The supervisory review process
The supervisory review process set up by the Bank enables a risk-based audit approach which is forward-looking and proportionate to the size, nature and complexity of the risks incurred by the undertakings. The process includes three successive stages: risk assessment, supervisory programme and supervisory measures (see below).
1. Risk assessment
The Bank uses an internally developed tool as a risk assessment support that contains the translation of each individual undertaking’s risk profile. The aim is:
a) to identify and assess current and future risks to which insurance and reinsurance undertakings are or may be exposed;
b) to assess the insurance or reinsurance undertaking’s ability to identify, measure, monitor and manage such risks and to communicate the relevant information in this regard;
c) to assess the undertaking’s ability to withstand possible events or future changes in economic conditions as well as their potentially negative impact on the undertaking’s solvency and financial situation and therefore its ability to honour its obligations towards insurance holders and beneficiaries if risks were to materialize.
This tool contains the synthesis of any analyses that have been conducted by the Bank and enable it to organize such prudential actions as must be taken in accordance with the risk-based approach. Assessments arising from this analysis are justified through specific documentation for each risk, including the fundamental points to be met. This ensures a level playing field among undertakings as regards risk assessment.
The need to take prudential action (e.g. through capital add-ons) is assessed on the basis of this analysis.
The information underlying the analyses conducted by the Bank comes from various sources, namely:
a) insurance and reinsurance undertakings or insurance groups themselves:
Regular narrative and quantitative reporting to the supervisor, the report on the own risk and solvency assessment (ORSA) and the annual accounts are the main source of information received by the Bank. This is complemented by other ad hoc information requested by the Bank as the need arises;
b) the Bank itself:
Based on the information at its disposal, the Bank has developed early-warning indicators and risk indicators whose developments over time allow it to assess the evolution of risks which undertakings are or may be exposed to. Such indicators are also used to detect any outliers. Thematic revisions and stress tests are also conducted by the Bank;
c) exchanges within supervisory colleges:
European supervisors of insurance undertakings that are part of a group exchange both qualitative and quantitative information on a regular basis. They also meet to discuss the results of risk assessment of undertakings within insurance groups. The work programmes developed within supervisory colleges subsequently make it possible to complement an undertaking’s risk analysis with any analysis, relevant information and any supervisory action taken and shared within the college;
d) the statutory auditor:
The statutory auditor’s reports and all communications made in the context of the so‑called signal function;
e) other competent authorities:
The Bank maintains close contacts with supervisory authorities in charge of other aspects (e.g. the FSMA as regards consumer protection), as those authorities’ analyses could turn out to be important in connection with the detection of risks to which undertakings are exposed;
f) other third parties:
Information on the market in general or the insurance sector in particular, as provided by professional associations (e.g. Assuralia, IA|BE, IRE), technical research reports from ESRB, EIOPA, IAIS or other international institutions, as well as information relayed in the press and media are also the subject of special attention on the part of the Bank as part of its mission.
2. Supervisory programme
The supervisory programme is carried out on the basis of the undertaking's risk profile and consists in an analysis of documents and/or on-site monitoring. In conducting its supervisory programme, the Bank pays particular attention to the following:
A. Governance system, including the own risk and solvency assessment (ORSA)
The Bank reviews and assesses whether the insurance or reinsurance undertaking has in place an effective system of governance which provides for sound and prudent management of the business. That system shall at least include an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities and an effective system for ensuring the transmission of information. The Bank reviews the manner in which the governance system meets the fit and proper requirements for persons who effectively run the undertaking or are responsible for independent control functions, the requirements for risk management, the requirements for the internal control system, the requirements for the internal audit function, the requirements for the actuarial function and the requirements for outsourcing activities or important or critical operational functions.
The Bank analyses the internal evaluation of risks and solvency process (ORSA) set up by the insurance and reinsurance undertakings and ensures that assessment is an integral part of its risk management system. The Bank assesses whether that assessment shall include at least the following:
a) the overall solvency needs, taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking, including medium- or long-term perspectives;
b) the compliance, on a continuous basis, with the capital requirements and with the requirements regarding technical provisions;
c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions for calculating the solvency capital requirement.
The Bank reviews and assesses whether the procedures set up by the undertaking are proportionate to the nature, scale and complexity of the risks inherent in its business and 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. The Bank assesses the suitability, as demonstrated by undertaking, of the methods it uses for this assessment.
B. Technical provisions
The evaluation of the calculation of the technical provisions of an insurance or reinsurance undertaking is carried out on the basis of a qualitative and quantitative analysis of the models used and the adequacy of these models with regard to the legal provisions, taking into account that the level of detail of this analysis must be proportionate to the nature, scale and complexity of the risks inherent in its business of the undertaking under supervision.
