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Solvency II & Captives. Solvency II. Speakers: Jonathan Groves, Senior Vice President, Marsh UK Limited Shelby Weldon, Director, Insurance Licensing and Authorisation, Bermuda Monetary Authority Vlad Uhmylenko, Director Standard and Poor’s Moderator:

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solvency ii
Solvency II

Speakers:

  • Jonathan Groves, Senior Vice President, Marsh UK Limited
  • Shelby Weldon, Director, Insurance Licensing and Authorisation, Bermuda Monetary Authority
  • Vlad Uhmylenko, Director Standard and Poor’s

Moderator:

  • Scott Gemmell, Senior Vice President, Marsh’s Captive Solutions Group
solvency ii captives1

Solvency II & Captives

Jonathan Groves

Senior Vice President

Marsh UK Limited

solvency ii what is it trying to do
Solvency IIWhat is it trying to do?

Further better regulation by:

  • Enhance policyholder protection
    • Existing rules lack risk sensitivity
  • Deepen the single market
    • Restrictions on proper functioning of the single market in insurance
    • Inefficient supervision of groups
  • Improve (international) competitiveness of EU insurers
    • International accounting and regulatory developments i.e. IFRS Phase 2
solvency ii what is it

Group supervision

and cross-sectoral convergence

Comes into effect on October 31, 2012 (but unofficially

expected to be January 1, 2013)

Pillar 1: quantitative requirements

1. Harmonised calculation of technical provisions

2. "Prudent person" approach instead of current quantitative restrictions

3. Two capital requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR)

Pillar 2: qualitative requirements and supervision

1. Qualitative requirements to cover risks which are not captured in the SCR

2. Enhanced internal control, governance, and risk management + solvency self-assessment

3. Strengthened supervisory review, harmonised supervisory standards and practices

Pillar 3: prudential reporting and public disclosure

1. Common European reporting tools

2. Public disclosure of the financial condition and solvency report

(market discipline, as participants prefer sound healthy companies)

Solvency IIWhat is it?
solvency ii when is it being implemented

2006

2011

2012

2007

2008

2009

2010

Development of Directive (Commission)

Negotiation & adoption

of Directive Proposal

(Council & Parliament)

Implementation preparation

(Member States)

CEIOPS: Work on the technical details for implementing measures/supervisory convergence/Level 3 guidance/Binding technical standards

Adoption of implementing measures

Commission: Preparation of implementing measures

July 2007

Directive Proposal

November 2009

Directive adopted

2010

Omnibus Directive II

QIS 2

QIS 3

QIS 4

April-July 2008

QIS 5

August-Nov

2010

Solvency IIWhen is it being implemented?
solvency ii proportionality principle

Scale

Nature

Complexity

Proportionality principle

Solvency IIProportionality principle
  • The Directive should not be too burdensome for small and medium-sized insurance undertakings. One of the tools to acheive that objective is the proper application of the proportionality principle. That principle should apply both to the requirements on the insurance and reinsurance undertakings and on the exercise of supervisory powers (Recital 19, Solvency II Directive)
solvency ii specific treatment of captives
Solvency IISpecific treatment ofcaptives
  • Framework principles formally define a ‘captive’.
  • Guidance from CEIOPS has further defined what will be treated as a captive:
    • ‘The insurance obligations of an insurance captive undertaking only relate to contracts where all insured persons and beneficiaries in respect of unexpired risks are legal entities of the group of the captive undertaking and where all insured persons and beneficiaries were legal entities of the group at the time the contract was entered into.
    • The reinsurance obligations of a captive undertaking only relate to contracts where all insured persons and beneficiaries of the underlying direct insurance contracts in respect of unexpired risks are legal entities of the group of the captive undertaking and where all insured persons and beneficiaries of the underlying direct insurance contracts were legal entities of the group at the time the contract was entered into.
    • The insurance obligations of the direct insurance captive undertaking do not relate to any third party liability insurance.’
  • Opt out for captive owners if premium income below EUR5 million per annum
    • Unclear as to whether can ‘passport’ if opted out
  • If not treated as a captive, subject to full effect of Solvency II
what does it mean if
What does it mean if…
  • You have a captive in the EU
    • Increased minimum regulatory capital
    • Increased operational procedures and accompanying documentation
    • Increased operational costs
    • Great disclosure of information into the public domain
solvency ii what might the market do
Solvency IIWhat might the market do?
  • Exit some risk areas
    • Axa have already announced they are exiting some life business due to Solvency II
  • Increase price on more volatile risks
    • Longer tail risks will require more capital to support than has previously been the case
  • Increase fronting charges and collateral
    • Value of reinsurance provided by companies from non equivalent jurisdictions discounted within Directive
  • Reduce ‘authority’ of underwriters
    • Potential for model to over ride decisions
  • Market consolidation particularly amongst smaller companies
solvency ii captives2

