solvency ii professional knowledge presentation training 27032013

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Solvency II Training

Professional Knowledge

Leonhardt Wohlschlager

26/03/2013

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Introduction Training

General information

© CGI 2013. All rights reserved

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Big picture

Solvency II Project

Knowledge

Solvency II

Capital requirement

Benefits

Processes

Risk definition

Governance

Market solutions

Skills centre

Reference People

Toolkit

Incidents & Losses

Pillars

Definitions

No. 3CGI Risk & Regulatory – Training Solvency II – Professional Knowledge

3 Objectives for 2 days [General information – Introduction Training]


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� Solvency Capital Requirement:The amount of capital to be held by an insurer to meet the Pillar I requirements under the Solvency II regime. It is expected that the SCR may be derived using either an approved internal model or the standard formula.

� Standard formula:In the context of the Solvency II regime, a set of calculations prescribed by the regulator for generating the Solvency Capital Requirement. The standard formula is intended to be able to be used by a very wide range of undertakings.

� Internal model:Risk management system of an insurer for the analysis of the overall risk situation of the insurance undertaking, to quantify risks and/or to determine the capital requirement on the basis of the company specific risk profile.

No. 4

Definitions and Terms [General information – Introduction Training]

CGI Risk & Regulatory – Training Solvency II – Professional Knowledge

Basic terms are the Solvency Capital Requirement, standard formula and internal model.

InternalStandard

Simpli-

fication

full

Internal

model

standard formula

and partial internal

model

standard formula

with undertaking-specific parameters

standard formula

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Why Solvency?

General information


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What is the customer interested in? [General information – Why Solvency II?]

How do we realizeCompliance with

minimumimplementation and

operation costs?

How do we fulfill ourperiodical

repording duties in time?

How can we initiallydecrease operational costs and effort per annum and finally

further decrease it?

What is the impact ofthe Solvency II requirements

on the individual business departments?

How do we realizeSolvency II Compliance?

CGI Risk & Regulatory – Training Solvency II – Professional Knowledge© CGI 2013. All rights reserved No. 6


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Industry Drivers! [General information – Why Solvency II?]

� Solvency II addresses risk across the three pillars – solvency capital, general regulatory principles and financial disclosure and solvency

� All Insurers with a European presence must meet Solvency II regulations by 2013, or face review and penalties by the regulator

� All firms can improve their competitive positioning in the market with improvements across the three pillars

� Get a grip on risk and deliver not only compliance, but also improved business processes

CGI Risk & Regulatory – Training Solvency II – Professional Knowledge No. 7


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No. 8

Analyst’s views [General information – Why Solvency II?]

Analyst’s views:

� Gartner states that “Solvency II will lead to major changes for European insurers and will affect most core insurance processes, including product development, underwriting, marketing and sales.”

� Ovum states that: “the move [to Solvency II] provides CIOs with a golden opportunity to transform the information management landscape in their business and provide a sharper competitive edge.”

� The same analyst quotes that “This is likely to be the largest IT project since Y2K.”� Firms need a partner they trust to deliver and respond to future changes


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Understanding the customer’s requirements [General information – Why Solvency II?]

No. 9

“<something someone has said, does not need to be a direct quote because of ambiguity in reference>”

<Position of a person with this requirement>01

Solvency II (SII) is a “no fail” programme with challenging timelines. SII programmes face a number of challenges that if not managed correctly put significant pressures on both cost and deadlines:

• Requirements are constantly emerging – e.g. QIS results and changing rules on asset eligibility for ORSA.

• Data management requirements are complex and people intensive.

• As SII is new to the industry delivery planning is not based on prior experience.

• There are many stakeholders and business functions involved across LBU/LoBs which adds complexity and means careful co-ordination and management is required.

• The large scope of work within an immovable timeframe requires a heavy resource profile which incurs additional management overhead.

• There is a need to prove the conceptual design before spending money on full production systems.

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Financial Crisis & News

General information


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No. 11

Financial crisis and Solvency II [General information – Financial Crisis & News]


Source: CRO Forum /Press Release: Financial Crisis strongly reinforces the case for Solvency II 24/10/2008; CEA /Solvency II CEA Key Messages on Level 2 Implementing Measures; CEIOPS /Lessons learned from the crisis (Solvency II and beyond) 2009/; legend: CRO – Chief Risk Officer

Financial markets are complex. The insurance industry has not been immune to the effects of the financial crisis as insurers have significant asset bases that were affected by the depressed market values of assets.

� ‘The economic crisis has triggered a phase of profound reflections for all —European institutions and industry — on the lessons to be learned from the financial crisis. A key lesson is that financial supervision must be improved.’ (Insurance Europe, formerly CEA, Comité Européen des Assurances)

� ‘EU legislators should not water down the Solvency II directive or postpone the legislative process. This would be like terminating a marathon at the 40 kilometer mark.’ (CRO Forum)

� ‘The crisis originated and developed in the banking sector, subsequently spreading to the insurance sector. Our main lesson of the current events is that Solvency II must be adopted. […] The crisis has highlighted needs for a further refinement of the existing Solvency II calibrations, both at module and sub-module levels. […] As in the financial sector at large, governance, risk management, and internal controls in the insurance sector need to be strengthened. […]’ (European Insurance and Occupational Pensions Authority, formerly CEIOPS)

No. 12© CGI 2013. All rights reserved

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Solvency IIin 2016?

Solvency II News today [General information – Financial Crisis & News, Germany specific]

.Recent headlines from daily press, legislation and jurisdiction create an image about the responses of the insurance industry to Solvency II.

New rules for insuranceregulation are expected to arrive later!


Source: Nov. 2012

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Risk Management

General information


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No. 14

Overview [General information – Risk Management]


After this section you have general knowledge about:

� Risk fundamentals

� Definition of risk

� Key components of risk

� Risk measures

� Solvency II risk types

� Mitigation and transfer


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No. 15

Risk Fundamentals [General information – Risk Management]


The overall management of an insurer includes:

� Design, pricing, marketing and underwriting of insurance policies

� Selection of assets backing the policies

� Estimation of the size and volatility of the liabilities associated with the policies

� Determination of the insurers’ capital needs

� Claims Management

� Adequate disclosure and communication process to key stakeholders

� Future financial condition analysis which provides a multi-scenario view


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� ‘A risk is often specified in terms of an event or circumstance and the consequences that may flow from it.’

� ‘Risk is measured in terms of a combination of the consequences of an event […] and their likelihood […].’

� ‘Risk may have a positive [then it is often called a chance] or negative impact.’

� ‘See ISO/IEC Guide 51, for issues related to safety.’

No. 16

Definition of Risk [General information – Risk Management]


There are many definitions of Risk. The one below was published in 2004 by Standards Australia and Standards New Zealand on Risk Management.

Source: Standards Australia/Standards New Zealand 4360:2004, p. 4


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No. 17

Key components of risk [General information – Risk Management]


Peril

Asset Loss

Incident

� Definition:– Particular set

of circumstance/events, risk source

� Perils examples:– Credit default– Insured liability

events

� Definition:– Financial negative outcome

or impact of an event� Loss examples:

– Storm catastrophe that leads to claims of 4 m. Euro.

– Loss of 0,1 m. Euro due to a delay in orders confirmations due to an inaccurate procedure

� Definition:– Asset that is

vulnerable to a certain type of threat

� Asset examples:– Insured object– IT component

� Definition:– Occurrence of an event

which could eventually generate losses

� Event examples :– Natural disaster– Damage to physical

assets due to a flooding

Definition:Probability

of loss occurring X

extent of loss if loss

occurs

Perils, assets, incidents and losses define a risk, quantifiable as product of probability and extent of loss.


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No. 18

Example of Risk [General information – Risk Management]


Peril

Asset

Loss

IncidentMr. Smith damaged Mrs. Dupont’s Bentley in Admiraliteitsstraat.

Damage was insured and accounts for 5.500 £.

Car

AccidentCar damage:

Expected risk value is

2.546 £.

Assumption:Decision-

maker risk-neutral


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No. 19

Risk Measures Summary [General information – Risk Management]


From the actuarial perspective, there is special attention to the volatility, uncertainty and extreme events of risk for each peril.

� DefinitionRisk Measure is a function of the probability distribution of losses.

� FunctionRisk Measure is used to determine either the total capital requirement or an indicated capital requirement for a component. Risk Measures can be visualised with data in a Normal distribution. A bell curve (normally distri-buted random variable) can be described by mean (expectation) and standard deviation.

� ExamplesValue at Risk (VaR) that is used to determine the solvency capital require-ment, is a quantile of a distribution. The 99,5th percentile of the distribution is the value for which there is a probability of exceedence of 0,5%.The volatility is a measure for price variation of a financial instrument over time.

� The risk margin represents the value of the deviation risk of the actual outcome compared with the best estimate.Extreme events such as an earthquake catastrophe lead to a Chi-Quadratcurve.


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No. 20

Aggregation of loss distributions [General information – Risk Management]

Source: European Union /DIRECTIVE 2009/138/EC/; legend: P&L – Profit & Loss Distribution, EL – Expected loss (mean)


In order to calculate the economic capital (= SCR) one needs to aggregate all P&L probability distributions.


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No. 21

Frequencyof occurence

Loss distributionValue X (VaR)

EXPECTEDLOSS

(Technical provisions)

UNEXPECTEDLOSS

(Economic capital)

P = 0,005(Risk appetite*)

Economic Capital=

SCR(Unexpected loss)

Mean (Expected loss)

=Risk provisions

Economic Capital [General information – Risk Management]

Source: European Union /DIRECTIVE 2009/138/EC/; legend: Risk appetite is a business term, usually called confidence level in maths.


The SCR is the capital required to cover a ruin probability based on risk evaluation (VaR), confidence level in a 1 year time horizon.


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No. 22

Solvency II Risk Types [General information – Risk Management]


SCR

BSCRAdj Op

DefaultHealth Life Non-life IntangMarket

Legend: Adj – Adjustment, CAT – Catastrophe, Op – Operational risk, SLT – similar to life techniques

The main Solvency II risk types include the underwriting risk (health, life, non-life), the market, counterparty default and intangible assets risk.


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� Underwriting risk

� The risk of a change in value due to a deviation of the actual claims payments from the expected amount of claims payments (including expenses). From the nature of the administration of risk within the company, one can distinguish between risks of claims which have already happened in the past – the reserve risk, and the risk of claims which will happen in the future – the premium risk.

�Examples: life underwriting risk, windstorm underwriting risk

� Market risk

� The risk of changes in values caused by market prices of financial instruments or volatilities of market prices differing from their expected values. Exposure to market risk is measured by the impact of movements in the level of financial variables such as stock prices, interest rates, real estate prices and exchange rates.

�Example: interest rate risk

No. 23



Source: CEA /Solvency II Glossary 2013/; European Commission /QIS5 Technical Specifications 2010/ p. 90 ff.; legend: risk types that were used in QIS5

The main Solvency II risks are called risk modules ...


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� Counterparty default risk

� The risk of possible losses due to unexpected default, or deterioration in the credit standing, of the counterparties and debtors of undertakings.

�Example: reinsurance counterparty risk

� Intangible assets risk

� The risk of a change in value derived from a decreasing price of an intangible asset in the active market and from unexpected lack of liquidity of the active market that may result in an additional impact on prices, or due to internal risks inherent to the specific nature of the intangibles. Goodwill is excluded.

�Example: Risk of price decrease of patents due to revolutionary innovations

No. 24



Source: CEA /Solvency II Glossary 2013/; European Commission /QIS5 Technical Specifications 2010/ p. 90 ff.; legend: risk types that were used in QIS5

… as they are taken into account to determine the Solvency Capital Requirement.


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� Definition

� The insurers’ steps to lessen the risk associated with its business.

� Examples

� Purchase of reinsurance

� Alternative risk transfer (ART)

� securitization of a portion of its asset or liability portfolio

� hedging of financial guarantees with derivates instruments

� product design

� active risk management.

No. 25

Mitigation and Transfer [General information – Risk Management]


Source: European Commission /QIS5 Technical Specifications 2010/ 90 ff.

In order to lessen the risk, the insurer applies various risk instruments. For the underwriting risk, it is usually reinsurance and, alternatively, ART, for operational risk, insurers use internal controls.


