Page 1 Own Solvency and Risk Assessment Jarl Kure Malta 9 April 2010

CEIOPS Page 2 The foundation of Solvency II Insurance supervision: solo and groups Focus on undertaking’s responsibility Convergence of supervisory practices Convergence of supervisory reporting More pressure from rating agencies, capital markets Total balance sheet approach Market-consistent valuation Validation of internal models Quantitative requirements Technical provisions (BE and risk margin) 2 capital requirements (MCR and SCR –SF/IM) Prudent person investment rule Own funds (3 tiers) Qualitative requirements Internal control and risk management (incl. ORSA) Supervisory review process (qualit. & quant - Add-ons) Reporting Supervisory reporting Public disclosure Market discipline Pillar 1Pillar 2Pillar 3

CEIOPS Page Omnibus Directive II Solvency II Road Map for CEIOPS: Work on the technical details for implementing measures/ supervisory convergence/Level 3 guidance/Binding technical standards Negotiation & adoption of Directive Proposal (Council & Parliament) Preparation of the implementation (Member States) QIS 2 July 2007 Directive Proposal QIS 3 QIS 4 April-July 2008 Commission: Preparation of implementing measures Adoption of implementing measures QIS 5 August-Nov 2010 November 2009 Directive adopted Development of Directive (Commission)

CEIOPS Page 4 Level 2 or level 3 for ORSA Solvency II directive : EC may adopt Level 2 measures CEIOPS plans to issue level 3 guidance in 2011 after public consultation Reporting requirement of ORSA is Level 2

CEIOPS Page 5 What is the ORSA? Basically telling undertakings: your turn

CEIOPS Page 6 Overall aim Outcome is to derive internal solvency needs Matching of the own funds to the risk profile should promote a strong culture of the risk management High level organisational commitment

CEIOPS Page 7 The framework The ORSA must become part of the risk management system of every insurance undertaking This assessment requires insurance undertakings to properly determine their overall solvency needs for short and long term risk

CEIOPS Page 8 ORSA and Internal Models The ORSA does NOT require an undertaking to develop or apply a full or partial internal model. However, if the undertaking already uses an approved full or partial internal model for the calculation of the SCR, the output of the model shall be used in determining the ORSA

CEIOPS Page 9 Five principles to follow 1. The ORSA is the responsibility of the undertaking and should be regularly reviewed and approved by the undertaking's administrative, management or supervisory body 2. The ORSA should encompass all material risks that may have an impact on the undertaking's ability to meet its obligations under insurance contracts

CEIOPS Page 10 Five principles to follow 3 The ORSA should be based on adequate measurement and assessment processes and form an integral part of the management process and decision making framework of the undertaking 4 The ORSA should be forward-looking, taking into account the undertaking's business plans and projections. 5 The ORSA process and outcome should be appropriately evidenced and internally documented as well as independently assessed.

CEIOPS Page 11 ORSA vs. SCR, MCR and Capital add on The ORSA does NOT create a third solvency capital requirement No automatic Capital add-on, e.g. if quantitative ORSA amount is above SCR

CEIOPS Page 12 Why is ORSA important to supervisors Within the Supervisory Review Process the ORSA contributes to a qualitative view of the management’s ability in to assess, measure and manage its own business and the inherent risks within its organisation During the Supervisory Review Process supervisors may challenge the bases for the ORSA and undertakings should be prepared to explain the rationale

CEIOPS Page 13 Reporting of the ORSA – CEIOPS advice A statement explaining how regularly the ORSA is reviewed and approved by the undertaking's administrative, management or supervisory body; A statement explaining how the undertaking has determined its own solvency needs given its risk profile and how its capital management activities take into account its risk management system A description of how the ORSA process and outcome is appropriately evidenced and internally documented as well as independently reviewed.

CEIOPS Page 14 SFCR vs. RTS CEIOPS advice: Public (SFCR) Processes Quantitative Outcome just to the supervisor

CEIOPS Page 15 Proportionality All undertakings - including smaller ones - have to be able to understand their own financial condition and solvency position. That is to determine their overall solvency needs irrespective of the supervisory solvency capital requirements The level of complexity and sophistication required of undertakings for the ORSA depends to a large extent on the specific risk profile of the undertaking The ORSA does not subject undertakings to qualitative measures that are disproportionate to their risk profiles and the methods and approaches they use

CEIOPS Page 16 To be prepared for Solvency II end 2012 industry might need to prepare soon CEIOPS Level 3 guidance expected – but will not include detailed recipes See Issues Paper from May 2008 (CEIOPS-IGSRR-09/08) Gap analysis needed Any cultural changes necessary Prepareness necessarry?

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