Solvency ii News July 2012


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1. Certified Solvency ii Professional (CSiiP) Distance Learning and Online Certification Program

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Solvency ii News July 2012

  1. 1. Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Todaywewill start from the SolvencyII EquivalencedevelopmentsSolvency II – Equivalence TransitionalsmeasureShort introduction of the concept and to the technical workcurrentlyundertaken by EIOPA1.Introduction1.This note aimstoprovidesome additional informationasto theconcept of SolvencyII EquivalenceTransitional measures (proposedunder the current draft OmnibusII Directive) aswell astotheworkcurrentlybeingundertaken by EIOPAin respect to the Commissionrequest for technical input of February 20121.2.TheCommission hasdeveloped a transitional regime for Solvency IIequivalencefor third countrieswhicheither have a risk based regimesimilar toSolvencyII or are willingand committedtomovetowardssucha risk based regime over a predefinedperiod (5years in initialCommissionproposal).3.Thetransitional measuresrecogniseboth that it will not be possibletoundertake full equivalenceassessmentsin respect of all pertinent thirdcountriesprior totheimplementationof SolvencyII, and that there are anumber of third countrieswheretheir solvencyand/ or prudentialregimesare not currentlyableto satisfythe equivalencecriteria in full,Solvency ii
  2. 2. but will be in a position todo soonce planned changesto theregimehavebeen made.Thetransitional measureswouldallowundertakingsin or connectedtothesethird countriesto obtain the benefitsof a positive equivalencefindingon a temporary basisduring thetransitional period.4.Inclusion in thetransitional regime wouldbe subject toaCommission Decision.This will most likely be taken in mid2013under the workingassumptionthat the SolvencyII regime will be appliedby EU undertakingsfrom 1January2014.Thecriteria envisagedfor eligibilityfor thetransitional regime are stillsubjecttoongoingpolitical discussion (negotiationson the OmnibusIIDirectivein the Council of Ministersand theEuropean Parliament).Commission‟srequest for EIOPA‟sinput5.In respect of thethird countriesthat haveindicated to theCommissionthat theyare interestedin beingcoveredby thetransitionalprovisions,theCommission hasrequestedthat EIOPAcarryout an analysisof thefollowingduring 2012:- Whether personsworkingfor, or on behalf of, the supervisoryauthoritiesare bound by obligationsof professional secrecy.Professional secrecyequivalenceisa prerequisitetoinclusion in atransitional regime.- Themain areaswheretheequivalencecriteria wouldcurrentlynot bemet.6.In its letter toEIOPA, theCommission hasnoted that the same level ofdetail aswouldbe required for a full equivalenceassessment isnotSolvency ii
  3. 3. requiredfor thepurposeof identifying the main areaswheretheequivalencecriteria may not currentlybemet.With the exception of the professional secrecyprovisions,what theCommissionhasrequested is a gap analysis.However, thisanalysis clearlyneedstobe basedon informationcoveringthesame ground aswouldbe covered in a full equivalenceassessment.Participatingthird countrieshave thereforebeen invited to provideinformation by wayof completing the questionnaire annexed to thisnote, which closely reflectsthat used in the earlier equivalenceassessmentsundertaken by CEIOPS/EIOPA.Participating third countriesand next steps:7.To date, the following third countriesthat have expressed an interest inbeing covered by the transitional provisions have received the EIOPArequestsfor information for theSolvencyII gap analysis:_Australia_ Chile_ China_ Hong Kong_ Israel_ Mexico_ Singapore_ SouthAfrica8.EIOPA will baseits adviceto the Commissionlargely on theresponsestothe questionnaire provided by theseparticipatingthirdcountries.9.However, followingadoption of the OmnibusII Directive(politicalagreement among colegislators)EIOPAexpectstolauncha “Call forevidence”procedure invitingany interestedpartiesto providetheir inputSolvency ii
  4. 4. regardingpractical experience/ directknowledgeof thesethird countriessupervisorysystems.2.Basic principlesunderlying EIOPAtechnical contribution tothe Commission decisions on equivalence transitionalsPositive Equivalence of third country professional secrecy is adeterminative element for a third country to be included in theequivalence transitional regime.1.Professional secrecyis the basisfor all supervisory cooperationamongEU and third country supervisors.EIOPA will aim to ensure that appropriateprofessional secrecyandconfidentialityrequirementsare in place.2.Afull equivalenceassessment of the third country professional secrecyregimewill be undertakenusingtheprinciple,objectiveaswell astheindicatorsCEIOPS (EIOPApredecessor) proposed in itsfinal 2010Level 2Advice tothe Commission.3.When pursuingthe assessment of theoverarching principleofprofessional secrecy, theprincipleof proportionalitywill not applyinrelationtoprofessional secrecy.Technical input to the Commission regarding identification ofregulatory & supervisory gapsby reference to Solvency IIframework isNOT an equivalence assessment.4.EIOPAwill NOT seekto establishwhetherthe country supervisorysystem providesfor a similar level of policyholder/beneficiaryprotectionasunder SolvencyII to be consideredequivalent.EIOPA will conduct a gap analysisthrough whichit will seekto identifytheareaswherethethird country doesnot meet the current criteria forSolvency ii
  5. 5. equivalencewhichwill be embeddedin the criteriatobe set out in theLevel 2 implementingmeasures.2.5. The gap analysiswill be conducted using the indicatorsofequivalencepreviouslyidentified by CEIOPSand taken over by EIOPAi.e. thosefactorswhichEIOPAconsidersprovideguidanceindeterminingwhether the relevant principlesand objectivesare achieved.Proportionality principle.6.Proper consideration shouldbe given to the adequacyof third countrypractice in applying the proportionalityprinciple,wherethis isrelevant.As such, a proportionalityprinciplein theapplicationof regulatoryprovisionsin third country jurisdictions(contingent upon thenature,scaleand complexityof therisksinherent in the business) should not initselfbe seen asan indicatorof regulatory/supervisory gaps.Thegap analysiswill be made in respect of the regime in existenceandappliedby a third country supervisoryauthority at the timeof theassessment. Nevertheless,relevant plannedregulatory developmentswillalsobe taken intoaccount in EIOPAAdvice tothe Commission.7.Plansand ongoing initiativesfor changingthenational insurancesupervisoryregime in the third country should be taken intoaccount atthetime of the gap analysisalthough theywill not automaticallylead toassessorsconcluding asto the absenceof a gap in the third countrysupervisory/ regulatoryframework.Such initiatives should be taken into account to the extent they arerelevant and clearly identified as ongoing work when providing thetechnicalgapanalysisto the Commission.8.As EIOPAexpectsthat a full equivalence assessment will beperformedduring thetransitional period.Solvency ii
  6. 6. Thecurrentlyplannedor ongoing developmentstaken intoaccount forthepurpose of performing thegap analysis will be revisitedat the time ofthefull equivalenceassessment.3.Main operational aspects of gap analysis process1.EIOPAworkis of technical nature only.TheEuropean Commission retainsfull decision making powersastothethird countriesto be included in the list of beneficiariesof an equivalencetransitional regime.The Commission also retains full responsibility as to the contents of anyfuture convergence plans that may be agreed with a third country as partof the processtobe accepted in the transitionalregime.2.EIOPAconsidersthat the activecooperation of the third countrysupervisoris essential for a proper analysis tobe undertaken.EIOPA will not engage in any SII gap analysisin the absence ofconfirmation of willingness to participate from the third countrysupervisoryauthority.Theconfirmation of thethird country willingnessto engageisprovidedbytheCommission.3.EIOPA will post a call for evidence on its website following OMD IIapproval (i.e. agreement of the criteria for a third country to be includedin thelist of beneficiariesfrom an equivalencetransitional regime).4.Thecall for evidencewill allowany interestedparties anopportunity, earlyin the process, to bring to EIOPA‟s attentionany factorsthat theythink may be relevant tothe gap analysisor the professionalsecrecyequivalenceassessment.Solvency ii
  7. 7. 5.Informationprovidedunder a call for evidencewill be considered byEIOPA but will not be published.Neither will EIOPArespond to thepointsmade.6.EIOPAassessment teamswill expertise, knowledgeand supervisoryexperiencein the followingareas:_ Legal expertise_ Financial requirementsexpertise (pillar I issues) includingactuarialexpertise_ Expertisein supervisoryreview, governanceand reporting(pillar II &III issues)_ Group supervision expertisefor assessmentsin relationtoArticles227and 260.7.The minimum number of assessors per team should be no less than 3,including a EIOPA Staff representative who can also cover one of theaboveareas.8.EIOPAhasinvitedthird country supervisoryauthoritiestocompletethe annexedquestionnairerelevant totheArticlesof the SolvencyIIDirectiveunder whichan assessment isto be undertaken.Thesequestionnairesare be based on thecriteriaset out in the Level 2implementingmeasuresand encapsulatethe indicatorsthat EIOPAconsidersprovide guidancein determiningwhetherthecriteria are met.9.Where necessary, EIOPAwill request additional evidencefrom therespectivethird country supervisoryauthority.10.While the responsesof the third country supervisory authorityto thequestionnairesissued by EIOPAwill form the basisof the analysis,EIOPA will not be restrictedtoconsideringonly thismaterial.Solvency ii
  8. 8. 3.11.EIOPAmay alsoconsider other relevant information available, whereappropriate, such asany assessment carriedout by theIMF or WorldBank, or whetherthe third country is partyto the IAIS MultilateralMemorandum of Understanding.Such informationwill only be used assupportinginformationfor thegapanalysis.QUESTIONNAIRE FOR EQUIVALENCE GAP ANALYSISIN RELATION TO ART. 172, 227 AND 260 OF SOLVENCYII DIRECTIVE (2009/ 138/ EC)Principle 1. Powersand responsibilities of third countrysupervisory authoritiesObjectiveThesupervisoryauthoritiesof thethird country have thenecessarymeans,and therelevant expertise, capacity, and mandatetoachievethemain objectiveof supervision, namelytheprotectionof policyholdersandbeneficiariesregardless of their nationalityor placeof residence.In particular, thesupervisoryauthoritiesin that third country shall havethenecessarycapacities, includingfinancial and human resources.Thesupervisoryauthoritiesof thethird country duly consider thepotential impact of their decisionson thestabilityof financial systemsglobally, particularlyduring emergencysituationsand take intoaccountthepotential procyclical effectsof their actionswhereexceptionalmovementsin the financial marketsoccur.Reinsurance specificities:Thesupervisoryauthoritiesof thethird country are empoweredby law orregulation to effectivelysupervise domestic insuranceor reinsuranceundertakingscarrying out reinsuranceactivitiesand toundertake aSolvency ii