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No. 26

Mitigation and Transfer [General information – Risk Management]


Risk

Incident

Action plan

ERMS

From 0 to N incidents

From 1 to N ERMS

Planed or ongoing action:

Ex: Documentation of a procedure, training, Set up of an automated control

ERMS = Element of the Risk Management System: current elements in place:

Ex : IT controls, procedures, internal audit control plan

Real cases; occurrence of a risk

A finalized action plan can be changed into an ERMS:

Ex : A published procedure becomes an ERMS

From 0 to N action plans

An overall generalized model for risk management can be drawn as follows. In case of underwriting risk incidents, insurers use the term ‘claims’ for loss.

Legend: ERM – Enterprise Risk Management, ERMS – Enterprise Risk Management Systems


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� Define the term risk!

� Of which components consists a risk? Take an example!

� For which risk modules does one have to calculate solvency capital, e.g. STEC (= short term economic capital), according to the Solvency II regime?

� How much is the risk appetite, that is proposed by the Solvency II Directive?

� Explain the steps to calculate the Economic Capital!

No. 27

Exercises [General information – Risk Management]


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Solvency IIData ReferenceModel

Specific information


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� Solvency II projects

� SCR calculation process industrialization

� Solvency II Data Model

� Calculation chain for SCR Non Life

� Benefits of our data reference model

� Partner

No. 29

Overview [Specific information – Solvency II Data Reference Model]


After this section you have specific knowledge about:


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SCR Calculation Process Industrialisation [Specific information – Solvency II Data

Reference Model]

We have designed a data reference model to industrialize the process of SCR calculation.

Solvency II requirements

(Directive + Consultation Papers)

Solvency II requirements

(Directive + Consultation Papers)Internal Model, data reference,

LBC

Internal Model, data reference,

LBC

Project Implementation

Project Implementation

LMC Solvency II and Basel II Project• Allianz

• Groupama

• …

LMC Solvency II and Basel II Project• Allianz

• Groupama

• …

� This is where our model provides:� A Roadmap to reach the

industrialization objective

� A detailed view of each process and step

� A detailed view of data required

� Best practices for aggregation and treatments

� Data Quality preset of deliverables


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Data Model Overview [Specific information – Solvency II Data Reference Model]

The data model has some Solvency II specific key dimensions.

Agregates for all Risk families

QIS 4 and QIS 5

compliant

Fits internal model or standard formula

requirement


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A Catalyst for SII Development [Specific information – Solvency II Data Reference Model]

To help through all these steps, our data reference model sustains processes and data required for SCR computation.

Collect Data for each Risk Family

Collect Data for each Risk Family

Aggregate Data, Preprocess, transform, pre/post analyzeAggregate Data, Preprocess, transform, pre/post analyze

Calculate by Risk family

(Assets, market, L, NL,..)

Calculate by Risk family

(Assets, market, L, NL,..)

Final aggregationFinal aggregation

Identify Data

(dependent from models,

risks, QIS stage,…)

Identify Data

(dependent from models,

risks, QIS stage,…)

Share/AnalyzeShare/Analyze


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Internal Model Flows & Mapping [Specific information – Solvency II Data Reference Model]

The model includes a generic description of internal models flows and mapping: CAT and Non Life.


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Process Specification [Specific information – Solvency II Data Reference Model]

The model presents the related sub processes and details them.


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Detailed View of Process 1 [Specific information – Solvency II Data Reference Model]

For example, the steps of large claims data preparation for DWH can be described as follows:

� L1: Claims data extract from DWH (>150k criterion)

� A1: Co-insurance rate application to get the company part

� L2: Manual release of data organization table

� A2: mapping data update

� L3: success of local brokerage data identification

� L4: data enrichment with A2 mapping

� A3: enriched and aggregated data input in DWH

� L5: data are ready for triangles

� A4: triangles setting

� L6: success of triangles constitution

� A5: triangles are calculated for descriptive statistics triangles calculations

� L7: triangles calculations taking into account L8 exclusions

� A6: business analysts can modify previously calculated data

� L8: business analysts can exclude some development indicators. Statistic data have to be automatically calculated.

� R1: Data to input in DWH have the right format to be copied/pasted in the appropriate templates

L3


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N N+1 N+2 N+3 N+4 N+5 N+6

Min 95 105 120 130 130 131 165

Average 121 127,5 141 148 145 148 165

Max 154 165 150 165 165 165 165

No. 36

Loss triangle and statistic data [Specific information – Solvency II Data Reference Model]


Development year

N N+1 N+2 N+3 N+4 N+5 N+6

2006 100 110 150 160 165 165 165

2007 95 105 120 130 130 131

2008 110 120 135 137 140

2009 120 135 150 165

2010 125 130 150

2011 154 165

2012 143

Subscri

ption

year

Sta

tistics


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No. 37

Loss triangle and development coefficients [Specific information – Solvency II Data

Reference Model]


Development year

N/A N ⇒N+1

N+1 ⇒N+2

N2 ⇒

N+3N+3 ⇒N+4

N+4 ⇒

N+5N+5 ⇒

N+6

2006 N/A 10,00% 36,36% 6,67% 3,13% 0,00% 0,00%

2007 N/A 10,53% 14,29% 8,33% 0,00% 0,77%

2008 N/A 9,09% 12,50% 1,48% 2,19%

2009 N/A 12,50% 11,11% 10,00%

2010 N/A 4,00% 15,38%

2011 N/A 7,14%

2012 N/A

Average N/A 8,88% 17,93% 6,62% 1,77% 0,38% 0,00%

Subscri

ption

year


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No. 38

Forecasts using development coefficients [Specific information – Solvency II Data

Reference Model]


1 Development year

N N+1 N+2 N+3 N+4 N+5 N+6

2006 100 110 150 160 165 165 165

2007 95 105 120 130 130 131 131

2008 110 120 135 137 140 140 140

2009 120 135 150 165 165 165 165

2010 125 130 150 150 150 150 150

2011 154 165 165 165 165 165 165

2012 143 155,69 183,61 195,76 199,23 200 200Subscri

ption

year


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No. 39

Gross loss triangle of Generali [Specific information – Solvency II Data Reference Model]


Source: Generali (ed.) /Annual Report 2011/


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Detailed View of Process 1 [Specific information – Solvency II Data Reference Model]

The overall view of the whole calculation chain for SCR Non Life

Step 2Step 1

Non Life Premium and reserve

Source Data (Systems)

Catastrophe

Source Data (Systems)

Triangles Triangles

TrianglesTrianglesTriangles

Triangles

Intermediate data storageIntermediate data storage

Intermediate data storageIntermediate data storage

Non Life Premium and reserve Risk

Non Life Premium and reserve Risk

Non Life Catastrophe

Risk

Non Life Catastrophe

Risk

NON LIFESOLVENCY II

CAPITALREQUIREMENT

TrianglesTriangles Triangles

TrianglesTriangles

Triangles


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SCRNL Premium & Reserve Risk [Specific information – Solvency II Data Reference Model]

In Step 2 the calculation chain for SCR Non Life is focused (1/2).

Intermediate data storage

On the left side is a picture of a UML data model for SCR Non Life Premium and Reserve risk storage.On the right side is a picture of a UML data model for SCR Non Life Premium and Reserve risk calculation.


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SCRNL Catastrophe Risk [Specific information – Solvency II Data Reference Model]

In Step 2 the calculation chain for SCR Non Life is focused (2/2).

On the left side is a picture of a UML data model for SCR Catastrophe risk storage.On the right side is a picture of a UML data model for SCR Catastrophe risk calculation.

Intermediate data storage


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SCR NL Premium, Reserve Risk & Catastrophe Intermediate Data [Specific information – Solvency II Data Reference Model]

This diagram is a schematic view of the different storage tables needed for the calculation of the SCR Non Life Premium and reserve risk.

• Written Premiums

• Earned Premiums

• Earned Exposures

• Total paid losses and Allocated Adjustment

Expenses (ALAE)

• Paid losses and ALAE on closed claims

• Loss and ALAE case reserve

• Salvage and Subrogation Recoveries on

Total Paid Losses Paid ALAE

• ALAE case reserves

• Paid Annuities

• Annuity case Reserves

• Total Number of Reported Claims

• Total Number of Closed Claims

• Number of Closed Claimed with no Loss

Payment

• Number of Reopened Claims

• Expected Written Premiums

• Expected Earned Premiums

• Best Estimate of Claims Outstandings

• Volume measures for premium risk

• Overall standard deviation

• A function of the standard deviation

• SCR Non Life Premium and

Reserve risk

• SCR Non Life Catastrophe risk

• Volume measures for premium risk by lob

• Volume measures for reserve risk by lob

• Overall volume measures by lob

• Overall standard deviation by lob

• Standard deviation for Premium Risk by lob

• Standard deviation for Reserve Risk by lob

• Volume measures for premium risk by

lob and country

• Volume measures for reserve risk by

lob and country• Loss Ratio

• Earned Premiums


• Total Paid Claims

• Total Claim Reserve

• Total Claims Recoveries

• Reinsurance Code

• Description in English

• Description in local

language



language

• LOB Code

• LOB description in English

• LOB description in local language

• Identification

Date

• Fiscal Period

Description

• Fiscal Period Code

• Company Code

• Country Code

• Sub LOB Code

• Sub LOB description in English

• Sub LOB description in local

language

• Exposure description in English

• Exposure description in local

language

• Claim type Code

• Claim type description in English

• Claim type description in local

language

Solvency II Non Life Basic Data

Non Life Volume and standard deviation Global

Non Life Volume and standard deviation

by LOB

Solvency II Non Life Historical

Data

Non Life Volume measures by

LOB and Country

Reinsurance code

Valuation Date

Company

Country

Sub LOB

Claim type

Line Of Business

Fiscal Period

Date


• Earned Premiums

• Earned Exposures

• Total paid losses and Allocated Adjustment

Expenses (ALAE)

• Paid losses and ALAE on closed claims

• Loss and ALAE case reserve

• Salvage and Subrogation Recoveries on

Total Paid Losses Paid ALAE

• ALAE case reserves

• Paid Annuities

• Annuity case Reserves

• Total Number of Reported Claims

• Total Number of Closed Claims

• Number of Closed Claimed with no Loss

Payment

• Number of Reopened Claims

• Expected Written Premiums

• Expected Earned Premiums

• Best Estimate of Claims Outstandings

• Volume measures for premium risk

• Overall standard deviation

• A function of the standard deviation

• SCR Non Life Premium and

Reserve risk

• SCR Non Life Catastrophe risk

• Volume measures for premium risk by lob

• Volume measures for reserve risk by lob

• Overall volume measures by lob

• Overall standard deviation by lob

• Standard deviation for Premium Risk by lob

• Standard deviation for Reserve Risk by lob

• Volume measures for premium risk by

lob and country

• Volume measures for reserve risk by

lob and country• Loss Ratio

• Earned Premiums


• Total Paid Claims

• Total Claim Reserve

• Total Claims Recoveries

• Reinsurance Code



language



language

• LOB Code

• LOB description in English

• LOB description in local language

• Identification

Date

• Fiscal Period

Description

• Fiscal Period Code

• Company Code

• Country Code

• Sub LOB Code

• Sub LOB description in English

• Sub LOB description in local

language

• Exposure description in English

• Exposure description in local

language

• Claim type Code

• Claim type description in English

• Claim type description in local

language

Solvency II Non Life Basic Data

Non Life Volume and standard deviation Global

Non Life Volume and standard deviation

by LOB

Solvency II Non Life Historical

Data

Non Life Volume measures by

LOB and Country

Reinsurance code

Valuation Date

Company

Country

Sub LOB

Claim type

Line Of Business

Fiscal Period

Date


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SCR NL Premium, Reserve Risk & Catastrophe Intermediate Data [Specific information – Solvency II Data Reference Model]

This diagram is a schematic view of the different calculation steps of the SCR Non Life Premium and Reserve risk.


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Non Life facts overview (UML) [Specific information – Solvency II Data Reference Model]

This diagram represents all relevant non-life data.


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It allows our customer to:

� Steer the IT project� by providing a common framework for discussion between business and IT participants

� Design a model� by providing sources of data and proposition of current processes for all risks families

(though only Assets/Credits, Cat and Non-Life have been fully modelized)

� Build& Implement a solution� by providing best practices recommendations of implementation (in a SAP BI

environment)

� Optimize the « Run & Use » of the solution

� Reportings & Controlling supports

No. 46

Data Reference Model Benefits [Specific information – Solvency II Data Reference Model]


Our data reference model brings several benefits.


