Date (Arial 16pt) Title of the event – (Arial 28pt bold) Subtitle for event – (Arial 28pt) Standard formula appropriateness for life and general insurers Head of Department, General Insurance Actuaries James Orr

Agenda 1.Key Messages 2.Timeline 3.PRA’s approach to assessing appropriateness 4.Outputs of 2014 data request exercise 5.Options for where SF does not capture risk profile 2

The standard formula solvency capital requirement 3 Solvency Capital Requirement (SCR) Solvency Capital Requirement (SCR)

Standard formula should fit a significant proportion of UK firms Lots of moving parts on the balance sheet, simplistic comparison to ICA is not the full picture. The PRA does not expect large capital inflows or outflows to result from Solvency II implementation The PRA does not promote or encourage the use of an internal model where the standard formula is a good fit The Directive requires firms to identify areas where your business materially deviates from the standard formula SCR assumptions. This is your responsibility The ORSA allows you to demonstrate assessment of appropriateness We will review all firms for standard formula appropriateness before Solvency II implementation Key messages 4

PRA decision/activity Firm activity Q Q Q Q Q Transposition 31 March 2015 CP23/14 published 15/10/14 detail on other approvals applications PRA assessments of priority SF firms PRA assess appropriateness of all other standard formula firms Ongoing 2014 ORSA reviews Firms start to apply for approvals including USPs Other approvals granted or declined by the PRA 2015 ORSA reviews and 2014 feedback PRA communication to firms 2015 data request* Implementation 1 January Timeline Firm and PRA continuous evaluation of standard formula appropriateness Firms to assess appropriateness *firms not subject to interim reporting requirement

PRA approach to assessing SF SCR appropriateness 6 The PRA has identified the priority firms for review by end Q High-level review of all other firms through 2015 Review will be based on quantitative deviations and qualitative information including the ORSA Proportionate approach, noting idiosyncratic nature of some firms Responsibility rests with the firm to identify standard formula appropriateness

Outputs of the 2014 ICAS-SCR data collection exercise 7 High response rate from data request – over 90% of live writers Life insurers Standard formula firms are reporting a larger decrease in SCR capital requirements than general insurers but only a minor drop in capital resources Matching adjustment, volatility adjustment and transitionals create significant movement and uncertainty in overall capital position General insurers Standard formula firms capital resources and requirements largely in line with ICG figures under the current regime

Risk areas for Life firms – PRA focus 8 Some examples of potential indicators of inappropriateness: Risk areas that may form part of standard formula reviews Credit: Firms hold a variety of credit risky assets that may not be well represented by the average portfolio of corporate bonds assumed within the Standard Formula Longevity: Firms with particular sector focus where their portfolio might be considered to have unusual concentrations e.g. deferred, enhanced or impaired annuities Equity: Firms pursuing an active investment strategy or with a concentrated equity portfolio Operational: Firms with significant outsourcing arrangements and / or a range of legacy systems Pension risk

General insurers – Transition from ICG to SF-SCR 9

Standard formula appropriateness for general insurers 10 Potential indicators of inappropriateness: Risk areas that may form part of a general insurer’s standard formula reviews Credit Risk: Reinsurance counterparty risk Non-Life underwriting risk: Where deviations from underlying assumptions are significant PPOs: Should be modelled in the life underwriting sub-module (longevity risk). Long term solution may be to consider use of partial internal model – where proportionate to do so Cat Risk: Firms with non-standard portfolios with a large element of non- European economic area (EEA) catastrophe risk or with large deductibles or complex outwards reinsurance programmes Pension Risk

Options where the standard formula does not capture risk profile Undertaking Specific Parameters Partial internal model Firm Dialogue and supervisory review ORSA review and post-ORSA action plan Firm Dialogue and supervisory review ORSA review and post-ORSA action plan Capital add-on, which may lead to: Partial internal model Full internal model PRA initiated action Full Firm initiated action Full Regular dialogue Full

Partial internal models (PIMs) must meet requirements of the Directive set out in Articles 112, 113 and standards in Articles Do not need to be overly complex Agree with the PRA the scope of a PIM and set out a timetable to develop it. The PRA appreciates the time needed to build a model Partial internal models 12

Capital add-ons The PRA will determine the requirement for capital add-ons ahead of Solvency II implementation Can be applied for governance and risk profile deviations including where the standard formula is not appropriate and a model is required May be used in conjunction with other measures – they are temporary Reviewable Ultimately made public 13

Summary 14 Standard formula should fit a significant proportion of UK firms Lots of moving parts on the balance sheet, simplistic comparison to ICA is not the full picture. The PRA is not expecting large capital outflows to result from Solvency II implementation The PRA does not promote or encourage the use of an Internal Model where the standard formula is a good fit The Directive requires you to identify areas where your business materially deviates from the standard formula SCR assumptions. This is the firm’s responsibility The ORSA allows you to demonstrate assessment of appropriateness Capital add-ons, where needed, will be used appropriately