  9. 9. rangeof actions,includingthe abilitytoimposesanctionsor takeenforcement action in relation to the domestic insuranceor reinsuranceundertakingscarrying out reinsurance activitiesthat it supervises.Group supervision specificities:The supervisory authorities of the third country shall be empowered bylaw or regulation to supervise insurance and reinsurance undertakingswhicharepart of a group.Thesupervision of insurance and reinsuranceundertakingswhicharepart of a group shall be carriedout effectivelyand thesupervisoryauthoritiesof thethird country shall be empoweredby law or regulationtoundertake a rangeof actions,includingthe ability toimposesanctionsor totake enforcement action in relationtothegroup that it supervises.Thesupervisoryauthoritiesof insuranceand reinsuranceundertakingswhicharepart of a group shall be ableto assesstherisk profileandsolvencyand financial position of that group aswell asitsbusinessstrategy.Third country provisionsand arrangementsshould allowefficient andeffectivesupervisionthrough cooperation and exchangeof informationamongsupervisorsof the group.1.Pleaseprovidea comprehensivepresentation of your supervisoryauthority, includingdetails asto:- Alegal basisspecifying supervisoryresponsibilitiesand enforcementpowers;- Freedomfrom undue political, governmental and industryinterferencein the performanceof supervisoryresponsibilities;- Transparencyof supervisoryprocesses/ procedures;- Adequate financial and nonfinancial (e.g. sufficient numbersofSolvency ii
  10. 10. appropriatelyskilledstaff) resources;- Appropriateprotectionfrom beingliablefor actionstaken in goodfaith.2.Pleaseprovide detailsasto supervisorypowersavailableto theauthorityin respect of undertakingsin difficulties(solo) / ultimateparent undertakingsin difficulties(groups), whichmay include:- Prohibition of disposal of assets;- Arecovery plan, financescheme;- Reestablishment of the level of own funds, reduction of risk profile;- Downwardrevaluations;- Preventingthe conclusion of new contracts;- Withdrawalof authorisation;- Measuresrelatingtodirectors, managers, controllersand otherrelevant persons.3.Pleaseoffer a detailed overview of theenforcement actionsavailabletothe authorityincludingasto the supervisoryauthority‟s abilitytocooperatewith other authorities/ bodiesin respect of enforcement action.4.Pleaseprovide information on your authority‟s powerstotakepreventativeand correctivemeasurestoensure that insuranceandreinsuranceundertakingscomplywith the applicablelaws,regulationsand administrativeprovisionsincludingdetails astothe authority‟s:- Ability to ensure complianceon a continuousbasiswithlaws,regulationsand administrativeprovisions(includingthrough onsiteSolvency ii
  11. 11. inspections)includingmeasuresto prevent/ penalisefurtherinfringements;-Ability to communicate concerns, includingthoserelatingtotheundertaking‟s/ group‟sfinancial position;-Ability to oblige the(re)insurerto respond to concernsraised by thesupervisor;- Ability to obtain all information necessaryto conduct the supervisionof the undertaking/ group.5.Pleaseindicate whetherin the exerciseof your general duties, you aredulyconsideringthepotential impact of your decisionson the stabilityoffinancial systems globally, particularlyduring emergencysituations,onthebasis of the informationavailableat the time.- Pleaseprovideany examplesof actionsrecentlyundertakenin thisrespect;-Pleaseprovidedetails asto regulatoryrequirementsastoinformationsharingin crisis/ normal situation with foreign supervisors.- In the context of group supervision, pleaseprovidedetails astoregulatory requirementsasto informationsharing in crisis/normalsituationswhichmay include:Ability/ Willingnessto submit information on intragrouptransactions;Exchangeof prior information on decisionsthat couldaffect thesolvencyof the entitiesbelongingtoan EEA MemberState;Ability/ Willingnessto allowthe transferof cash;Ability/ Willingnessto support restrictionson free assetsforsupervised entities.Solvency ii
  12. 12. 6.Please indicate whether the you are taking into account the potentialprocyclical effects of your actions where exceptional movements in thefinancial marketsoccur- Pleaseprovideany examplesof actionsrecentlyundertakenin thisrespect.7.In thecontext of group supervision, pleaseexplain your supervisorypowers/arrangements/ requirementsfor cooperationwithothercountries.Pleaseindicatewhether:- Under your national provisions,you may act asgroup supervisorfortheentiretyof groupsdomiciledin your jurisdiction.- Whereyou are thegroup supervisor,do you act asthe point ofcontact for keyquestionsat group level and take responsibilityfor:Thecoordinationand dissemination of information;Review of the groups‟financial position;Planningand coordination of supervisory actionsin respect ofthegroup asa whole;Establishment of a framework for crisismanagement;Theassessment of theapplicationfor a group internal model ifrelevant and takeitsdecision in consultation withother supervisoryauthoritiesconcerned.- As group supervisor doyou have theprerogative to consult andinvolvein advancethe relevant supervisoryauthoritiesconcerned incaseyou intend to carry out an inspectionin an (re)insuranceundertakingsituated in theEEA.Solvency ii
  13. 13. - Doyou haveprovisionsin placefor the establishment of cooperationarrangements,whichallowthat:Acollege of supervisorsor similar cooperationarrangementscanbe establishedcomposingaminimum of all relevant authoritiesfor thegroup supervision under the followingcircumstances:Relevanceofthegroup tooverall financial stability; Relevanceof the group inspecific insurancemarket; Similarity of supervisorypractices;Thenature and complexityof the businessundertakenby thegroup;In casea Collegeof supervisorsor similarcooperationarrangementsare established, the functioningand organisationof thesemechanismsis based on writtenarrangements,includingprovisionson obligationto cooperate/exchangeof information and decisionmakingprocesses(aimed at consensus);Pleaseindicatewhetherand, should it be the case,providedetailsastothe existenceof a mechanismfor disputesolving mechanism in caseof disagreement withother relevant supervisoryauthoritiesPrinciple 2 Professional secrecy, exchange of information andpromotion of supervisory convergenceObjectiveThesupervisoryauthoritiesof thethird country and supervisoryauthoritiesof Member Statesinvolved in thesupervision of domesticinsuranceand reinsuranceundertakingsshall cooperate and, whererelevant, ensurethe effectiveexchangeof information.Thesupervisoryauthoritiesof thethird country shall providethat allpersonswhoareworkingor whohave workedfor thesupervisoryauthorities,aswellasauditorsand expertsactingon behalf of thoseauthorities,are bound by obligationsof professional secrecy.Theabovementioned obligationsof professional secrecyshall extend toSolvency ii
  14. 14. information received from thesupervisoryauthoritiesof MemberStates.8.Pleasedescribethe applicableregime with regard tothe professionalsecrecyobligationstheauthoritymust observe(incl. theexistenceandextent of these obligations) including:- Confidential information – identification;- Legal dutytoprotect confidential information;- Applicable toall relevant individuals(i.e. all thosewhowork, haveworked or act(ed) on behalf of the supervisoryauthority);- Ongoingobligation(applicablewhilst working/actingon behalf ofsupervisoryauthorityand on continuousbasisthereafter);- Disclosureof confidential information in restricted and clearlydefinedcircumstancesaswell assubject toconditionsof professional secrecyUseof confidential information only in thecourseof supervisoryduties:compliancemonitoring (includingmonitoring of technicalprovisions, solvencymargins, administrative/accountingprocedures andinternalcontrols),impositionof penalties,court proceedings/ appeals;-Consent of Competent Authority wherethe confidential informationoriginatesfrom another competent authorityprior agreement tothedisclosure,disclosureis made in accordancewith any specifiedconditions,includingthoserelatingto the purpose of thedisclosureand useof theinformation.Solvency ii
  15. 15. - Ability to enter intocooperationagreements(subject to guaranteesofprofessional secrecy.9.Pleasedescribenational applicablelegal provisionsin caseof breachof the obligationof professional secrecylike for exampletheprovisionsin national law in respect of thebreach of professional secrecy(forexampleoffences,penalties,enforcement).10.Please describe the exceptions allowed by the applicable regime withregard to the professional secrecy obligations the authority must observeincluding:- Expressagreement todisclose/ use;- Summary/ aggregate disclosure (individual undertakingnotidentifiable);- Civil/ criminal proceedings(wherethe undertaking hasbeendeclaredbankrupt or is being compulsorily wound up information must notconcern third partiesinvolved in rescueattempts).11.Pleasedescribetheapplicableprovisionsregardingthe existenceandextent of provisionswithregard toyour abilityto exchangeinformationwith:- Supervisoryauthorities includingin relation toauthorisation andsuitability assessmentscoveringindividualsaswell ascommunicationof concernsregarding financial soundnessofsupervised undertakings/ groups;- Other authorities/ bodies/persons/institutionsresponsiblefor, orhaving oversight of:supervision of financial organisations/markets,liquidation/ bankruptcyproceedings,Solvency ii
  16. 16. carrying out statutoryauditsof accounts,detection/ investigation of breachesof company law,- Central banks;- Government administrationsresponsiblefor financial legislation (forreasonsof prudential control);- Other authorities/ bodies/persons/institutions(pleaseindicate).Principle 3 Taking up of businessObjectiveThetakingup of thebusinessof reinsurancein the third country shall besubjecttoprior authorisation.Authorisation for thetakingup of businessshall be conditional on theundertakingmeetinga clear, objectiveand publicly availableset ofwrittenstandardson a continuousbasis.12.Pleaseprovidedetails asto existenceand content of standardsinrespect of the Legal Entity:- Legal form;- Head office of theundertaking to be situatedin thesame country asitsregisteredoffice;- ArticlesofAssociation.13.Pleaseprovidedetails asto existenceand content of standardsinrespect totheundertaking‟soperations:-Limitation toreinsurance and relatedoperationsfor pure reinsuranceundertakingswhichmay include, for example, a holdingcompanyfunction;Solvency ii
