Solvency II - PLM Group- EH GRC JFD- 09 07 WG Meeting... · - For life communication of European Embedded value(EEV) or the market consistent embedded value (MCEV) And in Europe Push

SOLVENCY II

EH GRC – Jean-Francois DECROOCQCHAIRMAN OF ICISA SOLVENCY II WORKING GROUP09/2007

Page 2Solvency II - PML Group - EH GRC - Jean- Francois Decroocq

Contents

1 Introduction

2 Solvency II framework

3 Solvency II planning and timeline

4 Draft Directive

5 Some Comments for Credit insurance

6 ICISA working group

7 Other issue


RISK MANAGEMENT ENVIRONMENT

International regulation is evolving fast- Basle II applied to banks

- Sarbanes Oxley (SOX) in the USA

- IFRS in force since 2005

- For life communication of European Embedded value(EEV) or the market consistent embedded value (MCEV)

And in Europe Push by Solvency II, Local regulators are following the trend

- Some local regulation tends already requires computation of riskadjusted capital.

- Regulators merging banks and insurers supervisors

Market expectation is high

- Rating agency includes evaluation of Risk management in the rating

- Financial market expects more transparent communication fromcompanies specially on Risk management

- Securitization of insurance portfolio is becoming more common


Is Solvency II aim at Risk management excellenceEvolution of Risk Management structure under new requirements

Diagram

Degree of control measure of Risks

RiCo

Riskstrategy

Limitsframework

Coh

eren

ceof

pro

cess

Full ERM Structure

Target of RM for balance of risk/return and governance of Risk

Riskpolicy

Riskprocedures

Standard model

Internalmodel

Riskreporting

RiskGovernance

Risksystems

Internalmodel


Contents

1 Introduction



4 Draft Directive



7 Other issue


European Commission adopts formal proposal for Direc tive/Regulation after a full consultation proces s (including advice from CEIOPS)

CouncilEuropean Parliament

A greement on framework principles and definition of implementing powers in Directive/Regulation

European Commission, after consulting the EIOPC , requests advice from CEIOPS on technical implementing measures

CEIOPS prepares measures in consultation with market participants , end-users and consumers, and submits themto European Commission

European Commission examines the measures and makes aproposal to the EIOPC

EIOPC votes on proposal

European Commission adopts measures

EuropeanParliament

Keep fully informedand can adopta resolution if mesures exceedimplementing power

CEIOPS works on recommendations, guidelines and standards (on areas not covered by EU legislation), peer review, and compares supervisory prac tices to enhance their convergence

European Commission checks Member States´ compliance with EU legislation

European Commission may take legal action against Member States suspected of breach of Community law

Level1Level2

Level4Lev 3


SOLVENCY II TARGETS AND PRINCIPLES4 AMBITIOUS TARGETS FOR AN EUROPEAN PROJECT

� REINFORCE EUROPEAN INSURANCE MARKET

� REINFORCE THE PROTECTION OF POLICYHOLDER

� IMPROVE THE COMPETITIVITY OF EUROPEAN INSURERS

� BETTER AND COHERENT REGULATION

A PRINCIPLES BASED APPROACH

� BALANCE BETWEEN POLICYHOLDER PROTECTION AND COST OF CAPITAL

� PROMOTE BETTER RISK MANAGEMENT AND RESPONSABILITY OF INSURERS

� HARMONIZE THE EUROPEAN REGULATION

� A PROSPECTIVE AND ECONOMIC APPROACH RISK ORIENTED

LIKE BASLE II THE PROJECT IS ORGANISED IN 3 PILLARS


PILLAR I : QUANTITATIVE FRAMEWORK

STANDARD RISK CAPITAL MODEL

� SCR : Solvency Capital Requirement VAR at 99,5%

�FACTORS BASED BY INSURANCE ACTIVITY

�ECONOMIC APPROACH OF THE BALANCE SHEET

�TECHNICAL PROVISION AT BEST ESTIMATE + MARGIN

� EQUITY ASSESSED ACCORDING TO QUALITY AND LIMITS

� MCR : Minimum Capital Requirement


PILLAR II : CONTROLS AND QUALITATIVE REQUIREMENTS

�SUPERVISORS RULES AND GUIDELINES

�HARMONISATION OF CONTROL ACROSS EUROPE

�GOVERNANCE OF COMPANIES

� INTERNAL CONTROL (TARGETS, PERIMETER)

