Solvency ii News February 2013

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Solvency ii Association
http://www.solvency-ii-association.com

We are pleased to announce our updated Distance Learning and Online Certification programs:
1. Certified Solvency ii Professional (CSiiP) Distance Learning and Online Certification Program
http://www.solvency-ii-association.com/CSiiP_Distance_Learning_Online_Certification_Program.htm

2. Certified Solvency ii Equivalence Professional (CSiiEP) Distance Learning and Online Certification Program
http://www.solvency-ii-association.com/CSiiEP_Distance_Learning_Online_Certification_Program.htm

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Solvency ii News February 2013

  1. 1. P a g e | 1Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Good news. In UK, firms can usetheirSolvencyII worktomeet, asfar aspossible,thecurrent regulatoryrequirements.Yes,it meansmoreSolvencyII jobs, more opportunities.Solvency II – early use of Solvency II work to meetICAS requirementsDear FirmAt the PRA launch event for insurerson 22October 2012, I acknowledgedthedelayto the implementationof Solvency II and set out a new planninghorizon of 31December2015.I alsoset out the intentionto ***allowfirms touse their SolvencyIIworktomeet, asfar aspossible, thecurrent regulatoryrequirements***under the Individual CapitalAdequacy Standards(ICAS).Theextendedplanninghorizon hasledusto re-planICAS reviewsoverthenext 24 months, includingfor many firms in the internal modelapproval process(IM AP).In developing the approach, we have benefited from industry technicalinput in expert groupswe have convened; we are grateful to those firmswhoparticipated in the groups.Solvency ii Associationwww.solvency-ii-association.com
  2. 2. P a g e | 2In the speech, I set out a two-phaseapproachtoallowthe earlyuse ofSolvencyII models.In the first phase, weenvisaged that firms intendingtousetheir SolvencyII model for ICAS purposeswould additionallyneed to provideareconciliationbetweenthe calculationsperformed totakeaccount of thedifferencesin thetworegimes.In the second phase we said we would allow firms to use their SolvencyII balance sheet and model for ICAS purposeswithout further on-goingreconciliations.We believethat wehavenow developed an approach (referredto as„ICAS+‟ asshorthand) that providesa practical solution – availabletoboth life and non-life firms – consistent with our current regulatoryapproachand whichallowsfirms tocontinueto make progresstowardsSolvencyII.We consider ICAS+ to be most appropriate for those IMAP firms subjectto an ICASreview to the end of 2014, and firms should discusswith theirsupervisorthetimingand content of their reviews.Firms are remindedthat theyare not obligedto enter the two-phaseapproach, and it is not a condition for IM AP review or approval.On 20 December 2012, EIOPA publishedits opinion on interimmeasuresregardingSolvency II.We are workingwithEIOPAon thedetailsof the interim measures, anda consultationis planned for spring2013on guidancefor nationalsupervisoryauthoritiestoensure a harmonised approachtoimplementation.Solvency ii Associationwww.solvency-ii-association.com
  3. 3. P a g e | 3The key elements of the two-phase„ICAS+‟ approachCurrent ICAS ruleswill continueto apply, includingthe requirement tocarryout an ICAand the settingof individual capital guidance(ICG).ICAS+ doesnot require SolvencyII testsand standards tobe met.Wehave set out theinformation needed from firms for an ICAS+ reviewin theappendix. Thisincludesthe reconciliationswewouldneed tounderstand the relationship betweenthefirm‟s SolvencyII model and itspreviousIndividual CapitalAssessment (ICA) model.We will seektouseexistingIMAP material providedby thefirm whereverappropriatein our review of the ICAbut firms will need to confirm thescope of material that should form part of theICAS+ review.Thescopeof theICASreview will seek toleverage IMAP work alreadyconducted. Tothe extent that wereceivean ICAS+ submission ofsufficientlyhigh quality(seeappendix), wewill seektoprovideasmuchdetailedfeedback on IMAP progressaspossible.Thedetail will depend on timing, qualityof materials,policy certainty,thescope of the reviewand our resourceavailability.Our startingassumption is that our current ICASapproach will continuefor groups(see below).In theinterestsof efficiency, weintend to combineICAS+ and IMAPprocessesand governance. There arethree main outcomesof an ICAS+review:i)a review of the firm‟s ICAand settingICG;ii)feedback to thefirm on thedevelopment of the SolvencyII internalmodel;andiii) an updated workplan for the SolvencyII model review.Solvency ii Associationwww.solvency-ii-association.com
  4. 4. P a g e | 4Wewill review thein-development ORSAto facilitatethePRAapproach,for instanceasa wayof bringingtogether businessmodel analysis,forward-lookingcapital planning, assessment of stressand scenariotesting, evidenceof useand capital risk management.Firms should discusswith their supervisor how their in-developmentORSAmay beusedtomeet the current INSPRU requirements.SolvencyII reporting. I saidin my October speech that wewill requireenhancedinformation to deliver thePRA‟s objectivesand wewill look toseeif weneed to supplement the existingdata weget from firmsin areassuch asstresstestingor some market-widedata aswerefineour workinareassuch asassessingthe sustainabilityand vulnerabilityof insurers‟businessmodels.As I said in October, it is not our intentionto bring in SolvencyIIreporting anysooner than required by EIOPA.We are workingwithEIOPAon thedetail of its interim measuresinsettingpolicy for insurers.Thecurrent supervisory approach will continueforgroups. We will focuson UK solo firmsand take intoaccount group risksin ICAS+.Anumber of firmshaverequested a group ICAand wewill considersuchrequestsaspart of our reschedulingof reviews,takingintoaccount theappropriateconsiderationsincludingour own resource availability.Next stepsOur discussionswithfirms indicatethat industry interestiscurrentlymainlyfor phase1,in part reflectingthesignificant policyuncertainty.As noted above, we are updating our implementation plans to reflect thenew planning horizon of 31 December 2015, and we are scheduling ICASreviewsover the next 24months.Solvency ii Associationwww.solvency-ii-association.com
  5. 5. P a g e | 5Supervisorsare discussingwithfirms whetherthey want tointegratetheirICAS and IMAP reviews(revising slotsasneeded) and leveragetheinvestment in SolvencyII work for ICAS purposes.We are working through the next level of detail to implement the two-phase approach and will provide more information on what firms willneed to provide in their ICAS+ review in Q2 2013.Pleaseaddressany comment or feedbackyou may have on theICAS+approachto your usual supervisorycontact or email usatSolvency2@fsa.gov.uk.YourssincerelySolvency ii Associationwww.solvency-ii-association.com
  6. 6. P a g e | 6AppendixInputs to the ICAS+ reviewFor thepurposeof ICAS+, the firm will need to provide:- detailsof thoseaspectsof itsSolvencyII internal model that it will beusingto satisfy(if onlypartly) IN SPRU7;- anyadditional materials, includingwhererelevant an in-developmentORSA, that it will be using to satisfy INSPRU7;- appropriate reconciliations between the Solvency II model (or thosecomponents of the Solvency II model that the firms will be utilising)andthepreviousICAmodel; and- the firm‟s assessment of its progress in developing its Solvency IIinternal model and a summary of any additional work required tomeet theSolvencyII testsand standards.Firms not in thesubmission phaseof IMAP will alsobe expected toprovideany additional materialswedeem necessarytoinform our reviewand assessment of the key riskareasof theSolvencyII model againstthetestsand standards.This would include, whereappropriate, information on Solvency II groupmodels. We expect all materialssubmitted for an ICAS+ review tohavebeenapproved by thefirm‟sBoard.What doesthe reconciliation involve?In order tobe abletoperform the ICAS+ review, weneed tobe abletounderstand changesin the firm‟s businessand model sincethe previousICAreview, and therelationship betweentheSolvencyII model and thepreviousICA model.Solvency ii Associationwww.solvency-ii-association.com
  7. 7. P a g e | 7Firms wishingtotakepart in ICAS+ will have toproducethesereconciliations.We understand that some firmshavedeveloped their existingmodelsforSolvencyII purposeswhilst othershavecreated new model architecture.Tothisend, there are a number of possiblemethodsavailableto firmstoprovidethe reconciliationbetweenthe previousand new ICA.Firms wishingtoenter ICAS+ should discusswiththeir usualsupervisorycontact the methodthe firm wishestouseand how thereconciliationswill need tobe performed asthey will be bespoke to theindividual firm.Solvency ii Associationwww.solvency-ii-association.com
  8. 8. P a g e | 8BERMUDA MONETARY AUTHORITYSETSOUT REGULATORY PRIORITIESFOR 2013IN LATEST BUSINESSPLANKeyAreasof Focus:-Bermuda will not Apply SolvencyII-type Regime toCaptives-BMAtoBalanceInternational Cooperation with IndependentApproach to Regulation- FaciliatingQualityNew Businessfor Bermuda – while retainingeffectiveoversightHAMILTON, BERMUDA- The Bermuda MonetaryAuthoritypublishedits2013BusinessPlan whichsetsout itsregulatory prioritiesand goalsfor the year.JeremyCox, theAuthority‟s Chief ExecutiveOfficer, presentedthe Plantostakeholdersfrom thepublic and privatesector at theAuthority‟sAnnual Meetingheld at BMA House.Describingwhat will be another extremelybusyyear for theAuthority,Mr Cox said, “We will workhard to ensure that Bermuda firms willcontinuetobenefit from operating withina practical, risk-basedregulatoryand supervisoryenvironment that fitstheuniquenature ofBermuda‟smarket.”Several keyareasof focusin the Plan werehighlighted, including:Bermuda Will Not Apply Solvency II-type Regime to Captives“We can definitivelystatethat Bermuda will not applyany SolvencyII-type regimeto thecaptivesector,” Mr Cox said, ashe describedplanstoimplement refined reporting requirementsfor captivesthisyear.“We will introducea risk return aspart of consolidatedannual filing forcaptivesthat theywill submit electronically, which will createefficienciesin theprocessfor both themarket and theAuthority.Solvency ii Associationwww.solvency-ii-association.com
  9. 9. P a g e | 9“That isthe extent of our refinements,”Mr. Cox said.“What the risk return embodies is something that allows the regulator toget that key risk information and I think it is something the industry willbe quite happy to see in place given that they were volunteering so muchof this information already.”“It‟sgood for Bermuda and the market that wecan make this decisionbased on the proven appropriatenessof our regime for captives,” he said.“This step, aswell asthe changesto our frameworkfor the commercialsector, reflectsour ability totakeindependent decisionson regulatorychangeat a pacethat‟sright for Bermuda and accordingtowhat makessensefor our diversemarket, while taking intoaccount achievingglobalrecognition for our supervisoryregimes.”Balance International Cooperation with an IndependentApproach to RegulationMr Cox alsoindicatedthat theAuthority remainscommittedtoappropriateinternational engagement, while implementingfit-for-purpose regulationsfor Bermuda.TheAuthority recognisesthe importanceof contributing to, aswell aspreparingfor, global changesthat can affectthe Bermuda market.“We will continue our advocacyefforts, and tohave a seat at thetablewithin global standard setting bodies.This meanswecan contributeto international developmentsaswell asdetermineon goingrelevanceor impactsfor Bermuda of such changes,”hesaid.“Maintainingstrong workingrelationshipswithkeydecision-makersisavery important aspect of reinforcingthecredibilitywehaveearnedSolvency ii Associationwww.solvency-ii-association.com
