Solvency ii News April 2012


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Solvency ii News April 2012

  1. 1. Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comSolvency II News, April 2012Dear member,“We‟reno longer a committeeof supervisors,we‟rean authority”Interview with Gabriel Bernardino, Chairman of EIOPA,conducted byAndré de Vos, Omni magazineSupervisoryauthorityEIOPAsubmittedrecommendationsfor newEuropean pension regime tothe European Commission on 15 February.EIOPA Chairman Gabriel Bernardinounderstandsthat theproposed changesmakethesector nervous. „But let‟snot startpanicking;this is onlythefirst step.‟Ice flowsin the Mainfifty metresbelow us.Theview from Gabriel Bernardino‟sofficeis breathtaking, even on agrey Februaryafternoon.TheEIOPA‟s officesare located on the14th, 25th and 26th floorsof thegreenglassWesthafen Toweralongthe banksof the Main in Frankfurt.As the wind whistlesoutsidethe glasspanels, EIOPAChairmanBernardinodetails the European Insuranceand Occupational PensionsAuthority recommendationsreleased that sameday regardingchangestoIORP European pension regime.Solvency ii
  2. 2. Bernardino& Co.‟sfinal recommendationsweresubmittedthesame daytothe European Commission. The Commission in turn issuedits„whitepaper‟on thepension fundsa day later.The„whitepaper‟contained elementsfrom theEIOPArecommendationswhich, after all, had been released last October forconsultation.Theversion most recently submittedto theEC incorporatesthe 170responsestothe recommendationsreceived.Solvency ii
  3. 3. Are you surprised bythenumber of responsesto your recommendations?„Thepension sector takestheserecommendationsseriouslyand we‟vereceivedresponsesfrom every possibletype of organisation, not justthepension funds, facilitatorsand insurers,but alsogovernment authorities,labour unions,employers and even participants.Solvency ii
  4. 4. I‟m pleased withthewidediversity of responses.It‟s niceto have generated somany opinions,although a percentageofthefeedback did not pertain directlyto our recommendations, but tothecontent of the tasksassignedtousbythe European Commission.‟Recommendationsrunningtomorethan 500pagesis not exactlyeasyreading.„That wasa deliberatedecision.We‟rebreakingnewground and this isa sensitive discussion.That‟swhyweaim tobe completely transparent, toshow how wearrivedat our decisions,whoour sourcesare, the prosand consof our positionandthestepswe‟d like to take. That resultsin a thick document.But the onethat I‟m satisfiedwith.And thosewhoonlyread the blueboxeswith the adviceitself can still get a clear picture of our intention.‟Did all of thoseresponsesleadtochangestoyour originalrecommendations?Some of them do. We now clearly explain in the introduction what ourgoal is and, of all the options set out in the original recommendations,quitea few have been shelved.Therecommendationshavebeen streamlined, but are mostlyin linewiththeconsultationadvice given in October.‟This will comeasadisappointment to many.„Manypeopleare actingasif everything is already set in stone.But let‟snot start panicking;thisis onlythe first step.Solvency ii
  5. 5. There‟s still plentyof worktobe done before a new European regime isin place.‟Many of theresponsestoyour recommendations, includingfrom theNetherlands,point tothefact that theEIOPAshould not bemeddlinginthisarea – handsoff our pension schemes!„That‟sunderstandable.It‟sa misconceptionto think that our goal is to replace theexistingschemes.We want toseewhereimprovementscan be made.There arealwayssimilaritiesacrossnational pension systems. What theyall have in common is that pension promisesare beingmadeacrossEurope.Regardless of the national structure used to fulfil those promises, webelieve that clarity is needed at European level regarding the value ofthosepromises.But todo thiswemust be ableto compare, whichin turn requiresEuropean regulations.This is ultimatelyin everyone‟sbest interest, from employeesto thefundsmakingthepension promisesin the variouscountriestothepension industryitself, whichwill be in a better position to operateacrossborders.‟„European organisationslike EIOPAneed to communicatebetter abouttheaddedvalue of these typesof European agreements,certainlyat atimewhentheEU itselfis under debate.It is preciselybecauseof the EU current unpopularity weneedto moveforwardin thisway.Solvency ii
  6. 6. Thesekindsof recommendationsare in keepingwiththat ambition.They‟re good for Europe.‟What is your personal opinionof themost important proposalsin therecommendations?„We‟re putting forward a „holistic balance sheet‟, a harmonisation on topof the existing balances, which will make it possible to compare pensionfunds.ClearEuropean rulesare needed for thegovernanceof pension funds.And participantsin pension fundswitha definedcontributionplan mustbeprovided withclear and accessibleinformationin a standardisedfashion.This is calleda „KeyInformation Document‟.‟Theproposalsfortheholistic balancesheet require further development.„Over thenext few months, we‟regoing to carryout a quantitativeimpact studyon how our proposalswouldlook like in practice.We‟re starting in April and will conduct this study in the countrieswhereDefined Benefit Plans are most relevant. (Until now we have 7 countriesincludingthe Netherlands).Our primary goal is todevelop a uniform and consistent manner tocommunicateabout pensions.‟The pension sector isafraid that the new European pension regime willimpose much stricter capital requirementson pension funds, like thosein SolvencyII.Solvency ii
  7. 7. „I have nointentionof imposinganother Solvency II on the pensionsector. That isa persistent misconception.But it‟snot mentionedin our recommendations.After all, there are essentialdifferencesbetweenpension fundsandinsurers, soyou cannot imposecapital requirementsin thesame way.That doesn ‟t alter the fact th at Solv en cy II con t ain s a number of important provisionsin areaslike governanceand riskmanagement that can alsobe used for pension funds.‟What kind of changesare needed in thearea of governance?„Pension promisesin Europe need to be guaranteed in thesame wayacrossEurope.This meansthat governancealsoneedstobe organised in a comparablemanner.Regardlessof national pension system structures, the administratorsresponsiblefor investmentsneed tounderstand what theyare investingin.Theknowledgelevel of pension administratorsis a pan-Europeantheme; agreementsin this area alsoneed to be made at European level.But it should still be possibletodistinguishbetweenlargeand smallfunds,DB and DC schemes.‟Pensionfundsareafraid that largerbuffers will lead to lowerpensions.„We need a pension regimewitha good balancebetweencertaintyandaffordability.Solvency ii
  8. 8. That‟swherebufferscome in.If you want 100% long-term security, there will be no fundsleft forpensions.And if you onlyconsider theaffordabilityof the system, toomuch risk istaken.We want to supplyinstrumentsthat make it possibletoview risksacrossEurope in the same way.We want a consistent approach to riskacrossEurope.This can alsoentail certain minimum requirementsfor buffers.But that is ultimatelya politicaldecisionand doesnot concern us.We simplyaim toprovidea clear framework that facilitatesriskandreturn determination.‟All pension fundsareto bebasedon market valuefrom nowon.„Our standpoint is that, if you want to effectivelycompare pension funds,themarket valueof assetsand obligationsshould form thebasis.That is theholisticbalancesheet approach.If everyone usesthesame reporting format, pension agreementscan beeasilycompared. But this still meanspension fundscan continuetoconsider their national specificities.Not onlythat, but it providesthe possibilityof incorporatingassurancesasbufferson thenational level.Solvency ii
  9. 9. Our aim is toachievecomparability of thevariousnational systems withaslittleimpact on thosesystemsaspossible.‟TheDutch believethat theNetherlandshasthebest pension system.Shouldwebeconcerned that it could beunderminedbyEuropeanregulations?„TheNetherlandsmust alsobe integratedintotheEuropean system,which, after all, is the wholepoint of theEU, i.e. that weall observethesamerules.But I don‟t anticipateany dramatic changestothe Dutch pensionsystem.Our recommendationscontain numerousmeasuresthat wereintroducedin theNetherlandslong ago.‟Like themarket valuationsthat areseriouslydamagingour coverageratios and that wewouldprefer toget rid of onceand forall.„Afew years ago, theNetherlandsmade a brave decision whenit chosethemarket valuation of both assetsand obligations.That thismight now possiblyresult in cutbacksin pension rightsisevidenceof the risk run by pension funds.You can‟t solvethat problem but suddenlyusing a different interest rate.In the quantitativestudies,wewill be testinghow a holistic balancesheet withmarket valueswouldworkin practice.‟What about thekey information document?„There are needsfor a clear format for information presentationtoparticipantsregarding DC schemes.Solvency ii
