Presentation Speech 11/22/2013 12:59:00 PM

Solvency II is a regulation primarily designed to help insurance companies

take responsibility for their own risk management, to set an internal risk
strategy, and to ensure that they are following that risk strategy. It has
three pillars, defined as a way of grouping Solvency II requirements. They
aim to promote capital adequacy, enhance the supervisory review
process, and provide greater transparency in the decision making
process. Furthermore, pillars 1, 2 and 3 deal with risk measurement, risk
management and risk reporting respectively.

Pillar 1 covers the capability of an insurer to demonstrate that it has
adequate financial resources in place to meet all its liabilities and consists
of the quantitative requirements that an insurer should hold, such as the
amount of risk based capital the insurer should maintain. Pillar 1 is build
about the Solvency Capital Requirement, commonly known as SCR. This
is a risk responsive capital measure calibrated to ensure each insurer will
be able to meet its obligations over the next 12 months, with a probability
of 99.5%. If this level is not reached and maintained, it will likely result in
regulatory intervention and require remedial action. If an insurers risk-
capital level falls below the Minimum Capital Requirement, or more
commonly known as MCR, they will be prohibited from continuing
conducting business. Furthermore, MCR represents the minimum amount
of capital required by the insurer to cover its risks. SCR may be calculated
using a standardized approach, or an internal approach. The standardized
approach is closer to the system regulation currently in force in most EU
states, as it is less time consuming. However, it is based on averages and
there is a lot of guess work involved in its calculation. To compensate for
this, Solvency II will most likely build additional capital requirements.
Using an internal model requires regulatory approval, can only be used if
it satisfies test and requirements of supervisors, and is much more time
consuming. A model is considered to be an internal model if the SCR is
calculated with assumptions and models other than those set out in the
standard model. Such an approach is only recommended for larger firms.


Pillar 2 deals with risk management within a firms organization. It takes
the Own Risk and Solvency Assessment, commonly known as ORSA, into
consideration. ORSA may be defined as all the processes and procedures
employed to identify, assess, monitor, manage and report the short and
long term risks a reinsurance undertaking faces or may face and to
determine the own funds necessary to ensure that overall solvency needs
are met at all times. Moreover, this is a process by which the company
demonstrates how the SCR will continue to be met whilst executing its
business plan. It is the key linkage between the companys risk capital
modeling capability, and the way the business operates. Key aims of
ORSA incude:
ORSA should be a part of the business strategy, taken into
account during strategic decisions, and should be used to help
identify and manage risk.
ORSA should be used to promote a forward looking perspective,
typically of 3 to 5 years.
The ORSA should not be burdensome and complex in nature, be
proportionate to the nature of the risks at hand.
The ORSA should scale and take into account the risks inherent
in the company, and risks that may occur in the future, with a
reasonable degree of probability.
The ORSA may be a short report, or several hundreds of pages long,
depending on the nature of the insurers firm. There is no framework of
guideline for the output because regulators want each board of each
company to own its own ORSA process, designed for their company. It is
especially important because within the Supervisory Review Process it
contributes to a qualitative view of the managements ability to assess,
measure and manage its own business and the inherent risks within the
organization. The statement shall explain how the undertaking was
determined in relation to its solvency requirements needs and risk profile.
It requires a description of how the ORSA process and outcome is
appropriately evidenced and internally documented as well as
independently reviewed.
Practical benefits of ORSA include:
ORSA provides a continuous focus on risk and capital management. It
helps firms understand which areas of risk management they need to
work on and develop.
ORSA allows a clear indication of the link between strategy, risk and
capital.
Furthermore, capital can be appropriated in a better way due to the
better understanding of risks.