  10. 10. P a g e | 10overseas,and supports acceptanceof Bermuda‟s regulatory approachglobally.This alsofacilitatesour workon group supervision of the insurancemarket, and the supervisorycollegesprogramme wehave introducedand will continuethrough thisyear.”“What weneed to bedoing is having our ownindependent viewsof whatneedstobe done for our Bermuda market recognising that there arecompanies here that have a global footprint,” he said.“We arestrong enough, wearecredibleenough, weare skilledenoughasa jurisdictionand asa regulator tomake our own independent viewson how weshould be positioningthe regulatoryand supervisoryframeworkhere in Bermuda.”Faciliating Quality New Business for Bermuda – WhileRetaining Effective OversightMr Cox alsoannounced regulatoryprojectsplanned for 2013that willsupport initiativesidentified asnew businessdevelopment opportunitiesfor Bermuda.Theseincludea new licensingand supervisory regime for CorporateServiceProviders(CSP).TheCorporateService Provider BusinessAct came intoeffect on 1stJanuary2013.“Under the CSPregime theAuthority will licenseand superviseprofessional serviceprovidersin Bermuda that act asagentsfor formingcorporateentities,aswell asproviding other corporateservices.This addressesan opportunity that industry identifiedsome time agoforbuildingnew businessin this area, while establishingappropriateoversight.”Solvency ii Associationwww.solvency-ii-association.com
  11. 11. P a g e | 11The Authority will also be focused on the hedge fund area, participatingin the on going jurisdictional effort to position Bermuda as a domicile ofchoicefor asset managers.“Basedon my owninteractionswithstakeholdersin keymarketsoverseasregardinghedgefunds, Bermuda hasthe opportunityto raiseitsprofile further and competemore aggressivelyin this area,” he said.“TheAuthority is alsoengaged asa priority withlocalindustryparticipantsand theBermuda Government on developing Bermuda‟spositionregarding Europe‟sAlternative Investment Fund ManagersDirective.It‟s appropriate for theAuthority tobe part of such jurisdictional effortstofacilitatequalitynew businessfor Bermuda while ensuringweachieveregulatoryobjectivesappropriately, in a manner that is workablefor allparties.”Solvency ii Associationwww.solvency-ii-association.com
  12. 12. P a g e | 12Interview with CarlosMontalvo, ExecutiveDirector of EIOPA, conducted by GarryBooth, Reactions magazine(the UK)Can you explain what the interim SolvencyIImeasures, sometimes known as Solvency 1.5,encompass?PerhapsI should start witha disclaimer: I thinkthename Solvency1.5is unfortunate.We are not buildingfrom Solvency I, wearepreparingfor Risk Based Supervision.EIOPA will issueGuidelinesaddressed tonationalsupervisorson how toproceedin the interim phaseleadingup toSolvencyII.TheseGuidelineswill cover the system ofgovernance, includingrisk management systemand a forwardlookingassessment of theundertakingsown risks(basedon theORSAprinciples), pre+applicationof internal models,and reportingtosupervisors.For more information you may wishto consult theEIOPA Opinionon interim measuresregardingSolvencyII:https://eiopa.europa.eu/ fileadmin/ tx_dam/files/publications/ opinions/EIOPA_Opinion+Interim+Measures+Solvency+II.pdfSolvency ii Associationwww.solvency-ii-association.com
  13. 13. P a g e | 13Doestheproposalhave acceptance amongEU country supervisors?Willeveryone moveforwardtogether?Theabovementioned Opinion of EIOPAwasfirst welcomed, and thenapproved by theEIOPABoard of Supervisors, whichconsists of thenational supervisoryauthoritiesof theEU Member States.EIOPA expectsthat all our Board of Supervisorsmembers arecommitted to set thegroundsto develop a consistent and convergentsupervisoryapproach withrespect tothepreparation of SolvencyII.EIOPAs Guidelineswill ensure that important aspectsof thenewregimewill be phased in, takingintoaccount due proportionality.However, by nature theseInterim Guidelinesare soft regulation(i.e.used on a socalled"Comply or Explain basis"), sothere will be nosanctionsif some National SupervisoryAuthorities(NSAs) donot fullycomplywiththeGuidelinesat this stage.Whyhave you decided to issueguidelines(Spring2013)?Whatsintheguidelines?In the absenceof a final agreement on Solvency II in the scheduledtimeline, EIOPAhasexpressed an opinion in order toensureandenhancesound risk based supervision and preparethe industry for thefinal SolvencyII Directive.Instead of reachingconsistent and convergent supervisionin the EU,different national solutionsmay emerge tothedetriment of a goodfunctioninginternalmarket.In order toavoid thisscenario EIOPAdecidedtodevelop guidelinesandtotakea lead in thepreparatoryprocessaimed at a consistent andconvergent approach withrespect tothepreparation of SolvencyII.EIOPA Guidelineswill allowsupervisorsand undertakingstobe betterpreparedfor the applicationof the new regulatory framework.Solvency ii Associationwww.solvency-ii-association.com
  14. 14. P a g e | 14Tocut a long storyshort, the guidelinesare an excellent wayfor allpartiestouse theextra time of thedelayasa waytobe better preparedfor implementation.TheCRO of global reinsurer recentlytoldme, Weareexperiencing everincreasing requirementsforinternal model approval, witheach countrycarrying out itsownassessment, withlimitedrelation toproportionality...This processconsumesalot of resourceswithout creating valueit haseven started to destroyvalue. And thesituationmight get even worseuntil thefull formal implementation of all SolvencyIIs threepillarsin2015/16(oreven 17).It is mysincerehopethat EIOPAwill have thepowertoconvince localsupervisorstostick totheoriginal intention: a principlebased approachfollowingtheprincipleof proportionality.Whats your response?Therequirementsfor theuseof internal models are set out in theSolvencyII Directive, and will indeed befurtherdeveloped in theupcomingimplementingmeasures,and EIOPAstandardsandguidelines.Such requirementswill have tobe fulfilledby all undertakings(irrespectiveof their size) if theywant to usean internal model for SCRcalculationsunder Solvency II.EIOPA hasbeen supporting the roleof Internal Modelsin a risk basedframework,even after theexperienceof the Banking sector, wheremodelswhichweretooprinciplebasedhad a significant rolein thecrisis.This support should be acknowledged, and theneed tolearnfrom whathappened aswell.Solvency ii Associationwww.solvency-ii-association.com
  15. 15. P a g e | 15EIOPA recognisesthat theusesof the internal model will vary fromundertakingtoundertaking and will point out toNSAsthat theyhave toassesscompliancewithrequirementsbasedon proportionality,accordingtothe nature, scaleand complexityof the risksand businessoftheundertaking.Havingsaidthat, it isfair tosaythat EIOPArecognisesthat differencesbetweensupervisorycultures,Member States legal regimesand anumber of resourcesavailable, have led, in the short term, tosomeinconsistenciesin thesupervisoryapproacheswithrespect tointernalmodel reviewsin pre application.Preciselybecauseof that, whenyou lookat our Work Program andobjectivesfor 2013onwards,you will seethat EIOPAis building a Centerof Expertisefor Internal Modelsthat will workon enhancingconsistencyand supporting those supervisorsthat may need help achievingit.There‟s been alot ofuncertainty aroundtheimplementationdate ofSolvencyII. Realistically, whenwill theproject becompleted?Let‟s start withwhat mattersmost: Solvency II will be implemented, andthereshould be nodoubtsabout it.On the applicationdate, weare confident that the framework will beapplicablein 2016though I cannot give you 100% reassurancebecausethedecisionis not made at the EIOPAlevel.Thedecision hastobe made by agreement betweenthe EuropeanCouncil, EuropeanParliament and theEuropean Commission.I can confirm that EIOPA will do the necessaryworktomake theimplementationof SolvencyII happen on January 2016.But let‟sbe clear, oncewesettlethe pendingissueof Long TermGuarantees, partiesmust avoid thetemptationof reopeningmore issues.Solvency ii Associationwww.solvency-ii-association.com
  16. 16. P a g e | 16SolvencyII is a good framework, it will not be perfect on day1, but thisshould not be an obstacleto start.Dr ElkeKoenig, president of theGermansupervisor Bafin recently saidofSolvencyII, “Youhave created amassivelycomplex system whichisprobablyonlyfullyunderstandable forthosethat havecreated it.” What‟syour response?Thebasisof the system is quitesimple:it strivesfor risk basedsupervision that incorporatestransparency, callsfor a clearunderstandingof risk and good governance.Sothe ideais simplebut the wayit hastobe translatedintoa regulatoryframeworkis complex.SoDr Koenig isright in that sense.Whyisit socomplex?I wouldsaythat it is everybody‟s responsibility(the regulators,theEuropean Commission).But in many casesthe complexityis alsobeing drivenby theindustry.What canwedoto make thingslesscomplex?We needto enhancetheprincipleof proportionalitywhile bearing inmind that the same objectivescan be met in different waysin particularfor thecompaniesthat are not doingcomplicatedbusiness,for SMEsetc.EIOPA is alsoaimingat reducing part of thiscomplexity, with initiativessuch asan IT toolkit for undertakingsthat could includea waytocalculatethe SCR, etc.We don‟t just acknowledgetheproblem, wetry tocome withsolutions.Solvency ii Associationwww.solvency-ii-association.com
  17. 17. P a g e | 17Another CRO toldmethat regulatorsappear tonolongerfollowtheoriginal SolvencyII frameworkrouteofprinciplebased regulation.For example, theLevel Threeproposaltoaddacompliancefunction andanactuarial function, withtheadded requirement that nopersoncan besimultaneouslyresponsible formorethan onefunction.ShouldSolvency II, asaprinciplebased regime, forcecompaniestomakesuch departmental changes?I wassurprisedat this question.Theactionsthe CRO refersto, are explicitlycaptured in thelevel 1Directive(articles46and 48).There is a full article on the actuarial function (Article 48) that containsnumber of requirements.Thelevel 1text isprinciplebased and there is a second level which getsintomore nittygrittydetails todo withbest practicearound thecomplianceand actuarial functions.But theprincipleof proportionalityshould always be kept in mind.Furthermore, the intention of SolvencyII is not to force companiesto dotheir businessin onewayor another.It should ensure that risks are addressedand that themeanstodo so,subjecttoproportionality, are implemented.On that basisweare not going to force companiestorecruit a person tobea complianceofficer or anything like that.What weexpect is that theycomplywiththe principlesstatedin levels1and 2– comply in asound waybut not in thesame wayfor all thecompanies.Solvency ii Associationwww.solvency-ii-association.com
  18. 18. P a g e | 18Someindividualsinterpret the principlesasprescriptive but it is not ourintentionto tell companieshow tostructure their business.We usethe wordactuarial function but function doesnot mean person.Soin a tiny companyyou could have anactuarial function that doesnothavetobeperformed by a „pure‟actuarybut instead by someone whohasstrong mathematical knowledge.Are country supervisorsstraying fromtheoriginal SolvencyII script?Our duty is tomakesure that all 27NSAsunderstandthe principleofrisk basedsupervisionin a convergent wayand applyit consistently.Someof our membershave told usthat theyneed to enhanceriskmanagement, internal controls,or disclosure.Sotheyhad some internal projectson hold because theseprojectswereto be channelled via SolvencyII, whichis thesame for everybody.Now Solvency II is not coming in January 2014astheyexpected andtheywant tomove in thoseareas.Soexactlythe necessityto avoid the development of national solutionswasstated in EIOPAOpinion on Interim MeasuresRegardingSolvencyII, whereweare talkingabout number of areasfor whichtherewill beinterim guidelinestargetedtoenhance preparednesstowardsSolvency2.TheseGuidelinesindicatethat supervisorsaresupportingtheoriginalideaof convergenceand harmonization, they believein theconcept ofrisk basedsupervision, and EIOPAis takingthelead to ensure thatimplementationwill take placein a consistent way.EIOPA wantsto“pavethewayforfurther mutual understanding andfutureconvergence between theEU and theU.S.on insuranceregulationand supervision”.Solvency ii Associationwww.solvency-ii-association.com
