1. Solvency II challenges in the area of Governance
Sibylle Schulz
Malta, 08/04/2010
21 December 2017

2. CEIOPS
Executive summary
With regard to the management of investment risk undertakings have to comply with the Prudent Person Principle as set out in Article 132 of the Directive. While under this principle current quantitative regulatory investment rules no longer apply, undertakings have to comply with certain qualitative requirements that ensure an appropriate level of prudence. Under this principle undertakings cannot invest in instruments or assets unless they are fully aware of and able to manage the risks associated with them.
It is high time to prepare for the start of Solvency II. As the regime is not rules-based, i.e. does not establish very specific requirements, this does not necessitate that Level 2 measures and Level 3 guidance are known. Undertakings have to go through a stock-taking exercise to identify weaknesses in their systems of governance and to start introducing the necessary changes as the improved systems should be well established before 2013.
21 December 2017

3. Index Executive summary 2 Prudent Person Principle (general) 3
Prudent Person Principle (scope)
Prudent Person Principle (requirements)
Prudent Person Principle (requirements)
Time to get started
Time to get started
Challenges for system of governance
Proportionality
Towards Solvency II
Cultural changes necessary
21 December 2017

4. Prudent Person Principle (general)
Managing investment risk requires compliance with the Prudent Person Principle
No investment rules but investment principles
Process-oriented as opposed to outcome-focused
No explicit regulatory limits on investments
Undertakings need to establish their own internal limits
21 December 2017

5. Prudent person Principle (scope)
Applies to all assets of the undertaking
Applies qualitative investment requirements to portfolio as a whole:
 security
 quality
 liquidity
 profitability
 availability
21 December 2017

6. Prudent Person Principle (requirements)
Requirement to invest only in assets and instruments whose risks can be properly identified, measured, monitored, controlled and report and taken into account in the ORSA
Assets held to cover TP have to be appropriate to the nature and duration of (re) insurance liabilities
Diversification necessary to avoid excessive accumulation of risk
Mixing necessary to avoid excessive risk concentration
21 December 2017

7. Prudent Person Principle (requirements)
The use of derivative instruments is only allowable insofar
 as they contribute to a reduction of risks or
 facilitate efficient portfolio management
Prudent levels for investments/assets not traded on a regulated financial market
21 December 2017

8. Time to get started Solvency II is less than 3 years away!
21 December 2017

9. Time to get started Framework Directive is out
Implementing Measures are currently being drafted
CEIOPS is working on developing Level 3 guidance
 Even without Level 2 and 3 Governance requirements
are foreseeable enough to start on implementation
 No completely new requirements
 Legal rules will not give exact specifications
 Neither will supervisors
21 December 2017

10. Challenges for system of governance
Solvency II is a principles-based approach
 requirements are less specific than in a rules-based system
 compliance more open to challenge
 more room to find entity-specific appropriate solutions
 proportionality is important
 responsibility for an adequate, proportionate system of governance is on undertakings and specifically on the management
21 December 2017

11. Proportionality Requirements have to be applied proportionately
 proportionality may allow for a simple solution
 however, requirements cannot be reduced to zero
 proportionality may demand that a sophisticated
solution is chosen
Proportionality is a case-by-case decision
 no general conclusion as to what is proportionate
 undertakings have to make their own decision
21 December 2017

12. Towards Solvency II Stock-taking exercise is necessary
 Undertakings need to check where they have to improve systems, processes, procedures or documentation
 Necessary changes should be introduced well ahead of Solvency II
Undertakings should not wait for or expect the supervisor to tell them what to do
Undertakings have to be prepared to explain their decisions about their system of governance to the supervisor and to be challenged on them
21 December 2017

13. Cultural changes Holistic approach to risk management
Everybody in the undertaking should be encouraged to
be aware of risks
Appropriate organisational values and priorities need to be set at the top
Code of conduct should be implemented
Effective communication and reporting are key
21 December 2017

14. Thank you
21 December 2017