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Pillar 2 and Pillar 3 of Solvency II

Pillar 2 and Pillar 3 of Solvency II. Kathryn Morgan The Association of Financial Mutuals 4 April 2011. What we need Solvency II to deliver . Good quality capital Technical provisions that reflect the reality of the liabilities

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Pillar 2 and Pillar 3 of Solvency II

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  1. Pillar 2 and Pillar 3 of Solvency II Kathryn MorganThe Association of Financial Mutuals 4 April 2011

  2. What we need Solvency II to deliver • Good quality capital • Technical provisions that reflect the reality of the liabilities • Robust solvency capital requirement (SCR) standard formula calibrations that reflect the true economic cost of the risks • Strong requirements on forward looking risk identification and management • Strong emphasis on enhanced transparency of firms’ financial positions and risk management approaches

  3. Three-pillar approach Quantitative capital requirements • Technical provisions • Minimum capital requirement (MCR) • Solvency Capital Requirement (SCR) • Investment rules Qualitative supervisory review • Principles for internal control and risk management • Supervisory review process Market discipline • Transparency • Disclosure • Support of risk-based supervision through market mechanisms Pillar 1: Pillar 2: Pillar 3: Market-consistent valuation Validation of internal models New focus for supervisor Level of harmonisation More pressure from capital markets More pressure from rating agencies Solvency II - Pillar 2 and 3

  4. Solvency II - Pillar 2 and 3 • Pillar 2 • 4 functions: • Risk management • Compliance • Internal audit • Actuarial • Plus the ORSA • And the supervisory review process (SRP), general governance, fit and proper, outsourcing, internal control and capital add-ons. • Pillar 3 • Reporting • RSR • SFCR

  5. Own risk and solvency assessment (ORSA): Policy Level 1 Articles 45, 35 and 246 Level 2 Some commentary on risk management system and reporting Level 3 Pre-consultation paper: December 2010 May 2008 issues paper Five key principles:management responsibilityrisk coverageforward lookingintegrated into the businessdocumentation and validation CEIOPS advice to Commission(formerly CP58) Two main external reports:Solvency & Financial Condition Report (SFCR) – publicly disclosedReport to supervisors (RSR) – NOT publicly disclosed

  6. ORSA: Overview • Management body • Objectives/purpose • Solo/group • Scope • Ownership • Embedding/use • Granularity • Frequency Report: sign off by management body • Report • Strategy • Business plan • Statement of risk appetite • Governance and systems of risk management • Risk tolerance: capacity, limits etc • Assumptions • ORSA vs SCR • Results/analysis • Use of ORSA for decisions • Sign off • Process • Methodology • Roles and responsibilities • Data capture and flows • Validation • Dependencies: SFCR & RSR • Systems and controls • Change control

  7. Useful links • EIOPA papers https://eiopa.europa.eu/ • Pillar 5 ones are (submissions to the EC): • System of governance (2009, ex CP33) • Transparency and accountability (2009, ex CP34) • Valuation of assets and other liabilities (2009, ex CP35) • Special purpose vehicles (SPVs) (2009, ex CP36) • Capital add-ons (2009, ex CP57) • Reporting and disclosure (2009, ex CP58) • Remuneration (2009, ex CP59) • Extension of the recovery period (2010, ex CP 64) • Issues papers (Consultations) : • ORSA – May 2008 • SRP and reporting – August 2008

  8. More information can be found on our dedicated web pages: www.fsa.gov.uk/solvency2 Email us: solvency2@fsa.gov.uk

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