  17. 17. - Limitationtothe businessof insuranceand operationsarisingdirectlytherefrom for insuranceundertakings;- Schemeof operations(including, for thefirst three years, a forecastbalancesheet, estimatesregarding but not limited to: future SolvencyCapital Requirements,Minimum Capital Requirements,thefinancialresourcesintended tocover technical provisionsand capitalrequirements);- Financial resourcescoveringset up costs;- Basicown fund itemsthat constitutetheabsolutefloor of theminimum capital requirements;- Compliance withthe system of governancereferred tounder Principle4.14.Pleaseprovidedetails asto existenceand content of standardsinrespect totheundertaking‟sobligationto provideinformation onShareholders/Members:- Identityof shareholders/ memberswithqualifying holdings;- Amount of holdings;and- Assessment of reputation and financial soundnessof theownerandacquirer.15.Pleaseprovidedetails asto existenceand content of standardsinrespect tocloselinks:- Identification of closelinks(i.e. a situation in whichtwoor morenatural or legal personsare linked by control or participation, or arepermanentlylinkedtoone and thesame person by a controlrelationship);Solvency ii
  18. 18. - Monitoring of closelinkstoensure theydonot prevent the effectiveexerciseof supervisory powersover theauthorisedundertaking.16.Pleaseprovidedetails asto existenceand content of standardsinrespect of refusal/withdrawal of authorisation:- legallypossible;- possibledue to qualificationsof shareholders/ members;and- wherecloselinksprevent effectivesupervision.Principle 4 System of Governance; Supervisory Review andPublic DisclosureObjectiveThesolvency/prudential regime of thethird country shall requiredomestic insuranceand reinsuranceundertakingscarrying outreinsuranceactivitiestohave in placean effectivesystem of governancewhichprovidesfor sound and prudent management of thebusiness, andrequiregroupstohave in placesuch asystem at thelevel of the group.That system shall at least includean adequatetransparent organisationalstructure witha clear allocation and appropriatesegregation ofresponsibilities,requirementsfor ensuringthat personsmanagingtheundertakingare fit and proper and effectiveprocessesto ensure thetimelytransmission of information both within the undertaking or groupand totherelevant supervisory authorities.Thesolvency/prudential regime of the third country shall requiredomestic insuranceand reinsuranceundertakingscarrying outreinsuranceactivitiesto have in placean effectiverisk managementsystem comprisingthe strategies, policies,processesand internal andsupervisoryreportingproceduresnecessarytoidentify, measure,monitor, manage and report, on a continuousbasisand at an individualand an aggregated level, the riskstowhichtheundertakingisor couldSolvency ii
  19. 19. beexposed, and their interdependencies,aswell asan effectiveinternalcontrol system.It shall require groupstohave in placesuch asystem at the level of thegroup.Thesolvency/prudential regime of thethird country shall requiredomestic insuranceand reinsuranceundertakingscarrying outreinsuranceactivitiesto establish and maintain riskmanagement,compliance, internal audit and actuarial functions.Groupsshall be required toestablishand maintain thesefunctionsatgroup level.Thesolvency/prudential regime of thethird country shall require groupsanddomestic insuranceand reinsuranceundertakingscarrying outreinsuranceactivitiesto disclosepublicly, on at least an annual basis, areport on their solvencyand financial condition.Group supervision specificities:Theprudential regime of thethird country shall require thegroup tohavesound reportingand accountingproceduresto monitor and manage itsintragroup transactionsand risk concentrationsand toreport at leastannuallysignificant riskconcentration at the level of the group andsignificant intragroup transactions.17.Pleaseprovidean overview of the governance includingriskmanagement general requirementsand supervisory powersapplicableinyour regime, includinginformationon theexistenceof:- Effectivesystem of governance(includingbut not limited totransparent organisational structure witha clear allocation andappropriatesegregation of responsibilities,effectivesystem for timelytransmissionof information);Solvency ii
  20. 20. - Requirementsrelevant tothe fitness(for exampleappropriateprofessional qualification, knowledgeand experience) and propriety(for examplegood repute and integrity) of management and keyfunction holders;- Effectiveand well integratedrisk management system aimedatidentifying, measuring, monitoring, managingand reporting(on acontinuousbasis) the risks towhichtheundertaking isor could beexposed (on an individual and aggregatedlevel, interdependencies),and the amount of ownfundsnecessarytocover thoserisks(comparabletoan own risk and solvencyassessment;- Objectiveand independent internal audit function witha directreporting linetotheadministrative, management or supervisorybody;- Effectiveinternal control mechanisms(for art. 172 includingthoseappliedtoensurethat data received from cedantsarereliable andtimely);- Sound writtenadministrative/ accountingprocedures;- Contingencyplans.18.Pleaseindicatewhetherand under which conditionsis an actuarialfunctionrequired by your system includingwhetherthere isa clearcondition of knowledgeof actuarial and financial mathematicsappropriatetothe nature, scaleandcomplexityof theriskinherent in the(re)insurancebusiness.19.Please indicate whether your supervisory system requires continuoussupervision of outsourced functions or activities (in order to ensure thatmeetingof obligationsshall not be affected).In your replypleasealsoprovide information on theexistence/ extent ofprovisionsin relationto outsourcingincludingastothe requirement fora notification tothesupervisoryauthorityprior to outsourcingof criticalor important functionsor activitiesaswell asany other materialsubsequent developments.Solvency ii
  21. 21. 20.Pleaseindicatewhetheryour supervisorysystem requiresthatundertakingshave a ComplianceFunction in placeto providetheadministrative,management or supervisorybody adviceon compliancewith law,regulationsand administrativeprovisionsincludinganassessment of thepossibleimpact of any changesin the legalenvironment and theidentificationand assessment of compliancerisks.21.Pleaseprovide details asto governancerequirementsapplicableinorder to ensure identificationof deteriorating financial conditionsandremediation of deteriorating with appropriate monitoring toolsin place.22.Pleaseprovidedetails asto the existenceand extent of theauditorsdutytoreport:- Breach of laws,regulations,administrativeprovisions;- Issueswhichmay affect the continuousfunctioningof theundertaking;- Refusal (or reservations) in respect of certification of accounts;- NoncompliancewithSolvencyand Minimum Capital Requirements.23.Please provide a comprehensive overview of requirements for thepublic disclosure of report(s) on solvency and financial conditions atleast on an annual basiswithadescription of:- Thebusinessand performance;- System of governance;- Riskexposure, concentration, mitigation and sensitivity;- Assets;- Technicalprovisions,other liabilities;Solvency ii
  22. 22. - Capital management;- Significant intragroup transactionsand significant riskconcentrations,in thecaseof groups.24.Pleasedescribethe type and frequencyof accounting, prudential,statisticalinformationobtainableby thesupervisoryauthority:- Annual Report on thesolvencyand financial condition of theundertaking;- Annual accounts(coveringall operations, financial situationandsolvency);- Returns/statisticaldocuments;- Information regarding contractsheld withintermediaries,in thecaseof reinsuranceundertakings(art. 172)Principle no. 5 Changesin business, management or qualifyingholdingsObjectiveThesolvency/prudential regime of thethird country shall require thatproposed changesto thebusinessor management of domesticinsuranceor reinsuranceundertakingscarrying out reinsuranceactivitiesor ofgroups,or toqualifying holdingsin suchundertakingsand groupsareconsistent withmaintainingthesound and prudent management of thedomestic insuranceor reinsuranceundertakingor group.25.Pleaseprovide information on the existence/ extent of provisionsandsupervisorypowersin respect of acquisitions,includingasto:- Notification of intentionto hold or increasedirectlyor indirectlyaqualifying holding;Solvency ii
  23. 23. - Right of supervisoryauthorityto opposeproposed acquisitionaswellasabilitytosuspendvoting rightsand/ orability toannul castedvotes;- Existenceof thresholdsprompting notification;- Possibilityfor assessment of acquisitionby financial undertakingstobesubject toprior consultation.26.Pleaseprovide information on the existence/ extent of provisionsandsupervisorypowersin relationto disposals,includingasto:- Notification of intentionto disposedirectly/indirectlyof a qualifyingholding;- Thresholdsprompting notification.27.Pleaseprovide information on the existence/ extent of provisionsandsupervisorypowersregardingthe information obtainablefrom anundertaking, includingasto:-Thresholdspromptingnotification of acquisitions/ disposals;-Regular notification (e.g. annual) of qualifying holdings,includingsize.28.Pleaseprovide information on the existence/ extent of provisionsandsupervisorypowersin relationto the requirementsfor ongoingassessment, approval and disclosureof relevant information, includinginformation in respect of:- Portfolio transfersor transfer of individual contracts(e.g. in thecontext of reinsurancecontracts);- Changesto management;and- Schemeof operation.Solvency ii
  24. 24. 29. Pleaseprovidedetails asto existenceand content of standardsandsupervisorypowersin respect to theundertaking‟sobligationto provideinformation on assessment of reputation and financial soundnessof thenew owner / acquirer.Principle no. 6 –SolvencyAssessmentObjectiveThesolvency/prudential regime of thethird country shall requiredomestic insuranceand reinsuranceundertakingsand groupsto holdadequatefinancial resources.Theassessment of thefinancialpositionof domesticinsuranceandreinsuranceundertakingsand groupsin the third country shall rely onsoundeconomic principlesand solvencyrequirementsshall be based onan economicvaluation of all assetsand liabilities.Thesolvency/prudential regime of thethird country shall requiredomesticinsuranceand reinsuranceundertakingsand groupstoestablishtechnical provisionswith respect to all of their insurance andreinsuranceobligationstowardspolicyholders and beneficiariesofinsuranceand reinsurancecontracts.Thesolvency/prudential regime of the third country shall require thatassetsheld tocover technicalprovisionsare invested in thebest interestsof all policyholdersand beneficiariestakingintoaccount anydisclosedpolicy objectiveand that domesticinsuranceand reinsuranceundertakingsand groupsonlyinvest in assetsand instrumentswhoseriskstheundertaking concerned can properlyidentify, measure, monitor,manage, control and report.Thesolvency/prudential regime of thethird country shall requiredomestic insuranceand reinsuranceundertakingsand groupsto meetcapital requirementsthat are set at a level whichensuresthat in theeventof significant lossespolicyholders and beneficiariesareadequatelySolvency ii
