Life under Solvency II Be prepared! Moderator: Hugh Rosenbaum, Towers Watson Speakers: Tomas Wittbjer, Global Head of Insurance, IKANO SA Lorraine Stack, Marsh Management Services Dublin
Session Overview 1. Background of Solvency II and ORSA 2. ORSA Simulation for Sample Captive Parent Summary Information Captive summary ORSA Process ORSA Results 3. IKANO Examples 4. Conclusions
The rationale behind Solvency II Main objectives of Solvency II Improve protection of policy holders and beneficiaries Increase financial sustainability of insurance and reinsurance undertakings Improve risk management practices Complete harmonization throughout Europe and enhance competition More sophisticated measure and efficient control of the risks of the undertaking 3 pillars approach : Pillar 1 Quantitative requirements Technical provisions Solvency capital requirements Investment management Pillar 2 Qualitative requirements Governance Solvency II Risk management Some quantitative elements are embedded in Pillar 2 Pillar 3 Disclosure requirements Supervisory reporting Public disclosure Market discipline
Solvency II Capital Requirement Pillar 1 Free Surplus SCR Assets MCR 99,5% Prob Loss Reserves
Pillar 1 «Standard» formula for Calculation of SCR! SCR Adj BSCR Op Market Health Default Life Non-Life Intang Interest rate SLT Health CAT Non-SLT Health Mortality Premium & Reserve Equity Mortality Premium reserve Longevity Lapse Property Longevity Lapse Disability Morbidity CAT Spread Disability Morbidity Lapse Currency Lapse Expenses Concentratio n Expenses Revision Revision CAT Worse...Individual SCRs for each sub-module are aggregated through a correlation matrix allowing to take into account diversification effects 15/03/2013 5 5
What affects this SCR the most? Non-life risks for captives represent 44% of the SCR compared with 13% for traditional (re)insurers. Exposure Concentration risk low number of risks covered and lack of diversity in insured entities Financial Concentration risk mainly intragroup loans Default risk of counterparties, mainly reinsurers 6
ORSA : the heart of Solvency II (EIOPA)» Top-down process» Models short-term and mid-term risks» Evaluates risk/solvency, its risk appetite and business model» Goes further than the SCR-calculation Strategy Business plan Considering own funds Risk strategy Time horizon 3-5 years Risk identification - Quantitative - Qualitative Review SCRcalculation (assumptions & risk picture) Impact on SCR ORSA Stress-tests Risk management - Mitigation - SCR-calculation - Evaluation of risk assessment - Internal stress - External stress 7
Risk appetite consideration PILLAR 2 Part 2: Challenge of Best Practice Risk management and ORSA: an integrated approach Risk Management framework Integration of Pillar 1 risks Identification of new risks Risk forms (risk factors, controls ) Adjustment of Pillar 1 calculation hypotheses based on risk factors and existing mitigation elements Development of risk scenarios Risk modeling & stress tests Risk mapping & ORSA report Risk mapping ORSA Integration of ORSA results into the 3-5 years business plan + integration of the risk appetite into the regular decision-making process
ORSA Simulation Sample Captive Scenario Sample: Captive Details Established in 1998 in Ireland Property and Casualty Lines with EUR22M Aggregate Retention Annual Premium EUR4M Capital of EUR40M Loss reserves of EUR13M Combined ratio 50% Pillar 1 solvency capital requirement of: EUR15M
ORSA Simulation Sample Captive Scenario Implementation of the ORSA: our approach 1 Methodological guidelines 2 Definition and formalization of the risk management policy and procedure (including ORSA) Phase 1 : Risk management framework definition 3 4 5 Risk identification Risk quantification Validation of risk monitoring tools Phase 2 : Risk identification, quantification and monitoring 6 Definition of risk tolerance levels 7 Definition of a 3 to 5 year business plan, Stress testing & ORSA calculation 8 Production of the ORSA report Phase 3 : Calculation and production of the ORSA report
ORSA Simulation Sample Captive Scenario Phase 1 : Risk management framework definition Objectives Defining a Risk Management system Develop and formalize procedure to implement continuous and periodic RM actions Outputs Risk management policy (including risk strategy) Risk management & ORSA procedure
