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Solvency II: Final Agreement Polish Industry Perspective

Solvency II: Final Agreement Polish Industry Perspective. Witold Walkowiak. Joint International Seminar of the Geneva Association for the Study of Insurance Economics Polish Chamber of Insurance Warsaw University of Technology, Department of Management Warsaw, 29 June 2009.

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Solvency II: Final Agreement Polish Industry Perspective

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  1. Solvency II: Final AgreementPolish Industry Perspective Witold Walkowiak Joint International Seminar of the Geneva Association for the Study of Insurance Economics Polish Chamber of Insurance Warsaw University of Technology, Department of Management Warsaw, 29 June 2009

  2. Poland: fast growing insurance market Number of Insurance Companies Gross Written Premium (bln EUR) Source: Eurostat, Polish Financial Supervision Authority, Deloitte projection

  3. Polish insurance market is open to foreign capital and will be exposed to … cross border supervision # of companies Share Capital GWP 23% 19 48% 52% 46 77% Domestic capital/control Foreign capital/control

  4. Towards Solvency II in Poland: Who drives the process ? Financial Supervision Authority (KNF) • 2005 – 2008 Presentations and meetings with the market on Solvency II • Introduction and facilitation of QIS exercise on the Polish Market The Ministry of Finance • Council for Financial Markets Development (RRRF) Polish Chamber of Insurance (PIU) • Communication and discussion platform for the market • Discussion partner for CEA and Polish regulators/supervisors

  5. Towards Solvency II in Poland: Actions driven by the Polish Chamber of Insurance • Solvency II Working Group formed in 2004 and meets on a regular basis • Since 2007, the Solvency II related activities of the Chamber supported by Deloitte • Solvency II related issues presented by various professional speakers: • US Solvency Capital regulations and Mack reserving methodology for non-life – EMB Consulting • FSA experience and UK market approach – AVIVA • Basel II – Deloitte • Standard Approach for life and non-life – CEA • German GDV Solvency Model – GDV • Swiss Solvency Test – Thillinghast • Solvency II v. IFRS 4 – Peter Clark from IASB • Solvency II Group Regime and Support – Karel van Hulle EC • Communication • E-room for the exchange of information between Solvency II Working Group members • Key documents of CEOIPS, CEA, EC or other Solvency II stakeholders are summarized and made available of PIU website • Annual seminars on relevant aspects of Solvency II

  6. Towards Solvency II in Poland: Quantitative Impact Studies • QIS 1: September – December 2005 : Calculation of Technical Provisions • Life – 4 companies (67% of life provisions) • Non-life – 9 companies (91% of non-life provisions) • QIS 2: May – July 2006: + Valuation of Assets&Liabilities, SCR, MCR • Life – 9 companies (76% of life provisions) • Non-life – 13 companies (75% of non-life provisions) • QIS 3: April – June 2007: + Group Capital Requirements, Internal Models • Life – 9 companies (74% of life provisions) • Non-life – 15 companies (80.9% of non-life provisions) • QIS 4: April –June 2008: + Proxies and Simplifications of Technical Provisions • 25 out of 65 Polish companies participated • Life – 11 companies (86% of life technical provisions) • Non-Life – 14 companies (81% of Gross Premium Written) • QIS’s provided valuable learning opportunity for all parties involved in preparations for Solvency II in Poland

  7. QIS results: Total assets and technical provisions QIS4 to current • Assets roughly in line with current valuations • Material decrease of technical provisions • Best estimate/market consistent valuation vs. prudent valuation • higher discount rate • recognition of VIF in QIS4 valuation • Insufficient guidelines regarding reserve calculations: • future administration costs • future management actions • negative reserves in the calculations • Those were pre 2008 crises results! Median 7

  8. QIS results: Own Funds QIS4 to current • Own funds increased driven mainly by lower provisions • Equity booked in Polish companies is mostly Tier 1 • Capital excess derived from fair value approach might have been lowered as markets moved down in 2008 Median 8

  9. QIS4 results: Own Funds/SCR and Basic Own Funds/MCR Median • As per QIS4 results, the capital base of Polish insurance sector is more than sufficient relative to new capital requirements 9

  10. QIS results: Solvency Position and Internal Models Solvency Position Increase of Own Funds surplus more than 50% mainly for life companies (6 out of 7 companies) Decrease of Own Funds surplus more than 50% mainly for non-life companies (4 out of 6 companies) Total Own Funds are lower than SCR for 2 non-life companies Basic Own Funds are lower than MCR for 1 life company SCR in Internal Models 4 life and 2 non-life insurance companies use internal models in their activity 9 companies plan to use internal model (full or partial) in the future 4 companies plan to have full internal model 5 companies plan to have partial internal model 10

  11. Key challenges in implementing Solvency II:Insurance companies • Generally, no major business adjustment (capital injections, asset portfolio reshuffling etc.) expected as per QIS4 results • Enhancement of risk management structures and processes • Improvement/development of internal models • Potential inconsistencies between local and international (group driven) regulatory regimes • Active communication with the regulators/supervisors with support of the Polish Chamber of Insurance

  12. Key challenges in implementing Solvency II:Regulatory framework • Large scope of domestic regulations/supervisory guidelines to be amended or developed • Establishment of Solvency II compliant regulatory framework on time requires well defined and strong owner of the implementation planning and execution • Strong competence of the Financial Supervisory Authority is a precondition for its adequate interventions in response to potential risk management deficiencies in the insurance sector • The Financial Supervisory Authority needs to coordinate well its policies and actions with foreign supervisors to avoid inconsistencies or frictions in regulatory environment for Polish subsidiaries of international insurance groups • Communication with the market needs to be improved significantly • Harmonization of Solvency II framework with accounting (IFRS) principles (a global challenge) and with tax rules (a local issue)

  13. Conclusions • Necessary initial education and communication on Solvency II completed successfully • Quantitative Impact Studies proved to be productive and helpful • Need for clear definition of the Solvency II Project leader competent to drive necessary changes in the regulatory environment in Poland • Need for effective harmonization between Polish – other local – European supervisors • Need for improved communication between the regulators/supervisors and the market

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