Tag Archives: Mike Claffey

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.

Milliman Solvency II Readiness Assessment Tool first industry survey: Ireland – Life Assurance

Milliman developed the Solvency II Readiness Assessment Tool to help companies prepare and plan for Solvency II. The tool is designed for life and nonlife direct writing and reinsurance companies. It enables companies to rate themselves using a range of detailed questions covering the full scope of Solvency II. A score of 5 identifies areas that are 100% ready, whereas a score of 1 identifies areas where no progress has been made.

Thirteen life companies based in Ireland shared their current levels of preparedness. In this briefing, Milliman’s Andrew Kay and Mike Claffey have consolidated the results to give an overall idea of the issues facing companies.

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.

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.

Workshop preview F6 Assets within personalised funds, does default matter?

 

 

Portfolio Bonds and SIPP’s can include individualised funds where a wide range of investments may be held. Recent years of market turmoil have forced us all to examine what is investment risk, and who actually carries this risk. In this session we will discuss the nature of default risk and counterparty risk with these particular products in mind.

As speakers we have the advantage of knowing who plans to attend our session. We expect this will be an interactive session as we will present a range of open issues and dare to suggest our own personal opinions on each one. We look forward to the debate.

 

 

Sovereign Bond spreads

I have been thinking about sovereign bonds a lot recently. Ten year Irish government bonds were yielding 9.2% on the last day of 2010 when UK yields were 3.2% and Italian were 4.9%. As at 8 November 2011 the latest yields were 8.3% for Ireland, 2.2% for the UK and 6.7% for Italy.

So we agree that the market believes not all government bonds are risk free. As actuaries we have to try to quantify how much of this spread is credit (default) risk. The Society of Actuaries in Ireland produced a useful paper in May 2011 that summarised a range of approaches to try to quantify this credit component. The full paper (and presentation and podcast!) is here:

https://web.actuaries.ie/events/2011/06/sai-agm-followed-evening-meeting-sovereign-exposures-dinner

The interesting table is included in the Appendix to the paper:

Irish government bonds, as at 31 December 2010:

Approach to estimating credit risk % of the excess spread that can be considered credit risk
Credit default swaps >100%
Market based metrics 75% – 90%*
Solvency II illiquidity premium 92%
Historical experience approach **
Bank of England’s analysis on corporate bonds >50%

 

 

* Based on data at 15 February 2011

** Depends on the analysis of historical experience.

I’m looking forward to discussion of this at the life convention in Liverpool. I expect (and hope) the International Actuarial Association attendees will bring an interesting international viewpoint to the debate.