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No. 47

Solvency II Data Processing & Management Infrastructure [Specific information – Solvency II Data Reference Model]


The chart provides a General view of an infrastructure for Data processing and management under Solvency II regime.


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No. 48

Data Reference Model as Accelerator [Specific information – Solvency II Data Reference Model]


Our Data reference model serves as an accelerator to design & build our clients’ Solvency II architecture.


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� Founded in 2000 Prima Solutions operates globally from offices in Paris, London, Chicago and Tokyo.

� Combination of standards, software and services which allows for structured processing of enterprise information enabling greater control and data integrity across their organization.

� Three main products :

� Prima Repository: suite of components for insurance applications

� Prima Vanilla: Services for Contract/Policy management applications

� Prima IBCS: object-oriented insurance model suite

� Prima Solutions’ technology promotes Reusability and renewed Business and Technical Agility.

No. 49

Our Solvency II partner [Specific information – Solvency II Data Reference Model]


We are finalizing the Reference data model with our partner Prima Solutions.

CGI, now part of CGI, and Prima work together to adapt Insurance standard's model (IBCS) in order to fit Solvency II requirements.


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� Brainstorming: Worin bestehenden die Unterstützungspotenziale der CGI im Hinblick auf Säule-1-Projekte?

No. 50

Brainstorming [Specific information – Solvency II Data Reference Model]


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Reinsurance

General information


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No. 52

Overview [General information – Reinsurance]



� Reasons for reinsurance

� Types of Reinsurance

� Reinsurance and Risk Profile

� Reinsurance Credit Risk


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No. 53

Reinsurance – a Law to Business Translation [General information – Reinsurance]


In law you say.

Insurer transfers risk to reinsurer.

“The cedent cedes the cession to the cessionary.”


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One is the genuine transfer of risk, the other can be described as a risk transfer for the purposes of managing or spreading risk over time or achieving strategic business objectives.

Genuine risk transfer reasons primarily include:

� Limiting large or catastrophic claims

� Limiting total claims

Strategic or financial objectives include:

� Increasing new business capacity

� Investment Risk Transfer

� Financial Results Management

A mixture of both objectives can provide for:

� Gaining Product Expertise

� Underwriting Advice

� Divesting a Product Line

No. 54

Reasons for Reinsurance [General information – Reinsurance]


There are two main objectives to purchase reinsurance.


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Proportional reinsurance covers are quota share or surplus covers, while non-proportional covers comprise excess-of- loss or stop-loss contracts. Both types are often, mixed or aggregated.

Example “Proportional reinsurance”:

No. 55

Types of Reinsurance [General information – Reinsurance]


Reinsurance covers typically have two different types: proportional or non-proportional.

Individual/Common Person OrGroup of

Individuals/ Industries

InsuranceCompany

ReinsuranceCompany

Insured Insurer Reinsurer

Purchase a policy

Pay premium

Transfer portionof premium

AnotherInsurancecompany


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… usually with the effect of reducing risk, and those are important considerations for the capital requirement of an insurance company.

While proportional reinsurance reduces the overall (nominal) risk in a linearway, non-proportional covers the large losses, thereby reducing the company’snet exposure to large loss or catastrophic events.

No. 56

Reinsurance and Risk Profile [General information – Reinsurance]


Reinsurance contracts typically have significant impacts on the company’s aggregate risk profile.


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The stability of the relationship crucially depends upon the financial strength of the reinsurer.

To recognize the credit risks on the reinsurance recoverable, a factor 0 can beapplied to the full amount of capital relief derived from having a reinsurance arrangement in place. The factor 0 may vary depending upon:

• Financial stability of the reinsurer

• Amount of collateral being posted

• Nature of the reinsurance (i.e. short versus long tail)

• Concentration risk

No. 57

Reinsurance Credit Risk [General information – Reinsurance]


Reinsurance arrangements often generate a long-term relationship between cedant and reinsurer.

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Solvency IIRegulation

General information


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No. 59

Overview [General information – Solvency II Regulation]



� Three Pillars

� Timelines Solvency II

� Related regulatory


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Pillar 1

Technical Provisions

Standard Model

MCR

SCR

Own Funds

QIS

Pillar 2

Governance

Supervisor ReviewProcess

Risk Management

ORSA

Pillar 3

Disclosure

Report to Supervisor

Solvency and Financial Condition

Report

No. 60

Three Pillars [General information – Solvency II Regulation]


Pillar 1 comprises quantitative requirements, Pillar 2 the supervisory review process and Pillar 3 the disclosure requirements.


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No. 61



The three pillars conclude high data quality ...

� Pillar 1:

� Measuring the financial position and capital adequacy (SCR, Minimum Capital Requirement, reserves, integration of all quantifiable risks, capital rules, investment rules, asset liability management)

� Pillar 2:

� Integration of all non-quantifiable risks, Own Risk and Solvency Assessment (ORSA), supervisory intervention (e.g. ACAM, BAFIN etc.)

� Pillar 3:

� Disclosure Solvency & Financial Condition Report

� Market discipline

Source: European Commission /QIS5 Technical Specifications 2010/


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Pillar 1:Quantitative

Requirements

Pillar 2:Supervisory Review

Process

Pillar 3:Disclosure

Requirements

No. 62

•Technical Provisions

•Investment rules and ALM

•Capital rules

•Own Risk and Solvency

Assessment (ORSA)

•Supervisory Intervention

•Disclosure Solvency &

Financial Condition Report

•Market Discipline

Robust Internal controls around risk data collection and storage

Risk assessments based on accurate, complete and appropriate historical data

Accuracy and consistency between capital calculation data and wider reporting data

Source: European Commission /QIS5 Technical Specifications 2010/


… and robust controls.



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No. 63

Timelines Solvency II [General information – Solvency II Regulation]


2007 Studies: Directive negotiation, CEIOPS works on pillar I & II, QIS participation, QIS 3, Impact Studies, Lobbying

2008 Studies: Directive negotiation, CEIOPS works on pillar I & II, QIS 4

2009 Scoping: Directive transposition, Scoping of activities, Organization and planning of the project, Risk Management

2010 Scoping & Delivery: Directive transposition, QIS 5

2013 Directive transposition,QIS 5 report

2013 Delivery,transposition

On 31st December 2013 every insurer is supposed to comply with the Solvency II regulation.

No. 64© CGI 2013. All rights reserved

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Timelines Solvency II [General information – Solvency II Regulation]

2014 20152013

There are just 31 months left till the first quarterly reporting.

IRSG: „18 months between assurance ofreporting requirements till the fullimplementation of S II are necessary.“*

* Source: EIOPA Insurance and Reinsurance Stakeholder Group – Opinion Consultation – Reporting Package; Nov. 2012

2012

31 months till the 1. quarterlyreporting

Q3/Q4Solvency IIput intonationallaw

1.1.2015: Solvency IIGo-Live

May 2015: Hand-inQRTs Q1 and country reports

Q2: EIOPA sends final proposals and finalizesguidelines



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No. 65

Related regulatory [General information – Solvency II Regulation]


� International Financial Reporting Standards

� National legislation (e.g. MaRisk(VA), HGB, AktG for Germany)

As well other regulatory has to be taken into account.

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Technical Provisions



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No. 67

Overview [General information – Pillar I – Technical Provisions]



� Proportionality

� Best estimate

� Risk Margin

� Reinsurance recoverables

� Frequency of calculations


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The purpose and role of a proportionality assessment is interlinked with the selection of an appropiate valuation methodology. It then considers the notionof estimation uncertainty and why this is central to proportionality assessment.

The assessment of proportionality of the selected valuation methodology to the nature, scale and complexity of the underlying risks is an integral part of this process. Three elements of such an assessment are:

� Step 1: assess nature, scale and complexity of underlying risks

� Step 2: check whether valuation methodology is proportionate to risks as assessed in step 1, having regard to the degree of model error resulting

� Step 3: Back test and validate the assessment carried out in step 1 & 2

No. 68

Proportionality [Specific information – Pillar I – Technical Provisions]


Source: CEIOPS /Technical Provisions 2009/ p. 9 ff.

The principle of proportionality allows a reduction of complexity of the valuation methodology.


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� Simplified methods are used for the valuation of the best estimate element of technical provisions in the context of a proportionality assessment.

� The principle of proportionality provides an adequate framework to ensurethat undertakings apply appropriate methodologies for the valuation of technical provisions, including the use of simplified techniques.

No. 69

Best estimate [Specific information – Pillar I – Technical Provisions]


The best estimate represents the discounted probability-weighted average of future cash flows (also called present value).


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No. 70

Risk Margin [Specific information – Pillar I – Technical Provisions]


The risk margin represents the value of the deviation risk of the actual outcome compared with the best estimate.

� For the calculation of the risk margin, EIOPA states that the risk margin shall be calculated per line of business.

� The calculation of the risk margin per line of business shall in general be carried out according to the following steps:

1. Project the SCRs throughout the lifetime of the (re)insurance obligations

2. Apply the Cost-of-Capital rate to the projected yearly SCRs

3. Discount with the risk-free interest rate curve

4. Accumulate the amounts over all future years


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The steps to integrate the derived net valuations of technical provisions into the Solvency II Framework are:

• Step 1: Derive valuation of technical provisions net of reinsurance

• Step 2: Determine reinsurance recoverables as difference between gross and net valuations

• Step 3: Assess whether valuation of reinsurance recoverables is compatible with Article 81.

No. 71

Reinsurance recoverables [Specific information – Pillar I – Technical Provisions]


The calculation of the amount of recoverables from reinsurance contract of life insurance business should be based on policy-by-policy approach.

Reinsurance recoverables = gross provisions – net provisions


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No. 72

Risk Evaluation [Specific information – Pillar I – Technical Provisions]


In Solvency II evaluation principles for the calculation of the technical provisions, such as the best estimate and risk margin, are applied.

Legend: European Union /DIRECTIVE 2009/138/EC/ p. 45 f.; CEA /Solvency II CEA Key Messages on Level 2, legend: PV – present value.* The probability-weighted average of future cash flows is as well often refered to as mean, the discounted one as expected present value of future cash flows.

Solvency II reserves (technicalprovisions) =

best estimate + risk margin– Best estimate: discounted probabili-

ty-weighted average of future cashflows (also called PV)*

– Risk margin: to ensure thattechnical provisions are equivalentto amount that insurance under-takings would be expected torequire in order to take over andmeet the insurance liabilities.

Valuation principles– Prudent under Solvency I

– market-consistent under Solvency II

Solvency I Solvency II

Margin requirement (simplified example)

Premiums

(Non life)

Mathematical

reserves

(life)

X 16% = Margin Non Life

+

X 4% = Margin Life

Total Margin

Margin requirement

Internalmodel

Risk 1 Risk 2 Risk 3

Probability

Ruin

Results


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No. 73

Risk Evaluation under Solvency II [Specific information – Pillar I – Technical Provisions]


� Economic view: Ruin is the moment where liabilities exceed assets

� Solvency Capital Requirement (SCR): Capital required to cover a ruin probability based on:

�risk evaluation (VaR), confidence level (99,5%) and a time horizon of 1 year.

Assets

Assets

Market Value

as

counterpart

of

SCR/MCR

and technicalprovisions

Equity Capital

Risk Margin

Free Surplus

Best Estimate

Market

consistent

evaluation

MCR

Best

Estimate

Market

consistent

evaluation

Risk Margin

Liabilities Liabilities

SCR

Source: European Union /DIRECTIVE 2009/138/EC/ p. 77 f.; for more details see the so-called QIS5 spreadsheet ‘I.Valuation’

Equity capital includes free surplus and SCR.


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� Insurance and reinsurance undertakings shall calculate the Solvency Capital Requirement at least once a year and report the result of that calculation to the supervisory authorities.

� Insurance and reinsurance undertakings shall calculate the Minimum Capital Requirement at least quarterly and report the results of that calculation to supervisory authorities.

� Since the objective of the quarterly MCR calculation is to ascertain whether ornot the MCR has been breached, the own funds eligible to cover the MCR should also be calculated in parallel on a quarterly basis.

No. 74

Frequency of calculation [Specific information – Pillar I – Technical Provisions]


Source: European Union /DIRECTIVE 2009/138/EC/ p. 60

According to the Directive the SCR should be calculated at least once a year and the MCR at least quarterly.

