Tag Archives: Solvency II

Capital management in a Solvency II world: A non-life perspective

Insurance and reinsurance companies have charted a new approach to capital management. The financial crisis has shown that undertakings cannot assume that capital will be readily available as and when it is needed and, even if it is available, it may not be accessible at the right price. Solvency II will change the way insurance and reinsurance undertakings determine their regulatory capital requirements, as well as introduce new rules with regard to what forms of capital can be used to meet those requirements. As a result, Solvency II will bring about both challenges and opportunities for undertakings. This paper aims to address some of the key issues for insurers and reinsurers with regard to capital management in a Solvency II world.

Solvency II standard formula – increase in operational risk module capital for unit linked business

On 28th July 2014 the European Commission circulated an updated draft of the Solvency II Delegated Acts to Member States. The latest draft of the Delegated Acts includes a change to the standard formula operational risk module for unit linked products. As in previous drafts, the operational risk capital for unit linked business under the standard formula had been set at 25% of unit linked expenses. However, the definition of unit linked expenses in the latest draft Delegated Acts is:

• “Amount of expenses incurred during the previous 12 months in respect of life insurance contracts where the investment risk is borne by policyholders.”

This compares with the definition of unit linked expenses in the technical specification released by EIOPA in April 2014 for the purpose of completing stress tests which was:

• “Amount of expenses incurred during the previous 12 months in respect of life insurance where the investment risk is borne by the policyholders, excluding acquisition expenses.”

So, based on the latest draft Delegated Acts, companies writing unit linked business will now be required to include related acquisition expenses (including initial commission) in the operational risk capital calculation when using the standard formula. This change may result in a significant increase to the operational risk capital and thus the SCR for certain companies.

Footnote:
Acquisition expenses are defined in EIOPA Consultation paper on the proposal for Guidelines on Solvency II relating to Pillar 1 requirements dated 2 June 2014 as:

“2.52 Acquisition expenses include expenses which can be identified at the level of individual insurance contract and have been incurred because the undertaking has issued that particular contract. These are commission costs, costs of selling, underwriting and initiating an insurance contract that has been issued.”

If you have any questions or comments on this eAlert or any other aspect of Solvency II, please contact your usual Milliman consultant.

Visit our website to access our Solvency II documents. Also, to read past eAlerts, click here.

Disclaimer
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.

EIOPA announces more details on 2014 Europe-wide insurance stress test

In October 2013, the European Insurance and Occupational Pensions Authority (EIOPA) announced its intention to undertake stress testing of the European insurance industry in its 2014 work plan. They have now (20th January) updated their website to give more details on this insurance stress testing exercise.

The stress testing exercise is expected to include:

• Market risks under a combination of historical and hypothetical scenarios
• Insurance risks
• Impacts of low yields and low interest rates

EIOPA plans to consult with the industry in March 2014 and launch the Europe-wide stress test exercise by 30 April. National Supervisory Authorities (“NSA”) will collect and validate submissions by 20 June for onward submission to EIOPA. EIOPA currently expects to publish the results in November 2014.

As in previous stress testing exercises, each local NSA will be responsible for identifying and contacting individual insurers for inclusion in the exercise. It is not clear at this stage which insurers will be asked to participate in the stress testing exercise.

A link to the EIOPA 2014 insurance stress testing timetable and process is here.

If you have any questions or comments on this eAlert or any other aspect of Solvency II, please contact your usual Milliman consultant.

Disclaimer
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.

Recapping insurance industry’s 2013 with a look ahead to 2014

In this interview with InsuranceERM (subscription required), Milliman’s Neil Cantle and Elliot Varnell reflect on key issues impacting Europe’s insurance industry in 2013. They also discuss some challenges the industry may face in 2014.

Here’s an excerpt from the interview:

What will 2013 be remembered for?
Varnell: I would suggest that it was the year that Solvency II was finally “agreed” at the top level after a few years of debate and wrangling between the Council, Commission and Parliament.

Ironically, it was also the year when economically based regulatory capital was to some extent de-emphasised as the PRA published on Early Warning Indicators (see IERM, 4 October) and the FSB announced its G-SII list (see IERM, 19 July) and kicked off a project through the IAIS to come up with a global metric for regulatory capital (see IERM, 12 December.)

