Solvency II Survey April 2012

Transcription

1 Solvency II Survey April 2012

2 1. Introduction Solvency II is becoming ever closer and firms should be progressing with all the main elements. Many firms will be interested to know how others in the market are progressing with the implementation of their Solvency II related projects, given the milestones set by EIOPA between now and the implementation dates. Following the success of our Fifth Quantitative Impact Study (QIS5) Survey conducted in late 2010, we have recently carried out a survey to find out how prepared businesses are and what issues they are facing. Our survey was sent to a wide range of undertakings. We received 38 completed responses, comprising 19 life, 12 non-life and 7 composite undertakings, of which: 14 write reinsurance business Table 1.1 What type of insurance do you write? 3 are listed companies, 8 are Lloyd s syndicates/ London market firms, 13 are from the Mutual sector, 10 are a subsidiary of a larger group, 1 is a Captive and 3 listed themselves as Other Life Non-life Composite 8 classify themselves as small or medium The questions covered a range of topics including the implementation date, Pillar 1 and internal models, ORSA, Reporting Requirements and resources. Only 24% responded that they are confident or very confident that Solvency II will be implemented on 1 January Despite this, 63% of companies stated that their ideal implementation date would be 1 January 2013 or 1 January After the transposition, 29% of respondents think less than 6 months is required to implement Solvency II, 36% think 6-12 months is required and the remaining 35% think that over a year is required. The uncertainty surrounding implementation dates has negatively impacted 60% of respondents. 8 of respondents have recalculated, or are planning to recalculate, their SCR since QIS5 in autumn Solvency II Survey April 2012

3 2. Internal Model In the UK, many insurance companies are creating their own internal models that better reflect their risk profiles for calculating Solvency II capital adequacy requirements. The main stages of the process are design, creation, testing, validation and documentation. 39% of respondents are planning on using an Internal Model (IM). Of these, 13% classified themselves as small, 2 as medium and 60% as large. Not surprisingly, all Lloyd s syndicates are planning on using an IM but none of the respondents from the mutual sector are. The submission dates ranged from December 2011 to February Responses with submission dates in Q and Q were all Lloyd s syndicates / London Market Firms. Encouragingly the model design, the model creation and model testing were all progressing in line with expectations. 46% are behind schedule for validating their IM or are yet to start it. All the Lloyd s syndicates / London market firms are either completing the documentation for the IM alongside developing the IM or have already completed their documentation. Table What stage are you at in completing your internal model? Design 93% Creation 93% Testing 86% Validation 54% 33% 13% Progressing in line with Expectations Work in progress, but behind schedule Planning to do Table What aspects of the internal model approval process do you think are most challenging? (tick the most challenging three) External Models and Data Documentation Validation P&L Attribution 4 60% 73% 33% Calibration Standards Statistical Quality Standards Internal Models Governance Use Test 13% 0% 20% Overall, firms thought that the most challenging aspects of the approval process are validation, documentation and external models and data. The validation aspect was raised by 73% of firms regardless of what type of insurance they write. We questioned how insurers are planning to resource validation of their model. 80% of firms have commenced validating their model internally or are planning to, have or are planning to use external auditors to validate their model and the remaining 13% have or are planning to use some other form of external resources. The majority of firms (73%) are either confident or very confident that their IM will get approved. Solvency II Survey April

4 3. ORSA Solvency II s Own Risk and Solvency Assessment (ORSA) should be high on all insurers priority lists. Situated at the centre of Pillar II, the ORSA is the heart of Solvency II. The ORSA requires insurers to properly determine their overall solvency needs and plays a fundamental role in the whole company s operations. We questioned whether respondents think the guidelines from the consultation paper on level 3 guidance for the ORSA, published by EIOPA, are appropriate. The majority of firms have a neutral opinion of the guidelines. Table How appropriate were the guidelines for the following? Group Frequency of the ORSA Specific features including solvency needs, capital requirements and technical provisions Internal report on ORSA ORSA policy Documentation Role of administrative, management or supervisory body Principle of Proportionality 14% 69% % 11% 29% 60% 11% 24% 63% 13% 34% 53% 13% 32% 49% 19% 45% 52% 3% 32% 55% 13% Appropriate Neutral Not Appropriate Table What stage are you at in completing your ORSA design? ORSA Gap Analysis ORSA Policy Assessment of risk profile, tolerance limits and business strategy Assessment of deviations between risk profile and assumptions underlying the SCR ORSA Valuation basis Stress testing and scenario analysis Assessment of overall solvency needs Daily monitoring of regulatory capital requirements Record of each ORSA process Internal report on the ORSA ORSA supervisory report Feedback of ORSA results into the system of governance 41% 35% 19% 5% 36% 32% 24% 8% 32% 50% 13% 5% 19% 43% 22% 16% 28% 39% 19% 14% 21% 3 24% 18% 21% 42% 24% 13% 6% 31% 25% 38% 18% 18% 43% 21% 24% 26% 26% 24% 11% 2 32% 30% 12% 41% 21% 26% Completed Work in progress In planning stages Not started yet We asked how firms are progressing with their ORSA design. Reassuringly many firms have completed or are progressing work on their ORSA design. The daily monitoring of regulatory capital requirements part of the ORSA design is the aspect that requires the most work, with 38% of firms not having started any work on it. 25% of Lloyd s syndicates / London market firms have completed every aspect of their ORSA design. 3% of all firms have not started any aspect. 4 Solvency II Survey April 2012

