European Solvency II Survey 2014 - Ernst & Young · 2019-04-27 · 6 European Solvency ll survey 2014 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Readiness has improved in all areas, building

European Solvency II Survey 2014

2 | European Solvency ll survey 2014

Contents01 Keyfindings

02 Background

04 Generalimplementationreadiness

06 Implementationreadiness–Pillar1



14 DataandITreadiness

18 Applicationofinternalmodels

22 Regulatoryinteraction

24 Organizationaltransformationofriskmanagement

26 Recoveryandresolutionplanning(RRP)

30 ManagingcapitalunderSolvencyII

1European Solvency ll survey 2014 |

• Considerablevariabilityinthelevelofpreparednessexistsbycountry,withDutch,UKandNordicinsurersmostconfidentofmeetingtherequirements,whileFrench,German,GreekandEasternEuropeaninsurersarelessconfident.

• Thereisastrong,consistentmessagethatinsurersareseekingtoimprovetheeffectivenessoftheirriskmanagement,includingmanydimensionsinculture,appetite,controls,peopleandsystems.

• Challengesofreportingandensuringrobustdataandinformationtechnology(IT)remainverysignificant,andmanycompanieshaveyettosufficientlyenergizethis partoftheirplans.

• PreparednessforPillar3remainsrelativelylowandaction isneededbycompaniesin2014tomeettherequirementsontime.

KeyfindingsOverall,theinsuranceindustryisontracktoimplementSolvencyIIby1January2016;however,asignificantamountofworkisneededbetweennowandthentoaddresspreparednessacrossallthreepillars.

• Achievinginternalmodelapprovalremainsamajorchallenge;thereisonlyaslightreductioninthenumberofcompaniesplanningtotakethisroute.However,leadinginsurersremainstronglycommittedtoobtaininginternalmodelapprovalfrominceptionofthenewSolvencyIIregimeandhavealignedtheirworkplanstoreachthisgoal.

• Manyinsurersarenotsatisfiedwiththelevelofsupportfromtheirregulatorsinprovidingtimelyfeedbackonplansandinterpretationofnewrequirements;thisisdue,inpart,tothesignificantresourcingchallengesregulatorsface.

• Automationofmanyriskmanagementactivities,particularlyreporting,remainsrelativelylowand,ascompaniesdeveloptheirplans,weexpectthiswillbeanareaofincreasingfocus.

• Insurersareincreasinglyreceivingrequestsforrecoveryandresolutionplanning.

• CompaniesarebeginningtoinvestsignificanteffortinunderstandinghowtomanagetheircapitalunderSolvencyIIsothattheyareproperlypreparedforthenewregime.


BackgroundThelong-awaitedimplementationtimelineforSolvencyIIishere,andinsurersfacemanyissuesthatneedtoberesolvedbeforeadoption.


Inthefallof2013,EYconductedaPan-Europeansurvey,whichisanupdateofits2012survey.Thisisoneofthelargestandmostcomprehensivesurveysintheindustry,spanning 20countries,withparticipantsfrommorethan170insurancecompanies.

ImplementingSolvencyIIrequirementswillhavedirectimplicationsforbusinesses,asoursurveyreinforces.Theresultsareaself-assessmentoftheparticipatingcompaniesandexpresstheirviewsoncurrenttopicsrelatingtoSolvency

II,aswellaswheretheystandonimplementationreadinessforPillar1,Pillar2andPillar3.Thefindingsalsoshedlightonkeyareasofinterest,includingdataandITreadiness,organizationalchange,applicationofinternalmodels,regulatoryinteraction,recoveryandresolutionplanning,andcapitaloptimization.

ThesurveyportraystheimplementationreadinessofallthreeSolvencyIIpillarsinEurope’slargestinsurancemarkets:theUK,Germany,France,Italy,Belgium,theNetherlands,Poland,Spain,Portugal,Greece,theNordicsandothercountries.


General implementationreadinessNearly80%ofEuropeaninsuranceorganizationsexpecttofullymeetthesignificantSolvencyIIrequirementsbeforethenewJanuary2016deadline.

UnitedKingdom


Postponingtheregulatorydeadlinehasstronglybolsteredtheconfidenceofinsurancecompaniestomeettherequirementsinthetimeframe.Asignificantnumberoforganizations(79%)donotexpecttobecompliantuntil2015orlater.Manycountries,particularlyFrance,GreeceandtheUK,havebecomemorepessimisticorperhapsrealisticabouttheirimplementationreadiness.Comparedtoourlastsurvey,manyinsurancecompaniesinthesecountrieshavedelayedtheduedateoftheirimplementationplansbyatleastoneyear.

OnlyDutchinsurersconsiderthemselvestobewellpreparedandexpectanimplementationreadinessdateof2015,withnonestretchinginto2016.Incontrast,anumberofFrench,GreekandGermaninsurersarenotinganexpectedcompliancedatelaterthan1January2016(Figure3).

ThemajorityofEuropeaninsurancecompaniesrevealthattheyhavemadelimitedprogressorrecognizedmoredemandingrequirementsacrossallthreepillars,comparedtotheearliersurvey(Figure2).TheyindicateaconsistentlyhighstateofreadinesstoimplementallcomponentsofaPillar1balancesheetandfulfillmostPillar2requirements.Pillar3stillpresentsamajorchallenge.

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Figure 1: European Solvency II readiness

Alreadycompliant

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Figure 2: Overall implementation status by pillar

Pillar1 Pillar2 Pillar3

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Figure 3: Implementation of Solvency II requirements — country comparison 2013

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1:Therequirementsarenotmet 2:Someoftherequirementsaremet 3:Mostoftherequirementsaremet

4.Alloftherequirementsaremet 5:ThecompanyalreadygoesbeyondtheSolvencyllrequirements

Noresponse


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Readinesshasimprovedinallareas,buildingontheresponsetoourprevioussurvey,whichonaverageindicatedastatusofatleastmeeting“most”SolvencyIIrequirementsineachoftheareasconsidered.

Sincethelastsurvey,themostprogresshasbeenmadeinownfundscalculations,whicharenowthemostadvancedareawithinPillar1.However,uncertaintyremainsinsomeimportantareas,suchasequivalence.

