Solvency II Technical Provisions
Robert Treen, Grant Alderman and Amy Goodwin7 May 2013
© 2013 Towers Watson. All rights reserved.
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Introduction
towerswatson.com© 2013 Towers Watson. All rights reserved.
2
Overview of SII Technical ProvisionsOverview of SII Technical Provisions
ResQ ImplementationResQ Implementation
Igloo ImplementationIgloo Implementation
Overview of SII Technical Provisions
© 2013 Towers Watson. All rights reserved.
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Overview of SII Technical Provisions
l Changes to financial reporting standards under Solvency II (and also IFRS 4 phase 2) will lead to significant changes to the production of balance sheets and, in particular, the valuation of technical provisions
l Principles based approachl Assets and liabilities should be FAIRLY valued
– The amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm’s length transaction
l Principle of proportionality– Proportionate to the nature, complexity and scale of the risks inherent in the
business of an insurance or reinsurance undertakingl Calculations should be on a going-concern basis
towerswatson.com© 2013 Towers Watson. All rights reserved.
4
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Balance Sheet
Assets Liabilities Capital© 2013 Towers Watson. All rights reserved.
towerswatson.com
5
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Balance Sheet
Assets Liabilities
Capital
Capital
Investments
RI assets
Premium Debtors
Other
TechnicalProvisions
Other
© 2013 Towers Watson. All rights reserved.towerswatson.com
6
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
TechnicalProvisions
The Balance Sheet
Assets Liabilities
Capital
Capital
Investments
RI assets
Premium Debtors
Other
Provisionfor lossesand loss
adjustmentexpenses
Other
Provisionfor unearned
premiums
© 2013 Towers Watson. All rights reserved.towerswatson.com
7
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
TechnicalProvisions
The Solvency II Balance Sheet
Assets Liabilities
Capital
Capital
Investments
RI assets
Premium Debtors
Other
Provisionfor lossesand loss
adjustmentexpenses
Other
Provisionfor unearned
premiums
© 2013 Towers Watson. All rights reserved.towerswatson.com
8
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Solvency II Balance Sheet
Assets Liabilities
RI assets
Premium Debtors
Provisionfor lossesand loss
adjustmentexpenses
Provisionfor unearned
premiums
© 2013 Towers Watson. All rights reserved.towerswatson.com
9
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Solvency II Balance Sheet
© 2013 Towers Watson. All rights reserved.towerswatson.com
10
Liabilities
Assets
Provision for losses and
loss adjustmentexpenses
Provisionfor unearned
premiums
Premium Debtors
RI assets
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Solvency II Balance Sheet
© 2013 Towers Watson. All rights reserved.towerswatson.com
11
Liabilities
Assets
Provision for losses and
loss adjustmentexpenses
Provisionfor unearned
premiums
Premium Debtors
RI assets RI assets
Premium Debtors
Basis
Gross PremiumProvision
Gross Claims Provision
l Best Estimatel Removal of UPRl Probability-weighted average
of all possible outcomesl Legal obligations basis
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Solvency II Balance Sheet
© 2013 Towers Watson. All rights reserved.towerswatson.com
12
Liabilities
Assets
Provision for losses and
loss adjustmentexpenses
Provisionfor unearned
premiums
Premium Debtors
RI assets RI assets
Premium Debtors
Basis
l Inclusion of risk margin
Gross PremiumProvision
RI assets
Premium Debtors
Gross PremiumProvision
Gross Claims Provision
Gross Claims Provision
Risk Margin
Constituents
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Solvency II Balance Sheet
© 2013 Towers Watson. All rights reserved.towerswatson.com
13
Liabilities
Assets
Provision for losses and
loss adjustmentexpenses
Provisionfor unearned
premiums
Premium Debtors
RI assets RI assets
Premium Debtors
Basis
Gross PremiumProvision
RI assets
Premium Debtors
Gross PremiumProvision
Gross Claims Provision
Gross Claims Provision
Risk Margin
RI assets
Premium Debtors
Gross PremiumProvision
Gross Claims Provision
Risk Margin
Constituents Discounting
l Allowance for time-value money
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
The Solvency II Balance Sheet
© 2013 Towers Watson. All rights reserved.towerswatson.com
14
Liabilities
Assets
Provision for losses and
loss adjustmentexpenses
Provisionfor unearned
premiums
Premium Debtors
RI assets RI assets
Premium Debtors
Basis
l Future premiums allowed for in liability cashflows
Gross PremiumProvision
RI assets
Premium Debtors
Gross PremiumProvision
Gross Claims Provision
Gross Claims Provision
Risk Margin
RI assets
Premium Debtors
Gross PremiumProvision
Gross Claims Provision
Risk Margin
Constituents Discounting
Gross PremiumProvision
Gross Claims Provision
Risk Margin
RI assets
Shift from Assets
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Technical ProvisionsPotential Impact
towerswatson.com© 2013 Towers Watson. All rights reserved.
