April 2016 wwwpwccom IampIM Club Solvency II 20 April 2016 Introduction Topic 1 IFRS Post Solvency II Topic 2 Capital Optimisation Topic 3 Pillar 3 Reporting QampA IFRS Post Solvency II ID: 755274
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Slide1
PwC I&IM clubEmbedding Solvency II
April 2016
www.pwc.comSlide2
I&IM Club – Solvency II20 April 2016
Introduction
Topic
1: IFRS Post Solvency II
Topic 2: Capital OptimisationTopic 3: Pillar 3 ReportingQ&A
IFRS Post Solvency II
Pillar 3 Reporting
Capital Optimisation Slide3
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 industrySlide4
Topic 1: IFRS Post Solvency II
IFRS Post Solvency II
Pillar 3 Reporting
Capital Optimisation Slide5
Timeline
Significant disconnect in life business for the 1
st
time between
accounting and solvency reporting from 1 January 2016.Investment contract accounting (e.g. unit linked savings) is unchanged.2016IFRS 4 Phase II (Insurance contracts)
Effective 1 January 2015
Solvency IIEffective 1 January 2016Effective 1 January 2020/21?
StandardMind the Gap ... What could insurers adopt in the gap period?UK GAAP (
FRS 102/103)201720152018
2019-2020
Not confirmed if, how and when IFRS 4 Phase II would be incorporated for UK GAAP reporters
Final standard in 2016?Slide6
Possible options during the ‘gap period’For insurance and with-profit contracts only
Maintain current approach (linked to Solvency I / PRA return
)
Adopt elements of Solvency II or a modified version
Others?“more reliable and no less relevant” or “more relevant and no less reliable” to the economic decision-making needs of usersSlide7
Should life insurers use elements of Solvency II in accounting during the gap period?
Use elements of Solvency II (or a modified version)
Reduce operational costs (6+ years of 2 sets of financial numbers)
Optimise the use of Solvency II information
Accelerating elements of IFRS 4 Phase IIReducing the amount of reconciliations Costs of implementation versus savingsNew Solvency II KPIs may be unfamiliarFurther changes under IFRS in the futureComparability between insurersLimitationsImpact on tax and distributable profits (where relevant)?
BenefitsSlide8
Factors to consider
‘Relevant / reliability’ criteria
Prudence and risk allowance versus current accounting
Non-uniform accounting policies (across Groups)
Solvency II technical provision transitional measures
Operational and cost benefits (e.g. model runs, multiple restatements)
Messaging to market (including comparability with peers)Slide9
Identify the
implications for other areas. Operating
model impacts
across your existing systems, processes and additional data
gaps. The impact on areas such as tax and distributable reservesWhat 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.
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?
1
3
2
Quantify the cost savings
that could be achieved and compare with the expected implementation cost of making
a change.
4Slide10
Topic 2: Capital Optimisation
IFRS Post Solvency II
Pillar 3 Reporting
Capital Optimisation Slide11
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
With this context we expect a key focus of 2016 will be optimising the Solvency II position162%Solvency coverage ratios reported at YE15193%
180%
169%
160%148%
However comparing solvency ratios only tells half the story….Standard Life – “These figures do not take account of £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 surplusL&G – “
“The economic capital surplus was £7.6bn, representing a coverage ratio of 230%.”
All taken from YE15 Annual Reports and AccountsSlide12
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.
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
“Capital”
“Optimisation”SII Pillar 1 Own FundsSII Pillar 1 Capital RequirementSII Pillar 1 SurplusSII Pillar 1 Coverage RatioSII Pillar 2
IFRS EquityEEV/MCEV Free Surplus
SI Pillar 1 Math Reserves used in IFRSReduce / Increase Monetary AmountMaximise Return For Given Level Reduce VolatilityMaximise Release of Own Funds
Maximise IFRS ProfitsMaximise IFRS Operating ProfitsSupport DividendSlide13
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:
Interest rate risk mitigation using dynamic transitional measures
Unit-shortingOptimising asset strategyWe are aware of firms who are currently undertaking projects in all three areasSlide14
Topic 3: Pillar 3 Reporting
IFRS Post Solvency II
Pillar 3 Reporting
Capital Optimisation Slide15
Pillar 3 - some things to remember
15
1
3
2Pillar 3 is the largest ever change in regulatory reporting for insurers – it changes the accounting basis, frequency, volume and speed of reporting.Reporting will be both qualitative and quantitative and so have an impact much wider than just finance, and on a number of existing processes.
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 ofhigh quality?Do you know the key reporting issues?
How do the Solvency II numbers reconcile to IFRS?Slide16
16
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.
Overview of the challengeSpeed
Weeks
0
5
12
Finance
FTE
Utilisation
0%
100%
Busiest Period
Acceleration
t
Quarterly reporting will accelerate a week per year, reducing from 8 to 5 weeks by 2019
Annual Pillar III Reporting will move from 20 weeks to 14 weeks
Need to re-plan staff capacity to meet workload fluctuations
Volume
QRT, NST
Stat, ICA
80%
Public & Private Data
SFCR, RSR, ORSA
30 times increase in data being reported
Increased frequency – quarterly and annual reporting
Narrative disclosures i.e. both quantitative and qualitative required
Complexity
SCR / MCR
TP’s
Investments
Balance Sheet
Technology
xBRL
New rules & regulations to
comply
with
Reconciliations required
Reliable and accurate
data
Group complexities
Upskilling required
How is the market responding to the challenge?Slide17
17
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.
Rules &
Regulations
Controls
Data
Technology
.
Process
Governance
QRTs required at different entity levels
Technical interpretation of Pillar 3 items
Embeddedness of Public Disclosure and Supervisory Reporting practices
Completeness & accuracy of control operation and control review activities
Current approach to risk & control management
Level of control automation
Wider Pillar 3 reporting governance
Reporting lines definition
Level of resource dependency
Flexibility of current structure to adapt to future changes
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
Reporting capabilities of the existing platform
Flexibility of the existing data model
Level of data consistency and traceability across SII solutions
System integration and reconciliation
Data quality maintenance activities
Understanding of the data in scope, its impact and vulnerabilities
Extent to which data governance procedures are documented
Where are you in each of these focus areas?Slide18
Governance
How do you review the data submission easily?
Quality Control
How do you understand the potential issues with data quality and consistency?
Investment VerificationHow do you verify investment data against other sources?InsightHow do you gain meaningful insight from the volume and complexity of the return?
QRT reporting - meeting requirements and driving value18
xxx
xxx
xxx
xxx
Under Solvency II insurers must have
‘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 disclosureSlide19
QRT reporting – data analytics
19
Investment
verification
Quality
control
Visualisation
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)Slide20
Questions?
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