Bestestimateliabilities,riskmarginandstandardformula(SCR)calculationshavemadelessprogress,whichmayreflectthelackofclarityoverthepastyearregardingthefinalSolvencyIIbasis.ThishasnowbeenresolvedthroughtheOmnibusIIagreement,particularlywithrespecttolong-termguarantees.

ReadinessresponsesineachPillar1categorywereslightlyhigherforinsurersimplementing(partial)internalmodelsthanforthoseusingthestandardformula.Overall,thereisonlyamarginaldifferenceinreadinessbetweeninternalmodelandstandardformulausersforthecorePillar1calculations.

StrongoverallprogressonPillar1readinessmaskssignificantvariationsbetweencountryresponses.

AsshowninFigure5,French,DutchandItaliancompaniesappeartobeparticularlywellprepared,withreadinessapproachingfullcompliancewithSolvencyIIrequirements.

FrenchreadinessresponsesmayhavebenefittedfromworkperformedtoprovidecoreSolvencyIIresultstotheregulatorinSeptember2013.Thiswascompletedonavoluntarybasis,butparticipationwasencouragedbytheregulator.TheexercisewasdesignedtohelptheregulatorassesstheFrenchmarket’sdegreeofpreparationforSolvencyIIvaluationprinciplesandreporting,aswellastoinformdiscussionbetweenregulatorsandcompaniesonkeytopics.

AlowerlevelofreadinesswasassessedbyGreek,Portuguese,andCentralandEasternEuropean(CEE)companies,where theriskmargincalculationsweretheweakestareawithin Pillar1.Insurersinthesecountriesdonotyetconsiderthattheyaremeeting“most”SolvencyIIrequirementsforthisbalancesheetcomponent.

Implementationreadiness—Pillar 1

Multidimensionalandquantifiedstress-andscenario testingforbothtailandnon-tailevents

Figure 4: Pillar 1 implementation status

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Solvencycapitalrequirement

(standardformula)

Classification andtieringof ownfunds

RiskmarginBestestimateliabilities

Valuation ofassets

2012 20131:Low 5:Verysignificant

Figure 5: Readiness of Pillar 1 requirements

Nordics

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InsurancecompaniesappeargenerallywellpreparedonallaspectsofPillar1andcontinuetomakesteadyprogress.


Althoughprogresshasbeenmadeinmostareassincethelastsurvey,theresultssuggestthatrespondentsareanticipatingincreasedriskmanagementactivityinseveralareas.

Theresultsalsosuggestanincreaseinthepercentageofcompaniesthathavesomeformalmechanismtoassessriskmanagementsystemeffectiveness.However,EYconsidersstatement4inFigure6asbeingcompliantwithSolvencyIIand,inthatcontext,only20%ofrespondentsfallwithinthatcategory(aslightincreasefromthelastsurvey).

Itisinterestingthat32%ofrespondentshavenoformalizedwayofassessingeffectivenessagainstoutcomes.Eveniftherewasnoregulatoryrequirementtohaveeffectiveriskmanagement,itisdifficulttounderstandwhycompanieswouldnotseektounderstandthiselementofbusinessmanagementsothattheycouldimproveit.

GiventheincreasedavailabilityofeffectivenessassessmentmethodologyandtherequirementforNationalCompetentAuthoritiestodemonstrateprogresstotheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)onriskmanagementeffectiveness,weanticipatethatinsurancecompanieswillbeundertakingmoreformalassessments.

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Figure 6: Effectiveness of risk management system

Do not know orhavenoformalwayofassessingthis

Believeitiseffectiveoverall,butthisisnotassessedagainstoutcomesinanyformalandreliableway

Partiallyeffective,somecomponentshavebeenassessedformally

Itiseffectiveinbringingoutthedesiredoutcomeswewantinthebusinessandthishasbeenformallyassessedandvalidated

6%

26%

48%

20%

Figure 7: Fulfilment of selected requirements for Pillar 2

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ClearindividualandcommitteeresponsibilitiesforthemanagementofallrisksIndividualsaresuitably“fitandproper”persons

Clearsplitofresponsibilitiesbetween1st,2ndand3rdlinesofdefense

Effectivegovernancefunctions(internalaudit,risk,actuarialandcompliance)Embeddingriskappetiteinbusinessdecisions

OperationalizingmetricsAchievingclarityofdefinitionbyrisktypeandothersplits

SuitablyadaptedfordifferentbusinessprocessesTimelyupdatestoreflectchangingbusinessprocesses

PropergovernanceandcontractualagreementswithprovidersAssessmentofrisklevelsinproviderfirms

SuitablyfocusedandreliableriskreportsTheUseTest-capitalmodelimplicationsconsideredwhenmakingbusinessdecisions

Multidimensionalandquantifiedstress-andscenario testingforbothtailandnon-tailevents

Thecomponenthasnotyetbeenformalizedordesignedeffectively

Thecomponentexistsandiseffectivebydesign

Thecomponentexistsandisdemonstrablyeffectiveinpractice(minimumSolvencyIIcompliance)

Thiscomponentexists,iseffectiveinpracticeandoperatesefficiently(cost-effective)

Implementationreadiness—Pillar 2Overall,surveyresultsshowthatinsurancecompaniesneedtodoalotmoretobecomeSolvencyIIcompliantandtodemonstratesufficientprogressonriskmanagementeffectivenesstosupervisors.


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Inmostareas,organizationshavenotyetreachedtheminimumlevelofSolvencyIIcompliance.Foreachcomponent,abouthalfbelievethatthecomponentisnoteffectiveinpractice.

Only15%ofrespondentsfeeltheircomponentsareeffectiveandefficient,suggestingthat85%ofrespondentsseeopportunityforeffectivenessand/orefficiencyimprovementsinmanyoftheseareas(Figure7).

Thepercentageofcompaniesanticipatingaheavierworkloadisdramatic.Halftothree-quartersofrespondentsexpecttheamountofworkundertakenineveryoneoftheseareastoescalate(Figure8).

Approximatelyoneineveryfourrespondentscontemplateasignificantincreaseinthetimespentonmeasuringrisk,strategicinput,governanceandlimitframeworkmaintenance.Approximatelyone-thirdofallrespondentsanticipateappreciablymoreeffortonforward-lookingriskassessmentandreportingtoregulators.

