IMAP Pre-application Process

1. IMAP Pre-application Process Bucharest 23rd June 2011

2. Agenda • Background to the pre-application • What is pre-application? • Overview of the process • Criteria for resource allocation • Planning • Coming to a view • Ensuring consistency • Legal basis • Pre-application process in the UK – overview • Groups issues - IMAP sub college

3. Background to the pre-application process (1) CEIOPS/EIOPA has published (March 2010) a Level 3 guidance (former CP80) on the pre-application process for internal models. https://eiopa.europa.eu/fileadmin/tx_dam/files/consultations/consultationpapers/CP80/CEIOPS-DOC-76-10-Guidance-pre-application-internal-models.pdf The examples in the paper are there to illustrate particular points and should not be taken as real-life examples. Nor should the examples be used to draw conclusions about specific groups or group internal models as they are deliberately simplified.

4. Background to the pre-application process (2) CEIOPS recommended that the approval process included a “pre-application” stage The European Commission has indicated agreement – see recitals to Level 2 text Stakeholders indicated that industry would welcome a pre-application BUT wanted reassurance that it would not extend the “six-months” approval period

5. Legal basis Member States can implement Solvency II early Cannot conflict with Solvency I Member States can carry out Solvency II processes The internal model can calculate the SCR only after the go live date of Solvency II Cross border groups: Informal co-operation of supervisory authorities; assessment starts at first possible date Implement relevant parts of Solvency II early

6. Agenda • Background to the pre-application • What is pre-application? • Overview of the process • Criteria for resource allocation – entry criteria • Planning • Coming to a view • Ensuring consistency • Legal basis • Pre-application process in the UK – overview • Groups issues - IMAP sub college

7. What is Pre-application?

8. Benefit To undertakings: Early engagement with their supervisory authority Early view from the supervisory authority on the internal model Early view of how the supervisory authority will approach approval Better contingency planning – calculation of the SCR and capital planning To supervisory authorities Increased understanding of the internal model Better understanding across the market

9. Overview of the process EIOPA recognises that the pre-application process is going to be iterative: Undertakings will not have all elements of their internal model ready at the outset As undertakings get feedback from supervisory authorities internal models may change

10. Pre-application process Assessment of Preparedness Review / Re-plan / View Criteria for resource allocation COMPLETION, FAMILIARISATION & UPDATE OF PRE-APPLICATION Planning stage VIEW Firm / Supervisory Authority / College JUDGE THE FIRMS READINESS TO GAIN ENTRY INTO PRE-APPLICATION PHASE PLANNING IN COLLEGES IN CASE OF GROUPS Link from college to technical teams and back

11. Overview of the process Regular feedback to undertakings is recommended Negative feedback most likely: Poor practice easier to spot than good practice Supervisory authorities will gain experience to inform their views, so an initial good opinion may change Need to re-review in the context of new material about the internal model Different types of feedback Supervisory authority view of gaps Discussions

12. Pre-application process Assessment of Preparedness Review / Re-plan / View Criteria for resource allocation COMPLETION, FAMILIARISATION & UPDATE OF PRE-APPLICATION Planning stage VIEW Firm / Supervisory Authority / College JUDGE THE FIRMS READINESS TO GAIN ENTRY INTO PRE-APPLICATION PHASE PLANNING IN COLLEGES IN CASE OF GROUPS Link from college to technical teams and back

13. Criteria for resource allocation – entry criteria Supervisory authorities need to allocate resources sensibly: Include undertakings who are interested Promote the use of internal models BUT Supervisory authorities need to use their resources efficiently Supervisory authorities need to plan with undertakings when and how to use the resources Engagement from undertakings Intention to apply; date of submission; scope and coverage; any other information

14. Criteria for resource allocation Possible criteria: Early engagement Proportionality Prospects for internal model development in the undertaking

15. Criteria for resource allocation Key indicators: Assessment of own risks Self-assessment against the tests and standards (SAT) Detailed plan for Solvency II implementation Reasonable documentation Demonstration of administrative or management body involvement Tentative use in decision-making QIS5 completion or standard formula calculation

16. Pre-application process Assessment of Preparedness Review / Re-plan / View Criteria for resource allocation COMPLETION, FAMILIARISATION & UPDATE OF PRE-APPLICATION Planning stage VIEW Firm / Supervisory Authority / College JUDGE THE FIRMS READINESS TO GAIN ENTRY INTO PRE-APPLICATION PHASE PLANNING IN COLLEGES IN CASE OF GROUPS Link from college to technical teams and back

