PwC Assurance Main contacts

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2 PwC Croatia PwC Croatia is a professional services firm providing audit and assurance, valuation, transaction, performance improvement, tax, legal and bookkeeping services. We have more than 160 professionals in Croatia and a very strong Financial Services Team. The Financial Services Team comprises assurance/audit, tax, advisory and consulting experts.

3 PwC Assurance Main contacts Marija Mihaljević Senior Manager Siniša Dušić Partner Damir Radmilović Senior Manager Ivana Hobolić Manager Ivan Ćović Manager Jozef Ducky Manager

4 Solvency II Some of the forgotten requirements Jozef Ducky, PwC

5 Standard formula firms SII interim measures roadmap Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Pillar 1 Inform the NCA on decision to use SF vs USP Assess LTG impact Agree calculation approach for TP and SCR Setup validation process Submit validation report BAU calculations feed into Pillar 3 requirements Data Policy and Quality Standards in place Pillar 2 Assess readiness for PRA review: Key function readiness and compliance (particularly RMF) Risk appetite framework and trigger points Demonstrate FLAOR compliance for 1st assessment ORSA improvement Systems of governance: Fit and Proper, internal controls, overall governance. Demonstrate FLAOR compliance for 2nd assessment Build, implementation and testing phase Dry run on Q3 data Annual narrative and QRT reporting Pillar 3 SII re-planning: Assess and re-design Data readiness assessment and cataloguing/ integration for asset dry run/ sourcing (e.g. derivative data) Deploy technology for interim and full reporting covering data warehouse, models, consolidation platforms Solo: 22 weeks Group: 28 weeks Dry run on Q2 data 1 Quarterly narrative and QRT reporting Process alignment: install framework for reconciliations between current reporting basis vs. Solvency II Key: Submissions to regulator Preparatory activities Requires Board approval BCR: Backstop Capital Requirement EIOPA: European Insurance and Occupational Pensions Authority FLAOR: Forward Looking Assessment Of Risk (using ORSA principles GSII: Globally Systemically Important Insurers HLA: Higher Loss Absorbency IAIG: Internationally Active Insurance Group IAIS: International Association of Insurance Supervisors ICS: International Capital Standards ICAS+: Individual Capital Adequacy Standards plus IMAP: Internal Model Approval Process LTG: Long Term Guarantees NCA: National Competent Authorities ORSA: Own Risk and Solvency Assessment PRA: Prudential Regulatory Authority QRT: Quantitative Reporting Templates RMF: Risk Management Framework SCR: Solvency Capital Requirement SF: Standard Formula TP: Technical Provisions USP: Undertaking-specific parameters 1 Q1 2015: reporting to supervisor: Subset of RSR, QRTs 5

6 Known picture 6

7 Forgotten requirements Own risk profile vs Standard Formula risk profile Validation and control framework: Data quality Hidden importance of external reporting Undervalued documentation 7

8 Forgotten requirements Own risk profile vs Standard Formula risk profile Validation and control framework: Data quality Hidden importance of external reporting Undervalued documentation 8

9 Pillar 1 representatives Ancillary own funds Surplus Basic own funds Solvency capital requirement (SCR) Other liabilities Assets covering technical provisions and other liabilities Technical provisions Calculation as a whole for hedgeable risks Risk margin Best estimate 9

10 One of the main SII goals or just the calculation options? Full internal models Risk sensitivity Partial internal models Standard formula with Undertaking Specific Parameters (USPs) Standard formula with simplifications Standard formula Complexity 10

11 Interim measures FLAOR Guideline 16 Deviations from assumptions underlying the SCR calculation In accordance with Article 45 of Solvency II Directive and in accordance with Guideline 3 on the applicability of the threshold for the forward looking assessment of own risks, national competent authorities should ensure that the undertaking assesses whether its risk profile deviates from the assumptions underlying the Solvency II Solvency Capital Requirement calculation and whether these deviations are significant. 11

12 Forgotten requirements Own risk profile vs Standard Formula risk profile Validation and control framework: Data quality Hidden importance of external reporting Undervalued documentation 12

13 Enterprise risk management framework 1 Placing a risk dimension at the heart of the organisation. Risk is core 2 Risk appetite clearly articulated reflecting the group s risk carrying capacity, consideration when setting strategy, formulating business plans, business strategy and financial goals. Processes and procedures in place to managing performance and rewarding management success 1 Risk manage risk on an enterprise wide basis within defined (hard and soft) strategy boundaries without stifling day to day operations Identification and assessment of all (current and emerging / desired and undesired) risk faced by the organisation. Robust processes in place to aggregate and prioritise risks on an enterprise wide basis Governance structure ( three lines of defence model emerging as industry norm). Senior management accountability and responsibility for top tier risks. Clear risk management policies and procedures for managing all material risks Internal risk and capital models at the heart of the ERM framework. Models meet highest quality standards, appropriately calibrated ( real time ) and fully tested and documented. Models subjected to independent scrutiny and validation Required level of MI to support ERM framework. MI appropriately tailored to roles, responsibilities and authority levels Risk appetite Risk profile External communication and stakeholder management Governance, organisation and policies Risk and capital assessment (including internal models) 8 People, change and 9 Management 10 reward information ERM focused external communications strategy centred around actively managing stakeholders (policy holders, regulators (group and local legal entity), rating agencies, debt and equity investors, etc) in order to yield shareholder value added and capture wider business benefits 6 Business performance measured on a risk adjusted basis. Capital allocated to BUs / transaction opportunities based on risk : reward trade off. Risk reflected in factory gate product design and pricing and post sale portfolio management. Capital managed to optimise RORAC, but cognisant of stress scenarios Technology and infrastructure 8 People behaviour aligned with group risk, capital and performance strategy / business plans through balanced score cards, MBOs and incentives and rewards schemes. Required level of skill, experience and knowledge exhibited by majority of staff 10 Core technology to support fully integrated ERM approach. Focus on organisational span, data quality and automated processing Business strategy Business management Business platform 13