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SCR Calculation



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No. 76

Overview [Specific information – Pillar I – SCR Calculation]



� SCR Methods and Formulas

� Principle of Proportionality


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No. 77

SCR Methods & Formulas [Specific information – Pillar I – SCR Calculation]


There a number of ways to calculate capital for solvency and regulatory purposes with regard to one specific risk module.

� Here are five common and not so common methods used for calculating the Solvency Capital Requirement (SCR):

Those models and methods are “BLACK BOXES” in our data reference model.

We feed them and extract from them, no more, no less.

Examples

� Covariance matrix� Replicating portfolios� Least squares Monte Carlo� Curve-fitting� Nested stochastic


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� In particular, this Directive should not be too burdensome for insurance undertakings that specialise in providing specific types of insurance or services to specific customer segments, and it should recognise that specialising in this way can be a valuable tool for efficiently and effectively managing risk.

� In order to achieve that objective, as well as the proper application of the proportionality principle, provision should also be made specifically to allow undertakings to use their own data to calibrate the parameters in the underwriting risk modules of the standard formula of the Solvency Capital Requirement.

No. 78

Principle of Proportionality [Specific information – Pillar I – SCR Calculation]


Proportionality is as well applied for the SCR calculation.

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Standard Formula



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No. 80

Overview [General information – Pillar I – Technical Provisions]



� Solvency II Standard Formula

� Solvency II Risk Types

� Non-life Underwriting Risk Types

� Market Risk Types

� Life Risk Types

� Health-specific Risk Types

� Operational Risk


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� The standard formula is the method undertakings are expected to use to calculate the SCR when they do not have their own internal model.

� The standard formula should therefore be suitable for calculation, in particular by smaller firms.

� In QIS2 there are two methods for the standard formula being tested.

� Both take a modular approach to the assessment of capital i.e. the capitalrequirement is calculated for each risk factor separately and an overall capitalrequirement is then calculated using assumed correlation between the various risk factors.

No. 81

Standard Formula [Specific information – Pillar I – Standard Formula]


The SCR finally accumulates the Basic Solvency Capital Requirement (SCR), the SCR for operational risk and the adjustment as input data.

SCR= BSCR + SCROp + Adj


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No. 82

Solvency II Risk Types [Specific information – Pillar I – Standard Formula]


Premium Res. Longevity

SCR

BSCRAdj Op

Non-SLT HealthCATSLT HealthInterest rate

Mortality

Longevity

Disability

Lapse

Expenses

Revision

Equity

Property

Spread

Currency

Concentration

Illiquidity

Lapse

Mortality

Disability

Lapse

Expenses

Revision

CAT

Premium Res.

Lapse

CAT

included in the adjust-ment for the loss absor-bing capacity of technicalprovisions under the mo-dular approach

DefaultHealth Life Non-life IntangMarket

=

Source: European Commission /QIS5 Technical Specifications 2010/ 90; legend: Adj – Adjustment, CAT – Catastrophe, Op – Operational risk, SLT – similar to life techniques

The calculation of the Solvency Capital Requirement according to the standard formula is divided into modules as follows …


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� Premium risk

� The risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing, frequency and severity of insured events. Premium risk relates to policies to be written (including renewals) during the period, and to unexpired risks on existing contracts. Premium risk includes the risk that premium provisions turn out to be insufficient to compensate claims or need to be increased.

� Reserve risk

� The risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing and amount of claim settlements.

No. 83

Non-life Underwriting Risk Types [Specific information – Pillar I – Standard Formula]


Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 197 ff.

The non-life underwriting risk module consists of the non-life premium risk, non-life reserve risk ...


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� Catastrophe risk

� The risk of loss, or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events

� Lapse risk

� The risks of a change in value caused by deviations from the actual rate of policy lapses from their expected rates.

No. 84

Non-life Underwriting Risk Types [Specific information – Pillar I – Standard Formula]



… non-life catastrophe risk and lapse sub-modules.


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� Interest rate risk� The risk of loss, or of adverse change in the value of insurance liabilities,

resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events

� Equity risk� The risk of a change in value caused by deviations of the actual market

values of equities and/or income from equities from their expected values.

� Property risk� Property risk arises as a result of sensitivity of assets, liabilities and

financial investments to the level or volatility of market prices of property.

� Spread risk � The risk of a change in value due to a deviation of the actual market price

of credit risk from the expected price of credit risk.

No. 85

Market Risk Types [Specific information – Pillar I – Standard Formula]


Source: European Union /DIRECTIVE 2009/138/EC/ p. 52-53; European Commission /QIS5 Technical Specifications 2010/ p. 110 ff.; 116

The market risk module consist of interest risk, equity risk, property risk, spread risk …


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� Concentration risk

� The exposure to increased losses associated with inadequately diversified portfolios of assets and/or obligations. Concentration risk for an insurer may arise with respect to investments in a geographical area, economic sector, or individual investments, or due to a concentration of business written within a geographical area, of a policy type, or of underlying risks covered.

� Illiquidity

� The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Liquidity risk may arise due to illiquidity of the assets held to meet the cash flow requirements (commonly referred to as asset, market, or trading liquidity risk), but also due to insufficient funds being available to meet cash flow requirements (funding liquidity risk). From a more theoretical point of view liquidity risk on a day-today basis could also be understood as a change in value due to a deviation of the actual cash flow requirements from the expected cash flow requirements, being the cost of being over- or under capitalised.

No. 86

Market Risk Types [Specific information – Pillar I – Standard Formula]



… concentration risk and illiquidity risk.


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� Mortality risk

� Type of biometric risk. A change in value caused by the actual mortality rate being higher than the one expected. An increase in the frequency of the death of insured persons may for example result in higher claim patterns than charged for in the premiums.

� Longevity risk

� Type of biometric risk. A change in value caused by the actual mortality rate being lower than the one expected. Longevity risk affects contracts where benefits are based upon the likelihood of survival, i.e. annuities, pensions, pure endowments, and specific types of health contracts.

� Disability risk

� A change of value caused by a deviation of the actual randomness in the rate of insured persons that are incapable to perform one or more duties of their occupation due to a physical or mental condition, compared to the expected randomness. Disability risk only relates to cover against loss of income, contrary to morbidity risk, relating to cover other than loss of income, e.g. medical expenses.

No. 87

Life Risk Types [Specific information – Pillar I – Standard Formula]



The life risk module consist of mortality risk, longevity risk, disability risk ...


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� Lapse risk

� The risks of a change in value caused by deviations from the actual rate of policy lapses from their expected rates.

� Expenses risk

� The capital charge for expense risk is intended to reflect the uncertainty in expense parameters as a result of changes in the level, trend or volatility the expenses incurred.

� Revision risk

� In the context of the life underwriting risk module, revision risk is intended to capture the risk of adverse variation of an annuity’s amount, as a result of an unanticipated revision of the claims process.

� CAT risk

� The risk that a single event, or series of events, of major magnitude, usually over a short period (often 72 hours), leads to a significant deviation in actual claims from the total expected claims.

No. 88

Life Risk Types [Specific information – Pillar I – Standard Formula]



… lapse risk, expenses risk, revision risk and CAT risk.


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� Similar to Life Techniques (SLT) Health underwriting risk

� SLT Health underwriting risk arises from the underwriting of health (re)insurance obligations, pursued on a similar technical basis to life insurance, and is associated with both the perils covered and processes used in the conduct of the business.

� Non-SLT Health underwriting risk

� Non-SLT Health underwriting risk arises from the underwriting of health (re)insurance obligations, not pursued on a similar technical basis to that of life insurance, following from both the perils covered and processes used in the conduct of business. Non-SLT Health underwriting risk also includes the risk resulting from uncertainty included in assumptions about exercise of policyholder options like renewal or termination options.

No. 89

Health-specific Risk Types [Specific information – Pillar I – Standard Formula]



The health risk module consists of SLT and Non-SLT health underwriting risk.


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� Operational Risk is the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses. Related terms are Business risk, Compliance risk, Expense risk, Legal risk, Management risk, Model risk, Reputational risk, Strategic risk.

� Operational risks relate to operational loss events caused by internal or external reasons, excluding all ‘financial’ risks that a company has taken on in the expectation of a financial return.

No. 90

Operational Risk [Specific information – Pillar I – Standard Formula]


Source: CEA /Solvency II CEA Key Messages on Level 2

Operational risk is the risk that processes, people and systems causes incidents that lead to losses.

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Internal Model



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No. 92

Overview [Specific information – Pillar I – Internal Model]



� Use Test

� Governance

� Statistical Quality Standards

� Profit/Loss Attribution

� Validation

� Documentation Standards


FINAL COPY

The following elements must be taken into account when assessing the use of the internal model:

� Impact on policyholders

� Impact on risk management and use of policies, especially on risk mitigation, ALM, risk appetite, risk strategy, reinsurance program design, limit system, analysis of new products

� Impact on capital management, capital measurement and allocation

� Whether the scale of use of the internal model reflecs the nature, scale and complexity of the risks inherent to the business of the undertaking

� Impact of the level playing field between undertakings

� Consistency between supervisory authorities’ decisions

No. 93

Use Test (1/2) [Specific information – Pillar I – Internal Model]


One of the main aspects for an undertaking to qualify for an internal model approach to determine regulatory capital requirements is …


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There are several approaches that can be considered regarding the assessmentof compliance with the use test:

� Detailed list of uses that the undertaking must use the internal model for

� Principle-based assessment

� Case-by-case analysis of each application

The following areas are highlighted as particularly important within the undertaking’s system of governance:

� System of governance

� Risk-management system

� Descision-making process

� Economic capital assessment

� Economic capital allocation

� Solvency capital assessment

� Solvency capital allocation

No. 94

Use Test (2/2) [Specific information – Pillar I – Internal Model]


… that it demonstrates to its supervisory authority that there is sufficient discipline in its internal model development and application …


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� Overall requirements for internal-model governance

� High-level internal-model governance

� Detailed internal-model governance

No. 95

Governance [Specific information – Pillar I – Internal Model]


… such that it is widely used and plays an important role in the course of conducting its regular business, particularly in Risk Management.


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� Probability distribution forecast

� Requirements for probability distribution forecast

� Based on adequate applicable and relevant actuarial and statisticaltechniques

� Consistent with the methods used to calculate technical provisions

� Based upon current and credible information

� Based on realistic assumptions

No. 96

Statistical Quality Standards [Specific information – Pillar I – Internal Model]


With regard to the internal model, some statistical quality standards have to be hit.


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� The review of the causes and sources of profits and losses should be gearedto the categorisation of risks.

� This will allow the undertaking to demonstrate that the sources are classifiedaccording to the risks the (re)insurance undertaking takes into account and which reflect the risk profile of the undertaking.

No. 97

Profit/Loss Attribution [Specific information – Pillar I – Internal Model]


An undertaking shall regularly review the source and cause of profit and loss for each major business unit.


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These tools and processes are both quantitative as well qualitative.

Example of the areas of the internal model that need to be validated must include at least:

� Data

� Methods

� Assumptions

� Expert judgement

� Documentation

� Systems / IT

� Model governance

� Use test

No. 98

Validation [Specific information – Pillar I – Internal Model]


Validation is a set of tools and processes used by the undertaking to gain confidence over the results, design, workings and other processes within the internal model.


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� The documentation of an internal model shall be thorough, sufficiently, detailed and complete to satisfy the criterion that an independantknowledgeable third party could form a sound judgement as to the reliabilityof the internal model and could understand the reasoning and the underlyingdesign and operational details of the internal model.

� The documentation must describe the drawbacks and weaknesses of the model, including the circumstances under which the model does not workeffectively.

No. 99

Documentation Standards [Specific information – Pillar I – Internal Model]


If documentation is not kept timely and up to date, the undertaking is not protected from key-person risk, which is one of the main reasons that documentation is held.

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MCR



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� Overall structure

� Segmentation of the linear formula

� Overall MCR calculation

� Quarterly calculation

� Linear formula’s components

No. 101

Overview [Specific information – Pillar I – MCR]




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� A Linear Formula i.e. a simple factor-based combination of basic volume measures combined with a cap of 45% and a floor of 25% of the SCR (calculated using either the standard formula or an internal model) to ensurea proper ladder of supervisory intervention. The cap and the floor togetherare the ‘corridor’. In the final step an absolute floor is applied to the result of the above calculation.