  10. 10. Right now this informationisoften insufficient.How much have peoplebuilt up and what risksdotheyrun?Weare usingthe current best practicesin Europe todefine thisdocument.‟There‟s noguarantee that moreorbetter informationwill help if thesystem itself remainscomplicated.„It‟strue that peopledon‟t alwaysread thesmall print. That remainsadilemma.But if you usethat asan argument for simpler pension systems, youcould run intotrouble.Take, for instance, thediscussion on default optionsin DC systems.This makesit easier for peoplewhodo not fully understandthe systemtomake choices.Fiveyears ago, a risk-freedefault consistedprimarily of governmentbonds.Nowadays, thiscould be seen asa riskyportfolio. It is absolutelypossibleto createsimpler DC systems, but good information remainsessential.‟EIOPA hasbeen around formorethan ayear now.How doesit differfromCEIOPS,whichyou alsoheaded?„They‟re incomparable. We‟re livingin a different world, a different era.‟Youmean that much haschanged in just oneyear?„It seemslike much longer ago.Solvency ii
  11. 11. Our approach has changed dramatically. We‟re no lon ger a committee ofsup ervisors, we‟re an aut horit y.We d on ‟t n eed absolu t e u nan imit y .At CEIOPSdecisionsweretaken by consensus,now if we don ‟tall agree, weput it to a vote. The discussionsrun deeper asaresult.Whereas,in the past, a supervisor could say, „I don‟t agree‟, and thatwouldbe the end of it.It wouldsimplybeput on the record.How seriouslydopeopletake EIOPA?„Our authorityis acknowledged. I‟m ambitious.We aim tobe a well-informed, transparent supervisoryauthority.But weneed tooperate carefullyand inspire confidenceamong allparties.We needto avoid simplyimposingmeasuresand to introducechangesstep by step.‟Important European pension documentsare being released right in themiddle of the euro crisis. Isthe European pension framework in dangerof beingoverlooked?„Our job isto make sure that doesn‟t happen.TheEIOPA is alsoon the European Systemic RiskBoard. We‟re jointlyresponsiblefor financial stability.Pension fundsand insurersplayan important role in that.Solvency ii
  12. 12. It is understandablethat all attention isnow beingdirectedtowardsthebank sector, but this should not be at theexpenseof everything else.Alowlong-term interest rateis very good for banks, but not sogood forthepension sector.We‟re making sure that thisis alsoon theagenda for discussion.‟„Weview the crisisasan opportunity for change. The messageof thecrisisisthat wecan ignore neither financial nor demographic risks.We needto accept and analyse thoserisks. It‟s not about capital, butabout risk.‟What happensnowwithyour recommendations?„We‟regoingtostart workingon the quantitativeimpact studies, whichshouldbe finishedby September.Theresultswill be submitted to theEuropean Commission, whoplanstopresent itsproposal by theend of this year.Solvency ii
  13. 13. SPEECHGabriel Bernardino, Chairman of EIOPAHow EIOPAis “taking the lead” inconsumer Protection28th ProgressInternational SeminarGeneva, 23 March 2012Ladies and Gentlemen,It is a great pleasureto speak to you here in Geneva and toshare withyou EIOPA‟spriorities and plansrelatedto consumer protection.Theprotection of policyholders, pension schememembersandbeneficiariesis oneof our key objectives.But, consumer protection is not just a legal objectivefor us;itencompassesour entire philosophy.We are expectedtotake a “leading role” in promoting transparency,simplicityand fairnessin the market for consumer financial productsorservices;that is whyweaim tobe ambitiousin this area.And wehavetaken a number of important stepsin the right direction.Thefirst step wetook internallylast year wastocreatea specialisedCommitteeon Consumer Protectionand Financial Innovation(CCPFI).This wasnot only tocomplywith a legal requirement under theEIOPARegulation, but alsotosend out a messagethat weconsider the issuesofconsumer protection and financial innovation to be important and closelyinterlinked.Solvency ii
  14. 14. Product innovationalsohasan important impact on the level ofconsumer protection.Thenext step wasto target keyareaswherewefelt wecould achievetangibleoutcomesand toconsider our strategy asa EuropeanSupervisoryAuthority.In that respect, I will start by outliningour achievementslast year andthen go on totalk about our strategicgoalsfor this year and theyearsahead.Achievements in 20112011wasa very busyyear for EIOPAasregardsconsumer protection:•We prepared Guidelinesand a Best PracticesReport on ComplaintsHandlingby Insurers.We want to fill an existingregulatorygap at EU level and promoteconvergenceof regulatorypractice.We aim todothis by, first, clarifying the expectationsrelatingto aninsuranceundertaking‟sinternal control system and, second, givingguidanceon theprovision of informationto consumersand proceduresfor respondingto complaints.We consulted on theGuidelinesand Best PracticesReport at theend oflast year and they are due tobe finalisedin Q2 this year.•We publishedat theend of last year a Report on Financial LiteracyandEducation Initiativesbynational competent authorities;it wasa stocktake of existing structures/ processesin Member States.This wasin linewitha requirement under our empoweringlegislationtoreview and coordinatesuch initiatives.Solvency ii
  15. 15. •We collecteddataon consumer trendsamongst our Membersauthorities.This helped usto prepare an Initial Overview, analysing and reportingon thosetrends,whichwaspublished in earlyFebruary thisyear.We identifiedthree key trends:(i)Consumer protection issuesaround Payment Protection Insurance(PPI)(ii)Development of unit linked life insuranceand(iii)Increaseduseof comparison websitesby consumers.This is justthestart of our ongoing monitoring of consumer trends.•We provided input intothe Commission‟srevisionof the InsuranceMediationDirective(IM D) by carrying out an extensivesurvey ofnational lawsprovidingfor sanctions(both criminal and administrative)for violationsof theprovisionsof the IMD.TheCommission‟slegislativeproposal is expected at the end ofAprilthisyear. I will talk about thisagain later.• We focused on disclosureand sellingpracticesof VariableAnnuities.This exercisewasbrought about by the fact that some variableannuitiesproductsmay achieveoutcomesthat arenot easyfor consumerstounderstand.We consulted on a draft Report at the end of last year and thisis due tobefinalisedin Q2 thisyear.Solvency ii
  16. 16. Plansfor 2012We don‟t want to just stop therein 2012,however. We need tomoveforwardgiven theneed for ustobe proactive.As mentioned, wehavesome ambitiousobjectives.We will finalise existingprojects,but wealsoinitiatenew projectssuchasdeveloping trainingstandards for theindustry, ensuringtransparencyin national general good rules,enhancing theexistingmethodology weusefor collectingdata on consumer trendsand analyzing the impact ofSolvencyII on product development.All theseinitiativeswill be carried out under thebackdrop of theimpendingCommission legislativeproposalson therevised IMD andPackaged Retail Investment Products(or PRIPs), whichareexpected attheend ofApril 2012.There will inevitably be a considerable workload for EIOPA in responseto these proposalsand work under the Joint Committee of the ESAswillbecrucial toensure crosssectoral consistency.Theproposalswill contain requestsfor follow up workin theform ofadviceon implementingmeasures,binding technical standardsorcommon acts.Ensuring the appropriate level of remunerationdisclosureand robustmitigation of conflictsof interestwill be crucial toour ultimateobjectiveof enhancingcustomer protection.Strategic approachfor the years aheadBut what about our strategic approachfor the years ahead?We have developed a strategic orientation on consumer protection andfinancial innovation, whichunderpinsall thework wedo.Solvency ii
  17. 17. This statesthat wewill seekto prevent consumer detriment in thefollowingways:•First, wecontributeto makingsure that consumersin Europe are wellinformed.Information toconsumersprior to purchasingan insurancecontract andthroughout the duration of the contract should encompasstherisksandthe costsof theproducts, relevant regulatory requirementsandcomplaintshandlingprocedures.•Second, advice toconsumersshould best suit their profile and theirneeds,taking intoaccount the complexityof thecontract and the risksinvolved, witha view to purchasingan appropriateproduct.As mentioned above, a good practicesreport concerningdisclosureandsellingof variableannuitiesis currentlybeingfinalised.•Third, wewant tocontributeto the financial literacyand education ofconsumersinter alia by making available, through our website,information on therolesand responsibilities of national supervisorsinthesematters, and pointingtouseful financial education material.•Fourth, in order toensure thequalityof both theadvice and theinformation a consumer receives, minimum standardsfor ensuringthetrainingand competenceof relevant staff in contact withtheclientsshould be set out both at theoutset and on an ongoing basis.•Fifth, there should be effectiveredressproceduresfor consumers.Consumersshould be able to complain, and their complaintsshould beheard.In thisrespect, asalreadynoted above weare preparing guidelinesoncomplaintshandlingin theinsuranceindustry, whichmay beextendedtocover intermediaries at a later point in time.Solvency ii