  25. 25. protectedand continueto receivepaymentsastheyfall due toa level ofconfidenceat least equivalent tothat achieved byArticle 101of Directive2009/ 138/ EC.Thosecapital requirementsshall be risk based withtheobjectiveofcapturingquantifiablerisks.Wherea significant risk is not quantifiableand cannot be captured in thecapital requirements, thenthat risk shall be addressed through anothersupervisorymechanism.Thesolvency regimeof thethird country calculationof capitalrequirementsshall ensure accurateand timely interventionbysupervisoryauthoritiesof the third country in the event that thosecapitalrequirementsare not complied with.Thesolvency regimeof thethird country shall require domesticinsuranceand reinsuranceundertakingsand thosewhich arepart of agroup tomaintain a minimum level of capital, noncompliancewithwhichshall triggerimmediate and ultimate supervisoryintervention.Thesolvency regimeof thethird country shall require domesticinsuranceand reinsuranceundertakingscarrying out reinsuranceactivitiesto meet thecapital requirementsreferredtoin paragraphs5and6above withownfundsthat areof a sufficient qualityand whichareableto absorb significant losses.Ownfund itemsconsideredby thesupervisoryauthoritiesto be of thehighestqualityshall absorb lossesboth in a goingconcern and in caseofa windingup.For group supervision assessments:Thecalculationof group solvencyin thethird countrysprudentialregimeshall produce a result that is at least equivalent totheresultSolvency ii
  26. 26. achieved by either one of the calculationmethodsset out inArticles230and 233 of Directive2009/ 138/ EC.Thecalculation shall ensure that thereis no doubleuseof own fundstomeet thegroup capital requirement and that theintragroup creation ofcapital through reciprocal financingis eliminated.30.Pleaseprovide information on the existence,content and extent ofprovisionsin respect of financial supervision, including asto:- Verification of stateof solvencyand financial condition ofundertaking/ of thegroup;- Verification of establishment and abilitytorequest increaseoftechnical provisionsand coveringassets;- Obligation of undertakingto submit financial reportingtosupervisor.31.Pleasedescribe provisionsasto rulesfor valuationof assetsandliabilities,and indicate whetherthe followingare applicable:- Thevaluation of assetsand liabilitiesisbased on an economicvaluation of thewholebalancesheet;- Assetsand liabilitiesare valued at the amount for whichtheycouldbe exchanged betweenknowledgeablewillingpartiesin an arm‟slengthtransaction;- Valuationstandardsfor supervisorypurposesisconsistent withinternational accountingstandards, tothe extent possible.32.Pleaseprovidedetails asto the legaland supervisory regimeapplicablein relationtotechnical provisions(TP) and indicatewhetherand/ orhow:Solvency ii
  27. 27. - TP are establishedin respect of all (re)insuranceobligationsand aimtocapture all expectedrisksrelated to (re)insuranceobligationsof theundertaking;- TP are calculatedin a prudent, reliable and objectivemanner;- Thelevel of TP is theamount a third country (re)insuranceundertakingwouldhavetopay if it transferred or settleditscontractual rightsand obligationsimmediately toanotherundertaking/ knowledgeablewillingpartyin an arm‟s lengthtransaction;- Thevaluation of TP is market consistent and makes use, totheextent possible,of and isconsistent withinformation provided byfinancial marketsand generallyavailableinformationonunderwritingrisks;- Asegmentation of the (re)insuranceobligationsintoappropriateriskgroupsand asa minimum by linesof businessisout in order toachievean accuratevaluation of reinsuranceobligations;- Processesand proceduresexist to ensure theappropriateness,completenessand accuracyof the data used in thecalculationof TP.- Thesupervisor is ableto require theundertakingto raisetheamountof technical provisionsif it doesnot complywiththe requirements.33. Pleaseprovidedetails asto the regimeapplicablein relationto ownfundsincluding, whereapplicable, asto:- Ownfundsare classified in accordancewiththeir abilitytoabsorblossesin the caseof windingupand on a goingconcern basis;- Thehighest qualitycapital is available toabsorb lossesin a goingconcern and in caseof a windingup, withadditional requirementsofsufficient duration of the own fund item, absenceof incentivestoSolvency ii
  28. 28. redeem, absenceof mandatory servicingcostsand absenceofencumbrances;- Adistinction is made betweenown fundson thebalancesheet andoff balancesheet items(for exampleguarantees);- Accordingtotheir classification, own fundsare eligibleto coverpartiallyor fully(for thebest qualityownfunds) the capitalrequirements;- Quantitativelimitsapplytotheown fundsto ensure thequalityofownfundscoveringthecapital requirements.In theabsenceofquantitativelimitsother supervisory requirementsshould ensure thehigh qualityof own funds.34.Pleasedescribethe applicableregulatory and supervisoryregime inrelationtoinvestmentsproviding detailssupportingthat:- Undertakingsare onlyallowedto invest in assetsand instrumentswherethe riskscan be properlyidentified, measured, monitored,managed, controlledand reported and appropriatelytaken intoaccount in their solvencyneeds;- Assetsheld tocover TP are investedprudentlyin the best interestofall policyholdersand beneficiaries;- All assetsare invested in such a manner as to ensure the security,quality, liquidity, availability and profitability of the portfolio as awhole;- Prudent levelsof investmentsin assetsnot admitted totradingarerequired;- Investment in derivativeinstrumentsare possibleinsofarastheycontributeto a reduction of risks or facilitatean efficient portfoliomanagement;Solvency ii
  29. 29. - There is avoidanceof excessiverelianceon any one particular asset,issuer or accumulationsof risk; noexcessiveriskconcentration.35. Pleaseprovidedetails asto the legaland supervisoryregimeapplicablein relationtocapital requirementsand indicatewhetherand/ orhow:- Capital requirementsare be riskbasedand aim at measuringallquantifiable unexpected risks of theundertaking. Pleasecover thefollowingpoints:Where a significant risk is not captured in thecapitalrequirements,pleaseprovidedetails astothemechanism applied toguaranteethat capital requirementsadequately reflect suchrisk;How thecapital requirementsreflect a level of ownfundsthatwouldenabletheundertakingtoabsorbsignificant lossesand that givesreasonableassuranceto policyholdersand beneficiaries that paymentswill be made astheyfall due;What is thecalibration target for the capital requirements?Dothe requirementsenablethe undertakingat a minimum towithstanda 1in 200ruin scenario over a one year period or ensurethat policyholdersandbeneficiariesreceiveat least the samelevel of protection;Thecalculationof capital requirementsshall ensure anaccurateand timely intervention by supervisoryauthoritiesof thethirdcountry;Obligationon undertakingstocommunicateconcernsrelatingtotheir financial position;Obligationon undertakingtorespond to concernsraised;Thesupervisoryauthorityhaspowerstotakethe necessary andappropriateactionsagainst the undertakingto restorecompliancewiththat requirement;Solvency ii
  30. 30. Appropriate standardsare in place wherecapital requirementstake intoaccount theeffect of riskmitigation techniques.- There is a minimum level under whichcapital requirementsshouldnot fall whichequatestoaminimum level of policyholder protectionwhichtriggersimmediateand ultimatesupervisory interventionaction.- Soloand group capital requirementsare calculatedat least annuallyandmonitored on an ongoing basis.36.If your regime providesfor the useof internal models, pleasedescribethe applicableprovisionsregarding specificitiesof assessment of internalmodelsin the context of assessingcapital requirements, includinginformation relatingto the followingareas:- Wherethe (re)insuranceundertakingusesa full or a partial internalmodel tocalculate itscapital requirements, the resultingcapitalrequirementsprovidea level of policyholder protection that isat leastcomparable tothelevel that wouldbe required under local rules if nointernalmodel is used (i.e. it adequatelymodelsthe riskstheundertakingisor could be exposedtoand providecapitalrequirementswiththe same confidencelevel asthestandardapproach);- Theregimehas a processfor the approval of internal modelswhichincludesa requirement for prior approval of the internal model beforetheundertaking is permitted to use themodel to determineitsregulatorycapital requirements;- Theapplicableregime includesthe followingrequirementsfor aninternalmodel tobeused to calculateregulatorycapital:Aprerequisitefor an adequate risk management system;Theinternal model is widelyused in and plays an important rolein the undertakingssystem of governance(usetest);Solvency ii
  31. 31. Statistical qualitystandards;Validationstandards;Documentation standards;Calibration standards;Profit and lossattribution.- Wherea (re)insuranceundertaking usesa partial internal model tocalculateitscapital requirements,thescope of the partial internalmodel is clearlydefinedand justified toavoid the "cherrypicking" ofrisks. Pleaseprovideany supportinginformation todemonstrate thatthereis noambiguityasto whichrisks, assetsand/ or liabilitiesareincludedor excluded from the scope of thepartial internal model.37.Pleaseprovidedetails asto the legal& supervisoryregimeapplicablein relationtogroup capital requirementsand indicatewhetherand/ orhow:- Appropriatestandardsare in place wherecapital requirementstakeintoaccount theeffect of risk mitigationtechniquesanddiversificationeffectsat group level;- In order to reflect the total risks that the group may face, the groupsolvency capital requirement also reflects the risks that arise at thelevel of the group and that arespecific tothe group;- Thecalculation methodsusedfor determiningthegroup capitalrequirement.38.Pleaseprovidedetails asto the regimeapplicablein relationto groupownfundsincluding, whereapplicable, asto provisionsrequiring that:- Doublegearing and the intragroup creationof capital throughreciprocalfinancingis eliminated;Solvency ii
  32. 32. - Theresult of theassessment of fungibility/ transferabilityissues(e.g. restricted assets) is communicatedby the group supervisor;- Solodeficitsare fully taken intoaccount at group level unlessthegroup can provethat its responsibilityis limitedtoitsproportionalshareof the capital;- Thecalculationof thegroup solvency shall take account of theproportional share held by theparticipatingundertaking in itsrelatedundertakings.However, wherethe relatedundertaking is a subsidiaryundertakinganddoesnot have sufficient eligibleown fundstocover itsSolvencyCapitalRequirement, thetotal solvencydeficit of the subsidiary shall be takenintoaccount.Principle 8 Parent undertakingsoutside the Community: groupsupervisionObjectiveThesupervisoryauthoritiesof thethird country shall have a legal orregulatory framework for determiningwhichundertakingsfall under thescopeofsupervision at group level.Thescope of supervisionat group level shall at least includeallundertakingsover whicha participatingundertaking, asdefinedbyArticle 212of Directive2009/138/EC, exercisesdominant or significantinfluence.Thescope may excludeundertakingswherethiswouldbe inappropriatetothe objectivesof group supervision.39. Pleaseprovide information on whetherthe scope of groupsupervision coversall parts of thegroup particularlyfor entitiesfor whichSolvency ii
