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)

• 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

• Q4 2014

• Q1 2015

• Q2 2015

• Q3 2015

• Q4 2015

• 2016

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 2016

5

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 Q1 2015

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

Non-Life Underwriting

Health Underwriting

Market Risk

Counterparty Risk

Operational Risk0

1,000

2,000

3,000

4,000

5,000

6,000

SF firms - SF SCR vs ICG (pre-diversification) £m

SF SCR ICG

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

• 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 120-125

• 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