  18. 18. •Sixth, firmsshould alsohave in placeappropriateclaimshandlingprocedurestoensureeffectiveand fair treatment of claims.When following these strategic goalswe need to reconsider the policytools that we traditionally used to deal with information asymmetries,conflictsof interestand market inefficiencies.We need a paradigm shift.On the information sideweneed to reinforcestandardizationandcomparability.However, informationshould not be used to shift responsibilityfrom theprovidersto consumers.We cannot takefor grantedthat consumersalwaysmake rational decisions.Furthermore, it isnot all about transparency. Disclosure isa relevant toolbut alonecannot deliver the full resultsfor consumers.On theprovision of adviceweneed totake a closerlook at conflictsofinterest.Unfair practicesleadingto consumer detriment in theinsuranceandpensionsmarket areoften due to situationsof conflict of interest.Insuranceis an industry whereagencyincentivescan be themain driverof the kind of product to be sold.Sometimesthis resultsin the saleof productswhichare not suitablefortheconsumersconcerned.This necessarilyentails that sellingpractices,whetherthroughintermediariesor direct writers,should meet certainhigh standards.We alsoneed to payfurther attention to product suitability.Solvency ii
  19. 19. Insurersshould implement aspart of their governancesystem aframeworkfor earlydetection of unfair products,clausesor sellingpractices.I believethat thiscan usefullyincludethe request of an independentopinionon theproduct design and characteristicsby the internalgovernancefunctionsof the insurer.Looking ahead, oneof themost relevant powersof EIOPAis thepossibilityof issuingwarningswhenconsumer protection is at risk.Furthermore, in thecasesspecifiedin EU legislativeactsand inemergencysituationsEIOPAmay temporarilyprohibit or restrict certainfinancial activities.We needto usethesepowerswithin a robust governance framework, buttheyare there tobe used.This is a “whistlestop” tour of EIOPA‟s workin the area of consumerprotection and financial innovation.I hope it hasprovided you with some food for thought.Thank you for your attention.Solvency ii
  20. 20. The Solvency II implementation updateSpeechby JulianAdams, Director of Insurance, FSASolvencyII industrybriefing on 27February2012,LondonThis event marksanimportant stageon theroad tothe implementationof SolvencyII here in the UK, aswemove tothenext phaseof ourprogramme of workwith internal model firms.This takesplace,of course, against a backdrop of ongoing uncertaintyabout Solvency II, both in the substanceof thepolicy and thetimescalesfor its implementation, but what weaim to do today is giveyou asmuchclarityaswecan about what theposition is and, just asimportantly, whatweareproposingto doover the comingmonths.Later todaymy colleague, Martin Etheridge, will be talkingtoyou aboutour view of the latestpolicy position, and then we‟ll be takingyou throughthedetail of how our review processwill work, and what you canexpect tohappen followingyour submission date.There will alsobethe opportunityfor you to ask questionsof ourpanel, and I hope you will take the opportunityto doso.Before all of that, I havea number of topicsI want to cover withyou thisafternoon.Thefirst of theseistheongoinguncertaintyat a European level astowhat the timelinefor implementation will be, and when weand you willstart toget some certaintyabout what important aspectsof thenewregimewill look like.I then want togoon toexplain what our approachhasbeen todealingwith this uncertaintywhendesigning thenext stageof our processandputtingtogether thesupporting information and materialswearelaunchingtoday, aswellasdescribinghow weare going to applytheprincipleof proportionalityto our execution of that process.Solvency ii
  21. 21. And finally, I want totoucha littlebit on how all of thiswill interact witht he UK‟s d omest ic regulatory reform agen d a , in particularlookingat how the implementationof Solvency II will sit alongsidethecreation of thenew Prudential RegulationAuthority, whichwecurrentlyexpect in spring2013.Policy uncertaintyTurningfirst tothe issueof policyuncertainty, I‟d like to start by sayingthat theindustry‟sfrustration withthe ongoing lack of clarityis fullyunderstandable.We appreciatethat the lack of resolutionof important issues– both inrelationtowhat thenew regime isgoingto look like, and in particularabout when it islikelyto commence and what the effect of transitionalswill be – is disruptiveto the implementation plansthat theindustryhasspent a lot of time and effort puttingintoplace.Martin will set out later how weexpect therest of the legislativeprocesstobe concludedover the coming months, and how that fitswith ourongoingassumption that firms will be required tocomplywiththe newregimefrom January2014.You‟ll be aware,of course, that the timetableis a very tight one,particularlyin the context of a legislativeprocesswhich hasbeen farfrom straightforward, and I should share with you our viewson whatmight happen if thereis a further delay.We await a key votein the European Parliament at the end of March,andit wouldclearlynot take much further slippagein thisto put transpositionin January2013at risk, but thiswouldnot necessarilyaffect theimplementationdatefor firmsin January 2014.What it might do instead is merelycompresstheperiod betweentransposition and implementation.Solvency ii
  22. 22. It therefore remains our assumption that the new regime will apply tofirms from January 2014, and we have developed a plan which reflectsthis.Clearly, it is possiblethat this will changein thefuture, but for the timebeingweremain of the view that wemust plan for a 2014implementation.Our need to be able toapplythe new regime toyou from January2014isthereason wearepressingahead withthedevelopmentsweare outliningtoyou here today.It is alsothereason whyit is vitallyimportant that you stick tothesubmission slotswehave alreadyagreedwith you, asthere is very littlescopein our timetablefor anyform of slippage.By stickingtoyour submission slot you will alsobe consideredalongsidea peer group of firms, whichwill ensure a greater degreeof consistencyofapproach.Clearly, if the position in relation tothe implementation datechangesagain, wewill communicate this toyou asquickly aswecan, along withan outlineof what weexpect theimplicationsto be for our ownimplementationprogramme here in theUK.In doing so, we will attempt to respond in the same way aswe did to thebifurcation proposal last autumn, that isseeking a path which optimisesour own resource positionand theworkfirmshavealreadycompleted.Launch of the next phase of workI‟d like to turn now tothemain purposeof today‟s event, whichisthelaunchof the next phaseof internal model approval workin the UK.Last year, when we announced our revised implementation assumptionsbased on implementation for firms in 2014, we took the view that it madesense to maintain the momentum that the UK industry had built up, andcontinuewithour programme of model approval work.Solvency ii
  23. 23. We alsoset out a positionwhereit wouldpotentiallybe open to firmstostart using their SolvencyII model tomeet existingIndividual CapitalAdequacy Standards(ICAS) requirementswheretheywishedtodosoand wheretheycould be satisfied that themodel met all of therequirementsof thecurrent regime.As part of that, wedecidedthat wewould stick with our previously-announced „open for applications‟date of 30 March2012.Thepurposeof today is to give you more informationon what this nextphasewill look like, toset out the expectationswewill have of youduring this period, and toprovidemore detail on the support andguidance,whichwewill be making availableto you beforeand duringtheapplicationphase.Later on, some of my colleagueswill be takingyou through theprocessindetail, soin the meantimeI would like to set this in the context of how weare approachingthisissue, given thelack of clarity wehave about anumber of aspectsof the underlying policy.As I mentioned at anAssociation of British Insurers(ABI) event inDecember, wearebasingour approach tothenext phaseon thestabledraft text of the Level 2 material whichwascirculated by theCommissionin November.We are awareof the limitationsassociatedwiththisapproach, namelythat first, it is not a final or complete articulationof what the policy willbe, and second, that it is not technicallya public document.Nonetheless, wefeel that using theLevel 2 material asit standsis themost sensibleapproach, asit representsthebest availableview of whatthefinal positionwill be.We will be basingour internal decision-makingmaterialson thisLevel 2text, and will be publishinglater today an updated version of the selfassessment template based on this also.Solvency ii
