James Okarimia - Solvency II For Dummies Presentation

1. JAMES OKARIMIA - Solvency II Solutions
Presented by James J Okarimia

2. Calculation kernel
The central method for quantifying and modelling risk
and capital requirements in the internal model.

3. European Commission
The executive arm of the EU, responsible for initiating
new legislation and the day‐to‐day running of the EU. It
has been responsible for drafting the Solvency II
Framework Directive, shaping the implementation
measures and evaluating its enforcement.

4. European Council
• Made up of representatives from each of the EU’s
member states. It provides the EU with political
leadership and establishes the direction of European
policy. The Council and the European Parliament are
responsible for passing legislation, including the
Solvency II Directive.

5. European Insurance and Occupational Pensions Authority (EIOPA)
The EU supervisory body for insurance. It was
established in January 2011 as part of wider changes to
the European financial services regulatory framework
and replaces the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS). EIOPA has
greater legislative powers than CEIOPS and continues
as the regulatory advisory body to the European
Commission on Solvency II.

6. European Insurance and Pensions Committee (EIOPC)
An EU committee of experts from Member State
finance ministries. The Committee scrutinize the
implementing measures in order to develop the legal
text that will operationalize Solvency II.

7. European Parliament
Made up of Members of the European Parliament
(MEPs) elected directly by European citizens. The
Parliament and the European Council are responsible
for passing legislation, including the Solvency II
Directive.

8. Internal model
A risk management system developed by an insurer to
analyze their overall risk position, to quantify risks and
to determine the capital required to meet those risks.
Under Solvency II, an insurer may use its internal model
to calculate its Solvency Capital Requirement, with the
approval of its national supervisor.

9. Individual Capital Adequacy Standards (ICAS)
The current capital adequacy requirements regime
applicable to UK insurers. The ICAS regime will be
replaced by Solvency II.

10. Gap Analysis
An exercise undertaken by insurers to compare their
existing risk and capital management processes against
those required by Solvency II to identify and remedy
potential gaps.

11. International Association of Insurance Supervisors
(IAIS)
The global regulatory standard setting body for the
insurance industry. It represents insurance regulators
and supervisors of some 190 jurisdictions, issuing
global insurance principles, standards and guidance
papers.

12. Internal Model Approval Process (IMAP)
A process established by the Financial Services
Authority to assist insurers seeking to use internal
models to calculate regulatory capital requirements.
Internal models must be reviewed and approved by the
regulator before they can be used to calculate
regulatory capital under Solvency II.

13. Level 1 Framework Directive
The Solvency II Framework Directive which contains the
basic principles underpinning Solvency II.

14. Level 2 Implementing Measures
Detailed rules that allow Solvency II principles to be put
into practice. The main impact of Solvency II on EU
insurers is shaped by Level 2 implementing measures.

15. Level 3 Guidance
Supervisory standards, guidelines and
recommendations to enhance convergent and effective
application of Solvency II. Unlike levels 1 and 2 they are
not mandatory for Member States.

16. Level 4 Enforcement
Post‐implementation compliance with Solvency II
provisions in national laws and regulations.

17. Minimum Capital Requirement (MCR)
The lower of the two capital levels required by
Solvency II. It represents the minimum level of capital
required to be held by an insurer before ultimate
regulatory intervention is triggered.

18. Own Risk and Solvency Assessment (ORSA)
Own Risk and Solvency Assessment – An assessment
of an insurer’s processes and procedures used to
identify, assess, monitor, manage, and report the short‐
and long‐term risks it faces or may face and to
determine the own funds necessary to ensure that its
overall solvency needs are met at all times.

19. Own Funds
Capital, as described under Solvency II. Basic Own
Funds (BOF) is the excess of assets over liabilities as
determined by the EBS with any qualifying
subordinated debt added back. Some forms of off‐
balance‐sheet finance may receive regulatory approval
to qualify as Ancillary Own Funds (AOF). Both BOF and
AOF are allocated to tiers of Own Funds depending on
prescribed criteria, and the SCR and the MCR both have
rules regarding the extent to which the tiers of Own
Funds can be used as coverage of these requirements.

20. Pillar 1
The portion of Solvency II focused on all the quantitative
capital requirements, which cover market‐consistent
valuations of assets and liabilities, calculation of available
capital, capital requirements, and internal model validation.
This pillar aims to ensure firms are adequately capitalized
with risk‐based capital. All valuations in this pillar are to be
done in a prudent and market‐consistent manner.
Companies may use either the Standard Formula approach
or an internal model approach. The use of internal models
will be subject to stringent standards and prior supervisory
approval to enable a firm to calculate its regulatory capital
requirements using its own internal model.

21. Pillar 2
The qualitative requirements, which covers the
principals of internal control, governance, risk
management, ORSA process, and supervisory review
process. The portion of Solvency II focused on imposing
higher standards of risk management and governance
within a firm’s organization. This pillar also gives
supervisors greater powers to challenge their firms on
risk management issues. It includes ORSA, which
requires a firm to undertake its own forward‐looking
self‐assessment of its risks, corresponding capital
requirements, and adequacy of capital resources.

