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PwC I&IM club

Embedding Solvency II

April 2016
I&IM Club – Solvency II
20 April 2016

Introduction

Topic 1: IFRS Post Solvency II

Topic 2: Capital Optimisation

Topic 3: Pillar 3 Reporting

Q&A

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Introduction

• The last five years have been the busiest and most challenging the industry has ever seen

• There has been significant effort and investment in getting over the starting line

• Still a lot of effort/work over the next year as insurers perform quarterly and annual reporting for the first time

• However there now seems a good opportunity for insurers to take stock and work out how they make SII work
for them

• The 3 topics which we are going to discuss today which are key areas we see opportunities for the insurance
industry

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Topic 1: IFRS Post Solvency II

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Timeline

Standard 2015 2016 2017 2018 2019-2020

Solvency II Effective 1 January 2016

UK GAAP
Effective 1 January 2015
(FRS 102/103)
IFRS 4 Phase II Effective 1
Final standard in 2016?
(Insurance contracts) January 2020/21?

Not confirmed if, how and when IFRS 4 Phase II

would be incorporated for UK GAAP reporters

Mind the Gap ... What could insurers adopt in the gap period?

• Significant disconnect in life business for the 1st time between accounting and solvency reporting from 1 January
2016.
• Investment contract accounting (e.g. unit linked savings) is unchanged.

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Possible options during the ‘gap period’
For insurance and with-profit contracts only

1. Maintain current approach (linked to Solvency I / PRA return)

2. Adopt elements of Solvency II or a modified version
3. Others?

“more reliable and no less relevant” or “more relevant and no less reliable” to the economic
decision-making needs of users

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Should life insurers use elements of Solvency II in accounting
during the gap period?
• Reduce operational costs (6+ years of 2 sets of financial
numbers)
• Optimise the use of Solvency II information
• Accelerating elements of IFRS 4 Phase II
• Reducing the amount of reconciliations
Benefits

Limitations

• Costs of implementation versus savings

• New Solvency II KPIs may be unfamiliar
• Further changes under IFRS in the future
• Comparability between insurers

Impact on tax and distributable profits (where relevant)?

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Factors to consider

‘Relevant / reliability’ criteria Non-uniform accounting policies (across

Groups)

Prudence and risk allowance versus Operational and cost benefits (e.g. model
current accounting runs, multiple restatements)

Messaging to market (including Solvency II technical provision transitional

comparability with peers) measures

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What should insurers be doing now?

Insurers should carry out a gap analysis to assess the benefits and limitations of the alternatives

Understand the
requirements, how Solvency
II information could be used
in your reporting and whether
it would be permitted. 1 other areas. Operating model
Consider the expected
timing and impact of
adopting IFRS 4
Phase II. Would
changes made now be
more consistent with
requirements under
IFRS 4 Phase II in
future? Are there useful
synergies that could be
achieved? 2
Identify the implications for
impacts across your existing systems,
processes and additional data gaps.
The impact on areas such as tax and
distributable reserves
3
Quantify the cost savings that
could be achieved and compare with
the expected implementation cost of
making a change.
4

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Topic 2: Capital Optimisation

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A year of “getting over the line”
2015 was focused on “getting over the line” – with IMAP submissions, and MA/VA/transitional applications all
demanding focus …. giving very limited opportunities to optimise ahead of Solvency II go-live

Solvency coverage ratios reported at YE15 However comparing solvency ratios only tells
193%
half the story….
180%
169%
162% 160% Standard Life – “These figures do not take account of
148% £1.2bn of capital in subsidiaries that is not deemed to be
freely transferable around the Group”
Prudential – “The Group Shareholder position
excludes the contribution to the Group SCR and Own
Funds of ring fenced With-Profit Funds and staff
pension schemes in surplus”
Aviva – “The estimated Solvency II ratio represents the
shareholder view. This ratio excludes the contribution to
Group SCR and Group Own Funds of fully ring-fenced
with-profits funds and staff pension schemes in surplus
L&G – ““The economic capital surplus was £7.6bn,
representing a coverage ratio of 230%.”

All taken from YE15 Annual Reports and Accounts

With this context we expect a key focus of 2016 will be optimising the Solvency II
position
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What do we mean by capital optimisation?
Before beginning any project it is important to be clear what is actually meant by “capital optimisation” – in our experience
key stakeholders can have very different, often entirely contradictory, views on what is meant by this term.

