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

2. What is Solvency II?
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 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 Approach4

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?
2005
2006
2007
2008
2009
2010
2011
2012
Directive Development
(Commission)
Directive Adoption
(Council & Parliament)
Level 2 & 3
(EC & CEIOPS)
CEIOPS work on Pillar I
CEIOPS
advice on
Proportionality
& Groups
CEIOPS advice on Implementing Measures
CEIOPS work
on L3
CEIOPS work on Pillars II and III
QIS 1
QIS 2
QIS 3
QIS 4
QIS5
Industry gets prepared
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 II: Capital Requirement Levels
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
Level of SCR
Ladder of Intervention
Standard Approach
Level of MCR
Market -consistent Value of Liabilities 8

9. SCR CALCULATION SCR Adj. BSCR SCRop SCRmarket SCRhealth SCRdef SCRlife
SCRnon-life
SCRintang
Mktfx
LifeMort
Health
SLT
Health
NonSLT
Health
CAT
LifeMort
NLPrem&Res
Mktprop
LifeLong
HealthMort
NLLapse
Health
Prem&Res
Health
CAT
Mktint
LifeDis/Morb
HealthLong
NLCAT
Health
NSLTLapse
Mkteq
LifeLapse
Health
DisMorb
Mktsp
LifeExp
= adjustment for the risk mitigating effect of future profit sharing
Health
SLTLapse
Mktconc
LifeRev
HealthExp
Mktilliq
LifeCat
HealthRev

10. System of Governance in Solvency II
Date
11/04/2017
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
The functions included in the system of governance are considered to be key functions and consequently also important and critical functions. 10 10

11. System of Governance in Solvency II
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

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

13. Governance – Fit and Proper Requirements
Date
Governance – Fit and Proper Requirements
Management Body
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)
Fit and Proper Requirements
Internal Control
Internal Audit
Actuarial Function
Risk Management

14. Governance – Internal Control
Date
Governance – Internal Control
Management Body
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
Fit and Proper Requirements
Internal Control
Internal Audit
Actuarial Function
Risk Management

15. Governance – Internal Audit
Date
Governance – Internal Audit
Management Body
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.
Fit and Proper Requirements
Internal Control
Internal Audit
Actuarial Function
Risk Management

16. Governance – Actuarial Function
Date
Governance – Actuarial Function
Management Body
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
Fit and Proper Requirements
Internal Control
Internal Audit
Actuarial Function
Risk Management

17. Governance – Risk Management
Date
Governance – Risk Management
Management Body
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.
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

19. Risks To Be Covered by Risk Management
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
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
Concentration Risk
All risk exposures with a loss potential which is large enough to threaten the financial position of the company

20. Effective Risk Management System
Date
Effective Risk Management System
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.
Adequate written policies
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
Appropriate management
reporting

21. Effective Risk Management System
Date
Effective Risk Management System
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
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
Appropriate management
reporting

22. Effective Risk Management System
Date
Effective Risk Management System
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
Adequate written policies
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
Appropriate management
reporting

23. Effective Risk Management System
Date
Effective Risk Management System
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
Adequate written policies
Appropriate processes and
procedures
Appropriate reporting and
feedback loops
Appropriate management
reporting

24. Effective Risk Management System
Date
Effective Risk Management System
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
Adequate written policies
Appropriate processes and
procedures
Appropriate procedures and
feedback loops
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

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

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