22. Pillar 3
Market discipline, which covers disclosure requirements,
both private to the supervisors and public to the
marketplace. The portion of Solvency II that aims for
greater levels of transparency for supervisors and the
public. There is a private annual report to supervisors, and a
public solvency and financial condition report that increases
the level of disclosure required by firms. Any current
returns will be completely replaced by reports containing
core information that firms will have to make to the
regulator on a quarterly and annual basis. This ensures that
a firm’s overall financial position is better represented and
includes more up‐to‐date information.

23. Quantitative Impact Study (QIS)
An exercise to test the financial impact and suitability
of proposed Solvency II requirements on insurers. QIS5
is the most recent QIS exercise, conducted in 2010.

24. Solvency and Financial Condition Report SFCR
A public disclosure report which is required to be
published annually by all insurers and will contain
detailed quantitative and qualitative elements.

25. Solvency Capital Requirement (SCR)
The higher of the two capital levels required by
Solvency II. The SCR is the prudent amount of assets to
be held in excess of liabilities and is an early warning
mechanism if it is breached. The SCR is calculated using
either the standard formula or an approved internal
model.

26. Standard Formula
A risk‐based mathematical formula used by insurers to
calculate their Solvency Capital Requirement under
Solvency II. The standard formula is intended for use by
most EU insurers, although they may use an internal
model instead.

27. Supervisory College
A group of national supervisors monitoring the
activities of a cross‐border insurance group. The college
provides a platform for information sharing and co‐
operation between regulators.

28. Supervisory Review Process (SRP)
An important element of Solvency II that guides the
regulators review of an insurer’s risk management and
governance. It aims to ensure an insurer is well run and
meets risk management standards.

29. Technical Provisions
The amount of capital that an insurer needs to hold in
order to meet its expected future obligations arising
from insurance contracts.

30. Third Country Equivalence
Solvency II includes provisions for assessments of the
solvency regimes and systems of group supervision of
countries outside the EU (termed “third countries”).
The purpose of these assessments is to determine
whether assessed regimes and systems are equivalent
to the comparable provisions of Solvency II.

31. Transitional Provisions
Legislative provisions that allow certain aspects of
Solvency II to be deferred, giving insurers time to adjust
and manage the transition to the new regime.
Transitional provisions are included in the Omnibus II
Directive.

32. European Institutional Framework and Supervisory Architecture

33. Insurance Companies Supervision – Solvency II

34. Insurance Companies are required to become solvency II compliant by addressing a wide range of requirements, both in qualitative and
quantitative aspect:
To implement solvency 2 there are increasing need to support this project with different specialist on different front:
• Gap analysis, Impact analysis, with Program Roadmap
• Program Governance and Project Management
• Outline the linkage between Actuary, Finance, Risk, Business ,Process , Systems to support Business Solvency II Implementation
Pillar 2
• Governance analysis, Design
• Implement Risk appetite, Risk Limits, and Translate to Business Change
• Update of business functions such as Aactuary, Risk Management, Internal Control & Audit, Compliance
• Implement ORSA and Use Test
• Organisational changes, Risk Culture , Attitude and Behavior.
Pillar 3
Internal and External Reporting to DNB and Relation to Supervisors‐ IFRS and other Reporting standard
 cretiseren
 Aanpassingen in functies Actuariaat, Risk Management, Internal Audit, Compliancplementeren
RM Associates can support you with:
• Gap analysis SII requirements vs. Current state
• Readiness assements of your process,
project organisation & Internal Control
• Independent health checks of SII program
• Support implementation of Gap analysis findinhgs
• Program managemnt & Governance
• Streamline role in SII subareas for implementation
e.g. Define Risk appetite – Risk Limits – KRI’s,
ORSA, Risk Managememnt & Controls etc.
• Solvency II all Pillars Implementation
• Solvency II documentation
Multi‐disciplinaire Support on Different Solvency II Parts
Solvency II Support
:
:
• Balance sheet
evaluation
• Solvency Capital
Requirements
(SCR)
• Minimum Capital
Requirement
(MCR)
Our Value Proposition ‐ Solution & Expertise

35. Solvency II – Three pillar based implementation approach.
 Internal controls
 Risk Management
 Measures of
supervision
 Disclosure of
Information on
Risks
 Scenario
Analyses of
Assets and
technical Pro‐
visions
Insurance Risk
Investment /
Market Risk
Operational Risk
Solvency II
Protection of Policyholders
against Failure of Insurance Companies
Credit Risk
Asset ‐ Liability
Mismatch
 Technical
provisions
 MCR – Minimum
Capital Require‐
ments
 SCR – Solvency
Capital Require‐
ments
 Internal controls
 Risk Management
 Own Risk & Solvency
Assessment ‐ ORSA
 Measures of
supervision
 Disclosure of
Information on
Risks
 Scenario
Analysis of
Assets and
Technical Pro‐
visions
 Technical
provisions
 MCR – Minimum
Capital Require‐
ments
 SCR – Solvency
Capital Require‐
ments
Pillar I
Financial Resources
Pillar II
Regulatory
Review
Pillar III
Market discipline