5 Table What problems have you had with developing your ORSA? (tick all that apply) Understanding the requirements 42% Translating the requirements into a practical plan 71% Time /Resource 50% Collaborating with all required departments 18% None 8% When developing their ORSA, 71% of firms had problems with translating the requirements into a practical plan. Time and resources are also causing problems with developing the ORSA with 50% citing this. Small firms did not have any problems with collaborating with all required departments. Table What aspects of the ORSA have been, or do you think will be, difficult to meet? (tick most challenging three) ORSA Gap Analysis ORSA Policy Assessment of risk profile, tolerance limits and business strategy Assessment of deviations between risk profile and assumptions underlying the SCR ORSA Valuation basis Stress testing and scenario analyses Assessment of overall solvency needs 9% 15% 21% 26% 12% 32% 6% Daily monitoring of regulatory capital requirements 53% Record of each ORSA process Internal report on the ORSA ORSA supervisory report Feedback of ORSA results into the system of governance Getting buy in from the board 15% 9% 18% 21% 12% The most challenging aspect of the ORSA will be the daily monitoring of the regulatory capital requirement with 53% of respondents selecting this. Solvency II Survey April

6 4. Reporting Requirements Pillar III of Solvency II concerns disclosure and reporting requirements. This will involve publishing a Solvency and Financial Condition Report (SFCR), a Regular Supervisory Report (RSR) and Quantitative Reporting Templates (QRT). 34% of the respondents believe that there are still issues with the variation analysis templates. This was closely followed by the quarterly reporting of the balance sheet which 29% of respondents felt still has issues. Table Which of the following areas of the reporting requirements do you consider to still have issues? (tick all that apply) Guidelines for Narrative Public Disclosure & Supervisory Reporting 16% Reporting for ring-fenced funds 18% Non-life catastrophe risk template 24% Reporting of Risk Concentration 24% Quarterly reporting of the Balance Sheet 29% Own Funds 18% Variation Analysis templates 34% Table Do you have the required data readily available to satisfy the proposed quantitative reporting requirements? Composite 71% 29% Non-life 42% 58% Life 58% 42% Total 55% 45% Yes No 55% of the respondents believe that they have the required data readily available to satisfy the proposed quantitative reporting requirements, whereas 45% do not. Splitting this down to life and non-life it appears that life companies are more prepared than non-life with 58% saying they have the required data compared to 42% of non-life. Composite companies are the most prepared with 71% responding that they have the data readily available. 6 Solvency II Survey April 2012

7 Table How are you planning to meet the reporting requirements? Small firms 21% 14% 58% Medium firms 4 21% 11% 21% Large firms 80% 20% Total 3 18% 13% 32% Use available in-house software/package Build a bespoke solution Buy a new solution Not yet considered / have not decided 3 of the respondents are planning on using resources available in-house to meet the reporting requirements. 18% are planning on buying a new solution while 13% are expecting to build a bespoke solution. 32% respondents have not yet considered or are still undecided about how they are planning on meeting the requirements, the majority of which are the small firms. 80% of the large firms will be using inhouse resources while the remaining 20% will be building a bespoke solution. Conversely, only of small firms will be using resources available in-house and 21% will be buying a new solution. Table Have you started considering narrative reporting content of the SFCR and RSR? Yes 26% No, will wait until Level 2 delegated acts are finalised 4 No, but plan to start looking at them based on EIOPA s guidance in the consultation paper 24% Not yet considered 3% Overall 4 of firms plan to consider the narrative reporting content of the SFCR and RSR after the Level 2 delegated acts are finalised. We were interested to see what insurance companies feel are reasonable time frames for completing quarterly and annual reporting, both first time and long-term. 61% feel that they will need 12 weeks or less for annual reporting for the first time, rising to 78% in the long-term. All respondents think that 17 weeks or less is a reasonable amount of time to spend on annual reporting in the long-term. For quarterly reporting, 80% of respondents think they will spend 8 weeks or less for the first time, rising to 94% in the long-term. Solvency II Survey April

