Solvency II dry
run workshops
stage 1
20,21
& 22 April
2010
4 November
2009
Agenda
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Workshop format and purpose
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Dry run requirements
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Guidance recap
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System of governance
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Model scope, governance & use
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Documentation
Followed by group discussions
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Round up and questions
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Workshop
format & Purpose
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Purpose of workshop sessions
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Re-iterate dry run submission requirements
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Recap on guidance issued, highlighting major changes from current
requirements
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Followed by interactive session with facilitated group discussions
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Key purpose to allow feedback and questions on guidance
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areas where further clarity or content may be required
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questions around dry run process
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general queries on Stage 1 topics
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Group round up and play back of issues
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Panel to answer questions where possible – take away those we can’t
answer today and publish as FAQ
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Dry run
requirements
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What are Lloyd’s expectations of the
dry run?
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Obtain a clear picture of agents’ progress against plans and
requirements
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Evidence that all relevant areas are being addressed appropriately
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Transitional phase and agents are not expected to be fully compliant
with Solvency II standards
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Lloyd’s expects all agents to address at least the minimum
requirements
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z
but key to be able to evidence significant progress beyond planning
expectations of progress will change as we move closer to 2012
Process of continuous review and feedback
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best practice will emerge as reviews progress
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What should be submitted by 1 June?
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Templates being constructed for each of the nine elements
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at sub element level – approx 35 in total across whole process
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Setting out progress against each of the dry run requirements and
evidence available
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Self assessment score on Solvency II readiness for each area
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Full completion is mandatory for all
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required for each syndicate to support Lloyd’s reporting to FSA as
well as benchmarking and assessment
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Templates excel based – stage 1 available for download by 30/4
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Latest date for template submissions is 1 June 2010
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submit to [email protected]
© Lloyd’s
Example dry run submission template
Dry run element
Systems of Governance
Sub element(s)
General Governance requirements
Lloyd’s Dry run requirements/expectations
Repeat what we agree goes in guidance as expected position at date of dry run entry
Agent comments / current status
Agent to c omment on c urrent status of work and stage in process, highlight any issues and/or difficulties, changes made to plans
Progress against final Solvency II
requirements
Design Stage
Complete
Expected
complet’n
Evidence/deliverables
Some
available
Complete
Expected
complet’n
Format of evidence
Governance framework
Organisation s truc ture and lines of res ponsibility
Adequacy of skills and experience of board and staff
Procedures for activities
Procedures for decision-making
Adequacy of information systems
Adequacy of records and security of information
Conflicts of interest
Contingency plans
Review system of governance
Remuneration policy
Individual(s) responsible for delivery of above
Self assessment score – readiness against final Solvency II requirements
(please enter score between 1 and 10 with 1 being lowest score and 10 being fully compliant)
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What happens after template submission?
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Lloyd’s will collate and analyze information from submitted templates
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Agree with individual agents by mid June what should be submitted and
expected timings of review
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Evidence – proportional and format not mandated
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discussion based reviews as well as submitting documentation
Broad review timings published but anticipated that phases will overlap
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tie in with ongoing monitoring of progress across all areas
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high level feedback given as soon as possible but no drop dead final
feedback in 2010 -iterative process until 2012
FSA will be monitoring Lloyd’s review process as well as reviewing
selection of individual agents
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process and selection yet to be confirmed
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System of
governance
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Scope of the system of governance is
broad and includes…
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General governance requirements
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Risk management
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Internal audit
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Actuarial function
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Internal control
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Outsourcing
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Fit & proper
…and for each of these review and enhancement of existing
arrangements is needed to meet SII requirements
NB: Not necessarily a new set of standards, more a different take
on those that exist
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Some new requirements for specific
functions do come out of Solvency II
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Risk management function
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z
Internal audit function
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Managing agents will need to consider how responsibilities in
relation to the internal model will be met
Agents without an existing internal audit function will need to
consider how they will meet the requirement for an independent
function
Actuarial function
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New requirements to express an opinion on the underwriting policy
and adequacy of reinsurance arrangements
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If outsourced this will present challenges – demonstrating the use
test and contribution to implementation of the risk management
system
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Risk management development under
Solvency II
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Solvency II is unlikely to result in significant changes to Lloyd’s risk
management standards
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…however, a more sophisticated approach to risk management, that is
embedded across the business will be needed
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Key areas of focus
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Risk appetite
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Risk governance
