Risk management framework Under Solvency II

Transcription

1 Risk management framework Under Solvency II ICISA WORKING GROUP / EH GRC Jean-Francois DECROOCQ Risk management under SII- PASA 09/2006 JF DECROOCQ 1

2 SOLVENCY II ENVIRONMENT The evolution of regulation follows and anticipates the global trend of more transparent information: International regulation is evolving fast - Basle II applied to banks - Sarbanes Oxley (SOX) in the USA focus more on Risks of non disclosing information in the P&L. - IFRS in force since 2005, more IFRS reinforce Risk management disclosure - For life communication of European Embedded value(eev) or the market consistent embedded value (MCEV) including market value Local regulators are following the trend - Local regulation applying more market value approach and some already requires computation of risk adjusted capital. - Regulators merging banks and insurers supervisors Market expectation is high - Rating agency more based on Risk management - Financial market already expects more transparent communication from companies specially on Risk management Some Insurers anticipate the changes - internally many companies have already calculated Risk based capital and implement Risk management organization. - management in many companies uses Risk management proactively Risk management under SII- PASA 09/2006 JF DECROOCQ 2

3 SOLVENCY II ENVIRONMENT Target of solvency II is to improve the regulation of the insurance activity in Europe Solvency II, introducing new control of insurers, should improve capital allocation to Risk. This change can have many consequences, European commission has to consider: - on macro-economy and financial stability - on new undertakings and regulators - on market and products - on policy holders Some examples of impact would be on pricing, policy terms, investment and capital allocation of insurance companies, and overall impact on reinsurance market. The time frame is tight for such a change results on QIS 2 / first draft of impact assessment draft of impact assessment final report on impact assessment / first draft for Solvency II proposal Solvency II proposal Risk management under SII- PASA 09/2006 JF DECROOCQ 3

4 Going Forward planning is today respected Directive Development (Commission) Directive Adoption? (Council & Parliament) Implementation? (Member States) CEIOPS work on Pillar I CEIOPS work on Pillars II and III CEIOPS work on Implementing Measures QIS 1 QIS 2 QIS 3 Further QIS Model Calibration First standard model have been proposed under QIS 2 by CEIOPS Work is already in progress on Pillar I & Pillar II Risk management under SII- PASA 09/2006 JF DECROOCQ 4

5 Some comments Sovency II standard model (Pillar I) The solvency II proposed standard model is divided by Risk types and computed on factors based approach with some scenarios. More complex modeling will be allowed in the internal model to consider parameters not reflected in the standard model. 1- Factors approach ex: equity risk = equity amount x factor 2- Specific feature - Loss ratio will be applied for premium risks - Catastrophe risk is considered through market share - interest rate risk is based on duration mismatch between assets and liabilities 3- Correlation - between risks - between lines of business 4- Diversification for group - not considered in the model: allocation of the diversification balance will be challenging 5- Scenarios In addition, some scenarios approach are foreseen to illustrate some large risks or portfolio effect 6- SCR Standard Capital Requirement should be the result of the standard model or internal model after approval from the regulators. When capital is under the SCR, Regulators will gradually interact with the company. 7- MCR Minimum Capital Requirement is not defined. The computation should be simple and linked to SCR. If the capital is close or under the MCR, it is planned that regulators will take strong actions. Risk management under SII- PASA 09/2006 JF DECROOCQ 5

6 Many topics remain open NEW RULES WILL IMPACT DIFFERENT CATEGORIES OF COMPANIES, SOME COULD BE PENALISED THEREFORE REGULATORS WILL CHECK DIFFERENT ORGANISATION AND COMPANIES TO BENCHMARK THE NEW FRAMEWORK BEFORE ISSUING THE FINAL MODELING AND REQUIREMENTS: GROUP / STAND ALONE COMPANIES LARGE / SMALL LIFE / NON LIFE INSURER / REINSURER LINE OF BUSINESS AND DIVERSIFICATION BUSINESS MODEL QUALITATIVE ASSESSMENT CONSISTENCY OF RULES (COUNTRY/INTERNATIONAL) FINALLY, WHAT IS NOT DONE, THE CHANGES SHOULD ALSO BE CONSIDERED THE INCREASE OF ADMINISTRATIVE COST ON THE INDUSTRY. EULER HERMES SHOULD CONTINUE TO MONITOR THE EVOLUTION OF REGULATION TO BE SURE CREDIT INSURANCE AND SURETY IS PROPERLY CONSIDERED. Risk management under SII- PASA 09/2006 JF DECROOCQ 6

