The Impact of Solvency II

Türda ÖzmenDirector

The 2nd International Insurance Conference Istanbul, 30 September 2010

Agenda

The Road Ahead

Where are Capital Ratios Headed under Solvency II?

Impact on the Insurance Industry

Implications for Ratings

Agenda

The Road Ahead

Where are Capital Ratios Headed under Solvency II?

Impact on the Insurance Industry

Implications for Ratings

4

Road Ahead

1 July 2010

Final QIS5 Specifications

31 Dec 2012

Solvency 2 in Force?

2010

April 2011

QIS5 Results

2011 2012

End 2010

Draft Level 2 Implementing Measures

Aug–Nov 2010

QIS5 to Run

Jun–Oct 2012

Final Level 2 Implementing Measures Adopted

2013

Agenda

The Road Ahead

Where are Capital Ratios Headed under Solvency II?

Impact on the Insurance Industry

Implications for Ratings

6

0%

100%

200%

300%

400%

Captive Reinsurance Non-life Composite Life

(Solvency ratio) Solvency I QIS 4

QIS 4 Results – Refresher

Source: CEIOPS

Comparison of Solvency Ratios, All QIS4 Participants

7

UK Life Solvency Ratio

Source: Milliman

Breakdown from QIS 4 to Estimated QIS 5 (Draft Specifications)

100%

110%

120%

130%

140%

150%

160%

QIS 4 YE 07QIS 4 YE 08 IlliquidityPremium

Market SCRMktCorrelations

SCR Other QIS 5 DraftYE 08

(Solvency ratio)

Calculated for a Notional Life Company Representing Market

8

0%

100%

200%

300%

400%

500%

600%

France Ireland Italy UK Poland Romania Slovakia

(Solvency ratio) QIS 4 YE 07 QIS 4 YE 08 QIS 5 YE 08 Draft

EU Life Solvency Ratios

Source: Milliman, Autorité de Contrôle Prudentiel

For a Notional Life Company Representing Whole Market

Calculated for a Notional Life Company Representing Market

9

0%

5%

10%

15%

20%

25%

30%

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Pro

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TP

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tysh

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QIS 4 Final Advice QIS 5 Draft

Non-Life Underwriting Parameters

Source: CEIOPS, EC

Premium Risk Standard Deviations

10

Internal Models – The Vision

> Alternative to the standard formula

> Tailored to business specifics

> Calibrated to 99.5% VaR over 1 year

11

Internal Models – The Reality

Given that each insurer writes different business, has a different risk profile, a different corporate structure, different operational processes and a different risk management framework, each internal model will be different and used in a different way. (FSA DP 08/4)

Photo Source: US Army

12

Outstanding Issues

> Grandfathering

> Equivalence

> (Relative) level of some standard capital charges

> Tax

Agenda

The Road Ahead

Where are Capital Ratios Headed under Solvency II?

Impact on the Insurance Industry

Implications for Ratings

14

Impact on the Insurance Industry

> Shift from capital-intensive to capital-lite products

> Pricing for increased cost of capital

> Asset reallocation

> Increased de-risking

> Industry consolidation

> Implementation costs

Agenda

The Road Ahead

Where are Capital Ratios Headed under Solvency II?

Impact on the Insurance Industry

Implications for Ratings

Implications for Ratings

Capital Req.s

Up Means

Leverage Down

Increased

Barriers to Entry

Improved Risk-Based

Assess- ment

Transparency and

Comparability Up?

Short-Term

Implem- entation

Risk

Technical Issues: Coupon Deferrals

Threats to Some Product Lines

Transparency and

Comparability Down?

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