Implications of the introduction of ICAS+ before SII Stuart Robinson 1 May 2013

1 How does ICAS+ fit with other interim approaches? –There is still considerable uncertainty around the actual implementation date for Solvency II … –… but, EIOPA and other local supervisors are keen that companies continue to prepare. –UK is unique in having a Pillar 2 approach (ICAS) with similarities to Solvency II Pillar 1 –ICAS+ presents a framework for closing the gap between ICAS and Solvency II Pillars 1 and 2. –EIOPA are looking to drive regulatory consistency on Solvency II preparations for Pillars 2 and 3 through the interim measures –Therefore, we are expecting: –More focused ICAS reviews under ICAS+, to inform preparation for Solvency II –An opportunity to get more feedback on key elements, including ORSA and embedded use –More structured and intensive engagement with Colleges on Pillar 2 and Solvency II preparations –Alignment of expectations between supervisors –Clarity that there should be limited focus on Pillar 3 until it is clear when Solvency II will be implemented and go live

2 Implications for Pillar 1 –There does not appear to be a technical difference between an ICAS and an ICAS+ model –For an ICAS+ model, there should be a proportionate amount of effort on validation and calibration relative to Solvency II, although specific and observable benchmarks will be needed –The delay to Solvency II may also allow an increased proportion of validation and calibration process to be internal. Solvency II Internal Model ICA Model Risk calibration methodology Contract boundaries Counter-cyclical premium Liquidity/Matching premium Model enhancements1-year new business treatment Projection to ultimate for GI business Loss-absorbing capacity Diversification Benefit Management actions modelling Pension Schemes Treatment Ring-fenced funds Equivalence Treatment of non- EEA undertakings Fungibility requirements Intra-group arrangements Closure of new business risks Group Risk Liquidity Risk Basic risk free rate

3 Implications for Pillars 2 and 3 Pillar 2 –For Pillar 2, EIOPA and PRA guidance will require early implementation of many Solvency II based requirements, including: –ORSA type requirements (‘Forward looking assessment of risk’) –Forward looking stress and scenario testing –Embedding of risk appetite in decisions on business strategy –Given the delay to Solvency II, it is reasonable to focus on incrementally refining of BAU processes to address key requirements Pillar 3 –Given the uncertainty on the timing of Solvency II and ultimate Pillar 1 requirements, we expect companies to focus on ensuring that any development effort is cost efficient –The Pillar 3 reporting requirements of Solvency II are clearly still onerous for the industry and early implementation must be avoided until there is greater certainty on timing and Pillar 1 requirements. The EIOPA interim measures take a pragmatic approach to this issue. –A key area of uncertainty is how requirements can be met from a process perspective – key questions include: –How acceptable will a roll-forward approach be? –How accurate do results have to be? –How often will calibrations need to be refreshed?

4 Implications for the Board ICAS+ / Pillar 1 –Under ICAS+, we expect the PRA to look for additional evidence that the Board: –Is aware of the key limitations of the models, data and assumptions –Understands the importance of judgement in the models –Is comfortable that any management actions in the models are appropriate –Is comfortable that the capital requirements for key risks are ‘reasonable’ –Has ensured that Management has established an adequate model control framework Pillar 2 –The introduction of obligations around the ORSA (forward looking assessment of risk under the EIOPA interim measures) will be a key change –We expect to take a pragmatic approach, avoiding duplication of processes and reporting, by leveraging existing management information from: –Plan submissions –Capital and liquidity reports (including forward looking stress & scenario testing) –CRO Reports –However, Boards will still need to be clear that they have met the ORSA requirements

5 Key areas of concern –We see ICAS+ as pragmatic and helpful –We would be concerned if the UK gets too far ahead of the rest of the EU: –No other EU supervisor has an interim approach, so ‘benchmarks’ may be set too high –In addition, the level of effort expected on calibration and validation may ultimately be higher than necessary –On Pillar 2, we are keen to ensure that lessons from the exiting ICA regime are factored into the development of supervisory thinking: –ICA numbers already reflect an economic view of risk and are used to steer the business –An ICA-based ORSA would be a sensible interim option in the UK –Close engagement with EIOPA and other EU supervisors will be essential to ensure that ICAS+ evolves alongside the EIOPA interim measures, to maintain alignment and try to minimise rework as the timetable for Solvency II becomes clearer