7 Some possible Consequences on the market Pillar II will introduce rules on control and qualitative aspects. And Pillar III will concentrate on transparency and communication. The target of regulators is to limitate the impact on the market. The SCR will nevertheless be calculated at such a level that, when completed the new requirements will impact the insurance market in different ways: Return on capital and risks capital Return of companies will be based on risk return and risk modeling will be part of business management Product changes Charges or release of capital for products or specific features will be more spread and companies could reduce some type of coverage. Increase of risk transfer tools With strong requirement from regulators and tight capital, companies will go for more transfer of risks Investments Credit insurance short term business could be penalized for long maturity investment. Financial market and rating agencies Rating agencies (S&P, Moody s, Fitch) have already adjusted their methodology assessment and will continue to do so with continuous monitoring of risk management and capital computation. Diversification benefits Companies will look for more diversification benefits if their capital is constraint by regulators Risk management under SII- PASA 09/2006 JF DECROOCQ 7

8 LAST PROPOSAL PAPERS ISSUED by REGULATORS Risk management in companies Companies are required to have full Risk management and solvency capital strategies including assessment of all risks Disclosure of strategy for solvency capital to regulators Information should be made available to regulators (including analysis, stress tests, technical provision assessment, risk profile..) Regulators should check the adequacy of internal control and risk management including mitigation of risks Power of the supervisor Regulators can ask for any information, assess capital items, approved internal model but also ask for set up of internal model or change in the way standard formula is applied Capital add-on can be made if SCR computation cannot match the risk profile of the company Regulators could intervene if solvency capital is below SCR. Any measure cold be taken by regulators if MCR is not meet. Risk management under SII- PASA 09/2006 JF DECROOCQ 8

9 LAST PROPOSAL PAPERS ISSUED by REGULATORS Group supervision Regulators considered supervising groups with a lead In large or specific group, sub group could be considered to achieve proper supervision Few more issues on group Diversification = SCR GROUP -SCR entities to be confirmed Group SCR can be calculated by internal model or standard model applied on consolidated data A specific factor should be added for Group Risks and capital fungibility (necessary for diversification recognition) Diversification of group is recognised and allocation should rather be done through increase of solo capital than reducing the capital requirement Regulators could restrain some contingent capital set up A proxy of MCR group should be the sum of entities MCR to define a limit for SCR group after applying a factor (above 1) Risk management under SII- PASA 09/2006 JF DECROOCQ 9

10 Credit insurance is recognised ICISA was proactive with credit insurers Solvency II working group at ICISA Work with CEA and CEA steering group In QIS II credit insurance was fully recognised as a P&C category Regulators would like feedback They are starting to ask for direct feedback from companies and it should be even more the case during calibration phase ICISA could be even more proactive with regulators to improve calibration Risk management under SII- PASA 09/2006 JF DECROOCQ 10

11 Analysis of first impact for credit insurance Pillar I and Standard model should not impact but: Standard model should not be an issue as calibration should define lower SCR (around BBB of S&P) than current solvency (this issue should be monitored for all SBU s also) Small BU should be requested to apply standard model if internal model is not computed (specific could be requested to compute partly internal model) But, as benchmark, regulators could ask for standard model to be calculated Data retrieval (investment, reinsurers..) should be organized when standard model is stable Evolution of economic environment and calibration should be closely monitored. Risk management under SII- PASA 09/2006 JF DECROOCQ 11

12 Analysis of impact for Credit insurance Pillar II and internal Risk management From internal control to the control of Risks Pillar II includes as a strong principle for companies to have full risk management orgnisation and capital assessment strategy. A measurement of all risk is also required. The information of risk management should be directly made available to regulators. (audit?) Clear Methodology expected Risk management under SII- PASA 09/2006 JF DECROOCQ 12

13 Analysis of impact for credit insurance Pillar II and Regulators review Current review of regulators has been reinforced Group should also respond to local regulators Large power of investigation would mean also more data to deliver and probably regular review. SCR should be calibrated low enough but proactive review should be done specially for SBU to avoid any direct actions from regulators On group still to many issues remain among them:» SCR and MCR on Group» Lead supervisor (a strong input of specificities for credit insurance would favor direct link to french regulators!» Balance of power between Lead supervisors and local supervisor is not yet defined Risk management under SII- PASA 09/2006 JF DECROOCQ 13

14 Analysis of impact for credit insurance Pillar III and Rating agencies Pillar III is about transparency and diclosure to the market, but no precise paper has been issued on this part. In any case more information will be provided on Risk management to the market. What will the impact on the ratings : it should be limited for companies in line with Solvency II To follow the trend Rating agencies are also introducing changes to asses companies Risk management as S&P ERM (Enterprise Risk Management) S&P is condering: Give less weight to (risk capital of standard model) CAR computation. Considering fully the Risk management policy of the company Items more closely reviewed: - Income trends - interest rate risk coverage - diversification of income - management, strategy, competitive environment Risk management is independent from risk taking Risk management under SII- PASA 09/2006 JF DECROOCQ 14