Figure 8: Future focus areas of risk managers

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Significantdecrease Decrease Unchanged

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Figure 9: Future benefit of measures increasing risk management effectiveness

Increaseduseoftraining/e-learningmodulesforriskmanagement

DevelopmentofERMframeworktoaddressriskposedbythefirmtooutsideparties(especiallysystemicrisk)

Improvedrisk(dis-)aggregationmechanismsingroups

Improvedclarificationofriskmanagementresponsibilitiesingroups

Remuneration,incentivesandrewardsmorefocusedoneffectiveandappropriaterisktaking

Bettercollaborationbetweencontrolfunctions(2ndand3rdlines)

Moreformalizedmanagementofconduct/customerrisk

Moreefficient(cost-effective)riskmanagementactivity

Morecomprehensiveplanningforriskmanagementdevelopment(people,toolsandprocessesinalllinesofdefense)

Moreformalizedmanagementofriskinandaroundmajorchangeprograms

Improvedriskmanagementskills/capability/caliber inthecontrolfunctions

Moreflexible,reliableandfocusedriskreports

Bettercollaborationbetweenlinemanagement(1stline)andthecontrolfunctions

Improvedriskmanagementskills/capability/caliberinthe1stline(linemanagementinthebusiness)

Riskappetitemechanismsmoreembeddedinbusinessdecisions

Improvedriskculture(consistentandclearriskthinkingandbehaviorthroughouttheorganization)

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Itisencouragingtoseethat84%(Figure8)ofrespondentsexpecttospendmoretimeonstrategicinput,asthatisakeypartofensuringthattheriskmanagementsystemisproperlyalignedwiththebusinessstrategy.Moreexplicitlinkageofriskmanagementprioritiestobusinessstrategyshouldfollow.

Three-quartersofallrespondentsanticipatespendingmoretimeonreportingtomanagementboards.Thisreflectsincreasingdemandfrommanagementteamsforrisk-relatedinformation.Italsoposesaninterestingquestion:should2ndlineresourcesbespentonincreasedreportingtomanagementboardsorshouldthatbetheresponsibilityofthe1stlineindividualswhomanagerisk?Only3%ofrespondentsanticipateadeclineinthisarea,soimprovedriskreporting canbeexpected.

OftheitemslistedinFigure9,improvedriskculturescoredthehighestaveragemarkintermsofpotentialbenefits.Improvingriskcultureisreceivingsignificantattentioninbanksandincreasinglyininsurancecompaniesbecauseitunderpinsdecisionsmadeonthemanagementofrisk.

However,itisalsointerestingtonotethatthefourhighestscoringitemsallrelatetointerfacewiththe1stline.Improved1stlineriskmanagementcapabilityandgreaterembeddingofriskappetitebothrankednumbertwo,followedbybettercollaborationbetweenthe1stlineandcontrolfunctions.Inotherwords,improvementsinthe1stlinewouldseemtobringmostbenefittoinsurers’overallriskmanagementactivity.

Whenrespondentswereaskedtoscorethesameitemsinrelationtotheeffortrequired(Figure10),riskappetite,riskcultureandimprovedcapabilityinthe1stlinewereagainhighlyranked.Thissuggeststhatthehighestbenefitareasmayalsobethemostdifficulttoachieve.

However,thereweresomeexceptions.Bettercollaborationbetweenthe1stlineandcontrolfunctions(ahigherbenefititem)wasmuchloweronthescaleintermsoftheeffortneeded.

Figure 10: Effort of measures increasing risk management effectiveness

Bettercollaborationbetweencontrolfunctions(2ndand3rdlines)

Improvedclarificationofriskmanagementresponsibilitiesingroups

Increaseduseoftraining/e-learningmodulesforriskmanagement

Moreefficient(cost-effective)riskmanagementactivity

Improvedriskmanagementskills/capability/caliberinthecontrolfunctions

Bettercollaborationbetweenlinemanagement(1stline)andthecontrolfunctions

Remuneration,incentivesandrewardsmorefocusedoneffectiveandappropriaterisktaking

Improvedrisk(dis-)aggregationmechanismsingroups

Moreformalizedmanagementofconduct/customerriskMoreformalizedmanagementofriskinandaroundmajor

changeprogramsMorecomprehensiveplanningforriskmanagementdevelopment

(people,toolsandprocessesinalllinesofdefense)Improvedriskmanagementskills/capability/caliberinthe1stline

(linemanagementinthebusiness)Moreflexible,reliableandfocusedriskreports

Improvedriskculture(consistentandclearriskthinkingandbehaviorthroughouttheorganization)

DevelopmentofERMframeworktoaddressriskposedbythefirmtooutsideparties(especiallysystemicrisk)

Riskappetitemechanismsmoreembeddedinbusinessdecisions

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ThedevelopmentofanERMframeworktoaddressanorganization’srisktoothers(activityfromregulatoryinitiativestoaddresssystemicrisk)receivedhighratingsintermsoftheeffortrequired,butcameinsecondtolastintermsofthebenefitsoftakingaction(Figure10).

Asanexample,improvedriskmanagementskills,capabilityandcaliberofcontrolfunctionswereratedhighinpotentialbenefits,butrelativelylowerintermsoftheeffortneededforimplementation.

Thevastmajority(83%)ofcompaniesaremanuallyreportingandcalculatingkeyriskmanagementmetrics.Thereisconsiderableopportunityforincreasedautomation.

Almostoneinsixcompanieshave60%oftheseprocessesautomated(Figure11).Thisdemonstratesthatalthoughsomeprogresshasbeenmade,thereissubstantiallymorepotential—perhapsinalignmentwithotheractivities—toimprovetheinformationflowsthroughouttheorganization.Leveragingtechnologyanddataprogresstoimproveriskmanagementcosteffectivenessisanareaofopportunityformanyinsurancecompanies.

Figure 11: Level of automation for risk reporting and calculation of key risk management metrics

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Figure 12: Own Risk and Solvency Assessment (ORSA) implementation readiness—spread from lowest to highest country

1.5Projectionofcapitaland

solvencywithintheplanninghorizon(3-5y)

Designofstressandscenariotests

Assessmentof governanceeffectiveness

Assessmentofthesignificanceoftheriskprofiledeviatingfrom

assumptionsunderlyingtheSCRcalculation

IntegrationofORSAresult(forward-looking

assessment)inthestrategicbusinessplanningprocess

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Oneofthemoststrikingthingsabouttheseresultsisthespreadofresponsebetweencountrieswiththelowestaveragescoresandthosewiththehighest(Figure12).Althoughnocountryresponsesaverageat“alloftherequirementsaremet”(andtherefore,progressisrequiredinallcountriesonallitems),somescoresaverageashighas3.7.Incontrast,inothercountries,theaveragescoreswereverylow—justover1—andtherefore,closerto“therequirementsarenotmet”thanto“someoftherequirementsaremet.”Thisself-assessmentsuggestsaverylowlevelofreadinessinsomecountriesinrelationtoORSA.

