On 4 November 2013, the Central Bank of Ireland (the Central Bank) published Guidelines on Preparing for Solvency II (Directive 2009/138/EC) (the Guidelines). The Guidelines (which reflect the Guidelines on Preparing for Solvency II issued by the European Insurance and Occupational Pensions Authority (EIOPA) on 27 September 2013) consist of a general introductory paper (the Introduction Paper) and four Guideline papers regarding:
- systems of governance (including risk management systems) (the SOG Guidelines);
- forward looking assessment of own risks (the FLAOR Guidelines);
- pre-application for internal models (the PIM Guidelines); and
- submission of information to the Central Bank (the SOI Guidelines).
A brief synopsis of each document published by the Central Bank in this respect is set out below in points 1 to 4, inclusive, under 'Guidelines - a synopsis of key content'.
Scope of the Guidelines
The Guidelines apply to Irish (re)insurance undertakings which are (or opt to be) subject to Solvency II, and to groups for which the Central Bank expects to be the group supervisor under Solvency II. References to 'group' in the Guidelines should be interpreted accordingly.
The provisions of each of the Guideline papers applies to a different range of (re)insurance undertakings, depending upon the Guidelines/provision involved. Entities which are exempt from Solvency II (please contact a member of our Insurance Team for further information in this regard) based on criteria such as, for example, size and run-off status (the position in relation to which may yet change under Omnibus II):
- must notify the Central Bank of their view that the criteria are fulfilled and await confirmation of this from the Central Bank, or
- may opt-in to Solvency II, in which case the Guidelines will automatically apply to them.
Purpose of the Guidelines
The principal aim of the Guidelines is to aid (re)insurance undertakings in taking active steps towards implementing certain key aspects of Solvency II in a consistent manner and in line with the Central Bank's Probability Risk and Impact SysteM (PRISM) framework.
The Guidelines will apply until the implementation date of Solvency II (now scheduled for 1 January 2016).
The majority of the Guidelines are applicable with effect from 1 January 2014, but certain provisions apply from later dates. This timing is based on the assumption that Solvency II will be applicable on 1 January 2016 and may change if the implementation of Solvency II is again altered.
Further details set out under 'Guidelines - a synopsis of key content' below.
Monitoring by the Central Bank
The Central Bank confirmed in its press release regarding the Guidelines that it will 'closely monitor' their implementation. It is not clear how this will be achieved, e.g. by thematic inspection or otherwise.
Undertakings within scope should carry out a gap analysis to assess what action needs to be taken in order to bring the undertaking into line with the Guidelines, and proceed to address this within the timeframes set out in the Guidelines.
Entities which view themselves as falling outside the scope of Solvency II should:
- notify the Central Bank of that view (within the timeframes set out in the Guidelines – which differ depending upon the exclusion to be relied upon) and await confirmation of this from the Central Bank, or
- opt-in to Solvency II.
Guidelines – a synopsis of key content
Each of the following Guidelines mirror the equivalent EIOPA Guidelines closely.
- SOG (systems of governance) Guidelines
The SOG Guidelines:
- apply to all (re)insurance undertakings, and at the level of the group.
- apply generally from 1 January 2014. However, Low Impact and Medium-Low Impact PRISM (re)insurance undertakings are not required to establish the Key Functions (see bullet directly below) until 1 January 2015.
- require (re)insurance undertakings and groups to implement effective systems of governance and risk management consistent with Solvency II. Notably, the SOG Guidelines provide that undertakings should implement certain key functions (Risk Management Function, Compliance Function, Internal Audit Function and Actuarial Function) (Key Functions) and include a number of specific provisions relating to those Key Functions - including, for example, assignment of tasks.
- require the alignment and implementation of certain specific policies. These include policies in respect of Fitness and Probity, Internal Audit, Outsourcing, Capital Management and Risk Management. Minimum content expectations are set out. Particularly detailed requirements apply to the Risk Management policy (which must address underwriting and reserving management, operational risk (including development of operational risk stress scenarios), reinsurance and risk mitigation techniques, asset-liability management, investment risk management and liquidity risk management).
