG llP (UK) 2012 4. Providing opinions a significant number of actuaries are underwriting guidelines. Those actuaries awaiting institute Guidance before that feel they are well progressed in finalising their approach on what is providing an opinion on underwriting required to satisfy the solvency ii guidelines appear to base this more requirements on actuarial opinions; on good practice in rate adequacy with some actuaries expressing assessments rather than on the scepticism over whether it is the underwriting guidelines themselves. actuarial function’s role to opine on© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  15. 15. sOlvency ii PrOGraMMe: still fit for purpose? | 15Providing an opinion on U/W guidelines • Early days • Awaiting further guidance from Professional bodies 37.5% of • Not yet finalised (progress on thinking not shared respondents in the survey) • Limited additional effort expected: – involvement in Business Planning process suffices Next 25% of – Provide an option on the sensitivity of products respondents on the risk capital results • Rate adequacy reporting: Actual vs Technical – Provide an opinion whether plan is in line with risk appetite Next 37.5% of – Provide opinion on risks to plan, and achievability of plan respondents – Provide an opinion on U/W models and guidelinesProviding an opinion on Reinsurance arrangements • Early days • Awaiting further guidance from Professional bodies 25% of • Not yet finalised (progress on thinking not shared respondents in the survey) • Limited additional effort expected: – involvement in Business Planning process suffices Next 25% of – Modelling of reinsurance in the risk capital model respondents suffices (with sensitivity testing) • Explicit opinion on the appropriateness of the reinsurance programme in place, having consideration of the firm’s risk appetite, reporting findings to the r/i committee Next 50% of respondents • Provide opinion on gaps and efficacy of reinsurance • Financial output for each reinsurance contract: RoRAC, eva, etc… (no one is planning to asses the reinsurance wordings)KPMG ViewWith continued uncertainty as to what Those that are continuing to developis required we expect many actuaries their approach and interpretationto wait until the second half of 2012 for will need to consider carefully thethe expected consultation to provide key stakeholders of the opinionsmore details on the requirements of (and whether business decisions willthe actuarial function. be impacted), how the opinions are worded, who they can place reliance on and who will ultimately provide sign-off. © 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of , the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  16. 16. 16 | sOlvency ii PrOGraMMe: still fit for purpose? Beyond Solvency II Managing Risk, Finance ceO in a Head Office type role. and Actuarial – bringing This function picked up the financial processes namely statutory reporting, them together financial control, and financial management. a dedicated second line firms need to consider how they will risk function did not really exist and most evolve their functions to deliver real of what is now known as second line business value and efficiency whilst activities were carried out by finance. satisfying regulatory and market in recent years firms have adopted requirements. Traditional risk, actuarial different approaches to managing risk and finance structures included a with various iterations around the finance function reporting to the 3 lines of Defence Model in place. Figure 13 – Evolving functional structures Traditional Now Future Two Strong Independent Centres with Head Office Business Unit Developing Structures actuarial competencies embedded CFO CFO and CRO Risk Actuarial Management Finance Risk Actuarial Risk Management Management Finance Risk Taking Multi disciplinary teams Finance Actuarial Actuarial CEO CEO CEO CFO FD COO AD HoR AFH CRO CFO CRO Controls based Evolving risk based approach Value creation versus controls regulatory changes such as in order to facilitate this, firms are the Walker review have seen considering how best to become more the Head of risk given the same integrated and share specialised skills level of authority as the Heads regardless of traditional function. These of finance and actuarial. resources would then be aligned against business tasks rather than in functional Moving forward under solvency ii, silos. in the future, organisational the chief risk Officer and actuarial design will need to bring functions function Holder will have increased closer together and encourage more responsibilities as they will both aligned objectives to achieve cross- have involvement in new areas functional outcomes. e.g. Orsa, internal Model and the Use Test. as a result we will in today’s cost conscious insuranceRob Curtis see the roles of the crO and market, these outcomes also needDirector, Risk Management the chief actuary increasing in to be delivered at an optimal expense& Governance proportion to the cfO. to the business.© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  17. 