8 5. Resources There has been lots of work required to get insurance companies ready for Solvency II and many companies have not been able to rely solely on internal resources. For 9 of respondents Solvency II is impacting the availability of resources for normal business. 8 of respondents have used external resources, with 53% using consultants and 34% using contractors. This is much higher than our last survey, when only 4 of respondents required external resources to complete QIS5. The resources were required both for additional man hours and additional technical expertise. 82% were satisfied with the external resources that they used. Table Have you used external resources? 13% 34% Yes - contractors Yes - consultants 53% No The total amount spent on Solvency II has varied massively, ranging from less than 100,000 to over 4m. All Lloyd s and London market firms have spent over 500,000 to date on Solvency II while 85% of Friendly Societies and Mutuals have spent less than 250,000. For 61% of respondents, these figures are in line with expectations, while 3 feel that the cost is above expectations. Respondents also estimated how much they expect to spend on Solvency II in total. Table Can you provide an estimate of the amount Solvency II will cost in total to your organisation, including internal staff costs? Over 4,000,000 22% 2,000,000-4,000,000 9% 1,000,000-2,000,000 13% 500,000-1,000,000 6% 250, ,000 13% 100, ,000 28% Under 100,000 9% 8 Solvency II Survey April 2012

9 6. Pension Scheme Defined benefit pension scheme assets and liabilities are to be included in an insurers balance sheet on a Solvency II basis and will need to be included in the stresses to calculate the SCR. 39% of respondents have a defined benefit pension scheme, of which 53% have not yet considered the impact the Solvency II requirements will have on the management of the scheme. 7. Future We questioned what businesses have been doing since QIS5 in autumn The most common responses were improving internal processes and improving data collection, with 64% and 53% respectively stating that they have changed these. 34% have not made any major changes. Internal processes and data collection are still the main changes that companies are planning to make in the run up to Solvency II implementation, with 71% of respondents looking to improve these aspects. There are few radical changes that are going to be made with only one respondent looking to relocate to a non- EEA country. No companies are planning to pull out of certain markets or geographical locations. 50% of respondents will be reviewing their investment strategy and 32% will be looking at their reinsurance arrangements. Table Changes in the run up to Solvency II implementation Improve your internal processes Improve your data collection 71% 71% Review your investment strategy 50% Review your reinsurance strategy Implement ERM strategy Consider using an internal model/partial internal Amend your business mix Relocate to a non-eea country Pull out of certain geographical locations Pull out of certain markets None of the above 32% 21% 11% 5% 3% 0% 0% 8% At the end of 2011, EIOPA released consultation papers covering the ORSA and reporting requirements and comments have now been received. 8 of respondents will now be focusing on the ORSA and 68% will be looking at meeting the reporting requirements. Table Next steps Implementation of Pillar 1 42% Developing your internal model/partial model/usps 18% ORSA 8 Meeting Reporting template requirements 68% Solvency II Survey April

10 8. BW Comments In all aspects of implementation, Lloyd s syndicates and other London market firms are ahead of the game and lots can be learnt from the experience of the Lloyd s and London market. It is reassuring to see that of the companies who are planning to use an internal model the majority are progressing in line with expectations. The area that most needs addressing is validation, and companies will need to take care to ensure that the internal model validation satisfies the FSA s views on independence. The FSA has started accepting internal model applications and it will be interesting to see any comments it has on the independence of validation. The ORSA is the area that most companies will now be focusing on. Firms will find various aspects of the ORSA difficult to complete. It will be interesting to see what procedures are put in place for daily monitoring of regulatory capital requirements. Reporting is an area that needs progressing and meeting the reporting requirements is a key focus. Over half of the respondents from small firms have not yet considered how they are planning to meet the reporting requirements. Despite there still being uncertainty surrounding final rules for a range of elements in the new regime, companies are progressing well and are working towards implementation. There has been a push to get on top of the quantitative side but we have concerns that there has not been enough focus on what exactly Solvency II means to a business. For Solvency II to be of benefit to the industry it needs to be adding value. Firms need to consider the true implications and not just the effect on the balance sheet. This will involve reviewing the investment strategy, reinsurance arrangements and business mix. All departments of an insurance company need to be involved in Solvency II and not just the Solvency II project teams. 10 Solvency II Survey April 2012

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