But also the year that many insurers – especially life insurers – rebalanced their focus away from Solvency II and regulatory capital and turned to looking for the best opportunities for value creation in their business. The refocus on product development and investment in infrastructure stand out as examples of areas that insurers have re-focused onto value creation.

What will be the biggest ERM challenge of 2014?
Cantle: I think many firms are still struggling to bring ERM to life and make it truly operational. If ERM is done simply as a compliance exercise then it can cost a lot of money and simply be a burden. If it is done to bring insights to the business and improve the opportunity for discussion about performance uncertainty then it can improve resilience and add significant long-term value to the business. The challenge is therefore to look beyond templates and documentation and make it strategic. Concepts like risk appetite require a multi-variate view of performance, so that indicators are seen in context, and many firms still cannot do that.

Consequences for Irish insurers following EIOPA publication of the final guidelines for the preparation of Solvency II

Following our eAlert on the 30th September, we have published a more detailed Briefing Note on the final EIOPA guidelines for the phased introduction of specific aspects of the Solvency II requirements into national supervision from 1 January 2014.

Under the guidelines, all firms will be required to implement a System of Governance in line with Solvency II requirements and submit an assessment of overall solvency needs in 2014. In addition, firms identified by national supervisors as falling within the specified thresholds (i.e. high and medium high impact under PRISM in Ireland) will be required to submit one annual and one quarterly information package (QRTs and narrative reporting) in advance of the implementation of Solvency II. Assuming implementation on 1 January 2016 this means an annual submission and a quarterly submission of information as at 31 December 2014 and 30 September 2015 respectively. In 2015, these firms will also be required to perform an assessment of whether they would comply with Solvency II regulatory capital requirements and technical provisions on a continuous basis as well as an assessment of deviations from the assumptions underlying the capital calculation. These items will be based upon technical specifications that EIOPA intends to issue during 2014.

EIOPA publishes the final guidelines for the preparation of Solvency II

On 27 September 2013, the European Insurance and Occupational Pensions Authority (EIOPA) published the final guidelines on the preparation for Solvency II following a public consultation earlier this year. The guidelines are aimed at National Competent Authorities (“NCAs”) and allow for the phased introduction of specific aspects of the Solvency II requirements into national supervision from 1 January 2014, in advance of the full implementation of the Solvency II regime. The following key areas are each covered by a separate set of guidelines:

• System of governance
• Forward Looking Assessment of the undertaking’s own risk (based on Own Risk and Solvency Assessment (“ORSA”) principles)
• Submission of information to NCAs
• Pre-application for internal models

Responses to specific issues raised are included in each document providing clarification in a number of areas. EIOPA also responded to more general issues raised including timings during the preparatory phase and the extent of supervisory actions expected during this period.

The 57 requirements included in the consultation under the systems of governance have been reduced to 52 with the removal of some actuarial function requirements and the rationalisation of the internal audit guidelines. The final guideline on group internal models has also been removed and several wording changes have been made to the remaining guidelines.

The 25 guidelines for the Forward Looking Assessment of the undertaking’s own risk are largely unchanged from those included in the consultation.
However under the Forward Looking Assessment, the following aspects have been deferred to 2015 for all entities:

• The assessment of the continuous compliance with capital requirements and technical provisions
• The assessment of the significance of any deviation of the risk profile from the SCR assumptions.

The assessment of solvency needs will be required on a best efforts basis during 2014 irrespective of Omnibus II discussions and the Solvency II start date.

In relation to the submission of information, the 38 guidelines included in the consultation have been increased to 39, but this reflects a reformat of one of the guidelines rather than new content. EIOPA has concluded that one quarterly submission prior to Solvency II implementation is sufficient (i.e. Quarter 3 2015 if January 2016 is agreed as the Solvency II implementation date) and EIOPA has granted 2 extra weeks for completing the annual submission in 2015 for year-end 2014 (so 22 weeks after year end). EIOPA has introduced some further materiality thresholds and exemptions in the interests of proportionality. A final list and format of templates has been provided (with new naming conventions) including a log of changes from previous versions.

Under the pre-application for internal models, undertakings are required to submit the standard formula Solvency Capital Requirement during the pre-application process. The 72 guidelines that were consulted on have been reduced to 70 with one guideline on decision making being removed and the guideline on the application of profit and loss attribution and the use test also removed.

