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Solvency II challenges in the area of Governance

Solvency II challenges in the area of Governance. Sibylle Schulz Malta, 08/04/2010. CEIOPS. Executive summary.

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Solvency II challenges in the area of Governance

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  1. Solvency II challenges in the area of Governance Sibylle Schulz Malta, 08/04/2010

  2. CEIOPS Executive summary With regard to the management of investment risk undertakings have to comply with the Prudent Person Principle as set out in Article 132 of the Directive. While under this principle current quantitative regulatory investment rules no longer apply, undertakings have to comply with certain qualitative requirements that ensure an appropriate level of prudence. Under this principle undertakings cannot invest in instruments or assets unless they are fully aware of and able to manage the risks associated with them. It is high time to prepare for the start of Solvency II. As the regime is not rules-based, i.e. does not establish very specific requirements, this does not necessitate that Level 2 measures and Level 3 guidance are known. Undertakings have to go through a stock-taking exercise to identify weaknesses in their systems of governance and to start introducing the necessary changes as the improved systems should be well established before 2013.

  3. Index Executive summary 2 Prudent Person Principle (general) 3 Prudent Person Principle (scope) 4 Prudent Person Principle (requirements) 5 Prudent Person Principle (requirements) 6 Time to get started 7 Time to get started 8 Challenges for system of governance 9 Proportionality 10 Towards Solvency II 11 Cultural changes necessary 12

  4. Prudent Person Principle (general) • Managing investment risk requires compliance with the Prudent Person Principle • No investment rules but investment principles • Process-oriented as opposed to outcome-focused • No explicit regulatory limits on investments • Undertakings need to establish their own internal limits

  5. Prudent person Principle (scope) • Applies to all assets of the undertaking • Applies qualitative investment requirements to portfolio as a whole:  security  quality  liquidity  profitability  availability

  6. Prudent Person Principle (requirements) • Requirement to invest only in assets and instruments whose risks can be properly identified, measured, monitored, controlled and report and taken into account in the ORSA • Assets held to cover TP have to be appropriate to the nature and duration of (re) insurance liabilities • Diversification necessary to avoid excessive accumulation of risk • Mixing necessary to avoid excessive risk concentration

  7. Prudent Person Principle (requirements) • The use of derivative instruments is only allowable insofar  as they contribute to a reduction of risks or  facilitate efficient portfolio management • Prudent levels for investments/assets not traded on a regulated financial market

  8. Time to get started Solvency II is less than 3 years away!

  9. Time to get started • Framework Directive is out • Implementing Measures are currently being drafted • CEIOPS is working on developing Level 3 guidance  Even without Level 2 and 3 Governance requirements are foreseeable enough to start on implementation  No completely new requirements  Legal rules will not give exact specifications  Neither will supervisors

  10. Challenges for system of governance • Solvency II is a principles-based approach  requirements are less specific than in a rules-based system  compliance more open to challenge  more room to find entity-specific appropriate solutions  proportionality is important  responsibility for an adequate, proportionate system of governance is on undertakings and specifically on the management

  11. Proportionality • Requirements have to be applied proportionately  proportionality may allow for a simple solution however, requirements cannot be reduced to zero proportionality may demand that a sophisticated solution is chosen • Proportionality is a case-by-case decision  no general conclusion as to what is proportionate undertakings have to make their own decision

  12. Towards Solvency II • Stock-taking exercise is necessary  Undertakings need to check where they have to improve systems, processes, procedures or documentation  Necessary changes should be introduced well ahead of Solvency II • Undertakings should not wait for or expect the supervisor to tell them what to do • Undertakings have to be prepared to explain their decisions about their system of governance to the supervisor and to be challenged on them

  13. Cultural changes • Holistic approach to risk management • Everybody in the undertaking should be encouraged to be aware of risks • Appropriate organisational values and priorities need to be set at the top • Code of conduct should be implemented • Effective communication and reporting are key

  14. Thank you Sibylle.Schulz@bafin.de

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