� If an undertaking has an approved internal model, then the corridor used forcalculating its MCR is determined by the internal SCR result.

No. 102

Overall structure [Specific information – Pillar I – MCR]


A Linear Formula i.e. a simple factor-based combination of basic volume measures combined with a cap of 45% and a floor of 25% of the SCR.


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� Non-life activities practiced on a non-life

� Non-life activities technically similar to life

� Life actvities practiced on a life technical basis

� Life activities – supplementary obligations practiced on a non-lifetechnical basis

No. 103

Segmentation of the linear formula (1/3) [Specific information – Pillar I – MCR]


The MCR linear formula is divided between life activities and non-life activities. A second split is made between the technical nature of insurance obligations resulting in four components of the linear formula.


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1.Non-life activities practiced on a non-life technical basis

should be calculated as the sum over all lines of business of the higher of the following two results:

� a fixed percentage (αlob) of net technical provisions, reflecting underwriting risk for long-term business

� a fixed percentage (βlob) of net written premiums, reflectingunderwriting risk for short-term business

2.Non-life ativities technically similar to life

� a fixed percentage (αi) of net technical provisions, at an appropriate granularity, to reflect long-term risks relating to life business

� a fixed percentage of net capital-at-risk (α)

No. 104



The MCR parameter of non-life activities is calculated as follows:


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3. Life activities practiced on a life technical basis

� a fixed percentage (αi) of net technical provisions, at an appropriate granularity, to reflect long-term risks relating to life business

� a fixed percentage of net capital-at-risk (α)

4. Life activities – supplementary obligations practiced on a non-life technicalbasis

� a fixed precentage (αlob) of net technical provisions, reflecting underwriting risk for long-term business

� a fixed percentage (βlob) of net written premiums, reflectingunderwriting risk foe short-term business

No. 105



The MCR parameter of life activities is calculated as follows:


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MCR = max {MCRcombined: AMCR}

� MCRcombined the MCR of the undertaking is i.e. the linear formula result subject to a floor of 25% and a cap of 45% of the SCR.

� AMCR is the absolute floor of the MCR.

The combined MCR of an undertaking is calculated as follows:

MCRcombined = {min[max(MCRlinear;0.25 x (SCR));0,45 x (SCR)]}

MCRlinear is calculated as the sum of four components, whose calculation is as follows:

MCRlinear = MCRa + MCRb + MCRc + MCRd

No. 106

Overall MCR calculation (1/2) [Specific information – Pillar I – MCR]


The MCR of an undertaking should be calculated as follows:


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MCRlinear = MCRa + MCRb + MCRc + MCRd

� MCRa is the linear formula component for non-life business activities on a non-life technical basis

� MCRb is the linear formula component for non-life business activitiestechnically similar to life

� MCRc is the linear formula component for life business activities on a lifetechnical basis

� MCRd is the linear formula component for life business supplementary non-life activities

No. 107

Overall MCR calculation (2/2) [Specific information – Pillar I – MCR]


The MCR of an undertaking should be calculated as follows:

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Own Funds



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� Basic Own Funds

� Ancillary Own Funds

No. 109

Overview [Specific information – Pillar I – Own Funds]




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The following features need to be taken in consideration in addition to the characteristics of permanent availability and subordination:

� Sufficient duration� Free from requirements / incentives to redeem the instrument� Absence of mandatory fixed charges� Absence of encumbrances

Tier 1 Own Funds should display the following key features:

� Subordination� Loss absorbency� Sufficient duration� Free form requirements or incentives to redeem� Free from mandatory fixed charges� Absence of encumbrances

No. 110

Basic Own Funds [Specific information – Pillar I – Own Funds]


Raising Own Funds involves issuing capital instruments to investors (including to an entity within a group) who assume risk in return for yield.


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� For classification in Tier 2, ancillary Own Fund items must be callable ondemand to absorb losses on a going-concern basis, as well as in a winding-up.

� Ancillary own fund items classified in Tier 2 should be callable own funds of the highest quality and demonstrably absorb unexpected losses to enable anundertaking to continue as a going concern.

� Hybrid capital instruments and subordinated liabilities, to the extent that theyare classified in Tier 1, would also be classified as Tier 2 ancillary own funds.

No. 111

Ancillary Own Funds [Specific information – Pillar I – Own Funds]


Ancillary fund

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Qualitative Impact Study(QIS) Specific information


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� Lamfalussy Process

� Conclusions QIS1





No. 113

Overview [Specific information – Pillar I – QIS]




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� Level 1: The European Commission has drafted, discussed and adapted the DirectiveThe European Parliament adopted Directive 2009/138/EG of the EuropeanParliament and the European Council of the 25th November 2009 on the 22nd April 2009. The European Council has finally adopted it on 10th November 2009. Directive was published on the 17th December 2009 in the Official Journal of the European Union and came into force on 6th January 2010. Itmust be implemented into national law on 31st December 2014.

� Level 2: Based on the directive technical details in the form of implementing Directivesand implementing regulations of the Commission in cooperation with the market participants and the committees are fixed.

� Level 3: At level 3 work has to be done on implementing provisions and onspecifications of the implementing regulations, defined at level 2. CEIOPS gives recommendations on interpretations. Common standards are drafted. A comparison of authorities’ practices takes place. Objective is unified use.

No. 114

Lamfalussy Process (1/2) [Specific information – Pillar I – QIS]


In order to accelerate the EU legislation process... .


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� Level 4: At level 4 the implementation in the member states is monitored by the European Commission or EFTA.

No. 115

Lamfalussy Process (2/2) [Specific information – Pillar I – QIS]


… the Lamfalussy process has been applied to the whole financial sector since 2002.


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� This could give a rough indication of the impact of the proposed rules on the required provisions.

� Due to time constraints and the novelty of the approaches tested, the figurespresented by the undertakings are only an indication.

� The best estimate plus risk margin tends to be less than the provisions oncurrent bases, and that the risk margins tend to be small, for most undertakings and classes of business.

� This impact study also provides a good insight into the methodoCGIl issues that the requested calculations provide. For life undertakings the calculationof future bonuses was handled very differently by undertakings, in part because of differing national regulations.

� The stochastic modeling of financial guarantees and the calculation of risk margins gave problems for a significant number of life undertakings, nonethless the problems varied with the country. Life undertakings especiallyrequested more guidance. For non-life the undertakings applied very differingapproaches, though the outcomes tended to be similar nonetheless.

No. 116

Conclusions QIS 1 [Specific information – Pillar I – QIS]


QIS 1 focused on the level of prudence in the current technical provisions, benchmarking them against some predefined confidence levels.


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� Using the QIS 2 methodology and parameters, the technical provisions generally decrease and the capital requirements increase, but the available capital also increases.

� Overall the ratio of available capital to required capital decreases for most lifeparticipants in eleven national markets, but remains above 100%. In anothersix the ratio increases for most life undertakings. For a number of lifeundertakings the placeholder SCR is near to or even less than zero.

� For thirteen national markets all of the majority of the respondents had anMCR which was less than 75% of the placeholder SCR. For nationalsupervisors reported a substantial number of participants with an MCR/SCR ratio of more than 75%.

� There is some evidence that, using the QIS2 methodology and parameters, small undertakings and mutuals may be affected more than largeundertakings and proprietary undertakings.

No. 117



QIS 2 was about testing a possible methodology so that the results may not accurately represent the underlying risks.


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� It is noted that the level of prudence in placeholder and alternative methods were not always equal.

� Concerns were expressed by undertakings in most countries about the high size of number of the correlations within the market risk component, particularly those between equities and property, and between equities and interest-rate.

� Several participants noted that the transparancy of the Solvency II processcould be improved by disclosing the rationale for the QIS calibrationassumptions.

� It was commented by a number of undertakings that the time period betweenthe release of the QIS2 technical specification and Excel spreadsheet and the deadline was too short.

� For QIS3, more transparant and user-friendly technical specification, calibration, and spreadsheets were requested. Additional guidance regardingpractical approximations would be helpful for smaller undertakings.

No. 118



Some risk modules and correlations seem too be prudent (e.g. market risk, non-life underwriting risk, size factor).


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� The QIS3 spreadsheet provided for a choice to use 2006 or 2005 data. 89% of submissions were based on 2006, the rest on 2005 figures.

� While many participants considered their data to be fairly accurate and reliable, this view was not fully shared by some supervisors. One supervisor expressed strong doubts about the reliability after having identified significant errors in the participants’ calculations and due to the omission of essential input data. Another supervisor asked participants whether their results would meet the quality requirements of an annual statement of accounts – about half of the participating non-life insurers answered this question in the negative or had reservations regarding parts of their portfolios. In general, accuracy and reliability are considered to be higher for larger insurance firms and ‘QIS veterans’ with dedicated actuarial and financial staff.

No. 119



For QIS3 calculations company accounts were used as a source of inputs, usually complemented by supervisory reporting and actuarial models for valuing technical provisions.


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� QIS4 has confirmed the support from industry and supervisors for the modular structure of the standard formula for the calculation of the capitalrequirements.

� This modular structure is composed of different risk modules and sub-modules, for each of which a capital requirement needs to be calculated.

� These modules and sub-modules are then combined through correlationfactors, through which diversification effects are taken into account. As diversification effects are difficult to calculate, the calibration of the correlation factors has been subject to many comments.

� Undertakings would also welcome more transparency on the calibration of the various (sub-) modules.

No. 120



QIS4 has confirmed the support from industry and supervisors for the modular structure of the standard formula and would welcome more tranparency.


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� There is broad support both from industry and supervisors towards the modular approach design in Solvency II. Also the aggregation approach has been well received. The system allows, through the use of correlations among and within the different modules, for the recognition of diversification effects to acknowledge that all risks cannot materialize simultaneously.

� When looking at the correlations tested, and the changes within the correlations made by CEIOPS as compared to QIS4, very few comments were received. No major trends could be identified.

� In terms of the composition of the SCR, market risk has the highest weight within the standard formula, particularly for life undertakings (67%). For non-life the main driver remains the non-life underwriting risk sub-module (>50%).

No. 121



There is broad support both from industry and supervisors towards the modular approach design in Solvency II.

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Governance



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� Effective Governance & Transparency

� Governance Principles

� Structural Requirements

No. 123

Overview [Specific information – Pillar II – Governance]




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No. 124

Effective Governance and Transparency [Specific information – Pillar II – Governance]


� Insurer should have an „effective governance in order to allow a solid and careful business management.“

� It „contains an adequate and transparent organisational structurewith clear and segregated responsibilities and an effective systemto provide the information.“

� Idea and objective: Qualitative self-control of the insurers

Insurer should have an effective governance and a transparent organizational structure.

Source: European Union /DIRECTIVE 2009/138/EC/


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� Establish, implement and maintain effective cooperation, internal reportingand communication

� Be robust with a clear and well-defined organisational structure that has welldefined consistent and documented lines within the undertaking

� Ensure that important members in the organisation posses sufficientprofessional qualifications, knowledge and experience in the relevant areas of the business

� Ensure it employs personnel with the skills, knowledge and expertise necessary to discharge properly the responsibilities allocated to them

� Ensure all personnel are aware of the procedures for the proper discharge of their responsibilities

� Establish, implement and maintain decision-making procedures� Ensure that any performance of multiple tasks by individuals does not and is

not likely to prevent the persons concerned from discharging any particularfunction soundly, honestly and professionally

� Establish information systems that produce sufficient, reliable, consistent, timely and relevent information concerning all business activities, the commitments assumed and the risks to which the undertaking is exposed

� Maintain adequate and orderly records of its business and internalorganisation. Safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question.

No. 125

Governance principles [Specific information – Pillar II – Governance]


Further the undertaking’s system of governance should:


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No. 126

Structural Requirements (1/2) [Specific information – Pillar II – Governance]


� Risk management system [Art. 44]

� Compliance: Internal control [Art. 46]

� Internal Audit [Art. 47]

� Actuarial function [Art. 48] *


The SII Directive requires the following structure:


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� Risk Management System

� Underwriting and reserving

� Asset-liability management

� Investment

� Liquidity and concentration risk management

� Operational risk management

� Reinsurance and other risk-mitigation techniques

� Internal Control

� A system of effective internal control is a critical component of undertaking management. Internal control is not a procedure or policyperformed at a certain point in time, but rather a set of continuallyoperating processes involving the administrative, management orsupervisory body and all levels of personnel.