17. sOlvency ii PrOGraMMe: still fit for purpose? | 17examples of where we believe firms Optimising the Three Lines To transform the second line, a numberwill benefit from further collaboration of changes should be considered within of Defence modelbetween risk, actuarial and the business:finance are: First Line clearly firms need to develop their• Capital Management – work will link operating models to maximise • Greater devolution of responsibilities around the capital structure of firms, value for shareholders. into the front line increasing which risk appetite / standards and the will further increase accountability in order to evolve to meet the business overall cost of capital to the business needs we feel firms should be • Increased responsibility and• Performance Management – there developing cross-functional expertise involvement in: will be strong links around operational which will make firms more flexible – Quality assurance information, risk parameters, financial and adaptable. furthermore the three measures and an Mi framework to lines of defence model should evolve – Development of policies monitor the business closely to devolve responsibility further to the – Development of Management 1st line, thereby allowing the 2nd line information• ORSA – the areas of reporting, to take on a more “value-adding” role Second Line development of economic capital within the business. for example: and regulatory numbers and linking • Position as a “centre of excellence” this all into risk management will be 1st Line: The Actuarial Function to the business a key strategy priority for business supporting the business in evaluating risk • Build multi-functional teams providing under solvency ii. 2nd Line: A strong quantitative / insight and value add to group and qualitative risk function that reviews and front line activities provides challenge on the internal model • Provide insightful challenge and 3rd Line: Internal audit providing oversight coordinating the activities of the first and challenge on governance process line e.g. Group Orsa reporting Figure 14 – The “3 Lines of Defence” framework Risk and control First line: Day-to-day • An established model business operations control environment • Assessment of model risk Modelling team • Validation processes and tools Board and Audit Committee Risk and control Second line: Oversight • Validation policy and procedure setting risk function, internal model • Guidance and direction committee, risk committee • Monitoring • Technical review • Validation report Risk and control Third line: Independent • Challenge of model and validation assurance • Process and controls review internal audit © 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of , the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  18. 18. 18 | sOlvency ii PrOGraMMe: still fit for purpose? Figure 15 – Evolving the 2nd line as a centre of excellence Current state Added value Operational role strategic role COE risk Performance co-ordination reporting assurance risk Optimisation & Management • Monitoring, • Accounting • Involvement in • Effectiveness • Cultural reporting & actuarial the Orsa & alignment challenge and review • Internal/ • Internal model of the risk • Building of limits external profile to the measures & • Changing • Aggregation reporting business incentives organisational of information oversight structure • Risk selection • Efficient use • Planning and • New markets, of capital • Emerging forecasting markets & products • Investor focus report competition • Pricing on KPis production implications • Ratings implications • Managing risk appetite • Emerging risks Future state While there will inevitably be challenges for firms to achieve this level of efficiency and performance, we believe the longer term business benefits, whilst ensuring regulatory compliance, will outweigh these.© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  19. 19. sOlvency ii PrOGraMMe: still fit for purpose? | 19 Conclusions Our survey highlights open questions and areas where market consensus is still developing. as solvency ii evolves we expect to see greater alignment and consistency in many areas such as governance around the risk and actuarial functions, the use of internal models within business planning and finance functions, as well as in the more technical areas such as capital allocation and the derivation of the 1-year view. not all issues will need addressing prior to solvency ii implementation. With many firms suffering from solvency ii fatigue, setting out a clear road map of issues and milestones to address these will help to ensure resources and priorities reflect the right balance between current commercial concerns and ongoing regulatory compliance.© 2012 KPMG llP a UK limited liability partnership, is a subsidiary of KPMG europe llP and a member firm of ,the KPMG network of independent member firms affiliated with KPMG international cooperative, a swiss entity.
  20. 20. Contact usFor further information regarding any of the topics discussed please contact any one of the authors.Roger Jackson Stefan Claus Paul MerreyPartner, Solvency II, Director, General Insurance Director, Solvency II StrategyRisk Consulting Lead Capital Management Tel: 020 7694 5276Tel: 020 7694 5484 Tel: 020 7694 1602 paul.merrey@kpmg.co.ukroger.jackson@kpmg.co.uk stefan.claus@kpmg.co.ukMark Winlow Danny Clark Gavin DunkerleyPartner, UK Head Partner, Solvency II Senior Advisor,of General Insurance Pillar 3 Lead General InsuranceTel: 020 7694 2909 Tel: 020 7311 5684 Tel: 020 7311 1547mark.winlow@kpmg.co.uk danny.clark@kpmg.co.uk gavin.dunkerley@kpmg.co.ukRob CurtisDirector, Risk Management& GovernanceTel: 020 7694 8818rob.curtis@kpmg.co.uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.www kpmg.co.uk RR Donnelley | RRD 268973 | April 2012

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