PwC I&IM club Embedding Solvency II www.pwc.com PwC I&IM club Embedding Solvency II April 2016

I&IM Club – Solvency II 20 April 2016 IFRS Post Solvency II Introduction Topic 1: IFRS Post Solvency II Topic 2: Capital Optimisation Topic 3: Pillar 3 Reporting Q&A Pillar 3 Reporting Capital Optimisation

Introduction The last five years have been the busiest and most challenging the industry has ever seen There has been significant effort and investment in getting over the starting line Still a lot of effort/work over the next year as insurers perform quarterly and annual reporting for the first time However there now seems a good opportunity for insurers to take stock and work out how they make SII work for them The 3 topics which we are going to discuss today which are key areas we see opportunities for the insurance industry

Topic 1: IFRS Post Solvency II Pillar 3 Reporting Capital Optimisation

Timeline Standard 2015 2016 2017 2018 2019-2020 Solvency II Effective 1 January 2016 UK GAAP (FRS 102/103) Effective 1 January 2015 IFRS 4 Phase II (Insurance contracts) Final standard in 2016? Effective 1 January 2020/21? Not confirmed if, how and when IFRS 4 Phase II would be incorporated for UK GAAP reporters Mind the Gap ... What could insurers adopt in the gap period? Significant disconnect in life business for the 1st time between accounting and solvency reporting from 1 January 2016. Investment contract accounting (e.g. unit linked savings) is unchanged.

Possible options during the ‘gap period’ For insurance and with-profit contracts only Maintain current approach (linked to Solvency I / PRA return) Adopt elements of Solvency II or a modified version Others? “more reliable and no less relevant” or “more relevant and no less reliable” to the economic decision-making needs of users

Impact on tax and distributable profits (where relevant)? Should life insurers use elements of Solvency II in accounting during the gap period? Reduce operational costs (6+ years of 2 sets of financial numbers) Optimise the use of Solvency II information Accelerating elements of IFRS 4 Phase II Reducing the amount of reconciliations Benefits Use elements of Solvency II (or a modified version) Limitations Costs of implementation versus savings New Solvency II KPIs may be unfamiliar Further changes under IFRS in the future Comparability between insurers Impact on tax and distributable profits (where relevant)?

Factors to consider ‘Relevant / reliability’ criteria Non-uniform accounting policies (across Groups) Prudence and risk allowance versus current accounting Operational and cost benefits (e.g. model runs, multiple restatements) Messaging to market (including comparability with peers) Solvency II technical provision transitional measures

What should insurers be doing now? Insurers should carry out a gap analysis to assess the benefits and limitations of the alternatives Understand the requirements, how Solvency II information could be used in your reporting and whether it would be permitted. Identify the implications for other areas. Operating model impacts across your existing systems, processes and additional data gaps. The impact on areas such as tax and distributable reserves 1 Consider the expected timing and impact of adopting IFRS 4 Phase II. Would changes made now be more consistent with requirements under IFRS 4 Phase II in future? Are there useful synergies that could be achieved? 3 Quantify the cost savings that could be achieved and compare with the expected implementation cost of making a change. 4 2

Topic 2: Capital Optimisation IFRS Post Solvency II Pillar 3 Reporting Capital Optimisation

A year of “getting over the line” …. giving very limited opportunities to optimise ahead of Solvency II go-live Solvency coverage ratios reported at YE15 However comparing solvency ratios only tells half the story…. Standard Life – “These figures do not take account of £1.2bn of capital in subsidiaries that is not deemed to be freely transferable around the Group” Prudential – “The Group Shareholder position excludes the contribution to the Group SCR and Own Funds of ring fenced With-Profit Funds and staff pension schemes in surplus” Aviva – “The estimated Solvency II ratio represents the shareholder view. This ratio excludes the contribution to Group SCR and Group Own Funds of fully ring-fenced with-profits funds and staff pension schemes in surplus L&G – ““The economic capital surplus was £7.6bn, representing a coverage ratio of 230%.” 193% 180% 169% 162% 160% 148% All taken from YE15 Annual Reports and Accounts With this context we expect a key focus of 2016 will be optimising the Solvency II position

