Alok Tiwari-Aptivaa
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Transcript of Alok Tiwari-Aptivaa
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Solvency II
Alok TiwariCEOAptivaa Consulting22nd February 2008
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Contents
1. Overview of Solvency II
2. Comparsion of Solvency Regime
3. Solvency Regime in India
4. Pillar 1 - Solvency Capital
5. Pillar 2 - Overview
6. Impact of Solvency II
7. Q&A
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Solvency II Introduction
Solvency II is the proposed new EU legislation which will governThe capital requirements of insurance companies.
European Commission drafts the European legislation, with adviceprovided by CEIOPS who compile detailed analysis according to a
framework of calls for advice prepared by the EuropeanCommission.
European Commission will then publish a Solvency II FrameworkDirective to be approved by the European Parliament and
European Council. This will set out the broad principles andoutcomes to be achieved under Solvency II.
Solvency II is a radical move from the current Solvency Iregulatory approach, a simple factor-based insurance solvencyregime that has been in-force since the early 1970s.
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Solvency II Key Features
A principles-based approach
Creates harmonisation across the EU
Balance between protection of policyholders and encouraging
efficient operations of companies
Drives use of integrated internal models
Retains proportionality for small & medium sized companies
Treats groups as economic entities
An economic approach to determining solvency capital
for European Insurers
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Solvency II Some of the Key Stakeholders
European
Parliament
Council
of Ministers
EIOPC
CEIOPS
European Commission
(DG internal market)
CFO ForumCRO Forum
CEA
AISAM / ACME
ICISA
Other stakeholders
National
Insurance
Associations
Insurance
Companies
Groupe
Consultatif
Source: CEA
Government, regulation Insurance industry
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Solvency II The Three Pillars
Pillar 1
Quantitative requirements
Calculation of technical
provisions
"Prudent person"
approach to investments
Solvency capitalcalculation:
- SCR and MCR
- internal model vs.
standard approach
Pillar 2
Qualitative requirements
and supervision
Enhanced internal
governance, controls, risk
management and
solvency self-assessment
Strengthened externalsupervisory review,
harmonised supervisory
standards and practices
Pillar 3
Prudential reporting and
public disclosure
Disclosure to supervisors
Public disclosure of the
financial condition and
solvency report
Group Supervision
Groups are recognised as economic entities
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The Solvency II Timeline
10 July 2007
SII Directive
proposal ispublished
2007 2008 2009 2010 2011 2012
Directive development(Commission)
Directive adoption(Council, EU Parliament)
Implementation(member states)
Government, regulation
2H 2011
UK FSA
rulesfinal
1,2,3: Stages of the Lamfalussy processBased on CEIOPS guidelines, 27 Sept 2007
2009 / 2010
Adoption
expected1
31 Oct 2012
Solvency II
operational
QIS 1 QIS 2 QIS 3
Nov 2007Results
published
Implementation
Insurance Industry activity
QIS 4
March toNov 2008
2010
Implementing
Measures2, andNational
Supervisor
Standards3
finalised
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Comparison of Solvency Regimes
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Comparison of Solvency Regimes: Solvency II vs Basel II
Concentrates primarily on
assets
Applies economic principles
to both assets and liabilities
Scope
Standard or internal
approach (full / partial)
Standard formula or
internal model (full / partial)
Approach
Credit, market (as per BI),operational
Underwriting, counterpartydefault, market & ALM,
operational
Main riskscovered
Reduce systemic risk in the
banking system
Protect policyholders against
bankruptcy
Objective
Mainly included in generalcalibrationExplicitly allowedDiversification
Separate models for credit,
market and operational risks
Integrated approachRisk models
Mixture of principle-basedand rule-basedMostly principle-basedMethod
Basel IISolvency II
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Solvency Guidelines - India
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Solvency Guidelines - India
Simple Factor Based Approach
Life Insurance
Linked business 2% of Reserve + 0.2% of Sum at Risk
Non Linked business 4% of Reserve + 0.3% of Sum at Risk
Health Insurance 2% of Reserve
General Insurance
Max (% of Premiums , % of Claims) Limited benefits of Reinsurance
* Indian insurers have to maintain a Solvency Margin of 150%.
