[Photodisc]/Thinkstock. Solutions for Solvency II

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1 [Photodisc]/Thinkstock Solutions for Solvency II

2 Introduction Effectiveness of Solvency II in the European Union member states from 1 January 2016 is shaping up to be one of the greatest challenges on the horizon for insurers as it entails a degree of regulatory overhaul that forces them to recalibrate all of their risk management and calculation systems for the new capital requirements. Simply calculating capital requirements using the standard formula will require a notable effort on the part of the insurance industry. Aware of these difficulties, Afi offers a range of services intended to cover insurance undertakings' potential needs under Solvency II, taking an approach that is highly flexible and can be easily tailored to individual entities' circumstances. Standard formula SCR calculation tool Afi has developed a tool for calculating solvency capital requirements (SCR) under Solvency II using the standard formula. The tool replicates the Solvency II risk tree structure, so that SCR can be calculated in a transparent and simple manner. SCR Adj BSCR Op Market Health Default Life Non-life Intang Interest rate SLT Health CAT Non-SLT Health Mortality Premium Reserve Equity Mortality Premium Reserve Longevity Property Longevity Disability Morbidity CAT Spread Disability Morbidity Currency Concentration Expenses Expenses Revision = included in the adjustment for the loss - absorving capacity of technical provisions under the modular approach Revision CAT The various calculation nodes are fed automatically from text files containing all the inputs needed for calculation purposes. The input files are in turn taken from the entity s data warehouse or various actuarial or valuation systems. This structure of spreadsheets and text files enables simple automation and subsequent monitoring of the entire calculation process. In addition, staying within the standard formula framework, Afi has developed a series of helper tabs, spreadsheets designed to simplify preparation of the required inputs and some of the capital calculations at the individual risk factor level. These implications are valid for the vast majority of entities calculating SCR using the standard formula. 2

3 Financial asset valuations service The Afi team boasts long and varied experience valuing financial instruments. The financial asset portfolio valuation service it offers spans all manner of instruments from plain vanilla to the most complex structures. Valuing these instruments at fair value has become considerably more challenging in recent times due to the upheaval in the credit markets and resulting difficulty in reliably estimating the credit spread corresponding to the various instruments. It is precisely in estimating these spreads that Afi can offer its clients significant added value. Afi complements this service with a series of tools for calculating SCR using the standard formula for risk factors that warrant revaluation of the relevant financial asset portfolios under the various stipulated shock scenarios, essentially interest rate shocks but also exchange rate and equity shocks. Valuing profit-sharing arrangements, options and guarantees in the life insurance business Solvency II requires insurance entities to provide their best estimate of the value of their liabilities. One of the biggest challenges intrinsic to this calculation is the valuation ascribed to the options and guarantees forming part of insurance contracts such as surrender options, minimum guaranteed returns and profit sharing arrangements. Valuation of all of Interest rate scenario modelling these structures requires the use o f s t o c h a s t i c scenarios for an e n t i t y s m o s t significant financial risk factors (mainly interest rate and inflation). Development of a Solvency II datamart Implementation of Solvency II throws up both a challenge and an opportunity. The challenge posed by the requirement to have corporate information better documented and more centralised, traceable, auditable, accurate and complete warrants in many instances the strategic decision to build a datamart that ensures these prerequisites are met, while also enabling the generation of management information integrated with solvency-related data. Not only must a Solvency II datamart be designed to comply with the requirements associated with the provision of QRTs (quantitative reporting templates), but it must enable construction of a true risk datamart capable of combining an entity s solvency information with existing risk management and business information. This combination will prove invaluable when it comes to complying with the associated Pillar II and III requirements (corporate governance principles). Afi s IT experts have extensive experience designing and implementing these sorts of information systems for both banks and insurers. 3

4 Risk Integrator: controlling Solvency II calculation processes Another major challenge posed by Solvency II is the need to build a stable and robust calculation environment and platform equipped to control the integration of the various sub-processes intervening in the capital calculation process. Experience has shown that the calculation of capital (using both the standard formula and internal models) involves numerous information sources, calculation applications and departments. Against this backdrop, the concept of a control layer to enable the organisation and integration of the various processes takes on particular importance. The chart below illustrates the wide variety of tasks that can come into play in the SCR calculation process: IT architecture for a risk measurement environment In response to this challenge and to support its clients in the management, control, coordination and documentation of all the processes associated with SCR calculation, Afi has developed the Risk Integrator tool which enables: 4 Central and automated workflow control 4 The plug-in of multiple platforms/tools 4 Unmanned execution of the entire capital calculation process 4 Result traceability/replication 4 Back-up of incoming and outgoing data, codes used, etc. 4 Minimisation of implementation time and costs 4 Minimisation of additional development costs 4

5 Moreover, the standard formula SCR calculation tool mentioned at the beginning of this brochure can be built into the Risk Integrator tool. Risk Integrator up close Contact For any additional information or queries, please contact: Contact: Ángel Moreno Silvia Izquierdo Iratxe Galdeano Tel: Website: 5

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