Solvency II, messages and findings from QIS 5. Carlos Montalvo Rebuelta Executive Director Brussels, 7 March 2011

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1 Solvency II, messages and findings from QIS 5 Carlos Montalvo Rebuelta Executive Director Brussels, 7 March 2011

2 Index Preparedness of Insureres and Supervisors Impact of the proposed regime Feasibility of Solvency II How to get the best regime: next steps 28 June

prepare for the introduction of Solvency II o To provide a starting point for an ongoing

3 Objectives of QIS5 Commission s Call for Advice (July 2010): o Quantitative impact o Check principles and calibration targets o Encourage (re)insurers and supervisors to prepare for the introduction of Solvency II o To provide a starting point for an ongoing dialogue between supervisors and (re)insurers Also: EIOPA to test feasibility and assess complexity 3

4 Preparedness of insurers and supervisors 28-Jun-11 Page 4

5 Participation solo Participation rate More than doubled solo participation Solo Target (set by EC) Results QIS4 QIS5 QIS4 QIS5 25% 60% 33% 68% 1511 Small 791 Medium 217 Big 610 Life 1284 Non-Life 111 Reinsurers 175 Captives 336 Composites 382 Health 454 Mutual 5

Participation groups Groups: QIS4: 106 QIS5: 167 Increase in number of small and medium groups Large Medium Small Number 17 23 127

6 Participation groups Groups: QIS4: 106 QIS5: 167 Increase in number of small and medium groups Large Medium Small Number EEA groups without non-eea entities EEA groups with non- EEA entities EEA subgroup(s) of non-eea groups Number June

7 Challenges to implementation for industry and supervisors Complexity of the framework Major overhaul of valuation of balance sheet and calculation of the capital requirements Need to improve data quality and management IT challenges Requirements are not final but stabilising! 28 June

8 Current state of preparedness of the industry Participation rate shows that Solvency II is a priority to all insurers, regardless of size (Re)insurance undertakings and groups are striving to be ready for the implementation date of 1st January, o A majority of undertakings considers they will be ready by end 2012 o Large undertakings and group members in advance in their preparation (and QIS4 participants) Keep up the good work! 28 June

9 Gap analysis Simplifications Spend time to understand the requirements and how they will be implemented operationally o Training! Quality/quantity of resources (actuarial skills, risk management,...) o Availability of resources o Degree of dependence on external resources/consultants (small undertakings) Importance of Pillar 2 and 3 o Strengthening of corporate governance o Implementation of ORSA o Support the harmonised quantitative reporting

10 Move from regulation to supervision Put proportionality in practice address the complexity through adapted means EIOPA to undertake development of Technical Standards and Guidelines Smooth transition to the new system: assess need and appropriateness of transitional measures Keep the risk based and principle-based approach inherent to Solvency II 10

11 Impact of the proposed regime 28 June

12 Surplus evolution 28 June

13 Graph 5: Distribution of SCR coverage by country EEA EE SK LI FI LT NL CZ FR DE PT RO ES AT LU NO DK CY IS IT HU BE BG SI UK LV SE IE MT PL GR 75% to 120% Less than 75% 120% to 200% More than 200%

14 Solo MCR coverage Graph 6: Distribution of MCR coverage More than 400% 25.7% Between 350% and 400% Between 300% and 350% Between 250% and 300% 7.0% 8.8% 10.7% Between 200% and 250% Between 150% and 200% 15.9% 16.2% Between 120% and 150% 6.9% Between 100% and 120% Between 75% and 100% Less than 75% 2.7% 2.0% 4.2%

15 Explanation of solo surplus evolution Graph 8: Drivers of the surplus changes - EEA 150% 125% 100% 75% 50% 25% 0% -25% Surplus SI 100.0% Assets % Assets+ 30.9% Other valuation -3.5% TP % TP+ 66.0% Tax -15.2% Own funds 9.1% Capital reqs -58.8% QIS5 76.0%

16 Group surplus (Billions euro) Surplus Solvency I Surplus QIS5 Size sample Results in case internal models were approved and/or local rules under D&A for third countries were used Large Medium Small All Consolidated method with standard formula Large Medium Small All

17 Technical Provisions A general decrease in technical provisions from Solvency 1 to QIS5 due to : o Removal of implicit prudence o Generally a higher discount rate o Different cash-in and out flows to be assessed This statement has however to be nuanced for life business 17

18 Risk margin Clear support for simplifications Unavoidable market risk difficult to assess Simplifications to be refined o Especially for negative Best Estimates o For some lines of products 18

19 SCR: Positive outputs General design of SCR confirmed o Modular approach (modules and sub modules) o Diversification through correlation matrices Outcome of internal models on average similar to the standard formula, and better for well diversified structures No major practical difficulties in calculating the MCR Interplay between MCR and SCR ( MCR / SCR = 33.8%, in the middle of the corridor) 19

20 The loss absorbency modelled in the standard formula Graph 10: Impact of diversification and loss-absorbing capacity Risks ( 1328bn) Diversification (- 466bn / -35.1%) Sharing (- 314bn / -23.7%) SCR ( 547bn / 41.2%) 0% 50% 100% 150% 200% 250% Around 40% of the Future Discretionary Benefits were consumed 20