14 Validation and control framework Data Governance over the quality of data Testing should account for materiality of data Plan to remediate lack of data and issues with data quality Assumptions and methodology for inputs Expert judgement Limited guidance in some areas External validation most useful for inputs Model implementation There is no standard model from EIOPA Functional testing of model used Some areas of modelling where expert judgement required (e.g. interest rate risk) Outputs Fit to risk profile (ORSA) Comparison to expert views e.g. underwriters 14

15 Data quality Data Policy Data Flow Diagrams Risk and Impact Assessment Data Governance Document data in scope for the model / reporting Scope of Data Risks Assess the risks of data not achieving the required quality criteria Identify and develop controls to manage the identified risks and detect deficiencies in data Identify Controls Monitor Develop KPIs and metrics to assess whether data quality criteria have been met Evaluate and remediate identified data deficiencies Evaluate & Remediate Data Directory Controls Mapping Quality KPIs and Metrics Deficiency Log 15

16 Data dictionary The data directory is meant to be a documented repository where different users can go to understand which data is being used in the model, where it comes from, how it is used and what its specific characteristics are 1 Keep it simple and proportionate Explicit requirement for USPs and good practice for pure Standard Formula The underlying purpose is to ensure good governance over data quality - UK NCA Risk area Dataset Item Source Data owner Raw/ derived Usage Characterisitics E.g. Equity risk Details of assets Equity MV Bloomberg report XY Jozef Ducky Raw Shock applied to MV 1 Financial Services Authority Solvency II: internal model approval process data review findings, September

17 Forgotten requirements Own risk profile vs Standard Formula risk profile Validation and control framework: Data quality Hidden importance of external reporting Undervalued documentation 17

18 The role of Pillar 3 Pillar III acts as the external voice of the Directive. It is linked to Pillars I and II and a holistic approach to disclosure requirements across all three Pillars is strongly recommended. Pillar 3 outlines the disclosure requirements of Solvency II. Narrative reports: Regular Supervisory Report (RSR) Solvency & Financial Condition Report (SFCR) Qualitative reports will be supplemented by quantitative reporting templates (QRTs) QRT Quarterly QRT Annual RSR ORSA Undertaking /Group QRT Annual SFCR Regulator Public 18

19 Market impact of P3 Market valuation Return on Capital Demonstrating governance feedback Ultimate owner: CFO or CRO? Cash EEV IFRS Demonstrating decision making New business vs IF Key measures Presentation of results Re-base past results Pricing disclosures Shareholder value Governance and communication Level of breakdown required Strategy & asset disclosures IM vs SF Risk currenc y Explanation of risk strategy & sign-posting Comparison vs Peers Material books; or monoline issue? Competitive landscape First year: 2014? Pillar 3 Reporting Preparation for: SF, IM incl and excl TR Qualitative story Analysts focus on relative position Day-1 surplus vs ongoing margin? Business strategy Implementation strategy Link to IFRS Asset strategy Standard Issue Disclosure of key risks & mitigating actions Hedging strategy Liability strategy Hedging level? Legacy books Risks expected by SH? Or accepted by SH? New business margin? Manage disproportionat e impact disclose separately? (e.g. PPOs) Volatility Expected risks? Analysis of cost of risk Impact of VA Management buffer (PII); Rating agency capital; surplus? Increased volatility with limited de-risking options Monoline vs Composite pricing & return Demonstrat ing RoC Generating real return for asset risk versus peers? % of diversificatio n benefits across books Balance of 1- in-200 versus year-by-year Changing measures of profitability & RoC? Level will drive hedge effectiveness TPs; RM; SCR; 19

20 Strategic importance of P3 What strategic changes will result given enhanced info & ability to compare against peers? How are you going to tell your results story? and when? How will Pillar 3 affect your market valuation? 20

21 Forgotten requirements Own risk profile vs Standard Formula risk profile Validation and control framework: Data quality Hidden importance of external reporting Undervalued documentation 21

22 SII documentation Functional ownership & Management Finance Actuarial Underwriting Risk Target audience Board level Senior management Staff Technical specialist Documentation hierarchy Principles Policies Processes Standards Technical documents 22

23 SII document index Category Example 1. Documentation Documentation Control Framework 2. General Governance Organisational Structure Key Function 4.A Model Platform and Data IT Management Process Data Management Procedures Data Quality Policy & Standards 4.B Model Scope and Governance Model Design (Technical Model Specifications) Aggregation & Diversification Methodology Valuation Basis Model Outputs 6. Technical Provisions, Own Funds and Standard Formula Solvency II Balance Sheet Full Internal Model Comparison with Standard Formula Full SCR Results 23

24 Thank you for your attention Jozef Ducky, PwC E: T: