Solvency II Update Christopher Critchlow BSc FIA Chief Executive 10 November 2010

Agenda nQIS5 nIssues arising and outcomes nNext steps: Pillar 2

QIS5 n Study to assess calibration of specification to the market n 5 th study completed 31 October 2010 n Developed in response to problems raised in previous QIS exercises n CEIOPS to review and report April 2011 n Incorporates both qualitative and quantitative aspects

QIS5 – Balance sheet Market value of assets Best estimate liability incl. CoG Reinsurance recoverables Net asset value Technical provisions (market consistent exit value) Own funds Risk margin SCR (MCR) Surplus

QIS5 - Issues nTime limits => approach was approximate nParallels with ICAs nLack of availability of technically skilled resources nSpreadsheets not well-constructed nMarket consistent valuation of options and guarantees n Historic (simple, cost-effective) n Price to market (complex, expensive)

QIS5 – Issues (cont) nDeficits / surplus in OPS nEPIFP nRing-fenced funds nProjecting the SCR, risk margin nLoss absorbency, management actions nModelling systems

QIS5 – Outcomes nDepends on basis of base liability estimate nBIG generalisations but: n Peak 1 => decrease in free assets n RBS => increase in free assets nStill whole mass of issues to resolve nOverweight on technical specification on some areas nUnderweight on specification for others nStill much left to finalise

QIS5 – Outcomes nLots to negotiate in Europe nQIS6 to get a solid baseline nIs 1 January 2013 still achievable?

Next steps – Pillar 2 ORSA Operational issues Business plans and strategy Regulatory requirements Pillar 1: capital resources Risk appetite Scenario tests Black-swans Dashboard information Board decisions

ORSA: Article 45 (1) 1. As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its own risk and solvency assessment. That assessment shall include at least the following: (a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking; (b) the compliance, on a continuous basis, with the capital requirements, ….. and with the requirements regarding technical provisions……; (c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the [SCR] …., calculated with the standard formula ….. or with its partial or full internal model ….

Article 45 (2) 2.For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in that assessment.

Article 45 (3) 3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration.

Article 45 (4) 4. The own-risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking.

Article 45 (5) 5.Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile.

Article 45 (6) 6.The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own-risk and solvency assessment as part of the information reported under Article 35.

Article 45 (7) 7.The own-risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233 and 238.

Implications? nORSA becomes central to the management of an insurance business nBusiness decisions cannot be taken without reference to impact on ORSA nFull scenario tests and sensitivities need to be undertaken nDashboard information is key nIntegrate with operational aspects of the business and the plans for the future

Consider how an ORSA might look nBase Pillar 1 results nBusiness strategy nSpecific and operational risks nScenario tests nOverall capital requirements nRisk appetite nSummary of key risks and management actions to be taken nBusiness decisions to be taken nImpact on ORSA and capital

Finally….. nSee QIS5 / 6 as number-work providing a framework to assess impact of business decisions nHard part comes with Pillar 2 nBegin designing ORSA and business decision making process