Solvency 2 Documentation

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© 2010 The Actuarial Profession www.actuaries.org.uk

A Closer Look at Solvency 2Julian Ellacott, Just RetirementKaren Seidel, Allianz Global Corporate & Specialty

Solvency 2 Documentation

28 April 2010


Outline

• What is required?

– Why is it important?

– Who is it aimed at?

– What standards have to be met?

• How might the standards be met?

– Functionality required

– Documentation systems

– Documentation governance

• Final thoughts

1© 2010 The Actuarial Profession www.actuaries.org.uk

4/27/2010

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High level requirements – all firms

• Framework Directive, Level 2 and Level 3:

– Demonstrating compliance will require significant

documentation

– A number of explicit “policies” are likely to be required

– Other detailed information (eg data dictionary for Article

82/former CP43)

• Models underlying technical provisions and standard formula

calculations will need to be documented (ie not just internal

models)

• RTS, SFCR and ORSA very clearly involve (and embody)

documentation2

© 2010 The Actuarial Profession www.actuaries.org.uk

High level requirements – Internal Model firms

Article 125 – Documentation standards

• Insurance and reinsurance undertakings shall document the design and

operational details of their internal model.

• The documentation shall demonstrate compliance with Articles 120 to 124.

• The documentation shall provide a detailed outline of the theory,

assumptions, and mathematical and empirical bases underlying the internal

model.

• The documentation shall indicate any circumstances under which the internal

model does not work effectively.

• Insurance and reinsurance undertakings shall document all major changes to

their internal model, as set out in Article 115.


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Why is it important?

• Ensure compliance with Framework Directive and Level 2 Advice on Tests

and Standards for Internal Models (former CP56)

– Para 9.3 “Documentation is the primary way to communicate with

supervisory authorities about internal models…”

→ Shoddy, unstructured documentation can start the Internal

model review process off on the wrong foot

• Reduced key person risk (highlighted in para 9.22)

• Less reinvention of the wheel/going down bind alleys

• Better identification of duplication/inconsistencies across business units

• Easier production/provision of information for other purposes, eg audits,

external AFH reviews, ARROW visits, TASs


Level 2 Advice – Tests and Standards for Internal Model

Approval (“L2:56”), section 9

• This expands on Article 125 in a fair amount of depth, introducing key

principles needing to be followed:

– Detail (“thorough, sufficiently detailed and sufficiently complete”)

– Currency (“timely and up to date”)

– Granularity (“take into account the level of management or the key

function at which it is intended to be used”)– Board of Directors

– Senior Management

– Personnel responsible for the Internal Model

– Others

– Relevance (“list of all documents…relevant to the internal model”)


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What we did: Documentation Gap Analysis

Based on Articles 120 to 126 and Level 2 Advice together

Art 125 – Documentation standards

Art 120 – Use Test

Art 121 – Statistical Quality Standards

Art 122 – Calibration Standards

Art 123 – Profit and Loss Attribution

Art 124 – Validation Standards

Art 126 – External Models and Data



Documentation Gap Analysis

Example: Validation Standards

Art 124– Regular cycle of model validation, incl.

– Monitoring of performance, ongoing appropriateness, testing of results

against experience

– Robustness of the IM

– Sensitivity testing regarding changes in key assumptions

– Stress and Scenario Testing

– Reverse Stress Tests


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Gap Analysis Example: Art 124 – Validation Standards


Regular cycle of model validation, incl

Monitoring of performance, ongoing appropriateness, testing of

results against experience

Robustness of the IM

Sensitivity testing regarding changes in key assumptions

Stress and Scenario Testing

Reverse Stress Tests


High Level Structure (Insurance Risk only):


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What does Article 125 require?

• Demonstration of compliance with Article 125

involves “iceberg” approach for each aspect of

the Internal Model:

– Board level summary

– Mid level guide

– Underlying detail

→Need clear structure and different levels of detail for

different users

• What does the “criterion that an independent

knowledgeable third party could form a sound

judgment as to the reliability of the internal

model” mean in practice?


