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The role of the actuary under Solvency II regime

The role of the actuary under Solvency II regime. ALAC Date 20 February 2008. 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

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The role of the actuary under Solvency II regime

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  1. The role of the actuary under Solvency II regime ALAC Date 20 February 2008

  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

  3. 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 Solvency Capital Requirement Factor based approach or internal model Minimum Capital Requirement MCR Factor based approach Risk margin for unhedgeable risks Cost 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 System of governance Fit and proper ORSA Actuarial function Organisation (responsabilities, information) Internal control Risk management Internal audit Outsourcing Written policy, annual review ORSA: new?

  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

  12. 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 profession and the Solvency II project • 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 Groups Supervision P. Brady InternalModelsP. Sharma Internal Gover-nance, …G. Bernandino FinancialRequirementsP. de Chatillon Non LifeA. Olesen Life S. Creedon Hans-Peter Würmli E. Kivisaari H. Van Broek-hoven

  17. The profession and the Solvency II project • 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 profession and the Solvency II project • 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 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 BE BG DE FR IE IT NL NO PT SE SI UK

  20. The Belgian context • A Belgian expert group has been created at the request of CBFA KVBA ARAB CBFA Assuralia COORDINATION GROUP WG Non Life WG Workmen’s Compensation WG Life

  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 together Non Life Life WC Corlier 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

  22. 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. The Proposal for a Directive and the Actuarial Function • 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. The Proposal for a Directive and the Actuarial Function • 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. The Proposal for a Directive and the Actuarial Function • 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. The Proposal for a Directive and the Actuarial Function • 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. The Proposal for a Directive and the Actuarial Function • 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. The Proposal for a Directive and the Actuarial Function • 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 Proposal for a Directive and the Actuarial Function • 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. CEIOPS and the Actuarial Function • 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. CEIOPS and the Actuarial Function • 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. CEIOPS and the Actuarial Function • 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)

  37. 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 • Karel.goossens@watsonwyatt.com Thank you for your attention

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