solvency ii & captives. solvency ii speakers: jonathan groves, senior vice president, marsh uk...
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Solvency II & Captives
Solvency II
Speakers:• Jonathan Groves, Senior Vice President, Marsh UK
Limited
• Shelby Weldon, Director, Insurance Licensing and Authorisation, Bermuda Monetary Authority
• Vlad Uhmylenko, Director Standard and Poor’s
Moderator:
• Scott Gemmell, Senior Vice President, Marsh’s Captive Solutions Group
Solvency II & Captives
Jonathan GrovesSenior Vice President
Marsh UK Limited
Solvency IIWhat is it trying to do?
Further better regulation by:
• Enhance policyholder protection– Existing rules lack risk sensitivity
• Deepen the single market– Restrictions on proper functioning of the single
market in insurance– Inefficient supervision of groups
• Improve (international) competitiveness of EU insurers– International accounting and regulatory
developments i.e. IFRS Phase 2
Solvency IIWhat is it?
Pillar 1: quantitative requirements
1. Harmonised calculation of technical provisions
2. "Prudent person" approach instead of current quantitative
restrictions
3. Two capital requirements: the Solvency Capital
Requirement (SCR) and the Minimum Capital Requirement (MCR)
Pillar 2: qualitative requirements and
supervision
1. Qualitative requirements to cover
risks which are not captured in the SCR
2. Enhanced internal control, governance, and
risk management + solvency self-
assessment
3. Strengthened supervisory review,
harmonised supervisory standards and practices
Pillar 3: prudential reporting and public
disclosure
1. Common European reporting tools
2. Public disclosure of the financial condition and
solvency report
(market discipline, as participants prefer sound
healthy companies)
Group supervision and cross-sectoral convergence
Comes into effect on October 31, 2012 (but unofficially expected to be January 1, 2013)
Solvency IIWhen is it being implemented?
2010 Omnibus Directive II
CEIOPS: Work on the technical details for implementing measures/supervisory convergence/Level 3 guidance/Binding technical standards
2006 2007 2008 2009 2010 2011 2012
Negotiation & adoption of Directive Proposal
(Council & Parliament)
Implementation preparation(Member States)
QIS 2
July 2007 Directive Proposal
QIS 3QIS 4
April-July 2008
Commission: Preparation of implementing measures
Adoption of implementing
measures
QIS 5August-Nov
2010
November 2009 Directive adopted
Development of Directive
(Commission)
Proportionality principle
Scale
ComplexityNature
Solvency IIProportionality principle
• The Directive should not be too burdensome for small and medium-sized insurance undertakings. One of the tools to acheive that objective is the proper application of the proportionality principle. That principle should apply both to the requirements on the insurance and reinsurance undertakings and on the exercise of supervisory powers (Recital 19, Solvency II Directive)
The impact
Solvency IISpecific treatment of captives
• Framework principles formally define a ‘captive’.
• Guidance from CEIOPS has further defined what will be treated as a captive:– ‘The insurance obligations of an insurance captive undertaking only relate to contracts where all insured
persons and beneficiaries in respect of unexpired risks are legal entities of the group of the captive undertaking and where all insured persons and beneficiaries were legal entities of the group at the time the contract was entered into.
– The reinsurance obligations of a captive undertaking only relate to contracts where all insured persons and beneficiaries of the underlying direct insurance contracts in respect of unexpired risks are legal entities of the group of the captive undertaking and where all insured persons and beneficiaries of the underlying direct insurance contracts were legal entities of the group at the time the contract was entered into.
– The insurance obligations of the direct insurance captive undertaking do not relate to any third party liability insurance.’
• Opt out for captive owners if premium income below EUR5 million per annum– Unclear as to whether can ‘passport’ if opted out
• If not treated as a captive, subject to full effect of Solvency II
What does it mean if…
• You have a captive in the EU– Increased minimum regulatory capital – Increased operational procedures and
accompanying documentation– Increased operational costs– Great disclosure of information into the public
domain
Solvency IIWhat might the market do?
• Exit some risk areas– Axa have already announced they are exiting some life business due
to Solvency II
• Increase price on more volatile risks– Longer tail risks will require more capital to support than has
previously been the case
• Increase fronting charges and collateral– Value of reinsurance provided by companies from non equivalent
jurisdictions discounted within Directive
• Reduce ‘authority’ of underwriters– Potential for model to over ride decisions
• Market consolidation particularly amongst smaller companies
Solvency II & Captives
Shelby WeldonDirector, Insurance Licensing and Authorisation
Bermuda Monetary Authority
Agenda
• Solvency II Regulatory Objectives
• Why seek equivalency
• Bermuda’s preparations and progress to date
• Captive implications
Regulatory Objectives
• Improve the risk management of EU insurers and reinsurers
• Advance supervisory convergence and co-operation
• Encourage cross-sectoral consistency – no regulatory arbitrage
• Introduce proportionate requirements for small undertakings
• Promote international convergence
• Increase transparency
• Ensure efficient supervision of insurance groups and financial conglomerates
Why Equivalency?
