Solvency II Part 3: Other pillars

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Solvency IIPart 3 Other pillars

• Vesa Ronkainen
• Insurance Supervisory Authority, Finland
• 30.11.2006

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Contents

• 1. Pillar 2
• 2. Pillar 3
• 3. Group and cross-sectional issues

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CALLS FOR ADVICE
1. INTERNAL CONTROL AND RISK MANAGEMENT 2.
SUPERVISORY REVIEW PROCESS (GENERAL) 3.
SUPERVISORY REVIEW PROCESS (QUANTITATIVE
TOOLS) 4. TRANSPARENCY OF SUPERVISORY ACTION 5.
INVESTMENT MANAGEMENT RULES 6. ASSET-LIABILITY
MANAGEMENT 7. TECHNICAL PROVISIONS IN LIFE
ASSURANCE 8. TECHNICAL PROVISIONS IN NON-LIFE
INSURANCE 9. SAFETY MEASURES 10. SOLVENCY CAPITAL
REQUIREMENT STANDARD FORMULA (LIFE AND
NON-LIFE) 11. SOLVENCY CAPITAL REQUIREMENT
INTERNAL MODELS (LIFE AND NON-LIFE) AND THEIR
VALIDATION 12. REINSURANCE (AND OTHER RISK
MITIGATION TECHNIQUES) 13. QUANTITATIVE IMPACT
STUDY AND DATA RELATED ISSUES 14. POWERS OF THE
SUPERVISORY AUTHORITIES 15. SOLVENCY CONTROL
LEVELS 16. FIT AND PROPER CRITERIA 17. PEER
REVIEWS 18. GROUP AND CROSS-SECTORAL ISSUES 19.
ELIGIBLE ELEMENTS TO COVER THE CAPITAL
REQUIREMENTS 20. COOPERATION BETWEEN SUPERVISORY
AUTHORITIES 21. SUPERVISORY REPORTING AND PUBLIC
DISCLOSURE 22. PROCYCLICALITY 23. SMALL
UNDERTAKINGS
1st Wave
2nd Wave
3rd Wave
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• CEIOPS advises the Commission to reflect high
  level principles on governance in the Directive.
• The system of governance must provide for a
  sound and prudent management of the business.
  This implies an appropriate organisational
  structure, set of responsibilities and 'fit and
  proper' requirements, effective processes to
  identify, assess, manage, monitor and report the
  risks, as well as an appropriate and understood
  system of internal control, suitable reporting
  arrangements, and an audit framework.
• Ultimate responsibility for ensuring that a firm
  is well run and adequately manages its risks
  rests with its Board of Directors.
• Insurers are required to disclose information
  about the structure of their system of governance.

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1. Pillar 2 Risk management (RM)

• RM is about understanding the nature (i.e.
  causes, effects, likelihood) and scale of the
  risks faced, and the Board deciding on acceptable
  levels for these risks, risk tolerances and
  resilience strategies
• RM is an ongoing process, in which the Board of
  Directors, senior management and personnel are
  all involved in their respective roles
• The object of RM is to have an active influence
  on the risk profile as determined by the process
  of risk identification, measurement and
  management.
• RM strategies, policies and processes, reflecting
  all material risks, should be set, monitored and
  reviewed on a regular basis
• Insurers should have in place their own
  strategies for solvency capital and all material
  risks to which they are exposed, as well as for
  their risk mitigation and transfer arrangements

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1. Pillar 2 Risk management (cont)

• Insurers are required to establish a RM function
  appropriate to the nature, scale and complexity
  of their activities
• RM function should be separate from operational
  functions. It should monitor positions and report
  those in a timely fashion
• Systematic identification of risks includes early
  recognition, prioritisation and regular,
  structured recording (cf the IAA risk
  classification)
• Risk measurement, forward-looking stress tests,
  contingency plans are also necessary
• Cf Enterprise Risk Management, eg COSO ERM

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1. Pillar 2 Internal control (IC)