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Pillar 1 - Solvency Capital
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Framework for Pillar 1
MCR
Assets Liabilities & Capital
free assets
market
valuemargin
best
estimate
Technical provision
Solvency Capital Requirement
(SCR)
Non-
hedgeableHedgeable
market
consist-
ent
valuation
all assets at
market value
Assets covering
technical provision
Assets
available
for SCR
excess capital
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Calculating the SCR - The Standard Formula
SCDefault SCMarket SCHealth SCNon Life SCLife
BSCR SCROp risk
SCR
The SCR is composed of:
Basic SCR (Market, Default and Underwriting)
Solvency Capital charge for Operational Risk
Solvency capital is assessed separately for each risk
Explicit allowance is made for diversification benefits
To promotes better risk management
To facilitate the transition to Partial Internal Models
: adjustment for risk mitigating effects of future profit sharing
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Pillar 2 - Overview
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Pillar 2 Qualitative Requirements and Supervision
Objective Entrench good governance to ensure policyholder protection
Key components
System of internal governance
Establish a robust system to demonstrate:
Sound and prudent management
Risk and capital mgt is part of strategic decision-making
Complete an Own Risk and Solvency Assessment (ORSA)
Inform the regulators about the results
Supervisory review process
To ensure compliance with the Directive
Capital add-ons for material deficiencies
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Risk Management Process:
Identification, Measurement,
Monitoring and Control
Pillar 2 Development of Own Risk and Solvency Assessment
1
2
3
4
5
6
7
8
9
10
Senior management responsible to oversee implementation, setting
policies, procedures
Identify & assess risks in activities,
processes, systems, people
Develop policies and measure risk
Monitor exposure and loss events
Ensure companies have
effective systems in place
Public disclosure of risk
exposure & quality of risk
management
Role of Supervisors
Disclosure
Regular evaluation of
strategies, policies,
procedures & practices
Board sets strategy and framework plus oversight
Information flows provide effective monitoring
Implement cost effective
solutions to mitigate risks
Developing an Appropriate RiskManagement Environment
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Impact of Solvency II
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Impact of Solvency II Current Readiness
Current Approach to Risk Management
comments0% 20% 40% 60% 80% 100%
Rest
Eastern
Germany
Italy
France
UK
Do not manage / Solvency I Internally discussing improved approach
Implementing or improving framework Already implemented a risk based framework
Other
28
38
14
116
198
48
Responses
Source: CEA Impact Assessment survey, March 2007
the new framework will turn the spotlight on the accurate
identification, measurement and management of risk. The new
rules will spur insurers to raise their game in this area.C McCreevy, European Commissioner
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Impact of Solvency II Expected Approach
Expected Method for Calculating SCR
0% 20% 40% 60% 80% 100%
Small
Small - med
Medium
Med - large
Large
Standard approach Partial model Internal model
Source: CEA Impact Assessment survey, March 2007
15> 2,500 million (life)
> 1,500 million (non-life)
Large:
24< 50 millionSmall:
% of respondentsNet premium in force
Definition of company size
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Solvency II Expected Impact on Insurers (1)
Improvement in risk management practices Need to integrate these practices into the management process
Possible change in organisational structure
Greater volatility in balance sheet
Possible move to less volatile asset classes
Greater diversification of assets and use of risk mitigants
Increased capital requirements for higher risks
More innovative risk management
Industry consolidation
Changes to product design
Revision of product diversification
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Solvency II Expected Impact on Insurers (2)
Increased focus on internal governance including Identification, measurement ,
monitoring and control.
Introduction of Operational Risk in the framework for Solvency II
4. Risk MitigationProgrammes
Integrated Reporting ( SA, KRI & LDM),
New Product & Activity ( including Outsourcing)
BCP/DRP
Risk Causes Process People Systems External E
Fe
99.99%Confidence level
CATASTROPHICLOSSEffect Severity
EXPECTEDLOSS UNEXPECTEDLOSS
RISK
Risk Governance Operational Risk Definition/ Governance/ Policies1. Self Assessments(SA)
Strategic Diagnostic Study
Risk & Control Self Assessment (RCSA )
LossProvisioning
Gross Income Allocation to calculatecapital under SA
Loss Data Capture
Loss Data Analysis
3. Loss DataManagement (LDM)
RskMangmen 2. Key Risk Indicator Key Risk Indicator (KRI)
AMA Capital calculation using LDA,SBA & HMA
Internal Control Supervision
Risk Measurement
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Solvency II Expected Impact on Insurers (3)
Temporary resourcing and cost issues Shortage of resources and increased implementation costs
Should be mitigated by principle of proportionality
Alignment of supervisory requirements with market practice
Improved international competitiveness
Integration of the EU insurance market
Solvency II is not just about capital,
it is a change of behaviourThomas Steffen, Chairman of CEIOPS
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Questions