36. Overall govenance arrangements
1. Strategy and risk appetite
Oversight arrangements
Users test, decision and planning support
2. Technical pricing and value contribution is core imput to product design and
pricing
Metric to identify underperforming portfolio
Risk identification Risk assessment and measurement Risk monitoring
3. Cover all types of risk Single version of truth Industrialised
analysis
Identyfying emerging risk Reflects the risk presented Control of key risks
Risk reporting and Management information
4 Information to drive business decision
Clear, concise and reflective of current status
Data, IT, Infrastructure
5 Intergration of risk and finance system architecture
Data to be consistent, complete,accurate and auditable
Policis,standards, people and culture
6 Clear ownership of task and risk decision
consistent policies and standards
Enterprise Risk Management Framework

37. Insurance Enterprise Risk Management (ERM) System
 All Business Units
Data Sources/
Applications
Integration/
ETL
Consolidated
Data
Transformation/
Calculation
Results
Data Marts
Decision Supporting/
Reporting
Meta Data
Software Infrastructure
Development Environment and System Management
Enterprise Risk
Data
Consolidation
Market Value
Assets &
Liabilities
Monte Carlo
Scenarios
Stress Test
EC / EV
VaR / TaR
Solvency & Capital
Adequacy
Regulatory
Compliance
ALM & Stochastic
Planning
…
Asset Data
• In‐force Business
• Credit
• Derivatives
• Bond Duration &
Convexity
• Equities
• Real Estate
Liability Data
• Claims
• Expense
Non‐market
economic Data
Market Risk Data
(Volatilies,
Correlations)
Integration
Extraction –Transformation ‐Load Risk Engine
(e.g., DFA Advise,
MoSes,
Algorithmics)

38. Calculating Economic Capital (EC) is becoming an important tool for insurers in guiding risk‐based
decision making
• EC defines the organisation’s capital to cover potential losses at a
given risk tolerance level and time horizon.
Insurance Risk Credit Risk Liquidity Risk Market Risk Operational Risk
 Mortality
 Lapses
 Reserves
 …
 Defaults
 Spreads
 Counterparties
 …
 Asset / Liability
Mismatch
 Hedging
programs
 Equities
 Interest rates
 Real Estate
 …
 Distribution
 System
 People
Risk Aggregation
Illustrative

39. In the US, the calculation of Economic Capital (EC) follows a “Best estimate”
liability approach
• EC is the level of assets, in addition to the Best Estimate Liability, required
to pay future policyholder benefits at the chosen Security Factor.
Best
Estimate
Liability
Runoff
risk
Pricing
riskEconomic
Capital
Needed
Assets

40. Risk‐adjusted Value Based Management (VBM)
Market Values Balance Sheet

41. Integrated Risk & Finance Logical Architecture View
Example Measures: RAROC, VaR, RWA, Operational, Market & Credit Reporting
Data Warehouse: The Bank wide data warehouse stores the raw and processed
data from the calculation engines. It holds transaction level data and enables
views of the data by multiple dimensions e.g. counterparty, general ledger
account, functional organization, product etc. data is extracted from the business
units specific systems as frequently as is required to provide timely and
meaningful bank wide views of risk
RAROC
Capital
ELELExpensesvenue CROR

Re
Credit
Data
Integration&enrichment
Risk & FINANCE DW (Economic Data)
-Loans & Borrowings
-Economic Capital
-Revenue
-Expense
-Budgets
-Risk Capital charges
Risk & FINANCE DW
-Risk Capital- Prudential Limits (RWA)
-RWA for exposures
-Investment Portfolio
-Expected Loss EL
META DATA & BUSINESS RULES
SUPPORT
-Common meta data
-Business rules definitions & support
Integration&enrichment
RWA (Regulatory) Engines
Analytics Engines
EOD Calculators
-VaR
-Stress Testing
-Back Testing
-Prudential Limits
-Operational Risk (via
Dashboard)
INTRADAY Calculators
-VaR
-Trade position
-Real Time Limits
-Desk Level Analytics
-Operational Availability
(via dashboard)
Accounting Engine
-P&L
-RAROC
-Other Accounting Measures GL
Data Mart
(Regulatory
Reporting)
Data Mart
(Economic
Reporting)
Data Mart
(Operational Risk
Dashboard)
Reporting
Architecture
Reporting
Engine
Reporting
Engine
ServicesAPIs
RISK DIMENSIONS:
-Market Risk
-Credit Risk
-Operational Risk
-Prudential & Operational Limits
-Risk Capital Charges
& Measures
1
2
3
1. Example RAPM equation for illustration
2. This represents a shared architecture for both EOD & intraday pre deal analytics 3. RISK DASHBOARD for operational quantitative & graphical risk evaluations
Financial
Data
Client risk
Data
Market risk
Data
ODS’s
Data
Business
Actors
Traders
Debt
Managers
Operations
Accounting
Management
Regulators
Compliance
Pre deal RWA
Intraday / pre
deal
analytics

42. Contact details – For further information
James J Okarimia
Partner,
RM Associates –
Partners in Enterprise Risk Management
E: james.okarimia@rmassociates.nl
M: +31 (0) 62 3192 655
T: +31 (0) 30 2599 455