Solvency II

The new supervisory system Solvency II has been in force since 1 January 2016. The three pillars of Solvency II contain far-reaching regulations according to which European insurers have to organize their risk management. In addition to determining the necessary risk capital (Pillar 1), the catalogue of requirements regulates the design of risk management (Pillar 2) and periodic reporting on the risk situation and risk management (Pillar 3).

Meyerthole Siems Kohlruss (MSK) has been involved from the very beginning. Meyerthole Siems Kohlruss (MSK) advises primary insurers, reinsurers, industrial companies and captives on the implementation of the new regulatory requirements and supports risk management in mathematical-quantitative as well as process-related and strategic issues. From supporting the implementation of the standard model to taking over key functions and advising on reporting, Meyerthole Siems Kohlruss (MSK) has gained relevant experience in all three pillars. Since the preparatory phase for the introduction of Solvency II, Meyerthole Siems Kohlruss (MSK) has been offering services for the planning, implementation and documentation of the company's own risk and solvency assessment (ORSA).

Since 2016, Meyerthole Siems Kohlruss (MSK) has also provided the actuarial function for a large number of small and medium-sized insurance companies. Currently, Meyerthole Siems Kohlruss (MSK) works for around 15 companies and is also appointed as Independent Risk Control Function for some insurance companies.

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Standard Formula and Solvency Overview

The solvency overview and the standard formula form the core of Pillar I within the framework of Solvency II. While the solvency overview contains a comparison of the market values, assets and liabilities of the company, the minimum capital requirement (MCR) and the solvency capital requirement (SCR) are calculated using the standard formula. The solvency overview must be prepared both quarterly and annually. The valuation of assets and liabilities must be based on the respective market values.

Meyerthole Siems Kohlruss (MSK) advises and accompanies companies in the calculation of the standard model’s individual elements. This includes, among other things, the calculation of the best estimate provisions, the risk margin and the preparation of the solvency overview. Meyerthole Siems Kohlruss (MSK) supports companies in calculating the SCR and provides a calculation tool created for this purpose, which can be used to determine regulatory capital requirements. In connection with the man-made risk in property insurance, Meyerthole Siems Kohlruss (MSK) offers to determine the fire risk concentration of the building stock within a radius of 200 metres (OverLab) for your company.

In addition, Meyerthole Siems Kohlruss (MSK) supports the validation of the results of the standard model

We are at your side with advice and support in all matters. Feel free to contact us.

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Company-Specific Parameters (USP) and (Partial) Internal Models

The standard model anchored in Pillar 1 maps the underwriting risk via the premium and reserve risk.

The parameters used for this in the standard formula are calibrated using market data. This can lead to a company’s individual risk situation not being adequately reflected and, as a result, to an inappropriately high capital requirement. To counteract this, it can make sense to use a company's own parameters (USP) within the framework of the standard formula.

Meyerthole Siems Kohlruss (MSK) advises companies on the implementation and calculation of USP and accompanies the preparation and validation of the data used for this purpose. Meyerthole Siems Kohlruss (MSK) has been accompanying companies using USP in the standard formula since 2013 and therefore has experience in both calculation and approval.

The information content of a (partial) internal model goes far beyond the possibilities of the standard formula and the application of the company's own parameters. On the other hand, it is not limited to solvency issues: for example, risk relief through reinsurance can be examined in detail using such a model.

If you would like to carry out a custom-fit "measurement" of your underwriting, Meyerthole Siems Kohlruss (MSK) will support you in the implementation of a (partial) internal model. This allows detailed analyses for the economic assessment of your business (especially with regard to its value-oriented management). This creates a valuable knowledge advantage, especially in the Solvency II context, for example when conducting an ORSA.

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Governance System

The second pillar of Solvency II deals with the establishment of an effective risk management system. Applying the principle of proportionality, companies must be able to demonstrate that they meet the legal requirements and have an adequate governance system. The Minimum Requirements for Business Organization supplement the existing statutory regulations. Since 2020, the Minimum Requirements for Business Organization have been extended to a special set for small insurance companies. The focus here is on the adequate design of the business organization and a simultaneous consistent requirement across all insurance companies.

Meyerthole Siems Kohlruss (MSK) particularly supports insurers in conducting a regular in-house risk and solvency assessment (ORSA), in establishing key functions such as the actuarial function and the independent risk controlling function in the context of a spin-off, and complying with the "Fit & Proper" criteria through focused training. In addition, Meyerthole Siems Kohlruss (MSK) advises companies on the assessment of potential management decisions with regard to their impact on risk-bearing capacity. This also supports the independent risk controlling function in the risk-technical evaluation of planned strategies as part of the implementation of the risk management system.

When implementing the Minimum Requirements for Business Organization for small insurers, companies benefit from our many years of experience and a proportional implementation tailored to the company’s needs.

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Actuarial Function

As one of the four key functions, the actuarial function is part of the governance system required by Pillar 2 of Solvency II. The tasks of the actuarial function are aimed at supporting the effective implementation of the risk management system. The coordination of best estimates and risk margin plays a significant role as part of the technical provisions. In addition to the adequacy of the technical provisions, the actuarial function gives an assessment of the underwriting and acceptance policy, whereby, among other things, the compatibility of the underwriting policy with the company-specific risk profile is examined. In addition, the actuarial function assesses the company's reinsurance policy.

The actuarial function reports directly to the executive board and is closely linked to the independent risk controlling/risk management function.

Meyerthole Siems Kohlruss (MSK) assumes the actuarial function within the framework of a (regulatory-permitted) function outsourcing and supplies external professional know-how due to its actuarial expertise and many years of experience. Meyerthole Siems Kohlruss (MSK) is the market leader in the area of outsourcing the actuarial function.