  19. 19. P a g e | 19But manypeoplein theUSarguestronglyagainst convergence. Whyisconvergence important in your opinion?Theconvergenceis important for our overridingaim, whichisto developstrongglobal regulatoryand supervisorystandards.Thepurposeof theEU+USInsuranceDialogue is toenhancemutualunderstandingand cooperation aswell asto promotebusinessopportunity, consumer protection and effectivesupervision.We remain respectfullyawareof the commonalitiesand differencesofboth regimes,continueto strivetoaddressimportant issuesin technicaldetail, and may, over time, movetowardimproved compatibilitythat willbenefit insuranceconsumers, industryparticipants,and theeconomy.Thereis agrowingview that SolvencyII will lead to restructuring in there/insuranceindustrywithM&A and consolidationtofollow.Doyouagree this could bean unintended consequence?I havebeen hearing thisfor thelast 15 years and alsooften asked thisquestion at conferencesby representativesof smaller companies.And I used to givesuch an example:I like to buy booksand I buy my booksin a tinybookshop in Madrid.Theowner readsa lot and he knowswhat the customer likes and alwaysgivesme great recommendations.I could buymy booksat Barnes& Nobleor at Amazon.But aslong asIget sucha level of service[from my littlebookshop] I will never dothat.If smaller insurance companies understand the needs, bring added valueto their customers and also understand the specifics of the business theyunderwrite, theywill succeed.Solvency ii Associationwww.solvency-ii-association.com
  20. 20. P a g e | 20Theywill evenbenefit from SolvencyII becauseit givesthem therightincentivesto have better risk management.As for companiesthat aresubjected to restructuringor mergers, they willfacesuch issuesbecausetheir problemsare related to globalisationandnot toSolvencyII.Solvency ii Associationwww.solvency-ii-association.com
  21. 21. P a g e | 21Speech byAndrew Bailey, ManagingDirector, Prudential BusinessUnit atthe Chartered Institute‟sNicholasBarbon Lectures, LondonThank you for invitingme togive thisNicholasBarbon Lecture.And, thank you for givingme the opportunitytoremind myself of thecareer of NicholasBarbon – Isay“remind myself” becausea longtime agoI wasan economichistorian.Barbon iscertainlyone of the founders – if not thefounder – of the insurance industry in London in thelate seventeenth century.He wasfirst a builder, indeed, he wrotea tract called “an apology for thebuilder” in whichhe defended new constructionin London on thegroundsthat cities created employment and wealth.Barbon wasprobablytheleading builder of the time and he offeredanintegratedservicebecause he pioneeredhouseinsurance.Indeedthereareobservationsthat Barbon‟s businesswasto build,insure, and re-build your housewhenit fell down.Thesedaysyou wouldbein FSAenforcement if you tried that one.But Barbon wasalsoone of the earlyeconomic theoristsin a period attheend of the seventeenth century wheneconomictheory flourished,beforeit went intoabeyance until Adam Smith and David Hume cameontothe scene.Solvency ii Associationwww.solvency-ii-association.com
  22. 22. P a g e | 22Barbon developed theargument that wealthcreatesdemand and heextolledconspicuousconsumption: he wrote that “a poor man wantsaPound; a rich man a Hundred”.Clearly, Barbon never quite imaginedthat one day investment bankerswouldtake his ideatoa wholenew level.And, finallyon Barbon, he wasaround at thetime of the founding of theBank of England.Indeed, the recordssuggest that he very much wantedthe Bank ofEngland not to be founded, and instead that his own ideaof a nationalLand Bank should havereceivedthe favour of the Crown andParliament.That did not happen, and so I guess that Barbon would not be happy onfinding out that the Bank of England will, over three hundred years later,take on regulatinghis industry of insurance.But then hiswritingssuggestthat Barbon wasno fan of regulation.From my perspectivethisis a very excitingtime becauseafter nearlythreeyears of workon a wide range of subjectscovering the legislation,thenew model of prudential supervision, our staff, property, IT andother things,wecan seethenew Prudential RegulationAuthoritystartingtotake shapefor real.We are in the processof moving intoour new home at 20 Moorgate.There wereseveral reasonswhywechosea City location.One consequenceis that it will bringuscloser tothe insuranceindustry,whichfor themost part resistedtheappeal of CanaryWharf and stayedcloseto the rootsthat dateback to Barbon.He wouldhave approved, providinghe could havebuilt, insured, andrebuilt your building.Solvency ii Associationwww.solvency-ii-association.com
  23. 23. P a g e | 23Timewill tell whetheryou will welcomehaving your prudential regulatornear toyour doorsteps, and asfar asweknow locatedin theCity for thefirst time.I want totacklea number of largeissuestoday, whichare closelyconnected.First, whydowethink it makes sensetoplace prudential supervision ofinsurancein the PRAalongsidebanksand major investment firms?Second, what style of supervision will thePRA adopt and how will itaffect insurers?And third, how do wethink about theissueof systemic risk, andsystemically important statusfor insurers?There areover 700insurersin this country whichwill be subjecttoprudential supervisionby the PRAand conduct supervision by the FCA(in addition, insurancebrokerswill be entirelysupervisedby theFCA).Whyplaceprudential supervision of insurersin thePRA alongsidebanks?I am tempted to make onepoint here and conclude, namelythat weasked tohave one industrythat caused uslesstroublethanbanks.Of course,that wouldbe on thebasisof “please keep it that way”.It‟s tempting to stop there, but in all honestyit wouldnot bethe fullstory.Banks and insurershaveonecrucial thing in common whichdistinguishesthem from other financial servicesproviders,namelythattheybring thefundscustomersdeposit or investdirectlyontotheirbalancesheetsand thereforeexpose customersdirectlytotheriskinherent in thosebalancesheets.Solvency ii Associationwww.solvency-ii-association.com
  24. 24. P a g e | 24We did not, however, place insurersunder the PRA becausetheyare likebanks,even though there are important similaritiesin theprudentialapproachweapplytoboth sectors.Whythen?For me, the logic hasto dowithwhat wehave learned about our roleduring thecrisis.Thetraditional model of supervision hasbeen quiteindustryspecific. TheFSAregime introducedin 1997createda singleauthority, but withintheFSAtheframeworkof rules applied toinsurance supervision isuniqueto theindustry.It is truethat in the run-up tothestart of thecrisis,and for some timethereafter, the FSAmingled insuranceand bank supervisionin termsofitsoperatingunits, but I think that did not workeffectively and wehavemovedtoa clear distinctionwith an insurancesupervisiondirectorateheadedby JulianAdams.Insurancesupervision is a skill of its own, and while our supervisorsdomove rolesbetweeninsuranceand banking in both directions,wewanttoensurethat wehave groupsof trulyexpert insuranceand bankingsupervisors.Thereason for locatinginsuranceand banking in thePRA isin my viewthat wehave learned during the crisisthat our job asprudentialsupervisorsisto ensure that thepublic and usersof financial services,includingthe corporate sector, can beassured of continuousaccesstothecritical serviceson whichtheydepend.Many financial servicesmay be regarded ascriticalby their users,butsome aredistinctivebecauseit ishard for consumers toreplacetheirprovider witha substitutewithout acceptingunacceptablecost and loss.Solvency ii Associationwww.solvency-ii-association.com
  25. 25. P a g e | 25Insurersprovidecritical servicestothepublic in terms of risk transferandvery long-livedsavingscontracts.This lastpoint drawsout that insuranceis not a singlehomogenousindustry– general and life insurancearevery different activities- and werecognisethat in our supervision.It wouldbe unacceptabletothe public tohave accesstorisk transferthrough, sayhome or car insurance, or professional indemnityinsurance,toname but a few, withdrawnin a disruptive and unannounced way.In the same way, savingscontractsthat are long-lived and providedbylife insurers,and areoften an individual‟sprimary pension provision, arecritical financial servicesthat are difficult to replace withoutunacceptablecost.For me, there isthereforea common feature of banking and insuranceintermsof continuityof accessto critical financial services.This is not, however, the end of the storyon theissueof whythePRAwill regulate banks and insurers.What I have started todescribe isthe first objectivethat the newlegislationgivesto thePRA, namelythesafetyand soundnessof thefirmswewill supervise.But thereis another important leg tothe definitionof theobjective,namely that theunderlying objectiveof our pursuit of safetyandsoundnessis thestability of the financial system.For banks, this had led usto emphasisethat wewill be a proportionatesupervisor,puttingmore emphasison the largefirms that have morescopeto damage thestabilityof thesystem.We think wecan do thisfor banksbecausethe depositor is protected bythedeposit insurancearrangementson the first £85,000of depositsprovided by the FSCSfor all banks except branchesfrom other EUSolvency ii Associationwww.solvency-ii-association.com
  26. 26. P a g e | 26countries(wheretheinsurance comesfrom the home country), andbecauseasa consequenceof thecrisisthe resolutionregimeisnowsetdownin statute, though weclearlyhave worktodoto make the largerbanksresolvableusing thoseresolution powers,supplemented weexpectbyfuture EU legislation.For insurers,the legislationgivesthe PRAa second objective, namelytheprotectionof policyholders.Wedonot have acomparableobjective fordepositors.Policyholder protection meansin effect that our approach ofproportionalityin supervision cannot be thesame for insurers.Why?This is a good question becausetheFSCSis set up tocover insurance.For me, the reasonisthat wehave more worktodoto develop the besttoolstoensurecontinuity of accessto critical insuranceservices.WhydoI think weare short of tools?Toexplain my view on this requires somebackground on theresolutionof banks.Statutoryspecial resolution regimesfor bankslike the one adopted in theUK in 2009have at their heart thepower toalter property rights, thepowertoseparate thebusinessof a company from itsowners,albeit withsafeguardsagainstunfair expropriation.It is a very powerful tool, and onethat should be usedcarefullyfor thatreason.For banksa typical useof theresolutionregime is becausedepositors canloseconfidencein their ability to have accesstotheir funds,and thusarun can start whichbringsdownthe bank.Solvency ii Associationwww.solvency-ii-association.com
  27. 27. P a g e | 27Aresolution regimecan bring order tothat process.For insurers,policyholders are lesslikely run in thesense that theycanwithdraw their contract and take it somewhereelse,though it is possiblefor some life contractstobe surrenderedwithout penalty.Unlike money, insurancecontractsare not fungiblebecausethecover isspecific tothecontract.In the limit, a bank depositorcan exchangetheir claim on the bank(commercial bank money) for a risk-freeclaim on the central bank (byrequestingbank notes).An insurancepolicyholder cannot do this.Work is under waytodetermine whetherinsurance wouldbenefit from aspecial resolution regimethat overridesnormal insolvencyrulesin ordertoenhancethe abilityto ensure continuityof critical contactsthrough,say, the transfertobusinessto another firm.I will return tothis subject later in this lecturebecauseit is one that weshould consider carefully.My general view is that the policyholder protection objectiveforinsurancepointstothe need for a resolution regime for insurers,but theimportant issueis tobe clear on what sort of regime.There is one further area of insurancethat for me clinchesthecaseforthepolicyholder protection objectivein the PRA.I almost mention “With Profits” withtrepidation, but I am afraid I mustdosoat this stage.With about £350bnof policy valuesoutstanding, and policy maturitiesthat can run intodecadeshence, With Profitsis clearlya legacythat willbevery much withusfor a good while yet.Solvency ii Associationwww.solvency-ii-association.com