Solvency II & Captives

Shelby Weldon

Director, Insurance Licensing and Authorisation

Bermuda Monetary Authority

agenda
Agenda
  • Solvency II Regulatory Objectives
  • Why seek equivalency
  • Bermuda’s preparations and progress to date
  • Captive implications
regulatory objectives
Regulatory Objectives
  • Improve the risk management of EU insurers and reinsurers
  • Advance supervisory convergence and co-operation
  • Encourage cross-sectoral consistency – no regulatory arbitrage
  • Introduce proportionate requirements for small undertakings
  • Promote international convergence
  • Increase transparency
  • Ensure efficient supervision of insurance groups and financial conglomerates
why equivalency
Why Equivalency?

OBJECTIVE:

  • Compliance with International Standards
  • Solvency II most imminent

IMPORTANCE:

  • Significant amount of business conducted between Bermuda and European markets

BENEFITS:

  • Bermuda (re)insurers can conduct business in Europe on a non-discriminatory basis
  • Avoid duplicative regulatory oversight
  • Gain access to markets more efficiently due to consistency of supervisory standards
why equivalency1
Why Equivalency?

OUR GOAL:

  • Broad equivalency with Solvency II by 2012

OUR APPROACH:

  • Pragmatic – not to duplicate requirements line-by-line
  • Adopt intelligently in line with the nature of the Bermuda market
solvency ii preparations progress
Solvency II Preparations & Progress

Significant policy work and framework enhancements over the previous two years

  • Bermuda Solvency Capital Requirement (“BSCR”)
  • Internal Capital Model (‘ICM”) approvals
  • Group-Wide Supervision framework
  • Supervisory Colleges
  • Insurance Code of Conduct
solvency ii preparations progress1
Solvency II Preparations & Progress

Further enhancements in 2010:

  • CISSA (Commercial Insurer Solvency Self Assessment)
  • Eligible Capital Rules
  • Public Disclosure Standards
  • Enhanced Solvency Standards for Long-Term Insurers
  • Building on supervisory Resources
solvency ii preparations progress2
Solvency II Preparations & Progress
  • Bermuda’s framework enhancements are in accordance with the technical requirements of Solvency II as appropriate for the Bermuda market
  • Changes focused on commercial sector of the market reinforcing the Authority’s risk-based approach to supervision
implications for captives
Implications for Captives
  • Risk-based approach underpinned by the “Proportionality Principle”
  • Article 29 of the Solvency II Directive states “Requirements are to be applied in a manner which is proportionate to the nature, scale and complexity of the risk inherent in the business of an insurer”
implications for captives1
Implications for Captives
  • Bermuda’s captive regime remains consistent with international standards
  • Appropriate for the risk profile of companies in sector
  • No significant changes at this time
  • Actively monitoring and contributing to international developments
solvency ii captives3

Solvency II & Captives

Vlad Uhmylenko

Director

Standard and Poor’s

systems of governance pillar 2
Systems of Governance (Pillar 2)

Systems:

Risk Management

Compliance

Internal Audit

Actuarial

Requirements:

Proportionality

E.g. size, complexity

“Fit and proper” BoD and mgmt

Outsourcing

Properly vetted and monitored

ORSA

Own Risk and Solvency Assessment

Public Disclosure and Regulatory Reporting Requirements (Pillar 3 )

orsa own risk and solvency assessment
ORSA: Own Risk and Solvency Assessment

An internal tool:

Requires (re)insurance enterprises to adequately assess their own short- and long-term risks

“Own funds” necessary to cover the identified risks and uncertainties

Methodology used to determine solvency needs

A tool for the supervisory authorities:

Enables the regulators to evaluate the insurer’s risk profile, risk management practices, and approach to capital management

Proportionality: a lower bar for smaller/less complex insurers

Some outsourcing may be allowed

Further guidance needed on the minimum standards

Requirement: Integrated Management of Risks and Capital

integrated management of risks and capital
Integrated Management of Risks and Capital

Risk Limits

(& other controls)

Risk Tolerance(s)

Capital Needs

Quantification and Aggregation

Desired Risk Profile

Risk-Vs.-Reward

implications for captives2
Implications for Captives

Pillar 1 may lead to greater capital requirements

Pillars 2 and 3 may lead to a greater governance and management burden:

Higher expectations from the Board and the senior management

Formal and more sophisticated risk management

As of now, few captives are ready for Solvency II

Solvency II is likely to increase the cost of risks retained via captives

Potential mitigants:

Principle of proportionality

Bermuda’s captive-specific solvency regime?