What do we mean by capital optimisation? Before beginning any project it is important to be clear what is actually meant by “capital optimisation” – in our experience key stakeholders can have very different, often entirely contradictory, views on what is meant by this term. Reduce / Increase Monetary Amount SII Pillar 1 Own Funds SII Pillar 1 Capital Requirement Maximise Return For Given Level SII Pillar 1 Surplus Support Dividend IFRS Equity “Capital” “Optimisation” Maximise IFRS Profits EEV/MCEV Free Surplus SII Pillar 1 Coverage Ratio Reduce Volatility Maximise IFRS Operating Profits Maximise Release of Own Funds SI Pillar 1 Math Reserves used in IFRS SII Pillar 2 Capital optimisation strategies often improve one measure but worsen another….having a universally agreed view up front of what you are trying to achieve is crucial to success

Capital optimisation strategies Every capital optimisation project will differ and will depend on the circumstances of the individual firm – what works for one firm does not, necessarily, always work for another. We are going to explore three possible capital optimisation strategies in more detail – these were taken from a much longer list of ideas developed by PwC: Interest rate risk mitigation using dynamic transitional measures Unit-shorting Optimising asset strategy We are aware of firms who are currently undertaking projects in all three areas

Topic 3: Pillar 3 Reporting IFRS Post Solvency II Pillar 3 Reporting Capital Optimisation

Pillar 3 - some things to remember 1 2 3 Pillar 3 is the largest ever change in regulatory reporting for insurers – it changes the accounting basis, frequency, volume and speed of reporting. Reporting will be both qualitative and quantitative and so have an impact much wider than just finance, and on a number of existing processes. Questions for Board: How has the position changed since last quarter? And why? What are the key sensitivities around your capital position? Have you seen the reporting data and has this been explained to you? Is the information you are planning to submit of high quality? Do you know the key reporting issues? How do the Solvency II numbers reconcile to IFRS?

Overview of the challenge Solvency II preparatory reporting is over and go live reporting is underway. Firms are now required to deliver more information, with higher quality, to a faster timeline, on both a quarterly and annual basis. Volume Speed Complexity SCR / MCR TP’s Investments Balance Sheet Technology xBRL QRT, NST Stat, ICA 80% Public & Private Data SFCR, RSR, ORSA Weeks 0 5 12 Finance FTE Utilisation 0% 100% Busiest Period Acceleration t 30 times increase in data being reported Increased frequency – quarterly and annual reporting Narrative disclosures i.e. both quantitative and qualitative required Quarterly reporting will accelerate a week per year, reducing from 8 to 5 weeks by 2019 Annual Pillar III Reporting will move from 20 weeks to 14 weeks Need to re-plan staff capacity to meet workload fluctuations New rules & regulations to comply with Reconciliations required Reliable and accurate data Group complexities Upskilling required How is the market responding to the challenge?

A framework to provide focus Solvency II Reporting has a very wide impact on the business. To help frame the impact of these requirements, we suggest breaking it down to six focus areas. Rules & Regulations Controls Data Technology . Process Governance QRTs required at different entity levels Technical interpretation of Pillar 3 items Embeddedness of Public Disclosure and Supervisory Reporting practices Completeness & accuracy of control operation and control review activities Current approach to risk & control management Level of control automation Wider Pillar 3 reporting governance Reporting lines definition Level of resource dependency Flexibility of current structure to adapt to future changes Current close process and whether it can meet the SII timeline Integration of Pillar 3 reporting into the business Level of staff training Current workflow management activities Reporting capabilities of the existing platform Flexibility of the existing data model Level of data consistency and traceability across SII solutions System integration and reconciliation Data quality maintenance activities Understanding of the data in scope, its impact and vulnerabilities Extent to which data governance procedures are documented Where are you in each of these focus areas?

QRT reporting - meeting requirements and driving value Governance How do you review the data submission easily? Quality Control How do you understand the potential issues with data quality and consistency? Investment Verification How do you verify investment data against other sources? Insight How do you gain meaningful insight from the volume and complexity of the return? Under Solvency II insurers must have ‘Set out processes and timeline for completion of the various reporting requirements, review and approval; explain the processes and controls for guaranteeing the reliability, completeness and consistency of the data provided.’ xxx xxx xxx xxx Source: EIOPA Guidelines on reporting and public disclosure

QRT reporting – data analytics Visualisation QRT reporting – data analytics and support effective governance. S2D2 is a PwC tool designed to help senior management and the Board: Review the contents of the return easily Understand potential issues with data quality and consistency of the submission via a comprehensive test framework Verify investment data against other sources (including price) Investment verification Quality control

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