  33. 33. thereis a dominant or significant influenceare included in thescope ofgroup supervision.Thescope may excludeundertakingswheretheir inclusionwouldbeinappropriateto the objectivesof group supervision (i.e. the undertakingwhichshould be included is of negligible interest withrespect to theobjectivesof group supervision or the inclusion of the undertaking wouldbeinappropriate or misleadingwithrespect to the objectivesof the groupsupervision).40.Pleaseindicateyour approach, asgroup supervisor, to informingother supervisoryauthoritiesconcerned whereyou have decidedthat anentitywithinthe group should be excludedfrom group supervision.In communicatingwith theother supervisoryauthoritiesin such casesdoyou includethe reasonsfor this decision?41.Pleaseprovideany other relevant information on how your regulatoryframeworkprovidesfor a singleidentifiedgroup supervisor responsiblefor coordinationand exercisinggroup supervision.Solvency ii
  34. 34. Financial Stability Report 2012First half year reportIntroductionEIOPA‟sFinancial StabilityCommittee(FSC) hasupdateditsreport onfinancial stabilityin relationtotheinsuranceand occupational pensionfund sectorsin theEU/EEA.Thecurrent report coversdevelopmentsin financial markets,themacroeconomicenvironment, and the insurance,reinsuranceandoccupational pension fund sectorsasof 4 May2012unlessotherwiseindicated.Summary of main issuesand conclusionsINSURANCE SECTORLately, the relativelypositivedevelopment of insurersexperienced inrecent years, hasstartedtoreverse.This hasshown in solvencyratiosaswell asprofitability and to an extentalsopremium growth.Though the solvency situation of insurersis onlyreflectedon a SolvencyI basis1in this report right now, thedevelopment of keyvaluedrivers(e.g. lowyield environment in anumber of currencyzonesin Europe)indicatesthat the situationalsoputssignificant pressure on marketvalues.Solvency ii
  35. 35. Nevertheless, SolvencyI ratios for insurersarestill at a comfortablelevelwith ~200% at theend of 2011.Followingup on last report‟s risk perception, EIOPAhasanalysed thesector‟sresiliencetoa possiblelonger lastinglowinterestrateenvironment aswell.Although the sector overall seems to be capable of coping with thesechallenges for some time, EIOPA continues to monitor the situationclosely.However, if accompaniedby other potential threatsmaterialising, thesituation might lookdifferent, e.g. in caseof renewedturmoil duetothefailure of governmentstostabilisefiscal situations, a strong weighingofthesedevelopmentson economicgrowth, or a disruptiveunwindingofcurrencyrisk (e.g. asa consequenceof developmentsin Greece).While first order effectsof such an event on the European insurancesector asa wholeseem limited(accordingto EIOPAanalysisconducted), localinsurersare likely tosuffer and second order effectsmight alsohit other European insurers,though mainlythrough thepotentiallytriggered disruption of financial markets(e.g. sovereigns,banksand equities).REINSURANCE SECTORIn 2011, a largenumber of very severenatural catastrophesoccurred,making2011the costliest year ever for thereinsurancesector.Thenatural catastrophelossesexceededby far theheavy lossesof thepreviousrecord year 2005(withhurricanesKatrina, Rita, Wilma).At the same time, the financial crisisworsened,withinterest rate levelsgenerallyremaininglow.Solvency ii
  36. 36. As a consequencethereinsuranceundertakingswereconfronted withhugechallengesregardingboth the liabilityside and the asset sideof thebalancesheet.However, at the beginningof 2011theoverall reinsuranceindustry wasvery well capitalised.As a consequencethereinsurersdealt well withthe challengingenvironment; the capital reduction wasonly verymodest.Several years of relatively benign payoutsaswell asthe recovery of thefinancial marketshad ledto reinsurancecapacitiessubstantiallyinexcessof demand.Altogether, theinternational reinsurancemarket remained relativelystablein 2011and saw onlymodest price increasesat thebeginning of2012.Raisingpriceslargelycould not yet be seen in spiteof themany naturalcatastrophesin 2011.Therenewalsat thebeginningof 2012aswell asat April 1ledto somemarked increasesin reinsurancepricesin the regionsand segmentsaffected by losses.But overall therateshave gone up onlymodestly, last but not least due totheextensiveabsenceof major losseventsin Europe and North America.Furthermore, there isan increasedcapital flowintothereinsurancemarket.In the background of the financial crisisinvestors are searchingforrelativelysafe investments,exertinga moderatingeffect on the rates.Solvency ii
  37. 37. OCCUPATIONAL PENSION FUNDS SECTORThemembersand beneficiaries of Institutionsfor OccupationalRetirement Provisions(IORPs) are currentlyconcentrated mainlyin afew Member States,but continueto grow in importanceacrossEurope;in some Member Statesreforms are in place to foster thisgrowthin thefuture.A trend is observed towards defined contribution schemes, which leavesponsors less vulnerable to market downturns as risks are borne mainlybymembers and beneficiaries.Data for 2011(providedby supervisorson a best effort basis) document agrave evolution in thefundingpositionsof IORPs, especiallyfor thelarger defined benefit (DB) systems suchasUK and NL, wherelevelsin2011seem tohave declined below 100%.Thelow yield environment in both countries is a key driver behind thisdevelopment, asit forcesthemarket valueof liabilitiesup.At the same time both systemsalsoresult in low expected future assetreturnsgiven thedominance of debt investmentsfor most occupationalpensionsin most countries.Supervisorshave takenactionstoaddressthese lowfundinglevels.In NL fundsare obligedto participatein a recovery programme astheircoverageratio (assetsdividedby technical provisions)dropsbelow therequiredlevel (on average120%).TheUK pensionsregulator is alsorunning recovery programmesand haspublisheda statement inApril settingout expectationsof trusteesof DBIORPsstartingvaluationsunder thecurrent conditions.Other recent trendsincludean increasein sovereigndebt exposuresofIORPsin 2011withrespect to2010.Solvency ii
  38. 38. At least in high yield countriesthis isfocussingon shorter maturities.Given current turbulent market conditions,a number of regulatorshaveemphasisedthe increasingimportanceof proper governanceprocessesand increasingreporting requirements,alsoincludingregular scenarioanalysesand stresstests.Recent developmentsFINANCIAL MARKET DEVELOPMENTSThemacroeconomicenvironment is still challengingin manyEuropeancountriesand thusa main source of concern for financial stability.Uneaseover government debt levelsremains and political uncertaintycontinuesto influencemarketsalsoafter the relativelystrongpolicyresponsesat the European level.Overall, the political and economic climate continuesto weighongrowthprospectsin Europe, although there are regional differences.Figure 1showstheevolution of twoleadingEuropean businesscycleindicatorsfor theeconomiccycles six monthsahead.TheOECD indexshowsa somewhat decliningtrend in macroeconomicoutput, althoughpossiblyat a slowerpacethan in previousmonths.TheZEW Eurozone indicatorhad improved at thebeginningof 2012after having reached levelscomparablewiththoseobserved during thefinancial crisisin 2008.Thelatest figure, however, indicatesthat the sentiment is againdeterioratingslightly.Solvency ii
  39. 39. Note: Thefigure showsleadingindicatorsfor the economiccycle sixmonthsahead.Twoindicatorsaredepicted. Onederivesfrom theZEW (Zentrum fürEuropäischeWirtschaftsforschung) Eurozoneexpectation of economicgrowth and theother from OECD.Theformer isplotted in blue on theleft hand axis and the latter isplottedin green on the right hand axis.TheOECD updatedits methodology for thecalculation of the indicatorin April 2012touse GDP asa referenceseries.Several European countries are facingcontinuedeconomic downturn.Figure 2 showsthedevelopment in GDP in several largeEuropeancountries.Solvency ii
  40. 40. Onlyin a few countries is theGDP back topre crisislevels.In several countries,GDP seemsto be sloping downwards.Combinedwith deleveragingby the banking sectorin Europe and the fiscalconsolidationpath followedby major governments, growthprospectsforseveral countriesseem dim, at least in the short term.Thefact that fiscal consolidation and bank deleveragingis occurringinmanycountries at thesame time increasesthedisruptivepotential of thesituation.At the same time, there is littleevidenceof inflationarytendencieswhichmight have been expected given the debatesat the politicallevel ongrowth oriented instrumentsand global fiscal expansionarypolicies.Figure 3 showsthat overall inflationexpectationsare well anchored ataround 2% at a fiveyear horizon.Solvency ii
  41. 41. Note: Thefigure showsthe evolution of therateof the 5 year EURinflationswap.It is noted that the swaprate is not adjusted for any inflation or other riskpremia.Combined withhigh levelsof Government debt followingthebankingcrisiswhichstartedin 2008, thissituationhas led European governmentbond yields todiverge further.Government bond yields are high compared to the last few years formany European countries and several currently show an increasingtrend.Solvency ii
  42. 42. LEGISLATIVE AND REGULATORY DEVELOPMENTSAnumber of legislativeand regulatory developmentshavebeen reportedby 29 Membersand Observerson the basisof an EIOPAsurveyonnational regulatoryreformswhichhavebeen adopted in the secondhalfof 2011and thefirst part of 2012.Thevolatility in thecapital market and theturbulenceexperiencedin theEurozonesovereign debt market areperceived asthemajor thrust of theregulatoryand legislative changesreportedby most of the respondingcountries.As a reaction to the impact of sovereign risk on thesolvencyposition oftheinsuranceundertakings,in several countrieschangesweremadeinthevaluation approach tosovereign bonds(DE, DK, GR, IT).Supervisoryengagement alsoincluded increasingthe requiredfrequencyof reporting of sovereign, banking and other assetclassexposuresbyinsuranceundertakingsand groups(IE, LU, SI).To deeply explore potential risk concentration areas and marketvulnerabilities ad hoc risk analyses, legislative amendments andreporting requestshavebeen made (BE, FR, IT, PL).Thecomposition of the asset portfolios held by insuranceundertakingsandthe asset allocation policiesare closely monitored in many territories(BE, DE, EE, FR, GR, IE, IT, PL, RO) aswell asthe liquidityposition(BE, CY, PT, PL, RO) asa consequenceof higher lapserates.Likewisein houseStressTest exerciseswerewidelyperformed, or areplannedtobeconducted in 2012,to assessthe insurers‟abilityto absorbadditional shocksaswell astheimpactsof relatively largemovementsinrisk factorsusing new stresstest calculations,methodologiesoradditional adverse financial contexts(EE, FR, FI, LU, NO, PL, CZ).Solvency ii
