Tag Archives: eAlert

Solvency II standard formula – U-turn from the Commission on operational risk module capital for unit linked business

On 10th October 2014 the European Commission adopted a Delegated Act containing implementing rules for Solvency II. This Delegated Act has now been sent to the European Parliament and Council for approval which could take up to a maximum of 6 months.

A recent draft version of the Delegated Act (dated 28th July 2014) contained a suggested controversial change to the operational risk capital for unit linked business. The operational risk capital for unit linked business under the standard formula is set at 25% of unit linked expenses. However, the definition of expenses had been adjusted to include acquisition expenses (including initial commission). It was expected that this change would lead to large increases in capital requirements for many unit linked insurers particularly as commission payments could be a multiple of expenses for some companies.

Insurers of unit linked business may now breathe a sigh of relief as the Commission have since revoked this change. Note 67 of the opening remarks of the Delegated Act adopted this week refers to the operational risk module and states:

“In view of the fact that acquisition expenses are implemented heterogeneously in different insurance business models, these expenses should not be taken into account in the volume measure for the amount of expenses incurred during the previous 12 months.”

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.

To read our past eAlerts, click here, or visit our Solvency II documents here.

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.

PRA publications on recognition of deferred tax and data collection exercises

On 16 April 2014 the UK Prudential Regulation Authority (“PRA”) published Supervisory Statement SS2/14 “Solvency II: Recognition of deferred tax” which sets out the PRA’s expectations of firms regarding the recognition of deferred tax in Solvency II. The supervisory statement outlines the PRA’s expectations in relation to the credibility of projected future taxable profits, as well as highlighting areas to which firms should pay particular attention when considering whether they can:

• Recognise deferred tax assets (“DTAs”) on their Solvency II balance sheets;
• Recognise the loss-absorbing effects of DTAs when performing 1/200 shocks to calculate the solvency capital requirement (“SCR”).

The supervisory statement is aimed at all insurance companies that will be subject to Solvency II, including both internal model and standard formula firms, and reflects feedback that was received by the PRA in response to a public consultation carried out during February and March 2014.

The guidance contained in the supervisory statement, in particular around the projection of future taxable profits to calculate the value of DTAs, serves as a useful clarification of the current Solvency II level 2 guidelines in these areas. However, areas of uncertainty remain, in particular in relation to the basis that firms should use for determining the future profit projections.

PRA summary of Solvency II data collection exercises

On 14 April 2014 the PRA published a summary of the data collection exercises it intends to request from firms during 2014. The main focus of these exercises is to support the transition to Solvency II and aid in preparations for the new regime. A summary of the data collection exercises is given below.

Solvency II briefing

These data collection exercises are similar to those performed in previous years. The most significant difference is the requirement for non-IMAP firms to take part in the SCR comparison exercise (only IMAP firms were required to participate in this exercise in 2013).

The PRA asks firms to be aware that these exercises are in addition to any data collection exercises which may be requested by the European Insurance & Occupational Pensions Authority (“EIOPA”) and that the timing of the SCR comparison exercise is depended on the publication of EIOPA’s Technical Specifications for the Preparatory Phase (due at the end of April 2014), which firms must use when calculating the various elements of their Solvency II balance sheet.

The PRA state that the data collection exercises for 2015 are yet to be determined. Any additional exercises will be to support the submission of information that the PRA expects from firms that are in-scope to report under EIOPA’s preparatory guidelines. The PRA also state that they will make further information available in Q3 2014 regarding National Specific Templates for reporting.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website.

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant, or email SolvencyII@milliman.com for more information.

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.

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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Milliman e-Alert on EIOPA LTGA discount rates

 

On 22 January 2013, the European Insurance and Occupational Pensions Authority (EIOPA) released a pre-publication spreadsheet setting out the discount rates curves for each major currency to be used by firms in the upcoming Long-Term Guarantee Assessment (“LTGA”).

The LTGA is currently scheduled to run from 28 January 2013 and is intended to assess the impact of the proposed Long-Term Guarantees package (“LTG”) as part of the on-going discussions on Omnibus II. While the Terms of Reference for the LTGA have not been made publicly available, the assessment is expect to test different applications of the following components through a number of scenarios:

  • The counter-cyclical premium
  • The matching adjustment
  • Extrapolation of the risk-free rate
  • A transitional measure.

