17/06/2012. Solvency II: Implementation Challenges & Opportunities. What is Solvency II about?

Transcription

1 What is Solvency II about? Solvency II: Implementation Challenges & Opportunities The Solvency II Directive is a regulatory framework for the European insurance industry that adopts a more dynamic and integrated risk-based approach The EU Framework Directive was approved by Commission in May 2009 Rescheduled entry into force of Solvency II from 1 January 2014, pre-applications for internal models from 1 January 2013 Significant change for the European insurance and reinsurance industry, notably: Risk-based approach to calculation of capital requirements Market consistent approach to calculating insurance technical provisions Dusan Tomic, KPMG Belgrade Belgrade, June 2012 Important aims of the Solvency II are to create a risk based solvency regime which is consistently applied in EU and to encourage a deeper single insurance market within EU 1 1

2 Holistic three pillars approach SII (ORSA) framework Governance - ORSA policy Pillar 1: Quantitative requirements Aims to ensure firms are adequately capitalized with riskbased capital Standard vs. Internal model S2 Balance Sheet Solvency II Pillar 2: Qualitative requirements Imposes higher standards of risk management and governance Own Risk and Solvency Assessment ORSA Supervisory Review Process - SRP Pillar 3: Market discipline Aims for greater levels of transparency for supervisors and the public Supervisory report Public Solvency and Financial Condition Report Suppliers Inputs ORSA process Outputs Management/ controlling Risk function Pillar 1/ actuarial Asset mngmt. Business Strategic plans Business plans Management actions Risk Profile/Strategy Policies Stress testing SCR model outputs Out of SCR risks SII Balance sheets EC Balance sheets Capital Capital plans Financing plans Investment policies Assessment of past compliance with SCR, TP and adequacy of risk measurement Assessment of current solvency position and risk exposures Assessment of projected solvency positions and risk exposures ORSA supporting processes/ infrastructure Decisions Taking into account risk exposures and capital options ORSA reports and evidence Management presentations Customers Management Group Regulators Markets Rating agencies Policyholders 2 3 2

3 Possible business impact KPMG s latest research on Solvency II impact Product pricing and design, product mix Product design 22% 63% 16% Investment strategy Product pricing 38% 53% 9% Risk transfer mechanisms Reserving Organization Product mix Decision-making process and management information 13% 60% 77% 27% 16% 6% Significant impact Small impact No impact Decision-making process Corporate/Group structure 16% 47% 38% Cost of capital as key decision driver Capital management / allocation 72% 25% 3% 0% 20% 40% 60% 80% 100% 4 5 3

4 Insurers in CEE do not seem to be undercapitalised Gaps in SII preparedness across CEE CEE countries seem to be well-placed in terms of capital requirements based on QIS5 results from March Current regime and QIS5 surpluses ( bn) solo (source: EIOPA Report) Solvency I SCR MCR Based on QIS5 results, the financial position of the insurance sector in most of CEE remains stable. Surplus of Solvency II capital (SCR and MCR) compared to Solvency I (current rules) (source: EIOPA Report) P1 SCR calculation Valuation methods P2 Board awareness Actuarial Function Internal Control System ORSA Outsourcing Prudent person principle Risk management system Remuneration 6 7 4

5 Solvency II implementation in CEE KPMG s observations Solvency II implementation in CEE KPMG s observations Insurers across CEE mainly focus on achieving the minimum compliance rather than using the regulation to get competitive advantage and improve internal processes Pillar1: Usually under control Solvency project driven mainly by actuaries Determine the scale, nature and complexity of risks, measure the model error No S1 provision does not mean no S2 provision Pillar 2: Areas such as ORSA or risk management framework still in development SII consciousness and involvement of board/management Embedding of risk management and the model Using risk management for decision making ORSA Validation and documentation Insurers across CEE mainly focus on achieving the minimum compliance rather than using the regulation to get competitive advantage and improve internal processes Pillar 3: Insurers currently do not see the importance of disclosing significant amount of commercially sensitive information Focus on filling QRTs and are preparing for dry runs towards the end of 2012 Many insurers have not started yet to actively approach SFCR and RSR Majority are implementing new reporting applications (almost half of them are developing applications at the group level) EIOPA is developing an XBRL taxonomy for harmonized transmission of reporting which will need to be taken into account 8 9 5

6 Solvency II implementation in CEE KPMG s observations Identifying critical path for implementation Lack of resources Data and systems Insurers seem to face lack of qualified resources to address the requirements and also to perform activities in business as usual Regulators within CEE also seem to face lack of capacity and hold back issuing supporting guidelines (compared to regulators in western Europe) Most insurers seem to have significant issues ensuring relevant data are available in sufficient granularity and quality to support all three Pillars Data governance and especially data quality management are crucial components of Solvency II, many insurers are only starting thinking how to address those Understand Company s Strategic Objectives Gap Analysis PHASE 1 GAP ANALYSIS Planning & Business Case Implementation Plan and Actions PHASE 2 PROGRAMME IMPLEMENTATION Governance Risk Management ORSA Modelling Systems and Data Documentation Management Information Internal Approval BUSINESS AS USUAL Regulatory Approval Monitor Continuous Review Ongoing model validation Transition to BAU Documentation Demanding requirements as regards documentation of models, systems, processes, policies and systems which many insurers are only starting to address now Identifying gaps and critical path with consideration of Company s Structural, Business and Operational Strategic Plan Disclosure Implementing Solvency II Programme, understanding the interdependencies and interlinking each sub-programme to ensure coordination of project Integrating the Solvency II requirements within the business and identifying improvements before formally seeking regulatory approval

7 Critical success factors Beyond compliance Management s involvement and ownership tone at the top Existence of clear vision or ability to formulate one Proper assessment of starting position regarding Solvency II implementation Clear project structure roles and responsibilities Internal resources involvement External resources involvement Strong participation of Company s personnel Involvement of future users of the implemented solutions Adequate resources corresponding to the complexity of vision and envisaged final state For many insurers, regulatory requirements will present challenges to their existing distribution models and cost structures Market-leading companies will use the spur of regulation as an enabler to improve internal processes and to gain competitive advantage

8 Thank you! 2012 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). 8