  43. 43. Low yield valuation exercisesare alsoconsidered to be a key instrumenttobe further usedtoinvestigate financial weaknessesof the domesticmarket players.In thiscontext, and in preparation of 2012European stresstesting,several countrieshave alreadylaunchedor are planning toconduct aQIS5bisexerciseover thecurrent year.Followingup on theregular and ad hocmonitoring of the solvencyandcapital positionsof undertakings,more than half of therespondingcountriesreported the need toadopt additional supervisorymeasurestoprevent or solve solvencystrains.In few countries a need wasseen toput in placetargeted actionsor torequest ad hocdata (EE, MT, SE) on the basisof concern over the highrisk profile of individual companies.This hasbroadlyledto a review of theannual, quarterlyor monthlyreporting packages(LU, LI, SE) which in some caseshave alsobeenamended or newlyimplemented to allow an impact assessment of thenew prudential requirementsto be adoptedunder the SolvencyIIframework.Action planstograduallyimplement the new prudential requirementshavealreadybeen initiatedin the observed period (second half 2011firsthalf 2012) and will be carried out over theyear 2012(DE, LI, MT, FR).Thesemainlyconsist in exercisesfor evaluatingthe preparednessandaffectednessof the industry bySII requirements,supported in somecountriesby dedicatedmeetingsand byon sitevisitscarriedout aspartof the Internal Model pre applicationprocessand of the SolvencyIIimplementationprocess.Similar programs, startedbeforethe observed period, are ongoingandbroadlyperformed in many other European jurisdictions.Solvency ii
  44. 44. Developments in the European insurance sectorINSURANCE SECTOR DEVELOPMENTSOverall, the reported data from a sampleof largeEuropean insurersindicatesa slight worseningin profitabilityand solvencylevelswhilenewbusinessisquitesluggish for a significant number of reportinggroups.Lifeinsurancepremiumshave increased by only3% on averagethoughmore than half of the participatinggroupsreported decliningpremiums.While in traditional life insurance, with a guaranteecomponent,premiumsdeclinedby around 10% on average, unit linked life insurancerecorded higher premiums(+3%).In non life business,premiumsdecreased on averageby 2% whilemorethan half of the sampleexperiencedhigher premiums.Thehighest increasesin premiumshavebeen seen in marine/ aviation/ transport (+24%), whilein credit / suretyship premiumsshrank by17%.Solvency ii
  45. 45. Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 24 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (22 groupsfor 2011data).Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 24 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (22 groupsfor 2011data).Overall profitsof surveyed groupsdecreasedfrom 2010to2011– whenconsideringthemedian group, profitsweresome 17% lower.Return on equityalsodecreased (from 9.6% to7.8% for themediangroup) though the dispersion especiallyon the lowerend of thedistribution wassignificantlylowerin 2011than in 2010.Solvency ii
  46. 46. Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 28 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (25 groupsfor 2011data).Though 2011wascharacterised by a largenumber of unusuallycostlynatural catastrophes, profitabilityof thelarge non life insurancegroupsdid not deteriorate:Net claims incurred grew lessthan net premiumssocombinedratioswerequitestable.Overall, it declinedfrom 99% to 97%. Also thistrend wasobserved for amajorityof surveyed groups.Solvency ii
  47. 47. Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 22 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (18groupsfor 2011data).LOCAL MARKET DEVELOPMENTSIn addition tothe quantitativeanswersbasedon thefast track reportingsummarised above, membershave providedqualitativeassessmentsofmarket conditions, key aspectsof the life and non life insurancesectors,andthemain risks and challengesastheyareobserved in local markets.In EIOPA‟s view theinsurancesectoracrossMember Statesappearstobe generallyresilient.In spiteof adversemarket conditionsand sluggish economy, life and nonlife companiesare sufficientlycapitalisedin termsof solvencyratiosfollowingthe current regime.Alargegroup of Membersreported that solvencyratios in their nationalmarketssufferedend 2011from decreasesin market valuation andSolvency ii
  48. 48. sovereigndebt crisis, however,some insurershavealreadyrecapitalisedand othersannounceto doit during theyear 2012.Overall, in themajorityof the Member States(DE, DK, ES, FR, IT,UK) a stabilisation in the upcoming 6 to12monthsis expected.In a significant number of Member Statesa declinein grosspremiumsin thelife sector hasbeen observed recently, primarilydue to thesluggisheconomic activityin some countries.Continuedhigh unemployment alsomakes it difficult financiallyformanyindividualsto purchasenew products.In addition, in some MemberStatesthedemand for classicallifeinsuranceproductsdecreased slightlycomparedtolast year whichmaybesomehow relatedtothetrend in manyMemberStatesto marketingtowardsunit linkedor zero guaranteeproducts.While a few Member Statesreport slight improvementsin financialresultsof life and non life companies, in most MemberStates, insurerswereaffectedby adverse market conditions,low interestratesand by thesovereigndebt crisis.Hence, lowerreturnson assetsduetovolatilefinancial markets, lowinterest rates, the sovereigndebt crisisand the macroeconomicdownturn, are highlighted asthemain causesfor themixed financialresultsof the European life and non life sectors.In particular, thecurrentlyavailableinformationpointed out thatfinancial market developmentsduring thesecond half of 2011contributedtoa deteriorationof the solvencysituationof theinsurersinEurope, however, the sectorsare reported to remain well capitalised.Anumber of key aspectsand developmentsin theEuropean life and nonlife insurancesectorshave been reported by Members.Solvency ii
  49. 49. As life insurersexaminehow to reducethecapital strainscaused byguaranteed products, theprolonged low interest rate environment willdepresstheyieldsfor new cashflow and maturing bonds.Thereforethere isan increasedtrend in many Member States(DE, FI,NO, SE, UK) towardsmarketing unit linkedor zero guaranteeproducts.Aparticular issuepertainsto thelapserateswhichdeterioratein some oftheMember States(AT, BE, FR, IT) whichmay be somehow related toweakmacroeconomic environment.In particular in some Member Stateswereobserved higher lapseratesduring thelast quarter of 2011but latest information availablepoint outtoa decrease(FR) or a stabilisation in 2012(AT, BE, IT, SE).In termsof assetsheld by insurancecompanies,in a few Member States,insurersdetermined concentration limitsfor asset management, reducingexposurestoor even banning euro peripheral sovereign.Furthermore, in themajorityof MemberStatesmost insurerswrotedownthe value of Greek government bondsin thesecond quarter.In a largegroup of MemberStatesthere hasalsobeen an allocationfromperipherallowgraded government bondsto higher graded governmentbonds, equity and high graded non financial corporatebonds(DE, FR,UK, FI, NO). Moreover, in a few Member Statesit is expected thatinsurersshorten maturities,hold cash and favour liquid assets(FR, IT).Risk and ChallengesTheoverarchingand somewhat interconnectedrisk themes,whichhavebeen onthe economic agenda for some timenow,remain mainlyunchanged:(i) sovereignrisk;Solvency ii
  50. 50. (ii)thelow yield environment, and the riskof not meetingissuedinterestrate guarantees; and(iii) thesearch for yield and the additional risk assumed in this process.Emergingthemesmay well followon the back of these three well knownrisk factors.Thelist could contain eventssuch asfurther developmentsin thesovereignbond marketsin Europe, renewedstrainson the bankingsector, further deteriorationof the US economy and fiscalbudget, imbalancesand further uneven growth rateswithintheeuroareaeconomiesand followingpolitical and macroeconomic risks.SUPERVISORY RISKASSESSMENT FOR THEINSURANCE SECTORAs regardstherisk themeshighlightedby Members,some of theriskfactorswhichare affectedmore for adversefinancial marketsconditionsand a weakereconomicenvironment are seennow tobe more relevant.Therisksexpected toincrease:sovereign, property and credit tocorporatesand householdsemerge simultaneouslyin a sluggisheconomicenvironment suchasEurope experienced in the past months.Moreover, in an environment wheregovernment yieldsare located at lowlevels,interest rateguaranteesbecome hard to fulfil.Furthermore, asa result of a weakeconomicrecovery, the remainingeconomy and industrial enterprisesfacedifficulties, and theaveragecredit rating of governmentsand industrial corporationswouldthereforedeteriorate.Hence, investment opportunitiesin lower rated investmentvehicles,such as, for example, sub investment gradebonds, increasein supply, makingit relativelyeasierfor insurancecompanies toengagein such investments.Solvency ii
  51. 51. As highlightedby several Members,it is important tobe vigilant and tocontain and monitor theserisksdescribed above.Otherwise,it can be envisaged that weakercapitalisedinsurancecompanies could suffer unsustainablelossesfrom their investmentactivities.Indeed, macroeconomic conditionsindicate that 2012will likelybeanotheryear in Europe of lowGDP growth, lowinterestratesandmoderate equitymarket performance.Even if the economicrecovery continues, insurersmay find that theassetsunderpinningtheir balancesheetshave decreased in value.EIOPA Membersand Observershave been askedtoassessrisksandchallengesaccordingto the probability of a materialisationand theimpact on thenational insurancemarkets.While for theAutumn 2011EIOPAFinancial StabilityReport a morecomprehensivelist of 45risksand challengesisused asthe basisfor therisk assessment, many of them being of a structural nature, thelist usedin thethisSpring Report isprimarily focussedon market and creditrisks.Based on the responses from 29 Member States4, the following risks andchallenges are classified as the most imminent, ranked by the product ofthe scoresfor probability and potential impact.Sovereign risk, equityrisk, lowinterest ratesaswell ascredit risk ofbanksare the riskswith highest overall rankings.Especiallythefirst of these itemsis consideredto have an increasedprobabilityof materialisationand alsothe impact of such a scenarioisexpectedto be significant.Solvency ii
  52. 52. Over thelast six monthseight of the10 risks mentioned above haveincreasedaccordingto the feedback of national supervisors.Thehighest increasesare reported withregard to equityrisk, propertyrisk and liquidityrisk.On thecontrary, natural catastrophesand currency risk are consideredtobe stabilisedcomparedwith data from six monthsago.For thenext six monthsthreerisksare expected to increasefurther, dueto turbulencesin thefinancial marketsand asa consequenceof asluggisheconomy, e.g. credit risk on sovereigns, propertyrisk and creditrisk to corporatesand households.Conversely, interestrate risk relatedtoa prolonged period of low interestratesisexpectedtodecreaseslightly.Solvency ii