Oneoftheinterestingfeaturesinthisanalysisofaveragescoresbycountryisthemix.Somecountriesarerelativelymoreadvancedforsomeaspectsthanforothers.Thepatternisreversedforothercountries.Althoughthereissomedownwardtrendfromlefttorightinthechart(Figure13),overall,thereisverylittlecommonalityinaveragescoringpercomponent.

Generallyspeaking,theNetherlands,theNordicsandtheUKviewthemselvesasrelativelymoreprepared,whileGreece,PortugalandCEEconsiderthemselvestheleastwelldeveloped.

Figure 13: ORSA implementation readiness

Projectionofcapitalandsolvencywithintheplanninghorizon(3-5y)

Designofstressandscenariotests

Assessmentof governanceeffectiveness

AssessmentofthesignificanceoftheriskprofiledeviatingfromassumptionsunderlyingtheSCRcalculation

IntegrationofORSAresult(forward-lookingassessment)inthestrategicbusinessplanningprocess

Nordics CEE Poland Greece Portugal Spain Netherlands

Belgium Italy France Germany UnitedKingdom

1:Therequirementsarenotmet 2:Someoftherequirementsaremet 3:Mostoftherequirementsaremet

4:Alloftherequirementsaremet 5:Thecompanyalreadygoesbeyond theSolvencyIIrequirements


Inourcurrentsurvey,99%ofrespondentshaveyettomeetallSolvencyIIreportingrequirements,and76%saytheyhaveonlypartiallymetorhaveyettomeetanyrequirementsthusfar.Intermsofimplementationreadiness,Pillar3remainstheleastdevelopedareacomparedtoPillar1andPillar2.Clearly,thereissignificantworkaheadformostorganizations.

Whencomparingacrossgeographies,somemarkets,suchasGermany,theNetherlands,ItalyandCEE,havemadethemostprogresssince2012.However,forGermanyandItaly,theprogresscouldbeviewedassimplycatchingup,asthesewerepreviouslytwoofthemarketswherethemosteffort wasneeded.

TheNetherlandsremainsrelativelythemostadvanced,with43%ofrespondentssayingthattheyalreadymeetmostoforalloftherequirements.

Incomparison,theUKandFrancemayhavepreviouslyunderestimatedtherequirements,astheirlevelofpreparednessandimplementationreadinessappearstohaveregressed.In2012,boththeUKandFranceappearedtoberelativelymoreadvancedintheirpreparationcomparedtotherestofEurope,with30%to40%ofrespondentsinthesemarketssayingthattheymetmost,ifnotall,oftherequirements.Inourlatestsurvey,thepercentagehasreducedsignificantly,withonly19%to22%ofrespondentsinthesemarketssayingthattheymeetmostoralloftherequirements(Figure15).

Figure 14: Pillar 3 implementation status

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AnalysisandpopulationofQRTs(datarequirements

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SolvencyIIreportingprocessesdesigned/

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currentreportingprocesses(incl.

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Developmentofdisclosurepolicy

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SolvencyIIreporting(toanauditable

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2012 2013

1:Requirementsnotfulfilled(35%)2:Somerequirementsfulfilled(41%)3:Mostrequirementsfulfilled(17%)4:Allrequirementsfulfilled(7%)5:Beyondrequirements(0%)

Implementationreadiness—Pillar 3Mostorganizationshaveregisteredlittleprogresssince2012.Almost76%ofrespondentssaythattheyhaveyettomeetmostorallSolvencyIIreportingrequirements(amarginalimprovementcomparedto80%in2012).


In2012,therelativelackofprogressinPillar3comparedtoPillar1andPillar2couldbeexplained.MostorganizationswereawaitingmorecertaintyintheSolvencyIIPillar3requirementsbeforecommittingseriouseffortandworktodefiningandimplementingreportingsolutions.ThesubsequentdelaysanddeferraltotheSolvencyIIimplementationdatemayexplainwhylittleprogresshasbeenmadesincethen.

However,thetimelinehaschangedwiththereleaseofOmnibusIIattheendof2013,thetransitionalreportingrequirementsfor2015andthefullimplementationandreportingrequiredin2016.Theremainderof2014willbeacriticalperiodfororganizationstonowrestartand,inmanycases,acceleratetheirPillar3projects.

Giventhecurrentstatusandlevelofpreparedness,therealityformanyisthatthe2015transitionalreportingwillneedtobedonelargelyonamanualbasis.In2016,thefocuswillbeonmoreautomated,robustandembeddedsolutions.Butgiventhedata,process,controlandITchallengesthatmanyorganizationsstillface,achievingandembeddingthereportingrequirementswithinthesetimeframesislikelytoprovetobeademandingtask.

Figure 15: Implementation of Pillar 3 requirements

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DataandITreadinessNearly79%ofEuropeaninsurancecompaniessaytheyhavemetnoneorareonlymeetingsomeoftherequirementstodocumentandcontrolend-usercomputingtools.ThisisaclearsignthatthereisalongwaytogointermsofSolvencyIIdataandITreadiness.


MakingadatalandscapeworkacrossmultipleandcomplexITsystems,multiplereportingbasesandpotentiallyacrossbothgroupandsoloentitiesremainsasignificantchallenge.Oursurveysuggeststhatachievingadequatedataintegration,qualityandcontrolremainsanimportantpriorityforallcompanies.

DesigningasystemandinfrastructurearchitecturethatmeetsSolvencyIIrequirementsacrossallpillarsisequallychallenging.Thebiggestissuesinvolve:

•Designingsystemsthatreusebusinessrulesandsharecommondataacrosspillars

•Deployinginfrastructurethatissufficientlyflexibleandscalabletohandleadhocrequestsfrommanagementandregulators

•Providingarobustdataintegration,qualityandcontrolframework

Theseelementsmustbeaddressedtounderpinreportinginthepublicdomainandtoallowinsightsintofinancialperformanceandriskexposuresonadynamicbasis.

