Solvency 2 – What the Irish industry is doing Michael Culligan DIMA/IIF Solvency 2 Seminar 17 November 2006

2 What the Irish industry is doing Hmmm…..

3 Today’s agenda Solvency 2 - where are we now? Irish industry involvement so far What next? Recap & summary

4 Background Current EU solvency rules date from 1970s No major updates since their introduction –Solvency I review (2002) introduced some refinements Solvency II represents a ‘root and branch’ review of entire model of insurance supervision in Europe Will cover entire insurance industry –Life & non-life –Direct writers & reinsurers (incl. captives)

5 Objectives of Solvency II project European Commission’s stated aims for Solvency II: To develop new framework for insurance supervision –Must be risk-based; Must not focus solely on ‘quantitative’ aspects To incentivise good risk management To give supervisors appropriate tools to assess overall solvency position of insurance co. To promote harmonisation of standards of supervision across the EU To provide better supervision of groups and conglomerates To be more adaptable to future changes To provide a level playing field To be consistent with emerging international developments

6 How will it differ from current system? © CEA 2006

7 Three pillar approach © CEA 2006

8 Who’s who? EU Commission & EIOPC CEIOPS CEA (Industry) CRO Forum (Industry) Groupe Consultatif (Actuaries)

9 Irish inputs EU Commission & EIOPC CEIOPS CEA (Industry) CRO Forum (Industry) Groupe Consultatif (Actuaries)

10 Project timetable © CEA 2006

11 Today’s agenda Solvency 2 - where are we now? Irish industry involvement so far What next? Recap & summary

12 Opportunities to get involved CEIOPS is the main driving force behind the design of the new system Two main ways in which companies can engage in this design process 1.Quantitative Impact Studies –There have been 2 already –At least one more planned 2.Consultation Papers –6 published this week! (CPs 15-20) –Not usually this busy though

13 What’s a QIS? Stands for Quantitative Impact Study CEIOPS sets out instructions and asks insurance companies to provide it with the results Allows CEIOPS to –Gauge the potential impact on firms of its suggested approaches –Understand the practicality of its suggested approaches –Understand the suitability of its suggested approaches QISs address the main quantitative elements of the Solvency 2 framework (Pillar 1) –Technical provisions –Capital requirements Also provides firms with an opportunity to engage with, and influence, the design process

14 What was QIS2 looking at? Technical specifications Valuation assumptions Eligible capital Solvency Capital Requirement Minimum Capital Requirement QIS2 coveredQIS2 did not address Focus very much on design and structure Calibration was tentative Examined solo company position Employed mixture of factors and scenarios Results provided in spreadsheet along with additional information Group level issues Internal models Innovative forms of capital © Barrett & Persad 2006

15 Results from QIS2? No official results published yet, but … Comment from Henrik Bjerre-Nielsen (Chair CEIOPS) at CEIOPS conference earlier this week: “In general, the exercise showed that the impact on companies’ solvency positions seems to differ between undertakings, with the overall impact appearing to depend on a combination of opposing effects. “On average, technical provisions appear to decrease, the SCR to increase, and eligible capital to increase. “The solvency ratio, on average, seems to decrease, but remains above 100% for most undertakings in the majority of countries, confirming an overall resilience of the sector.”

16 So, who has participated? So, lots of Irish companies have been participating in the QISs, right? Well, not exactly … LifeNon-Life No. of companies Market share No. of companies Market share QIS13 (out of 51) 28%2 (out of 124) 20% QIS2430%?1<20%? Participation rates for QIS1 were so low (and so dominated by a single large company) that the Financial Regulator felt unable to send the results to CEIOPS Unfortunately (but not surprisingly) this didn’t help to improve QIS2 take-up

17 Contrast with the position in the UK Compare and contrast QIS2 experience … However… –UK participation included 4 reinsurers, 6 mutuals, 6 London Market insurers –Only 2 “small” companies participated in the UK And remember… –Irish reinsurers not invited to participate (plenty of other issues to contend with!) –Almost all Irish companies are “small” LifeNon-Life No. of companies Market share No. of companies Market share Ireland430%?1<20%? UK1965%2367%

18 Why the low Irish participation? A variety of reasons…. It’s too complicated I don’t have the resources It’s years away Nobody told me about it Reasons are quite valid and quite understandable But, if you don’t get involved you’re running a huge risk –in terms of potential for unexpected Solvency II impact on your business

19 Why Irish firms need to get involved Because Ireland is different! We have –Lots of life companies who are exclusively focused on unit-linked –Lots of reinsurers based here (compared to most other countries) –Lots of captives So what? Risk that Solvency II is designed with others in mind Risk that Solvency II won’t deliver benefits for Irish companies –And may put Ireland at a disadvantage

20 Today’s agenda Solvency 2 - where are we now? Irish industry involvement so far What next? Recap & summary

21 Future timetable QIS2 (results due soon) Consultation papers QIS3 (Apr-Jun 2007) Framework Directive & Impact Analysis (July 2007) Informal drafts before then? 2008 Target for completion of detailed regulations 2010 Regime fully operative? QIS3 will be crucial © Barrett & Persad 2006

22 How can you get involved? Participate in QIS3 –Last chance to influence calibration of capital requirements –The Financial Regulator has helped to organise Q&A sessions for previous QISs (as has the UK regulator) which should help to make it less daunting An Taoiseach’s IFSC Insurance Group has established a Solvency II sub-group –Includes representatives from Dept of Finance, Financial Regulator, life & non-life direct writers, life & non-life reinsurers, captives –Useful forum to air views – please bring any issues to its attention Assist industry groups (DIMA / FSI / IIF) in their lobbying efforts by bringing your concerns to them –As I understand it only the IIF is represented through the CEA (?)

23 Where can I find out more? Can be daunting and difficult to know where to start I recommend this short CEA publication as a good introduction if you’re coming to this from scratch Available to download from: download/publ/article244.pdf

24 Where can I find out more? The CEIOPS website The European Commission site The CEA’s website The European actuarial profession’s website Other useful sources include FSA website, UK actuaries website …

25 Today’s agenda Solvency 2 - where are we now? Irish industry involvement so far What next? Recap & summary

26 Recap & summary Solvency II represents a ‘root and branch’ overhaul of the supervisory regime for all European insurers Aim is to move from current simplistic system to a more risk- sensitive, sophisticated system –Standard formula for capital requirements will be more complicated –Possibility to dispense with standard formula and use own internal model –Implications for resources (both within firms and regulators) Currently at a crucial stage in the design process –Next QIS may be last chance to influence design and calibration of Pillar 1 requirements Irish industry involvement to date has been less than stellar! –Irish industry running huge risk through inaction There are lots of ways to get involved –Can’t stress enough how important it is!

Solvency 2 – What the Irish industry is doing Michael Culligan DIMA/IIF Solvency 2 Seminar 17 November 2006