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Dr. Onur ACAR Risk Manager Mapfre Genel Insurance Risk Management Practices in Solvency II.

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Presentation on theme: "Dr. Onur ACAR Risk Manager Mapfre Genel Insurance Risk Management Practices in Solvency II."— Presentation transcript:

1 Dr. Onur ACAR Risk Manager Mapfre Genel Insurance Risk Management Practices in Solvency II

2 It is the proposed new EU legislation which will govern the capital requirements of insurance companies. Disadvantages of Solvency I which entered into force in 1970s: – Capital is not adequately directed to risks – Rules conflict with good risk management – A lack of harmonisation across the EU Solvency II is an opportunity for a better and more appropriate risk based solvency regime What is Solvency II? 2

3 Solvency II : 3 Pillars It is not only a capital calculation system but it is based on 3 Pillars: -Pillar I, which focuses on quantitative requirements -Pillar II, which focuses on qualitative requirements and supervisory activities -Pillar III, which addresses supervisory and public disclosure of financial and other information 3

4 Solvency II: 3 Pillar Approach 4

5 Aims of Solvency II Strong, effective policyholder protection with optimal capital allocation Proportionate, risk-based approach to supervision with appropriate treatment both for small and large companies To incentivise more sophisticated risk management tools To increase competition within the EU insurance markets and the global competitiveness of the EU insurers 5

6 Where do we stand in the Solvency II process? Directive Development (Commission) Directive Adoption (Council & Parliament) Directive Adoption (Council & Parliament) Level 2 & 3 (EC & CEIOPS) Level 2 & 3 (EC & CEIOPS) CEIOPS work on Pillar I CEIOPS work on Pillars II and III CEIOPS advice on Implementing Measures QIS5QIS 1QIS 2QIS 3QIS 4 CEIOPS advice on Proportionality & Groups Industry gets prepared CEIOPS work on L Transposition 1 Jan 2014 ?

7 Risk-based economic model A risk-based economic model implies an increased accuracy of the solvency assessment, closer to the true risk profile of the insurance company. The main principles of a true economic risk-based model are: -A Total Balance Sheet approach: market consistent valuation of all assets and liabilities in the balance sheet -Addressing risk diversification effects: within the same risk, between risks, between companies, between geographical areas -Addressing risk mitigation effects: reinsurance and ART 7

8 Solvency Capital Requirement (SCR) Target Capital that an entity should aim to meet under normal operating conditions Dropping below SCR does not necessarily require immediate supervisory intervention Minimum Capital Requirement (MCR) Reflects a level of capital below which ultimate supervisory action could be triggered Ladder of Intervention An appropriate ladder of intervention if the available capital falls below SCR Internal Model Standard Approach Market - consistent Value of Liabilities Level of MCR Level of SCR Ladder of Intervention Solvency II: Capital Requirement Levels 8

9 SCR BSCR SCR op SCR intang SCR health SCR non-life SCR def SCR life Adj. SCR market Mkt fx Health SLT Health NonSLT Health CAT NL Prem&Res Health Mort Health Long Health DisMorb Health Exp Health SLTLapse Health Rev Health Prem&Res Life Mort Life Long Life Dis/Morb Life Lapse Life Exp Life Rev NL Lapse Mkt prop Mkt int Mkt eq Mkt sp Mkt conc = adjustment for the risk mitigating effect of future profit sharing Health CAT Health NSLTLapse Mkt illiq Life Cat NL CAT SCR CALCULATION

10 System of Governance in Solvency II Internal Audit Internal audit function Internal Control Compliance function Actuarial Function Management body System of Governance Fit and proper requirements Own Risk and Solvency Assessment (ORSA) Risk Management Risk management function 10 The functions included in the system of governance are considered to be key functions and consequently also important and critical functions.

11 The system of governance should: – be proportionate to the nature, scale and complexity of the operations of the insurer – include an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities and an effective system for ensuring the transmission of information – be subject to regular internal review Governance is crucial because: – Solvency II is a flexible system – There are risks that cannot be properly quantified – There are internal models 11 System of Governance in Solvency II

12 Management Body Fit and Proper Requirements Internal Control Internal Audit Actuarial Function Management body has the ultimate responsability to establish an effective system of governance which provide for sound and prudent management of the business. 12 Governance – Management Body Risk Management

13 All persons who effectively run the undertaking or have other key functions should be fit and proper. Their professional qualifications, knowledge and experience should be adequate to enable sound and prudent management (fit) They should be of good repute (proper) 13 Governance – Fit and Proper Requirements Management Body Fit and Proper Requirements Internal Control Internal Audit Actuarial Function Risk Management

14 Companies should have an effective internal control function that should include: administrative and accounting procedures appropriate reporting arrangements at all levels of the company a compliance function Compliance function should include: advising the management body on compliance with laws, regulations and administrative provisions an assessment of the possible impact of any changes in the legal environment on the operations of the company 14 Governance – Internal Control Management Body Fit and Proper Requirements Internal Control Internal Audit Actuarial Function Risk Management