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Risk and Solvency Assessment (ORSA)

In addition to the adaptation of risk management to the design requirements of the Governance Directive, Pillar 2 of the Solvency II Directive requires that companies conduct a regular comprehensive "risk inventory". In such a company's own risk and solvency assessment (ORSA), it is important on the one hand to fully map the company's own risk management process, which should cover the business-relevant underwriting risks as well as compliance aspects or new influences such as cybercrime. On the other hand, the stability of the company's own solvency situation is to be determined by means of stress scenarios in a medium-term plan.

Meyerthole Siems Kohlruss (MSK) accompanies insurers in the implementation of individual process steps up to a complete ORSA. As part of the calculation of the overall solvency needs, Meyerthole Siems Kohlruss (MSK) supports you in developing internal solutions for individual risks.

For the projection of the business results, Meyerthole Siems Kohlruss (MSK) uses PORTo, a tool developed in-house, which projects the income statements and balance sheets according to German Commercial Code (HGB) for a predefined period. In addition, SCR, overall solvency needs as well as solvency overviews and own funds are mapped for the projection period. This is based on current calculations for the standard model and the company-specific assessment of the risks.

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Independent Risk Control Function / Risk Management Function

As one of the four key functions, the independent risk control function is part of the governance system required by Pillar 2 of Solvency II. The tasks of the independent risk control function are aimed at significantly promoting the implementation of the risk management system.

The independent risk control function is responsible for the operational implementation of risk management on behalf of the executive board. In this context, the independent risk control function actively points out potential for improvement of the risk management system to the executive board. It helps the executive board to further develop the risk management system on an ongoing basis. The independent risk control function supports other functions in the effective handling of the risk management system. If new risks emerge or decisions are made with a potential impact on risk-bearing capacity, the independent risk control function assesses them qualitatively and quantitatively.

Meyerthole Siems Kohlruss (MSK) assumes the risk management function within the framework of a function outsourcing (permitted by supervisory law) and supplies external specialist know-how due to its many years of experience in risk management and quantitative assessment procedures.

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Reporting

Through regular supervisory reporting, Pillar 3 of Solvency II entails extensive reporting and disclosure obligations consisting of:

• the Solvency and Financial Condition Report (SFCR)
• the Regular Supervisory Report (RSR)
• the report on the company's own risk and solvency assessment (ORSA report)
• the Quantitative Reporting Templates (QRT)

While the RSR is only forwarded to the insurance supervisory authority, the SFCR is additionally made public and thus also made available to policyholders, for example.

The quantitative reporting forms have to be fulfilled partly annually, partly quarterly and present a challenge to the capacities of risk management in terms of scope and complexity. Meyerthole Siems Kohlruss (MSK) assists insurance and reinsurance companies, industrial enterprises and captives in fulfilling the diverse reporting requirements.

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Pension Funds – IORP II

The EU Directive on the activities and supervision of institutions for occupational retirement provision (2016/2341, the so-called IORP II Directive) was transposed into national law on 13 January 2019 and serves to further develop the supervisory law of pension funds. The IORP II Directive contains significant changes, particularly with regard to the qualitative requirements for business organization, risk management as well as information and reporting obligations towards members and beneficiaries.

As part of the business organization requirements, pension funds have to introduce independent key functions under IORP II. This includes an independent risk controlling function, an internal audit function and an actuarial function. In principle, a key function can also be outsourced to a service provider.

Meyerthole Siems Kohlruss (MSK) accompanies you in the implementation of the IORP II Directive. This includes, in particular, assuming key functions such as the Independent Risk Controlling Function (URCF) within the framework of a function outsourcing permitted by supervisory law and supporting risk management in an Own Risk and Solvency Assessment (ORSA) and in all emerging procedural and strategic issues.

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Approvals of the Federal Financial Supervisory Authority

For an expansion of the business operations to new insurance classes or for a completely new authorization, an application pursuant to the Insurance Supervision Act (VAG) §9 must be submitted to the German Federal Financial Supervisory Authority (BaFin).

Meyerthole Siems Kohlruss (MSK) supports clients all the way. In the past years, Meyerthole Siems Kohlruss (MSK) successfully accompanied several start-ups from licensing to becoming an established insurer on the market. This requires close coordination with the supervisory authority. Meyerthole Siems Kohlruss (MSK) is your independent partner – also in direct communication with the German Federal Financial Supervisory Authority – and supports you in clarifying supervisory issues and requirements.

As part of the application for authorization, Meyerthole Siems Kohlruss (MSK) determines a granular medium-term plan in accordance with the Insurance Companies Accounts Regulations (RechVersV) based on business planning with the help of PORTo, a tool developed in-house. For this purpose, the actuarial account is prepared for each business segment and this is expanded to include the complete profit and loss accounts. In addition, balance sheets are derived according to German Commercial Code (HGB) and Solvency II. Finally, the regulatory own funds are projected and the necessary capital requirements are determined.

The model developed by Meyerthole Siems Kohlruss (MSK) enables the variable presentation of gross underwriting variables such as premium, claims and costs and, in particular, the variable design of reinsurance structures. The implications of these variables and structures on the annual surpluses, on the own funds and the solvency capital required by supervisory law (MCR and SCR according to the Insurance Supervision Act VAG) are shown over several years and enable those responsible to optimally set up the new business field. The choice of reinsurance has a significant influence on the necessary capital requirement and should therefore be made depending on the planned financing. A quantitative analysis of all mutually influencing effects is therefore indispensable for the responsible solution of the optimization problem in the balancing act between investors, reinsurers and supervision.

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