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Risk management process & reporting
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ORSA
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Examples to follow comparing old
vs. new requirement
New Requirement
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Example 1: Risk appetite
needs to be clearly understood and used in running the business
Previous understanding
Lloyd’s approach
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One top level statement
z
z
Residual and target risk
scores
Development of quantitative risk
metrics
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Risk appetite not linked to
data/indicators
Top level risk appetite
statements
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Operational tolerances for use
in day to day decision making
z
z
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Difficult to demonstrate link
between risk appetite and
day-to-day decision making
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Example 2: Risk governance
structure needs to be clear and consistent across all risk categories
Previous understanding
15
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One risk committee
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Risk ownership not always
clear
Lloyd’s approach
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Top level risk committee with
number of sub-committees,
which will focus on different risk
areas
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Clear mapping of risk universe
to governance structure
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Risk MI to be developed for
reporting
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model scope,
Governance & Use
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Model scope
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Model scope will not be mandated by Lloyd’s
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LIM will need consistent outputs but not affected by scope
Definition must be relevant for the business operation of an agent and
must describe a model that:
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meets tests within Level 1 text
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is an integrated part of risk management, systems of governance
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can calculate SCR
Defining elements as outside the model scope does not mean
Solvency II compliance can be ignored
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any process/component that can have a material effect on
output/operation of model must be Solvency II compliant
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anything can be part of Lloyd’s review
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What do we mean by internal model
Risk Management System
ORSA
Internal Model
SCR Calculation
Kernel
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Scope ?
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Use test and embedding
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Requires agents to demonstrate that model is widely used in and plays
an important role in system of governance
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Evidence how model is embedded in business:
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understood by senior management (and relevant users of model)
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used to support and verify decision-making
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relevant to business operations
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integrated within risk management system
Embedding can take many forms (business planning, risk appetites,
capital allocation)
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Model governance and change policy
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Model governance will require documentation of model development
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version control, audit trail, authorisation for changes
Model change policy must be tailored and suitable for agent’s structure
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changes can arise from many sources, including:
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changes affecting business (internal/external)
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changes to methodology or parameters
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changes to governance around the model
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Policy should define major and minor changes and resultant escalation
process – internally and with Lloyd’s
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Is not just the impact on the SCR that should determine classification
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Differences from current practices
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Internal model scope:
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z
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likely to be wider than an ICA model
Use test:
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ICA model should already be embedded in business but Solvency
II increases and formalises this requirement
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use of internal model must be evidenced
Model governance:
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formal governance process and change policy needed
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pre-approval of major changes
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full documentation of model development and future changes
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documentation
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Documentation requirements increase
significantly under Solvency II
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Needs to demonstrate and evidence compliance with the model tests
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Will need to be much more detailed than current ICA documentation
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principle of independent knowledgeable third party recreation of model
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Should also recognise model weaknesses and show plans to address
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Suitable governance and controls need to be in place around ownership
and update
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changes should be documented on an ongoing basis in line with
model change policy
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policies and procedures for review and update (non mandatory
templates provided)
Historical development of the model including ICA models where relevant
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A crucial tool in demonstrating
understanding and use of the model
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Agents should consider granularity when drafting documentation
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Differing levels of understanding expected - suggested breakdown
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executive summary
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technical detail
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specialist level
Clear indexing and storage is also key
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list all relevant documents and ownership
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storing electronically will aid access and updating/version control
Differentiate between internal and external model documentation
requirements
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Discussion time
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Round up and
questions
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Summary
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Hope today’s session has been useful
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Comments/feedback on format and content welcome ahead of stage 2
and 3 workshops
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invites for May workshops this week and Stage 3 in early May
Questions and answers from all 3 workshops will be summarised and
posted on lloyds.com by 30 April
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dry run templates also made available at same time
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