- Provide that boards of directors (Boards) have ultimate responsibility for ensuring that effective risk management systems are in place, setting risk appetite and risk tolerance and approving the main risk management strategies and policies. Other specific Board obligations include determining the scope and frequency of internal reviews of the systems of governance and monitoring the medium term capital plan of the undertaking.
- Provide that, in the case of groups within scope, the 'parent undertaking' is expected to notify the Central Bank of the 'responsible entity' (i.e. the entity responsible for fulfilling the governance requirements at group level). Group-focussed requirements (e.g. responsibility for effectiveness of the group's risk management system, consistent implementation of policies across the group and appropriate interaction with the boards of group companies) generally fall on the 'responsible entity'. Other group specific requirements include 'Fit and Proper' requirements for those who run the group and the setting of internal governance requirements and systems of governance at group level.
- FLAOR (Forward Looking Assessment of Own Risks) Guidelines
The FLAOR Guidelines:
- apply to all (re)insurance undertakings and groups (but specific aspects of the Guidelines apply to particular categories of undertaking).
- provide that (re)insurance undertakings and groups should adopt a forward looking assessment of risks to which they are exposed and compile qualitative information supporting this assessment to allow the Central Bank to evaluate the position.
- address, amongst other matters, the following key issues: (a) proportionality (the Central Bank acknowledges that complex approaches are not necessarily required), (b) documentation (policies and record keeping), (c) communication (results of the FLAOR to be communicated to relevant staff), (d) supervisory reports (reports to be made to the Central Bank) and (e) provisions in respect of regulatory capital requirements. Group specific provisions include (a) provisions regarding scope (all entities within the scope of group supervision are to be captured), (b) provisions regarding supervisory reports, (c) assessment of the impact of group -specific risks/interdependencies and (d) provisions in respect of records, internal models and integration of third-country (re)insurance undertakings.
- provide for expectations of Boards, including active participation in the FLAOR and approval of the FLAOR policy, process and results.
- contain provisions which may or may not apply to an undertaking depending upon the PRISM rating assigned to it. Irrespective of PRISM rating, commencing in 2014, all (re)insurance undertakings and groups are expected to perform an annual assessment of their overall solvency needs. The first such assessment is to be completed before the end of 2014. A supervisory report (Supervisory Report) on the assessment should be provided to the Central Bank within two weeks from the date of the Board's review and approval of the assessment.
- in addition to the above-mentioned assessment, provide that, commencing in 2015, all High Impact and Medium-High Impact PRISM (re)insurance undertakings will be expected to assess whether they would comply with the Solvency II capital requirements (SCR) (details expected to be provided by EIOPA) on a continuous basis. Groups meeting a certain threshold (i.e. having more than €12 billion (or equivalent in another currency) of total assets as reflected in their consolidated accounting balance sheet for the reporting period ending during 2012) will be expected to assess whether the group would comply with the SCR on a continuous basis. From 2015, the above all High Impact and Medium-High Impact PRISM (re)insurance undertakings, and groups above the threshold mentioned, are expected to include a comparison between overall solvency needs, regulatory capital requirements and own funds when submitting their Supervisory Report.
- PIM (Pre-application for Internal Models) Guidelines
The PIM Guidelines:
- apply to all (re)insurance undertakings and groups engaged in the Central Bank's pre-application process for internal models.
- aim to provide guidance on what an undertaking engaged in the process mentioned should consider in order to allow the Central Bank to assess the undertaking's preparedness to submit an application for the use of an internal model under Solvency II, once implemented.
- provide that an undertaking should (a) build its internal model framework in a way that enables it to be prepared to use that internal model for both risk management and decision making purposes and the calculation of the SCR and (b) prepare for the possibility that its internal model may not be approved (and set up processes to calculate the standard formula SCR as well as consider the capital planning implications of using the standard formula). The level of detail required must be agreed on a case by case basis with the Central Bank.
- provides that a policy for changing the internal model should be established by the undertaking (to include defined triggers which constitute major changes, based on key qualitative and quantitative indicators relevant to the undertaking's business). Changes to the internal model should be notified to the Central Bank.