  28. 28. P a g e | 28Consequently, I dothink that the industryand the authoritiesneed to bealert toitsinherent risks and complexities.In thinking about the implicationsof With Profits, let me step back for amoment. In broad terms, I can seetwodistinct typesof financial contractinvolvingdepositsand savings.Adeposit contract witha bank hasat itscore the promisethat the bankwill return the full value of the deposit at any timewhen it iscontractuallyobligedto doso.Lossof confidencein a bank setsin whendepositorsfear that this maynot happen.An asset management contract isquitedifferent becausethepromiseisat itssimplest toreturn theproceedsof the investment strategy, whichmay be more or lessthan the amount invested.It is cruel to remember the WoodyAllen jibeat thispoint that astockbroker issomeone whoinvestsyour moneyuntil it is all gone.Economistsmight call thedeposit and asset management contract“corner solutions” in that they have a robust definitionand lie atoppositeendsof a range.If so, With Profitsfallsin between, and it is in thisground that issuescan arise.Theproposition wasessentiallyto offer investorsa blendedexposuretocash, bond, propertyand equityreturn withsome degreeof smoothing ofoverall returns, essentiallyat management‟sdiscretion, toreduce markettimingrisk.Themarketingtendedto make much of theseproducts‟potential toearnabovecash returnswithout thevolatilityof pure equityexposure; and thisin turn conditionedpolicy holders‟expectations,a fact first acknowledgedexplicitlyin the UK‟sprudential solvencyregime forSolvency ii Associationwww.solvency-ii-association.com
  29. 29. P a g e | 29insurersin 1967(bear in mind that this wasnot the original prudentialregime, whichwasintroduced in 1870).Theessenceof theWith Profitscontact asI understand it is that theprovider offersa guaranteedminimum return, variouslystructured, plustheprospect of additional returnsderived from the return earnedon apooledfund that combinesmany contractsincludingover differentgenerationsof policyholders.There is of coursea logic topooling returns, but for the policyholder thereturn can be complicated, and sometimesmade opaque, bythepracticeof pooling different generationsof policyholders whomay havedifferentexpectationson their returns(conditioned, for instance, on changesin theexternal environment); and by thepracticesof smoothingreturnsand ofchargingdifferentiallyfor the economicvalue of the guarantees.Additionally, problemshave arisen becausethe fundsare made up ofmanydifferent groupsof policyholders with different guarantees,someof which, essentiallyon the annuityside, became increasinglyvaluableasnominal interest ratesfell from the mid 1990‟s.Theexistenceof theseguaranteeswasoften, at best, unclear or, at worstnot disclosed to new joinerstothe fund.Bear in mind alsothat thesecontractsare long-livedwithmaturitiestypicallyof 25yearsof more; and that theWith Profitsinsurersthemselveshave often built up over many years through the take-over ormergersof manysmaller providers, each with their own distinctproducts,associated policyholder expectations,and administrative“legacy” systems.Sufficetosay that in the last twoyearsin whichI have been involvedwith insurancesupervision, some of themost difficult issuesthat I havefaced havebeen in the area of With Profits.For that reason, I think it isappropriatethat the PRAshould have apolicyholder protectionobjectivebecauseI think wehave torecogniseSolvency ii Associationwww.solvency-ii-association.com
  30. 30. P a g e | 30explicitlythecontractual complexitythat weinherit and thesolvencyrisksthis can generate.I should alsoadd finallythat it is not a coincidencethat wehave foundthisarea tobe themost challengingin terms of creating the “twinpeaks”model in whichthe FCAwill haveresponsibilityfor reachingjudgements,through a formal determinationprocesson fairnesstopolicyholders and thePRA will be responsiblefor ensuring that thosejudgementsare compatiblewiththe prudential soundnessof firms.We have reached a satisfactory conclusion, withspecific languagein thelegislation, and a special With ProfitsMoU betweentheFCAand PRA;but it hasrequired very careful consideration to ensure that eachregulator‟sroleand responsibilitieshasbeen appropriatelydefined toavoid any “under-laps”and that thecorrect balancehasbeenstruckbetweenthem.Let me nowmove on to thesecond subject – what style of supervisionwill the PRA adopt and how will it affect insurers?Let me start by drawingthe distinctionbetweenregulation andsupervisionin our world.Regulation is about the frameworkof rulesand policiesagainst whichweoperate.Supervision is about how weapplythat frameworkevery day.Theyare not thesame thing.Rulesare for the most part in our worldtheproduct of internationalagreement, eventually.There aregood reasonsfor this in termsof seeking to ensure comparablestandardsof protection whereservicescan be provided acrossborders,and whereencouraging free tradein servicesisconsistent with openeconomies.Solvency ii Associationwww.solvency-ii-association.com
  31. 31. P a g e | 31When it comestosupervision the PRA will be applying judgementaround the framework of rules.This is important for a number of reasons,but above all against abackground of inexorableincreasesin rule making wemust have thedetermination to befocussed on thekeyrisksthat matter toourobjectives.One of my commitmentsisthat wemust be focussed on the(I hope)small number of big risksthat threaten our objectivesof safetyandsoundnessand policyholder protection.I don‟t have any difficultywith intensiveand intrusive supervisionwhereit is focussedand justifiedby the risks.We are not, however, substitutecomplianceofficers– that is the job offirms, and onethat wewill expect to seein placeand functioningalongwith risk and audit functions.Another key aspect of judgemental supervisionis that it must beforward-lookingtotherisksthat may arise.This is crucial, and wasnot properlyincorporated intothe pre-crisisregimeof supervision.Let me givea few current examplesof thisfor insurers.We are focussedon the impact of very lowinterest ratesstaying withusfor a protracted time, and whenI say this I am offeringno viewwhatsoever on the likelycourseof monetary policy.Likewise,wewant toknow that theprudential position of firms alsocapturesthe possibleimpact of an unexpected upwardshift in the slopeof the yield curve, and again I am offeringno view on monetary policy.Solvency ii Associationwww.solvency-ii-association.com
  32. 32. P a g e | 32Mythird exampleis different:wearewatchingthe rangeof possibleoutcomeson flood insurance in thiscountry for their prudentialimplications.Judgment in supervision isnot, however, without itschallengeswhenitcomesto thepracticeof supervision.There aretwolargechallengesI see.First, wehave to balancethe use of sensiblejudgement againstthe riskof creatingundue uncertainty in our behaviour whichdamagesyourabilityto do business.This is not easyI accept.It requires usalmost constantlyto check and test our judgementsagainst a frameworkof reasonablepredictability.Also, it requiresa greater degreeof transparencyfrom ustoyou, and Ithink from both of usto thepublic and investors.This is important toensure that wecan both be held toaccount forapplying judgement in a waythat is consistent withthepursuit of ourobjectives.I am consciousthat achievingaccountability in insurancesupervision inthecurrent environment is challengingbecauseall thefocusis on thebanks.No visits to the TreasurySelect Committeemay seem like a blessing, butwehave toensure that the accountabilitystill holds water.On that point, frankly, I think there should have already been moreaccountabilityfor how the processesof theEuropean Union could havecreated such a vast cost for an industry for the implementation of adirectivewhichhasnot even yet been finallyagreed, and for whichIcannot give you a date.Solvency ii Associationwww.solvency-ii-association.com
  33. 33. P a g e | 33Largelyunseen in thebanking crisishasbeen the shockingcost ofSolvencyII.Thesecond challengewiththeuseof judgement in supervisionis thatelsewherewehave seen a preferencetohavemany rules, but often oneswhichcan then be gamed.Paul Volcker put it nicelyin his evidencetothe ParliamentaryBankingCommission.He said that peopleaskfor clear and simplerulessothat theycan tellwhentheyare in abeyance, but theytypicallyfail toadd that theywant toknow how toget round the ruletoo, but that ispart of the in deal.At the PRA wewill apply judgement rigorously; sometimesyou willagree withus, and sometimesyou won‟t. We will be clear andtransparent in our judgements,and wewill be accountable.Finallyon theissueof the PRA‟sapproach to supervision, I want toassureyou that wewill take supervisionof insurersjust asseriouslyaswedotheother lot.It is not in our nature todootherwise.And, weare puttingmore emphasison senior level contact in the newapproach.We want to deliver keymessagesvery clearlyto senior management andboards,and wewant to know how your governanceworksin practice.I will give one exampleof thisapproach in recent months, returningtoSolvencyII.It wasclear tome bythe end of last summer that wewerefacinga longdelayin the directiveon top of a bill that, asI have said, wasindefensibleand ever rising.Solvency ii Associationwww.solvency-ii-association.com
  34. 34. P a g e | 34We have had extensivecontact withchief executivesand theAssociationof British Insurersin recent months, withtheoverarchingobjectivethatthiscannot go on.I think wehave reacheda sensibleconclusionwhichat least makes thebest of wherewefind ourselves.Wherepossibleand sensiblewewill use thework done on SolvencyII todateto bolster our existingICAS regime, though I should stressthat weare quitecomfortablewiththe coreof ICAS and believe that wecan useitasthe frameworktobuild the PRA approachuntil such timeasSolvencyII appears.I hopethat this changeof approach both alleviatesthecostsand helps tocreatea lesspressured environment in whichwecan seek to obtain abetter framework for prudential supervision of insurersin the future thanwouldotherwisebe thecase.There is too much at stake for theindustry and theeconomy tocompromiseon thisobjective.Let me turn to the third and final issue, namely how dowethink abouttheissueof systemic risk, and systemically important status, forinsurers?This is obviously topical in thecontext of the IAISproposed policymeasuresfor globallysystemically important insurers.First of all, in my view thecasefor systemic importancefor insurershastobe proved.It doesnot followthat becausemajor banks are systemically important,thesame must be true for insurers.And, second, if a casecan be made, it doesnot automaticallydeterminewhat the responseshould be; in other words, it doesnot followthat theSolvency ii Associationwww.solvency-ii-association.com
  35. 35. P a g e | 35same capital treatment of systemic firms and/ ora statutory resolutionregimeareneeded asfor banks.Thecalibrationof theseresponseswill have tobe proven, and theresponsewill need tobe consistent withmitigatingthe causeof thesystemic risk.So, let‟sput bankstoone side, but only after making one importantpoint, that whereassystemicrisk in banking is dangerousin good partbecausethat it is in thenature of bankingthat the confidenceissuecombinedwitha very high level of inter-connectivityof risk within thesystem createssystemic risk, thisis not true tothe same extent ininsurance.Over theyears, re-insurancehascome under thespotlight asa possiblecauseof intra-system connectivityand risk, but I have not yet seen aconvincingdemonstration of a major systemic issuefor pure reinsuranceof idiosyncratic, diversifiable, non-financial risks such asfire, weather,earthquake or liability.It is of courselikelythat withintheinsuranceindustry there are firmswhichbecauseof some combination of complexityof risk and size posemore risksto the financial system, and assuchour supervisionshould beproportional.Let me develop thistheme drawingon, I should say, valuableinput frommy colleaguesPaul Sharma and JulianAdams.Theresolution challengefor non-life insuranceinvolvesensuring short-term continuityof risk cover.But life insurersmake long-term promisestotheir policyholders whichcan onlybe matched imperfectlywithavailablefinancial instruments(securitiesand derivatives).This createsa vulnerabilityto shocksfrom financial marketssuch astheimpact of thelargefall in equitymarketsin 2002to 2003.Solvency ii Associationwww.solvency-ii-association.com