� RISK MANAGEMENT ORGANISATION

� PROSPECTIVE SOLVENCY

� INTERNAL MODEL CONTROLS


PILLAR III : MANDATORY REPORTING AND PUBLIC DISCLOSURE

�REGULAR REPORTING UNDER EUROPEAN FORMAT

�CONTROL AND REQUEST FROM SUPERVISORS

� FINANCIAL REPORTING AND SOLVENCY SITUATION

� INFORMATION TO POLICYHOLDERS


Contents

1 Introduction



4 Draft Directive



7 Other issue

2007 2009

NOV DEC JAN APR JUL

2008

MAY NOV OCT

2010

Commissions consultation period for QIS4

Launch QIS4 exercise

Close QIS4 exercise

CEIOPS factual report on QIS4

Impact Assessment Report

Approval framework Directive

CEIOPS final advice to put regime into operation

Report on results QIS3

CEIOPS consulted advice key issues for Directive

JUL

Solvency II Framework Directive

QIS4 Draft specification

Level 1 finalised Level 2&3 finalised


EU developments on Solvency II

Latest developments 10July 07: Commission presents draft Directive

Codecision process beginsExpected developments

6-7 Sept 07: Council Working Group meeting on Solvency II. Initial discussions on Pillar II and Recast part of FD21 Sept 07 / 3-4 Oct 07: Council Working Group meeting3 October 07: EP ECON 1st exchange of views Oct 07 (poss.): EP workshop on QIS 3 20 Nov 07: EP ECON 2nd exchange of views (hearing)Nov 07: CEIOPS publication of QIS 3 resultsDec 07: CEIOPS publication of QIS 4 Draft Technical Specifications 4 Dec 07: Council Coreper II (ambassador level) meeting6 Dec 07: Council ECOFIN (ministers level) meeting


Expected developments (cont) Feb/March 08: EP draft report to be presented April/May 08: EP deadline for amendmentsMay/June 08: EP ECON adoption of draft reportJune/July 08: EP plenary adoption of report

EP first reading endsCouncil working groups (dates tbd)Dec 08: Council approves EP text in its Common Position

Formal adoption of Directive

EU developments on Solvency II


Contents

1 Introduction



4 Draft Directive



7 Other issue


PRINCIPLES SOLVENCY II DRAFT DIRECTIVE

Directive in 92 paragraph

- Risk based and economic approach

- Include explanatory memorandum

Organisation of the directive

PILLAR I : Art 73-141

PILLAR II : Art 27-34/36-38/40-49/190-192

PILLAR III : Art 35/50-55

Groups : Art 219-277

Annex with details on « Solvency Requirement Standard Formula »

- Directive went further in details than expected to let some room for flexibility


COMMENTS ON PILLAR I

- Directive introduces a full standard model and calculation principles

-Main regulatory provisions are canceled :

For bonds

On equalisation reserve

- Correlation between Asset and liabilities could be considered

- Calculation should be audited and some quarterly frequence are introduced

- MCR view at 80% or 90% confidence intervalle

- Target to introduce acceptable methods to estimate assets&liabilities and reconciliation to IAS principles

- Asset and liabilities mismatched must be reflected


COMMENTS ON PILLAR II and PILLAR III

- Supervisors get strong proactive and corrective power

- Set up of proper internal function to control, assess and manage Risk

- Directive requires detailed information to be published

- Timing and some type of information will be decided in the next directive

- Information to PH for consumer protection reason

PILLAR II

PILLAR III


COMMENTS ON GROUPS

- Main Concept is « Group support regime »

Group support regime when Group capital is above SCR

- Lead supervisor even for sub group

- Flexible capital flow to be defined in next directives

- Minimum local capital above MCR+50% (SCR-MCR)

- Lead and local supervisor decides together of local capital add on.