OBJECTIVE:
• Compliance with International Standards
• Solvency II most imminent
IMPORTANCE:
• Significant amount of business conducted between Bermuda and European markets
BENEFITS:
• Bermuda (re)insurers can conduct business in Europe on a non-discriminatory basis
• Avoid duplicative regulatory oversight
• Gain access to markets more efficiently due to consistency of supervisory standards
Why Equivalency?
OUR GOAL:
• Broad equivalency with Solvency II by 2012
OUR APPROACH:
• Pragmatic – not to duplicate requirements line-by-line
• Adopt intelligently in line with the nature of the Bermuda market
Solvency II Preparations & Progress
Significant policy work and framework enhancements over the previous two years
• Bermuda Solvency Capital Requirement (“BSCR”)
• Internal Capital Model (‘ICM”) approvals
• Group-Wide Supervision framework
• Supervisory Colleges
• Insurance Code of Conduct
Solvency II Preparations & Progress
Further enhancements in 2010:
• CISSA (Commercial Insurer Solvency Self Assessment)
• Eligible Capital Rules
• Public Disclosure Standards
• Enhanced Solvency Standards for Long-Term Insurers
• Building on supervisory Resources
Solvency II Preparations & Progress
• Bermuda’s framework enhancements are in accordance with the technical requirements of Solvency II as appropriate for the Bermuda market
• Changes focused on commercial sector of the market reinforcing the Authority’s risk-based approach to supervision
Implications for Captives
• Risk-based approach underpinned by the “Proportionality Principle”
• Article 29 of the Solvency II Directive states “Requirements are to be applied in a manner which is proportionate to the nature, scale and complexity of the risk inherent in the business of an insurer”
Implications for Captives
• Bermuda’s captive regime remains consistent with international standards
• Appropriate for the risk profile of companies in sector
• No significant changes at this time
• Actively monitoring and contributing to international developments
Solvency II & Captives
Vlad UhmylenkoDirector
Standard and Poor’s
Systems of Governance (Pillar 2)
Systems:
• Risk Management
• Compliance
• Internal Audit
• Actuarial
Requirements:
• Proportionality– E.g. size, complexity
• “Fit and proper” BoD and mgmt
• Outsourcing– Properly vetted and monitored
• ORSA– Own Risk and Solvency
Assessment
Public Disclosure and Regulatory Reporting Requirements (Pillar 3 )
ORSA: Own Risk and Solvency Assessment
• An internal tool:– Requires (re)insurance enterprises to adequately assess their own
short- and long-term risks– “Own funds” necessary to cover the identified risks and uncertainties
• Methodology used to determine solvency needs
• A tool for the supervisory authorities:– Enables the regulators to evaluate the insurer’s risk profile, risk
management practices, and approach to capital management• Proportionality: a lower bar for smaller/less complex insurers
– Some outsourcing may be allowed– Further guidance needed on the minimum standards
Requirement: Integrated Management of Risks and Capital
Integrated Management of Risks and Capital
Risk Tolerance(s)
Quantification and Aggregation
Risk Limits (& other controls)
Desired Risk Profile
Risk-Vs.-Reward
Case Study: An S&P-Rated Captive Insurer
Rating Criterion Enterprise Risk Mgmt Capital Adequacy
Observations P&C risks of the parent company;
Avoidance of market and credit / counterparty risks
Capital continues to increase (via retained earnings);
No pressure to pay dividends
Conclusions Adequate risk culture and governance; as well as risk controls, risk analytics, and strategic risk management
Redundant capital;
Implicit support from the highly rated parent
Integrated Management of Risks and Capital
Implications for Captives
• Pillar 1 may lead to greater capital requirements
• Pillars 2 and 3 may lead to a greater governance and management burden:– Higher expectations from the Board and the senior management– Formal and more sophisticated risk management
• As of now, few captives are ready for Solvency II
• Solvency II is likely to increase the cost of risks retained via captives
• Potential mitigants:– Principle of proportionality– Bermuda’s captive-specific solvency regime?
Questions