Forward Looking Assessment of Own Risk · In deciding on the business strategy, the undertaking has to take into account the output from the forward looking assessment of the undertaking’s

Forward Looking Assessment of Own RiskHelping you to prepare for the new regime

A presentation to the Integrated Assurance Networkby Kirsty Leece30 January 2014

© 2013 Towers Watson. All rights reserved.

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Contents


4. How Towers Watson can help

3. Overview of the requirements

2. Background

1. Introduction

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1. Introduction



Introduction


INTRODUCTION

• This presentation provides a high level overview of the Forward Looking Assessment of Own Risks (“FLAOR”, previously known as “ORSA”) requirements

• It highlights the impending requirements following the announcement of the Solvency II interim guidance in September 2013, and the announcement of the Omnibus II directive in November 2013, as well as the full implementation requirements that will be necessary from 1 January 2016

• Contact details are provided at the end of this pack

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2. Background



Omnibus II

Background to Solvency II


BACKGROUND

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Pre-2013 2013

EIOPA said:- Pillar II

regulations/ ideas in place

- Like early implementation

Final guidelines announced –cementing timeline and an implementation date of Jan 2016

Sept Nov/Dec

PRA –supporting EIOPA

Oct 2010 –Delay of SII implementation to Jan 2014.

Expected further delays


Solvency II roadmap to 2016

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)

)

Companies should have

done a dry-run and be

comfortable with their

model by mid 2015

EIOPA technical specifications published 2014

Pilla

r IPi

llar I

IPi

llar I

II

ORSA report 2014 completed

Threshold firms – 2015Continuous assessment with SII capital requirements,

TP and deviations from SCR assumptionsIntegration of systems of governance

Annual report YE 31 Dec 2014 produced + 22 weeks (solo), +28 weeks (group)

Quarterly (30/9/15) report produced +8 weeks

Implementation of Pillar I model (IM or SF)

Pre-approval/ discussion with regulators

Model build/ Model changes

Model runs

Assumption methodology

Review and independent validation

Iterative cycle

Policies completed: risk, internal control, internal audit, governance

Governance and risk management structure in place

Apr 2015IM

approval starts

Implementation dateFeb 2015Delegated

acts become official

Jan 2015Put

SII/OMDII into

national law

Aug 2014Publish

delegated acts

May 2014OMDII

published in official journal

Feb 2014Plenary vote on OMDII

ORSA report 2015 completed - showing more progression towards full implementation

Reg

ulat

ion

Results: TP, A&L, own funds, SCR

1/1/2014 1/1/2015 1/1/2016

BACKGROUND

3. Overview of requirements



FLAOR includes three main requirements


Forward-looking assessment of own risks and capital Assessment of overall

solvency needs including forward-looking assessment of capital needs

Assessment of continuous compliance with Solvency II capital requirements and the requirements on technical provisions

Assessment of how the company’s risk profile compares to the assumptions underlying the Solvency II standard formula

All companies 80% of the market + assets under management > €12bn

Internal model firms are exempt from this

requirement

1 2 3

OVERVIEW OF REQUIREMENTS

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As of 2014

As of 2015


Stre

ss &

sce

nario

test

ing

Business plan (including options)

Risk appetite and tolerances

Risk strategy

Generation of stresses / scenarios

Management actions and “use test”

decisions

Business strategy, including key drivers

of change

Risk identification including emerging

risks

Projected capital and solvency position

Comparison of risk profile with SCR

Capital contingency planning

Assessment of governance system

Continuous risk and solvency monitoring

Sensitivity and stress and scenario

test results

Assessment of the risk profile

Information received by the

business

Forward looking assessment of risk and capital

Components of FLAOR

Continuous monitoring with SII capital requirements

Assessment of risk profile compared with Standard Formula

Inputs from the business Documentation

Engagement, embedding and links to business strategy

Policy

Internal Report

Supervisor Report

Record

FLAOR depends upon wider ERM processes and engagement from the business, but delivers valuable information in return

Regular review

Board ownership


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2

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Forward looking assessment of risk and capital


Firm’s own view of its necessary capital and risk management requirements Taking into account future solvency needs

Allowing for changes in risk profile Allowing for business plans

Applies to both standard formula (SF) and internal model (IM) firms Requires input from across the business Capital needs expressed in quantitative terms Supplemented by a qualitative description of material risks Subject material risks to a wide range of stresses

Own Solvency Needs

T = 0Economic Capital + other current risk

management arrangements

Allowance for future capital needs + other

future risk management arrangements

1A forward looking assessment of the risk profile, and the capital and other

means needed to address these risks


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Assessment of continuous compliance with Solvency II capital requirements Need to demonstrate “continuous compliance” with SII Pillar 1 requirements of the

business planning horizon – both Solvency Capital Requirement (SCR) and technical provisions

This will require processes for monitoring the regulatory solvency position at the current time, and also methods for projecting the regulatory solvency position forward on different scenarios


2

The analysis needs to consider:• Potential future material changes in the

risk profile • Impact of future shocks on own funds• Quantity and quality of its own funds

over the period• The composition of own funds across

tiers during the period• The capital management plan / policy• Issuance, redemption or repayment of

capital instruments• Distributions of income or capital• Ability to raise capital


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Need to assess “the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement”

Assessment of how the risk profile compares to the assumptions underlying the standard formula

The review process will be unique to each firm – the depth and areas of review will depend on your business, your definition of materiality and proportionality and other factors such as whether an internal model already exists.