- provide that, for groups, a single model change policy should be developed for all entities within that group.
- state that the uses of the internal model and its appropriateness for the undertaking's business must be carefully examined in light of the Guidelines (in particular in relation to how the internal model supports decision making and is integrated with the risk management system).
- provides that each undertaking should ensure that the internal model is understood by its Board and other relevant users of the internal model for the purpose of decision making. Regular internal model results should also be provided to internal stakeholders (in particular, directors) on internal model results which relate to business decisions where the internal model has been used.
- state that formal policies and procedures should be implemented in respect of (a) assumption setting and validation of the internal model (specific provisions apply to group internal models) and (b) the use of expert judgement in connection with the internal model. These procedures should be documented and applied consistently, with the most material assumptions being approved by the Board. The undertaking should ensure that users of material assumptions receive transparent, clear and comprehensive written information on those assumptions (including any uncertainties or variations in final results).
- Provide that the internal model should be kept up to date and regularly reviewed by the relevant undertaking. It should include any shortcomings and be appropriate for different users and target audiences, as well as being sufficiently detailed to allow 'an independent knowledgeable third party' to operate and run the internal model.
- SOI (Submission of Information) Guidelines
The SOI Guidelines:
- apply to High Impact and Medium-High Impact PRISM (re)insurance undertakings and groups meeting a certain threshold (i.e. groups with more than €12 billion of total assets (or equivalent in another currency) in the consolidated accounting balance sheet for the reporting period ending during 2012).
- aim to provide direction to undertakings as to how the Central Bank expects them to prepare for having 'appropriate systems and structures' in place that will allow 'an adequate exchange of information' with the Central Bank. The SOI Guidelines 'may be used as a benchmark against which compliance with existing statutory requirements is assessed."
- provide that an undertaking should (a) build systems and structures to deliver high quality information for supervisory purposes and (b) submit to the Central Bank the quantitative and qualitative information set out in the SOI Guidelines, which will allow it to assess the quality of the information and the undertaking's readiness for submission of information under the Solvency II regime, once implemented.
- provide that certain information is to be submitted by each undertaking to the Central Bank on an annual basis (and for the quarter ending 30 September 2015). In respect of certain categories of information, the Guidelines provide for a sub-set of the full reporting package described under Solvency II. The information to be submitted can be broadly summarised as follows:
- annual quantitative information regarding the financial year ending 31 December 2014. This is to be submitted no later than 22 weeks after the financial year end (consisting of quantitative annual information as defined in the equivalent EIOPA Guidelines and information on internal models (where applicable) and ring-fenced funds). There are certain minor differences between the quantitative information described in EIOPA's Guidelines and in the Guidelines;
- quarterly quantitative information regarding the quarter ending on 30 September 2015. This is to be submitted no later than 8 weeks after that quarter end (consisting of quantitative quarterly information as defined in the equivalent EIOPA Guidelines). Notably, while the EIOPA Guidelines envisaged that national competent authorities could exempt captives from this quarterly reporting requirement, this has not been effected or referred to in the Guidelines;
- other annual reporting in relation to the financial year ending on 31 December 2014. This is to be submitted no later than 22 weeks after the undertaking's financial year end and consists of information regarding (a) systems of governance (general governance standards, fit and proper policies and procedures, risk management system, internal control system and any other additional material information regarding the undertaking's system of governance), (b) capital management (own funds), (c) valuation for solvency purposes (including valuation of assets, valuation of technical provisions, other liabilities and any other martial information regarding the undertaking's valuation of assets and liabilities for Solvency II purposes); and
- in the case of reporting by the participating insurance and reinsurance undertaking or insurance holding company at the head of a group, the submission of the information set out in paragraphs (1) – (3) above is extended by a further six weeks in each case. Groups may be required to engage in a dialogue with the Central Bank in relation to the method used to calculate group solvency.
- confirm that, where an undertaking/group currently reports its financial information based on an accounting year other than a calendar year, the reporting reference dates may be adjusted by agreement with the Central Bank.