If you have any questions or comments on this eAlert or any other aspect of Solvency II, please your Milliman consultant.

EIOPA consultation on guidelines for preparation of Solvency II

 

On 27 March 2013, the European Insurance and Occupational Pensions Authority (EIOPA) launched a consultation on guidelines for the preparation for Solvency II. The purpose of the consultation is to “support both National Competent Authorities (NCA’s) and undertakings in their preparation for the Solvency II requirements” with the aim of ensuring a consistent and convergent approach in preparations.

The consultation covers guidelines for the phased introduction of specific aspects of the Solvency II requirements into national supervision from 1 January 2014, in advance of the full implementation of the Solvency II regime.  The guidelines are set out in consultation papers and accompanying explanatory text covering:

  • System of governance;
  • Forward looking assessment of the undertaking’s own risk (based on ORSA principles);
  • Submission of information to NCA’s; and
  • Pre-application for internal models.

As set out in EIOPA’s opinion paper, published in December 2012, NCA’s are expected to comply with the guidelines by ensuring firms meet the specified outcomes.  As such, NCA’s will have two months following the issue of the finalised guidelines to explain whether they currently comply, how they intend to comply, or why they do not intend to comply with the guidelines.  NCA’s will be required to submit annual progress reports on the application of the guidelines by the end of February following each year of application of the guidelines (with the first report due to be submitted 28 February 2015).

EIOPA has stressed that the guidelines do not require NCA’s to take supervisory action in relation to any of the outcomes from the requirements, particularly where these may reflect a failure to comply with Solvency II Pillar 1 requirements. The guidelines are intended to be applied by NCA’s in a proportionate manner and allow for flexibility in application through provisions for “phasing-in” and the use of specific thresholds.

The consultation will run until 19 June 2013 with final guidelines expected to be published by EIOPA in autumn of this year.

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Living with Solvency II: An economic capital perspective from recent history

There is little doubt that Solvency II will have a significant impact on many aspects of how insurance companies operate in the future. Much has been written already about this and it remains fertile ground for discussion as debate continues over many details of the regulation.

This report brings some of the implications of Solvency II alive by:

• Creating a simplified but realistic UK ‘Model Life Company’ (MLC)
• Imagining a world where Solvency II had been implemented before the global financial crisis (GFC)

This report combines modelling techniques refined in industries outside the financial sector with significant advances in computing technology to gain insights that would previously have been out of reach. This report offers an illustration of how advanced modelling approaches can expand the body of actionable information to support management decision-making.

First long-term guarantee assessment Q&A published

The European Insurance and Occupational Pensions Authority (EIOPA) recently released its initial set of questions and answers (Q&A) regarding the long-term guarantee assessment (LTGA). The LTGA began on 28 January.

This InsuranceERM.com article (subscription required) cites William Coatesworth’s perspective on the Q&A. Here is an excerpt:

EIOPA confirmed that the firms that are taking part in the assessment, which it is hoped will smooth out disagreements between EU policy-makers in the Omnibus II directive, should use a base reference date of 31 December 2011, even where more recent data is available.

As such, for firms whose asset portfolios have changed significantly since the end of 2011, the results from the LTG impact assessment are “unlikely to represent a realistic view of their financial position, particularly where such changes have been made in reflection of expected Solvency II requirements,” according to consulting firm Milliman.

The first set of questions cover a wide range of issues, and, as noted by Milliman in its round-up of the Q&A, many respondents have taken the opportunity to ask questions relating to wider Solvency II issues including the calculation of technical provisions and the solvency capital requirements as set out in part I of the technical specifications, released by EIOPA in January.

In relation to part II of the technical specifications, end of December is a base reference date and no hypothetical eligible assets should be quantitatively tested – whereby assets are assumed to be sold and hypothetical eligible assets instantaneously purchased in order to optimise the matching adjustment, Milliman explained.

Strategic implications of Solvency II

There is currently no publicly available revised timeline for the implementation of Solvency II. With the long term guarantee assessment taking place over the coming months it is likely that it will be summer at the earliest before such a timetable is made public.

This briefing note examines some of the longer-term strategic issues that insurance and reinsurance companies may want to consider as they continue to prepare for Solvency II.