17. Generic planning Planning is essential in such a potentially complex process Initiation phase: Initial discussion between the supervisory authority and the undertaking based on the information in the resource allocation criteria Information gathering: Intended scope and coverage of the internal model Undertaking plan to complete the internal model

18. Generic planning Supervisory authority plan Covering all undertakings being pre-reviewed Objectives for the pre-application Scope and coverage of the process Organisation and governance Activity plan Assumptions (resources….) Constraints (key dates…) Risks Resources Communications plan

19. Generic planning Communicating the plan High-level to individual undertakings Dates of delivery from undertakings to supervisory authority Dates of delivery from the supervisory authority to the undertaking Milestones Critical path Planning is iterative and the plan may change

20. Group specific planning Cooperation in colleges of supervisors EIOPA to work on guidance about good communication between supervisory authorities Group supervisor responsibilities: Preliminary analysis Share with the college College responsibilities Platform for cooperation and coordination Come to a view Supervisory authority responsibilities Inform the group supervisor about solo internal model developments in the group

21. Group specific planning Develop the framework for each pre-application Each group is different Each internal model is different Identify group specific risks Allocate relevant resources Experience – involve specialists May change over time Use local supervisory authorities for local specificities Update the plan as the review progresses

22. It will follow the sane process as laid out in the previous diagram. With Group, Colleges will play an important role in the Pre-application/Application, review and decision making process. GROUP Find Out Information about Int. Model • Gather Initial Understanding • from Group • (Structure, Who involved) • Previous findings High-level report to the (annual) college meeting LEAD Send Out Analysis College of SUPERVISOR REVIEW & COME TO A VIEW .Preliminary Analysis . Decide How College will Work • Application Of • guidance • When? • How? Planning in line with overall process • Gather Further information • Local Specificities • (Allocated to Solos) • Produce a management • report on the subsidiaries OTHER PRE-APPLICATION WORKSTREAM TO PROMOTE FURTHER CONVERGENCE WORKSTREAM ON TECHNICAL ISSUES FACILITATION EIOPA

23. Group specific planning – role of EIOPA Facilitation Gather data on pre-application processes and on which undertakings are being reviewed Workstreams: Pre-application workstream to promote further convergence Workstream on technical issues

24. Group specific planning Third country undertakings Third country supervisors can be involved in the college Availability and quality of data Need to identify possible issues quickly Third country groups Equivalent third country => group supervision at parent level; internal model assessed on solo basis in EEA and / or at EEA subgroup Non-equivalent third country => may set up an EEA subgroup Cross-sectoral groups Cannot use the internal model for the non-insurance parts

25. Group specific planning – Colleges Colleges guidelines give a framework for a pre-application process Colleges can have a role before the live date of Solvency II Each college should decide on its own process for reaching agreement The pre-application is useful experience for Colleges transitioning to Solvency II

26. Coming to a view Supervisory authorities wish to be able to come to a view on how prepared the undertaking is to submit an application to use their internal model to calculate the SCR Supervisory authorities will express views throughout the process The supervisory authority view at the end of the process is NOT a guarantee of approval

27. Coming to a view Regular communication from the supervisory authority to the undertaking is important Several steps where the supervisory authority can come to a view Interim views are likely to be negative Poor practice easier to spot than good practice Supervisory authorities will gain experience to inform their views, so an initial good opinion may change Need to re-review in the context of new material about the internal model Gap analysis will be communicated at least annually Iterative process

28. Coming to a view Many opportunities for discussion Supervisory authorities will not be involved in the development of the internal model Good communication throughout the process is important: Between the supervisory authority and the undertaking Between supervisory authorities in the college

29. Ensuring consistency Ensuring consistency in the views that supervisory authorities come to is part of EIOPA’s aims. Supervisory authorities need to invest in: Training on internal models Ability to compare internal models Communication between supervisory authorities Encouraging active participation in colleges EIOPA plans to: Set up a pre-application workstream to promote further convergence Set up a workstream on technical issues

30. Agenda • Background to the pre-application • What is pre-application? • Overview of the process • Criteria for resource allocation • Planning • Coming to a view • Ensuring consistency • Legal basis • Pre-application process in the UK – overview • Groups issues - IMAP sub college