  24. 24. It is clearlypossiblethat the Level 2 text will changeasit getsclosertoadoption, and wewill review our materialsand update them asneeded.Thenew self-assessment template setsout the almost 300requirementswhichthe Directiveidentifiesashavingtobe met beforemodel approvalcan be granted, requirementswhicharederived from theDirectivetextandhave not in anywaybeen overlaid by uswithadditionalUKcriteria.We appreciatethat this changewill require some additional workforfirms, in particular in themove from our previouslypublished contentsof applicationmaterials.We have not made this changelightly, but believe that it is important todoso, asit is the Level 2 text whichwill ultimatelyset out thestandardswhichhavetobe met, and arethereforethe standardsagainst whichyour compliance– and ours– will have tobe judged.Thechangealsoremovesa number of itemsfrom thepreviousversionwhicharenow super-equivalent followingchangesto the text.I should alsomention herealsothat the materialsweare launchingtodaydo not take any account of the Level three text.This is insufficientlydeveloped at thisstageand lacksstability, meaningthat it doesnot providea meaningful platform for planningpurposes.Again, wewill ensure that our materialsare updated in future to reflectanychangeswhichmay be required asthepolicybecomesclearer.An areain whichwecan provide some more clarity today isthat oftechnicalprovisions.We are oftenaskedwhethera review of these will form part of ourapproval processfor an internal model, given that technicalprovisionsare thelargest and most complex item on an insurer‟sbalancesheet.Our view isthat wewouldnot be ableto approve a model underSolvencyII without having reasonableassuranceasto the accuracyofSolvency ii
  25. 25. theunderlying balancesheet, and wewill thereforebe undertakingareview of the technical provisionsof IM AP firms aspart of our existingactivitywiththe firm before and after itssubmission slot.In the main, weenvisagethat there will be twoelementsfor our review:theapproach takenby firms and the actual calculation of technicalprovisions.Whilst wemay beableto start a review of theapproach this year, it isunlikely that wewill review thecalculationof technical provisionsuntil apoint in 2013,whenfirms will have preparedtheir year-end 2012balancesheet on a SolvencyII basis.We are consideringthe approach that wemay taketo our review oftechnicalprovisions,whichmay includetheuse of external review -somethingfirmsare already doing and whichwehavedeployed for otheraspectsof SolvencyII suchasdata management.Supervisorswill start discussionswithfirms about the review of theapproachtothe calculationof technical provisionsin the next fewmonths, and wewill providefurther detail on our approach to thereviewof the calculationoncewehavesight of the finalisedLevel 2 text,probablythis autumn.TheDirective text – for model approval aswithother matters– setsoutcriteria whichhave tobe met in order for an approval to be granted.In the caseof internal models approval, theseare detailed, and around300in number.It will be necessaryfor usto gain assurancethat all of these requirementshavebeenmet beforewecan decide togrant approval for a model‟suse.We makeno apology for doing so, sincemodel approval is notsomethingwhichshould be granted lightly, and the Directiveallowsfornodiscretion in applying or not applying certain requirements.Solvency ii
  26. 26. Model approval will allow firms to set their own pillar one regulatorycapital requirement, something which is a step change both from theexistingDirectivesand our own current ICAS regime.Once granted, it is difficult to unwind, and soweneed to besure that notonlyis the resultingcapital requirement correct, but alsothat theframeworkof the model is sufficientlyrobust and risk-sensitiveto respondto changesin circumstancesover time.ProportionalityWhat the Directivedoesallowfor – and indeedspecificallymandates– istheprincipleof proportionality.This meansthat theamount of effort whichweand you collectivelywillhavetogotoin order toshow that a requirement hasbeen met should becommensuratewiththe riskthat isposed by the item in question, and theextent towhichit is material tothe performanceof theoverallmodel.My commitment to you, therefore, is that our review workwill focusonwhat is genuinely important in thecontext of your business, whilstbearingin mind our obligationsunder the Directive.Thepractical stepswehave takentoensure this have includedseniormanagement challengeof all of theworkplans for pre-application, andtheapproach of reviewingteamswill be challengedagain at a number ofstagesthrough the processto ensure that weare focusing our effortsonwhat are themain driversof risk in an individual firm.We makeno apology, though, for beingchallengingin our approachtowhat firms are doing.I want togiveyou today some examplesof specific issueswhich havearisenand whytheyare important.This will hopefullyhelp to put intocontext some of the questionsweareaskingand the approach wehave takensofar, and will continuetotake.Solvency ii
  27. 27. Thefirst exampleisin the areaof model scope, wherewehavechallenged firms on their exclusion from scopeof important factorswhichcould be significant drivers of themodel‟sperformance.One exampleof thisis in the areaof catastrophemodelling.Clearlyif a firm hasa significant portfolio of catastrophe-exposedbusinessit is not a tenableposition, assome haveclaimed, thatcatastrophemodelsare out of scope, asthesewill have a very significanteffect on the wayin whichthemodel functionsand the extent to whichitis genuinelyreflectiveof risk.Thesecond issuethat our review workregularlyidentifiesiswherevariousaspectsof a firm‟s model submission donot fit together in acoherent way.Let me giveyou anexample.We donot view theDirectiverequirementsin silos – Model Scope, UseTest, Validation, Model Change requirementsare all linked andinterdependent.In reviewinga firm‟smodel wethereforeneed to ensure the approachbeingtaken to scope, use, validationand changeareall consistent.And this will includetheextent towhichthesenior management andBoard of the firm have engaged with, understood, and challengedwhathasbeen done.Thethird isin the area of documentation.Our review workregularlyhighlightsexamplesof firmsbeingable toprovidecredibleexplanationsof how certain Directive requirementswillbemet, but not necessarilybeing ableto followthrough withsounddocumentaryevidenceof this compliance.This doesnot necessarilymean that more documentation isrequired,simplythat it needstobe of better quality.Solvency ii
  28. 28. For thereasonsI outlined earlier thisis an important factor in beingassured asto the performanceof the model in a range of futurecircumstances.In some casesthestateof documentation is a reflection of the fact thatfirmsare implementingand embeddingtheir models in parallel withthedevelopment work.We recognisewhat‟sdrivingthis issueand are sympathetic withthechallengesthat firmsfacein thisregard but wewill continueto view thequalityof a firm‟s documentation asbeing an important indicator ofoverall preparednessfor makinga submission.Whilst it isimportant for ustobe robust, and I hopethe foregoingexamplesgive a senseof whythis is thecase,I wouldask you to raisewith your supervisor any concernsyou may have about theapproachwhichis beingtaken or the scope of our review.Theywill be ableto explain what it is that the review teamsare doingand whytheyare takinga certain approach or raisingcertain concerns.I should mention that wearealsoworkingto ensure that our approach isconsistent withthat taken by supervisorsin other Member States.We are pursuingthisthrough European Insuranceand OccupationalPensionsAuthority (EIOPA), and alsothroughmore informalcontactswith the supervisorsin theother major jurisdictions.Through itspeer review workEIOPAiscurrentlyreviewingMemberStates‟approachestopre-application, and alsotheperformanceof asampleof colleges.We know that thisis a matter of acute importance to many groupswithEuropean operations, and we will not be able to achieve our objectiveswithout closecooperation withregulatorsin other partsof Europe.Solvency ii
