At an industry briefing this morning the Central Bank of Ireland outlined their plans to implement EIOPA’s Guidelines for the Preparation of Solvency II. The briefing covered a summary of the CBI Guidelines, and an outline of their supervisory approach for the Preparatory Guidelines.
The CBI Guidelines follow the EIOPA Guidelines quite closely. In the summary below we have noted some key points from the CBI Guidelines and the proposed supervisory approach.
The CBI has indicated that it will conduct surveys on companies’ level of preparedness in Q3 2014 and Q3 2015 and we expect that Solvency II implementation will receive increased regulatory focus from now on.
The Introduction to the CBI Guidelines on Preparing for Solvency II includes information on general issues as well as on the scope of the Guidelines. The Guidelines apply from 1 January 2014 until the implementation of Solvency II. The provisions could still be reviewed should Solvency II implementation be later than 1 January 2016, however following the recent trialogue agreement on Omnibus II this is now highly unlikely.
The principle of proportionality is embedded in the guidelines and they should be applied in a manner which is proportionate to the nature, scale and complexity of the risks inherent in the business of an undertaking. The CBI has reflected this by aligning the requirements with the PRISM framework.
Thresholds based on PRISM impact categories are set out in the Guidelines. The relevant impact category is the one that applies at 31 December 2013. Where a firm’s impact category is reclassified from high/medium-high impact to low/medium-low impact, the Guidelines will continue to apply in the way they do for high/medium-high impact undertakings. Where a low/medium-low impact undertaking is re-categorised as high/medium-high impact, all Guidelines will apply in the way they do for high/medium-high impact undertakings.
The Guidelines apply to all undertakings expected to be within the scope of the Solvency II Directive. There are some limited exclusions for certain companies due to size and other criteria such as being in run-off. Companies must notify the CBI if they expect that the Guidelines do not apply.
The Guidelines relevant to groups are addressed to groups where the Central Bank expects to be the group supervisor under Solvency II.
The Guidelines cover four key areas:
I. System of governance
• High & Medium-High impact companies: subject to all Guidelines from 2014
• Medium-Low & Low impact companies: subject to all of the general requirements from 2014. The four key functions (Risk Management, Internal Audit, Compliance, and Actuarial) should be established & the associated Guidelines apply from 2015.
• The CBI indicated that Medium-Low and Low impact companies will need to work on risk policies in 2014.
• Also, companies will have flexibility in how they organise their control functions and that, with the exception of the Internal Audit function, it will be possible to integrate functions. They also reaffirmed that it would be possible to outsource any/all functions.
• For Medium-High and High impact companies, the CBI has indicated that it will not be necessary to calculate technical provisions in 2014 with the focus being on data and methodologies. The Actuarial function report will not therefore need to include technical provision results but instead report on how the compliance of data and methodologies and the areas where work is needed. However the CBI considers it to be ‘best-practice’ for companies to conduct ‘dry-runs’ of the calculation process in order to road-test their systems in 2014. EIOPA is expected to publish a revised Pillar 1 Technical Specification in Q2 2014.
II. Forward Looking Assessment of the undertaking’s own risk (based on Own Risk and Solvency Assessment (“ORSA”) principles)
• High & Medium-High impact companies: Perform & report on overall solvency needs in 2014. Perform & report on overall solvency needs, compliance on a continuous basis, and deviation from SCR assumptions using own structured report in 2015.
• Medium-Low & Low impact companies: Perform & report on overall solvency needs using CBI ORSA / FLAOR tool in 2014 & 2015.
• The online FLAOR tool for Low and Medium-Low impact companies is expected to be available in early Q3 2014. An electronic upload facility is expected to be available for Medium-High and High companies’ reports (pdf, word, excel) in early Q2 2014.
• The FLAOR in 2014 will need to address quantitative requirements at risk category level.
• EIOPA is expected to publish a document setting out the assumptions underlying the Standard Formula SCR in Q2 2014 to help companies judge the appropriateness of the Standard Formula to their business.
III. Submission of information to National Competent Authorities (“NCAs”)
• High & Medium-High impact companies: Prepare reporting systems during 2014. Submit annual (as at YE 2014 ) & quarterly templates (as at Q3 2015) during 2015.
• Medium-Low & Low impact companies: Prepare reporting systems during 2015.
• Pillar 3 reporting will be via XBRL. EIOPA is developing a tool to facilitate this process. Commercial tools (such as STAR Vega from Milliman) will also provide the functionality to allow uploading via XBRL.
IV. Pre-application for internal models.
• The CBI Guidelines that relate to pre-application for internal models only apply to insurance or reinsurance undertakings engaged in the Central Bank pre-application process.
How Milliman can help
To help companies with this process Milliman has developed a Solvency II Readiness Assessment Tool that is relevant for life / non-life / (re)insurance companies that:
• Provides companies with a clear assessment of the status of the organisation’s Solvency II project across key areas;
• Includes a separate assessment for both the Preparatory Guidelines and full Solvency II implementation;
• Identifies work remaining in key areas and assists with project planning;
• Is an easy-to-use reference tool with automatic links to the Solvency II regulations;
• Enables benchmarking against industry best practice.
This brochure provides more information on this easy-to-use tool. If you would like to arrange a free demonstration of the Solvency II Readiness Assessment Tool please contact your usual Milliman consultant.
This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.