August 18th, 2009

Solvency II – Summary of CEIOPS March Consultation Papers: System of Governance

Posted at 1:00 AM ET

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Each (re)insurer’s system of governance should:

  • Establish and maintain effective cooperation, internal reporting and communication at all relevant levels.
  • Have a clear, consistent and documented organizational structure.
  • Establish, implement and maintain decision-making procedures
  • Establish information systems that produce sufficient and relevant information concerning all business activities and risks to which the entity is exposed.
  • Establish and maintain adequate risk management, compliance, internal audit and actuarial functions.

Policies on risk management, internal control, internal audit and outsourcing need to establish clearly the relevant responsibilities, processes and reporting procedures to be applied.

An effective risk management system must be created, requiring at least a risk management strategy (objectives, key principles, risk appetite, and assignment of risk management responsibilities), as well as a definition of the risks faced by the entity, the levels of acceptable risk limits, and the appropriate processes and procedures that enable the company to manage and report risks. A suitable “own risk and solvency assessment process” (ORSA) is also necessary.

Asset/liability risk management is to be fully integrated into this risk management system. The company will be required to consider any off-balance sheet exposures that it may have, and should have written investment policies that include commitments such as derivatives. The company should also take into account risk tolerance levels, the solvency position, and long-term risk return requirements in developing the investment policy. The investment policy should manage liquidity risk prudently in the short, medium, and long terms and include stress tests and scenario analyses — all of which should be reviewed regularly.

As part of their reinsurance management strategies, companies should have adequate procedures for the selection of reinsurance programs, including:

  • The identification of the level of risk transfer appropriate to the company’s approach to risk.
  • The types of reinsurance arrangements that are most appropriate to limit the risk to the company’s insurance risk profile.
  • The principles used in selecting reinsurance counterparties.
  • The procedures for assessing the creditworthiness and diversification of reinsurance counterparties.
  • Concentration limits for credit risk exposure to reinsurance counterparties and appropriate systems for monitoring them.
  • Provision for adequate liquidity management to deal with any timing mismatch between claims payments and reinsurance recoveries.

The risk management function will be responsible for the way in which an internal model is integrated with the company’s internal risk management system and its day-to-day functions. It needs to assess the internal model as a tool of risk management and as a tool to calculate the entity’s Solvency Capital Requirement (SCR).

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Contributors:

  • Susan Witcraft, Managing Director
  • Frank Achtert, Managing Director
  • Iain Boyer, Managing Director
  • Michelle Harnick, Managing Director
  • Dave Lightfoot, Managing Director
  • Scott Lohman, Managing Director
  • Don Mango, Managing Director
  • Eddy Vanbeneden, Managing Director
  • Jeff Bellmont, Senior Vice President
  • Gina Carlson, Senior Vice President
  • Debbie Griffin, Senior Vice President
  • David Flandro, Senior Vice President
  • Benoît Butel, Vice President
  • Sebastien Portmann, Vice President
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