  29. 29. By seekingthis consistencywealsohope to achieveone of the otheraims of the Directive, whichis to achievea high level of harmonisationacrossEurope.In mentioning this high level of harmonisationI wouldlike toemphasise– asI have on a number of occasionsin thepast – that it iscategoricallynot our intention to„gold plate‟the Directive‟srequirementson modelapproval, or, for that matter, in other areas.We have designedour processesin accordancewitha set ofrequirementswhichare deriveddirectlyfrom the Directivetext.In the few areas wherewehave felt the need to dosomethingwhichisdifferent or in some waysuper-equivalent – for examplein thearea ofapproved persons– wehave sought to be transparent about this in thetext of our consultationdocuments, and havedrawnour reasoningspecificallyto your attention.All of this, of course,is theFSA‟s statedapproach, but you may bewonderingwhetherthis will continueto hold true onceresponsibilityforinsuranceregulationpassestothe new Prudential RegulationAuthority(PRA), probablyin spring 2013.Thesimpleanswertothisis yes, it will, and the reasonsfor this are verysimple. First, thesenior management team responsiblefor Solvency IIin theFSAare– by and large – thepeople whowill continuetoberesponsiblefor it whenwemove tothe PRA.Our colleaguesfrom theBank of England have been engaged in ourimplementationprogramme for over a year now, and are alsofullyawareof the approachweare taking.Thesecond is that SolvencyII seeksto bring intoplacea regime whichis basedon the same principlesasthat envisagedfor the PRA.SolvencyII is a regime whichis forward-looking, based on a market-consistent valuation basis;it encompassesa proactiveframework forSolvency ii
  30. 30. supervisoryintervention, and providesa direct link betweenrisk andcapital.All of this is completely consistent withthe judgement-drivenapproachtosupervision whichthe FSAand theBank of England set out in thelaunchdocument for the PRA, whichwepublished last summer.The third reason is derived from the second, namely that we are ensuringthat the requirements of Solvency II are being taken fully into account inthedesign of insurancesupervision in thePRA.This should ensurethat the processyou seebeingdeveloped now willendure through thecreationof thePRA and beyond, and supervision ofinsurersunder the PRA will have at itscore the requirementsof theSolvencyII Directive.Solvency ii
  31. 31. Gabriel Bernardino, Chairman of EIOPAStability and growth – Abalancing actGalaDinner of the Institutional MoneyCongress, FrankfurtLadies and Gentlemen,I am very pleased to be here with you tonight.First of all I wouldlike to thank the organizersfor their invitationtodeliverthis short dinner speech.It is my pleasure asChair of EIOPA, theEuropean InsuranceandOccupational PensionsAuthority, based in Frankfurt, to welcomeyou tosuch an important congress.TheInstitutional MoneyCongressis knownasa significantcommunicationplatform for institutional investors, providingan idealforum for professional exchangebetween internationallyrenownedassetmanagersand institutional investors.This year it will alsobe an opportunitytodebatethechallengesposed byrecent regulatory initiatives,such asSolvencyII and Basel III, anddiscusstheir possibleeffectson theinvestment policiesof financialinstitutions.Solvency ii
  32. 32. As for challengesI think there is nodoubt that the development andimplementationof theseregimesrequiressignificant effort not only fromregulatoryand supervisoryauthorities,but alsofrom the industry.The more these issues are discussed, the easier we will build up a newfinancial culture based on robust standards of solvency, enhanced riskmanagement and increasedconsumer protection.And by launchingdiscussionsand different workshopson such topics,theInstitutional MoneyCongresscreatesa basisfor this culture.Becauseonly by discussing, by exchangingviewswecan reacha fullunderstandingof the regimesby all market participants.Let me start by usingthis opportunitytomake some remarksabout thepossibleconsequencesof SolvencyII on the investment behaviour ofinsurersand more generallyon thefinancial markets.It is clearthat applying capital chargesfor investment risk mayencourageinsurerstoshift tolessvolatile investments,especiallywhentheexpected financial returnsof risky assetsdo not offset the additionalcapital requirement.However, asinsurersare awareof the changingregulation and havebeen rebalancingtheir portfoliosaccordingly, there should not be anysignificant suddenportfolio reallocations.Most importantly, a reduction of investment riskcould alsobe achievedbyan improvement in asset liability management, especiallyon longterm guaranteed products.That is thepurposeof the strong focusof SolvencyII on enhancingriskmanagement policiesand practices.Solvency ii
  33. 33. Controllingand ensuring sound and prudent management isfar moreimportant than the capital calculations,becausemanagement errorsbytheir nature cannot be compensatedbycapital requirements.As a consequenceof a greater focuson asset liabilitymanagement, insurerscould be willingto investmore in relativelyhighlyratedcorporatebondssincetheyoffer higher yield andwouldprovidediversification benefitswithin the fixed incomeportfolio.Therefore, easieraccesstofinancingcould be grantedtofirms withhighcredit ratings, whichwill translateintoa lowercost of capital and wouldthereforecontributetohigher investment and economicgrowth.Overall, regulatory regimesare alwaysa result of a balancingactbetweendifferent objectives.I am convinced that SolvencyII will providean appropriate basisforincreasedpolicyholder protection and will contributeto reinforcingfinancial stability, while allowinginsurancecompanies tocontinuetoplaytheir role aslong term investors.In a recent paper oneof your distinguishedguests, Prof. ThomasSargent, discussedwheretodraw thelinebetweenstabilityandefficiency.In my opinion this isa fundamental question for the policydecisionstobetaken in the coming years.We needto decidewhat wewant toprivilege:securityor growth.If wewant both, and I believeweshould, then weneed to bepreparedtocollectivelyaccept some risks.Solvency ii
  34. 34. One of themajor consequencesof the financial crisiswasthe fall ofconfidenceand trust in the financial sectorand increasein suspicion onall areasof financial innovation.Unfortunately, thebenefitsof financial innovation have beenovershadowedby thecostsof some activitiesthat went reallybad.I believeregulatorsand theindustryneed to take a fresh look at thisarea.Financial innovation toolscan be a useful wayfor investorsto protectthemselvesagainst unavoidablerisks.However, theyshould be used tofacilitaterisk transferand accesstofundingwithin the real economy and not to help institutionstoarbitrageregulationsand make balance sheetslook saferthan theyare.In order to increase long term stability and regain consumer confidencein the financial system we need to proceed with the reforms not only byadaptingregulationbut alsoby changingbehaviour.We should encourage realisticrisk assessment and pricing.Market participantsshould take concretestepstopromote responsiblebusinessconduct.Overall wealsoneed to reinforcepreventiverisk based supervisionandtimely enforcement.We have all been witnessing during the last years systemic risks causedby excessive leverage combined with risky financial products as well asinadequaciesin financial regulation and supervision.Variousuncertaintiesaround the global financial system are still atplace.Solvency ii
  35. 35. In the modern highlyintegrated environment financial stability can bealready thought of asan international public good.All countriesbenefit from thestabilityof theworldfinancial system asawhole.But at the same time all countries experiencecertain costswhenthesystem is unstable.Soit became clearthat without more effectivesupervision it will not bepossibleto addressfurther systemic risksin thefinancial system.This callsfor international coordination.Anumber of different international bodiessuch asG20 and the FinancialStabilityBoard arecurrentlyworkingon theseissuesin their differentspheresof influence.EIOPA for exampleis contributingto thedevelopment of a commonframeworkfor supervisinginternationallyactiveinsurancegroupsanddeveloping criteria toidentify systemic risk in insuranceactivities,bothconducted under theumbrellaof theInternationalAssociation ofInsuranceSupervisors(IAIS).Theresultsof thisheavyregulatory agenda will reshapethe financialsystem asweknow it and weshould be prepared to copewith thechallengesahead.At EIOPAweare quiteawareof the relevanceof our mandate andresponsibilities.As you may know in January 2012 EIOPA completed the first year in itsstatus as a European institution, one of the three European SupervisoryAuthorities.Solvency ii
  36. 36. EIOPA‟s mission is to protect the public interest by contributing to theshort, medium and long term stability and effectiveness of the financialsystem, for theEU citizensand economy.This mission ispursuedbypromotinga sound regulatory frameworkand consistent supervisorypracticesin order toprotect the rightsofpolicyholders, pension scheme membersand beneficiariesandcontributeto the public confidencein the European Union‟sinsuranceand occupational pensionssectors.And I wouldlike toassure you that weare ambitiousin fulfillingourobligationstowardstheEU citizensand businesses.EIOPA is currentlyintensively working on thedevelopment of technicalstandardsand guidelinesthat areessential for the implementationofSolvencyII.But if I start elaboratingfurther on this,it will not be a dinner speechanymore, but an epicpoem.EIOPA is alsoworkingintensivelyon thereview of the IORP Directive,advisingthe EU Commissionon the waystointroducea risk basedframeworkfor the supervision of occupational pension funds.EIOPA is an institution opentosociety.We want to listenand debate withthe different stakeholdersand that iswhywevaluevery muchthe opportunitytoexchangeviewswithyouduring this Congress.Thank you for your attentionand have a good dinner.Solvency ii