- Internal reinsurance is not group support

- Group support cannot be above diversification effects

- issues remain for group with among them

* to define the flow of capital (fungibillity of capital)

* to compute Group MCR SCR and diversification recognition


Contents

1 Introduction



4 Draft Directive



7 Other issue


Some impacts for credit insurance&surety : PILLAR I & II

� Internal model approvalThe internal model must cover all quantifiable risks with methodology validated by regulators

and it must be used at operational level and regularly updated� Groups have small entities where it could be more challenging to run internal model� Use internal models for other calibration like reinsurance and portfolio analysis� Process for approval still to be clarified

� Pillar II introduces a strong principle for companies to have full riskmanagement organisation and capital assessment strategy in place.

Risk culture in Credit insurance is strong and many areas of Risk management are alreadyinvestigated

� organisation of Risk management in OE’s in line with EH group risk management.

� Risk management Information should be made available to regulators (including analysis, stress tests, technical provisions, risk profile..)� Information to be provided is still an issue and additional work is forseen for credit insurers

to meet the requirements.


Some impacts for credit insurance&surety : Pillar III

�Rating agencies

To follow the trend Rating agencies are also introducing changes to assess companiesRisk management as S&P ERM (Enterprise Risk Management) S&P is condering:

� Give less weight to (risk capital of standard model) CAR computation.� Considering fully the Risk management policy of the company� Items more closely reviewed (Income trends, interest rate risk coverage,

diversification of income, management, strategy, competitive environment)� Rating agencies have knowledge on credit insurance that could be expanded.


SOME GENERAL COMMENTS

Current proposals are a positive steps even if some issues remain :

�Current diversification recognition could be considered as restricted�The framework should be in line with IFRS requirements�Implementing measures should stick to some principles (time horizon, economicapproach….)�Calibration and some risk measure still need to be improved and should not be an inccentive to go for the standard model instead of internal model�Group supervision is still unclear�MCR computation must be consistent with SCR�Disclosure of requirements should be limited for sensitive information�….


Contents

1 Introduction



4 Draft Directive



7 Conclusion


ICISA WORKING GROUP

Motivation for a working group

�Credit insurance and surety are “niche markets” with their own specificities

� Importance to set up an educational process, notably towards the main stakeholders (European Commission, Supervisory Authorities, CEA...)�Importance that the new rules have no negative impact on the business

CURRENT SCOPE OF THE WORKING GROUP

� Follow the Solvency II process with a proactive view

�Interact with the stakeholders of Solvency II to give input on Credit insurance&Surety

�Reflect on some general issues on Solvency II which could impact credit insurance&Surety

to get a consistent approach of the market


Some ICISA Solvency II Expert Group activity

Some exemples of topics already reviewed� Analysis of impact assessment for Credit insurance� Analysis of QIS2

� Feedback on IAIS paper� Participation to CEA for recognition of Credit insurance in the standard model� …

Topics in progress or foreseen� Hedgeable and non hedgeable risks in Trade Credit Insurance� Lobbying paper on Trade Credit Insurance

� Equalisation Reserves� Catastrophe risks� Group approach and diversification

� …


Contents

1 Introduction



4 Draft Directive



7 Conclusion


Typography

Most credit insurers have already strong risk culture

Position of Risk management

Risk mitigationCompliance ERMStrategic risk

integration

Scale of ERM development

� Models / measures

� implementation

� Governance

� Group wide

Main valuation axes

Thank you for your attention.

Solvency II - PLM Group- EH GRC JFD- 09 07 WG Meeting... · - For life communication of European Embedded value(EEV) or the market consistent embedded value (MCEV) And in Europe Push

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