The road to Solvency II: The Regulatory View Rob Curtis Director, KPMG 1 June 2011
Background to developments The Global Financial Crisis (GFC) highlighted: Regulatory focus at individual firm level and not enough at group or the macro level A lack of oversight and monitoring of non-regulated subsidiaries/activities Legal and legislative limitations on insurance group supervision Limitations in the quality and content of supervision A lack of coordination of responsibilities and mechanisms among supervisors A lack of effective tools to identify and monitor regulatory arbitrage on a cross-sector and cross-boarder basis
Focus was very nationalistic: NAIC - RBC What were regulators doing previously? Canada DCAT Australia Non-Life RBC reforms UK FSA ICAS reforms Europe Solvency 1
Solvency II: The drive for a common approach European developments Risk-based approach focussing particularly on achieving better risk and capital assessments, governance oversight, group supervision and regulatory cooperation Causes of insurance failure usually a result of poor board and senior management oversight and controls
Strategy & Risk Management Strategic Framework Planning SII control framework DRAFT Risk Appetite Risk Operating Model Calculation kernel Methodology Data Assumption setting Validation Asset & Liability Management Business & Operations Planning & Control Risk & Financial Information Reporting Disclosures Risk MI Assessment & Steering ORSA Pillar I Pillar II Pillar III [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4
Latest developments on Solvency II QIS 5 Results - overview Participation rate 70% (2,520 firms from 3,700) For the industry as a whole, eligible own funds in excess of the SCR by 395bn Average solvency ratio for UK Life firms was 388% and 203% for Non-Life firms 15%-20% of insurers did not meet the requirements Lloyd s have announced they will need to raise capital (global specialist risks and Cat. risks difficult to model in the SCR) Little benefit at a solo level for internal models but 20% at group level
Key findings from QIS5 The likely future for the European insurance sector Insurers likely to reduce their exposure to certain types of assets e.g. Corporate bonds vis-a-vis sovereign debt Inevitably there will be further consolidation as firms will try to maximise upon diversification benefits offered from Solvency II especially from smaller firms struggling to meet new capital requirements New regime based on the fair value of assets and liabilities, which will invariably bring volatility to traditional measures of financial strength Such outcomes will likely increase the use of hedging and reinsurance to manage capital positions We expect firms to continue changing their corporate structures, for example, moving from a subsidiary to branch structure
Looking ahead Residual tensions still remain between supervisors and industry Implementation issues remain significant UK FSA difficulties Undertaking Specific Parameters (USPs) proving challenging for many firms due to complexity ORSA biggest issues is how to turn the ORSA regulatory requirements into practical use cultural change still to take effect although many now seeing a risk and finance transformation need Risk appetite link to strategic plans proving difficult including knock-on effects to risk integration of finance, risk and actuarial, risk MI, risk assurance and capital management Use Test Board and senior management responsibilities many struggling with increased expectations of supervisors Implementing a three lines of defence model is proving very difficult for many insurers Supervisory strategy is needed by insurers
Beyond Solvency II New challenges emerging for the industry Omnibus II transitional measures and transposition difficulties Equivalence issues IAIS Insurance Core Principles greater focus on risk management and governance including increased use of stress and scenario testing ComFrame Systemic risk - Living Wills Recovery and Resolution Plans
Thank you Rob Curtis Director Risk and Regulatory Centre of Excellence Europe, Middle East and Africa rob.curtis@kpmg.co.uk Ph: +44 20 7694 8818