Milliman Solvency II Readiness Assessment Tool first industry survey: Ireland – Life Assurance

August 13th, 2014 No comments

Milliman developed the Solvency II Readiness Assessment Tool to help companies prepare and plan for Solvency II. The tool is designed for life and nonlife direct writing and reinsurance companies. It enables companies to rate themselves using a range of detailed questions covering the full scope of Solvency II. A score of 5 identifies areas that are 100% ready, whereas a score of 1 identifies areas where no progress has been made.

Thirteen life companies based in Ireland shared their current levels of preparedness. In this briefing, Milliman’s Andrew Kay and Mike Claffey have consolidated the results to give an overall idea of the issues facing companies.

Capital management in a Solvency II world

July 18th, 2014 No comments

Solvency II will change the way insurance and reinsurance undertakings determine their capital requirements as well as introducing new rules with regard to what forms of capital can be used to meet those requirements.

This paper by Eamonn Phelan, Scott Mitchell, and Sinead Clarke addresses some of the key issues, including the need for a robust decision-making framework, how investment strategy fits in, uses of reinsurance, and the new regulatory landscape. The paper also outlines Pillar II and Pillar III requirements.

PRA publications on recognition of deferred tax and data collection exercises

April 17th, 2014 No comments

On 16 April 2014 the UK Prudential Regulation Authority (“PRA”) published Supervisory Statement SS2/14 “Solvency II: Recognition of deferred tax” which sets out the PRA’s expectations of firms regarding the recognition of deferred tax in Solvency II. The supervisory statement outlines the PRA’s expectations in relation to the credibility of projected future taxable profits, as well as highlighting areas to which firms should pay particular attention when considering whether they can:

• Recognise deferred tax assets (“DTAs”) on their Solvency II balance sheets;
• Recognise the loss-absorbing effects of DTAs when performing 1/200 shocks to calculate the solvency capital requirement (“SCR”).

The supervisory statement is aimed at all insurance companies that will be subject to Solvency II, including both internal model and standard formula firms, and reflects feedback that was received by the PRA in response to a public consultation carried out during February and March 2014.

The guidance contained in the supervisory statement, in particular around the projection of future taxable profits to calculate the value of DTAs, serves as a useful clarification of the current Solvency II level 2 guidelines in these areas. However, areas of uncertainty remain, in particular in relation to the basis that firms should use for determining the future profit projections.

PRA summary of Solvency II data collection exercises

On 14 April 2014 the PRA published a summary of the data collection exercises it intends to request from firms during 2014. The main focus of these exercises is to support the transition to Solvency II and aid in preparations for the new regime. A summary of the data collection exercises is given below.

Solvency II briefing

These data collection exercises are similar to those performed in previous years. The most significant difference is the requirement for non-IMAP firms to take part in the SCR comparison exercise (only IMAP firms were required to participate in this exercise in 2013).

The PRA asks firms to be aware that these exercises are in addition to any data collection exercises which may be requested by the European Insurance & Occupational Pensions Authority (“EIOPA”) and that the timing of the SCR comparison exercise is depended on the publication of EIOPA’s Technical Specifications for the Preparatory Phase (due at the end of April 2014), which firms must use when calculating the various elements of their Solvency II balance sheet.

The PRA state that the data collection exercises for 2015 are yet to be determined. Any additional exercises will be to support the submission of information that the PRA expects from firms that are in-scope to report under EIOPA’s preparatory guidelines. The PRA also state that they will make further information available in Q3 2014 regarding National Specific Templates for reporting.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website.

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant, or email for more information.

This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.

A pragmatic approach to modelling real-world interest rates

March 14th, 2014 No comments

Even without the advent of Solvency II and the appeal of internal models to model capital more accurately, it’s likely that the events following the global financial crisis (GFC) would have sharpened up European insurance companies’ risk modelling capabilities.

In Asia, insurance companies are also investing significant resources in developing their own economic capital models. Boards of directors have been charged with the measurement of risk and the need to plan their capital requirements through such things as an Own Risk and Solvency Assessment (ORSA) and an Internal Capital Adequacy Assessment Process (ICAAP) in Singapore and Malaysia, respectively.

Much has already been written about building complex Monte Carlo engines to calculate risk measures. This report by Milliman’s Clement Bonnet and Nigel Knowles addresses a question about the front-end of the risk measurement process: How do we project our yield curve?

Milliman Asia ERM Newsletter, February 2014

February 20th, 2014 No comments

This Milliman Asia ERM Newsletter highlights the latest developments in enterprise risk management (ERM) across the Asia Pacific region. ERM activity in the insurance sector is accelerating at a rapid pace around the region, especially since a number of regulators have introduced Own Risk and Solvency Assessments (ORSA). Even in countries where ORSA has not been introduced yet, there is an increased interest among risk managers who realize the value that ERM can add to their business through enhanced business resilience.

