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The Impact of Solvency II

The 2nd International Insurance Conference Istanbul, 30 September 2010. The Impact of Solvency II. Türda Özmen Director. Agenda. The Road Ahead. Where are Capital Ratios Headed under Solvency II?. Impact on the Insurance Industry. Implications for Ratings. Agenda. The Road Ahead.

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The Impact of Solvency II

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  1. The 2nd International Insurance Conference Istanbul, 30 September 2010 The Impact of Solvency II Türda Özmen Director

  2. Agenda The Road Ahead Where are Capital Ratios Headed under Solvency II? Impact on the Insurance Industry Implications for Ratings

  3. Agenda The Road Ahead Where are Capital Ratios Headed under Solvency II? Impact on the Insurance Industry Implications for Ratings

  4. 1 July 2010 Final QIS5 Specifications Road Ahead End 2010 Draft Level 2 Implementing Measures 31 Dec 2012 Solvency 2 in Force? 2010 2011 2012 2013 Aug–Nov 2010 QIS5 to Run April 2011 QIS5 Results Jun–Oct 2012 Final Level 2 Implementing Measures Adopted

  5. Agenda The Road Ahead Where are Capital Ratios Headed under Solvency II? Impact on the Insurance Industry Implications for Ratings

  6. QIS 4 Results – Refresher Comparison of Solvency Ratios, All QIS4 Participants Source: CEIOPS

  7. UK Life Solvency Ratio Breakdown from QIS 4 to Estimated QIS 5 (Draft Specifications) Calculated for a Notional Life Company Representing Market Source: Milliman

  8. EU Life Solvency Ratios For a Notional Life Company Representing Whole Market Calculated for a Notional Life Company Representing Market Source: Milliman, Autorité de Contrôle Prudentiel

  9. Non-Life Underwriting Parameters Premium Risk Standard Deviations Source: CEIOPS, EC

  10. Internal Models – The Vision • Alternative to the standard formula • Tailored to business specifics • Calibrated to 99.5% VaR over 1 year

  11. Given that each insurer writes different business, has a different risk profile, a different corporate structure, different operational processes and a different risk management framework, each internal model will be different and used in a different way. (FSA DP 08/4) Internal Models – The Reality Photo Source: US Army

  12. Outstanding Issues • Grandfathering • Equivalence • (Relative) level of some standard capital charges • Tax

  13. Agenda The Road Ahead Where are Capital Ratios Headed under Solvency II? Impact on the Insurance Industry Implications for Ratings

  14. Impact on the Insurance Industry • Shift from capital-intensive to capital-lite products • Pricing for increased cost of capital • Asset reallocation • Increased de-risking • Industry consolidation • Implementation costs

  15. Agenda The Road Ahead Where are Capital Ratios Headed under Solvency II? Impact on the Insurance Industry Implications for Ratings

  16. Capital Req.s Up Means Leverage Down Improved Risk-Based Assess- ment Increased Barriers to Entry Transparency and Comparability Up? Implications for Ratings Transparency and Comparability Down? Short-Term Implem- entation Risk Threats to Some Product Lines Technical Issues: Coupon Deferrals

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