21 Market Counterparty Life Health Non-Life Diversification Intangible BSCR SCR Op Adj TP/DT RFF SCR Market Counterparty Life Health Non-Life Diversification Intangible BSCR SCR Op Adj TP/DT RFF SCR SCR Composition Similarities and differences between solos and groups Graph 32: BSCR structure (solo) Graph 32: BSCR structure (groups) 200% 250% 180% 160% 140% 120% 100% 80% 60% 40% 102% 12% 28% 8% 30% 32% 0% 148% 8% 57% 1% 100% 200% 150% 100% 50% 113% 8% 34% 10% 31% 46% 0% 149% 10% 60% 3% 100% 20% 0% 0% Diversified risk charge Diversified risk charge 21

22 BSCR structure Similarities and differences for life and non-life Graph 35: Diversified BSCR - Life undertakings (solo) Graph 36: Diversified BSCR - Non-life undertakings (solo) 120% 120% 100% 80% 60% 40% 67.4% 7.7% 23.7% 1.0% 0.0% 0.1% 100.0% 100% 80% 60% 40% 7.0% 0.5% 7.0% 52.4% 0.4% 100.0% 20% 20% 32.8% 0% Market Counterparty Life Health Non-Life Intangible BSCR 0% Market Counterparty Life Health Non-Life Intangible BSCR Diversified risk charge Diversified risk charge 22

23 Internal models (1) Caveats: small sample and internal models not finalized Using: 262/309. Working on implementation: % of group members would use the model developed at group level Spike of submissions around the introduction date of Solvency II expected 23

24 The standard formula SCR compared to RSM The removal of implicit prudence in the TP is parallelled by an increase in the explicit, granular, risk based own funds requirements. SCR: Around twice the existing Required Solvency Margin. Graph 9: SCR compared to RSM AT: [242]% BE: [171]% BG: [330]% CY: [168]% CZ: [258]% DE: [241]% DK: [156]% EE: [172]% ES: [167]% FI: [376]% FR: [167]% GR: [229]% HU: [272]% IE: [358]% IS: [380]% IT: [162]% LI: [381]% LT: [202]% LU: [303]% LV: [178]% MT: [266]% NL: [206]% NO: [269]% PL: [291]% PT: [160]% RO: [208]% SE: [677]% SE(*): [134]% SI: [319]% SK: [229]% UK: [191]% QIS5: [211]% 24

25 Participants The MCR main essential points After the AMCR, 15% of the undertakings are above the corridor 1.3% had a shortfall greater than 50% 0.6% had negative own funds Graph 53: The corridor and AMCR effect on MCR 15% Graph 7: Distribution of MCR shortfall 30% 25% 20% 20% 15% 10% 5% 0% Negative Own funds 50% to 100% 25% to 50% 10% to 25% 5% to 10% Less than 5% 35% Shortfall as % of required MCR Above corridor At cap level In corridor At floor level 25

26 The Standard formula SCR coverage distribution Graph 4: Distribution of SCR coverage More than 400% 13.9% Between 350% and 400% 5.3% Between 300% and 350% 7.4% Between 250% and 300% 9.5% Between 200% and 250% 12.2% Between 150% and 200% 17.1% Between 120% and 150% 11.4% Between 100% and 120% 8.3% Between 75% and 100% 6.1% Less than 75% 8.8% 26

27 Composition of own funds Total available own funds billion 846 billion of Tier 1 Predominance of ordinary share capital, share premium account and retained earnings Reconciliation reserve = 10% approx 27

28 Feasibility 28 June

29 How to get the best regime: steps forward 28 June

30 Further work: Valuation Consistency with IFRS Mark to model Deferred taxes 30

31 Further work: SCR Non-Life catastrophe risk: (calibration, data availability and effort required, risk mitigation) o Further work in progress Counterparty default risk o Difficulty applying full calculation o Proportional to (lack) of importance for some? Calculation of loss absorbency of deferred taxes Equivalent scenario Lapse risk (policy level in life, availability of systems and process in non life) Look through approach (e.g. unit-linked) 31

32 Further work: Expected profits in future premiums Quantified in QIS5 amount disclosed as part of Tier 1 Proxy methodology intended to provide a simple and consistent approach but Poor participation rate 29% Results affected by calculation difficulties, assumptions and undertakings concerns about the concept Care with use of data Weighted average 20% of Tier 1 v 16% for groups 32

33 Further work: Groups Absorbing effects of deferred taxes and future discretionary benefits at group level Treatment of ring fenced funds Treatment of intra-group transactions 33

34 Thank you Anna Maria Ambroselli, ISVAP, QIS5 Task Force

Results of the QIS5 Report

Results of the QIS5 Report aktuariat-witzel Universität Basel Frühjahrssemester 2011 Dr. Ruprecht Witzel ruprecht.witzel@aktuariat-witzel.ch On 5 July 2010 the European Commission published the QIS5 Technical Specifications The