The newsletter features regulatory and market developments related to ERM from India, Singapore, and Thailand. An article by Neil Cantle on the complexity of risk within businesses is also included.

EIOPA announces more details on 2014 Europe-wide insurance stress test

January 23rd, 2014 No comments

In October 2013, the European Insurance and Occupational Pensions Authority (EIOPA) announced its intention to undertake stress testing of the European insurance industry in its 2014 work plan. They have now (20th January) updated their website to give more details on this insurance stress testing exercise.

The stress testing exercise is expected to include:

• Market risks under a combination of historical and hypothetical scenarios
• Insurance risks
• Impacts of low yields and low interest rates

EIOPA plans to consult with the industry in March 2014 and launch the Europe-wide stress test exercise by 30 April. National Supervisory Authorities (“NSA”) will collect and validate submissions by 20 June for onward submission to EIOPA. EIOPA currently expects to publish the results in November 2014.

As in previous stress testing exercises, each local NSA will be responsible for identifying and contacting individual insurers for inclusion in the exercise. It is not clear at this stage which insurers will be asked to participate in the stress testing exercise.

A link to the EIOPA 2014 insurance stress testing timetable and process is here.

If you have any questions or comments on this eAlert or any other aspect of Solvency II, please contact your usual Milliman consultant.

This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.

Recapping insurance industry’s 2013 with a look ahead to 2014

January 7th, 2014 No comments

In this interview with InsuranceERM (subscription required), Milliman’s Neil Cantle and Elliot Varnell reflect on key issues impacting Europe’s insurance industry in 2013. They also discuss some challenges the industry may face in 2014.

Here’s an excerpt from the interview:

What will 2013 be remembered for?
Varnell: I would suggest that it was the year that Solvency II was finally “agreed” at the top level after a few years of debate and wrangling between the Council, Commission and Parliament.

Ironically, it was also the year when economically based regulatory capital was to some extent de-emphasised as the PRA published on Early Warning Indicators (see IERM, 4 October) and the FSB announced its G-SII list (see IERM, 19 July) and kicked off a project through the IAIS to come up with a global metric for regulatory capital (see IERM, 12 December.)

But also the year that many insurers – especially life insurers – rebalanced their focus away from Solvency II and regulatory capital and turned to looking for the best opportunities for value creation in their business. The refocus on product development and investment in infrastructure stand out as examples of areas that insurers have re-focused onto value creation.

What will be the biggest ERM challenge of 2014?
Cantle: I think many firms are still struggling to bring ERM to life and make it truly operational. If ERM is done simply as a compliance exercise then it can cost a lot of money and simply be a burden. If it is done to bring insights to the business and improve the opportunity for discussion about performance uncertainty then it can improve resilience and add significant long-term value to the business. The challenge is therefore to look beyond templates and documentation and make it strategic. Concepts like risk appetite require a multi-variate view of performance, so that indicators are seen in context, and many firms still cannot do that.

Central Bank of Ireland industry briefing on Preparatory Guidelines for Solvency II

November 25th, 2013 No comments

At an industry briefing this morning the Central Bank of Ireland outlined their plans to implement EIOPA’s Guidelines for the Preparation of Solvency II. The briefing covered a summary of the CBI Guidelines, and an outline of their supervisory approach for the Preparatory Guidelines.

The CBI Guidelines follow the EIOPA Guidelines quite closely. In the summary below we have noted some key points from the CBI Guidelines and the proposed supervisory approach.

The CBI has indicated that it will conduct surveys on companies’ level of preparedness in Q3 2014 and Q3 2015 and we expect that Solvency II implementation will receive increased regulatory focus from now on.

The Introduction to the CBI Guidelines on Preparing for Solvency II includes information on general issues as well as on the scope of the Guidelines. The Guidelines apply from 1 January 2014 until the implementation of Solvency II. The provisions could still be reviewed should Solvency II implementation be later than 1 January 2016, however following the recent trialogue agreement on Omnibus II this is now highly unlikely.

The principle of proportionality is embedded in the guidelines and they should be applied in a manner which is proportionate to the nature, scale and complexity of the risks inherent in the business of an undertaking. The CBI has reflected this by aligning the requirements with the PRISM framework.

Thresholds based on PRISM impact categories are set out in the Guidelines. The relevant impact category is the one that applies at 31 December 2013. Where a firm’s impact category is reclassified from high/medium-high impact to low/medium-low impact, the Guidelines will continue to apply in the way they do for high/medium-high impact undertakings. Where a low/medium-low impact undertaking is re-categorised as high/medium-high impact, all Guidelines will apply in the way they do for high/medium-high impact undertakings.

