date (arial 16pt) title of the event – (arial 28pt bold) subtitle for event – (arial 28pt)...
TRANSCRIPT
Date (Arial 16pt)
Title of the event – (Arial 28pt bold)Subtitle for event – (Arial 28pt)
Standard formula appropriateness for life and general insurers
Head of Department, General Insurance Actuaries
James Orr
Agenda
1. Key Messages
2. Timeline
3. PRA’s approach to assessing appropriateness
4. Outputs of 2014 data request exercise
5. Options for where SF does not capture risk profile
2
• Standard formula should fit a significant proportion of UK firms
• Lots of moving parts on the balance sheet, simplistic comparison to ICA is not the full picture. The PRA does not expect large capital inflows or outflows to result from Solvency II implementation
• The PRA does not promote or encourage the use of an internal model where the standard formula is a good fit
• The Directive requires firms to identify areas where your business materially deviates from the standard formula SCR assumptions. This is your responsibility
• The ORSA allows you to demonstrate assessment of appropriateness
• We will review all firms for standard formula appropriateness before Solvency II implementation
Key messages
4
PRA decision/activity
Firm activity
• Q4 2014
• Q1 2015
• Q2 2015
• Q3 2015
• Q4 2015
• 2016
Transposition
31 March 2015
CP23/14 published
15/10/14 detail on other
approvals applications
PRA assessments of priority SF firms
PRA assess appropriateness of all other standard formula firms
Ongoing 2014 ORSA reviews
Firms start to apply for approvals
including USPs
Other approvals granted or declined by
the PRA
2015 ORSA reviews and 2014 feedback
PRA communication to firms
2015 data request*
Implementation
1 January 2016
5
Timeline
Firm and PRA continuous
evaluation of standard formula
appropriateness
Firms to assess appropriateness
*firms not subject to interim reporting requirement
PRA approach to assessing SF SCR appropriateness
6
The PRA has identified the priority firms for review by end Q1 2015
High-level review of all other firms through 2015
Review will be based on quantitative deviations and qualitative information including the ORSA
Proportionate approach, noting idiosyncratic nature of some firms
Responsibility rests with the firm to identify standard formula appropriateness
Outputs of the 2014 ICAS-SCR data collection exercise
7
High response rate from data request – over 90% of live writers
Life insurers
• Standard formula firms are reporting a larger decrease in SCR capital requirements than general insurers but only a minor drop in capital resources
• Matching adjustment, volatility adjustment and transitionals create significant movement and uncertainty in overall capital position
General insurers
• Standard formula firms capital resources and requirements largely in line with ICG figures under the current regime
Risk areas for Life firms – PRA focus
8
Some examples of potential
indicators of inappropriateness:
Risk areas that may form part of
standard formula reviews
Credit:
Firms hold a variety of credit risky assets that may not be well represented by the average portfolio of corporate bonds assumed within the Standard Formula
Longevity:
Firms with particular sector focus where their portfolio might be considered to have unusual concentrations e.g. deferred, enhanced or impaired annuities
Equity:
Firms pursuing an active investment strategy or with a concentrated equity portfolio
Operational:
Firms with significant outsourcing arrangements and / or a range of legacy systems
Pension risk
General insurers – Transition from ICG to SF-SCR
9
Non-Life Underwriting
Health Underwriting
Market Risk
Counterparty Risk
Operational Risk0
1,000
2,000
3,000
4,000
5,000
6,000
SF firms - SF SCR vs ICG (pre-diversification) £m
SF SCR ICG
Standard formula appropriateness for general insurers
10
Potential indicators of
inappropriateness:
Risk areas that may form part of a
general insurer’s standard formula
reviews
Credit Risk:
Reinsurance counterparty risk
Non-Life underwriting risk:
Where deviations from underlying assumptions are significant
PPOs:
Should be modelled in the life underwriting sub-module (longevity risk). Long term solution may be to consider use of partial internal model – where proportionate to do so
Cat Risk:
Firms with non-standard portfolios with a large element of non-European economic area (EEA) catastrophe risk or with large deductibles or complex outwards reinsurance programmes
Pension Risk
Options where the standard formula does not capture risk profile
• Undertaking Specific Parameters• Partial internal model
• Firm Dialogue and supervisory review• ORSA review and post-ORSA action
plan
• Capital add-on, which may lead to:• Partial internal model• Full internal model
PRA initiated action
• Full
Firm initiated action
• Full
Regular dialogue
• Full
Partial internal models (PIMs) must meet requirements of the Directive set out in Articles 112, 113 and standards in Articles 120-125
• Do not need to be overly complex
• Agree with the PRA the scope of a PIM and set out a timetable to develop it. The PRA appreciates the time needed to build a model
Partial internal models
12
Capital add-ons
The PRA will determine the requirement for capital add-ons ahead of Solvency II implementation
• Can be applied for governance and risk profile deviations including where the standard formula is not appropriate and a model is required
• May be used in conjunction with other measures – they are temporary
• Reviewable
• Ultimately made public
13
Summary
14
• Standard formula should fit a significant proportion of UK firms
• Lots of moving parts on the balance sheet, simplistic comparison to ICA is not the full picture. The PRA is not expecting large capital outflows to result from Solvency II implementation
• The PRA does not promote or encourage the use of an Internal Model where the standard formula is a good fit
• The Directive requires you to identify areas where your business materially deviates from the standard formula SCR assumptions. This is the firm’s responsibility
• The ORSA allows you to demonstrate assessment of appropriateness
• Capital add-ons, where needed, will be used appropriately