GIBRALTAR INSURANCE FORUM Considerations within the Solvency II Environment 3 March 2015
GIBRALTAR INSURANCE FORUM Solvency II Insight from Other Jurisdictions Derek Bridgeman Solvency II Project Lead Marsh Captive Management Office: Dublin Tel: +353 1 605 3055 Email: derek.bridgeman@marsh.com Margareta Zaveri Solvency II Pillar 2 Lead Marsh Captive Management Office: Malta Tel: +356 23423103 Email: meta.zaveri@marsh.com
Introduction to Marsh Captive Solutions Part of the Marsh & McLennan Companies Group Risk and Insurance Services Marsh & McLennan Companies (NYSE: MMC) 2014 Revenue US$12.95 billion Consulting Marsh Guy Carpenter Mercer Oliver Wyman Group Global leader in risk and insurance services and solutions 24,000 colleagues in 400 offices Clients in more than 130 countries Nearly $40 billion in global insurance premium placed Services offered include: Risk management Risk consulting Captive management Insurance broking Alternative risk financing Insurance program management services World's premier risk and reinsurance intermediary Over 2,000 professionals in 50 offices worldwide More than 1,200 clients in 32 countries $22 billion in reinsurance premium placed globally Services offered include: Reinsurance broking Enhanced and traditional analytical services Capital markets & financial advisory services Capital optimisation Catastrophe advisory Rating agency advisory Business intelligence Global leader in consulting, outsourcing and investments Over 20,000 employees based in over 40 countries Serve more than 25,000 clients worldwide Services offered include: Consulting: HR and benefits Outsourcing: Customized administration, technology and total benefit solutions Investment services: Investment consulting and multi-manager investment management Global leader in advisory services with three operating subsidiaries Oliver Wyman - management consulting with expertise in strategy, operations, risk management, organizational transformation, and leadership development NERA Economic Consulting - Economic analysis and advice regarding complex business/legal issues arising from competition, regulation, public policy, strategy, finance, and litigation Lippincott - brand strategy and design consultancy - Marsh Captive Solutions Group MARSH 3 March 2015 2
Marsh s Captive Solutions Group (MCSG) Background MCSG was established in 1968 when the Bermuda office was opened: Marsh s Captive Solutions Group is comprised of three key disciplines: Captive Management Captive Advisory Captive Actuarial Services MCSG also provides Management, Advisory and Solvency II solutions to Non Captive Commercial Non-Life insurance companies We currently provide services to more than 1,250 clients worldwide and are confident we can provide the full range of services you require and exceed your expectations MCGS has 450 colleagues in 42 domiciles Industry leader for more than 45 years MARSH 3 March 2015 3
Marsh Presence in the Major Domiciles Total Global Captive Market: Marsh 20% Share Source: Business Insurance Survey, March 17, 2014 MARSH 3 March 2015 4
Timeline Solvency II / Pillar 1 Timeline for Implementation 2013 2014 2015 2016 Interim Measures Issued by EIOPA for consultation Published by EIOPA Implemented by Central Bank of Ireland Effective from 1st Jan 14 Governance, ORSA, Internal Model Preapproval, FLAOR Report 2014 Feasibility analysis, FLAOR Report 2015 Effective date of 1 Jan 16? MARSH 3 March 2015 5
Pillar 1 Where are we now? Most companies participated in QIS5 Various changes in requirements since QIS5 Requirements are now mostly stable with simplifications permitted in certain areas e.g. Risk Margin Companies taking a proportionate approach but clarification still required on certain aspects from regulators Marsh Pillar 1 SCR model has been developed which enables clients to maximise the efficiency of insurance program through detailed stress and scenario testing 2015 currently aligning the outputs from SCR model to Pillar 3 Qualitative Reporting Templates (QRT s) MARSH 3 March 2015 6
Marsh Captive Solvency II Experience Positives from Solvency II Clarity surrounding implementation date has driven recent growth in Solvency II domiciles. High growth from new formations and relocation of captives through 2014 and continuing into 2015 Overall Solvency II permits increased flexibility around the Investment Strategy of the company. Companies are revisiting Investment strategy to potentially reduce SCR - More efficient use of capital e.g. Potentially favourable to Intercompany Loan more funds back to highly rated parent (BBB and higher) - FLAOR exercise has allowed the Board to see the alignment of Pillars 1 and 2 and the resulting impact on the SCR charge - FLAOR/ORSA process has improved management of risk, including areas such as stress and scenario testing MARSH 3 March 2015 7
Marsh Captive Solvency II Experience Challenges ahead of 1 st Jan 2016 implementation How to Proportion Proportionality. The impact of solvency II on captives will depend on how each jurisdiction translates its requirements into national law and how its insurance regulator then applies those requirements to captives. e.g. treatment of deferred tax Local Regulatory clarification regarding types of Capital permitted under Solvency II - Ancillary Own Funds: Use of Parental Guarantees/LOC s etc. as Tier 2 or 3 Capital - Use of Subordinated Debt as 2 Capital Insurance structure to be designed with solvency II equivalence in mind. Constraints regarding dealings with subsidiary entities of international groups in non-equivalent countries How can proportionality be applied to Pillar 3 reporting MARSH 3 March 2015 8