• IC is a system of continuing processes (including
  Board, management, personnel) to ensure that
• strategies, policies and procedures are
  implemented and applied effectively and
  efficiently
• financial and non-financial information is
  reliable
• regulation is complied with.
• The Board of Directors has overall and ultimate
  responsibility for ensuring that an adequate and
  effective system of IC is established, maintained
  and monitored, as well as for establishing
  integrity and appropriate culture in the firm

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1. Pillar 2 Internal control (cont)

• IC covers all levels of the firm, including
  outsourcing
• Appropriate allocation of responsibilities and
  segregation of duties is necessary
• Ongoing, effective and comprehensive control (of
  nature and scope appropriate to the business)
  should be established
• The control function should be carried out by
  competent, operationally independent and
  appropriately trained staff
• Important areas include reporting, effective
  audit function, information and communication
  technology

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1. Pillar 2 Supervisory review process (SRP)

• The supervisory authority should evaluate, on an
  ongoing basis, the risk profile, adequacy of
  financial resources and prudent conduct of
  insurance undertakings (forward-looking analysis)
• SRP should include both quantitative and
  qualitative elements, and should be conducted
  both off-site and on-site.
• The supervisor should obtain the necessary
  information to conduct effective monitoring and
  to evaluate the condition of insurers as well as
  of the insurance market. The supervisory
  authority ought not replicate the role of the
  undertaking's management nor the internal control
  function.
• The supervisor carries out on-site inspections
  e.g. to examine the business, internal controls
  and financial conditions of a firm and its
  compliance with regulation (including, where
  appropriate, entities which perform outsourced
  functions)

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1. Pillar 2 SRP (cont)

• Supervisors should employ appropriate monitoring
  tools, including notification requirements, which
  enable deteriorating financial conditions in
  insurance firms to be identified and remedied.
• The supervisory authority takes actions that are
  timely, based on clear criteria and are suitable
  to achieve the objectives of insurance
  regulation.
• Quantitative tools are part of supervision.
  Therefore, supervisors should be able to
  prescribe the use of this kind of quantitative
  tools.

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1. Pillar 2 Transparency of supervisory action

• The relevant IAIS core principles concerning
  transparency should be made operational, i.e.
• regulations
• administrative principles
• aggregate information of industry
• objectives and internal organisation of the
  supervisor
• etc
• should be available to the public
• Any significant findings and remedial action
  required of the firm by the supervisor should be
  communicated appropriately to the Board of
  Directors.

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1. Pillar 2 Supervisory powers

• The powers that enable the supervisor to
• protect policyholders and beneficiaries
  interests
• monitor the solvency and
• enforce EU and national specific regulations.
• The powers are the tools of the supervisor to
  implement the SRP and the measures that can be
  taken as a result of it.
• For instance
• Direct access to relevant information in a firm
• To be able to check the complicance with the
  legislation and regulations

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1. Pillar 2 Supervisory powers (cont)

• To check the financial position, risk profile,
  technical provisions, assets etc of the firm, and
  to require corrective actions when necessary for
  policy-holder protection (e.g. regarding capital,
  risk profile, business activities of the firm)
• To have powers to address management problems in
  situations where the governance of a firm is
  considered demonstrably unsatisfactory from a
  prudential viewpoint
• To assess the level of compliance with the market
  conduct requirements
• To be able to take preventive measures that are
  timely, suitable and necessary from the
  supervisory point of view
• To take ultimate action if an insurer breaches
  the MCR (withdraw the license, transfer or
  wind-up the portfolio)

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2. Pillar 3

• A general concept for public disclosure should
  enhance market transparency, wellfunctioning of
  financial markets and market discipline.
• Compatibility with the IAIS enhanced disclosure
  standards, IFRS, Basel II is a goal
• Double reporting to be avoided
• Reporting will increase and become more important
  in the future
• Clear differentiation between public and
  confidential information is necessary
• CEIOPS will develop common reporting formats

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3. Group and cross-sector issues

• Group-level supervision and cross-sectoral issues
  are becoming increasingly important (insurance
  groups and financial conglomerates)
• Group supervisor and its role (resposibilities,
  powers) needs to be defined in the directive
• Group-level SCR will be developed
• Many questions are still open (cf Consultation
  Paper 14 at www.ceiops.org)