No. 127

Structural Requirements (2/2) [Specific information – Pillar II – Governance]



In more detail risk management and internal control structure requires the following:

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ORSA



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� Principles

� Requirements

� Evaluation & Follow-up

No. 129

Overview [Specific information – Pillar II – ORSA]




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No. 130

Overview [Specific information – Pillar II – ORSA]


� ‘As part of its risk-management system every insurance undertaking and reinsurance undertaking shall conduct its Own Risk and Solvency Assessment.’

ORSA is an essential component of the governance system (pillar 2) of insurance companies. They shall regularly evaluate their specific risk profile and solvency status.

Source: European Union /DIRECTIVE 2009/138/EC/ p. 34-35


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No. 131

Requirements [Specific information – Pillar II – ORSA]


� ORSA should be an integral part of risk management and regularly provide

� the overall solvency needs (starting from risk profile, risk tolerance limits, business strategy)

� Assets necessary to cover the liabilities including technical provisions

� Regulatory capital requirements MCR and SCR

� Internal capital needs

� the compliance, on a continuous basis, with the capital requirements (as well technical reserves)

� Assessment of risk profile (if eligible funds cover MCR and SCR on a continuous basis), e.g. difference between actual capital need and SCR

� the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down

� ORSA results must be reported to the national regulatory authority.

The ORSA process has to ensure that the process meets the requirements of Art. 44 (Risk management) of the EU Directive and is also proportionate to the nature, scale and complexity of its risks.

Source: CEIOPS /Own Risk and Solvency Assessment (ORSA) 2008/ p. 7-12; European Union /DIRECTIVE 2009/138/EC/ p. 34-35


FINAL COPY

No. 132

Principles [Specific information – Pillar II – ORSA]


Source: CEIOPS /Own Risk and Solvency Assessment (ORSA) 2008/ p. 13

� The ORSA is the responsibility of the insurer and should be regularly reviewed and approved by the insurer’s administrative or management body.

� The ORSA should encompass all material risks that may have an impact on the insurer’s ability to meet its obligations under insurance contracts.

� The ORSA should be based on adequate measurement and assessment processes and form an integral part of the management process and decision making framework of the insurer.

� The ORSA should be forward-looking, taking into account the insurer’s business plans and projections.

� The ORSA process and outcome should be appropriately evidenced and internally documented as well as independently assessed.

The insurer should have regard to the following principles when conducting its ORSA:


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No. 133

Guidance Examples [Specific information – Pillar II – ORSA]


� ‘The undertaking’s administrative or management body should approve and regularly review the assumptions, including any management actions, and parameters used in the ORSA and should also sign-off the results as it has the ultimate responsibility for the adequacy of the ORSA.’

� ‘The following risks are examples of risks not considered in the standard formula, but which should be considered in the ORSA, if they are material for the undertaking: a) Liquidity risk; b) Reputational risk; c) Strategic risk.’

� ‘The ORSA should be proportionate in its sophistication and depth to the nature, scale and complexity of the undertaking’s business.’

� ‘The assessment should reflect both the undertaking's desire to fulfil its business objectives and its responsibility to meet liabilities to policyholders. This means that the ORSA should demonstrate that the undertaking holds sufficient financial resources to be able to make planned investments and take on new business (within an appropriate planning horizon).’

� ‘Documentation should at a minimum include: a) A description of the areas that are included in the ORSA; b) A description of the process of conducting the ORSA and the responsibilities of key personnel involved in the process […]’

Guidance items are specifying the principles.

Source: CEIOPS /Own Risk and Solvency Assessment (ORSA) 2008/ p. 14 ff.

FINAL COPY

Disclosure



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� Report to Supervisor

� Solvency and Financial Condition Report

No. 135

Overview [Specific information – Pillar II – Disclosure]




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� The Report to Supervisor will contain all the regularly reported informationnecessary for the purposes of supervision, within a private document sent to the supervisory authority. This section sets out the envisaged structure, frequency and contents of the RTS.

� The Report to Supervisor is a stand-alone document, which does not requirereference to any other document in order to be understood by the supervisor. The information should be specifically aimed at the supervisor, including all elements set out in the SFCR.

� Consistent with the structure of the SFCR, the structure of the qualitative RTS is another area where the proposals from CEIOPS.

No. 136

Report to Supervisor (RTS) [Specific information – Pillar III – Disclosure]


The Report to Supervisor will contain all the regularly reported information necessary for the purposes of supervision.


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Structure SFCR Business and Performance

� Business and external environment

� Performance from underwriting activities

� Performance from investment activities

� Operating / other income and expenses

� Any other disclosures

No. 137

Solvency and Financial Condition Report (1/2) [Specific information – Pillar III –

Disclosure]


The detail of information to be disclosed should be commensurate with the nature, scale and complexity of the risks inherent in the business of the undertaking concerned.


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System of Governance

� General governance arrangements

� Fit and proper

� Risk management system

� ORSA

� Internal control system

� Internal audit function

� Actuarial function

� Outsourcing

Risk Profile

Regulatory Balance Sheet

Capital Management

Quantitative reporting templates

No. 138

Solvency and Financial Condition Report (2/2) [Specific information – Pillar III –

Disclosure]


The report should comprise:


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Pillar 3 reporting requirements [Specific information – Pillar III – Disclosure]

Solvency and Financial Condition Report (SFCR)

Quantitative Reporting Templates (QRT)

Report to Supervisors (RSR)

Target group Public/ insured Supervisorpublic/insured (partly)

Supervisor

Contents • Business and Performance• Governance system• Risk profile• Regulatory Balance Sheet• Capital management

• MCR• SCR• Technical Provisions• Assets• Own Funds

• Business and Performance• Governance system• Risk profile• Regulatory Balance Sheet• Capital Management

Information Quantitative and qualitative Quantitative Quantitative and qualitative

Reporting cycle Yearly Quarterly (supervisor)/ yearly(supervisor/insuredpublic)

< 5 years (complete report)

Source: CEIOPS ’Advice for Level 2 Implementing Measures on Solvency II: Supervisory Reporting and Public Disclosure Requirements (former Consultation Paper 58), Oct. 2009

Specifically, the following requirements must be met:


FINAL COPY

� To which stakeholders are reports to be delivered, in which cycles?

� How many QRT reports does one have to produces in Solvency II?

� What drives the complexity of report generation?

� How can we support the client in report generating?

No. 140

Excercises [Specific information – Pillar III – Disclosure]


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Insight into core S-II documentsSpecific information


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• Solvency II Directive

� Technical Specifications

� CEIOPS (EIOPA) Consultation Papers

� Annual Reports

� Data Reference Model

� Solvency II Sales Toolkit

� SAS SOREG Solution Spec

No. 142

Core Documents [Specific information – Insights into core S-II documents]


FINAL COPY

Solvency II Projectat AllianzSpecific information


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Allianz France - Solvency II – RAI : the objectives

• The new regulation Solvency II is a directive from the European Union which aims at harmonizing the solvency prudential rules imposed on the EU insurers in order to improve their risks measurement and management

• It relies on more complex calculation rules by integrating the real risks either by the application of standard formulas or internal models

• It requires agile, accurate, auditable data and IT systems

• In this context, the main objective of the group is the approval of its internal model and Risk Capital production process by ACAM and BAFIN in 2012, to reach the targeted capital requirement reduction.

• For that purpose, one of the projects is the implementation of a centralized data warehouse dedicated to Risks:

• Centralization of the risks data

• Industrial delivery of the risks calculations (not the automation of source data from legacy system)

• Delivery of the regulatory statements and Allianz’ various report

• Perimeter covers several companies :

• Life : Allianz France Vie, Coparc, Génération Vie, CGP2, Martin Maurel Vie, Arcalis et AVIP.

• Non-Life : Allianz France IARD, Calypso, La Rurale et Protexia.

RAI Datawarehouse will provide :

New regulatory reports (BAFIN, ACAM et CCR)

New reports for Allianz and Allianz France (Risk Reports, Risk Limits, KRIs…)

New functionalities and services for Financial and Risks teams



FINAL COPY

LEGACY/ BUSINESS SYSTEMS

CENTRAL ACTUARIAL SOLUTION

RAI France will provide a

Complete set of new functionalities for Risk professionals

IART data import from the actuarial module

Life data import from the business unit

Data and asset, ?, credit files import

Accounting data import, re-insurance

Import/Export input and output data to calculation module

Import/Export data to Algorithmic

Import module/Automatic export

SCR and MCR calculation with standard method

Re-processing / Data aggregation

Risk capital disaggregation

Calculation / reprocessing

Risk report regulatory

Risk indicator management

RC report in business unit

Report

Identity management and authorization

Risk management

Policies and damages data download since infocentres or system management

Reprocessing in SAS

Gathering per LOB

Liabilities data export (IART and CAT) and aggregated to RAI/export modul

CCR data export (consolidated by postal code)

Actuarial

Data preparation for the account

reconciliation

Automatic reconciliation with

data from BW Paris

Results storage

Account reconciliation

Data imported and exported storage

Data storage after every processing (Audit trail)

Storage and filling



FINAL COPY

RAI program overview and current status

2008 2009 2010 2011

Scoping-Phase

Phase 1 A(Assets/Credit)

Phase 2 A & BLife/ Non Life/ Cat/ORM

Phase 1BImplementation of connexions to Allianz system

Homologation

CGI has supported ALLIANZ France teams since the beginning of the project and for all the following phases.We are helping ALLIANZ team at all delivery levels.



FINAL COPY

An ambitious target architecture has been designedLocal

units

Algorithmics

ALLIA

NZ

Gro

up

Excel(s)SMART / IDS (MIS)Decalog / GPFO

Excel(s) / SAP SMART /

Decalog / GPFO

Excel(s) /

ALIM (GAIN)Infocentre SAS

ORM model(operational risks)

P&C Invest. C1a model(market risk)

ALIM ModelMoSeS(risks from life insurance segment)

CAT ModelRMS(catastrophe risk)

RUN –RiO ModelResQ-IGLOO(underwriting risk)

ORMLiabilitiesNon-life

AssetsLiabilitiesLeben

Cat

MIS

CCR

SVTDublin

ARIES model

MKMV model(credit risk)

RAI flow to Algorithmics

Credit

ALLIANZ RAI

Data Base



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Overview of the targeted RAI Architecture (*Not up to date)

Extracts

RAI

File CCR (in

CSV format) Accounting

Reconciliation

Ass

ets

Cre

dit

Lia

bili

ties

IAR

T/C

AT

Lia

bili

ties

life

OR

MT

ran

sver

se

En

gin

eR

MS

SAS

Policydata

Claimsdata

SAP

Store

Archiving

and Unloading

En

gin

eA

LIM

Mo

SeS

Alg

orith

mics

En

gin

eM

KM

V/

AR

IES

/ P&

C / C

IaE

ng

ine

OR

M –

Op

en

Pag

es

MODULE

Transverse

Life

EV

Assets

Credit

ORM

IART

CAT

Actu

arialpro

cessin

g

SMART

SAFIR / BW PARIS

Octave

BD ORM

Other data

IART

Data pots

IART (AG/CL)

Receivables

AR DB

GIMW

Reinsurance

BDD central actuarials

EV DeterministischOutput xls EV statistic

ResultsExcel, Access

Lo

ad

En

gin

eR

UN

RiO

SAP EV AZ

Reporting

Algorithmics

Input/Output

model

SAP PORTAL

Lo

ad/ U

nlo

ad


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What is an operational risk management project like ?


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A wide range of projects:

• Design and roll out of a complete operational risk management organisation

• Gap analysis approach / benchmark

• Optimisation of the operational risk management system

• Deployment of a new methodology (AMA)

• Deployment of a tool (vendor’s or internal)

• Change management

Method expertise :

OR system audit, support to become

AMA compliant

Organisation :

definition, optimisation and roll

out of the OR organisation, gap

analysis, benchmark

Tool :

software assessment, tool implementation

Change management :

training, communication


What is an operational risk project like?


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The 7 stages of the operational risk management

Processes identification

1

Risk mapping (evaluation & prioritisation)

Indicators (KRI) /

Steering

Measurement of action

plans

Collection of incidents and

lossesBack-Testing

2 3

4

56

Organisation

7



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Detailed reviewStep 1 – Process Identification

� Obtain pieces of information on previous missions that may have already described processes

(document management, quality plans, ABC method, process re-engineering and software

architecture...)