  36. 36. P a g e | 36Life insurers do not close down by going into so-called solvent run-off inthe same way as non-life insurers, and bear in mind that the term solventrun-off is theexpression of a probabilityof an outcome.Anon-life insurer whenit entersrun-off typicallyceasestocollect newpremiums.Therisk in run-off here – and thereis a risk that needsexamination– isthat near-term claimsare paid out tothedetriment of unidentified far-term claims, therebycreatingan inequalitythrough a form of timesubordination.In contrast, a life insurer that entersrun-off continuesto collect regularpremiumson itsexistingin-forcelife insurance policies.Moreover, it needstocontinueto pay itsobligations(e.g. annuities-in-payment) on theexact day contracted whereasa non-life insurer in run-off has some greater flexibilityto pay claimstomatch itscash flow.Finally, a life insurer in run-off needstohonour contractual policysurrenderrights.Thesefeaturesof life insurersdraw out thedifferencein economicinterest betweennear-term and far-term policyholders, and one whohasa right of surrender and one whodoesnot.Moreoveraslife insurersaremaking long-term promisesto policyholders,theyoften seek tomatch thosecommitmentsdynamically, using short-term derivatives,and therefore rely on continuedaccessto thosederivativesand the willingnessof counterpartiestotakesuch exposurestoa firm in run-off.Thesederivativepositionswill not be more idiosyncratic like traditionalinsurance,but will be determined by theoverall direction of financialmarket prices, giving scopefor more system-wide problems.I described earlier theissuesI seewithmore traditional With-Profitcontracts.Solvency ii Associationwww.solvency-ii-association.com
  37. 37. P a g e | 37TheissuesI highlightedwerenot somuch to dowithdefinitefeaturesofthecontract betweentheinsurer and thepolicyholder but withtheuncertaintyaround thecontract itselfarisingfrom thesubstantialdiscretionafforded tothe insurers‟management todeterminefinal policychargesand returns.There is an argument that suchuncertaintyishelpful tothe insurerbecausethe promiseto thepolicyholder iscautiousin termsof accruedincome and gains, and the insurer is in control of theinvestment strategyfor the asset pool.Theissuewith uncertaintyaround contractual termsis thereforearguablymore of a conduct issuetodowithfairnessin the operation ofthecontract, but to be clear it will have prudential consequencesif thescaleof the fairnessproblem is largeenough, asEquitabledemonstrated.Compare this withthe newer life insuranceproductsin somejurisdictionswhichcontain much more definitivepromises, for examplethat at eachvaluation point the policyholder hasa commitment such thatif their asset-pool is valued higher thanthepreviousguaranteed amount,thisnew amount will feature in the minimum guaranteedreturn.This reducesuncertaintyin one senserelativetoWith Profitsbutincreasesfinancial riskfor the insurer – whichis further increasedwherepolicyholders can switchinstrumentsat each valuation point and thusselect against theinsurer on thebasis of a more definitivepromisetheyhavemade on future returns.Theinsurer thusrisksadverseselectionagainst them.Therisks in thistype of contract are thereforemore clearlyprudential.Globallythescaleof all of thesepromisesis very large – the full extent isnot clear, but it could be well over $1trillion.Solvency ii Associationwww.solvency-ii-association.com
  38. 38. P a g e | 38In the UK these contractsare markedtomarket, whichprovidesusefulinformation, but that is not consistentlythe caseglobally.There is scope for problemsin, for instance,the time-valueof liabilitiesandthevaluation of complex derivativepositions.All of this tendstomy mind to demonstrate that there isat least onepartof the insuranceindustry that is,globally, largeand complex, and UKfirmsare an important part of this sector.That doesnot, tobe clear, lead to a conclusion that thereforetheapproachand toolkit taken for globallyimportant banksshould applytotheseinsurers.It leadsme to twoinitial conclusions.First, that in a worldof proportionatesupervision, weshould take a moreenhancedand intensiveapproach for theselargeand complex firms.This is what the PRAwill do, and it doesnot contradict our policyholderprotection objectivewhich, asI indicated earlier, givesusin my view asomewhat different objectivein respect of small insurersversussmallbanks.Second, this degree of complexity inevitably raises important questionsaround our resolution tools where we face dealing with large-scale run-downs.In thiscontext, I am awarethat thePRAwill need tobe veryclear how itinterpretsand putsintoeffect itspolicyholder protection objectivein thecontext of insurersthat enter run-off or require some other meanstodrawthebusinesstoa close.In conclusion, I hope thisdescription hasgiven you a senseof the PRA‟sintendedapproach tosupervisinginsurers,and some of thebig issuesthat weseeahead.Solvency ii Associationwww.solvency-ii-association.com
  39. 39. P a g e | 39We have grown all too accustomedtofocusing heavily on banks,reflectingtheir capacityfor damagingspilloversand externalities.Whether, or how much, insurersshare some of these characteristicsisthesubject of extensivedebate.I am yet to be persuadedthat thesimilaritiesof insurersand banksaremore important that thedifferences.But I am persuadedthat insuranceis a critical financial serviceprovidedbyfirms that haveconsiderablecomplexityin termsof financial risks.This alone demonstrates whywecare about theprudential supervision ofinsurers.I should stressthat weare lookingforward to thechallenge.Thank you.Solvency ii Associationwww.solvency-ii-association.com
  40. 40. P a g e | 40Corporate and Risk Governance:The IAIS‟ Self-Assessment and Peer Reviewon ICPs 4, 5, 7 and 8TheIAIS haslaunchedthe Self-Assessment andPeer Review (SAPR) on Corporate and RiskGovernance.This SAPR assessesobservanceand understandingof the InsuranceCorePrinciples(ICP) relatedtolicensing, suitabilityof persons,corporategovernance, and risk management and internal controls(ICPs4, 5, 7 and8).TheStandardsObservanceSubcommittee, whichoverseestheSAPRprocess, strongly encouragesall IAIS Memberstoparticipatein thisexercise.This is an important initiativefor the IAIS.If your authorityhasnot received an invitationtoaccessthe onlinesurveytool for thisSAPR, pleasecontact conor.donaldson@bis.org.What is the process?TheSAPR isnot a traditional self-assessment.Theprocessbeginswith development of an onlinesurvey preparedby anExpert Team.TheExpert Team for this SAPR consists of representativesfrom theStandardsObservance Subcommittee,the Governanceand ComplianceSubcommittee,aswell astheWorld Bank.Alink tothe onlinesurvey will be circulatedto all IAIS Membersin earlyFebruary.Solvency ii Associationwww.solvency-ii-association.com
  41. 41. P a g e | 41Memberswill then have four weekstocompletethe survey.Once the surveyperiod is closed, theExpert Team will meet toreviewthesurveyresults.Each IAISMember whoparticipatesin the SAPR will receivea draftreport containingthe Expert Team‟spreliminaryassessment of overallobservanceand each of the standardscontained within ICPs4, 5, 7 and 8.Once a Member receivestheir draft report, they areinvitedtoprovidecommentsand makecorrectionsasnecessary.TheExpert Team will thenconsider thecommentsand correctionsbeforeissuinga final report to the jurisdiction.Once individual jurisdictionreportsare finalised, theExpert Team willpreparean aggregatereport of their findings.TheSAPR on Corporate and Risk Governanceshould be completedbythefirst quarter of 2014.Whyshould Membersparticipate?Theglobal financial crisisdemonstrated the importanceof a strongcorporategovernance and riskmanagement framework.Therevised 2011ICPs incorporatedlessonslearnt by supervisorsduringthecrisis,includingin these areas.TheSAPR will help IAISMembersenhancetheir observanceandunderstandingof the standardsin ICPs4, 5, 7 and 8.Jurisdictionswhoparticipatedin previousSAPR exerciseshave alsofound the individual reportshelpful toimprove understandingandobservanceof theICPs.Solvency ii Associationwww.solvency-ii-association.com
  42. 42. P a g e | 42In fact, many jurisdictions have drawn on the SAPR exercise and thereport provided to enhance their supervisory practices and legislativeframeworks.IAISMember participationalsoprovidesinsight intothe understandingand observance of theICPs.This insight formsa keyaspect of the feedback loopbetweenstandardsettingand implementationand is critical for helpingthe IAISprioritiseitsfutureimplementationand standard settingwork.TheSAPR alsocomplimentsthe World Bank (WB) and InternationalMonetaryFund‟s(IM F) Financial SectorAssessment Program (FSAP)and contributestotheFinancial StabilityBoard‟ssupervisory intensityand effectivenessfocus.Throughparticipationin the SAPR, jurisdictionsgain further insight intotheFSAP processand limit some of the workin the self-assessmentstageof the FSAP.Further, the Self-Assessment and Peer Review process directly supportsthe IAIS mission to promote effective and globally consistent regulationand supervisionthrough facilitatinggreater understandingof the ICPs.Solvency ii Associationwww.solvency-ii-association.com
  43. 43. P a g e | 43EMIR Rules- Statement byCommissioner Michel Barnier onthe technical standardstoimplement the new rulesonderivativesI take note of thefact that the EuropeanParliament hasdecidednot to object toour proposed technicalstandardstoimplement our new rules on derivatives.TheCouncil had earlier confirmedthat it doesnot object totheseproposed standards.This meansthat thestandardscan now enter intoforce 20days aftertheir publicationin the Official Journal of the EU, most likely aroundmid-March.This reform isessential tobring more responsibilityand transparencytoderivativetransactions.As a result, financial institutionsand non-financial companieswill besubjecttonew transparencyrulesin termsof reportingand supervision,andtoclearingobligationsfor derivativecontracts.By adopting thesestandardstheEU meetsitsG20 commitment in thecontext of thereform of financial services.Thenew rules will reducetherisksrelatedto derivativetransactions.Next weekI will be travellingtothe USAand will meet amongst otherswith GaryGensler, Chairman of theCommodity FuturesTradingCommission (CFTC).I will be ableto reassureour American counterpartsthat the EU ismeetingitsG20commitment on derivatives,and that wearenow in aSolvency ii Associationwww.solvency-ii-association.com
  44. 44. P a g e | 44positionto applystringent rulesin Europe that are equivalent to theonesin theUSA.With my visit I hopeto make progresstowardsa system wherebytheEUandtheUSArecognisetheapplication of their respectiveruleson bothsidesof theAtlantic asequivalent.BackgroundIn September 2009, at the G20Pittsburgh Summit, theleadersof the 19biggest economiesin the worldand theEuropean Union agreedthat "allstandard OTC derivativecontractsshould be traded on exchangesorelectronic tradingplatforms, whereappropriate, and clearedthroughcentral counterpartiesbyend-2012at thelatest."Furthermore, they acknowledged that "OTC derivative contracts shouldbe reported to trade repositories and that non-centrally cleared contractsshouldbe subject to higher capital requirements."TheEU isimplementingthis commitment with itsnew rules.Thephasing-inperiodreferred to in theCommissionsdeclaration, fornon-financial firms, is a periodof three years.Solvency ii Associationwww.solvency-ii-association.com