The Guidelines apply to all undertakings expected to be within the scope of the Solvency II Directive. There are some limited exclusions for certain companies due to size and other criteria such as being in run-off. Companies must notify the CBI if they expect that the Guidelines do not apply.

The Guidelines relevant to groups are addressed to groups where the Central Bank expects to be the group supervisor under Solvency II.

The Guidelines cover four key areas:

I. System of governance
• High & Medium-High impact companies: subject to all Guidelines from 2014
• Medium-Low & Low impact companies: subject to all of the general requirements from 2014. The four key functions (Risk Management, Internal Audit, Compliance, and Actuarial) should be established & the associated Guidelines apply from 2015.
• The CBI indicated that Medium-Low and Low impact companies will need to work on risk policies in 2014.
• Also, companies will have flexibility in how they organise their control functions and that, with the exception of the Internal Audit function, it will be possible to integrate functions. They also reaffirmed that it would be possible to outsource any/all functions.
• For Medium-High and High impact companies, the CBI has indicated that it will not be necessary to calculate technical provisions in 2014 with the focus being on data and methodologies. The Actuarial function report will not therefore need to include technical provision results but instead report on how the compliance of data and methodologies and the areas where work is needed. However the CBI considers it to be ‘best-practice’ for companies to conduct ‘dry-runs’ of the calculation process in order to road-test their systems in 2014. EIOPA is expected to publish a revised Pillar 1 Technical Specification in Q2 2014.

II. Forward Looking Assessment of the undertaking’s own risk (based on Own Risk and Solvency Assessment (“ORSA”) principles)

• High & Medium-High impact companies: Perform & report on overall solvency needs in 2014. Perform & report on overall solvency needs, compliance on a continuous basis, and deviation from SCR assumptions using own structured report in 2015.
• Medium-Low & Low impact companies: Perform & report on overall solvency needs using CBI ORSA / FLAOR tool in 2014 & 2015.
• The online FLAOR tool for Low and Medium-Low impact companies is expected to be available in early Q3 2014. An electronic upload facility is expected to be available for Medium-High and High companies’ reports (pdf, word, excel) in early Q2 2014.
• The FLAOR in 2014 will need to address quantitative requirements at risk category level.
• EIOPA is expected to publish a document setting out the assumptions underlying the Standard Formula SCR in Q2 2014 to help companies judge the appropriateness of the Standard Formula to their business.

III. Submission of information to National Competent Authorities (“NCAs”)

• High & Medium-High impact companies: Prepare reporting systems during 2014. Submit annual (as at YE 2014 ) & quarterly templates (as at Q3 2015) during 2015.
• Medium-Low & Low impact companies: Prepare reporting systems during 2015.
• Pillar 3 reporting will be via XBRL. EIOPA is developing a tool to facilitate this process. Commercial tools (such as STAR Vega from Milliman) will also provide the functionality to allow uploading via XBRL.

IV. Pre-application for internal models.

• The CBI Guidelines that relate to pre-application for internal models only apply to insurance or reinsurance undertakings engaged in the Central Bank pre-application process.

How Milliman can help

To help companies with this process Milliman has developed a Solvency II Readiness Assessment Tool that is relevant for life / non-life / (re)insurance companies that:

• Provides companies with a clear assessment of the status of the organisation’s Solvency II project across key areas;
• Includes a separate assessment for both the Preparatory Guidelines and full Solvency II implementation;
• Identifies work remaining in key areas and assists with project planning;
• Is an easy-to-use reference tool with automatic links to the Solvency II regulations;
• Enables benchmarking against industry best practice.

This brochure provides more information on this easy-to-use tool. If you would like to arrange a free demonstration of the Solvency II Readiness Assessment Tool please contact your usual Milliman consultant.

This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.

Milliman Solvency II briefing – Omnibus II provisional agreement

November 14th, 2013 2 comments

On 13 November 2013 the European trilogue parties, comprising the European Parliament, the European Commission and the Council of the European Union reached a provisional agreement on the Omnibus II Directive allowing Solvency II to move forwards towards implementation. The Directive will now be subject to a final approval from the European Council and a Plenary vote by the European Parliament, currently expected to be held on 3 February 2014, before it can be approved into European legislation.

A press statement from the Presidency of the Council of the European Union stated that the agreed new rules contain “so-called “long term guarantees” (LTG) measures which adjust current Solvency II framework to cope with “artificial” volatility and low interest rate environment, and allow for the smooth transition from the Solvency I regime to Solvency II.”

In addition, the Omnibus II Directive is understood to include enhanced requirements for risk management, supervisory review process, public disclosure and the possibility to review the LTG measures, in order to ensure prudence and transparency of the framework.