� Define, with the management committee, the ambition of the bank on the cartography of

processes (simple list of process or advanced cartography)

� Carry out interviews with experts in order to better describe some activities of the bank

� Principles to be followed:– 80/20 Rule : do not try and reproduce all the exception cases

– Granularity Level : do not go to deep in the analysis, since it would become difficult to maintain the list of

processes

Work to carry out

� To have a structured and consistent vision of the bank activities

� To map processes with the 8 regulatory business lines

� Process list of the bank (Business-Lines and support functions)

Deliverables

Objectives



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Detailed reviewProcess Identification- Illustrations

Agency services

Retail banking

Trading & sales

Asset Manage-

ment

Retail Brokerage

PROCESS

P3 – Giving orders to brokers or trust company

P5 – Customer communication

P4 –Back-office processing

P6 – …

Procédures de l'activité Réception et traitement des factures

Gestionnaire exportInfogistique modulefacture

Gestionnaireadhérents

Assistant utilisateursDSI

Informatique SIL

Logistique courrier

Contrô le e tenre gistrem ent des

remises dans lemodule facture

Remises de factures

domestiques

Préparation desremises de factures

export

Remises de

factures export

Préparation et envoide remises à la sous-

traitance

Traitement desremises non

externalisables

Réception ettraitement des

factures reçues par e-mail

Réception ettraitement des fichiers

.tif

Traitement des rejets

Contrôle des écartssur les remises

Achat des factures

Saisie des factures ouintégration des

fichiers disquette

Envoi des données factures

Envoi de factures

par ETEBAC ou

Creancenet

Envoi de factures

par e-mail

Envoi de

factures par

courrier

Relations adhérent

Relations sous-

traitant factures

Envoi des remises de

factures à la saisie

extérieure

Retour des remises

papier

Envoi du fichier

sous-traitant

factures

Retour des remises de

factures papier

Relations factor

Gestionnaire import

Saisie des facturesimport

Envoi des données factures

Message edifactoring

d'envoi factures import

P1 – Opening a bank account

P2 – Orders reception

MODELISATION OF THE PROCESSES IN BASIC TASKS

Corporate finance

Commercial banking

Payment & settlement



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Detailed reviewStep 2 – Risk Mapping

� Identify experts to be interviewed thanks to the process analysis

� Prepare meeting with the experts:– Gather and summarize the existing pieces of information that could already exist (e.g. internal

audit deliverables)

� Carry out meetings with experts in order to:– Identify risks within their perimeter

– Identify existing control methods and test their efficiency

– Evaluate the risks (potential risk frequency and impact if occurring)

� Consolidate collected data (risks gathering, complete information on impact…)

� Note: the evaluated risks are the net-risks (i.e. after taking into account the control

plans)

Work to carry out

� To have an updated and evaluated cartography of Operational Risks

� To split all identified operational risks into the 7 regulatory categories

Objectives

� Risk forms and « Frequency x Impact » matrix

Deliverables



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Detailed reviewRisks Identification - Illustration

Finance d’entreprise

Activités de marché

Banque de détail

Banque commerciale

Banque de flux

Services financiers

Gestion d’actifs

Activités de courtage

LIGNES D’ACTIVITE

PROCESSUS

P3 – Passage d’ordres vers courtiers et sociétés de gestion

P1 – Ouverture de comptes titres

P2 – Réception d’ordres

P5 – Communication clients

P4 – Traitements de back-office

P6 – …

IDENTIFICATION DES COMPOSANTS POUR CHAQUE TACHE ELEMENTAIREFund Adm inis trationCle a ring

Broke r

Fund

Ma na ger Ba ck -o ffic e Ac counting

Cus todia n

Ba nk

Ord er In it i at i on

T ran sa ctio n I n pu t

Ma nua l ly V al i da tio n

Va li d ate Opera tio n

T ran sfer Ord er (swi ft)

Ge ne rate C ash

P os it i on

I nj ecti on in Ac co un ti n g

sy stem

A c cou nti ng v al i dati on

Tran sfe r Ex ecu tio n

Fu n d A dm i ni s trati o nC le a ri ng

B ro ke r

F un d

Ma na g er B a ck -o ff ic e A c co u n tin g

C u s to di a n

B a nk






Ge ne rate C ash

P os it i on


sy stem



Tâche 1 – « Initialisation de l’ordre »

Acteur

Flux d’information

Moyens informatiques

Locaux

Documentation

• Equipe de 3 courtiers par domaine fonctionnel (9 courtiers au total)

• Type et nombre de titres, type d’ordres, type de marché, garanties

• Application : logiciel TREMA, contrôles de 1er niveau sur l’interface de saisie

• Téléphonie : 2 postes par équipe et 1 fax• Réseaux : LAN, PABX

• Gestion des bâtiments : immeuble avec normes IGH, 4ème étage – ascenseur 4 personnes

• Electricité et climatisation : air conditionné, alarme incendie• Sécurité des locaux : badges sécurisés, procédures

d’évacuation

• Duplication des manuels• Coffres et armoires ignifugés



Banque de détail

Banque commerciale

Banque de flux

Services financiers

Gestion d’actifs


LIGNES D’ACTIVITE

PROCESSUS






P6 – …

IDENTIFICATION DES COMPOSANTS POUR CHAQUE TACHE ELEMENTAIREFu n d A dm i ni s trati o nC le a ri ng

B ro ke r

F un d


C u s to di a n

B a nk






Ge ne rate C ash

P os it i on


sy stem




B ro ke r

F un d


C u s to di a n

B a nk






Ge ne rate C ash

P os it i on


sy stem




Acteur



Locaux

Documentation







d’évacuation


Transactions non enregistrées (intentionnel)

Activité sur type de transaction non autorisée (avec perte

pécuniaire)

Faux et Positions erronées (intentionnel)

Fraude / fraude sur crédits / dépôts sans valeur

Vol / vol avec violence/ extorsion / détournement de fonds /

Détournement de biens

Destructions de biens physiques

Faux et usage de faux, contrefaçons

Effets de complaisance (chèques en bois)

Contrebande

Manipulation de comptes / Usurpation d’identité / etc.

Infraction à la législation fiscale / évasion fiscale (intentionnel)

Corruption

Délit d’initié (sauf pour compte propre de la société)

Vol / vol avec violence

Faux et usages de faux, contrefaçons

effets de complaisance (chèques en bois)

Intrusion dans les systèmes

Vol de données (avec perte pécuniaire)

Compensation/ indemnisation, notamment pour licenciement

abusif

Grèves et autres mouvements sociaux

Sécurité sur le lieu de

travail

Responsabilité civile, événements relatifs au non-respect des

règles d’hygiène et de sécurité sur le lieu de travail,

compensation

Diversité et Discrimination Toute forme de discrimination

Non-respect des obligations fiduciaires/violations des règles de

conduite/commerciales

Non adéquation du produit au client / infractions aux règles de

confidentialité internes et clientèles

violation de la vie privée

Pratiques de vente agressives

Commissions générées par opérations superflues

Utilisation abusive d’information confidentielle

Rupture des obligations du Prêteur

Pratiques anticoncurrentiel les

Pratiques commerciales inappropriées

Manipulation des marchés

Délit d’initié (pour le compte propre de la banque)

Activité non autorisée

Blanchiment d’argent

Déficiences des produits ou services (non autorisés, etc.)

Erreurs de conception

Absence d’investigation sur le cl ient conformément aux règles

Dépassement des limites de crédit

Activités de conseil Litige sur les activités de conseil

Catastrophes naturelles

Pertes humaines de source externe (terrorisme, vandalisme)

Matériel Informatique

Logiciels, Progiciels

Télécommunications

Pannes des infrastructures (électricité, etc.)

Erreur de communication d’informations

Erreurs de saisie, mises à jour ou chargement/transfert des

données

Non respect des échéances ou des responsabilités

Traitement manuel ou automatique erroné

Erreur comptable/ erreur d’affectation

Mauvaise exécution de tâche (exemple : confirmations non

rapprochées, réconciliation défail lantes, erreur de règlement)

Défaut de livraison

Défai llance de gestion du collatéral

Mise à jour de bases de données référentiel les

Manquement à une obligation de reporting

Reporting externe erroné (avec perte financière)

Exécution, Livraison et Gestion des processus

Pertes dues à la défail lance dans l’exécution des transactions

ou dans la gestion des processus, dans la relation avec les

contreparties et fournisseurs

Initiation des transactions,

exécution, et suivi

Monitoring et Reporting

Interruption d’activité et défaillance de systèmes

Pertes dues à l’interruption d’activité ou la défaillance des

systèmes

Systèmes

Dommages aux actifs matériels

Pertes dues aux dommages causés aux biens physiques par

des catastrophes naturelles ou autres événements similaires

Désastres ou autres

événements

Clients, Produits et Pratiques commerciales

Pertes dues à de la négligence ou à des actes non

intentionnels qui ont pour conséquence l’incapacité de remplir

une obligation professionnelle envers un cl ient spécifique (y

compris actes fiduciaires), ou de par la nature ou la conception

d’un produit.

Vente abusive, défaut

d’ information, défaut aux

obligations financières

Pratiques commerciales

ou professionnelles

inappropriées

Services ou produits

défectueux

Sélection et prise de

risque non conformes

Pratiques sociales et Sécurité sur le lieu de travail

Pertes dues au non respect de la législation du travail ou des

accords sur l’emploi, l’hygiène ou la sécurité sur le lieu de

travail, à l’indemnisation du personnel pour accidents

physiques, ou à des événements liés à la

diversité/discrimination

Relation avec les

Collaborateurs

Fraude externe Pertes dues aux actes imputables à un tiers avec intention de

frauder, détournement de biens, ou infraction législative

Vol et fraude

Sécurité des systèmes

Définition Sous-type d'événement Exemples d’activités

Fraude interne Pertes qui impliquent au moins une personne physique

interne, dues aux actes commis avec l’ intention de frauder,

aux détournements de biens, aux infractions légales, aux

infractions de règlement interne de la société, à l’exclusion des

événements de discrimination, etc.

Activité non autorisée

Vol et fraude

Type d’évènement de risque



Banque de détail

Banque commerciale

Banque de flux

Services financiers

Gestion d’actifs


LIGNES D’ACTIVITE

PROCESSUS






P6 – …

MODELISATION DES PROCESSUS EN TACHES ELEMENTAIRES

Fund AdministrationClearing Broker

Fund Manager

Back-office Accounting

Custodian Bank

Order Initiation

Transaction Input

Manually Validation

Validate Operation

Transfer Order (swift)

Generate Cash

Position

Injection in Accounting

sy stem

Accounting validation

Transfer Execution


Fund Manager


Custodian Bank

Order Initiation

Transaction Input

Manually Validation

Validate Operation


Generate Cash

Position


sy stem


Transfer Execution

MODELISATION DES PROCESSUS EN TACHES ELEMENTAIRES


Fund Manager


Custodian Bank

Order Initiation

Transaction Input

Manually Validation

Validate Operation


Generate Cash

Position


sy stem


Transfer Execution


Fund Manager


Custodian Bank

Order Initiation

Transaction Input

Manually Validation

Validate Operation


Generate Cash

Position


sy stem


Transfer Execution



Banque de détail

Banque commerciale

Banque de flux

Services financiers

Gestion d’actifs


LIGNES D’ACTIVITE

PROCESSUS






P6 – …

IDENTIFICATION DES COMPOSANTS POUR CHAQUE TACHE ELEMENTAIREFu n d A dm i ni s trati o nC le a ri ng

B ro ke r

F un d


C u s to di a n

B a nk






Ge ne rate C ash

P os it i on


sy stem




B ro ke r

F un d


C u s to di a n

B a nk






Ge ne rate C ash

P os it i on


sy stem




Acteur



Locaux

Documentation







d’évacuation


Process cartography

Standard risks

reference lists

Risk identification

and evaluation meetings

Risk cartography



Banque de détail

Banque commerciale

Banque de flux

Services financiers

Gestion d’actifs


LIGNES D’ACTIVITE

PROCESSUS






P6 – …

RISQUES « PROCESSUS » IDENTIFIES POINTS DE CONTRÔLE CIBLE

R1 – Oubli/retard dans la saisie des

clients dans le carnet d’ordres

• Contrôle du temps moyen entre la

demande du client et la saisie effective

dans le carnet d’ordres

R2 – Ordres passés sans provisions en

espèces sur le compte du client

• Vérification automatisée du solde du

compte du client

R3 – Erreur d’exécution des ordres passés par le broker (sur les prix, les

quantités, …)