The spreadsheet sets out discount rates for 13 scenarios, of which scenario 0 represents the base position (with no LTG measure applied), scenarios 1 to 9 test different applications of the LTG measures using a reference date of 31/12/2011, and scenarios 10, 11 and 12 test how the measures would have fared under the economic conditions at 31/12/2009 and 31/12/2004.

The scenario summary tab, included with the spreadsheet, details the extrapolation parameters used to derive the curves beyond the point where market data can be used, and the level of any counter-cyclical premium (“CCP”) that has been applied under each scenario, as follows:

  • The last liquid point (“LLP”), representing the point at which extrapolation starts, for the Euro and Sterling is set at 20 years and 50 years respectively (with an Euro LLP of 30 years used for the base position in scenario 0).  The rates for all currencies converge to the ultimate forward rate within 10 years for all scenarios, except scenarios 0 and 4 where a convergence of 40 years is used
  • The credit risk adjustment has been increased from 10 basis points, as used under QIS5, to 35 basis points, for all scenarios using a reference date of 31/12/2011, and 20 basis points as at 31/12/2009 (consistent with the increased credit concerns observed in the market as indicated by the widening differences between 3 month and overnight swap rates); and
  • For the purposes of the LTGA, the CCP to be tested is applied as fixed rates, set at 50, 100 and 250 basis points under the various scenarios.

The discount rates are published in advance of Part 2 of the technical specifications for the LTGA, which are currently expected to be released by EIOPA on 28 January 2013. Part 1 of the technical specifications to be used by firms participating in the assessment were published by EIOPA on 18 October 2012, and subsequently revised on 22 December 2012 (and are discussed in three Milliman summary papers which are available on our website).

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found at UK.Milliman.com.

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant for more information.

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.

UK FSA speech on approach to insurance regulation and Solvency II

On October 22, Julian Adams, director of Insurance at the UK FSA, gave a speech at the Prudential Regulation Authority’s (PRA) Insurance Conference in London.  As well as setting out in more detail what the PRA’s supervisory approach will be for insurance business (and with-profits business in particular) when it becomes the UK’s prudential regulator for insurers in 2013, the speech covered the continuing uncertainty around the Solvency II timeline and the implication of this for firms.

Significantly, the speech highlighted the FSA’s view that an implementation date for Solvency II of 2014 is unrealistic and that 2015 looks challenging given “the lack of agreement on the shape of the long-term guarantee package” including the matching adjustment and counter-cyclical premium.  While he stopped short of saying it was working towards an implementation date of 2016, Mr Adams stated that revised “landing slots” for firms in the internal model approval process (IMAP) will be agreed and that these “can be at any point of the firm’s choosing up to a maximum of 31 December 2015”, commenting that this “simply reflects the furthest end of what we regard as a sensible planning period”.  These comments also coincide with comments made last week by Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), to the Wall Street Journal that “Under the best scenario, Solvency II could start to be implemented either 2015 or 2016… At the end of the day, we’ll probably go to 2016, but it is still to be seen”.

This revision of landing slots reflects a change in the FSA’s (PRA’s) approach to Solvency II implementation, moving away from the previous approach of working backwards from the official implementation date, and instead basing workloads and timescales on a realistic assessment of firms’ preparedness and internal implementation plans.  Mr Adams acknowledged that this approach may need to be reconsidered when a credible official timetable eventually emerges.

In relation to the use of Solvency II models for the current ICAS regime, Mr Adams set out a new two-phase approach. Phase 1 will require firms intending to use their Solvency II internal model under the ICAS regime to publish a “reconciliation between the calculations to take account of the differences in the two regimes”.  This will allow the PRA to understand the differences between the ICA and Solvency II models.  Once this reconciliation has been performed to a sufficient level to give assurance to the PRA, phase 2 will allow firms to use the Solvency II internal model and balance sheet for ICAS purposes with no further reconciliation. However, this may require reconciliation being performed more than once for firms less advanced in their model development.

Even where the Solvency II model is used for ICAS purposes, the PRA will retain the right to apply Individual Capital Guidance (ICG) and to ensure the Solvency I capital requirements are being met.

For firms intending to use the standard formula under Solvency II, Mr Adams indicated that the FSA will use its recent data request to firms to prioritise its assessment of the pre-day one appropriateness of the standard formula – although no further details were provided on how this assessment would be performed.

