Solvency II

Insights

CBI Solvency II April Forum

The Central Bank of Ireland held a Solvency II forum on the 20th of April 2015, which Cyril Roux, Sylvia Cronin and Gabriel Bernardino addressed.

Main points from Cyril Roux's speech

  • Cyril commented that “Solveny II brings to insurance firms the potential to invest where they couldn’t before” and “At the Central Bank of Ireland, we will challenge Irish insurance companies to demonstrate they have defined and implemented investment policies commensurate with their knowledge of the investment universe and their ability to sustain investment losses”.
  • In addition Cyril outlined that “One topic that was given no thought it seems in designing Solvency II is the revision of the conditions for authorisation. Solvency I conditions for authorisations have been maintained in the new regime, and so their deficiencies have not been addressed”.
     

Main points from Sylvia Cronin's speech

Feedback on FLAORs

  • The CBI “are reasonably satisfied with the quality of the FLAOR reports which your firms submitted this year”.
  • She commented on the issue of Board ownership of the ORSA and outlined “For the ORSA to become a part of business as usual, it will not be enough for the actuary or risk function to present you and the Board with an essentially finished ORSA”.
  • The CBI will be taking an active interest in entities ORSA and ORSA policy.
    Some entities “are producing FLAORs which do not appropriately stress test what are, in our opinion, your key risks, and which ignore those risks that are difficult to quantify.”
  • Some entities “consider time horizons and business plans over too short a time period, for example two years, or over time periods which are ill defined.”

Feedback on Model Governance:

  • “The senior management and the Board should assess and understand the stability of the risk measures and models over time and there should be appropriate validation of results in place. 
  • The process for removing or adding scenarios and stress tests should be comprehensive and challenged. 
  • There should be robust governance around expert judgement. 
  • Where the risk profile of the undertaking changes significantly the model or Standard Formula must be reassessed for continued suitability. 
  • And last but not least, where an undertaking seeks internal model approval the model must be used in practical business decision and strategic decisions and key issues discussed at the Board level should be understood in the context of the Internal Model results. This requires Boards of subsidiaries of international groups to be satisfied in their own right with the appropriateness of group model methods and assumptions in respect of the local business”

Feedback on Data Governance:

  • “We require more detailed rationale when an undertaking removes outliers from the data, and we also require evidence of how the events removed can be expected not to re-occur. 
  • We also require the undertaking to carry out sensitivity tests on key assumptions.”

Main points from Gabriel Bernardino

  • EIOPA “need to see insurers relying on strong risk management capabilities to deal with the challenges posed by low interest rate environment, the financial markets volatility, the slow economic crisis, the digital era.”
  • He outlined that “A tone from the top is also needed here, to ensure that as time goes by internal models will not be transformed into a capital optimisation tool. A race to the bottom will kill the underlying idea of the internal model.”
  • EIOPA will publish, in Q3 2015, the Tool for Undertakings (T4U) related to XBRL reporting under Solvency II. The aim of the tool is “assist SMEs in creating, editing and validating XBRL documents”. EIOPA will provide the tool free of charge and intend to decommission it after undertakings conduct their first Solvency II reporting in the second half of 2016.

     
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