  37. 37. Dear Member,In Basel iii, Solvencyii, and many other lawsand regulations, wehavetomake economicprojections.What I reallylove isthe need for “realisticassumptions”.So, wehave a crystal ball: The MonetaryPolicy Report totheCongresswherewecan find the“Summaryof Economic Projections”Monetary Policy Report to theCongressSummary of EconomicProjectionsIn conjunctionwiththe January24–25, 2012,Federal OpenMarketCommittee(FOMC) meeting, themembersof the Board ofGovernorsand thepresidentsof theFederalReserve Banks, all ofwhom participatein the deliberationsof the FOMC, submittedprojectionsfor growthof real output, theunemployment rate, and inflation for theyears 2012to 2014and over thelonger run.Theeconomicprojectionswerebased on informationavailableat thetimeof the meetingand participants‟individual assumptionsaboutfactorslikely toaffect economicoutcomes,includingtheir assessmentsof appropriate monetary policy.Startingwiththe Januarymeeting, participantsalsosubmitted theirassessmentsof thepath for thetarget federal fundsrate that theyviewedSolvency ii
  38. 38. asappropriateand compatiblewiththeir individual economicprojections.Longer-run projectionsrepresent each participants‟assessment of therate to whicheachvariable would be expected tocon-vergeover timeunder appropriate monetary policy and in theabsence of further shocks.“Appropriatemonetary policy” isdefinedasthe future path of policythat participantsdeem most likely tofoster outcomesfor economicactivityand inflation that best satisfytheir individual interpretation oftheFederal Reserve‟sobjectivesof maximum employment and stableprices.As depicted in figure1, FOMC participantsprojectedcontinuedeconomicexpansionover the 2012– 14period, withreal grossdomesticproduct (GDP) risingat a modest rate this year and then strengtheningfurther through 2014.Solvency ii
  39. 39. Solvency ii
  40. 40. Participantsgenerallyanticipatedonlya small declinein theunemployment rate thisyear.In 2013and 2014, thepace of theexpansion wasprojected to exceedparticipants‟estimatesof the longer-runsustainablerateof increaseinreal GDP by enough to result in a gradual further declinein theunemployment rate.However, at the end of 2014,participantsgenerallyexpected that theunemployment rate wouldstill be well above their estimatesof thelonger-run normal unemployment ratethat they currentlyview asconsistent withtheFOMC‟sstatutorymandatefor promoting maximumemployment and pricestability.Participantsviewedthe upwardpressureson inflation in 2011from factorssuch assupplychain disruptionsand risingcommoditypricesashavingwaned, and theyanticipatedthat inflation wouldfall back in 2012. Overtheprojection period, most participantsexpected inflation, asmeasuredbythe annual changein theprice index for personal consumptionexpenditures(PCE), to be at or b elow t he FOMC‟s objectiveof 2percent that wasexpressedin the Committee‟sstatement of longer-rungoalsand policy strategy.Solvency ii
  41. 41. Core inflationwasprojectedto run at about the same rate asoverallinflation.As indicatedin table1, relativeto their previousprojectionsin November2011, participantsmadesmall downwardrevisionstotheir expectationsfortherateof increasein real GDP in 2012and 2013,but theydid notmateriallyalter their projectionsfor a noticeablystronger paceofexpansion by 2014.With the unemployment rate havingdeclined in recent monthsby morethan participantshad anticipatedin thepreviousSummary of EconomicProjections(SEP), theygenerallyloweredtheir forecastsfor the level oftheunemployment rate over the next twoyears.Participants‟expectationsfor both the longer-run rateof increasein realGDP and the longer-run unemployment rate werelittlechangedfromNovember.Theydid not significantlyalter their forecastsfor the rate of inflationover thenext threeyears.However, in light of the 2 percent inflationthat istheobjectiveincludedin thestatement of longer-run goalsand policy strategy adopted at theJanuarymeeting, the rangeand central tendencyof their projectionsoflonger-run inflationwereall equal to2 percent.As shown in figure2, mostparticipantsjudged that highlyaccommodativemonetary policywaslikelytobe warrantedover comingyears topromote a stronger economicexpansion in thecontext of pricestability.In particular, withtheunemployment rate projectedto remain elevatedover theprojection period and inflation expectedtobe subdued, sixparticipantsanticipatedthat, under appropriatemonetary policy, the firstSolvency ii
  42. 42. increasein the target federal fundsrate wouldoccur after 2014,and fiveexpectedpolicyfirming to commenceduring 2014(the upper panel).Theremainingsix participantsjudged that raisingthefederal fundsratesoonerwouldbe required to forestall inflationarypressuresor avoiddistortionsin the financial system.As indicatedin thelowerpanel, all of theindividual assessmentsof theappropriatetarget federal fundsrate over thenext several years werebelow the longer-run level of the federal fundsrate, and 11participantsplacedthe target federal fundsrate at 1percent or lowerat the end of2014.Most participantsindicated that they expected that thenormalization oftheFederal Reserve‟sbalancesheet should occur in a wayconsistentwith the principlesagreedon at theJune2011meeting of theFOMC,with the timingof adjustmentsdependent on the expecteddate of thefirst policytightening.Afew participantsjudgedthat, given their current assessmentsof theeconomicoutlook, appropriate policywouldincludeadditional assetpurchasesin 2012,and one assumed anearlyendingof thematurityextension program.Asizablemajorityof participantscontinuedto judgethe level ofuncertaintyassociatedwiththeir projectionsfor real activityand theunemployment rate asunusuallyhigh relativeto historical norms.Many alsoattacheda greater-than-normal level of uncertaintyto theirforecastsfor inflation, but, compared withthe November SEP, twoadditional participantsvieweduncertaintyasbroadly similar tolonger-run norms.As in November, many participantssawdownsiderisksattendingtheirforecastsof real GDP growthand upsiderisks to their forecastsof theSolvency ii
  43. 43. unemployment rate; most participantsviewedthe riskstotheir inflationprojectionsasbroadlybalanced.The Outlook for Economic ActivityThecentral tendencyof participants‟forecastsfor the changein realGDP in 2012was2.2 to 2.7percent.This forecast for 2012, while slightly lower than the projection preparedin November, would represent a pickup in output growth from 2011 to arate close to itslonger-run trend.Participantsstated that theeconomic information receivedsinceNovember showedcontinued gradual improvement in thepaceofeconomicactivityduring thesecond half of 2011, asthe influenceof thetemporaryfactorsthat damped activityin the first half of the yearsubsided.Consumer spendingincreasedat a moderate rate, exportsexpandedsolidly, and businessinvestment rosefurther.Recently, consumersand businessesappeared to becomesomewhatmore optimistic about the outlook.Financial conditionsfor domesticnonfinancial businessesweregenerallyfavorable,and conditionsin consumer credit marketsshowedsignsof improvement.However, a number of factorssuggested that the paceof theexpansionwouldcontinuetobe restrained.Although some indicators of activity in the housing sector improvedslightly at the end of 2011, new homebuilding and sales remained atdepressed levels, house priceswere still falling, and mortgage creditremainedtight.Solvency ii
  44. 44. Households‟real disposableincomeroseonly modestlythrough late 2011.In addition, federal spendingcontractedtowardyear-end, and therestrainingeffectsof fiscal consolidationappearedlikely tobegreaterthisyear than anticipatedat thetime of the November projections.Participantsalsoread the information on economic activityabroad,particularlyin Europe, aspointing to weakerdemand for U.S.exportsin comingquarters thanhadseemed likelywhenthey prepared theirforecastsin November.Participantsanticipatedthat thepace of the economicexpansion wouldstrengthen over the2013–14period, reachingratesof increasein realGDP above their estimatesof thelonger-run ratesof output growth.Thecentral tendenciesof participants‟forecastsfor thechangein realGDP were2.8 to3.2 percent in 2013and 3.3 to4.0percent in 2014.Among the considerationssupportingtheir forecasts,participantscitedtheir expectationthat the expansionwouldbe supported by monetarypolicy accommodation, ongoing improvementsin credit conditions,risinghousehold and businessconfidence,and strengtheninghouseholdbalancesheets.Many participantsjudgedthat U.S. fiscal policy wouldstill be a drag oneconomicactivityin 2013,but many anticipatedthat progresswouldbemadein resolving the fiscal situation in Europe and that theforeigneconomicoutlook wouldbe more positive.Over time and in theabsence of shocks,participantsexpectedthat therate of increaseof real GDP would converge to their estimatesof itslonger-runrate, witha central tendency of 2.3 to2.6percent, littlechangedfrom their estimatesin November.Theunemployment rate improved more in late 2011than mostparticipantshad anticipatedwhenthey prepared their NovemberSolvency ii