ORSA Simulation Sample Captive Scenario Phase 2 : Risk identification, quantification and monitoring Objectives Analyze all the captive s risks Implementing a monitoring system Outputs Risk map: risk description, assessment, risk owners, key risk indicators, and action plans
ORSA Simulation Sample Captive Scenario Phase 2 : Risk identification, quantification and monitoring General description (name, type) Qualitative description (exposure and mitigation techniques) Pillar 1 calculation and critics Assessment (SF or other methodologies) Monitoring (risk owners, indicators, improvement of mitigation techniques)
ORSA Simulation Sample Captive Scenario Phase 3 : Calculation and production of the ORSA report Objectives Projection of the risks of the captive s business plan (3 year horizon) Show impact of captive s management and/or strategy Outputs Risk appetite and Risk tolerance levels ORSA report
ORSA Simulation Sample Captive Scenario Phase 3 : Calculation and production of the ORSA report Contents of the ORSA report Executive Summary Introduction General description of the ORSA Process Description of risks (risk exposure & existing risk mitigation techniques) The impact of the risk profile on capital allocation Description of methods used and underlying assumptions Overall Solvency Needs: current and prospective Conclusions
ORSA Simulation Sample Captive Scenario Sample ORSA Results 35 000 30 000 25 000 22 856 24 191 29 233 20 000 15 000 14 956 10 858 15 268 16 111 17 935 SCR ORSA 10 000 5 000-2013 2014 2015 2016 Conclusion Free surplus of capital Potential to reduce regulatory capital through a partial or full internal model.
Ikano Insurance Companies Non-Life Insurer (Sweden) active in retail market Employee Benefit Insurer (Sweden) active in retail market Captive in off-shore jurisdiction Captive in Luxembourg subject to Solvency II Captive in Vermont
Our concerns Will our capital be sufficient? Will EU based insurers charge more to cede premiums to a non Solvency II captive? Will our costs increase due to increased corporate governance? How much do we have to disclose?
Solvency capital Current situation Solvency II Available capital 3.6 million Solvency requirement 0.5 million Minimum capital 3.2 million Available capital 16.8 million Solvency requirement 2.6 million Minimum capital 3.2 million
Captive Best Practice Guidelines Established by ECIROA ( the European CICA ) Not formally accepted by Regulators Captives should consider the Proportionality Principle. Frameworks and policies should reflect the nature, scale and complexity of the captive
General Governance Requirements Solvency II, Level 1, Chapter IV, Section 2, Articles 41,42 &43 Composition of the captive board Responsibilities of the captive board Duties of the captive board
Risk Management System Solvency II, Level 1, Chapter IV, Section 2, Article 44 Risk Management Strategy Risk Management Function Risk Management Policy Underwriting and Reserving Asset-Liability Management Investments Liquidity Operational Risk Reinsurance Credit Risk Strategic Risk Internal Control and Compliance Internal Audit
Actuarial Function Solvency II, Level 1, Chapter IV, Section 2, Article 48 Captive to ensure that decisions are based on actuarial advice Provide Captive board with reports Advise on impact of underwriting, reinsurance and risk management Can be outsourced Must meet the fit and proper requirements
Outsourcing Solvency II, Level 1, Chapter IV, Section 2, Article 49 Written outsourcing policy Service Level Agreement Service provider must demonstrate capabilities
Conclusion Solvency 2 Will Solvency II Consequences for captives Increase barriers to entry for new captives For a majority of existing captives, require higher level of capital Increase complexity of retention strategy : arbitrage own funds / retention level / market transfer conditions Increase cost of captive management Require better risk awareness by board. Does ORSA accomplish this? Affect Investment policy General application of Solvency II on the traditional insurance market may give rise to increased premiums and reduced capacity to cover certain risks. 25