Tag Archives: William Coatesworth

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.

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.

Will the lack of specifications and timing jeopardise the quality of results from the LTGA?

Insurers’ ability to properly conduct the long-term guarantee assessment (LGTA) may be at risk due to insufficient specifications and scheduling by the European Insurance and Occupational Pensions Authority (EIOPA). The final part of the technical specifications are not due to be released until the start of the LTGA, which, due to delays in the political processes, is now currently scheduled by EIOPA for 28 January, a date which coincides with the year-end reporting period for many firms.

In this Risk.net article (subscription required), William Coatesworth highlights concerns facing firms required to perform the test in light of these events. Here is an excerpt:

Actuaries say the absence of any detail on when the specifications will be published could jeopardise insurers’ ability to take part in the exercise, with smaller firms likely to be particularly challenged.

William Coatesworth, consulting actuary at Milliman in London, says: “Insufficient notice of the requirements may impose significant challenges for firms required [to] conduct the assessment.

“Many firms, and small and medium-sized firms in particular, may be at risk of significant resourcing issues caused by overlaps with year-end reporting timetables,” he adds.

…there are fears that the exercise will not be completed in time for the parliament’s plenary vote to finalise Omnibus II, scheduled to take place on June 10, regardless of when the LTGA begins. Eiopa will publish its report on the LTGA in June 2013.

“Given the proposed timelines for producing the final report, absorbing this and subsequently feeding the results into the trilogue discussions, it appears increasingly likely that Omnibus II will not be finalised in time for approval at the plenary session,” says Milliman’s Coatesworth.

“If this is the case, a more justified approach may be for Eiopa to either postpone the assessment until after the year-end reporting period, or extend the assessment deadlines. This would give greater flexibility to companies and national supervisors for the submission of the results, and would appear to increase the chances of greater participation and hence produce more accurate results from the assessment,” adds Coatesworth.

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.

Should firms get on with their ORSA development?

The European Insurance and Occupational Pensions Authority (EIOPA) published its final report on draft guidelines for Own Risk and Solvency Assessment (ORSA), which “underlines the purposes of the ORSA,” and provides “additional details on how the guidelines are to be interpreted.”

This article by the InsuranceERM (subscription) cites Milliman’s recent Solvency II paper authored by William Coatesworth, John McKenzie, and Neil Cantle where they provide a brief analysis of what the EIOPA’s proposals may mean for companies and Solvency II in general.

Here is an excerpt from their paper:

EIOPA’s final report on the ORSA guidelines sets out the responses and comments raised during the public consultation of the proposed Level 3 ORSA text initiated in November 2011 together with EIOPA’s review and resulting changes to the ORSA requirements.

Consistent with the guidelines set out in the original consultation paper, EIOPA’s report focuses on what the ORSA should achieve rather than how it is to be performed.

While a number of the changes are aimed at providing more clarity around the guidelines, the report does contain several changes that may prove significant to companies. This includes ORSA to be based on a multi-year time horizon rather than a series of one-year horizons.

While these guidelines are still in draft form, and may be subject to further changes in order to reflect future development in the Solvency II Directive as a result of Omnibus II, EIOPA has stress that companies should use these guidelines as the basis for their implementation of the ORSA.

The key message from some national regulators is that firms should now “get on with it” as it is a central part of the new regulation and there will be no more guidance.

Download and read the entire paper here.

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.

EIOPA publishes draft technical standards for IORP QIS

On 15 June 2012, the European Insurance and Occupational Pensions Authority (EIOPA) released the draft technical specifications for a quantitative impact study (QIS) in relation to its review of the Directive on the activities and supervision of institutions for occupational retirement provision (IORPs). This review proposed a Solvency II-style approach, including the use of a holistic balance sheet, in order to create a harmonised prudential regime for IORPs in line with stated aims of “encouraging cross border activity of IORPs, allowing IORPs to benefit from risk based supervision while ensuring regulatory consistency between and within sectors and to modernise the prudential regulation for IORPs that operate DC schemes”.

While the document draw heavily on the latest Solvency II specifications, it states that it recognises that these have been elaborated upon and modified to account for the differences between IORPs and insurance undertakings”.

The impact study will only look to assess the impact of EIOPA’s advice on valuation and security mechanisms on the financial requirements for IORPs providing defined benefit or hybrid schemes at a level required for future Level 1 legislation. As such, the specifications do not include details of areas such as the confidence level required for SCR calibrations (as this is seen to be a political issue), or technical advice that would form part of Level 2 implementing measures, except where this is required to test the practical implementation of a holistic balance sheet. Technical items included for this purpose include:

  • Methodologies to value technical provisions;
  • The determination of the risk free interest rate;
  • The risks to be included in the calculation of the SCR and their accompanying stresses and correlations in the standard formula.

The consultation on the draft technical standards is open until 31 July 2012 with the QIS expected to be conducted between the beginning of October and mid December 2012.

Copies of the draft technical specifications are available on EIOPA’s website (link).

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.

Proposed further delay to Solvency II implementation date

On 6 June 2012, the Czech Republic released a statement to the Committee of Permanent Representatives in the European Union (link) calling for the full implementation date of Solvency II to be moved to 1 January 2015, a further delay of one year to the date set out in the emergency directive published last month.

The statement raises concerns that the 6 month period currently proposed between the date at which Solvency II must be transcribed into national law (30 June 2013) and the full implementation date for Solvency II (1 January 2014) is too short for stakeholders to prepare for the new regime, and, as such, should be extended. While this only represents a single request from one member state, this public statement will stimulate debate during the final stages of the Omnibus II trilogue discussions over whether the current timescales are realistic.

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.

Milliman Solvency II briefing – Proposed directive amending transposition of Solvency II

On 16 May 2012, a proposed directive of the European Parliament and the Council was published in order to amend the deadline for the transposition and subsequent implementation of the Solvency II Framework Directive (Directive 2009/138/EC) (link). Under the current deadlines set out in the Solvency II Framework Directive, the transposition must take place by 31 October 2012, while the existing Solvency I requirements would be repealed with effect from 1 November 2012.

While these deadlines are amended in the proposed Omnibus II Directive, there is a real risk that this will not have entered into force before the deadline for transposition of Directive 2009/138/EC expires on 31 October 2012. As such, the amending Directive proposes that the deadline for the transposition of Solvency II is extended to 30 June 2013 while the date for first application of Solvency II (and the corresponding repeal of Solvency I) is set at 1 January 2014.

This proposal highlights that “leaving this date unchanged would imply that the Framework Directive would need to be implemented without the transitional rules and other important adaptations foreseen in Omnibus II” and, as such, this Directive is necessary in order to prevent a uncertain legal situation occurring after 31 October 2012 whereby the EU legal system incorporates Solvency II requirements while Member States continue to apply Solvency I.

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.