  45. 45. projections,fallingfrom 9.1to8.7percent betweenthe third and fourthquarters.As a result, most participantsadjusteddowntheir projectionsfor theunemployment rate thisyear.Nonetheless, withreal GDP expected to increaseat a modest rate in 2012,theunemployment rate wasprojected to declineonly a littlethis year, withthecentral tendencyof participants‟forecastsat 8.2 to8.5percent at year-end.Thereafter, participantsexpected that the pickup in thepace of theexpansion in 2013and 2014wouldbe accompaniedby a furthergradualimprovement in labor market conditions.Thecentral tendencyof participants‟forecastsfor theunemployment rateat the end of 2013was7.4 to8.1percent, and it was6.7 to7.6percent attheend of 2014.Thecentral tendencyof participants‟estimatesof the longer-run normalrate of unemployment that would prevail in theabsence of further shockswas5.2 to6.0percent.Most participantsindicated that they anticipatedthat fiveor six yearswouldbe requiredtoclosethe gap betweenthe current unemploymentrate and their estimatesof the longer-runrate, although some noted thatmore timewouldlikelybe needed.Figures 3.A and 3.B providedetails on the diversityof participants‟viewsregardingthe likely outcomesfor real GDP growthand theunemployment rate over thenext threeyears and over thelonger run.The dispersion in these projections reflected differences in participants‟assessments of many factors, including appropriate monetary policy anditseffectson economicactivity, the underlying momentum in economicSolvency ii
  46. 46. activity, the effectsof the European situation, theprospectivepath forU.S.fiscalpolicy, thelikely evolution of credit and financial marketconditions,and theextent of structural dislocationsin thelabor market.Compared withtheir November projections, the rangeof participants‟forecastsfor thechange in real GDP in 2012narrowedsomewhat andshiftedslightlylower, assome participantsreassessedtheoutlook forglobal economic growth and for U.S. fiscal policy.Many, however, made no material changeto their forecastsfor growthofreal GDP this year.Thedispersion of participants‟forecastsfor output growthin 2013and2014remained relatively wide.Havingincorporatedthe data showinga lowerrate of unemployment attheend of 2011thanpreviouslyexpected, thedistribution of participants‟projectionsfor theend of 2012shifted noticeablydownrelative to theNovember forecasts.Therangesfor theunemployment rate in 2013and 2014showedlesspronouncedshifts toward lowerratesand, aswasthe casewiththeranges for output growth, remained wide.Participantsmade onlymodest adjustmentsto their projectionsof theratesof output growthand unemployment over the longer run, and, onnet, thedispersionsof their projectionsfor both werelittlechangedfromthosereportedin November.Thedispersion of estimatesfor thelonger-run rate of output growth isnarrow,withonlyone participant‟sestimate outsideof a rangeof 2.2to2.7 percent.By comparison, participants‟viewsabout the level towhichtheunemployment rate wouldconverge in thelong run are more diverse,Solvency ii
  47. 47. reflecting, among other things,different viewson the outlookfor laborsupplyand on theextent of structural impedimentsin the labor market.Solvency ii
  48. 48. Solvency ii
  49. 49. Solvency ii
  50. 50. Solvency ii
  51. 51. TheBermuda MonetaryAuthority (BMA) is the integratedregulator ofthefinancial servicessector in Bermuda.Established under the Bermuda Monetary Authority Act 1969, theAuthority supervises, regulates and inspects financial institutionsoperatingin or from within the jurisdiction.It alsoissuesBermuda‟snational currency; managesexchangecontroltransactions;assistsother authoritiesin Bermuda withthe detectionandprevention of financial crime;and advisesthe Government and publicbodies on banking and other financial and monetary matters.TheAuthority developsrisk-based financial regulationsthat it appliestothesupervisionof Bermuda‟sbanks, trust companies,investmentbusinesses,investment funds,fund administrators,moneyservicebusinessesand insurancecompanies. It alsoregulatesthe BermudaStock Exchange.LICENCE FEES REDUCED FOR BERMUDA SPECIALPURPOSE INSURERSAmendment toFeeStructure ReinforcesBermuda‟sCompetitivenessforitsGrowingSPI BusinessTheBermuda MonetaryAuthority („theAuthority‟ or „BMA‟) is pleasedtoannounce that theregistration feesfor Special PurposeInsurers(SPI‟s) hasbeen nearlyhalved.Solvency ii
  52. 52. Effective1st April 2012,all new SPI‟s licensed in Bermuda will pay $6,000for annual registration. This isa significant reductionfrom the currentregistration feeof $11,600.ShelbyWeldon, theAuthority‟s Director, Insurance,Licensing&Authorisationssaid, “Theabilityto establish SPI‟shere withinourinsuranceclassification system isanother option for the market to useBermudasextensivealternativerisk transferexpertise.”An SPI assumesinsuranceor reinsurancerisks and typically fullyfundsitsexposure tosuchrisksthrough debt issuanceor some otherfinancing.Therepayment rightsof the debt or other financingmechanismsaresubordinatedtotheinsuranceor reinsurance obligationsof that vehicle.Mr. Weldon continued, “SinceSPI‟sarefully funded, theAuthority alsoappliesa proportionate level of supervisionto such entities,whichappropriatelyis different from what wewouldapplytosay, a largeClass4commercial insurer.Therefore, this fee adjustment alsorecognisesthat distinction, sinceourfeesare directlyrelatedto the cost of supervision, further reinforcingBermuda‟scompetitivepositionto support SPI‟s.”Bermuda hasrecorded significant growthin SPI formationsin the lasttwoyears.Atotal of 23new SPI‟swerelicensed in 2011, up from eight in 2010andonein 2009whentheAuthorityestablishedthe regulatoryframeworktoaccommodateSPI‟s.During January and February2012,threeSPI‟shad already licencedinBermuda.Solvency ii
  53. 53. Themove toreducethe feeshasbeen well receivedby industry,includingBermuda-based law firm, Appleby.Brad Adderley, Partner, Corporate & Commercial at Appleby said, “Thefee reduction epitomises the proactive approach of the Authority, whichwas reinforced by the very senior Bermuda contingent that attended therecent Insurance- & Risk-Linked Securities Conference held annually bytheSecurities Industry and Financial MarketsAssociation (SIFMA).TheBMAsattendanceat the conferencereaffirms tothe market placethat Bermuda wantsto be the preeminent player in this space.”GregWojciechowski, President and CEO of the Bermuda StockExchangesaid, “Sincethecoming into force of the new licensingregimefor Special PurposeInsurers,the BSX hasseen a significant increaseininterest from themarket for thecreation of Bermuda based SPI‟swhichare used for the issuanceof InsuranceLinkedSecurities (ILS). Thisdevelopment hasledto a record number of listedILS issueson the BSX.”SPI‟s are often u sed t o issu e cat ast roph e b ond s.TheBSX hasreportedthat $3.4 billionworth of catastrophebonds,orILSwaslisted on theexchangeby theend of 2011.Todate, 25 ILSstructureshavebeen listedon the BSX.Mr. Adderleycontinued, “Bermuda hasmade significant inroads intothecat bond market – the reduction of feeswill help the island continuetogrow this businesswhichwill have a positiveimpact on the Bermudaeconomy.”Mr. Wojciechowski added, “The announcement by the BMAtoreduceregistration feesfor SPI structuresis a significant development andunderscoresBermudas firm commitment toprovideregulatoryandSolvency ii
  54. 54. commerciallysensiblesupport to the global reinsuranceindustry.Bermuda hasbeen a partner totheglobal reinsuranceindustryfor overthreedecades,a healthypartnership whichhasresulted in thejurisdictionexhibitinga "siliconvalley" effect for specialtyinsurance.Bermuda is a global leader in the reinsuranceindustry and developmentssuch asthisreduction of feeshighlight Bermuda stakeholders‟resolveinprovidingthe environment for that partnership tocontinuefor decades tocome.”Arthur Wightman, Partner,Assurance and BusinessAdvisory Services,Insurance/Reinsuranceat PricewaterhouseCooperssaid, “Bermudasestablished fundsand reinsurancemarketplacesmakeit the optimaljurisdictionfor structuring InsuranceLinkedSecurities and otherconvergencestructures.This moveby Bermudasforward-lookingregulator isjust one exampleof how seriouslyBermuda is committed tofurther developingthesemarketsand representsanother proactive move by the BMAtocommerciallypracticableregulation.It alsoreinforcesa commitment by the regulator tofacilitatespeedtomarket.”BERMUDA INSURANCE SECTOR ACHIEVES STRONGRESULTSIN CHALLENGING MARKET CONDITIONSSignificant premium volumes, increasedinsurer registrationsachievedTheBermuda MonetaryAuthority (theAuthority or BMA) todayannounced the Bermuda insurancemarket remained resilient in 2011andcontinued to absorb the impact of market issues,includinga continuedsofteningof prices, lowinterestratesand above-averagelossesfromnatural catastrophes.Solvency ii
