the role of the actuary under solvency ii regime

watsonwyatt.com

The role of the actuary under Solvency II regime

ALAC

Date 20 February 2008

Copyright © Watson Wyatt Worldwide. All rights reserved

2

What will we talk about ?

Solvency II brief update The actuarial profession is a stakeholder in the

Solvency II project The Proposal for Directive and the Actuarial

Function The actuary before and after Solvency II

watsonwyatt.com

The Solvency II project


4

Main Framework

Proposal for Directive on Solvency II – 10 July 2007

Issues Paper CEIOPS : Risk Management and other Corporate Issues – 17 July 2007

QIS3 results

QIS4 preparation


5

The Directive : Solvency II balance sheet

Market value of assets

Free capital

Adjusted SCR

SCR

Risk margin

Best estimate liability

MCR

Factor based approach or internal model

Solvency Capital Requirement

Factor based approach

Minimum Capital Requirement

Risk margin for unhedgeable risksCost of capital approach


6

The Directive : quantitative requirements

Valuation - Art. 73

– Full fair value / No own credit risk standing

Technical provisions – Art. 74-84

– Current exit value

– BE+ risk margin CoC (≠ hedgeable risks)

– Proxies Own funds – Art. 85-98

– Basic / Ancillary = off balance sheet (subject to supervisory approval, for amount and valuation method)

– Tiers and sub-tiers

– Limits: SCR covered ≥ ⅓ tier 1 , ≤ ⅓ tier 3

MCR: 100% basic OF, ≥ ½ tier 1

– Level 2 list


7

The Directive : quantitative requirements

SCR – Art. 99-124 + Annex IV– 99.5% VaR one-year, going concern, on-going monitoring– Unexpected losses on existing business– Structure of std formula, correlations and calibration/ module– Full modelling freedom– Partial models: / sub-module and/or /major business unit

MCR – Art. 125-128– Simple and auditable, breach = unacceptable risk– 80%-90% VaR one-year– ≥ 1 M€ non-life, reins, ≥ 2 M€ life, ≥ quarterly calc.

Prudent person approach – Art. 129-132– Freedom to invest


8

The Directive : qualitative requirements

Fit and proper

Internal control

System of governance

ORSA

Internal audit

Actuarial function

Outsourcing

Risk management

ORSA: new?

Organisation (responsabilities, information)

Written policy, annual review


9

CEIOPS vision

CEIOPS-PII-11/07 Issues Paper on “Risk Management and Other Corporate Issues” of 17 July 2007

– Information on CEIOPS’ possible further work on the subject

– Principle based view on General principles such as Organisational structure, fit and

proper management, Risk management system, Internal control, Actuarial function,

Types of risks such as Strategic risk, Insurance specific risk, Market risk, Credit risk, Concentration risk, Liquidity risk, Operational risk, Reputational risk, and correlation effects


10

Recent events

QIS3 results QIS4 Technical Specifications Public Hearing European Parliament (18 December

2007) Public Hearing European Commission (28 January

2008) Stakeholder meeting European Commission (11

February 2008)


11

Next steps

End Consultation QIS4 Tehnical Specifications (15 February 2008)

Launch QIS4 (1 April 2008) Answers industry (1 August 2008) Vote Parliament expected before summer (?)

Solvency II for Pension Funds– Findings started and 2008 to come to first positions

– Still a lot of divergence in views in Europe

watsonwyatt.com

The actuarial profession is a stakeholder in the Solvency II project


13

Groupe Consultatif is a Stakeholder

GC covers the European actuarial associations since 1978

Gives advice to European Commission and CEIOPS on technical matters in insurance, pensions, investment and financial risks and coordinates professional framework (e.g. mutual recognition agreement)

Detailed information on www.gcactuaries.org


14

Who is the GC ?

Chairman : Ad Kok (Netherlands) Vice Chairmen : Peter Prieler (Austria)/Bruce Maxwell (Ireland) Committees

– General Purposes and Freedoms : Malcolm Campbel (Sweden)

– Education : Ron Hermis (Netherlands)– Investment and Financial Risk : Falco Valkenburg

(Netherlands)– Pensions : Philip Shier (Ireland)– Insurance : Karel Goossens (Belgium)

Groupe’s Secretary : Michael Lucas


15

The profession and the Solvency II project

The actuarial organisations have since the beginning actively participated in the consultation

The Groupe Consultatif is working together with CEIOPS The International Actuarial Association is in contact with

International Association of Insurance Supervisors and International Accounting Standard Board

The Groupe Consultatif has regular contacts with DG Internal Markets and is commenting on Proposal for Directive (amongst others about the Actuarial Function)