Model supervision can be carried out both on an individual level and on a more global level. Individual supervision is carried out as part of the regular contacts between the undertaking and the financial, actuarial and legal analysts of the Bank in charge of relations with the undertaking. Global supervision is carried out through a comparative study at market level, e.g. following a detailed survey addressing specific issues as regards certain legal provisions. Each instance of such supervision can, if necessary, be followed by on-site inspection aiming at further analysis.
In the field of life assurance, the valuation of technical provisions can be strengthened by the use of a specific tool developed by the Bank. This instrument makes it possible to decompose the Best Estimate into its various constituents, to reconcile its cash flows with the inventory reserves and to conduct a series of consistency tests. This tool is associated with specific reporting required for this purpose.
C. Capital requirements (MCR and SCR)
Undertakings are subject to a twofold capital requirement: the Minimum Capital Requirement (MCR), which is the capital that is necessary to limit the undertaking's bankruptcy risk to 15% over a one‑year period, and the Solvency Capital Requirement (SCR), which is the capital that is necessary to limit the undertaking’s bankruptcy risk to 0.5% over a one‑year period (i.e. one bankruptcy every 200 years).
The evaluation of the undertaking’s capital requirements consists firstly in a detailed analysis of its capital requirements calculations, namely SCR and MCR, and secondly in the analysis of the adequacy of these calculations in relation to the results of the assessment of the undertaking’s risk profile.
The calculation of the capital requirements is reviewed by analysing the information mentioned in point 1 above and the analysis of the assumptions and expert judgments used in calculating the capital requirements.
The assessment of the undertaking’s risk profile is translated into in the tool mentioned in point 1 above.
An analysis is made of the adequacy of each undertaking’s risk profile in relation to the calculation of the capital requirements. These enables the supervisor to determine whether the undertaking should calculate its capital requirements using the standard formula, or whether it can resort to either undertaking-specific parameters (USP) to reflect certain specific aspects of its insurance portfolio or a partial or full internal model (see F).
D. Investment rules
The law provides for greater freedom of investment for undertakings, centred on the “prudent person principle”.
In assessing the investment policy of undertakings and the prudent person principle, great attention is paid to the decision-making process set up within the undertaking as part of its investment policy. The investment policy must determine at least the objectives in terms of risk and return, taking into account the appropriate time horizon, the business model, risk appetite and risk tolerance limits. It should determine in particular the acceptable investments, the asset allocation strategy and the internal limits set by the undertaking as well as principal assumptions upon which such limits are based.
The description of the ALM (Assets and Liabilities Management) policy as well as the manner in which the assets are selected with a view to optimal matching between assets and liabilities is of crucial importance to assess the relevance of the investment policy.
Alongside the review of governance as related to the investment policy, a detailed analysis of the investment portfolio is carried out on the basis of the list of assets as communicated through quantitative reporting.
This analysis is based on criteria for safety, quality, liquidity and profitability. Various indicators are developed to exploit the data provided by the undertaking, including the composition of the portfolio by asset class but also the rating of the securities and their duration.
Benchmarks are also developed in order to compare the behaviours of undertakings that use similar business models.
E. Quality and quantity of own funds
The level and quality of own funds are assessed on the basis of both qualitative and quantitative reports based on the information mentioned in point 1 above.
The focus is initially set on the level of own funds in terms of capital requirements. Compliance with the limits in the levels of own funds is also part of this first review.
Particular attention is paid to the quality of own funds and compliance with the rules on classification of own funds. Supervision of approval of ancillary own funds and other elements of own funds for which prior approval of the Bank is required complies with European requirements.
Subsequently, based on the information on capital management as contained in the narrative part of regular reporting to the supervisor and based on the ORSA, an assessment is made of the undertaking’s capital planning, taking into account an estimate of the evolution of the solvency capital requirement and any deadlines as regards own funds.
F. Full or partial internal models
The Bank uses a set of tools (both off site and on site) so as to follow up, over time, the adequacy of internal models used in determining the capital requirements.
The conditions and remediation plans established upon approval of a model are followed up, taking into account their deadlines. The Bank is also involved in the event of a material change to an approved model.
Following up models also involves reading validation reports, assessing the results of tests performed by undertakings or of on‑site inspection assignments where concerns exist as to the quality of the internal models. The evolution of the level of regulatory capital requirements is also analysed on the basis of regulatory reporting.
Finally, quantitative studies with a view to determining the benchmarks are carried out – by the Bank and/or through EIOPA – in order to compare between undertakings and detect any outliers.
The objective of such work is to enable the Bank to maintain its knowledge of the undertakings’ risks and business models, so as to ensure that regulatory capital requirements are in line with the risks incurred.
3. Supervisory measures
Depending on the conclusions of the control programme, the Bank identifies such weaknesses, shortcomings and non-compliance with requirements as may lead to supervisory measure. The Bank notifies the undertaking in writing in due time of the specific measures that the undertaking is required to implement, and of the deadline by which the undertaking is required to take the necessary steps to comply with the supervisory measure.