Lessons arising from the first year of Solvency II | KPMG | BE

Lessons arising from the first year of Solvency II college meetings

Lessons arising from the first year of Solvency II

On 1 March, EIOPA published its annual report to the European Parliament on the functioning of supervisory colleges in 2016, setting out its priorities in this area for 2017. There are currently 92 cross-border insurance groups with a head office in the European Economic Area (EEA).

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On 1 March, EIOPA published its annual report to the European Parliament on the functioning of supervisory colleges in 2016, setting out its priorities in this area for 2017. There are currently 92 cross-border insurance groups with a head office in the European Economic Area (EEA).

A surprising finding was that there are a number of non-EEA parented groups for whom there is no group supervision undertaken – neither at worldwide nor EEA level. As part of reprioritising its involvement with colleges, EIOPA will focus on these groups and also any group whose failure would have a significant impact on European financial markets – linking with the work EIOPA has been undertaking regarding the potential need for harmonisation of resolution and recovery frameworks for insurers across the EEA.  The determination of which groups fall into this systemic category will be based on their scale, market position, risk exposure, complexity and the perceived quality of supervision.

While many colleges are already using the new information afforded by Solvency II as part of their ongoing work, EIOPA is concerned that in a number of colleges’ risk assessments are more retrospective in nature than forward looking.  Accordingly, EIOPA's work programme for 2017-2019 encourages discussion of business models, planning and risk analyses under stressed conditions.

While most of the findings are directed to supervisors, there are some areas for firms to address.  In particular, EIOPA notes some inconsistencies in the own risk and solvency assessment (ORSA) reports that may result in insurers needing to adapt their reporting.  The main area highlighted is inconsistency between solo and group ORSAs, although concerns are also raised regarding: embedding the ORSA; links between risk appetite, tolerances and limits; appropriateness of stress scenarios and sensitivity analysis; inclusion of non-EEA countries in the group ORSA; assessment of appropriateness of the standard formula and links with future business plans.

EIOPA also highlights an inconsistent use of long-term guarantees and transitional measures and states that it will assess the quality of reporting of their use in the public solvency and financial condition reports (SFCRs) due to be published shortly.

EIOPA also gives a few clues on its early warning indicators tests being developed for internal model firms (and groups).  For example, EIOPA states that “a benchmark study for market and credit risk models is underway and a comparative study for non-life underwriting risk is about to start” and that projects on volatility adjustment and sovereign risk are on-going.

Looking forward, EIOPA has identified two themes for colleges to address in 2017:

  • Further developing the effectiveness, efficiency and impact of exchange of information and joint risk assessment in colleges.
  • Ensuring the robustness and reliability of the SII balance sheet, with particular reference to valuation principles, the use of options and their impact on the both solvency positions of the group overall and the major insurers within it.

Both the ORSA points above and this final bullet could result in increased supervisory demands on firms to explain their rationale for the approaches adopted.

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