The Challenges of Solvency II

Transcription

1 Solvency II The Challenges of Solvency II

2 Gain-Line & Solvency II Solvency II is the biggest ever exercise in bringing together insurers and re-insurers under one regulatory regime. Solvency II is a set of principles and guidelines leading to best practice in risk management; Solvency II Programme It is an Enterprise-Wide initiative that will impact all areas of the business; Early adopters are helping the FSA set the bar for what is required in the Market; Numerous approaches are being adopted across the market and it not a case of one size fits all; The range and diversity of insurance operations means that a Solvency II solution will vary from company to company; The eventual solution in each case will depend on a range of inputs from a number of different disciplines. Slide 2

3 Who Are Gain-Line The Gain-Line Group is a consortium of specialist companies who have come together to deliver a solution for Solvency II Solvency II Programme Slide 3

4 Gain-Line & Solvency II There are many stakeholders with differing priorities that need to be integral to the Solvency II Programme CA CRO CEO Chief Actuary centralised and consistent modelling Solvency approach II Programme for all actuarial ensuring realistic what-if and scenario planning; CIO CFO Chief Risk Officer enterprise wide consistent risk management age e standards a s and transparent t risk modelling approach; Chief Information Officer robust IT governance with a consistent approach to data controls & quality; Slide 4 Chief Financial Officer faster reporting timetable with a consistent approach to financial and management information; Chief Executive Officer enhanced business performance through risk-based decision making and more efficient allocation of capital.

5 Solvency II Components Programmes will be challenged to align a variety of different functions as Solvency II will impact all elements of the Business Governance, Compliance & Comms Governance & Oversight Documentation, Comms & Training External Reporting ramme Office) cy II Prog rogramme O Solvenc (inc P Balance Sheet & Portfolio Management Risk Management Standard Formula Portfolio Management Calculation Kernel Technical Provisions Assets & Asset Liability Management (ALM) Internal Model/Risk Management ORSA and the 6 Tests Systems & Data Data Quality & Governance Solvency II Data Repository IT Systems & Processes Slide 5

6 FSA Guidance Highlighted below are extracts from the FSA s guidance as to why firms must meet the minimum requirements Systems of Governance Solvency II requires four functions Solvency to II be Programme established as part of a firm s system of governance, with each one performing at least the required specific tasks and activities as outlined in the Directive (Level 1 text) and supplemented by further requirements and guidance at Levels 2 and 3. These are: risk management; compliance internal audit; and actuarial. Slide 6 Insurers will be able to consider for themselves how to organise and staff these functions to effectively achieve the outcomes expected, with this analysis driven by their Board; Resource should be proportionate - for example, larger, more complex firms are likely to require more resource to achieve the required outcomes than smaller, simpler insurers. It may be that very small firms consider it appropriate for a single person or organisational unit to carry out more than one function (with the exception of the internal audit function, which the Level 1 text requires to be independent ); Alongside these functions, the system of governance under Solvency II also sets out obligations in areas such as fit and proper requirements (for persons who effectively run the firm or have other key functions), outsourcing, a firm s own risk and solvency assessment (ORSA) and internal control; Senior management engagement with this area of Solvency II is essential for a firm to establish an appropriate and compliant system of governance. The Supervisory Review Process under Solvency II will incorporate the firm s system of governance as a key area of focus for supervisory authorities review the FSA in the UK.

7 Key Deliverables The Key Deliverables for the Governance & Compliance workstream are highlighted below Terms of Reference project overview that includes project objectives, key sponsors and stakeholders, steering and reference committees and timescales; Governance Approach overall approach to governance to include:- - Reporting Lines; - Risk & MI Reporting; - Escalation Procedures; - Strategic t Planning; - Decision Making Processes; - Outsourcing; - Function Interactions; - Internal Controls; - Reporting Arrangements; - Actuarial; - Policies for Approved Persons; - Internal Audit; - Risk Management Processes; - Business Continuity. Compliance Approach overall approach to compliance to include the interaction and context with the ORSA, Use-Test, SCR in relation to changes to the risk profile, strategic decision making and integration into BAU. Slide 7

8 ERM Under Solvency II Highlighted below are extracts from the FSA s guidance as to why firms must meet the minimum requirements Clear responsibility at senior level for risk management ensuring its use in managing the business, including influence on key decisions; Full integration of risk and capital management must be emmbedded sufficiently to pass the Use Test ; The ORSA is an integral part of managing the business against the chosen strategy and strategic decision making; Risk appetite is clearly articulated and widely understood as the parameters to manage the business changes are proactive and based upon the risk and capital framework; The risk and capital framework is clearly documented and evidenced in advance of its use. Slide 8