  45. 45. P a g e | 45EIOPAMulti-Annual Work Programme2012-20141. IntroductionEIOPA is an independent EuropeanSupervisoryAuthority actingwithinthe scope of variousDirectivescoveringinsuranceand reinsuranceundertakings, institutionsforoccupational retirement provision and insuranceintermediariesaswellasrelated issuesnot directlycovered by these Directives.EIOPA haslegal personality, administrativeand financial autonomy andis accountableto theEuropean Parliament and the Council of theEuropean Union.EIOPA‟sobjectiveisto protect public interestsby contributingto theshort, medium and long-term stability and effectivenessof thefinancialsystem, for the Union economy, its citizensand businesses.This objectiveispursued by promoting a sound regulatory frameworkand consistent supervisorypracticesin order toprotect the rightsofpolicyholders, occupational pension scheme members and beneficiariesand contributeto the public confidencein the European Union‟sinsuranceand occupational pensionssectors.EIOPA is part of theJoint Committeewhich hasthe goal ofstrengtheningcooperation betweenthe ESAs.EIOPA‟stasks,responsibilitiesand scope of action are wide-ranging.It is thereforeessential todefinestrategicchoicesin eachof thedifferentareasof work.Solvency ii Associationwww.solvency-ii-association.com
  46. 46. P a g e | 462. Regulatory TasksEIOPA‟sregulatorypowersin theinsurance,reinsuranceandoccupational pensionssectorsincludedevelopingtechnicalstandards,issuingguidelinesand recommendationsand providing opinionsinEIOPA‟sfield of competence.Thepolicyenvironment will be subject tosignificant changebetween2012and 2014with the finalisation, implementation and subsequentmonitoring of the SolvencyII frameworkfor insuranceand reinsurance,anddevelopment of revisedlegislationfor occupational pensions.EIOPA will take an ambitiousEuropean approachtopolicyin thesesectors:there will be substantial benefitstogreater harmonisation in themeasurement of therisks facing both insuranceundertakingsandIORPs, in their internal governance, and in theinformation theyprovidetomembers, policyholders and supervisors.We will workwith consumersand industry, withthe EU member states,and withEuropean and international organisations.We will usethe full rangeof EIOPA‟s toolsto implement our policy:standards,guidelines,opinions,and advice.Strategic directions2012-2014-Completion of the standardsand guidelinesrequired for theintroduction of Solvency II, and the monitoring of their implementation-Establishment of the operational tasksrequired of EIOPAunderSolvencyII- Enhancement of convergence in supervisionby greater useof toolse.g. supervisory review process, Q&A- Assessment of impact of SolvencyII frameworkon consumersSolvency ii Associationwww.solvency-ii-association.com
  47. 47. P a g e | 47-Advice tothe European Commissionon review of EU legislationforoccupational pensions- Quantitativeimpact of EIOPA‟sproposalswithspecial focusondefinedbenefit pensions-Bestpracticesand recommendationsfor treatment of definedcontribution pensions, particularlyin theareasof default fundsandinformation to members- Advice the European Commission on a frameworkfor theactivitiesand supervisionof personal pension schemes- IncreaseEIOPA‟s voice in internationalpensionsfora-Embedselectionand use of EIOPA‟s existingtoolsfor assessingtheeffectsof regulatory changes:regulatoryimpact assessment; quantitativeimpact studies;stresstests;public consultation- Improve useof evidencein policy development and option selection3. Supervisory TasksEIOPA is a supervisory authoritythat contributesto high qualitysupervisorystandardsand practices,through consistent and efficientapplication of the Union acts.Collegesof Supervisors(Colleges)are considered effectivetoolstoenhancemutual understandingamong supervisorsand convergence ofsupervisorypractices,withtangiblebenefits to undertakings,supervisorsandpolicyholders.EIOPA hasa leadingrole in buildingtheposition of theEEAsupervisorycommunitytowardsthe cross-border operatinginsurancegroupsfor the benefit of both group and solosupervision.Solvency ii Associationwww.solvency-ii-association.com
  48. 48. P a g e | 48With SolvencyII coming intoforce group supervisionand thecooperationamongst supervisorsthrough collegeson pillar 1,pillar2andpillar 3 related issuesbecomesa legal requirement.In order toshapetheoverall supervisorypracticesEIOPAwill providetoolstosupport the convergent implementation of Solvency II, e.g. asupervisoryhandbook and a centre of expertisein thefield of internalmodels.Strategic directions2012-2014- Participatein college meetingsand joint on-siteinspections- Support thepreparation of the collegesfor SolvencyII with theaimthat theyare readyfor thetaskby the entry intoforce of SolvencyII- Facilitateinformation exchangeand providesupport on thediscussion on risksin thecolleges- Enhancefunctioningof collegesby collecting, defininganddisseminatingbest practicesregardinge.g. internal model pre-applicationassessment process, delegationof tasks- Enhancepractical approachto collegesvia the establishment of aQ&Aprocedure topractical or supervisory questionson establishedguidelines,recommendationsand standards- Development of a supervisoryhandbook addressingbest practisesinthesupervisoryprocess- Promote consistencythrough sharingbest practicesand providingsupport to competent national authorities- Investigateallegedcasesof breach or non-applicationof Union Lawand addressrecommendationstocompetent authoritieswherenecessarySolvency ii Associationwww.solvency-ii-association.com
  49. 49. P a g e | 494. Consumer Protection and Financial InnovationUnder Article 9 of the EIOPA Regulation, EIOPA is already taking aleading role in promoting transparency, simplicity and fairness in themarket for consumer financial products or services across the internalmarket.In thisrespect, EIOPA‟sstrategy in the area of consumer protection andfinancial innovationis toproactively createadded valuefor consumersand enhanceconsumer protection in thearea of insurance andoccupational pensions.Moreover, EIOPAensuresconvergenceof regulatory practiceson thebasisof fundamental Union principlesasfollows.Strategic directions2012-2014- Develop common methodologiestoassesstheeffect of productcharacteristicsand distributionprocesseson consumer protectionand on the financial position of institutions- Promote transparency, simplicityand fairnessfor consumer financialproductsor servicesacrosstheinternal market- Collect, analyse and report on consumer trendsand identifying areaswhereaction of EIOPAcan make a differencetoconsumers- Review and coordinate financial literacyand education initiativesbythecompetent authorities- Develop training standardsfor the industry- Contributetothedevelopment of common disclosurerules- Coordinateregulatoryand supervisorytreatment of new or innovativefinancial activitiesSolvency ii Associationwww.solvency-ii-association.com
  50. 50. P a g e | 50- Adopt guidelinesand recommendationswith a view to promotesafety and soundnessof financial marketsand convergence ofregulatorypractice- Issuewarningsand, within the casesspecified and under theconditionslaid down in sectoral legislation, temporarily prohibit orrestrict certain financial activities- Contributetothe assessment of the need for a European networkofnational insuranceguaranteeschemes- Lead preliminary work on the operations tasks required of EIOPAunder the proposed revised Insurance Mediation Directive (IMD2)anddelegatedactsrequired under IM D25. Common Supervisory CultureTheEIOPA Regulation stressesthe importanceof a commonsupervisoryculture in the European Union.EIOPA stronglysupportsthe shift from regulationtocommonsupervisoryculture and plays an activerolein building consistentsupervisorypractices,aswellasensuringuniform proceduresandconsistent approachesthroughout theUnion.Strategic directions2012-2014- Establishand conducting sectoral and cross-sectoral trainingprogrammesfor European insuranceand occupational pensionssupervisorstoenhanceconvergence in supervisory practices- Prepare and train operational supervisorsfor SolvencyIIimplementationwiththeview towardsconsistent and efficientsupervision under SolvencyIISolvency ii Associationwww.solvency-ii-association.com
  51. 51. P a g e | 51- Establishand conduct EIOPAConferencesand joint trainingsforsupervisorsand industry representativesto reach better mutualunderstanding- Facilitatepersonnel exchangesand secondmentsbetweencompetentnational authorities- Conduct regular thematicpeer reviewsacrossall national competentauthoritiesto strengthen theconsistencyand qualityof supervisorypractices- Resolvedisagreementsbetweencompetent national authorities inCross-border situationsby wayof bindingand non-bindingmediation- Establishmediation proceduresand an independent EIOPAMediationPanel that facilitatesthe mediation6. Financial StabilityEIOPA is granted the task of enhancingEuropean financial stabilityintheinsuranceand occupational pension fund sectors.EIOPAshall assesspotential threatsto the stability of the financialsystem and make appropriaterecommendationsfor actionstothecompetent authoritiesconcerned.It shall ensurethat possiblesystemic risk posed by some financialinstitutionsis taken intoaccount whendevelopingdraft regulatoryandimplementingstandards.Theoverall aim of EIOPA‟s Financial Stabilityworkis to monitor andassessmarket developmentsand their implications.Solvency ii Associationwww.solvency-ii-association.com
  52. 52. P a g e | 52In consultationwiththe European Systemic Risk Board (ESRB), itdevelopscriteria for the identification and measurement of systemic riskwith particular focus on the insuranceand occupational pensionssector.Strategic directions2012-2014- Issuefinancial stabilityreportsand report outcomesof financialstability and vulnerability analysestotheESRB, the EuropeanCommission, the European Parliament and the Council of theEuropean Union- Stresstestsof the Insuranceand Occupational Pensionssectors- Maintenanceand further development of financial stability riskdashboard- Assessmarket impact of potential regulatory changesthat influencetheinsuranceand occupational pension sectorsand developingpolicy optionsthat enhancefinancial stability and limit possiblesystemic risk- Support competent national authoritieswith financial stabilityissues,includingbilateral contactsand visits to thenational authorities tobuild a better mutual understandingof riskassessment and morenational specific issues- Monitor and assessfinancial marketsand followingup identifiedrisks- Providethird parties withrelevant statisticalanalysesand furtherdevelop thestatistical frameworkSolvency ii Associationwww.solvency-ii-association.com
  53. 53. P a g e | 537. CrisisPrevention, Management and ResolutionEIOPA is empowered to take action to identify an “emergencysituation” and, oncesuch a situation is declaredby the Council of theEuropean Union, to act todeal withit.EIOPA alsohasa responsibilityto facilitate and, whereappropriate,coordinateactionstaken by national supervisoryauthoritiestodeal withadversedevelopmentsthreateningEU financial stability.Strategic directions2012-2014- Promote vigilanceon the part of insuranceand pensionssupervisoryauthoritiesin EEA Member Statesto anticipateand prevent financialcrises:oidentify risk“hotspots” and feed this information back toEEAsupervisoryauthoritiesoassessthe riskof an “emergencysituation” and make a proposaltothe European Council whennecessary- Raiseawarenessand improvepreparednessof national competentauthoritiesto deal withfinancial crises:opromoteinformation exchangeand development of actionstodeal withcrisissituationsoserve asa platform for supervisoryauthoritiestowork togethertodeal withcrisissituationsodevelopment of consistencyand best practicein the areaofcrisismanagement- Facilitateand, wherenecessary, coordinate supervisoryactionstodeal witha crisis:Solvency ii Associationwww.solvency-ii-association.com