• Contrôle au fil de l’eau de la

cohérence des ordres passés par les gérants et par le back-office

R4 – Non vérification des pouvoirs des transmetteurs d’ordres (identité,

capacité juridique, …)

• Interrogation en temps réel de

l’identité du transmetteur d’ordres

R5 – …

Risk form

Frequency x Impact Matrix

MEETINGS PREPARATION MEETINGS CONSOLIDATION



FINAL COPY

Detailed reviewRisks Identification - Illustration

Agency services

Retail banking

Trading & sales

Asset Manage-

ment

Retail Brokerage

PROCESS

P3 – Giving orders to brokers or trust company

P5 – Customer communication

P4 –Back-office processing

P6 – …

P1 – Opening a bank account

P2 – Orders reception

Corporate finance

Commercial banking

Payment & settlement

RISKS IDENTIFIED IMPACTS

R1 – Delay/default while updating a customer in the order book

� Clients issue� Losses generated by erroneous

operation

R2 – Order issued while the client has insufficient funds

� Losses generated by erroneous operation

R3 – Broker mistake (on prices and/or quantities)

� Losses generated by erroneous operation

� Clients issue

R4 – No ordering party powers check (identity, juridical power…)

� Fines and penalties � Losses generated by erroneous

operation

R5 – …



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6 ways to identify risks:

1. Initiate the risk mapping phase by identifying the most important risks and then extend little by little the list so that it becomes comprehensive

2. Analyze your activities to identify your operational risks following a process approach

3. Analyze the incidents already occurred on your business to identify/detail your operational risks

4. Think about action plans (what are the ongoing or planed action plans? which risk are they supposed to mitigate?)

5. Think of impacts. If the risk occurs, the Bank will be affected at least on one of these aspects: financial, legal, compliance, image, customer, human, process interruption, credit risk, market risk

6. Analyze the recommendations produced by internal audit related to your activity to better your risk identification and description

Detailed reviewRisks Identification - How to identify risks ?

So what?

Why?



FINAL COPY

Risks are evaluated through 2 axes:

• Potential risk frequency (occurrence)

• Impact if occurring

Detailed reviewRisks Identification - How to evaluate risks ?

Level 4

Level 1

Level 2

Level 3

OC

CU

RR

EN

CE

IMPACT



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Detailed reviewSteps 3 & 4 – Definition of KRI and action plans

� Identify indicators for the risks considered as significant by the bank, in order to

follow them (indicators of exposure, warnings, indicators of occurrence): – Study the existing indicators used for other purposes

– Prepare and conduct complementary brainstorms with experts to identify new indicators

– Consolidate collected information

� Implement the tool to collect and update these indicators periodically

� Build monitoring dashboards

� Write risks reports for risks staff or for operational use

� Define thresholds of alarm beyond which it is necessary to take preventive measures

� Define actions to reduce or control the risks

Work to carry out

� To obtain monitoring dashboards of risks

� To implement action plans in order to mitigate the risks

Objectives

� Monitoring dashboards

� Reports for risks staff

� Reports for operational use

� Policy of risk control

Deliverables



FINAL COPY

Detailed reviewDefinition of KRI and action plans – Illustrations

Examples of dashboards of

indicators



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Detailed reviewStep 5 – Collection of incidents and losses

� Study the existing pieces of information in the bank in terms of "Incidents

databases" (Computer issues data base, accounting procedure “Unusual costs and

profits", complaints data base...)

� Design a tool for incidents collection (Excel files, Access, Notes data bases, specific

software), which makes possible the mapping of the incidents noticed to the risks

identified while realising the cartography

� Create an operational risk community and determine the roles and responsibilities of

all stakeholders (designation of coordinators in the departments, definition of a

threshold for loss collection, nomination of an administrator of the database,

definition of authorizations...)

Work to carry out

� To have an incident collection tool and community that guarantee

the exhaustiveness of the process

� To obtain a sufficient historic of incidents in order to allow the use

of the advanced method

Objectives

� Standard incident form� Operational incident database

Deliverables


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Our Solvency II ServiceSpecific information


FINAL COPY

• International Value Proposition

• Regulatory Reporting

• Risk management process & governance

• PMO capability

Solvency IICapabilities

• Insurance expertise • Critical mass of

• BI, data quality and ETL experts

• Proven BI methodology

BICapabilities

We put our Solvency II capibilities onto 3 pillars[Specific information – Our Solvency II Service]

InsuranceCapabilities

Solvency II SupportSolvency II Support

Solvency II Toolkit

Legend: BI – Business Intelligence, ETL – Extract Transform Load, PMO – Project Management Office, SII – Solvency II



FINAL COPY

A good expertise in the of risk management through Basel II/III

Consulting approachIT solutionsMajor referencesSolvency II toolkit

Solvency II Consulting Proposition

We deliver a high added-value approach to our customers.

Solvency II DWH reference model

Solid IT expertise addressing S2 issuesSolid IT expertise addressing S2 issues(BI, ETL, MDM, Managed Testing,…)

References with key players: References with key players: Allianz-AGF, Generali, Groupama

Current Solvency II Assets Complementary Assets

A European community of resources in:A European community of resources in:• Risk management, Compliance and Solvency area• BI /ETL area

+

+

+

+

+

Several marketing events with market experts/services providers/decision makers

+

Solvency II and CGI Risk Management Assets[Specific information – Our Solvency II Service]

Legend: BI – Business Intelligence, DWH – Data Warehouse, ETL – Extract Transform Load, MDM – Master Data Management, SII – Solvency II



FINAL COPY

Externe

Personnel

Technologie

Organisation

0

10000

20000

30000

40000

50000

60000

70000

80000

Montants (€)

Montants des pertes par cause d'incident

Montants Bruts

Montants nets

CGI toolkit provides a « ready-to-use » set of solutions for SII projects

Norms & rules for operational risks

Organisation & processes fürOperational Risk

A datawarehouseexpertise and SII model

Software solutions

� A complete rulebook� A complete set of risks based on best practices of insurers

� A Risk Management Vision (« OpRisk Policy »)� Procedures guide� Organisational models

� A complete model covering all kinds of risks� An in-depth experience of DWH implementation in the

context of SII

� A complete set of possible solutions for the market� A benchmark of possible solutions� References and feedbacks from our projects

Gestion de portefeuille

RELATION CLIENT, VENTE ET SOUSCRIPTION DE CONTRAT

Souscription des contrats Opérations de guichet Banque à distance

GESTION DES CLIENTS, DES DEPOTS ET DES FLUX INTERBANCAIRES

Gestion des ComptesDépôtsGestion des Personnes

Gestion des Flux interbancaires

Gestion des FluxInternationaux

Traitements comptabilités auxiliaires des comptes de dépôts, des Flux interbancaires

GESTION DE L’EPARGNE, DES TITRES ET DE L’ASSURANCE

Gestion des TitresGestion Epargneconvention de services Gestion Assurances Gestion des Successions

Traitements comptabilités auxiliaires Epargne, Titres, Assurances

GESTION DES CREDITS ET DES RISQUES

Gestion administrative et financière

Gestion des Créditstous marchés Gestion des Escomptes Gestion des Risques

Traitements comptabilités auxiliaires des Crédits et des Risques

SUPPORT ET FONCTIONNEMENT DE L’ENTREPRISE

Inspection et Audit Gestion des R.H Gestion Moyens GénérauxPilotage et contrôle

de gestion

MARKETING ET PILOTAGE COMMERCIAL

Marketing opérationnel Pilotage force de vente

DIRECTION GENERALE

DIRECTION DES RISQUESRisk Manager

NIVEAU GROUPE

Inspection Générale

Direction des assurances

Direction de la qualité

Marché Crédit Risque opérationnel

Département 1

Contrôle interneCorrespondant Risque

Opérationnel

Département 2 Département n

DIRECTION

Direction juridique

CO

OR

DIN

ATI

ON

CO

OR

DIN

ATI

ON

NIVEAU FILIALE/ENTITE/METIER

Correspondant Risque

Opérationnel

Correspondant Risque

Opérationnel

Cartographie des Risques par Cause

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Impacts

Pro

bab

ilité

d'o

ccur

ren

ce

Externe Organisation Technologie Personnel

Risque Fa ible

Risque Moye n

Risque Fort

Risque Inacceptable

CGI Solvency-II-Toolkit[Specific information – Our Solvency II Service]

Off-the-shelf SII Business case solutions

� A simple and effective framework to evaluate costs and benefits

� Data configuration� An experience in project set-up and starting phases (before

budget)

Our toolkit supports the client to implement Solvency II requirements.

SOLVENCY II - TOOLKIT

business



FINAL COPY

Solvency II ID Card[Specific information – Our Solvency II Service]

Our service

Pillar 1: Capital requirements

• Agile implementation of standardrequirements for the SCR calculation

• Advice in the development ofSolvency II business case andproject-scoping

• Identify and assess alternative architectural scenarios

• Manage data qualityrequirements

• Model and centralize risk dataand improve their quality

• Industrialize risk calculation

Pillar 1: Capital requirements

• Agile implementation of standardrequirements for the SCR calculation

• Advice in the development ofSolvency II business case andproject-scoping

• Identify and assess alternative architectural scenarios

• Manage data qualityrequirements

• Model and centralize risk dataand improve their quality

• Industrialize risk calculation

The challenge: In the framework of the Solvency II regime European insurers have to adopt their riskmanagement and their risk database to the directive till 2005. The regulation leads to the rethinking ofrisk management. Take the chance to set up your IT in the right way!Our proposition: Using our core assets and core competence we consult you independent fromyour software product during the IT implementation of your Solvency II program. To support youto reach compliance with minimum implementation effort in your IT, to fulfil your reporting dutiesand to reduce cost, consider we as our core support promise.

Pillar 2: Governance

• Implement governance systemfor solid and careful insurancebusiness management

• Implement new risk managementrequirements

• Introduce Own Risk and SolvencyAssessment (ORSA) andinterfaces to BAFIN and otherauthorities

• Support software selection

• Implement robust internalcontrols for risk data collectionand storage in time

Pillar 2: Governance

• Implement governance systemfor solid and careful insurancebusiness management

• Implement new risk managementrequirements

• Introduce Own Risk and SolvencyAssessment (ORSA) andinterfaces to BAFIN and otherauthorities

• Support software selection

• Implement robust internalcontrols for risk data collectionand storage in time

Pillar 3: Regulatory Reporting

• Implement requirements ofSupervisory Reporting (RTS), Public Disclosure (SolvencyFinancial Condition Report) andQuantitative Reporting Templates

• Solvency II reporting set-up

• Consistency and precisionbetween Solvency II andGAAP/IFRS reporting data

Pillar 3: Regulatory Reporting

• Implement requirements ofSupervisory Reporting (RTS), Public Disclosure (SolvencyFinancial Condition Report) andQuantitative Reporting Templates

• Solvency II reporting set-up

• Consistency and precisionbetween Solvency II andGAAP/IFRS reporting data



FINAL COPY

“Solvency II is not just

about Capital. It is a

change of Behaviour”.Thomas Steffen, Former Chairman of CEIOPS

No. 167

Last but not least …



FINAL COPY

No. 168

Evaluation and Follow up


After every training part we will shortly evaluate the activities of the day. Afterwards you can evaluate the complete training.

• Overall impression ��

• Benefit ��

• Achievement of objectives ��

How do you evaluate the training all in all?

• Contents ��

• Definitions ��

• Documentation ��

How do you evaluate the seminar?

• Technical skills ��

• Knowledge transfer ��

• Presentation ��

How do you evaluate the trainer?

• Support by our contributors ��

• Equipment of the seminar room ��

How do you evaluate the trainings center?

FINAL COPY

Our commitment to youWe approach every engagement with one objective in mind: to help clients succeed

Dr. Leo WohlschlagerSenior Managing ConsultantGermany

+49 211 5355 0+49 173 8895 [email protected]

solvency ii professional knowledge presentation training 27032013

Business

pillars solvency capital

impact ofthe solvency

addresses risk

professional knowledge

general regulatory principles

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overall risk situation