The Groupe Consultatif supports the European Parliament and its “rapporteurs” - Peter Skinner. The GC is preparing a hearing in the Parliament


16


The Groupe Consultatif has organised a Solvency II project over the last 3 years with the active participation of more than 30 colleagues from several countries in Europe and led by Rolf Stölting

The Groupe Consultatif has decided to mirror the Solvency II structure in CEIOPS which decided end June to change to 4 expert groups

FinancialRequirementsP. de Chatillon

InternalModels

P. Sharma

Internal Gover-nance, …

G. Bernandino

Groups Supervision

P. Brady

Non LifeA. Olesen

LifeS. Creedon

Hans-PeterWürmli E. Kivisaari

H. Van Broek-hoven


17


The Project Team is publishing a SII Newsletter on a regular basis (see web site)

The Project Team is keeping a permanent inventory of documentation (see web site)

The Project Team has recently produced :

– Additional comments on the Proposal for Directive

– A feedback on convergence of supervision with IORP

– Interventions on the Stakeholder meeting on the Choice of the Risk Neutral Discount Rate and the Renewal of Premiums

– Comments on QIS4 Technical Specifications

Detailed information on www.gcactuaries.org


18


The Project Team is preparing :– A comparison between SII and IFRS balance sheet– A methodology paper on Best Estimate for Technical Provisions

non Life– A proposal for the Solvency II report

The SII project is governed by a Terms of Reference– New Project Manager to be elected in 2008

The Groupe Consultatif is co-chairing a Coordination Groupe for Proxies

– Coordination of local working groupes on the approach of proxies for the BE technical provisions in Non Life, Life and Workmen’s Compensation


19

The European context : Coordination GroupThe European context : Coordination Group

Steer and coordinate the work of national expert groups in the work on proxies

Develop harmonised approaches to the calculation of BE Report including testing proposal for proxies under QIS 4 –

December 2007 (focus on non life)

Ceiops Groupe Consultatif

COORDINATION GROUP

FR UKSENO PTBE IE IT SIBG DE NL


20

The Belgian context

A Belgian expert group has been created at the request of CBFA

CBFA AssuraliaKVBAARAB

COORDINATION GROUP

WGNon Life

WGLife

WGWorkmen’s

Compensation


21

The Belgian CG

Coordination Group in Belgium– Including

Chandelle F, Cortese E, De Vos P, Kaiser L

Goossens K (Chair)

– Working groups installed and coming togetherNon Life Life WCCorlier F Ozkan F Maes JM

Janssen E Schouteten S Meganck A

Van Camp E Vandenbosch G Mellery X

Vanderheyden P Wuiame S Piccaluga R

– First objective : input Interim Report on Proxies– Continued efforts : coordination platform– Extended comments on QIS4

watsonwyatt.com

The Proposal for Directive and the Actuarial Function


23

The Proposal for a Directive and the Actuarial Function

The Proposal for a Directive defines an Actuarial Function Article 47 is part of Title I - Chapter IV (Conditions Governing

Business) – Section 2 (System of Governance) and introduces the Actuarial Function

– “1. Insurance and reinsurance undertakings shall provide for an effective actuarial function … “

– Use of the term “Function” avoids reference to a “qualified person”

– Effective ? At several places there is reference to actuarial methods


24

Technical provisions under SII

Proposal for Directive Section 2 – Art 74 to 84– Based on current exit value– Market consistent– Best Estimate (BE) + Risk Margin (RM)

To be valued seperatly If future cash-flows can be replicated by financial instruments

for which the market value is directly observable, the corresponding value can be used


25


To undertake 9 tasks of which 6 concern the technical provisions

“(a) to coordinate the calculation of the technical provision ; (b) to ensure the appropriateness of the methodologies and

underlying models used as well as the assumptions made in the calculation of technical provisions ;

(c) to assess the sufficiency and quality of the data used in the calculation of the technical provisions ;

(d) to compare the best estimate against experience ; (e) to inform the administrative or management body of the

reliability and adequacy of the calculation of the technical provisions ;”


26


Also when data is missing … “(f) to oversee the calculation of technical provisions in the cases set

out in Article 80”

Article 80 :

“If insurance and reinsurance undertakings have insufficient data of appropriate quality to apply a reliable actuarial method to a subset of their insurance or reinsurance obligations, or amounts recoverable from reinsurance contracts and special purpose vehicles, a case-by-case approach may be taken with respect to the calculation of the best estimate.”


27


Or to consider underwriting or reinsurance …“(g) to express an opinion on the overall underwriting policy;

(h) to express an opinion on the adequacy of reinsurance arrangements”

– Pricing and the respect of it ?– Also the lack of reinsurance ?


