SOLVENCY ASSESSMENT AND MANAGEMENT (SAM) FRAMEWORK Hantie van Heerden Head: Actuarial Insurance Department 5 October 2010
High-level summary of Solvency II Background to SAM Agenda Current Structures Progress to date SAM Roadmap Interim measures: Short-term insurance QIS
EU process The EU Process for implementing regulation in financial services uses the Lamfalussy Process: Level 1 Framework Principle (Directive) Approved 2009 Level 2 Implementation of principles (regulation) ( ) CEIOPS advice given Level 3 Guidelines and recommendations Next step Level 4 Enforcement After 2012
Solvency II Background Three Pillar Approach Quantitative capital requirements Qualitative supervisory review Market discipline Technical provisions Minimum capital requirement (MCR) Solvency Capital Requirement (SCR) Investment rules Principles for internal control and risk management Supervisory review process Transparency Disclosure Support of riskbased supervision through market mechanisms Market-consistent valuation Validation of internal models New focus for supervisor Level of harmonisation More pressure from capital markets More pressure from rating agencies
Pillar I components Own funds Assets Technical provisions Policyholder liabilities Margins cost of capital approach Other liabilities Capital Requirements More detail in following slides
Solvency II Balance Sheet
Pillar I: SCR formula
QIS 5: SCR formula
Solvency Capital Requirement Calculated at least annually Based on 1 in 200 year confidence level (99.5% sufficiency) over a 1-year time horizon Going-concern assumption Calculated by Standard formula Standard formula with company-specific parameters Partial internal model Full internal model Risk modules aggregated by correlation matrices Calculated for at least 2 years after model approval
Minimum Solvency Requirement Absolute minimum requirement Allows for a ladder of supervisory intervention Roughly represents an 85% level of confidence Simple linear factor-based formula, calculated quarterly Corridor of 25% to 45% of SCR Subject to monetary minimum
Pillar II Quantitative requirements not sufficient on their own Require every insurer to have four functions: Risk management Internal audit Actuarial function Compliance function
Pillar II Every insurer must complete an ORSA (Own Risk and Solvency Assessment) Part of risk management (not an actuarial exercise) and should encompass all material risks Does not require an insurer to develop an internal model Responsibility of the insurer (understood by administrative / management body) and should be regularly reviewed and approved. It is insurer s own assessment (Economic capital level) Integral part of the business strategy Forward looking - the risks an insurer is currently exposed to or may face in the long term.
Pillar II: Articles with level 2 advice Article 49: Outsourcing Article 48: Actuarial Function Article 42: Fit & Proper Article 41: Governance system Article 47: Internal Audit Article 44: Risk Management Article 46: Internal Control
Key Responsibilities
Pillar II: Supervisory Review Process Importance of on-site visits Framework is a continuous process based on intervention ladder: 1) Periodic (reporting) C A Free Assets SCR 2) Ad-hoc Early warning indicators (Economic capital) Breach of SCR / MCR triggers supervisory intervention 3) Supervisory Enquiry P I T A L Initial Intervention Ultimate Regulatory MCR Action
Pillar III Private Report to Supervisors (RTS) Annual submission will highlight any material changes over the year Other reporting includes quarterly submissions of core information to supervisors (including detailed information on investments) SFCR plus material not suitable for public disclosure Public Annual Solvency and Condition Report (SFCR) Exemptions permitted if undertaking would be at a competitive disadvantage - materiality Major change for insurers
High-level summary of Solvency II Background to SAM Agenda Current Structures Progress to date SAM Roadmap Interim measures: Short-term insurance QIS
Background to SAM Aim is to develop a SA equivalent solvency regime to be in line with international standards, based on Solvency II SAM will encompass a solvency regime for both shortterm and long-term insurance Overarching principle: the recommendations arising from the SAM project should meet the requirements of a third country equivalence assessment under Solvency II, adapted for SA circumstances Started November 2009
Background (continued) Proposed implementation date is January 2014 Proposed implementation date for certain interim measures is January 2012 Revised technical provisions and capital requirements for short-term insurers Pillar 2 requirements i.t.o. governance, internal controls, and risk management for both industries Group supervision In implementing SAM, a few IAIS core principles will be introduced in South Africa and some will be enhanced
High-level summary of Solvency II Background to SAM Agenda Current Structures Progress to date SAM Roadmap Interim measures: Short-term insurance QIS
SAM structure
Structure Project management of SAM o FSB provides project management team for SAM project o The secretariat function is provided by the FSB o All meetings up to task group level recorded and minuted by SAM secretariat (provided by FSB) Drafting o The FSB will be responsible for drafting changes to short-term and long-term Insurance Acts (comparable with Solvency II level 1 text) and sub-ordinate legislation (level 2 and 3 texts) Website o A web portal for SAM project has been established to provide a single point of reference for all project and library documentation
High-level summary of Solvency II Background to SAM Agenda Current Structures Progress to date SAM Roadmap Interim measures: Short-term insurance QIS
Progress to date 1st deadline was 30 September 2010 Deals with input into primary / enabling legislation Close alignment with SII expected Short-term insurance QIS sent out (more about that later) Stress testing first results to be submitted end October 2010 (based on June 2010 information) Group legislation
High-level summary of Solvency II Background to SAM Agenda Current Structures Progress to date and current issues SAM Roadmap Interim measures: Short-term insurance QIS
SAM Roadmap document The purpose of the roadmap document is to serve as a guide for the insurance industry to assist with preparations for the implementation of SAM Contains checklist of major timelines Key messages for SA insurers Summary of interim measures Broad guidance on Pillar I, II and III
Internal Model Approach Under SAM companies will be able to calculate the Standard Capital Requirement using their own full or partial internal model as an alternative to the standard formulae, subject to approval by the FSB Insurers wishing to use an internal model from 2014 should already have made substantial progress in the development of their model Companies using an internal model should use the same model to determine economic and regulatory capital No internal model approach will be specified as the complexity of the internal model should reflect the insurers risk profile
High-level summary of Solvency II Background to SAM Agenda Current Structures Progress to date SAM Roadmap 7Interim measures: Short-term insurance QIS
Interim measures: ST QIS Interim measures for short-term insurers @ Jan 2012 Technical provisions Capital requirements First FCR calibration done in 2005 Latest FCR calibration in 2009 Simplify framework Include latest data (up to 2008) excluding reinsurers, cells, captives Introduce additional features Objectives of interim measures More risk-based Easy to calculate Stepping stone to full implementation of SAM
Interim measures: ST QIS QIS sent out 6 August 2010, submission date was 6 September 2010 Received feedback from 54 insurers out of 88 QIS sent (i.e. 61% of insurers and 78% of total assets based on total industry) Comparing current requirements proposed FCR requirements stochastic calculations based on 2009 annual returns First proposals before the end of the year (will also propose an MCR) Draft Notice for industry comment expected in first quarter 2011
Differences: Interim and SAM Both interim measures & SAM addresses insurance risk, market risk, credit risk and operational risk But under SAM the formulas will be different SAM will also introduce - Catastrophe risk Technical provisions on cash-flow basis Discounting Margins on technical provisions on cost of capital approach
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