1. SOLVENCY II - PILLAR I Grey areas
Baltic actuarial days Latvian Actuarial Association – ACTUAM S.à.r.l Date: 23/09/2016 – Time: 12:00 am – Location : RIGA
SOLVENCY II - PILLAR I
Grey areas
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This Presentation can be only forwarded for the attendants of the seminar and cannot be used or diffused anywhere else.
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
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2. SOLVENCY II –PILLAR I - ACTUAM
Table of contents
1. Global overview of Solvency II – Pillar I
2. Main grey areas on the SCR Standard Formula
3. EIOPA SCR Standard Formula Review
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
©Copyright ACTUAM 2015
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
© Copyright ACTUAM 2016

3. SOLVENCY II –PILLAR I - ACTUAM
Table of contents
2. Main grey areas on the Standard Formula
3. EIOPA SCR Standard Formula Review
1. Global overview of Solvency II – Pillar I
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
©Copyright ACTUAM 2015
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
© Copyright ACTUAM 2016

4. 1. Global overview of Solvency II – Pillar I (1/2)
Solvency II = single risk-based framework (EU)
1rst year of application
TRANSITIONAL PERIOD
2016
Pillars of Solvency II
Pillar I : Quantitative Requirements
Calculate the value of assets and liabilities on a market consistent basis
Capital requirements (Solvency Capital Requirement - SCR, Minimum Capital Requirement - MCR)
Pillar II : Supervisory review
System of Governance (including a Risk Management System)
Forward Looking Assessment of Own Risks (FLAOR)
Supervisory review process
Pillar III : Disclosure
Public Disclosure – annual solvency & financial condition report (SFCR)
Information to be provided for supervisory purposes (RSR)
Quantitative Reporting Templates (QRTs)
ACTUAM S.à.r.l - Actuarial and Risk Services
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Solvency II Delegated Regulation -> Regulation (EU) 2015/35 supplementing Directive 2009/138/EC (in force: 18/01/2015)
SOLVENCY II –PILLAR I - ACTUAM
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5. 1. Global overview of Solvency II – Pillar I (2/2)
Could encourage (re) insurers for Partial or Internal Models
SCR
Calculation
Standard Formula
Partial Model
Internal Model
Solvency II Balance Sheet
All possible Risk Profiles in the Standard Formula parameters it represents a « GENERIC » (re) insurer
ASSETS
LIABILITIES
Assets at Market Value
Free surplus
SCR
MCR
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
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Risk Margin
Best Estimates Liabilities
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
Source: EIOPA
© Copyright ACTUAM 2016

6. SOLVENCY II –PILLAR I - ACTUAM
Table of contents
1. Global Overview of Solvency II – Pillar I
2. Main grey areas on the Standard Formula
3. EIOPA SCR Standard Formula Review
2. Main grey areas on the SCR Standard Formula
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
©Copyright ACTUAM 2015
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
© Copyright ACTUAM 2016

7. 2. Main grey areas on the SCR Standard Formula (1/6)
Principle of proportionality and its application
Adjustment for the loss absorbing capacity of deferred taxes
Risk Margin
Non-life and health NSLT premium and reserve risk modules
Spread risk sub-module, Concentration risk sub-module, Counterparty default risk module
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
©Copyright ACTUAM 2015
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
© Copyright ACTUAM 2016