31. FSA Objectives of Pre-application

32. Benefits of Pre-application to Firms

33. Benefits of Pre-application to FSA

34. Risk of Pre-Application

35. What we will and will not do

36. There are three principle components to our assessment

37. 77 Firms in pre-app 44 Withdrawn from pre-app Pre-application process 58 9 2 8 *Based on FSA Solvency II IMAP update (April 2010)

38. Steps in the Pre-app Process (1)

39. Steps in the Pre-app Process (2)

40. Step 2 – Scoping and Planning Meeting (1) • Part 1: up to a half-day • Outcome: We have introduced the IMAP process to the firm, including its key SII management, so they understand what is going to happen • Attendees • Firm: mandated : SII key exec, internal model lead, SII programme manager • optional: any others at firm's discretion, the more the better • FSA: mandated: Group/Solo supervisor and IMAP lead • optional: any other member state supervisors (groups only), supervisory manager, IMAP support, line actuary • Agenda • Intro to SII and IMAP • PAQC feedback (high-level) • Explain overall process, timelines – role of college, schematic (key meetings, Contents of Application, self-assessment, FSA validation thereof, sequencing of review activity) • Explain project management process (monthly update reports, quarterly face-to-face project mgmt meetings) • Explain political process - L1, L2, L3 and timelines - what is hard-coded, what is fairly sure, what is yet to emerge • Commitment of FSA and other authorities - who will be involved and what will we do • Commitment required by firm - which people, and for how much time • Outcome - firm submits application - max 1000 pages, fewer preferred [distinction between application and evidence]

41. Step 2 – Scoping and Planning Meeting (2) • Part 2: up to one day (may be combined with Part 1) • Outcomes: Follow up on matters arising from PAQCSupervisors familiar with model architecture and plan • Attendees • Firm: mandated : Internal model lead, SII programme manager • optional: any others at firm's discretion, the more the better • FSA: mandated: group /solo supervisor and IMAP lead • optional: any other member state supervisors, IMAP support, line actuary • Agenda • Matters arising from PAQC including review of SII plan in general and IMAP plan in particular • Firm's group structure and implications for SII (note, may need a more detailed evaluation at the Step 5 stage) • Presentation by Firm of its internal model plans, especially model architecture and scope (full v partial), sub-models and timelines, role of Group v solo entities in model build etc • Contingency planning around / post-QIS5 (which parts of standard formula might the firm be able to fall back on if full internal model approval not achieved on time) • Agree Requirements Meeting(s) for Step 5

42. Step 3 – Pre application pack (1)

43. Contents of Application 80+ items cover chapters d-n from the “minimum documentation requirements for an internal model application” in the former CP37, fleshed out using material from other former CPs 33, 56, 58 and 65 Firm suggests what evidence it intends to produce for each item and records this in the Self-Assessment During pre-application the “file of evidence” will be filled out

44. Self-Assessment Template • An Excel spreadsheet, designed to track the progress for each of the CoA and provide regular updates towards completion. • The first iteration will be completed at stage 6 of the pre-app process • One worksheet for each chapter in the CoA. Each worksheet contains a list of all sub-section questions and the firm needs to fill in the evidence or documents expected to support and constitute the application. • Against each item of evidence the firm: • describes the evidence • identifies which sub-sections the evidence relates to • provides a state of readiness score (1-4) • indicates the date available for FSA review • indicates whether it will be part of the application (in full / in part / in support of)

45. Sample Worksheet from Self-Assessment

46. Step 5 – Requirements Meeting • Duration – will depend on how familiar the Firm is with process. Might be more than one meeting. • Outcomes:(1) Firm to understand supervisory requirements around application contents, supporting evidence and detailed plan, and is ready to progress to preparing its self-assessment and progress plan. • Attendees • Firm: mandated : Internal model lead, SII programme manager • optional: others as required • FSA: mandated: group/ solo supervisor and IMAP lead • optional: any other member state supervisors, IMAP support, line actuary, others as required • Agenda • Contents of Application template will have been provided in advance • Explain and discuss Contents of Application template for relevant subjects – ensure firm understands SII requirements and is ready to begin detailed planning • Ensure that firm appreciates Group v solo roles – including which activities will be carried out at Group and which at solo level. This will enable supervisors to begin to plan model review activity at Group / solo level

47. Step 8 – Monitoring Progress

48. Step 10 – Review and Assessment

49. FSA Resources for pre-application

50. Agenda • Background to the pre-application • What is pre-application? • Overview of the process • Criteria for resource allocation • Planning • Coming to a view • Ensuring consistency • Legal basis • Pre-application process in the UK – overview • Groups issues - IMAP sub college