Asoursurveyshows,limitedprogresshasbeenmadeonsomeofthefundamentaldecisionsthatwillallowdata,systemsandinfrastructuretoworktogethereffectively.Surprisingly,thereisveryslowprogressonspecificationanddesignofRegularSupervisoryReporting(RSR),theSolvencyandFinancialConditionReport(SFCR)andtheORSAreport,withnearly80%ofrespondentsnotmeetingmostrequirements.DefinitionoftheSolvencyIIreports,incombinationwiththeQuantitativeReportingTemplates(QRTs),helpsidentifywheredataneedstobebroughttogetheracrosspillars,ideallyinanautomatedandorchestratedsequencetodriveefficiencies.TheprogressmadeontheSolvencyIIreportdefinitionextendsintotheweakdescriptionoffinancialandtechnicalreconciliationsrequired,aswellastootherreportingbaseswhereonly32%ofrespondentsmeetmostoralloftherequirements.

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Figure 16: IT system readiness

Standardformularesultsareproducedandcanbereproducedusingacontrolledandrobustsystem

Investmentdatastorageandanalysissolutionsarespecified,developedandtestedusingactualthird-partydata

Cleararchitectureexistsoutlininghowsystemswillsupporttheevidencingofsolvencyoutsideofregularreportingcycles,ifrequiredunderPillar2

Reportingsystemsareselected,designedandimplementedforPillar3

Testsofalignmentbetweengroupandsolonumbersaredefinedandtestedviadryruns

RSR,SFCRandORSAreportsarespecified,designedandbuilt

XBRLtaggingandvalidationsystemsareselected

Financialandtechnicalreconciliationsofdataheldindifferentsystemsaredefinedanddeveloped

Automationofdataintegration,dataqualityanddatalineageisdevelopedandtestedforhighvolumedata

Controlsandworkflowsupportinglow-volume,high-valuedataaredefinedandimplemented

Endusercomputingtoolsfullydocumentedandcontrolled

End-to-endsystemtestplansareestablishedandapproved

Parallelrunandcutoverplansareestablished,includingdecommissioningandarchivingasrelevant

ITdevelopmentandsupportmodelinBAUisdefined

Stage1-2:Requirementsnotmet/somerequirementsmetStage3-5:Mostrequirementsmet/allrequirementsmet/beyondrequirements


In2012,thesurveyidentifiedthat37%ofrespondentshadimplementedmostoftherequirementsrelatedtosystemreadiness.ThemostsignificantprogresswasmadeinassessingthesystemsrequiredtodeliverSolvencyIIcapabilitiesandthesimultaneousidentificationofsystemcapabilitygaps.Inthisyear’ssurvey,morespecificquestionswereaskedtobetteridentifytheprogressandpinpointthegaps.

•Companieshavemadegoodprogressinmeetingmostofthestandardformularequirements,with53%nowindicatingthattheycanproducestandardformularesultsinarepeatable,controlledandrobustmanner.Oftheremainder,only9%havenotmetanyoftherequirements.

•Comparedwiththeprevioussurvey,itappearsthatmorecompaniesareelectingtousemanualalternativestodataintegration,qualityandcontrol,withjust24%havingmostoralloftheSolvencyIIdatarequirementsmetthroughautomation.Theresultsareconsistentacrosshigh-volume(transactionaldata)andlow-volumeandhigh-valuedata.Thisindicatesthatwhilelargesysteminvestmentshavebeenmade,notablyonPillar1,thedataintegrationinvestmentislagging.

•RespondentsindicatedthatPillar2waswelladvanced;however,almost66%ofrespondentsnotedthatdataandsystemsarenotdesignedorreadytosupportORSAassessmentsbeyondthenormalreportingcycle.Thisseemstobeanoversight,asthisiswheremanagementandtheregulatorwillpressurecompaniestoworkdynamicallyandprovidereliableinformation.

•Almost42%havemetmostoralloftherequirementsforinvestmentdata.Thisisconsistentwithmarketfeedback,indicatingthatmanyinsurersrecognizethevalueofinvestmentinformationbeyondtheregulatoryrequirement.Theyareusingthisinformationtobettermanageconcentrationrisk,collateralandcreditriskandtomakedecisionsonagroupratherthansimplyasolobasis.

•DataandsystemsreadinessforPillar3continuestolagbehindPillars1and2,withonly25%ofrespondentsindicatingthattheyhaveselectedanddesignedasystemtomeetmostorallofthePillar3requirements.Furthermore,intermsofreadinesstomeetXBRLtaggingandvalidation,astaggering52%havenotselectedasystemtomeetthismandatoryrequirement.

Notsurprisingly,thedecisiontofreezeorplaceprogramsinto“businessasusual”hasmeantthatonlylimitedprogresshasbeenmadeacrossallpillarsinthepast12months.

Oursurveyindicatesthatthereisasignificantamountofnear-termactivityrequired.Atthesametime,thereisalackofforwardthinkingaroundend-to-endtestplans(41%donothavetheseready)andparallelrunandcutoverplans(44%donothavetheseready).ThesetwofactorsgiverisetorealconcernsaboutthereadinessofmanyrespondentstomeettheSolvencyIIrequirements.Formanyrespondents,oursurveyimpliestheneedforrapidgapassessments,prioritizationandstrongprojectleadershiptomeettheconfirmeddeadlines.



ApplicationofinternalmodelsTheproportionofinsurersplanningtousea(partial)internalmodelhasdroppedsinceourprevioussurvey.However,partialinternalmodelshaveshownthemostnoticeablereduction,andcompaniesadoptingfullinternalmodelsaremorelikelytobecontinuingwiththeirplans.


Thereisamarkedreductionintheproportionofcompaniesadoptinga(partial)internalmodel:from49%to40%ofrespondents(Figure17).Asinourprevioussurvey,theprofileofparticipantsisweightedtowardlargerorganizationsthataremorelikelytoapplytousea(partial)internalmodelgiventheexpenseandresourcesthatanapplicationrequires.