SF AssumptionsPerceived

InappropriateMaterial

Risks

Focus areas

3

Once SII is implemented, the regulator could potentially apply a capital add-on:

“Draft level 2 - Article 268 CA 3Add-ons in relation to deviations from SCR assumptions – risk profile deviations are regarded as significant if the SCR reflecting the actual risk profile is more than 15% higher than the standard formula SCR. Below this level the supervisory authority can conclude that the deviation is significant or not, depending on the reasons for it.”



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Stress, scenario and reverse stress testing


• Subject the identified risks to a sufficiently wide range of stress tests / scenario analyses to provide an adequate basis for the assessment of the OSN

• Consider loss absorbing capacity under different scenarios

• Consideration of future scenarios including different scenarios for the business plan (i.e. consider changes to the risk profile over time), which are likely to be additional to those used for the internal model

• Regularly carry out stress tests, reverse stress-tests, as well as scenario analyses as part of the business and capital planning processes

• Use experience from stress tests and scenario analyses to determine whether changes in external factors could impact the undertaking’s risk profile significantly

Need to include:

• An analysis of the sensitivity of the standard formula to changes in the risk profile, including the influence of reinsurance arrangements, diversification effects and the effects of other risk mitigation techniques

• An assessment of the sensitivities of the SCR to the main parameters

• Insurers are required to include in the Policy document information on how stress tests and sensitivity analyses are to be performed, and how often they are to be performed

Documentation


Forward looking assessment

Continuous monitoring Risk profile assessment

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Documentation requirements

FLAOR needs to be performed at least annually or on occurrence of trigger event Documentation requiredFLAOR Policy FLAOR RecordFLAOR Internal ReportFLAOR Supervisory Report (if different to internal)

Longer term the FLAOR will also feed into the Regular Supervisory Report (RSR) and the Solvency and Financial Condition Report (SFCR)

Some firms may also choose to document the FLAOR process in more detail than is covered in the Policy

Management body of the organisation needs to take an active role in the process, including approval of the Policy and signing off the Report

In addition, as part of the system of governance firms will need to undertake an independent review of the FLAOR (this can be internal or external)


“The information communicated to the AMSB has to be sufficiently detailed to enable it to use it in its strategic decision-making process and the information communicated to relevant staff has to be sufficiently detailed to enable those staff to take any necessary follow-up actions.” (Guideline 9 supporting text)


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Embedding and linking to business strategy



‘Effective model validation breeds trust – a benefit not just reserved for regulators’

In deciding on the business strategy, the undertaking has to take into account the output from the forward looking assessment of the undertaking’s own risks

Guideline 17 – Supporting text

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Risk budgeting

New business planning

Capital management

Mergers / acquisitions

FLAOR

Risk strategy

Risk analysis

Internal environment influences

External environment influences

National competent authorities should ensure that the undertaking takes into account the results of the forward looking assessment of the undertaking’s own risks and the insights gained during the process of this assessment in at least:

a) its capital management; b) its business planning; and c) its product development and design.


Regular review



“The system of governance shall be subject to regular internal review”

Article 41, Level 1 Solvency II text

• Despite there being no explicit reference in the FLAOR supporting text, as part of the consultation process, EIOPA has confirmed that firms will need to conduct an independent review as part of the system of governance

• Guideline 8 of the supporting text on System of Governance states that there must be a regular internal review of the system of governance

• Internal audit is responsible for evaluating the functions, effectiveness and efficiency of the internal control system and all other elements of the system of governance. So the review undertaken by the internal audit function can provide input to this internal review of FLAOR.

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4. Implementing the FLAOR



Implementation

Roadmap to implementing FLAOR


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IMPLEMENTING THE FLAOR

3. Dry run Planning and execution of an initial dry run of the

process Engage with the business functions to ensure

that they all input into the process Draft the FLOAR Report Communication/presentation of the results to the

business, including presentation to the Board

4. Embedding Training/educational workshops to support the

implementation of the process Linking of the FLAOR to the business planning

process Further iterations of process Independent review

1. Assessment

1. Project initiation Gap analysis of current risk management system against

latest guidelines and prioritise areas for development Interviews with key stakeholders to determine

effectiveness and efficiency of current risk management system, areas for improvement and understanding

Review of current modelling and reporting capabilities Planning exercise

2. Develop systems and processes Draft the FLOAR Policy Review of the appropriateness of the standard formula

approach Individual risk calibration, where appropriate Development of capital projection models Own solvency needs assessment Development of stress and scenario tests/reverse stress

testing Development of risk reporting tools/MI

Project initiation1 3 4

Develop systems &

processDry run Embedding2

Development

20152014


Summary slide – take-aways


SUMMARY

• Solvency II is firmly back on the agenda• January 2016 implementation date

• FLAOR is a major part of Solvency II• Everyone must do an ORSA in 2014 and 2015

• 3 main components to FLAOR• Forward-looking assessment of own risks and capital

• Continuous monitoring with SII capital requirements

• Assessment of risk profile compared with Standard Formula

• All companies must do the forward-looking assessment of own risk and capital

• Threshold companies must consider all 3 components• Many firms have a lot to do in the next 15 months and the PRA have

highlighted that the FLAOR will be at the top of their agenda

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Contacts


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CONTACTS

Kirsty Leece Gavin Hughes

[email protected] [email protected]

+44 207 170 2175 +44 161 833 7297

Documents

Forward Looking Assessment of Own Risk · In deciding on the business strategy, the undertaking has to take into account the output from the forward looking assessment of the undertaking’s