The Benefits of FLAOR Looking Forward to ORSA Pillar 2 in the making Period of uncertainty Until January 2014 Work completed to date: Gap analysis commenced 2012 Formalised structure and reporting lines Policies for all key functions First FLAOR submitted to regulator in 2014 Corporate Governance Risk Management Internal Control Framework MARSH Code of Conduct Board Charter Fit and proper policy Outstanding Policy Internal Audit Policy Actuarial Policy Remuneration Policy Risk Appetite and Risk Tolerance Risk Management Policy Risk Management Process and FLAOR Policy Risk Register and Monitoring RM Policies: Claims reserving and IBNR Underwriting and Risk Mitigation Policy Asset and Liability Guidelines, TOR IC Internal Control and Compliance Policy 9
The Benefits of FLAOR Looking Forward to ORSA Pillar 2 in the making Challenges faced: Engaging risk owners Very complex for small undertakings such as captives A new way of thinking changing of a paradigm (reactive to pro-active) Keeping up with regulatory changes New guidelines and changes in technical specifications MARSH 3 March 2015 10
The Benefits of FLAOR Looking Forward to ORSA From ORSA to FLAOR what s next? Up to 2013: ORSA During 2013: EIOPA Guidelines FLAOR CP09/13 effective January 2014 2 dry runs in 2014 and 2015 Feedback from regulator Refinement / improvement In 2016: ORSA Regulator Feedback 2015 FLAOR 2014 FLAOR Implement changes / Refinements More feedback & refinements 2016 ORSA MARSH 3 March 2015 11
The Benefits of FLAOR Looking Forward to ORSA The first dry run what did we learn/what can be improved? The Principle of Proportionality (GL 4) Refine / Review assumptions behind financial projections Results to be challenged by the board (GL5) Sufficient resources to carry out the ORSA in-house? Insurance managers / External expertise MARSH 3 March 2015 12
The Benefits of FLAOR Looking Forward to ORSA Pillar 2 - benefits Greater synchronization and communication Subsidiary / Parent / Managers Focus on purpose and business strategy Greater awareness of risks Risk appetite (willing to take) Risk capacity (able to take) MARSH 3 March 2015 13
The Benefits of FLAOR Looking Forward to ORSA Linking FLAOR and Strategic planning Pillar 1 connection with Pillar 2 Capital requirement under own assessment and SCR under Pillar 1 Plan for ensuring compliance with SCR requirements (plan in place and monitored since 2008) Optimisation of the business Change or Affirm business strategy Lines of business Limits and retention levels Geographic territories MARSH 3 March 2015 14
The Benefits of FLAOR Looking Forward to ORSA Stress tests and Scenario Analysis According to EIOPA it is expected that companies carry out a sufficiently wide range of stress test or scenario analyses in order to provide an adequate basis for the assessment of the overall solvency needs. Reverse stress tests where is the breaking point? Scenario analysis Historical Probable future events External factors New lines of business What if MARSH 3 March 2015 15
The Benefits of FLAOR Looking Forward to ORSA Stress tests and Scenario Analysis Insight into downsides of certain strategies Remediation plans within stress testing, should the adverse events occur Not to be carried out in isolation Cooperation from finance, actuarial, underwriting, risk management and other functions MARSH 3 March 2015 16
The Benefits of FLAOR Looking Forward to ORSA Challenges for 2015 onwards Embedding Risk Management System Pillar 2 challenges for 2015 onwards Continued engagement of risk owners and board MARSH 3 March 2015 17
The Benefits of FLAOR Looking Forward to ORSA Discovering Opportunities Awareness and ownership of risks Communication across the organisation Forward looking and ahead of the game MARSH 3 March 2015 18
Pillar 2 - Corporate Governance and Risk Management System How can Marsh Captive Solutions assist? Overall Compliance Control and gap analysis Formalisation of the Corporate Governance Framework incl. review of policies Formalisation of the Risk Management System incl. review of policies MARSH 3 March 2015 19
Pillar 3 regulatory reporting requirements What will be required: Regular Supervisory Report (RSR) - Includes: Quantitative Reporting Templates (QRTs) Solvency and Financial Condition Report (SFCR) - public report Need to consider system requirements and how you will be able to transmit data in XBRL format, where required. MARSH 3 March 2015 20
Pillar 3 regulatory reporting requirements (continued) QRTs: - Standard reporting templates, as developed by EIOPA - Only need to use those that are applicable to your company - Majority of required information should flow from standard model: Balance Sheet Own Funds Capital Requirement Assets Ring Fenced funds Technical Provisions Variation Analysis Group issues - Information populated in excel format - XBRL overlay, validation and file output for upload to regulator portal - Expected quarterly and annual reporting frequency MARSH 3 March 2015 21
Pillar 1 and 3 How can Marsh Captive Solutions assist? Pillar 1 calculation tool/model to perform detailed capital analysis planning in order to achieve maximum capital efficiency Completion of Quantitative Impact/FLAOR studies detailed including stress and scenario testing Provide platform which integrates the Management, Pillar 1 calculations and Pillar 3/XBRL reporting into a single system MARSH 3 March 2015 22
Thank You Questions? Derek.Bridgeman@Marsh.com Meta.Zaveri@Marsh.com MARSH 3 March 2015 23