Solvency II New Framework for Risk Management Organisation

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Solvency II New Framework for Risk Management
Organisation
Dr. Maciej Sterzynski (Triglav Insurance, Ltd.)
Matija Bitenc (Triglav Insurance, Ltd.)
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AGENDA

• Understanding Solvency II
• Setting up Integrated Risk Management Framework
• Leveraging on Economic Capital
• Becoming a a leader (conclusion)

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SOLVENCY II TIMELINE
Directive adoption ? (Council Parliament)
Implementation ? (Member states)
Directive developed by the EC
CEIOPS work on technical advice necessary for
implementing measures / supervisory convergence /
preparation for implementation / training
development
Commission preparatory work on possible
implementing measures
Adoption of Implementing
measures
July 2007 Solvency II Directive
published
QIS 1
QIS 2
QIS 3
QIS 4??
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SOLVENCY II ARCHITECTURE
Solvency II Three Pillars Construction reflects
Integrated Risk Management Framework
Quantitative Requirements
Disclosure Reporting
Qualitative Requirements

• Market consistent valuation
• MCR SCR
• SCR Total balance sheet app.,
• VaR 99.5 1-year
• European Standard Formula
• for SCR
• MCR-relation to SCR to set up
• Internal models for SCR
• Prudent Person Rule
• Credit Risk mitigation
• Credit for diversification

• New requirements for
• disclosure to harness market
• discipline in support of
• achieving regulatory objectives
• New requirements for
• transparency

• New regime places much
• emphasis on good governance
• Risk-management key change
• from old regime ?
• Own Risk Solvency Ass.
• Supervisory Review Process
• More developed than in BaselI

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INTEGRATED RISK MANAGEMENT FRAMEWORK
Vision Strategy
Model Cartography
Definitions
Data
Risk Policies
Model
Approach Selection
Testing
Risk Appetite
Usage Policies
Culture Awareness
Model Risk Management

Organisational Structure
Corporate Governance
Headcounts Profiles
Documentation
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VISION STRATEGY RISK POLICY (ROADMAP)
Defining vision for a company to be used as a
foundation for a global strategy
Setting up global strategy which encompasses
approach to risk management framework

• Deciding about RM strategy compliant with global
  vision strategy

Producing policy cartography covering entire
integrated risk management framework
Defining policy development process through
Setting up RM Service as oversight and
coordination body
Assigning of policy owners (BU)
Defining gapless transparent decision-making
process where the board endorses the policies
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EXAMPLE OF POLICIES FRAMEWORK
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RM GOVERNANCE
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GENERIC RM ORGANISATION
MANAGEMENT
ALM COMMITTEE
ORM COMMITTEE
Board Member
CRO
RISK MANAGEMENT COMMITTEE
Risk Officers From each Dep
Heads of each Unit
CHIEF RISK OFFICER (Director of Risk Management
Department)
Global level

Global level
Operational Risk Unit (ORM Team)
Financial Risks Management Team
ALM Team
Underwriting Team
Life
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
Market Risk Unit
Credit Risk Unit
Non-Life
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
Health
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
Internal Control
Internal Audit
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
RISK OFFICER IN EACH UNIT
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ECONOMIC CAPITAL IRM
Best Practice of Competitors, Regulatory
requirements
INTELLIGNENT RISK MANAGEMENT
QUALITATIVE PART Strategy Policy, Governance
Structure Internal Controls
QUANTITATIVE PART ECONOMIC CAPITAL
APPROACH
RISK IDENTIFICATION
RISK DISTRIBUTIONS (Assessment)
RISK AGGREGATION
ECONOMIC CAPITAL
RAROC
POSSIBILITY FOR INTERNAL MODELS
Generic RM Framework (Solvency II Compliance)
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SOLVENCY II - INTERNAL MODEL CONDITIONS
INTERNAL MODEL (SCR CALCULATION)
DOCUMENTATION
METHODS
PROCESSES
CONTROLS
DATA
IT SYSTEMS