  54. 54. P a g e | 54orefine and develop EIOPA‟sown capability todeal with crisisprevention and management issuesocoordinatenational competent authorities in their actions- Stand readyto takedirect action withinEIOPA‟spowers:obe readytomake decisionsaddressedtocompetent authoritiesorfinancial market participantsunderArticle 18 of theEIOPAregulation- Playa key rolein the development of resolution policy for insurancein Europe:oworkwiththe European Commission through itsconsultationprocesstoensurethat any new legislationis well tailoredforinsuranceoput in placewhateverinternal processesand structuresarerequiredto operatethe new resolution regime8. External RelationsIn compliance withthe powersgranted by the Regulation EIOPAisplaying an active rolein thefield of international insuranceandoccupational pensions.An important goal of EIOPA is to guaranteea level playing field for allmarket participants.Toachievethis,equivalenceand compatibilityof the different regulatoryand supervisory regimesplaya key role.EIOPA furthersand contributestothe development of a globalregulatorystandard.Solvency ii Associationwww.solvency-ii-association.com
  55. 55. P a g e | 55In thiscontext, EIOPApromotesa joint European approach toactivelyshapetheglobal debate in international fora such asIAISand IOPSandtoget the European voicebetter heard to eventuallymake a realdifference.Over thenext years, EIOPA will produce sound, prudent and qualityregulatoryframeworksin insuranceand occupational pensions.EIOPA is highly committed to involve the professional expertise, know-how and experience of its Stakeholder Groups provided through the wellbalancedand diverse background of their members.We strongly believe in a mutual benefit through a trustful andtransparent cooperation.Strategic directions2012-2014- Providea platform for EIOPA, EIOPAMembers,EU Institutionsandthird country competent authoritiesor administrationsaswell asother international stakeholderstooFacilitatemutual understanding, know-how exchangeandmutual learningfrom experiencein different jurisdictionson anon_goingbasisoAddresstopicsof overarchinginternational relevance- Support, coordinateand facilitatethe work in the areaof Thirdcountry equivalence, in particular theEquivalence Committeeaswellasother projectsrelevant in thiscontext- Coordinate, facilitate and support the functioningand the work ofthetwoEIOPAStakeholderGroupsoEnsure successful delivery of the Stakeholder Group opinionstoEIOPA on publicly consulteddocumentsSolvency ii Associationwww.solvency-ii-association.com
  56. 56. P a g e | 56- Liaise and cooperatewith theother ESAsand the EuropeanSystemof Financial Supervision (ESFS)oSupport the ESAJoint Committeeactivitiestoensureoverallcross-sectoralconsistencyand take over chairingthe Joint Committeein2013- Liaise withEU Institutionsand other stakeholderson relevantsubjectsfor EIOPAand contributeto thosediscussions9. EIOPAInternal OrganisationAfter theinitial set up in 2011, EIOPAwill be further establishedin 2012-2014asa fully-fledged EU Agency.TheAuthority will grow intoa modern, efficient and adaptiveorganisation, well equipped to meet the various and challengingdemands.Thesedemandsoriginatefrom EIOPA‟s evolving external environment,adjustmentstoEIOPA‟s productsand services,the furtherimplementationof theEIOPARegulationand of the specificrulesandregulationsrelatedtostaff and financialmatters.On thebasis of the approved IT Strategyand IT Strategy implementationplan EIOPAwill develop a centralisedsystem for secure transfer andmanagement of information within EIOPAand betweenEIOPA and itsMembers.EIOPA alsoimplementsthe recommendationsand benefitsfromcontributionsof theInternalAudit Services(IAS) of the EuropeanCommission and theEuropean Court ofAuditors.Strategic directions2012-2014Ensure EIOPAhastherequired competent and motivated staffSolvency ii Associationwww.solvency-ii-association.com
  57. 57. P a g e | 57- further equip EIOPA with competent staff whose team work skills,flexibility and continuous learning abilities enable the institution tobeagile and adaptive- further build on EIOPA‟sidentityand culture, creatinga workingenvironment wherestaff can thrive- promotethesecondment of national experts toEIOPAEnhanceEIOPA‟sprocessesand supporting ICT solutions- further design and deployEIOPA‟skey processes,aimingat a highlevel of compliance, transparency, efficiencyand effectiveness- createfast and secure information storage and exchangesolutionssupportingEIOPA‟s core businessactivities- extend administrativesupportingsystems- ensure efficient budgetary, financial and internal controlarrangements- implement best practicesin the area of budgeting, ensuring budget isplanned and justified from scratcheach year based on actual needs- build up and enhancethe financial policyframeworkwitha focusonefficient and compliant processes- continuouslyimprove the internal frameworkin order toensuretimely, efficient and economicdeliveryof its taskswhilst striving todeliver the highest qualityof EIOPA‟sproductsand servicesContingencyplanning- ensure contingencyif EIOPA headquartersbecome unavailable, byestablishingalternativelocationsand modalitiesfor high levelmeetingsSolvency ii Associationwww.solvency-ii-association.com
  58. 58. P a g e | 58- ensure availabilityof keyproductsand serviceswithinagreed timeframesand accordingto the highest security and confidentialitystandardsEIOPAtakingfull corporate& social responsibility- reducethe carbon footprint by using environmental friendlysolutions- set up robust workingprocessesof communication withmedia andpublic- continueeducatingour youth, offeringopportunitiesfor traineesandstudents- build a positiveEIOPAimage in social media and networksSolvency ii Associationwww.solvency-ii-association.com
  59. 59. P a g e | 59Solvency ii Associationwww.solvency-ii-association.com
  60. 60. P a g e | 60Solvency ii Associationwww.solvency-ii-association.com
  61. 61. P a g e | 61Suitability Requirements WithRespect To the Distribution of ComplexFinancial ProductsFinal ReportExecutive SummaryIn February 2012,the IOSCO TechnicalCommitteepublished a ConsultationReport,entitledSuitabilityRequirementswithrespect tothe DistributionofComplex Financial Products(theConsultation Report).Thepurposeof theConsultation Report wasto discusspossibleprinciplesfocusingon customer protections,includingsuitability anddisclosurerequirements,relating to thedistribution by intermediariesofcomplex financial productsto retail and non-retail customersbased on areview of members‟existingregulatoryframeworks,aswell asthelessonslearnedfrom the financial crisisand relevant actionstaken in response.This Final Report includesthefollowingkey principlesrelatingtosuitability requirementswithrespect tothe distributionof complexfinancial products, takingintoaccount the publiccommentsto theConsultationreport:Classification of customersPrinciple1:Intermediariesshould be required toadopt and apply appropriatepoliciesand procedurestodistinguishbetweenretail and non-retailcustomerswhendistributingcomplex financial products.Solvency ii Associationwww.solvency-ii-association.com
  62. 62. P a g e | 62Theclassification of customers should be basedon a reasonableassessment of thecustomer concerned, takingintoaccount thecomplexityand riskinessof different products.Theregulatorshould consider providingguidancetointermediariesinrelationtocustomer classification.General duties irrespective of customer classificationPrinciple2:Irrespectiveof theclassification of a customer asretail or non-retail,intermediariesshould be required toact honestly, fairlyandprofessionallyand take reasonablestepstomanage or mitigateconflictsof interest through implementingappropriate proceduresin thedistribution of complex financial products,and wherethere existsapotential risk of damageto the customer‟sinterest, theintermediariesshould, whereappropriate, be required toclearlydisclosetherisk.Disclosure requirementsPrinciple3:Customersshould receiveor have accessto material informationtoevaluatethefeatures, costsand risksof the complex financial product.Any information communicatedby intermediaries totheir customersregardinga complex financial product should be communicatedin a fair,comprehensibleand balancedmanner.Protection of customersfor non-advisory servicesPrinciple4:When an intermediarysellsa complex financial product on anunsolicitedbasis (no management, adviceor recommendation), theSolvency ii Associationwww.solvency-ii-association.com
  63. 63. P a g e | 63regulatorysystem should provide for adequate meansto protectcustomersfrom associatedrisks.Suitability protections for advisory services(including portfoliomanagement)Principle5:Whenever an intermediaryrecommendsthepurchaseof a particularcomplex financial product, includingwherethe intermediary advisesorotherwiseexercisesinvestment management discretion, theintermediaryshould be required totake reasonablestepstoensure thatrecommendations,adviceor decisionsto trade on behalf of suchcustomer are based upon a reasonableassessment that the structure andrisk-rewardprofile of the financial product is consistent withsuchcustomer‟sexperience,knowledge,investment objectives,risk appetiteand capacityfor loss.Principle6:An intermediary should have sufficient information in order tohave areasonablebasisfor anyrecommendation, advice or exerciseofinvestment discretionmade toa customer in connection with thedistribution of a complex financial product.Compliance function and internal suitability policiesandproceduresPrinciple7:Intermediariesshould establisha compliancefunction and developappropriateinternal policiesand proceduresthat support compliancewith suitabilityrequirements,includingwhendevelopingor selectingnew complex financial productsfor customers.Solvency ii Associationwww.solvency-ii-association.com
  64. 64. P a g e | 64IncentivesPrinciple8:Intermediariesshould be required todevelop and applyappropriateincentivepoliciesdesigned to ensurethat onlysuitablecomplexfinancial productsare recommendedtocustomers.EnforcementPrinciple9:Regulatorsshould superviseand examineintermediarieson a regularand ongoing basis tohelp ensure firm compliancewith suitabilityandother customer protectionrequirementsrelatingtothe distribution ofcomplex financial products.Thecompetent authority should takeenforcement actions,asappropriate.Regulatorsshould consider thevalue of makingenforcement actionspublic in order toprotect customersand enhancemarket integrity.Solvency ii Associationwww.solvency-ii-association.com
  65. 65. P a g e | 65Review of Requirements onInvestment Activities ofInsurersImportant partsMAS adoptsa principles-basedapproachon theregulation of theinvestment activitiesof insurers.All insurersare expectedto observe MAS‟ Guidelineson RiskManagement and maintainsound investment practice.With the growthof assetsand correspondingincreasein theinvestmentactivityof direct general insurersand reinsurersover theyears, MASproposesto extend thescope of theseadditional requirementstoincludedirect general insurersand reinsurers.EXTENSION OF REQUIREMENTSIN MAS NOTICE 317TO DIRECT GENERAL INSURERS AND REINSURERSMAS Notice317setsout thebasicprincipleswhichgovern theoversightof the asset management processof life insurance funds.There is no equivalent MASNoticefor direct general insurersandreinsurers.With the growthof assetsand corresponding increasein theinvestmentactivityof theseinsurers,MAS proposestoextend the requirementsinMAS Notice317totheseinsurers.Key requirementswouldincludetheneed for an investment policy andan investment committee.Investment PolicySolvency ii Associationwww.solvency-ii-association.com
