Solvency II Interpreting the key principles

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Cory Morrison
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1 Solvency II Interpreting the key principles

3 Contents Introduction 2 Pillar I: solvency capital requirements 5 Pillar II: general regulatory principles 7 Pillar III: financial disclosure and solvency 9 Conclusion 9

Introduction Now that the European Commission has endorsed the basic architecture for Solvency II, we believe it is important to in the proposed directive issued by the European Commission on July

4 Introduction Now that the European Commission has endorsed the basic architecture for Solvency II, we believe it is important to in the proposed directive issued by the European Commission on July Parliament and the Council of the European Union recasts the current 13 Solvency (re)insurance directives into one, with plans share the proposed implementation measures that the European and standards will come from the Committee of European 2 Solvency II key principles

5 The three pillar structure for Solvency II is the insurance industry s equivalent of bank regulation under Basel II. It addresses risk from the perspective of quantitative requirements, supervisory process, market transparency and disclosure. Solvency II key principles 3

6 Overview of Solvency II Assets covering technical provisions, the MCR and the SCR assets Solvency capital requirement Minimum capital requirement Risk margin (for non hedgeable risk components) Best estimate Technical provisions Market-consistent valuation for hedgeable risk components 4 Solvency II key principles

Pillar I: solvency capital requirements both solvency capital requirements (SCR) and minimum capital Insurance and reinsurance entities have a responsibility to inform Standard formula Full internal

7 Pillar I: solvency capital requirements both solvency capital requirements (SCR) and minimum capital Insurance and reinsurance entities have a responsibility to inform Standard formula Full internal model Validation criteria Use test Statistical quality standards Calibration standards Profit and loss attribution Validation standards Documentation standards Validation process Companies submit documentary evidence that the internal model the company provides the supervisor with an estimate of its SCR, Partial internal model Determination of own funds Solvency II key principles 5

8 Solvency capital requirement Mkt cone Mkt prop Mkt int Mkt eq Mkt sp SCR Health exp Health xs Health ac SCRop SCR nl SCR mkt SCRhealth SCR def SCRlife NL prem NL cat Mkt fx BSCR Life lapse Life exp Life dis Life mort Life long Life cat Life morb = Adjustments concerning the ability to absorb losses via policy bonuses ancillary own funds (other items that may absorb losses under permanence, their ability to absorb losses, their subordination, their Minimum capital requirement (MCR) Principles Have an absolute floor of 1,000,000 for non-life (re)insurance the results of that calculation to supervisory authorities on at least a Investment rules Prudent person principle Assets will be invested to ensure the security, quality, liquidity and technical provisions will be invested in a manner appropriate to the 6 Solvency II key principles

Pillar II: general regulatory principles Appropriate internal controls understood and applied by An actuarial function to coordinate the calculation of

9 Pillar II: general regulatory principles Appropriate internal controls understood and applied by An actuarial function to coordinate the calculation of technical Supervision The process Compliance with the qualitative and quantitative standards when a The power of regulators Solvency II key principles 7

10 Interactions between Pillar I and Pillar II MCR SCR - SCR + Adjusted SCR Potentially similar to Solvency I Standard approach Reduction due to explicit quantification of diversification, risk exposure, etc. Internal model +Allowance for not quantified risk, supervisory views and any deficiency of the risk management and internal control framework Supervisor intervention zone regarding capital requirements Pillar 1 Underwriting, market, credit, liquidity, operational risk Pillar 2 Other risks include group risk, strategic risk, corporate governance, etc. 8 Solvency II key principles

Group supervision Group solvency should be calculated, as a preferred approach, on method would be accepted by the supervisor as an alternative Pillar III: and solvency An overview of the business

11 Group supervision Group solvency should be calculated, as a preferred approach, on method would be accepted by the supervisor as an alternative Pillar III: and solvency An overview of the business and its performance: description of the Valuation method: technical provisions, assets held to cover the technical provisions and capital requirements, as well as other assets Own funds: description of the structure, quality, and amount of own Internal model potentially used by the company: description of the Conclusion view this timeframe as an opportunity for insurance companies website that provides up-to-date information on the proposed Solvency II key principles 9

12 About Ernst & Young About Ernst & Young s Global Insurance Center help you achieve your potential a team with deep implications and develop points of view on relevant

Appointed Actuary Symposium 2007 Solvency II Update

watsonwyatt.com Appointed Actuary Symposium 2007 Solvency II Update Naomi Burger 7 November 2007 Agenda Overview Pillar 1 - Capital requirements Pillar 2 - Supervisory review Pillar 3 - Disclosure Conclusions