Sound actuarial techniques
Identification
Accurate
Current credible information
Quantification
Complete
Monitoring
Appropriate
Realistic a assumptions
Measuring
VALIDATION
Internal model central role in risk management
decision making processes, capital allocation
and system of governance functions
SUPERVISORS APPROVAL off INTERNAL MODEL
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BEST PRACTICE MODEL RM FRAMEWORK
MODEL RISK MANAGEMENT GOVERNANCE
MODEL CARTOGRAPHY
mapping methodology, consistency,
DATA
policies, premiums claims, how are the data
processed, (data quality and back-office
quality), coherence across the processes
MODEL
methodology assumptions and modeling techniques,
transparency and performance
For each model and sub-model
TESTING
model stability, stress testing method
USAGE POLICIES
policies of model use
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ECONOMIC CAPITAL CORE OF INTERNAL MODELS
EXPECTED LOSS (TECHNICAL PROVISIONS)
UNEXPECTED LOSS (ECONOMIC CAPITAL)
Frequency of occurrence
P 0,05 (Risk appetite)
ECONOMIC CAPITAL
SCR
(Unexpected Loss)
Loss Distribution
Value X (VaR)
Mean (Expected Loss) Risk Provisions
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CALCULATION OF ECONOMIC CAPITAL
RISK
1. Identify all sources of risk
Asset Risk
Operational Risk
Market Risk
Credit Risk
ALM Risk
Insurance Risk
Event Risk
Business Risk
2. Characterize the distributions
3. Combine the distributions
CORRELATIONS, DEPENDENCIES
Solvency Standard
EL
4. Measure Required capital
5. Calculate contributions of individual business
lines and individual risks
Economic Capital
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RISK - RETURN FRAMEWORK
ECONOMIC CAPITAL (Risk Framework)
Part 1.
(Responsibility) RISK MANAGEMENT RISK OFFICERS

• Risk identification
• Measurement Distributions
• Aggregation
• EC measurement

EC RAROC FRAMEWORK
COST RETURN MEASUREMENT (Return Framework)
Part 2.
(Responsibility) CONTROLING BUSINESS UNITS

• Cost measurement framework
• (business units, product lines)
• Return measurement framework
• (business units, product lines)

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VALIDATION

• Validation covers all internal models
• Validation comprises organisation process

VT provides with validation report
VC pre-approves validation report and submits
for endorsement
Homologation file sent to local supervisor
AZN
Validation Team (VT)
Validation Committee
Board

• Validation to be recognized by local supervisors
  needs
• to provide with a clear and consistent
  validation methodology

t
3
4
2
1
Methodology and Modeling Validation
PoliciesValidation
OperationalValidation
Strategy Phase
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CONCLUSION

• Market competitive advantage
• Improved cost efficiency by engaging resources
  and capital only once
• Optimization of on-going business through more
  adequate capital allocation
• Investments made now for RM re-engineering will
  provide a strong return in medium-term
  perspective
• Regulatory requirements driven by Solvency II
  Directive

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Back-up slides
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ORM Governance structure (example)
Board of Directors
Support Decision Making Process
Operational Risk Sub-Committee
Internal Audit
Support Cooperation
Coordination Approach Perimeter Data
warehouse Key Risk Indicator Scorecard Risk
Control Self Assessment Review
IT DEPARTMENT
Risk reporting
IT RISK MANAGEMENT
BUSINESS CONTINUITY PROGRAM
Members 1 OR manager in cooperation with every
risk officer
Operational Risk Unit (Working Group)
IT Support in Software development
DECENTRALIZED RISK MANAGEMENT
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
Internal Control

• Constant cooperation
• Regular reporting regarding
• Risk identification
• Risk assessment
• Risk evaluation
• Risk management

RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
Legal IT Finance HR Business Lines Marketing Etc
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
RISK OFFICER IN EACH DEP
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IRM ECONOMIC CAPITAL MODEL (example)
3. INVEST IN NEW LINES WITH RAROC OF AT LEAST
9 4. COMPARE AVAILABLE CAPITAL TO ECONOMIC
CAPITAL if Available Capital gt Economic Capital
? distribute capital to owners (dividends) and
increase ROE or new investments
RESULT