Companiesarebecomingmoreconcernedaboutthecostsassociatedwiththeextendedpre-applicationprocessformodelapproval.Manyhavebeenengagingwiththeirregulatorsince2010inpre-applicationprocesses.FormalapplicationsareonlyexpectedtobepossiblefromApril2015,reflectingthedeferredimplementationdateforSolvencyII.Therealsoappearstobegreaterawarenessoftheongoingcostsofoperatingtheinternalmodelprocessesaspartof“businessasusual.”Settingthetotalcostburdenagainstthepotentialcapitalbenefithasledsomecompaniestoreconsidertheattractivenessoftheinternalmodelapproachcomparedtothestandardformula.

Thelackofacceptanceofinternalmodelsappearstocomefromcompaniesconsideringpartialinternalmodels.Theproportionoforganizationscontinuingwithfullinternalmodelshasbeenmoreresilient,fallingonlyslightlyfrom19%to17%.Thisisperhapstobeexpected.CompaniesadoptingapartialinternalmodelaremorelikelytoconsiderthattheirriskprofileissufficientlyclosetothatunderlyingthecalibrationofthestandardformulatomakeadoptionoftheSCRviable.

Giventhetwo-yeardelayoftheSolvencyIIimplementationdate,insurersappeartobemoreconfidentintheapprovaloftheirmodelsforday1use.Thisreflectstheextratimetheyhavehadtofinalizetheirprograms.Two-thirdsofinternalmodelusersexpecttohavereceivedmodelapprovalintimetousetheirmodelsatthestartofSolvencyII.

Figure 17: Internal model development 2013

60%Nointernal

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Figure 18: Internal model approval 2013

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Havenotconsideredthematteryet

67%

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Atthetimeofourprevioussurvey,overhalfofinternalmodelusersanticipatedreceivingapprovalby1January2014;thiswasexpectedtoincreaseto65%by1January2016.Thisisinlinewiththeresponsesinthelatestsurvey,with67%ofcompaniesnowexpectingtoreceiveapprovalby1January2016(day1usepertheexpectedimplementationtimetable–Figure18).

Ingeneral,internalmodelrequirementshavebeenstable,reflectinglimitedregulatorychangessinceourearliersurvey.Asaresult,companieshavebeenabletoprogresswithsomecertaintyregardingSolvencyIIrequirements.

Internalmodelusers’readinessassessmentshaveadvancedacrosseachoftheinternalmodeltestsandstandards.However,thereisstillmuchtodorelativetoPillar1,particularlyinmeetingtherequirementsofprofitandlossattributionanddocumentationstandards,whichremainasignificantchallenge.

Inspiteoftheprogressmadeincomplyingwithinternalmodeltestsandstandards,thishasnot,sofar,supportedanassessmentwheretheaveragecompanymeetsmostoftherequirementsinanyoftheinternalmodeltestsandstandards(Figure19).

ThisisincontrasttotheprogressmadeonthePillar1calculationswheretheaveragereadinessratingissignificantlyhigherforallaspectsandorganizationsaremovingtowardfullcompliancewithSolvencyII.Thelowestinternalmodelratingsareinrespecttothestandardsfordocumentationandprofitandlossattribution.

Figure 19: Solvency II requirements for internal models

1.01.52.0

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Profit and loss attribution

•Thereareoftenissuesrelatingtothealignmentoftheprofitdefinition(s)sotheyarenotonlyrelevanttothebusinessbutalsoSolvencyIIcompliant(i.e.,onan“economicbasis”).

•Acommonproblem,relatingespeciallytothosecompanieswithpartialinternalmodels,hasbeenthedifficultyineliminatingitemsfromtheactualresultthatarenotcoveredbythescopeofthemodel.

•Thelevelofgranularityusedintheriskmodelingmayexceedthatofthereadilyavailableexperiencedata,requiringasufficientlydetailedanalysis.

Documentation

•Poorarticulationofwhyaparticularapproachorriskcalibrationhasbeenchosen(i.e.,preferredtootherpossiblechoices).Emergingpracticeistoidentify,earlyintheprocess,whychoicesweremadeandwhyotherswerenot.

•Documentationoftendoesnotexplaintherationaleforthedataselection,thefilteringappliedtodataorwhyoutliershavebeenremoved.Frequently,thereisnoinformationonthesignificanceofthechoicesthathavebeenmade.

•Manyimplicitassumptionsandjudgmentsexistinthecalibrationdocumentswithoutadequateexplanationorjustification.

•Recognitionofweaknessesandlimitationsinthemodel,andhowthisalignstothemodeldevelopmentplan,isoftenimmature.Itmaynotprovideclaritytothetriggerpointsforadditionalvalidationorcalibrationandtheescalationprocedurestobefollowed.

In our experience, the current challenges that companies now need to address include:


RegulatoryinteractionMostinsuranceorganizationsarenotcompletelysatisfiedwiththesupporttheycurrentlyreceivefromtheirregulators,andtheyexpectanincreaseinsupervisoryinterventiononceSolvencyIIcomesintoeffect.


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Theoverallfrequencyofinteractionwiththeregulatorybodiesseemstobeconsideredadequatebymostcompanies(48%ofrespondentsarecompletelysatisfied);however,insurersexpectmorefromthiscooperation(Figure20).Insuranceorganizationsarecallingformuchbettersupportintheinterpretationofregulatoryrequirements,withonly21%beingsatisfiedwiththecurrentassistancetheyreceivebytheregulatoryauthorities.Insurersexpectmoreoftheirregulatorsintermsoftheamountandqualityoffeedbackprovidedoncompany-specificimplementationprogress.Only25%ofcompaniesdeemedthisasatleastsatisfactory.

Providinginformationonregulatoryprogressandresponsivenessuponspecialrequestisanotherkeyareawhereregulatoryauthoritiesshouldimprove,with67%and68%ofsurveyedinsurancecompanies,respectively,notbeingfullysatisfied.

Thismightreflectthefactthatsupervisorsareunderstaffedastheycopewiththenewregulation.Nearly61%ofthesurveyedinsuranceorganizationsarenotcompletelysatisfiedwiththesizeoftheirsupervisoryteams.

InsurersalsowereaskedabouttheirexpectationsregardingsupervisoryinterventiononceSolvencyIIcomesintoeffect.Manybelievethatanincreaseinregulatoryinterventionismostlikelywhenthereisabreachineitherthecompany’sSCRorMCR.InsufficientsetupofthemarketvaluebalancesheetandthefailuretomeetORSAcapitalrequirementsareadditionalareaswhereregulatoryauthoritiesareexpectedtoberigorousandmorelikelytoimposesanctions.