  55. 55. With respect to 2011registrations,theAuthority registered a total of 54new Bermuda insurers,up from the36recorded in 2010.Growth in theregistration of Special Purpose Insurers(SPIs) has continued: 23 newSPIs werelicensed in 2011, up from eight the previousyear.2011alsosawthe formationof twoClass4 reinsurancecompanies.ShelbyWeldon, Director, Insurance, Licensing & Authorisationssaid,“2011wascertainlya challengingyear, whichwasreflectedin the year-end resultsof some firms.However, Bermuda‟sinsurersare successfullyaddressing global marketconditions.Also, Bermuda‟scommitment to achievingequivalencewithrelevantstandardsgloballycontinuestoattract qualitybusinessesthat seethebenefitsof being based in a practical, first leagueregulatory environmentthat is well-regardedin keyinternational markets.”“Thelatest available statistics show theBermuda insurancemarketachieved significant premium volumesand healthy amountsof assetsand capital and surplus,” Mr. Weldon said.“The market recorded gross premiums written of $107.7 billion; thiscompares to $119.7 billion written the previous year, not surprisinglyreflectingthe challengesof a prolongedsoft market.In addition, themarket recorded aggregatetotal capital and surplusof$185.2billion and assetsof $524.7billion, year-on-year increasesof1.7per cent and 5.8per cent respectively.”Commentingon themarket‟sbusinessvolumesbysector, Mr. Weldonsaid, “The commercial sector wrotea consistent amount of grosspremiums, $86.3 billion compared to$87.1billion thepreviousyear.Solvency ii
  56. 56. Total assetswere$438billion, up 16.5 per cent year-on-year. Capital andsurpluswasalsoup, by 10.5per cent, from $131.8billion to$145.6billion.”“Bermuda captivesalsomaintained high businessvolumes, and therewerea total of 862captivesregisteredin Bermuda at the end of 2011, upfrom 845in 2010,” Mr. Weldon continued.“Captiveswrotea total of $21.4billion in gross premiums,compared to$32.7billion the previousyear.This changecan be attributedto a combination of theAuthority‟scontinuing reclassificationof a number of companiesto more accuratelyreflect their risk-profiles, aswell asa decrease in premiumswrittenbyparticular firms within the sector.”Mr. Weldon concluded, “Bermuda‟sinsurancemarket continuestomanagethe impactsof theglobal economy and market conditionseffectively.Bermuda is a unique jurisdiction providing leadership across thespectrum of insurance risk management: captives, insurance andreinsurance.This reinforcesBermuda‟spositionasa leading domicile for insurancebusinessalongwithother core elementsof our success– such asdisciplinedunderwritingby firms and apragmaticregulatoryenvironment withworldclassstandardsthat supportsqualitybusiness.”Solvency ii
  57. 57. Solvency II SpeakersBureauTheSolvencyII Association hasestablishedthe SolvencyII SpeakersBureau for firmsand organizationsthat want to accesstheexpertiseofCertified Solvencyii Professionals(CSiiPs) and Certified SolvencyiiEquivalenceProfessionals(CSiiEPs).TheSolvencyII Association will be theliaison betweenour certifiedprofessionalsand theseorganizations,at no cost. We stronglybelievethat this can be a great opportunity for both, our certified Solvency_II_Speakers_Bureau.htmlCourse TitleCertified Solvency ii Professional (CSiiP):Preparing for the Solvency ii Directive of the EU (3 days)Objectives:This coursehasbeen designed toprovidewiththe knowledgeand skillsneeded to understand and support compliancewiththeSolvencyiiDirectiveof theEuropean Union.TargetAudience:This course isintendedfor decision makers, managers, professionalsand consultantsthat:A.Work in Insuranceor Reinsurancefirmsof EEAcountries.B.Work in Groups- Financial Conglomerates(FC), Financial HoldingCompanies(FHC), MixedFinancial Holding Companies (MFHC),InsuranceHolding Companies(IH C) - providing insuranceand/ orSolvency ii
  58. 58. reinsuranceservicesin the EEA, whoseparent islocated in acountry oftheEEA.C.Want tounderstand thechallengesand the opportunitiesafter theSolvencyii Directive.This course ishighlyrecommendedfor supervisorsof EEA countriesthat want to understand how countriesseeSolvencyII asa CompetitiveAdvantage.This course is also recommended for all decision makers, managers,professionals and consultants of insurance and/ or reinsurance firmsinvolvedin risk and compliancemanagement.About the CourseINTRODUCTIONTheEuropean Union‟sLegislativeProcessDirectivesand RegulationsTheFinancial ServicesAction Plan (FSAP) of theEUExtraterritorialApplication of European LawExtraterritorialApplication of the SolvencyII DirectiveSolvencyii and theLamfalussyProcessLevel 1: FrameworkPrinciplesLevel 2: Detailed Technical MeasuresLevel3: StrengtheningCooperationAmong RegulatorsLevel 4: EnforcementWeaknessesof SolvencyIFrom SolvencyI toSolvencyIISolvencyii PlayersSolvencyii ObjectivesSolvency ii
  59. 59. THE SOLVENCY II DIRECTIVEAUnified LegislativeBasisfor Prudential Regulation of InsurersandReinsurersRisk-BasedCapitalAllocationScope of theApplicationImportant DefinitionsValue-at-Riskin SolvencyIIAuthorisationCorporateGovernanceGovernanceFunctionsRiskManagementCorporateGovernanceand Risk Management - Level 2Fit and proper requirementsfor personswhoeffectivelyrun theundertakingor haveother key functionsInternal ControlsInternalAuditActuarial FunctionOutsourcingBoard of Directors:Role and Solvencyii Responsibilities12Principles– System of Governance (Level 2)PILLAR 2SupervisoryReview Process(SRP)Focuson Risk Management and Operational RiskOwnRisk and SolvencyAssessment (ORSA)ORSA- TheInternal Assessment ProcessORSA- TheSupervisoryToolORSA- Not a Third Solvency Capital RequirementCapital add-onPILLAR 3DisclosureRequirementsSolvency ii
  60. 60. TheSolvencyand Financial Condition Report (SFC)PILLAR IValuationOf AssetsAnd LiabilitiesTechnicalProvisionsTheSolvencyCapital Requirement (SCR)TheValue-at-RiskMeasureCalibratedtoa 99.5% ConfidenceLevel over a 1-year Time HorizonTheStandardApproachTheInternal ModelsTheCollectionofAdditional HistoricalDataExternal DataThe Minimum Capital Requirement (MCR)Non-Compliancewiththe Minimum Capital RequirementNon-CompliancewiththeSolvencyCapital RequirementOwn FundsInvestment RulesINTERNAL MODEL APPROVALCEIOPSLevel 2 - Testsand Standardsfor Internal ModelApprovalCEIOPSLevel 2 - The procedure tobe followedfor the approval ofan internal modelInternal ModelsGovernanceGroup internal modelsStatistical qualitystandardsCalibrationand validationstandardsDocumentation standardsSOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIESSolvencyI: SoloPlusApproachGroup Supervisionunder SolvencyIIRightsand dutiesof the group supervisorSolvency ii
  61. 61. Group Solvency - Methodsof calculationMethod1(Default method):Accounting consolidation-basedmethodMethod2 (Alternative method): Deduction and aggregationmethodParent UndertakingsOutsidethe Community - Verification ofEquivalenceParent UndertakingsOutsidethe Community - Absence ofEquivalenceThehead of thegroup isin theEEA and the third country regimeisnot equivalentThehead of thegroup isin theEEA and the third country regimeis equivalentThehead of thegroup isoutsidethe EEAand the third country isnot equivalentThehead of thegroup isoutsidethe EEAand the third countryregimeis equivalentSmall and Medium-SizedInsurers:TheProportionalityPrincipleCaptivesand SolvencyIIEQUIVALENCE WITH SOLVENCY II AROUND THE WORLDSolvencyii and Countriesoutsidethe European EconomicAreaTheInternationalAssociation of InsuranceSupervisors(IAIS)TheSwissSolvencyTest (SST) and Solvencyii:Solvencyii and theOffshoreFinancial Centers(OFCs)Solvencyii and theUSASolvencyii and theUS NationalAssociation of InsuranceCommissioners(NAIC) - The Federal InsuranceOffice createdunder the Dodd-Frank Wall Street Reform and ConsumerProtectionAct in theUSA, and the ORSAin theUSASolvency ii
  62. 62. FROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY IIDIRECTIVEDirective2005/ 68/ EC of 16November 2005on Reinsurance- TheReinsuranceDirective(RID)CLOSINGTheImpact of Solvencyii OutsidetheEEAProvidingInsuranceServicestotheEuropean ClientCompeting withBanksLearningfrom theBasel ii FrameworkRegulatoryArbitrage:AMajorRisk for Countriesthat seeComplianceasan Obligation, not anOpportunityBasel II, Basel III, SolvencyII and RegulatoryArbitrageChallengesand Opportunities:What is nextRegulatoryShopping after SolvencyIITolearnmore about theonlineexam you may CSiiP_CSiiEP_Certification_Steps.pdfTolearnmore about Certified_Solvency_ii_Training.htmSolvency ii
  63. 63. Solvency ii