8. 2. Main grey areas on the SCR Standard Formula (2/6)
Principle of proportionality and its application
Definition/Context
To ensure the proportionate application of the Directive requirements (e.g.: small (re)insurers, captives)
Methods, Assumptions, Standard parameters
Simplifications are provided for modules and risk modules
Grey areas
ACTUAM S.à.r.l - Actuarial and Risk Services
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Tel : +352   :
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Simplifications are provided for specific/some modules and risk modules but not for all. (e.g.: no simplifications for: non-life lapse risk sub-module, sub-module for the non-life catastrophe risk)
Criteria of simplification that (re)insurers shall be required to fulfill in order to be entitled to use the simplifications
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
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9. 2. Main grey areas on the SCR Standard Formula (3/6)
Adjustment for the loss absorbing capacity of deferred taxes
Definition/Context
Reduction in capital requirement due to a deferred tax adjustment
Methods, Assumptions, Standard parameters
High level of supervisory judgment
Grey areas
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
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Complex calculation which requires a high level of supervisory judgment -> different methods could be currently applied in EU member states (divergences practices)
SOLVENCY II –PILLAR I - ACTUAM
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10. 2. Main grey areas on the SCR Standard Formula (4/6)
Risk Margin
Definition/Context
Part of technical provisions in order to ensure that the value of technical provisions is equivalent to the amount that (re)insurer would expect to require in order to take over and meet the (re)insurers obligations
Methods, Assumptions, Standard parameters
Should be calculated by determining the cost of providing an amount of eligible own funds equal to the SCR necessary to support the (re)insurance obligations over the lifetime thereof. The rate in determining of that cost is the Cost-of-Capital rate which is set at 6%.
The 6% are determined as to be a long-term average rate, reflecting both periods of stability and periods of stress
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
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Grey areas
The appropriatness of the 6% (e.g.: in a market environment changes context).
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
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11. 2. Main grey areas on the SCR Standard Formula (5/6)
Non-life and health NSLT premium and reserve risk modules
Definition/Context
The sub-modules combines a treatment for the two main sources of underwriting risk: premium and reserve risk
Methods, Assumptions, Standard parameters
The underwriting risk modules are calibrated using volume measures and standard deviations for premium and reserve risk by Line of Business (LoB) (defined set of parameters in the Standard Formula)
Grey areas
ACTUAM S.à.r.l - Actuarial and Risk Services
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Assessment of which standard parameter need to be changed
Possible new calibrations
Use of undertaking specific parameters by (re)insurers (e.g.: calibrations are calculated by (re)insurers based on sufficient data)
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
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12. 2. Main grey areas on the SCR Standard Formula (6/6)
Spread risk sub-module, Concentration risk sub-module, Counterparty default risk module
Definition/Context
The stresses for spread risk sub-module, concentration risk sub-module and counterparty risk module consider the use of credit ratings for each exposure to compute the SCR. Depending of the rating of the exposure, tthe risk of default is low or high
Methods, Assumptions, Standard parameters
Ratings are not always available. Exposures without credit rating can penalize strongly the SCR (e.g.: intragroup loans to Groups without credit rating, bank without credit rating but member of a Group with credit rating)
Grey areas
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
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For exposure without credit rating, the use of alternative credit assessments
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
© Copyright ACTUAM 2016

13. SOLVENCY II –PILLAR I - ACTUAM
Table of contents
1. Global Overview of Solvency II – Pillar I
2. Main grey areas on the Standard Formula
3. EIOPA SCR Standard Formula Review
3. EIOPA SCR Standard Formula Review
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
©Copyright ACTUAM 2015
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
© Copyright ACTUAM 2016

14. 3. EIOPA SCR Standard Formula Review
Context: post-evaluation of Solvency II based on feedback and empirical evidence from (re)insurers during transitional periods and the first years of application of Solvency II. Intention of the European Commission to review specific items of Solvency II Standard Formula before December 2018 in terms of:
Standard Parameters
Methods
Assumptions
EIOPA supports that project and will suggest changes in the three items above deadline: 31/10/2017
ACTUAM S.à.r.l - Actuarial and Risk Services
66, rue du X Octobre ∙ L-7243 Luxembourg
Tel : +352   :
Site:
©Copyright ACTUAM 2015
Two main objectives:
To ensure proportionate and technically consistent supervisory regime
To provide possible simplifications in the SCR Standard Formula
SOLVENCY II –PILLAR I - ACTUAM
23/09/2016
© Copyright ACTUAM 2016

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4. Questions & Answers
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Tel : +352   :
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SOLVENCY II –PILLAR I - ACTUAM
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