Regulação no sector Segurador Solvency II Strategic implications & international trends. Garvan O Neill

Transcription

1 Regulação no sector Segurador Solvency II Strategic implications & international trends Garvan O Neill

2 Solvency II is the most significant single change ever faced by Europe s insurance companies How well prepared are Insurers and their regulators??

3 Strategic implications & international trends Agenda Solvency II Overview and key drivers International trends UK Switzerland Sweden Others Strategic implications Implications for Companies Implications for Regulators Next steps for Insurers Slide 3

4 Overview and key drivers Key drivers behind Solvency II Deficiencies in current solvency framework No risk-based capital requirements Risk Management practices have little influence on capital requirements No consideration of the composition of the assets held in the capital calculation No consideration of other significant risks (e.g. operational, legal) Increased recognition of the importance of global insurance industry Solvency developments in other FS areas (i.e. Basel for banking etc.) Slide 4

5 International trends EU - Solvency II Introduce in 2010/11 an EU harmonised prudential solvency standard that allows comparability and is transparent and coherent Principles based regime - not detailed rules Solvency position will be based on market-consistently valued assets and liabilities Allows standard and internal risk models -expects risk interdependencies to be explicitly modelled thereby incentivizing use of own internal models Based on three pillar approach similar to Basel II Slide 5

6 Overview and key drivers Overview of Solvency II structure The Three Pillar Approach Solvency II PILLAR I QUANTITATIVE REQUIREMENTS Technical provisions Investment rules and ALM Capital rules PILLAR II SUPERVISORY REVIEW Internal controls and sound risk management Supervisory intervention PILLAR III DISCLOSURE REQUIREMENTS Disclosure Frequent Forward-looking Relevant MORE COMPLEX THAN BANKING DUE TO INDUSTRY CHARACTERISTICS Slide 6

7 Overview and key drivers Timescales Draft Framework Directive Published Full Implementation Detailed rules (Level 2) Quantitative Impact Studies (QIS I, II, III, ) 3 waves of EC Calls for Advice Further Calls for Advice Slide 7

8 International trends Most recent QIS II high level findings Achieved representation of 50% market share across 23 countries No indication of solvency shortfall amongst respondents Overall solvency ratios fell but greater than 100% Slight preference for cost of capital Highlighted clear need for additional guidance on assumptions to be used Slide 8

9 Strategic implications & international trends International trends Slide 9

10 International trends UK risk based system already introduced January 2005 introduction of a risk-orientated system of supervision Financial resources must take account of all significant risks and liabilities Requires insurers to identify their specific risks, have an appropriate control environment in place to manage those risks and monitor the enforcement of controls. Final level of capital is based on the Enhanced Capital Requirement (mathematical) and the Individual Capital Assessment (a self assessed capital requirement based on risk profile) Slide 10

11 International trends Switzerland moving towards Solvency II type model By 2008, all insurers must perform the Swiss Solvency Test (SST) calculations and solvency target must be met after 2011 Principles based system and is similar to Solvency II SST is based on market - consistently valued assets and liabilities 3 pillar structure Insurers must calculate two capital numbers: minimum capital (statutory solvency) and target capital (market valued solvency) There is a mixture of standard models (market, credit and insurance risks) and internal models (target capital) Reinsurance can be fully taken into account Slide 11

12 International trends Sweden new traffic light system In 1999, Swedish Government established a commission to review restrictions on assets covering technical provisions (TP) and rules for available solvency margin. Reports presented in New Traffic- Light System introduced designed to increase transparency, enhance incentives to manage risks and defines criteria for Regulatory intervention in companies with a weakened capital. Three interdependent components: - Realistic valuation of insurance liabilities (TP) - Amended asset restrictions and valuation of assets covering TP - Assessment of risks as a safety margin The underlying model was developed in co-operation with the industry this year through preliminary tests. The Regulator expects a full-fledged version to be available for 2006/07. Slide 12

13 International trends Other unilateral regulatory developments Netherlands Risk based system being considered but currently postponed Germany Focus on Pillar II controls frameworks and evaluation thereof Ireland Development of risk based system for more complex players within the scope of the reinsurance directive Slide 13

14 Strategic implications & international trends Strategic implications Slide 14

15 Strategic implications for companies Strategic implications for companies Possible re-evaluation of lines of products and prices Examine extent of integration of risk management framework with business processes Consider creation of Economic Capital Models Establish financial and resourcing costs of conversion Basel II experience Slide 15

16 Strategic implications for companies Product pricing/design Product pricing strategy and development will need to be considered in more detail by insurers (i.e. ensure risk/ reward is balanced) Different products have different characteristics and Solvency II will bring greater transparency into the elements that drive risks making some products more capital intensive Capital strain will increase for firms concentrated in certain lines of business Life: unit linked products with guarantees may become more attractive to insurers than long term with-profits products with high guarantees Non-life: some commercial lines/assumed reinsurance products could lead to re-rating, exclusions and market withdrawals Slide 16

17 Strategic implications for companies Integration of risk management framework and business process Solvency II system will reward organisations with: Integrated risk management frameworks Well developed reporting technologies and systems Clean and accessible historic data sets Strong awareness of all risks - operational risk (risk inventory) A focus on core competencies Controls designed to identify volatility in markets to promote mitigation An adjusted risk strategy to risk bearing capacity Slide 17

18 Strategic implications for companies Economic capital modeling Sophisticated internal risk models can bring competitive advantage Standard model approach for small to medium sized entities, who have difficulty in meeting cost of building internal models, need to perform cost/ benefit evaluation Trade off between simplicity and conservatism Standard Model Approach is not company specific and thus insurers likely to need to maintain greater capital Slide 18

19 Strategic implications for regulators Strategic implications for regulators Increasingly complex and demanding regulatory landscape Resource challenge for regulators in smaller territories Challenge of consistency across Europe and within markets currently a potentially tilted playing field Slide 19

20 Strategic implications for regulators Main challenges and unresolved issues Challenges: Level of industry engagement Gaining necessary skills and expertises Cost/ benefit analysis Solvency arbitrage and consistency Unresolved issues: Pillar I Home versus host regulatory responsibilities (evolution/ revolution) Proportionality for small and medium sized enterprises Slide 20

21 Strategic Implications Next steps for insurers Solvency II Understand better the implications of Solvency II Inform business units and functions Start to develop a list of activities (i.e. Project Office etc.) Integrate with business planning process and current projects (SOX, IFRS and IT upgrades) Slide 21

22 Strategic Implications Next steps for insurers Solvency II Embed within strategic decision making process Develop management information - Including key risk indicators, solvency reporting, ongoing monitoring of company performance Internal audit/ QA/ Control loops Slide 22

23 Strategic Implications Key messages Insurers need to understand and influence the debate NOW: - July 2007 will be much too late Solution will NOT be Group delivered (unlike IFRS) consideration at local territory level is key Planning for Solvency II will avoid business disruption and may offer competitive advantage Slide 23

24 Strategic implications & international trends Concluding remarks Industry s overall solvency position may not have a change significantly but the way business is conducted will change dramatically The adoption of an integrated risk approach will see insurers with a conservative investment strategy and less concentrated product structure maintaining less capital than their peers. The same is true of those with effective risk mitigation systems built into their internal models. Insurers in UK and Switzerland have derived benefits from risk based regulation Slide 24

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