28


AND to contribute to risk modelling !“to contribute to the effective implementation of the risk

management system referred to in Article 43, in particular with respect to the risk modelling underlying the calculation of the capital requirements set out in Chapter VI, Sections 4 and 5 and the assessment referred to in Article 44.”

– Article 43 is about Risk Management

– Article 44 is about the Own Risk and Solvency Assessment

– Chapter VI, Sections 4 and 5 : the Solvency Capital and the Minimum Capital Requirement

– The Actuarial Function is explicitly involved in the Risk and Solvency analysis


29


Who is going to fulfil the function ?“2. The actuarial function shall be carried out by persons with

sufficient knowledge of actuarial and financial mathematics and able where appropriate, to demonstrate their relevant experience and expertise with applicable professional and other standards.”

– Qualified actuaries can apply but not exclusively

– The profession organises already and has to further develop professional and ethical standards

Actuarial professional bodies under the guidance of the Groupe Consultatif and the International Actuarial Association is respecting mutual recognition standards


30


Risk Management is crucial– It requires an effective system comprising strategies, processes

and reporting

– It is integrated into the organisational structure

– The system covers the risks included in the SCR but also the risks which are not or not fully included

– It complies with the “prudent person” principle for investments

– It is covered by a Risk Management Function

– It is responsible for the design, the test and validation, the documentation, the analysis and the reporting of results of internal models

– Application of standard formula also …


31


The concept of ORSA (Own Risk and Solvency Assessment)

– Is part of Risk Management– Takes into account the specific risk profile, the risk

tolerance limits and the business strategy– Monitors compliance with the capital requirements– Is enabled by processes to identify and measure risks– Goes together with recalibration of models that lead to

SCR– Takes into account the strategic decisions– Is regularly performed or when significant change in risk

profile– Is communicated to supervisory authorities


32

CEIOPS and the Actuarial Function

CEIOPS-PII-11/07 Issues Paper on “Risk Management and Other Corporate Issues” of 17 July 2007

– Information on CEIOPS’ possible further work on the subject

– Comments expected by 17 October 2007– Principle based view on

General principles such as Organisational structure, fit and proper management, Risk management system, Internal control, Actuarial function,

Types of risks such as Strategic risk, Insurance specific risk, Market risk, Credit risk, Concentration risk, Liquidity risk, Operational risk, Reputational risk, and correlation effects


33


The CEIOPS sees tasks for the Actuarial Function such as making an assessment of :

– The overall underwriting policy– The claims management procedures– The methods used and assumptions made in the calculation of

technical provisions– The sufficiency and quality of data used in the calculation of

technical provisions – The impact of management actions included in the technical

provisions– The overall investment policy and management– The overall reinsurance and risk mitigation– The IT systems used in actuarial procedures


34


The CEIOPS gives a view on qualitative aspects :– The Actuarial Function requires understanding of the stochastic

nature of insurance and risks inherent in assets and liabilities

– Actuarial methods are used to assess risks, determine adequacy of premiums, and establish technical provisions

– The assessment of the Actuarial Function does not imply responsability for the issues

– The Actuarial Function produces an annual report

– The Actuarial Function monitors the measures implemented in the pursuit of the recommandations


35


The CEIOPS (re)introduces the risk modelling function

– Such a function must be in place when internal models are used

– It develops and documents all features of the internal model

– It is responsible for the integration of the actuarial model with the risk management system

– It ensures the “use test”

– This does not compare with Proposal for a Directive

– It is not clear if actuarial function can be combined


36

European Parliament and the Actuarial Function

In first instance the European Parliament has agreed with article 47

Recent feed back seems to re-open discussion – Different functions in pillar II

– Problem of Actuarial Function Lack of actuarial resources Additional cost for smaller companies

– GC has reacted and is supported by European Commission (DG Internal Markets)

watsonwyatt.com

The Future of the Actuary


38

The actuary pre- and post SII

SII is a mile stone for the development of the actuarial world– New concepts, multiple discussion groupes, research and

development– Actuaries are in the middle of the events as neutral

professionals SII offers opportunities

– Shape the actuarial function– Prove of added value in risk modelling and risk

management Prepare to take the opportunities

– Contribute to change – Organise professional environment


39

The actuary pre- and post SII

Challenges to be addressed– Meet the expectations of the environment

– Increase number of professionals

– Open to other experts in the same field (financial mathematics, risk modellers, …)

– Organise to take on the responsibilities Challenges are similar in your company to those in

the “political” world– Together we are stronger


40

Karel Goossens– +32 2 663 87 00

– +32 475 55 14 47

– [email protected]

Thank you for your attention

the role of the actuary under solvency ii regime

Documents