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Regulação no sector SeguradorSolvency IIStrategic implications & international trends
Garvan O’Neill
Solvency II is the most significant single change ever faced by Europe’sinsurance companies
How well prepared are Insurers and their regulators ??
Slide 3PricewaterhouseCoopers12 de Dezembro de 2006
Agenda
Solvency II – Overview and key driversInternational trends • UK • Switzerland• Sweden• OthersStrategic implications• Implications for Companies• Implications for RegulatorsNext steps for Insurers
Strategic implications & international trends
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Key drivers behind Solvency II
• Deficiencies in current solvency frameworkNo risk-based capital requirementsRisk Management practices have little influence on capital requirementsNo consideration of the composition of the assets held in the capital calculationNo consideration of other significant risks (e.g. operational, legal)
• Increased recognition of the importance of global insurance industry
• Solvency developments in other FS areas (i.e. Basel for banking etc.)
Overview and key drivers
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EU - Solvency II
International trends
• Introduce in 2010/11 an EU harmonised prudential solvency standard that allows comparability and is transparent and coherent
• Principles based regime - not detailed rules• Solvency position will be based on market-consistently valued
assets and liabilities • Allows standard and internal risk models -expects risk
interdependencies to be explicitly modelled thereby incentivizing use of own internal models
• Based on three pillar approach similar to Basel II
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Overview and key drivers
Overview of Solvency II structure
Technical provisions
Investment rules and ALM
Capital rules
Internal controls and sound risk managementSupervisory intervention
PILLAR I
Disclosure• Frequent• Forward-looking• Relevant
SUPERVISORY REVIEW DISCLOSURE
REQUIREMENTS
Solvency II
QUANTITATIVE
REQUIREMENTS
PILLAR II PILLAR III
The Three Pillar Approach
MORE COMPLEX THAN BANKING DUE TO INDUSTRY CHARACTERISTICS
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Overview and key drivers
Timescales
2005 2006 2007 2008 2009 2010
3 waves of ECCalls for Advice
Draft Framework Directive Published
Quantitative Impact Studies (QIS I, II, III,…)
Full Implementation
Detailed rules(Level 2)
FurtherCalls for Advice
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Most recent QIS II high level findings
International trends
• Achieved representation of 50% market share across 23 countries
• No indication of solvency shortfall amongst respondents
• Overall solvency ratios fell but greater than 100%
• Slight preference for cost of capital
• Highlighted clear need for additional guidance on assumptions to be used
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International trends
Strategic implications & international trends
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International trends
UK – risk based system already introduced
• January 2005 – introduction of a risk-orientated system of supervision
• Financial resources must take account of all significant risks and liabilities
• Requires insurers to identify their specific risks, have an appropriate control environment in place to manage those risks and monitor the enforcement of controls.
• Final level of capital is based on the Enhanced Capital Requirement (mathematical) and the Individual Capital Assessment (a self assessed capital requirement based on risk profile)
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Switzerland – moving towards Solvency II type model
• By 2008, all insurers must perform the Swiss Solvency Test (SST)calculations and solvency target must be met after 2011
• Principles based system and is similar to Solvency II • SST is based on market - consistently valued assets and
liabilities• 3 pillar structure• Insurers must calculate two capital numbers: minimum
capital (statutory solvency) and target capital (market valued solvency)
• There is a mixture of standard models (market, credit and insurance risks) and internal models (target capital)
• Reinsurance can be fully taken into account
International trends
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Sweden – new “traffic light system”
• In 1999, Swedish Government established a commission to review restrictions on assets covering technical provisions (TP) and rules for available solvency margin. Reports presented in 2003.
• New Traffic- Light System introduced designed to increase transparency, enhance incentives to manage risks and defines criteria for Regulatory intervention in companies with a weakened capital.
• Three interdependent components:
- Realistic valuation of insurance liabilities (TP)
- Amended asset restrictions and valuation of assets covering TP
- Assessment of risks as a safety margin• The underlying model was developed in co-operation with the industry this
year through preliminary tests.
• The Regulator expects a full-fledged version to be available for 2006/07.
International trends
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Other unilateral regulatory developments
Netherlands
• Risk based system being considered but currently postponed
Germany
• Focus on Pillar II controls frameworks and evaluation thereof
Ireland
• Development of risk based system for more complex players within the scope of the reinsurance directive
International trends
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Strategic implications
Strategic implications & international trends
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Strategic implications for companies
• Possible re-evaluation of lines of products and prices• Examine extent of integration of risk management framework
with business processes • Consider creation of Economic Capital Models• Establish financial and resourcing costs of conversion – Basel
II experience
Strategic implications for companies
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Product pricing/design
• Product pricing strategy and development will need to be considered in more detail by insurers (i.e. ensure risk/ reward is balanced)
• Different products have different characteristics and Solvency II will bring greater transparency into the elements that drive risks making some products more capital intensive
• Capital strain will increase for firms concentrated in certain lines of business• Life: unit linked products with guarantees may become more attractive to
insurers than long term with-profits products with high guarantees• Non-life: some commercial lines/assumed reinsurance products could lead
to re-rating, exclusions and market withdrawals
Strategic implications for companies
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Integration of risk management framework and business process
Solvency II system will reward organisations with:• Integrated risk management frameworks • Well developed reporting technologies and systems• Clean and accessible historic data sets• Strong awareness of all risks - operational risk (risk inventory)• A focus on core competencies• Controls designed to identify volatility in markets to promote
mitigation• An adjusted risk strategy to risk bearing capacity
Strategic implications for companies
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Economic capital modeling• Sophisticated internal risk models can bring competitive advantage• “Standard model approach” for small to medium sized entities, who have
difficulty in meeting cost of building internal models, need to perform cost/ benefit evaluation
• Trade off between simplicity and conservatism –Standard Model Approach is not company specific and thus insurers likely to need to maintain greater capital
Strategic implications for companies
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Strategic implications for regulators
• Increasingly complex and demanding regulatory landscape
• Resource challenge for regulators in smaller territories
• Challenge of consistency across Europe and within markets –currently a potentially tilted playing field
Strategic implications for regulators
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Main challenges and unresolved issues
Challenges:• Level of industry engagement• Gaining necessary skills and expertises• Cost/ benefit analysis• Solvency arbitrage and consistencyUnresolved issues:• Pillar I• Home versus host regulatory responsibilities (evolution/ revolution)• Proportionality for small and medium sized enterprises
Strategic implications for regulators
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Next steps for insurers – Solvency II
• Understand better the implications of Solvency II• Inform business units and functions• Start to develop a list of activities (i.e. Project Office etc.)• Integrate with business planning process and current projects
(SOX, IFRS and IT upgrades)
Strategic Implications
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Next steps for insurers – Solvency II
• Embed within strategic decision making process
• Develop management information - Including key risk
indicators, solvency reporting, ongoing monitoring of company performance
• Internal audit/ QA/ Control loops
Strategic Implications
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Key messages
• Insurers need to understand and influence the debate NOW: - July 2007 will be much too late
• Solution will NOT be Group delivered (unlike IFRS) –consideration at local territory level is key
• Planning for Solvency II will avoid business disruption and may offer competitive advantage
Strategic Implications
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Concluding remarks
• Industry’s overall solvency position may not have a change significantly but the way business is conducted will change dramatically
• The adoption of an integrated risk approach will see insurers with a conservative investment strategy and less concentrated product structure maintaining less capital than their peers.
• The same is true of those with effective risk mitigation systemsbuilt into their internal models.
• Insurers in UK and Switzerland have derived benefits from risk based regulation
Strategic implications & international trends
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