Other areas where firms may be able to use their Solvency II development work as part of the current ICAS regime include:

  • The Own Risk and Solvency Assessment (ORSA) – the PRA may allow firms to use parts of the ORSA to use to satisfy current requirements;
  • The Prudent Person Principle; and
  • Reporting – the PRA will look to see if there is a need to supplement existing data received from firms in areas such as stress testing or market-wide data.

The FSA has stated that it will be looking to work with firms over the coming weeks to derive the next level of detail in relation to its approach to Solvency II implementation, allowing firms to both build on their existing implementation work and to use this Solvency II work to “meet the current requirements to the maximum extent possible”.

The speech went on to discuss the approach to the supervision of with-profits business and the respective roles of the PRA and FCA in relation to this.

A copy of the speech is available on the FSA’s website.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website.

Please contact your usual Milliman consultant, or email SolvencyII@milliman.com for more information.

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’s report on reporting and disclosure requirements

On 10 July 2012, the European Insurance and Occupational Pensions Authority (EIOPA) published a package containing its final report on the public consultations on the proposal for reporting and disclosure requirements for insurance undertakings and insurance groups under Solvency II (link). This package sets out EIOPA’s latest position on reporting requirements under Solvency II following the formal consultations released in November 2011 and includes:

  • EIOPA’s report on public consultations 11/009 and 11/011 on the proposal for the reporting and disclosure requirements, including guidelines for the Solvency and Financial Condition Report (SFCR) and Regular Supervisory Report (RSR);
  • Revised reporting templates for solo and group companies (both annual and quarterly);
  • Templates required for public disclosure for solo and group companies (both annual and quarterly); and
  • Finalised summary and LOG files.

The report sets out a summary of concerns raised by participants during the formal consultation and EIOPA’s response to these. Perhaps unsurprisingly, these concerns focused on issues surrounding scope, thresholds, frequency of reporting, submission deadlines, and the granularity of information required.

While EIOPA acknowledges that the package is expected to change further in order to reflect the final position of the Omnibus II Directive and Level 2 Implementing measures, it has commented that this package represents a “stable view of the level of granularity of the information that supervisory authorities will need to receive” and as such industry should use this package as a basis for implementation. EIOPA has commented that it “expects that the full package on reporting and disclosure with all the changes incorporated will be available later in 2012”.

Gabriel Bernardino, Chairman of EIOPA, has commented that: “The publication of this report is crucial because insurance undertakings and supervisors need to start as early as possible with the implementation of reporting and disclosure requirements. The proposed reporting templates are the result of a long effort by EIOPA and have benefited from contributions from the different stakeholders. This set of harmonized reporting templates represents a major step towards the consistency of supervisory practices in the EU”.

The report highlights that further changes are likely to required to a number of the reporting templates in the following significant areas:

  • Scope of quarterly reporting;
  • Own Funds;
  • SCR specific risk modules;
  • Life Technical Provisions;
  • Activity by country; and
  • Templates applicable to ring-fenced funds.

The report also states that further structural changes may be required to the templates due to the development of data point modelling and eXtensible Business Reporting Language (XBRL) taxonomy. Furthermore, the report comments that while a tool for the calculation of the SCR may be made available by EIOPA in the future this will not be used for reporting purposes.

While we will produce a more detailed summary of this package in due course, practitioners in this area may wish to note the following points of detail:

The report comments that EIOPA recognises the burden of reporting on firms and highlights that changes have been made between the split of information required as part of the quarterly and annual information to help address this while the thresholds for quarterly reporting have been reviewed. Under this, asset template D1, setting out the detailed list of investments, and derivative templates D20 and D2T would only be required as quarterly templates (although these would be required in the 4th quarter and the level of granularity required on D1 would remain as per the previous templates).

The templates include a number of further significant changes since the November versions, including:

  • The need for all companies to disclose quarterly balance sheets (with no threshold or exceptions);
  • Revised Variation Analysis templates (including changes to the order of calculation and the removal of the detailed breakdown on reinsurance recoverables);
  • Changes to the counterparty default risk SCR template to better reflect the rationale of the calculation;
  • Removal of the “salvages and subrogation” triangles for non-life technical provisions;
  • Simplification of reinsurance templates J1 and J2; and
  • Removal of the requirement for information on risk concentration for groups to be disclosed publicly.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website: http://uk.milliman.com/perspective/

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant  for more information.

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.