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

2. 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. 3 Solvency II - Pillar 2 and 3 New focus for supervisor Level of harmonisation More pressure from capital markets More pressure from rating agencies Market-consistent valuation Validation of internal models 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 Three-pillar approach Pillar 1:Pillar 2:Pillar 3:

4. 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. 5 Own risk and solvency assessment (ORSA): Policy Level 1 Level 2 Level 3 May 2008 issues paper CEIOPS advice to Commission (formerly CP58) Articles 45, 35 and 246 Pre-consultation paper: December 2010 Five key principles: management responsibility risk coverage forward looking integrated into the business documentation and validation Two main external reports: Solvency & Financial Condition Report (SFCR) – publicly disclosed Report to supervisors (RSR) – NOT publicly disclosed Some commentary on risk management system and reporting

6. 6 ORSA: Overview Management body Objectives/purpose Solo/group Scope Ownership Embedding/use Granularity Frequency 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 Report: sign off by management body Process Methodology Roles and responsibilities Data capture and flows Validation Dependencies: SFCR & RSR Systems and controls Change control

7. 7 Useful links EIOPA papers https://eiopa.europa.eu/ 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. 8 More information can be found on our dedicated web pages: www.fsa.gov.uk/solvency2 Email us: solvency2@fsa.gov.uk