15Source: Lloyd’s Solvency II – Technical Provisions under Solvency II detailed guidance – March 2011 Update
100%
88.9%
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
What are the challenges?
towerswatson.com© 2013 Towers Watson. All rights reserved.
16
l It’s not conceptually difficult.
l Most of the techniques are not new.
What isn't challenging
l It is time-consuming, messy and tedious.
What is challenging
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
What are the challenges?
© 2013 Towers Watson. All rights reserved.towerswatson.com
17
Reserving Classes
Reserving Currencies
Allocate to SII Currencies Calculations
Aggregate over
Currencies
Aggregate over Classes SII Classes SII Currencies
Res 1
Res 2
Res 20
USD
CAD
GBP
All to GDP
AUD
CAD
EUR
GBP
JPY
OTH
USD
Cashflows
Discounting
Binary Events
Expenses
Risk Margin
Medical Expenses
Income protection
Misc Non-life
AUD
CAD
EUR
GBP
JPY
OTH
USD
AUD
AUD
AUDGross
RINet
DirectProportional
Non-Proportional
All to GBP
∑
∑
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
What are the challenges?
towerswatson.com© 2013 Towers Watson. All rights reserved.
18
l Auditablel Flexiblel Repeatablel Efficientl Understandable
We would like a process that is
ResQ Implementation
© 2013 Towers Watson. All rights reserved.
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Overview of ResQ Custom Methods
towerswatson.com© 2013 Towers Watson. All rights reserved.
20
l For Underwriting Year reserves, a conversion to Earned, Unearned (UK GAAP) and Legally Obliged basis within ResQ
Custom Method 1 –Data Conversion
l Allocation of Claims Reserves and Future Premiums to SII Reporting currency
Custom Method 2 –Currency Allocation
l SII TPs calculated within ResQ using “Custom Methods”l Underwriting Year or Accident Year data as the starting pointl Initial reserving performed at Reporting Currency
l Conversion to cashflow basis for discounting
l Inclusion of SII adjustments
Custom Method 3 –SII Technical Provisions
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
ResQ Custom Method Structure
towerswatson.com© 2013 Towers Watson. All rights reserved.
21
Method 1 Method 2 Method 3Reporting Legally Allocate to CalculateCurrency Obliged SII Currency SII TPs
Pure GBP Pure GBP
AUD AUDGBP Conversion
JPY JPY
Other GBP Other GBP
USD Conversion USD
CAD Conversion CAD
EUR Conversion EUR
ResQDemo of Custom Methods (Beta Versions)
© 2013 Towers Watson. All rights reserved.
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Next Steps…
towerswatson.com© 2013 Towers Watson. All rights reserved.
23
Future DevelopmentsFuture Developments
l Automating the population of key inputs and assumptions
l Automating the population of key inputs and assumptions
l Aggregating cashflows for Risk Margin calculation
l Aggregating cashflows for Risk Margin calculation
l Exporting results and summaries to Excel
l Exporting results and summaries to Excel
l Extending allocation capabilities to produce:l Results at SII
Class for reporting purposes
l Results at Lloyd’s Risk Code level to support TPD returns
l Extending allocation capabilities to produce:l Results at SII
Class for reporting purposes
l Results at Lloyd’s Risk Code level to support TPD returns
Igloo Implementation
© 2013 Towers Watson. All rights reserved.
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Why Igloo?
towerswatson.com© 2013 Towers Watson. All rights reserved.
25
l Data may already be in Igloo
l Easy to feed inl Flexibilityl Easy to update
Inputs
l Diagnosticsl Flexible reports
Outputs
© 2013 Towers Watson. All rights reserved.