Lessthanaquarter(22%)ofsurveyedinsurersexpecttheirregulatortorequirethemtoholdadditionalcapital(beyondtherequirementsoftheSolvencyIIdirective)throughcapitaladd-ons,“earlywarningindicators”forinternalmodelsorothermeansoncethisregulationcomesintoeffect.Companieswillneedtobevigilanttoensurethat“gold-plating”ofaprudentcapitalstandarddoesnotoccur.

Figure 20: Evaluation of regulatory authorities

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Figure 21: Evaluation of potential sanctions

BreachofMCR

BreachofSCRInsufficienciesinsetupof

marketvaluebalancesheet

FailuretomeetORSAcapitalrequirementsInsufficientqualitywithregard

tocontentofORSAreport

InsufficientqualityreportedinQRTsFailuretomeetreportingdeadlines

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Figure 22: Additional capital requirements

78%Willonlyrequirecapitalatalevelprescribedby

Solvency ll

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additionalcapital


OrganizationaltransformationofriskmanagementThelevelofautomationofriskreportingisstillpoor;however,insurersrecognizetheneedforchangesrequiredintheITandriskinformationlandscape.


0%5%

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Inthefuture,theriskmanagementfunctionisexpectedtobeevenlyinvolvedinmanyimportantactivities,withgreaterfocuson:

•Calculatingriskmetrics

•Performingaforward-lookingassessmentofrisk

•Providingbusinesswithstrategicinputs,suchasriskappetite,reviewofbusinessplans,etc.

SolvencyIIwillleadtoanincreasedfocusofriskmanagersonallthemainareas.

AsillustratedinFigure24,thelevelofautomationofriskreportingandcalculationofkeyriskmanagementmetricsleavesmuchtobedesired.Morethan60%oftherespondentsestimatethattheirlevelofindustrializationislessthanorequalto40%.

MostinsurancecompaniesexpectmoderatetosignificantchangeintheirITlandscapeduetoSolvencyIIimplementation.Additionalareaswithahighpotentialforchangeandrestructuringareriskinformationflow,riskcultureandtopmanagementfocusonriskmanagement.

Figure 23: Future focus areas of risk managers

15%Strategicinput(e.g.,riskappetite,reviewofbusinessplans)

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andadvice

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Figure 24: Level of automation for risk reporting and calculation of key risk management metrics

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Figure 25: Change and restructuring due to Solvency II is expected in the following areas

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Recoveryandresolutionplanning(RRP)InsurersfaceincreasingrequestsforRRPs,andmanyarechallengedbytheRRPprocess.


AsinsuranceRRPismobilizedbymanyoftheglobalsystemicallyimportantinsurers(G-SIIs)thatweredesignatedinJuly2013andbymultiple,large,domesticinsurers,bothregulatorsandinsurersalikerecognizethechallengesofdevelopingplanswithinternationaldimensions.

Different approaches and stages of implementation

HomeandhostregulatorsareatdifferentstagesofimplementationandaredemonstratingmarginallydifferentapproachestoRRPforinsurers.Becauseprotocolsarenotyetsettled,insurersarefindingitdifficulttointerpretregulators’expectationsforinformationrequirementsanddepthofanalysis.Evenfundamentalsubstantivequestions,suchasclarityaroundwhentheauthoritiesineachjurisdictionwillinpracticetriggerresolution,remainopenformanyinsurers.

Inlightofdifferentregulatoryrequirementsaroundtheworld,theInternationalAssociationofInsuranceSupervisors(IAIS)andtheFinancialStabilityBoard(FSB)haveaskedhomeandhostregulatorstoworkmorecloselytogether.Therefore,in2014,thefirstsetofcrisismanagementgroups,comprisedofhomeandhostregulators,willbeestablishedfortheG-SIIs.Thiscross-borderapproachseems,inpart,alsotobedrivingthepaceofdomesticrequestsforRRPsandsystemicriskmanagementplans(SRMPs),asregulatorsseehowothersareapproachingthistopicandconsiderpotentialsystemicrisksposedbyinsurersintheirownmarkets.

Ifthebankingregulatorytrendisanexample,itispossiblethatthefocusfordomesticrequestswillbeintheG20countries,whereregulatorshaverequiredtheG-SIIstosubmitplansbytheendof2014.TherearesomenotableexceptionsincountrieswheretheregulatorsdonotcurrentlyhaveadesignatedG-SIIbuthavepreviouslyrequiredtheirglobalsystemicallyimportantbanks(G-SIBs)tosubmitplans.Assuch,theyarerequestingtheirlargestdomesticinsurerstoinitiallycompleterecoveryplans,withrequestsforresolutionplanstofollow.

ManyinsurersareawareofthisemergingdevelopmentinRRPrequests.Nearly26%ofrespondentsexpectatleastanotherfivetoteninsurancecompanies(inadditiontodesignatedG-SIIs)intheirowncountrytobeconsidered asdomesticsystemicallyimportantinsurers andlikelytoreceiverequestsforplansfromthehomeregulator.

Proposeddevelopmentsinregulatoryguidancewouldtendtosupportthis;forexample,arecentconsultationpaper(CP2/14)issuedbythePrudentialRegulatoryAuthority(PRA)intheUKincludesaproposedrequirement(FundamentalRule8)that“afirmmustprepareforresolutionso,iftheneedarises,itcanberesolvedinanorderlymannerwithminimumdisruptiontocriticalservices.”ThismeansthattheregulatorexpectsinsurersintheUKtoprovideallinformationneededforthePRAtoperformanassessmentoftheirresolvability.Expectationsarethatmostregulatorswillfollowthisdirection,atleastwithintheG20countriesandpotentiallywideraudience.

Figure 26: Expectation of additionally identified, systemically relevant insurance companies

67%1-5insurance

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26%5-10insurance

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3%10-15insurance

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showsthatmostinsurershavecompletedasignificantamountofgroundworkinrelationtomanagementactionsinordertoqualifyasrecoveryoptionsandmeettheregulatoryrequirements.However,furtherworkisrequiredtoensurethattherecoveryoptionsaresufficientlymaterialandcapableofbeingexecutedinatimelymannerinacrisis.Asdevelopmentoftherecoveryoptionstendstorepresent50%to70%oftheeffortrequiredtodeveloparecoveryplan,thetimeandresourcesrequiredtobuildoutexistingmanagementactionsshouldnotbeunderestimated.

