3
Risk Management
3.1
- (1) A firm must have in place an effective risk-management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report on a continuous basis the risks, at an individual and at an aggregated level, to which it is or could be exposed, and their interdependencies.
- (2) That risk-management system must:
- (a) be effective and well integrated into the organisational structure and decision-making processes of the firm with proper consideration of the persons who have key functions;
- (b) cover the risks to be included in the calculation of the SCR as set out in Solvency Capital Requirement - General Provisions 3.3(1), as well as the risks which are not, or not fully, included in the calculation thereof; and
- (c) cover at least the following areas:
- (i) underwriting and reserving;
- (ii) asset-liability management;
- (iii) investment, in particular derivatives, quasi-derivatives and similar commitments;
- (iv) liquidity risk and concentration risk management;
- (v) operational risk management;
- (vi) reinsurance and other risk-mitigation techniques.
- (3) Where a firm applies the matching adjustment or the volatility adjustment it must set up a liquidity plan projecting the incoming and outgoing cash-flows in relation to the assets and liabilities subject to those adjustments.
[Note: Art. 44(1)–(2) of the Solvency II Directive]
- 01/01/2016
3.2
As regards asset-liability management, a firm must:
- (1) regularly assess the sensitivity of its technical provisions and eligible own funds to the assumptions underlying the extrapolation of the relevant risk-free interest rate term structure referred to in Technical Provisions 5;
- (2) where the matching adjustment is applied, regularly assess:
- (a) the sensitivity of its technical provisions and eligible own funds to the assumptions underlying the calculation of the matching adjustment, including the calculation of the fundamental spread referred to in Technical Provisions 7.2(2), and the possible effect of a forced sale of assets on its eligible own funds;
- (b) the sensitivity of its technical provisions and eligible own funds to changes in the composition of the assigned portfolio of assets;
- (c) the impact of a reduction of the matching adjustment to zero;
- (3) where the volatility adjustment is applied, regularly assess:
- (a) the sensitivity of its technical provisions and eligible own funds to the assumptions underlying the calculation of the volatility adjustment and the possible effect of a forced sale of assets on its eligible own funds;
- (b) the impact of a reduction of the volatility to zero.
[Note: Art. 44(2a) of the Solvency II Directive]
- 01/01/2016
3.3
A firm must submit the assessments referred to in 3.2 as part of the information reported annually in accordance with Reporting 2. Where the reduction of the matching adjustment or the volatility adjustment to zero would result in non-compliance with the SCR, the firm must also submit an analysis of the measures it could apply in such a situation to re-establish the level of the eligible own funds covering the SCR or to reduce its risk profile to restore compliance with the SCR.
[Note: Art. 44(2a) of the Solvency II Directive]
- 01/01/2016
3.4
As regards investment risk, a firm must demonstrate that it complies with the Investments Part of the PRA Rulebook.
[Note: Art. 44(3) of the Solvency II Directive]
- 01/01/2016
3.5
A firm must provide for a risk-management function that is structured in such a way as to facilitate the implementation of the risk-management system.
[Note: Art. 44(4) of the Solvency II Directive]
- 01/01/2016
3.6
In order to avoid overreliance on external credit assessment institutions when it uses external credit rating assessments in the calculation of technical provisions and the SCR, a firm must assess the appropriateness of those external credit rating assessments as part of its risk management by using additional assessments wherever practicably possible in order to avoid any automatic dependence on external assessments.
[Note: Art. 44(4a) of the Solvency II Directive]
- 01/01/2016
3.7
A firm that has received internal model approval must ensure that its risk-management function covers the following additional tasks:
- (1) to design and implement the internal model;
- (2) to test and validate the internal model;
- (3) to document the internal model and any subsequent changes made to it;
- (4) to analyse the performance of the internal model and to produce summary reports thereof; and
- (5) to inform the governing body about the performance of the internal model, suggesting areas needing improvement, and updating that body on the status of efforts to improve previously identified weaknesses.
[Note: Art. 44(5) of the Solvency II Directive]
- 01/01/2016
3.8
- (1) A firm must conduct an ORSA as part of its risk-management system.
- (2) The ORSA must include at least the following:
- (a) the firm’s overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the firm;
- (b) the compliance, on a continuous basis, with:
- (i) the SCR and MCR; and
- (ii) the requirements regarding technical provisions, as set out in Technical Provisions; and
- (c) the significance with which the risk profile of the firm deviates from the assumptions underlying the SCR.
- (3) For the purposes of 3.8(2)(a), the firm must:
- (a) have in place processes which are proportionate to the nature, scale and complexity of the risks inherent in its business and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is, or could be, exposed; and
- (b) demonstrate the methods used in that assessment.
- (4) Where a firm applies the matching adjustment, the volatility adjustment, the risk-free interest rate transitional measure or the technical provisions transitional measure, it must perform the assessment of compliance with the capital requirements referred to in 3.8(2)(b) with and without taking into account those adjustments and transitional measures.
- (5) In the case referred to in 3.8(2)(c), when an internal model is used, the assessment must be performed together with the recalibration that transforms the internal risk numbers into the SCR risk measure and calibration.
[Note: Arts. 45(1), (2), (2a), (3) of the Solvency II Directive]
- 01/01/2016
3.9
A firm must make the ORSA an integral part of its business strategy and take the ORSA into account on an ongoing basis in its strategic decisions.
[Note: Art. 45(4) of the Solvency II Directive]
- 01/01/2016
3.10
A firm must perform the ORSA regularly and without delay following any significant change in its risk profile.
[Note: Art. 45(5) of the Solvency II Directive]
- 01/01/2016
3.11
A firm must inform the PRA of the results of each ORSA as part of the information reported under Reporting 2.
[Note: Art. 45(6) of the Solvency II Directive]
- 01/01/2016