Date (Arial 16pt)

1. Standard formula appropriateness for life and general insurers Title of the event – (Arial 28pt bold) Subtitle for event – (Arial 28pt) James Orr Head of Department, General Insurance Actuaries Date (Arial 16pt)

2. Agenda • Key Messages • Timeline • PRA’s approach to assessing appropriateness • Outputs of 2014 data request exercise • Options for where SF does not capture risk profile

3. The standard formula solvency capital requirement Solvency Capital Requirement (SCR)

4. Key messages • 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

5. Timeline Implementation 1 January 2016 Transposition 31 March 2015 CP23/14 published 15/10/14 detail on other approvals applications Firms start to apply for approvals including USPs Other approvals granted or declined by the PRA Firm and PRA continuous evaluation of standard formula appropriateness 2015 data request* PRA assessments of priority SF firms PRA assess appropriateness of all other standard formula firms 2015 ORSA reviews and 2014 feedback Ongoing 2014 ORSA reviews Firms to assess appropriateness PRA communication to firms *firms not subject to interim reporting requirement PRA decision/activity Firm activity

6. PRA approach to assessing SF SCR appropriateness 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 formulaappropriateness

7. Outputs of the 2014 ICAS-SCR data collection exercise 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

8. Risk areas for Life firms – PRA focus Some examples of potential indicators of inappropriateness: Risk areas that may form part of standard formula reviews 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 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 Operational: Firms with significant outsourcing arrangements and / or a range of legacy systems Pension risk

9. General insurers – Transition from ICG to SF-SCR

10. Standard formula appropriateness for general insurers Potential indicators of inappropriateness: Risk areas that may form part of a general insurer’s standard formula reviews 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 Credit Risk: Reinsurance counterparty risk Pension Risk

11. Options where the standard formula does not capture risk profile Regular dialogue Full Firm Dialogue and supervisory review ORSA review and post-ORSA action plan Undertaking Specific Parameters Partial internal model Firm initiated action Full PRA initiated action Full Capital add-on, which may lead to: Partial internal model Full internal model

12. Partial internal models 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

13. 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

14. Summary • 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