At a press conference held on 14 November 2013 by Burkhard Balz MEP, the European Parliament economic and monetary affairs committee (ECON) rapporteur for Omnibus II, and Sharon Bowles MEP, Chair of the European Parliament’s ECON Committee, Balz noted that the Omnibus II text should present an “efficient and practical solution” under Solvency II for firms offering long-term guarantee products and should ensure that these firms can continue to operate in difficult market conditions and in low interest rate environments. Specifically, Balz noted that the solutions set out in the Omnibus II Directive should allow firms to continue to offer these products and to maintain their role as long-term investors.

The press conference confirmed a number of details of the content of the approved text, including:

• A matching adjustment (MA) to be applied to the discount rate used to value annuity-style liabilities meeting specific requirements in relation to the liability cashflows and the assets held to match these. The value of the MA looks set to be calculated as the spread over risk-free rates on the matching assets less an allowance for defaults (the fundamental spread). The fundamental spread is expected to have a floor of 30% of long-term average spreads for government bonds and 35% of long term spreads for other eligible assets.
• A volatility adjustment to be applied to the discount rate used to value all other business, calibrated as 65% of the risk-adjusted spread of assets in a representative portfolio.
• Transitional arrangements for existing life insurance business to adjust to Solvency II over a period of 16 years.

While the package of measures has deviated from that set out by the European Insurance and Occupational Pensions Authority (EIOPA) following the long-term guarantees assessment (LTGA) run earlier this year, in particular with less onerous calibrations on a number of the measures, Bowles and Balz noted that this has been balanced by the introduction of important qualitative requirements relating to the governance and disclosure of these measures. The press conference highlighted the need for firms to maintain a liquidity plan, for proper supervision of the LTG measures and for these measures to be applied in a transparent way.

While Balz acknowledged that the new rules were ambitious he highlighted the importance of respecting the principle of proportionality when applying them. In particular, he noted that while the reporting obligations will include asset-by-asset reporting and annual reporting, exemptions for certain parts may be available for smaller firms.

Significantly for European groups, the approved text includes an extended provision for transitional equivalence for third countries. This would allow the European Commission to grant provisional equivalence to third countries for a period of 10 years, at which point it would be reviewed with the option to extend for a further 10 years (and potentially indefinitely). The approval of this provision would allow the US to be considered as an equivalent regulatory regime, allowing European firms with US subsidiaries to use local regulatory methods when calculating group solvency requirements. While this provision has been developed as a specific response to the US regulatory situation it has been stressed that this will provide flexibility to develop pragmatic solutions for other regulatory regimes to ensure that European groups are not disadvantaged when operating in third countries.

Balz confirmed that the expected timeline is for Solvency II to be operational for firms from 1 January 2016 with transition into national regulation required by 31 March 2015. These dates are expected to be confirmed at an EP Plenary session in Strasbourg later this month.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found here.

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant, or email us here for more information.

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Lack of management action plans may leave European insurers exposed

November 8th, 2013 No comments

This article (subscription required) highlights Milliman’s “Dynamic policyholder behavior and management actions survey report”. In the article, Ed Morgan discusses how the absence of management action plans by European insurance firms can lead to shortcomings in governance. Here is an excerpt:

The majority of European insurers are not formally documenting how management teams plan to respond to changing economic conditions and are not modelling the impact of such management behaviour in stress scenarios, a survey has found.

Only five out of 20 European firms currently possess an official plan listing the actions management will take in certain economic scenarios, according to the survey by actuarial consultancy Milliman.

This is despite such plans being a requirement for European insurers under the Solvency II directive.

Ed Morgan, managing director of Milliman’s operations in Italy and Central Eastern Europe, says not having well-documented management actions is a governance issue, as well as being an issue for modelling and financial reporting.

“The absence of management action documents and model functionality can sometimes be because firms haven’t fully appreciated their importance,” says Morgan. “But you could also argue that sometimes management themselves might prefer not to be subject to this high spotlight governance in case it makes it harder to justify the actions they take in real life after the event.”

… The reason why some European firms have to do model management actions, despite regulatory pressure, is unclear, says Morgan.

“One thing may be lack of awareness of how modelling management actions can materially improve results. If you model management actions in an overly simplistic way, then they’re very likely to be suboptimal under various stress scenarios, and likely to overstate required risk capital,” he says.

The way companies are organised may also play a part in how management actions are modelled, says Morgan. For example, the actuaries that are building the model may not be close to the personnel setting investment decisions. “So when it comes to modelling management actions in regards to investment decisions, one set of people have one view on what they’re doing, another set of people are doing the modelling, and potentially a lack of communication and of understanding prevents a proper linkage being made between the two,” Morgan adds.