Pillar 2 and Pillar 3 of Solvency II

  • Slides: 8
Download presentation
Pillar 2 and Pillar 3 of Solvency II Kathryn Morgan The Association of Financial

Pillar 2 and Pillar 3 of Solvency II Kathryn Morgan The Association of Financial Mutuals 4 April 2011

What we need Solvency II to deliver • Good quality capital • Technical provisions

What we need Solvency II to deliver • Good quality capital • Technical provisions that reflect the reality of the liabilities • Robust solvency capital requirement (SCR) standard formula calibrations that reflect the true economic cost of the risks • Strong requirements on forward looking risk identification and management • Strong emphasis on enhanced transparency of firms’ financial positions and risk management approaches 2

Solvency II - Pillar 2 and 3 Three-pillar approach Pillar 1: Pillar 2: Pillar

Solvency II - Pillar 2 and 3 Three-pillar approach Pillar 1: Pillar 2: Pillar 3: Quantitative capital requirements Qualitative supervisory review Market discipline Technical provisions Minimum capital requirement (MCR) l Solvency Capital Requirement (SCR) l Investment rules l l Market-consistent valuation Validation of internal models Principles for internal control and risk management l Supervisory review process l New focus for supervisor Level of harmonisation l l l Transparency Disclosure Support of risk-based supervision through market mechanisms More pressure from capital markets More pressure from rating agencies 3

Solvency II - Pillar 2 and 3 Pillar 2 Pillar 3 4 functions: Reporting

Solvency II - Pillar 2 and 3 Pillar 2 Pillar 3 4 functions: Reporting • Risk management • RSR • Compliance • SFCR • Internal audit • Actuarial Plus the ORSA And the supervisory review process (SRP), general governance, fit and proper, outsourcing, internal control and capital add-ons. 4

Own risk and solvency assessment (ORSA): Policy Level 1 Articles 45, 35 and 246

Own risk and solvency assessment (ORSA): Policy Level 1 Articles 45, 35 and 246 Level 2 Some commentary on risk management system and reporting Level 3 Pre-consultation paper: December 2010 May 2008 issues paper Five key principles: management responsibility risk coverage forward looking integrated into the business documentation and validation CEIOPS advice to Commission (formerly CP 58) Two main external reports: Solvency & Financial Condition Report (SFCR) – publicly disclosed Report to supervisors (RSR) – NOT publicly disclosed 5

ORSA: Overview Report: sign off by management body Management body • Objectives/purpose • Solo/group

ORSA: Overview Report: sign off by management body Management body • Objectives/purpose • Solo/group • Scope • Ownership • Embedding/use • Granularity • Frequency Report • Strategy • Business plan • Statement of risk appetite • Governance and systems of risk management • Risk tolerance: capacity, limits etc • Assumptions • ORSA vs SCR • Results/analysis • Use of ORSA for decisions • Sign off Process • Methodology • Roles and responsibilities • Data capture and flows • Validation • Dependencies: SFCR & RSR • Systems and controls • Change control 6

Useful links • EIOPA papers https: //eiopa. europa. eu/ • Pillar 5 ones are

Useful links • EIOPA papers https: //eiopa. europa. eu/ • Pillar 5 ones are (submissions to the EC): – System of governance (2009, ex CP 33) – Transparency and accountability (2009, ex CP 34) – Valuation of assets and other liabilities (2009, ex CP 35) – Special purpose vehicles (SPVs) (2009, ex CP 36) – Capital add-ons (2009, ex CP 57) – Reporting and disclosure (2009, ex CP 58) – Remuneration (2009, ex CP 59) – Extension of the recovery period (2010, ex CP 64) • Issues papers (Consultations) : – ORSA – May 2008 – SRP and reporting – August 2008 7

More information can be found on our dedicated web pages: www. fsa. gov. uk/solvency

More information can be found on our dedicated web pages: www. fsa. gov. uk/solvency 2 Email us: solvency [email protected] gov. uk 8