9 The Risk Management Framework ERM Framework Elements Governance Accountability - 1 st line: Line Management - 2 nd line: Review & Challenge - 3 rd line: Independent assurance / challenge Structure Decision making (inc. Delegation) Systemic / Interdependent Risk Governance E.g.: Risks & Controls Financial markets risk Review & Assurance Currency fluctuations Quantification Market changing events Scenario Analysis Contingency Planning Operational Market changing events Emerging Risk Management Linkage to Strategy Risks & Controls Identification & Assessment Systems & controls i.e.: Policy and approach Core processes & systems Risk appetite set Id tifi ti & A t Regulatory Risk Review & Assurance MI / KPI s Scenario analysis & stress testingti Review & challenge Independent assurance Quantification Base Level (solvency / regulatory) Economic Stress testing / tolerance levels Continually refined risk appetite Governance Risks & Controls Group & Capital Risk Review & Assurance Governance Risks & Controls Quantification Liquidity Risk Review & Assurance Governance Risks & Controls Quantification Operational lrisk Review Governance & Assurance Risks & Controls Quantification Market Risk Review & Assurance Governance Quantification Risks & Controls Review & Assurance Governance Quantification Risks & Controls Review & Assurance Governance Quantification Risks & Controls Review & Assurance Credit Risk Quantification Insurance Risk Regularly updated, dtd clearly documented Disclosure & Reporting Pillar 1 MCR, SCR, Capital Model, etc Pillar 2 ORSA & Supervisory Review Pillar 3 Disclosure & Market Discipline Slide 9

10 Key Deliverables The Key Deliverables for the Risk Management workstream are highlighted below Slide 10 Risk Strategy documentation of a firm s risk strategy, defining objectives, key principles, risk appetite and assignment of responsibilities; Risk Profile documentation of the current risk profile and amendment of the risk register (if appropriate) and the inclusion of other risks (e.g. market, counterparty); Risk Appetite documentation of the Board s appetite to risk and to ensure appropriate p policies and procedures are in place for management of the risk; Risk Management Framework the actual processes to manage existing and emerging risks in the business; The ORSA should assess the solvency needs, risk profile and risk tolerances of the firm, and should be based on historical information but must be forward looking by incorporation of the business plan.

11 Systems & Data The reality facing organisations, is that they may or may not have the data, but the ones that do, do not always know what to do with it Those people who do not read books, have no advantage over those who cannot read at all. Mark Twain early 1900s Decision makers who cannot use their data have no advantage over those with no data at all. Current Comparison Slide 11

12 Systems & Data Different organisations have different priorities for data within the Solvency II context 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Data Quality Data Governance Data Warehouse Data Dictionary/Directory Spreadsheet Control Documentation, e.g. of the Internal Model Data Lineage Facilitating Business Processs Change External Reporting Policy ORSA/ /SFCR/RTS Slide 12 Source Xchanging Survey, February 2011

13 FSA Guidance Highlighted below are extracts from the FSA s guidance as to why firms must meet the minimum requirements Systems & Data 5.24 The Directive sets out high-level Solvency requirements II Programme for the statistical quality standards underlying the model. This requirement aims to ensure that the methodology underlying the model is sound. The standards apply to: the methodology used to select, fit and, where appropriate, combine statistical distributions (probability distribution forecasts); data quality; model dependencies and diversification effects; risk mitigation techniques; the treatment of financial guarantees and options; and future management actions Firms seeking internal model approval will need to have accurate, complete and appropriate data, as well as be able to justify assumptions and judgment High quality data is essential for modelling. Firms should pay particular attention to this requirement as experience under the FSA s existing regime has indicated that the current quality of data in many UK firms may fall short of both existing and Solvency II requirements. We recommend that firms review the following for internal and external sources of data: Data collection processes to make sure all data items required are collected; Data resolution to ensure data is stored and accessible at a level appropriate for the design of the internal Model; The quality of data to ensure data items are correct and validated as far as possible; Access to data, to ensure it can be easily and accurately retrieved by relevant users. Slide 13

14 Data Policy & Governance The Data Policy should define the complete needs of all data and all data users across the organisation Slide 14

15 Systems & Data An approach to managing the various key areas is given below Solvency II Programme Slide 15

16 Key Deliverables The Key Deliverables for the Systems & Data workstream are highlighted below Data Policy/Governance a robust data policy/governance document which defines the data policy, key data owners and the link between deliverables; Data Dictionary a repository which defines all of the key data elements required for Solvency II and a definition of each data element; Data Directory a definitive repository of each model input into the standard of internal model; Data Controls & Flow Diagrams a DFD must be created for each input into the standard or internal model and cross reference the Data Dictionary; Data Controls Register a complete register of all controls (categorised) applied to the data as it transfers through the organisation. Slide 16

17 In Summary Solvency II, uniquely, Solvency effects all II areas Programme of an organisation; Programmes need to be structured in such a way to address this; C-Level Level Executives are accountable for Solvency II; Data is central to the concept of Solvency II; Different organisations will have different requirements dependent upon the systems/legacy landscape; Minimum standards and requirements must be delivered. Slide 17 Kesh Sharma Director of Magellan Consultancy Services Part of the kesh.sharma@magellancs.com