ViewsontheprosandconsofcompletingRRPsvary,butmostseniorexecutivesviewrecoveryplanning,inparticular,asbeneficialtothegroupandaworthwhilemanagementexercise.

Insummary,manyinsurersarechallengedbyaspectsoftheRRPprocess.Thereissomeconfusionaroundexpectations,andmanyareconcernedaboutregulatorsmovingatdifferentspeedswithdifferingpriorities.Therequirementsthatnationalinsuranceregulatorswillimposeondomesticinsurersareemerging.Theplansthathavemostcommonalityacrossjurisdictionsaretherecoveryplans,whileregulatoryrequirementsforresolutionplansandSRMPscontinuetoevolve.

Progress with recovery plans

Recoveryplans,whichestablishhowaninsurerwilluseaseriesofpredefinedrecoveryoptionstoavoidfailure,arefurtheralongindevelopmentthanresolutionplans.

Encouragingly,mostinsurersandreinsurershavepreviouslyundertakenadegreeofanalysisaroundstresstesting,developmentoftriggersandmanagementactionsthatcanbeleveragedtobuildarecoveryplan.Indeed,noinsurershouldhavetostartfromscratch.

Thesurveyexploredtheleveloffamiliaritywiththerecoverytoolsavailabletoinsurersandtheimportancethattherespondentsplacedonspecificrecoveryoptions.Therangeofresponseswasbroad,withmostrecognizingthevalueofcapital-raisingoptionswhenunderseverefinancialpressure.Unsurprisingly,incaseofacrisis,puttingselectedsubsidiariesintorun-offanddisposingofentitieswerecitedasusefulrecoveryoptions.

Whatisclear,astheplansdevelop,isthateachinsurerwillcreateaportfolioofrecoveryoptions(Figure27).Therangewilldependonthecurrentgroupstructureandwhatisconsideredtobecoreandnon-corebusiness.Ourexperience

Figure 27: Average importance of recovery options—G-SII only

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ManagingcapitalunderSolvency llAfteryearsofwaiting,SolvencyIIisagainaprominentconsiderationwhenlooking attheoptimizationofthe balancesheet.


AsshowninFigure28,manycompaniesanticipateanincreaseincapitalrequirementsandareductioninthereportedgroupcapitalratio.

Currentorplannedactivityisbeingdrivenbothbyadesiretoimproveandoptimizethereportedcapitalratioandtocombinethiswiththein-forcebackroommanagementinitiativesthatfocusonimprovingothermetrics.Thisisespeciallyapparentinlifeinsurance.

Figure29showstherangeofoptionsbeingconsideredtoimprovetheposition,andsomeofthesearebeingimplemented.Thisincludesacombinationofinternalandexternaloptions,coveringnewandexistingbusinessinliabilitymanagementandrestructuring,aswellasoptimizingtheassetsideofthebalancesheet.Inparticular,asthedetailsofthevariousdiscountratesandacceptablestressesintheinternalmodelbecomeclear,therewillbealargeamountofadditionalasset-focusedactivity.Currenthedgingandreinsurancearrangementsarealreadyunderreviewandwillshortlyreceivegreaterattention.Atthesametime,productdesignandpricingfornewbusinesswillbereviewed.

Asclarityemerges,companieswillbemoreinclinedtoimplementstrategicoptions,suchaslegalentityrestructuring.

Irrespectiveoftheexactfiguresthatarefinallyachieved,itisclearthatcompaniesintendtospendsignificantmanagementtimeandeffortinthisareaandtorealizesignificantbenefits.Challengesremainduetothecontinuinguncertaintyofthedetailsoftheproposedregulationandtheinterpretationofspecificitemsbytheregulator.Inaddition,itisnotknownhowmuchtheseinitiativesneedtobefullyimplementedtoillustratethebenefitorwhetheralessmaterialimplementationcanbeusedtoclaimfullercredit.

Inaddition,muchoftheseinitiativesarefocusedonfungibilityofcapitaland,inmanycases,movingorprovingtheabilitytomovecapitalaroundthegroup.ThisposeschallengesforlocalboardsandregulatorsandbeginstointeractwiththeneedtodemonstrateRRP.Alloftheseissuescanbeandarebeingdealtwithalready,buteachaddtotheneedtoconsiderallstakeholderswhenlookingatoptionstoimprovethebalancesheet.

Figure 28: Expected total capital requirements

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Figure 29: Average importance of specific management instruments and strategies for optimizing risk capital

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Mergersandacquisitions

Securitization

Optimizationoftheriskcapitalstructure

Optimizationofexternalreinsurance

Developmentofnewproducts

Hedging

Optimizationofcurrencymatching

Intra-groupreinsurance

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Activerunoffmanagement

Pricingreview

Alternativeinvestment

Optimizationofassetmix

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Importance foroptimizing riskcapital

Useof(internal)capitalmodel

1:Notimportant 5:Veryimportant



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ContactsGlobal Solvency II Leader MartinBradley [email protected]

Belgium KrisVolkaerts [email protected]

France and Luxembourg PierrePlanchon [email protected]

Germany/Austria BerndGreuel [email protected]

JanLeiding [email protected]

Greece and Cyprus LamprosGkogkos [email protected]

Ireland JamesMaher [email protected]

Italy StefanoBattista [email protected]

Netherlands PauldeBeus [email protected]

The Nordics PehrAmbuhm [email protected]

HenrikAxelson [email protected]

Poland MarcinSadek [email protected]

Portugal RitaCosta [email protected]

Spain ManuelMartinez [email protected]

Switzerland PhilVermeulen [email protected]

HansJürgenWolter [email protected]

UK RodneyBonnard [email protected]

RoyO’Neil [email protected]

Pillar I and internal models TimFord [email protected]

Pillar II CliveMartin [email protected]

Pillar III DavidFoster [email protected]

Data and IT readiness Steve Bell [email protected]

RichardHart [email protected]

Regulatory Interaction and Organizational Transformation of Risk Management PhilVermeulen [email protected]

Recovery and resolution planning (RRP) KabariBhattacharya [email protected]

Managing Capital under Solvency II JeffDavies [email protected]

European Solvency II Survey 2014 - Ernst & Young · 2019-04-27 · 6 European Solvency ll survey 2014 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Readiness has improved in all areas, building

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