SII Pillar 1 SII Pillar 1 Capital Reduce / Increase

Monetary Amount Maximise Return
Own Funds Requirement For Given Level

SII Pillar 1 Support

IFRS Equity
Surplus Dividend Maximise
“Capital” “Optimisation” IFRS Profits
EEV/MCEV
SII Pillar 1 Free Surplus Reduce
Coverage Ratio Volatility Maximise IFRS
Maximise
SI Pillar 1 Math Operating
Release of
Reserves used Profits
SII Pillar 2 Own Funds
in IFRS

Capital optimisation strategies often improve one measure but worsen another….having a universally
agreed view up front of what you are trying to achieve is crucial to success
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Capital optimisation strategies

Every capital optimisation project will differ and will depend on the circumstances of the individual firm –
what works for one firm does not, necessarily, always work for another.

We are going to explore three possible capital optimisation strategies in more detail – these were taken
from a much longer list of ideas developed by PwC:

1. Interest rate risk mitigation using dynamic transitional measures

2. Unit-shorting
3. Optimising asset strategy

We are aware of firms who are currently undertaking projects in all three areas

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Topic 3: Pillar 3 Reporting

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Pillar 3 - some things to remember
1 2
Pillar 3 is the largest ever change in
regulatory reporting for insurers – it
changes the accounting basis,
frequency, volume and speed of
reporting.
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Reporting will be both qualitative
and quantitative and so have an
impact much wider than just
finance, and on a number of existing
processes.
3
Questions for Board:
• How has the position changed
since last quarter? And why?
• What are the key sensitivities
around your capital position?
• Have you seen the reporting data
and has this been explained to
you?
• Is the information you are
planning to submit of
high quality?
• Do you know the key reporting
issues?
• How do the Solvency II numbers
reconcile to IFRS?
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Overview of the challenge
Solvency II preparatory reporting is over and go live reporting is underway. Firms are now required
to deliver more information, with higher quality, to a faster timeline, on both a quarterly and annual
basis.

Volume Speed Complexity

Balance SCR /
Finance Sheet MCR
QRT, NST 100% Busiest FTE
Public & Period Utilisation
Private Stat,  0% TP’s
80% t
Data ICA Technology
SFCR, RSR, Acceleration
ORSA Investments
Weeks 0 5 12 xBRL

• 30 times increase in data
being reported
• Increased frequency –
quarterly and annual
reporting
• Narrative disclosures i.e.
both quantitative and
qualitative required
• Quarterly reporting will • New rules & regulations to
accelerate a week per year, comply with
reducing from 8 to 5 weeks by • Reconciliations required
2019 • Reliable and accurate data
• Annual Pillar III Reporting will • Group complexities
move from 20 weeks to 14 weeks • Upskilling required
• Need to re-plan staff capacity to
meet workload fluctuations

How is the market responding to the challenge?

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A framework to provide focus
Solvency II Reporting has a very wide impact on the business. To help frame the impact of these
requirements, we suggest breaking it down to six focus areas.
• QRTs required at different
entity levels
• Technical interpretation of
Pillar 3 items
• Embeddedness of Public
Disclosure and Supervisory
Reporting practices
• Current close process and
whether it can meet the SII
timeline
• Integration of Pillar 3
reporting into the business
• Level of staff training
• Current workflow
management activities
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• Completeness & accuracy of control operation and control review activities
• Current approach to risk & control management
• Level of control automation
Rules & Controls Governance • Wider Pillar 3 reporting
Regulations governance
• Reporting lines definition
• Level of resource
dependency
• Flexibility of current
structure to adapt to future
changes
• Data quality maintenance
activities
• Understanding of the data in
scope, its impact and
vulnerabilities
Process Technology . Data • Extent to which data
governance procedures are
• Reporting capabilities of the existing platform documented
• Flexibility of the existing data model
• Level of data consistency and traceability
across SII solutions
• System integration and reconciliation
Where are you in each of these focus areas?
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QRT reporting - meeting requirements and driving value

Governance Quality Control

• How do you review the data
submission easily?
• How do you understand the
potential issues with data quality Under Solvency II insurers must have
and consistency?
‘Set out processes and timeline for
completion of the various reporting
requirements, review and approval;
explain the processes and controls for
guaranteeing the reliability,
completeness and consistency of the
data provided.’

Source: EIOPA Guidelines on reporting and public disclosure

Investment
Verification
• How do you verify investment
data against other sources?
Insight
• How do you gain meaningful insight
from the volume and complexity of
the return?

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 Visualisation

QRT reporting – data analytics

Use of data analytics tools to visualise and
validate Pillar 3 regulatory returns and
support effective governance.
S2D2 is a PwC tool designed to help senior
management and the Board:
• Review the contents of the return easily
• Understand potential issues with data quality and
consistency of the submission via a comprehensive
test framework
• Verify investment data against other sources
(including price)

Investment verification Quality control

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Questions?

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disclosed to any third parties.

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