  53. 53. Developments in the European reinsurance sectorMAJOR LOSS EVENTSIN 2011AND AT THEBEGINNING OF 2012Theyear 2011has set new records.At about USD 380bn, global economic lossesfar surpassed2005, thepreviousrecord year withlossesof USD 220bn and make 2011a year ofunprecedentedlosses.Original insured lossestotalled USD 105bn, slightlymore than 2005 sUSD 101bn(in original values).Themost destructive lossevent of the year 2011wasthe devastatingearthquakeof 11Marchin Tohoku, Japan, whichalone (includingthetsunami and without consideringtheconsequencesof thenuclearaccident) accounted for overall lossesof USD 210bn and insuredlossesof about USD 35bn - 40bn.It wasthecostliest natural catastropheof all timesand the strongestearthquake (magnitude of 9.0) ever recorded in Japan.Theearthquake wasalsothemost severe natural catastrophe in 2011relatingtofatalities:15,840people werekilled, roughly more thanthehalf of all peoplewhohave been victimsof natural catastrophesin 2011.However, thefigure doesnot includethecountlesspeoplewhodied asaresult of the faminefollowingthe worstdrought in decadeson the HornofAfrica, whichwasthe greatest humanitariancatastropheof theyear2011.Thesecond most expensivenatural catastrophein 2011for the insuranceindustrywasagain a very severe earthquake.On 22 February, New Zealand s second largest town, Christchurch, waspartly destroyed by an earthquakewith a magnitudeof 6.3, whichcausedSolvency ii
  54. 54. insuredlossesof about USD 13bn and overall lossesof roughlyUSD16bn.Thesetwolargeearthquakeswereresponsiblefor making geophysicaleventsthe dominant lossdrivers in 2011.Nearlytwothirdsof economiclossesand about half the insured lossesstemmedfrom geophysical events.Thelong term averagecontribution of geophysical eventshasbeen just22% of theeconomiclossesand only 10% of the insuredlosses.So2011wasexceptional not onlyduetoitsextraordinarilyhigh losses,butalsobecauseof significant deviationsof thedistributionof the lossestothedifferent perils.Sincethe hurricaneseasonwasrelativelyharmlessthestorm relatedinsuredlossesreachedonly 37% of all insured lossesin 2011comparedwith 76% in thelongterm average.Again, untypically, more than 50% of all insured storm lossesstemmedfrom devastatingthunderstormsand tornadooutbreaksin theUSAwhichaccountedfor an absoluterecordof insured lossesof about USD26bn.Afurther record in 2011representsthe floodingin Thailand.Solvency ii
  55. 55. With overall lossesof about USD 40bn and insured lossesof about USD10bnthe floodingin Thailand wasnot onlyby far the country smostexpensive catastrophe to date, but alsotheworld smost expensive flooddisaster.Aprominent role played the increasedimportanceof Thailandregardingthe global manufacturing supplychains.Alargenumber of keycomponent manufacturerswereaffectedby theflooding, leadingto production delaysand disruptionsat clientbusinesses.As a consequenceinsured lossescaused by production disruptionssoared up.So, despite thedominant geophysical eventsin 2011, the weatherrelatedeventsin total werealsovery severe, leadingtothesecond highest valuesrecorded since1980in termsof overall and insured losses(in 2011currencyunits).Even without the earthquakes,2011wouldhave been an extremenatural catastropheyear.Moreover, thedistribution of insured lossesbetweenthe continentsin2011wasalsoexceptional.Asia accountedfor 44% of all insured losses, whereasNorthAmerica andEurope together accounted for fewerthan 40% in 2011contrary tothelongterm averageof more than85% of all insured losses.Theabsenceof major losseventsin theWestern developed countrieswith a high insurancedensity left the insured lossesin relation to theoverall lossesat a low level and is one major reason whyoverall theratesonlyincreasedrelativelymodest in spiteof theheavy lossesin 2011.By contrast, lossactivityduringthe first three monthsof 2012hasbeenrelativelylight.Solvency ii
  56. 56. Insuredlossesduring the quarter are expectedtobe lessthan USD 5bn,significantlylowerthan lossesof over USD 50bn in thefirst three monthsof 2011.Thesinking of the cruiseship Costa Concordia, regional tornadooutbreaksin the US and earthquakesin Mexicoand Chile werethe mostsignificant lossesthat occurred in the first quarter of 2012.Despitetheheavy lossesof 2011, thereinsurancemarket continuestofunctionnormallyand hassufficient capital.At the end of 2011, the reinsurancecapacitywasonlythree percent underthelevel of 2010.Therenewalsin January andApril reveal that sufficient capacitywasavailablein the market in spiteof theheavylossesand thechallengingmacroeconomicenvironment (particular low investment yieldsandincreasedinvestment volatility).Several years of relatively benign payoutsaswell asthe recovery offinancial marketshad ledto reinsurancecapacitiessubstantiallyover thedemand, whichdepressed theprices.Consequentlythe ratesdid not riselargely, whichisvery different from other post lossmarkets.There are, of course,somemarked increasesin reinsurancepricesin theregionsand segmentsaffectedby losses, especiallyregardingtheAsiaPacific region.But overall therateshave gone up onlymodestly, last but not least due totheextensiveabsenceof major losseventsin Europe and North America.Particularlythe demand for reinsurancein theUS, wherereinsurancedemand far exceedsthat of any other region, continuestobe verysensitiveto price.Solvency ii
  57. 57. The2011hurricaneseason wasrelatively harmless.Themodel version changes(RMS v.11) wereoften alreadyreflectedinunderwritingprocessestovarying degreesbased on previouslossexperiencewith theresult of a lessincreaseddemand for reinsurancethan expectedearlier.Annex 1:Country abbreviationsAT AustriaBE BelgiumBG BulgariaCY CyprusCZ Czech RepublicDE GermanyDK DenmarkEE EstoniaES SpainFI FinlandFR FranceGR GreeceHU HungaryIE IrelandIS IcelandIT ItalyLI LiechtensteinLT Lithuania LULuxembourgLV LatviaMT MaltaNL NetherlandsNO NorwayPL PolandPT PortugalRO RomaniaSE SwedenSolvency ii
  58. 58. SI SloveniaSKSlovakiaUK United KingdomCH SwitzerlandSolvency ii
  59. 59. The translation (Japaneseto English) is ready!Insurance Inspection Manual(Inspection Manual for Insurance Companies)Points ofAttention for Inspections with Use of ThisManual(1)This inspectionmanual shall applytoall insurancecompanies,includingthe overseasofficesof Japanese insurancecompanies(overseasbranches,locallyincorporatedentities,representativeoffices,etc. provided however, that the determination of whether toincludetheseofficesin the inspectionsubject to thismanual shall be judged inview of applicablelawsand regulations,includingthe local regulatoryframework), aswell asJapanesebranchesof foreign insurancecompanies, etc. and specified corporations.(2)Whenthe insurancecompany is a company witha committeesystem,inspectionsshall be conducted from theviewpoint of whether the Boardof Directors, committees(such asthe nomination, compensation, andaudit committees), executiveofficers,and other corporatestructuresexercisetheir empoweredauthority, etc., paying attention tothefollowingpoints:- 1) Theauthorityto executebusinessis bestowedon executiveofficers,and in principle, directorsdo not have theauthoritytoexecutebusiness.- 2) The Board of Directorsmay delegate, by resolution, the authoritytomake businessdecisionsto executiveofficers.Solvency ii
  60. 60. - 3) The purposeof theBoard of Directorsis to supervisetheexecutionof therespectivedutiesperformed by directorsandexecutiveofficers.- 4) Auditing authorityis bestowedon theaudit committee,and not onindividual audit committeemembers. (Audit committeemembersappointedby theaudit committeemay exercisethe authorityof theaudit committee.)(3)In thecasewherean executivedirector (non-director) assumestherolesand responsibilitiesthat wouldnormallybe assumed by a directorin chargeof a specificbusinessoperation, it is necessarytoconduct acomprehensivereview asto whethertheBoard of Directorshasassignedtheofficer authoritysimilar in effect tothat whichwould be granted toadirector in charge, whetherthe focusof the responsibilityis made clear,and whether the Board of Directorssufficientlymonitorsthe execution oftherelevant businessoperation.Basedon thefindingsthereof, theinspectorshould determine whethertheexecutive officer is performing the rolesand responsibilitiesrequiredfor a director in charge, asspecified in thechecklistsof this manual.(4)Furthermore, whendue tocertain special reasons,it isnecessarytoconduct an inspectionof subsidiaries, etc., of insurancecompaniesorpartiesconductingbusinesson their behalf, examinationsasmay berequiredshall be conductedin accordancewiththeapplicablesectionsof this manual.(5)Unlessspecified otherwise,itemsexpressed in the question formsuch as“doesthe company…” or “isthe company…” refer torequirementsthat must bemet by insurancecompanies.Meanwhile, itemsprecededby “It isdesirable…” refer tobest practicesrecommended for insurancecompanies,unlessspecifiedotherwise.Solvency ii
  61. 61. With regard toitemsaccompanied by “for example,” insurancecompanies arenot required tofully complyletter-by-letterwiththecriteria and requirementsspecified therein.Theyare merelyexamplesof itemsthat may be useful for checkingwhetherinsurancecompaniesare meeting certain criteria andrequirements,in a manner befittingthe scaleand nature of theirbusiness.(6)Thefollowingare definitionsand usesof someof thekey termsinthismanual- 1) Itemsthat are defined asroles of “the Board of Directors” areitems for which the Board of Directors itself needs to determinesubstantial mattersrelated thereto.However, thisshall not precludeanother deliberativebody, divisionor department from discussing draft proposalsfor decision.- 2) The “Board of Directorsor organizationequivalent to theBoard ofDirectors”includes, in addition to the Board of Directors,otherentitiesthat decide mattersconcerningcorporatemanagement, withtheparticipationof senior managerssuch asa council of managingdirectorsand a corporate management council (hereinafterreferredtoasthe “Council of Managing Directors,etc.”).It is desirablethat decisionsconcerningitemsspecified astheprerogativesof the Board of Directorsor organizationequivalent totheBoard of Directorsbe madeby the Board of Directorsitself.In the casewherethedecision- making authorityis delegated to theCouncilof ManagingDirectors, etc., it isnecessaryto make sure thatthedelegation hasbeen madein a clearmanner, that a follow-upreview is provided for through the compilation of theminutesofmeetingsof the Council of ManagingDirectors,etc., and that asufficient check-and-balancesystem is ensured, througharrangementssuch asrequiringreportstobe madetothe Board ofSolvency ii
  62. 62. Directors,and allowingcorporate auditorsto attend meetingsof theCouncilof ManagingDirectors, etc.- 3) The “businesslocations”referstoorganizations,other than thehead office, whichincludesbranches,regional offices, businesslineheadquarters,businessoffices,overseasbranches, and overseascorporations.Theterm “businesslocations,etc.” refers tobusinesslocations,andalsoincludesservice centers(includinglossinvestigationoperations), overseasrepresentativeofficesand other locationsthatare not engaged in salesactivities,and businesslocationsother thanthehead office.- 4) The “manager” refers topersonsin senior managerial positionsinmanagement divisions(includingdirectors).Furthermore, the term alsoreferstothehead of a businesslocation,or seniormanagers thereof(includingdirectors) with levelsofresponsibilityequivalent toor higher than thehead of a businesslocation.- 5) The “employees, etc.” refers toemployees, salesrepresentatives,and insuranceagentsof insurancecompanies.- 6) The “insurancesalesrepresentatives”refers tosalesrepresentativesand insuranceagents,but doesnot includeinsurancebrokers.- 7) The “policyholders” referstopersonswhoarepartiestoinsurancecontractswithinsurancecompanies.- 8) The “policyholders,etc.” refers topolicyholders, insuredpersons,andbeneficiaries.Solvency ii