  66. 66. P a g e | 66Insurerswill be required tohave an investment policy.An insurer may adopt their Head Office‟s/ Parent Company‟sinvestment policy whenmeeting the requirementsof thenew Notice, aslongasthe investment policy isrelevant tothe Singaporeoperations.In particular, there has to be an assessment by the insurer on whetherthe Head Office‟s/ Parent Company‟s investment policy is relevant tothelocal operations,and such assessment should be documented.TheapplicableHead Office‟s/ Parent Company‟sinvestment policy, ifadopted for the Singapore entity, wouldalsohave to be Board-approved.Investment CommitteeAdirect life insurer is required to establishan Investment Committeethat includesthe Principal Officer (“PO”), Appointed Actuary (“AA”)and Chief Investment Officer (or an officer in a similar capacityresponsiblefor investment functions).MAS proposesthat direct general insurersand reinsurersbesimilarlyrequiredtoestablishan investment committee, that includesthe PO andChief Investment Officer (or an officer in a similarcapacityresponsiblefor investment functions).However, MAS wouldleaveit to the insurersto decidewhethertoincludethe CertifyingActuary (“CA”) asa member of the investmentcommittee.This recognisesthat most direct general insurers‟and reinsurers‟CAareexternal consultants.Also, given the long-term nature of life business, there is greater need fortheAA of direct life insurerstobe involved in the development of aninvestment strategyfor more effectiveasset-liabilitymanagement.Solvency ii Associationwww.solvency-ii-association.com
  67. 67. P a g e | 67At theminimum, theCAof direct general insurersand reinsurersshouldadvisethe PO and Board of Directorson mattersfor whichhisexpertiseand experiencewouldbe useful, such asinvestment policyand riskmanagement, in linewiththeproposed expandedrolesandresponsibilitiesof theCA.Proposed New MAS NoticeFor thepurposeof this Notice:(a)“investments”meansthe investmentsof the insurancefundsand, inthecaseof an insurersestablished or incorporated in Singapore, includestheinvestmentsof the shareholders‟funds.(b)“hedging” meansthe reduction of investment risk through engagingin a transaction for a derivative on an investment wherethere is a highdegreeof negative correlationbetweenthe changesin valueof thederivativeand changesin value of the hedged investment;(c)“efficient portfoliomanagement”, in relationto a derivativetransaction, hasthemeaningascribedin paragraph 21below;(d)“economiccapital” meansthe capital needed by theinsurer to satisfyitsrisk toleranceand support itsbusinessplansand whichisdeterminedfrom an economicassessment of the insurer‟srisks, therelationshipoftheserisksand the riskmitigation in place;and(e)“liquid assets” meansassetswhicharereadily converted intocash at avalue close to itsfair price under normal market conditions.Board of Directorsand Senior Management OversightTheresponsibility for the formulation, approval and establishment of theinvestment policyof the insurer must rest ultimately withitsBoard ofDirectors.Solvency ii Associationwww.solvency-ii-association.com
  68. 68. P a g e | 68Theinsurer shall ensure that itsBoard of Directors, at all times, exercisesadded oversight to ensure that the interestsand rightsof policyownersare not compromised.For thepurposeof theinsurer‟sinvestment activities,the insurer shallestablisha committee(the"Investment Committee") that includesthechief executiveand chief investment officer (or an officer in a similarcapacityresponsiblefor the investment functions) and seek approvalfrom itsBoard of Directorsfor the establishment of the InvestmentCommittee.For a direct life insurer, the Investment Committeeshall alsoincludetheAppointed Actuary (“AA”).Adirect general insurer and reinsurer should consult the CertifyingActuary (“CA”) or theAA, asthe casemay be, on investment relatedmattersfor whichtheCA‟s or theAA‟s expertiseand experiencewouldbe useful.At least annually, theinsurer shall ensure that itsBoard of Directorsreviewsthe adequacyand relevanceof itsinvestment policy- in termsofoverall risk tolerance, long term risk-returnrequirementsand solvencyposition- in thelight of the insurersactivitiesand risk profile.Reportsto the Board of DirectorsTheinsurer shall ensure that the Investment Committeereportsregularly, but nolessthan once every quarter, to theBoard of Directorsand ensuresthat thereportson investment activitiesareprepared in atimely manner.If the Board of Directorsdelegatesauthority tothe InvestmentCommitteetomake investment decisionson itsbehalf, the insurer shallensure that theInvestment Committeereportstoeach meeting of theBoard on any and all decisionsof material consequencemade sincethelast meeting of the Board of Directors, but suchreport shall be no laterthan three monthsof making the decision of material consequence.Solvency ii Associationwww.solvency-ii-association.com
  69. 69. P a g e | 69In additiontothe above reports,the insurer shall ensure that theInvestment Committeealsopreparesreportsfor theBoard of Directors,asand whenany investment-related activityof material consequencearises, withdetails of the variousissuesand the impact on thefundsandtheinsurer.Solvency ii Associationwww.solvency-ii-association.com
  70. 70. P a g e | 70Anti-Money Laundering: Strongerrules to respond to new threatsTheEuropean Commission has adoptedtwoproposalstoreinforcethe EUsexistingruleson anti-moneylaunderingand fund transfers.Thethreatsassociatedwithmoney launderingand terrorist financingareconstantlyevolving, whichrequiresregular updatesof the rules.Internal Market and ServicesCommissioner Michel Barnier said:"TheUnion is at the forefront of international effortsto combat thelaunderingof the proceedsof crime.Flowsof dirtymoney can damage thestabilityand reputation of thefinancial sector, whileterrorism shakesthe very foundationsof oursociety.In addition tothe criminal law approach, a preventiveeffort via thefinancial system can help tostop money-laundering.Our aim is toproposeclear rules that reinforcethevigilanceby banks,lawyers, accountantsand all other professional concerned."Home affairs Commissioner Cecilia Malmströmsaid:"Dirtymoney hasnoplacein our economy, whetherit comesfrom drug deals, theillegalgunstrade or traffickingin human beings.We must make sure that organised crimecannot launder itsfundsthrough thebankingsystem or thegamblingsector. To protect thelegaleconomy, especiallyin timesof crisis,there must beno legal loopholesfor organised crime or terroriststo slip through.Our banksshould never function aslaundromatsfor mafia money, orenablethe fundingof terrorism."Solvency ii Associationwww.solvency-ii-association.com
  71. 71. P a g e | 71Todayspackage, whichcomplementsother actionstaken or plannedbytheCommission in respect of fight againstcrime, corruption and taxevasion, includes:A directive on the prevention of the use of the financialsystem for the purpose of money laundering and terroristfinancingA regulation on information accompanying transfers offundsto secure "duetraceability" of thesetransfersBoth proposals fully take into account the latest Recommendations1 ofthe Financial Action Task Force (FATF) (see MEMO /12/246), theworld anti-money laundering body, and go further in a number of fieldsto promote the highest standards for anti-money laundering and counterterrorism financing.More specifically, both proposals provide for a more targeted andfocussed risk-basedapproach.In particular, thenew Directive:improves clarity and consistency of the rules across theMember States by providing a clear mechanism for identificationof beneficial owners.In addition, companies will be required to maintain records as totheidentityof thosewhostand behind thecompany in reality.by improving clarity and transparency of the rules oncustomer due diligence in order to have in place adequate controlsand procedures, which ensure a better knowledge of customersand a better understandingof thenature of their business.In particular, it is important to make sure that simplifiedprocedures are not wrongly perceived as full exemptions fromcustomer due diligence.Solvency ii Associationwww.solvency-ii-association.com
  72. 72. P a g e | 72and by expanding the provisions dealing with politicallyexposed persons, (i.e. people who may represent higher risk byvirtue of the political positions they hold) to now also include“domestic” (those residing in EU Member States) (in addition toforeign) politically exposed persons and those in internationalorganisations.This includes among others head of states, members ofgovernment, membersof parliaments,judgesof supreme courts.extendsitsscope toaddressnew threats and vulnerabilitiesby ensuring for instance a coverage of the gambling sector(the former directive covered only casinos) and by including anexplicit referencetotax crimes.promoteshigh standards for anti-moneylaunderingby going beyond the FATF requirementsin bringing withinitsscope all persons dealing in goods or providing services forcash p aymen t of € 7,500 or more, as there have beenindications from certain stakeholders that th e cu rren t €15,000t h resh old was not sufficient.Such persons will now be covered by the provisions of theDirective including the need to carry out customer due diligence,maintain records, have internal controls and file suspicioustransactionreports.That said, the directive provides for minimum harmonisation andMember Statesmaydecidetogo below this threshold.strengthens the cooperation between the different nationalFinancial Intelligence Units (FIUs) whose tasks are to receive,Solvency ii Associationwww.solvency-ii-association.com
  73. 73. P a g e | 73analyse and disseminate to competent authorities reports aboutsuspicionsof moneylaunderingor terrorist financing.The two proposals foresee a reinforcement of the sanctioning powers ofthe competent authorities by introducing for instance a set of minimumprinciple-based rules to strengthen administrative sanctions and arequirement for them to coordinate actions when dealing with cross-border cases.Background:Further to the publication of a revised set of international standards inFebruary 2012 (IP/ 12/357), the Commission decided to rapidly updatetheEU legislativeframeworktoincorporate thenecessarychanges.In parallel, the Commission alsoundertook a review of theThird Anti-Money LaunderingDirectivethat showedtheneed toupdate theexistinglegislativeframework in order toaddressall identifiedshortcomings.Theproposedupdateof the legal ruleswill have to be adopted by theEuropean Parliament and the Council of Ministersunder the ordinarylegislativeprocedure.Frequentlyasked questions: Anti-Money Laundering1. What are money laundering and terrorist financing?1.1What is money laundering?Money laundering is the conversion of the proceeds of criminal activityintoapparentlyclean funds, usuallyvia the financial system.This is done by disguising the sources of the money, changing its form,or moving the funds to a place where they are less likely to attractattention."Criminal activity" includes fraud, corruption, drug dealing and otherseriouscrimes.Solvency ii Associationwww.solvency-ii-association.com
  74. 74. P a g e | 741.2 What is terrorist financing?Terrorist financing is the provision or collection of funds, by any means,directly or indirectly, with the intention or in the knowledge that theywouldbe used in order tocarry out terrorist offences.2.What is the EU already doing to fight money-laundering andterrorist financing?1. What is the current legal framework and to whom it applies?The current EU legislation, the so-called Third Anti-Money LaunderingDirective(hereinafter, the 3rdAMLD), has been in force since2005.It provides a European framework built around the internationalFinancialAction TaskForce (FATF) standards(see IP/04/832).The Directive applies to banks and the whole of the financial sector aswell as to lawyers, notaries, accountants, real estate agents, casinos andcompany service providers.Its scope also encompasses all dealers in goods (such as dealers inprecious metals and stones), when payments are made in cash in excessof €15000.Thosesubject totheDirectiveneed to:- identify and verify theidentityof their customersand of thebeneficial ownersof their customers(for example, byascertainingtheidentityof thenatural personwhoultimatelyownsor controlsa company), and tomonitor thetransactionsof and the businessrelationshipwiththecustomers;- report suspicionsof money launderingor terrorist financingtothe public authorities - usually, the financial intelligenceunit; and- take supportingmeasures,such asensuring the propertrainingof personnel and the establishment of appropriateinternalpreventivepoliciesand procedures.Solvency ii Associationwww.solvency-ii-association.com

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