A) Covering letter

B) Declaration re: clarifications and omissions

C) Application approval from firm’s management

D) ORSA

E) Scope of application

F) Risk management process and profile

G) Self-assessment

H) Technical characteristics of internal model

I) External models and data

J) Model governance, systems and controls, organisational chart

K) Independent review/ validation report

L) Change policy

M) Plan for future improvement

N) Capital requirement

“Unpacked”

into 78

subsections

Ultimate documentation requirement – full Internal Model application pack (FSA version)


14 high

level areas

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What will the final documentation look like (FSA version)?

• 14 (or 78) adjacent icebergs

• Actual application fits within a ring binder (200-1000

pages)

• Content changes infrequently – future proofed

• More significant mass of supporting material –

submission upfront is not an option!

• FSA does not expect to look at everything, but has the

option to look at anything

• Content will change on an ongoing basis

• Material will inevitably overlap between levels and

aspects – therefore need either:

– Cross-referencing (leading to inconvenience to the

reader)

– Or duplication of material in multiple places

(leading to problems of consistency)



Outline

• What is required?

– Why is it important?

– Who is it aimed at?

– What standards have to be met?

• How might the standards be met?

– Functionality required

– Documentation systems

– Documentation governance

• Final thoughts


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Implications for creation/management of documentation

Fulfilling these requirements is likely to require a “solution”

which provides all or some of the following features

However, need to maintain appropriate balance between degree of

structure and ease of use


Requirement Solution feature

Ease of navigation Clear document hierarchy, hyperlinks, searchability, tagging

Multi user access/audit trail Accessibility, version control, record of approvals

Efficiency Write once and re-use, integration with Excel, Word etc

Uniform style/structure Standard documentation templates

Security/records maintenance Version history, permissions, archiving, backup, retrieval

Management Status reporting, automatic prompts for future reviews

Potential solutions

There is no explicit guidance or requirements on the type of

documentation “solution”

• Providing these outcomes will require a mixture of system(s) and

governance

• Range of potential methods:

– Paper based

– Documents on LAN

– Web/intranet based systems

– Specialist documentation systems


Greater reliance

on governance

Greater reliance

on system

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Example – management on LAN

• Limited inbuilt functionality to fulfil requirements

• Folder structures can be restrictive (eg some documents belong in more than

one place)

• Requires strong governance to provide robustness

• However, familiar to users and (generally) easy to use


Case study 1 – Author-it documentation management system

Author-it – a database of documentation components,

supporting:

• Multi-user authoring, with access control and audit trail at component level.

• Drag and drop reuse

• Publish in multiple formats – Word, pdf, online

• Citrix Server-based and web-based versions allow shared use from

anywhere in the world

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Case study 1 – Author-it documentation management system

Documentation Management Benefits

Requirement Author-it Feature

Efficiency (write once and re-use) Main benefit - distinction between content and

assembly of contents into published documents

Consistency Edit anywhere, automatic update everywhere

Audit trail Who modifies what & when recorded at

document at component level

Uniform structure and style Central format control

Links with Excel and ppt Include as OLE objects

Multi-user access In-built

Archiving Two options: archiving within Author-it or use

Author-it only for live content and Sharepoint for

archiving

Version control In-built , at component level

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Case study 2 – Microsoft SharePoint

SharePoint: web based

collaboration tool,

offering:

• Multi user access, version

history, access control

• Searchability/tagging

• Approval workflows

• Customisable ways of looking

at subsets of the overall

document library

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Documentation governance

Regardless of sophistication of software, governance of the

documentation process will be important (ref PAQC Q3.3)

• Roles:

– Setting up and monitoring structure and guidelines for documentation

– Oversee training of relevant staff

• Who should create the documentation?

– Relevant content owners, eg actuarial, finance, risk

– Specialist technical writers? Outsource?

• Who should own the documentation?

– Not an actuarial job – skill set and cost/availability

– Compliance? Internal audit? Risk management? Project office?

Company secretarial?


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Final thoughts

FSA feedback

• Some firms submitting draft ORSAs already

• Overall FSA is “disappointed” so far – most firms not even

reaching ICAS standard

• Documentation will be a key area of focus through the IM pre-

application and full application process

General

• Proportionality – need to be careful over definition. Quantity

may be proportional, but quality cannot be


Questions or comments?

Expressions of individual views by

members of The Actuarial Profession

and its staff are encouraged.

The views expressed in this presentation

are those of the presenters.


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