15 Companies should have an effective internal audit function that should: include an evaluation of the adequacy and effectiveness of the internal control system and other elements of the system of governance. be objective and independent from the operational functions. Any findings and recommendations of the internal audit should be reported to the management body which should determine what actions are to be taken. 15 Governance – Internal Audit Management Body Fit and Proper Requirements Internal Control Internal Audit Actuarial Function Risk Management

16 Companies should have an effective actuarial function to: ensure the appropriateness of the methodologies and models used in the calculation of technical provisions inform the management body regarding the reliability and adequacy of the calculation of technical provisions express an opinion on the overall underwriting and reinsurance policy contribute to the effective implementation of the risk management system 16 Governance – Actuarial Function Management Body Fit and Proper Requirements Internal Control Internal Audit Actuarial Function Risk Management

17 Companies should have an effective risk management system comprising strategies, processes and procedures necessary to identify, measure, monitor, manage and report the risks they face. It needs to be integrated into the decision making process of the company. The management body should have the ultimate responsibility for ensuring that the implemented risk management system is suitable, effective and proportionate to the nature, scale and complexity of the risks. 17 Governance – Risk Management Management Body Fit and Proper Requirements Internal Control Internal Audit Actuarial Function Risk Management

18 Tasks of the Risk Management Function Assisting the management body in the effective operation of the risk management system Monitoring the risk management system Maintaining an organisation-wide and aggregated view on the risk profile of the company Reporting details on risk exposures and advising the management body with regard to risk management matters Identifying and assessing emerging risks 18

19 Operational Risk The risk of loss arising from inadequate or failed internal processes, personnel or systems, or from external events Liquidity Risk The risk that the company is unable to realise investments and other assets in order to settle its financial obligations when they fall due Underwriting Risk The risk of loss in the value of insurance liabilities, due to inadequate pricing and provisioning assumptions Market Risk The risk of loss in the financial situation resulting from fluctuations in the level and in the volatility of market prices of assets, liabilities and financial instruments Credit Risk The risk of loss in the financial situation, resulting from fluctuations in the credit standing of counterparties or issuers of securities Concentration Risk All risk exposures with a loss potential which is large enough to threaten the financial position of the company Risks To Be Covered by Risk Management

20 20 Effective Risk Management System Adequate written policies Appropriate processes and procedures Appropriate procedures and feedback loops Appropriate management reporting Clearly defined and well documented Risk management strategy should include: risk management objectives key risk management principles general risk appetite assignment of risk management responsibilities across all the activities of the company It should be consistent with the company’s overall business strategy.

21 21 Effective Risk Management System Appropriate processes and procedures Appropriate procedures and feedback loops Appropriate management reporting Clearly defined and well documented Written risk management policies should include: definition and categorisation of the material risks faced by the company definition of acceptable risk limits implementation of risk strategy and control mechanisms Written policies should at least cover: underwriting and reserving asset–liability management (ALM) investments liquidity and concentration risk management operational risk management reinsurance Adequate written policies

22 22 Effective Risk Management System Adequate written policies Appropriate procedures and feedback loops Appropriate management reporting Clearly defined and well documented Main risk management strategies and policies should be approved by the management body. Processes and procedures should include: risk identification risk assessment risk measurement risk monitoring risk reporting Appropriate processes and procedures

23 23 Effective Risk Management System Adequate written policies Appropriate processes and procedures Appropriate management reporting Clearly defined and well documented Information on the risk management system should be actively and continuously monitored and managed by the management body and by all relevant staff Appropriate reporting and feedback loops

24 24 Effective Risk Management System Adequate written policies Appropriate processes and procedures Appropriate procedures and feedback loops Clearly defined and well documented Material risks faced by the company and the effectiveness of the risk management system should be reported to the management body Appropriate reporting to the management

25 Supervision of the Risk Management System The company is required to demonstrate to the supervisor that it has an effective risk management system which is: – capable of identifying, monitoring and mitigating both current and future risks in line with its risk tolerance levels. Stress testing and scenario analysis can be used to determine the effect of these risks. – an integral part of its business strategy – subject to regular internal review by the management body – proportionate to the nature, scale and complexity of its business 25

26 Supervision of the Risk Management System The disclosure to the supervisor could include: – material risks and their potential effects – any perceived emerging risks to the company’s solvency position – the scope and nature of risk and capital measurement systems – the structure and organisation of the relevant risk and capital management systems – details of organisational structure and staff responsible for the risk management system – qualitative measures for risks which are not quantifiable, such as liquidity risk and operational risk 26

27 Thank you … Onur Acar, Ph.D. Mapfre Genel Sigorta Risk Manager


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