  63. 63. - 9) “Internal rules”are rules that specifyarrangementson aninsurancecompany‟sbusinessin accordancewithitscorporatemanagement policy, etc. that are applicablewithinthe company.It should be noted that internal rules donot necessarilyhavetospecify detailed procedures.- 10)The “marketingand salesdivision” referstoa division,department, or businesslocation engaged in salesbusiness.Forexample, a division involveddirectlyor indirectlyin salesor engagedin salespromotionplanningis a marketing and salesdivision.- 11) The “legal checks, etc.,” which includesa compliancecheck,means, for example, a validation of the consistencyand compatibilityof internal rulesand the legalityof transactionsand businessoperationsbypersonnel in chargeof legal affairs, a division in chargethereof, personnel in chargeof compliance,thecompliance controldivision, and in-houseor outside lawyersand other experts.- 12)“Monitoring” refers tonot onlysurveillancebut alsoimplementationof specificpre-emptivemeasuressuch asissuingwarnings.- 13)The “risk profile” of a financial institutionrefers tothesum offeaturesof variousriskstowhichthe institutionis exposed.Checklist for BusinessManagement (Governance) (for BasicElements)Checkpoints- In order toprotect customersby ensuring the sound and appropriatemanagement of businessand fairnessof insurancesolicitationof aninsurancecompany, under appropriate governance, thoroughimplementationof legal compliance,proper insurancesolicitationandcustomer protection, and accuratemanagement of variousrisksacrossall businessesof theinsurancecompanyare needed.Solvency ii
  64. 64. -In order toenablean insurancecompany to conduct businessmanagement (governance) effectively, officers and employees, aswellasorganizationswithin thecompany must perform their respectiverolesand responsibilities.Tobe more specific, directorsand other executivesare responsiblefornurturing workethicsand cultivatinga company-wide culturethatattachesimportanceto internal control.Therepresentative directors,non-representativedirectorsand corporateauditorsmust understand their own rolesin thevariousprocessesofinternalcontrol and fully involvethemselvesin theprocesses.Also, it is important that theBoard of Directorsand the Board ofAuditorsfunction effectivelyand that thefunctionsof a check-and- balancesystemamongdivisionsand departments, and thefunctionsof internalauditsbytheInternalAudit Division are executed appropriately.-Theinspectorshould determine whether the insurancecompany‟sbusinessmanagement (governance) system is functioningeffectivelythroughout the institutionand whetherthe management isperformingitsrolesand responsibilitiesappropriatelyby wayof reviewing, withtheuseof the check itemslistedin thischecklist, theeffectivenessof thefunctionsof five basicelements,namely a system of(1)Businessmanagement (governance) by therepresentativedirectors,non-representativedirectorsand the Board of Directors,(2) Internal audits,(3) Auditsby corporate auditors,(4) External audits,and(5) Checkingby actuaries.- If the insurancecompany‟s management fails torecognize weaknessesor problemsrecognized by the inspector,it is alsonecessarytoexplore,Solvency ii
  65. 65. in particular, thepossibilitythat the Internal Control System isnotfunctioningeffectively, and review the findingsthereof through dialogue.-Theinspectorshould review the statusof improvementswith regard tothemajor issuespointed out on the occasion of the last inspectionanddeterminewhetheror not effectiveimprovement measureshave beendeveloped and implemented.Checklist for Legal ComplianceCheckpoints-The development and establishment of a legal compliance system isone of the most important tasks for an insurance company in order tosecure the sound and appropriate management of itsbusiness.Therefore, the company‟s management ischargedwith and responsiblefor taking theinitiativein developing and establishingthe legalcompliancesystem that coversthe company‟s entire businessbydecidinga basic policyon legal complianceand developing anorganizational framework,etc..-Theinspectorshould determine whether the legalcompliance system isfunctioningeffectively and whethertherolesand responsibilitiesof theinsurancecompany‟sBoard of Directorsare being appropriatelyperformed by wayof reviewing, withtheuseof check itemslistedinChapter I., whetherthemanagement isappropriately implementing(1) Policy development,(2)Development of internal rulesand organizational frameworksand(3) Assessment and improvement activities.- If any problem is recognizedasa result of reviewsconductedwiththeuseof the check itemslistedin Chapter II and later in this checklist, it isnecessaryto exhaustively examinewhichof the elementslistedinChapter I are absent or insufficient, thuscausingthesaid problem, andSolvency ii
  66. 66. review findingsthereof through dialoguebetweenthe inspector and theinsurancecompany.-If the company‟s management fails torecognize weaknessesorproblemsrecognized by theinspector,it is alsonecessarytoexploreinparticular the possibility that the InternalControlSystem is not functioningeffectivelyand review findingsthereofthroughdialogue.-Theinspector should review the statusof improvementswith regard totheissuespointed out on the occasionof the last inspectionthat arenotminor and determinewhetheror not effectiveimprovement measureshavebeen developed and implemented.Toread morehttp:/ / en/ refer/manual/ hoken_e/ h-all.pdfSolvency ii
  67. 67. Interview with Gabriel Bernardino, Chairman of EIOPA,conducted by Silke Wettach, WirtschaftsWoche (Germany)Mr Bernardino, howmuch doesEIOPAcurrentlyknowaboutoccupational pensionsin theEU?Bernardino:We currentlyhave very littledata from pension fundsat theEuropean level.We d on ‟t h ave a comm on lan guage and national regimesconsiderablyvary from eachother, whichmakesit even more difficultto havecomparable data for different countries.We cannot easily assessthesustainabilityof thefundsand thesoundnessof their promises.Acommon and transparent frameworkthat ensurescomparable datawouldbe extremely useful in this case.Sohowareyou goingto proceedwith it?Bernardino:If wehad comparable data wecould conduct stressteststhewaywealreadydofor insurers.We have no scheduleddate, but thisis in our plansin thenear future.What doyou expect from theIORPsstresstest?After thestresstestsinthe bankingsector thepicture wasinsufficient.Bernardino:European pension fundsmanagein total 3 trillion EUR inassets.Solvency ii
  68. 68. Theyare represented in assetseverywhere whichmakesthem relevantfor the economy and for the stability of our financial system.That is whyEIOPAproposesto conduct annual stresstestsfor the bigpension fundsat theEuropean level.At the same time supervisoryauthoritiesshould perform stresstestsatthenational level.SmallerIORPscan be testedon a lessfrequent basis.What wewant to know while conductingstresstestsis wherethe futurevulnerabilitiesare?But here weare talkingabout a very longtermperspective.With thebankingstressteststherewerealot of national reflections.Nobodywanted to seenational championsfailing. Will thesituation inoccupational pensionsbedifferent?Bernardino:We have now a very sensitivediscussionon thepensionssideand it wasexpected.Thetruth must finallybe put on the table.And howexactlydoesthetruth looklike?Bernardino:Occupational pensionsarenow under a great pressure.Everywhere be it Germany, theNetherlandsor theUK population andlabour forceare contracting.At the same time stock marketsbecome very volatileand have atendencyto go down.Thelong term interestratesare alsodecreasing.All this threatensthosepension promisesthat weremade in the past.Solvency ii
  69. 69. But if wedeny the reality, wewill not takeany action.And I am afraid that on theoccupational pensionsif wedon‟t act, wemight be heading towardsan inter-generational conflict, whenthepensionsof future generationsmight be significantlyreduced.What arepolicyholdersgoingtoface?Bernardino:It isquitesimple:if I make a promisetopay basedon acertainassumptionand thisassumptionchanges,theneither I can paylessor I request higher contribution.In the Netherlandswealready witnessthe consequences:occupationalpension fundscut their paymentsbecausemarket interestratesare lowerthan it wasoriginallyanticipated.Are theNetherlandssmarter than theothers?Bernardino:Some countriesare more transparent. And thisisexactlywhat werequire from others when wesuggest a “holistic balancesheet”or an extendedsolvencybalancesheet.Each employee will exactlyknow the riskshebearsand whichpaymentshewill get. Sosuch a reality+driven check+up wouldbe beneficial foreverybody.Perhapssome fundsareabsolutely not interested that their truecondition comestolight?Bernardino:Some fundsdiscount long term liabilitieswithtoohighinterest rates.If you use more prudent and real discount ratesthey will report hugeunderfunding. And of coursecompaniesdo not want that it comesout,but it isnot a secret.How goodarethefunds‟managers?Solvency ii
  70. 70. Bernardino:Thequalityvariesand in any caseit must be improved. Thecurrent low interest ratesmake IORPssearch for interestinginvestments.And thismakesit very important for fund managersnot just tooutsourceasset management.Thosewho, however, instruct a third party to invest in derivativesorstructuredfinancial instruments, should at leasthavea thoroughunderstandingof the possibleconsequences.Theindustryexpectsthat theEU is goingto set upthesamecapitalrequirement fortheIORPsasfortheinsurers. Is that correct?Bernardino:We do not want just tocopythe requirementsfor insurers.However, let‟stakea situation when a companyhasa pension plan andtransfersthe risk tothe IORP like it usedto do withan insurancecompany.In thissituation whycan‟t thesame regulation be appliedtothe IORP?.But thisshouldnot be the caseif pension fundsact asinvestmentvehiclesand their risk is taken by the company or a protection fund.SomeGerman criticsfear that theCommission s planscould destroytheGermansystem. Doyou understand their fears?Bernardino:It isnot our intention todestroy anykind of systemsand ourgoal is not todesigna perfect regulation, whichmakesoccupationalpensionssoexpensive that nobody can afford them.But the worst scenario wouldbe if thosepension promiseson whicheverybody counted, fail. This is whywemust act. Ultimately, it is like thedebt crisis:it emerged not becausepeople know littleabout economics,but becausetheyweredenying the reality. And this isalwaysexpensive.Solvency ii
  71. 71. Overview of Progress in the Implementation of the G20Recommendations for Strengthening Financial StabilityReport of the Financial Stability Board to G20 Leaders, 19June2012IntroductionSincethe onset of theglobal financial crisis, theG20hasestablished coreelementsof a new global financial regulatoryframework that will makethefinancial system more resilient and better abletoserve theneedsofthereal economy.National authoritiesand international bodies,withthe Financial StabilityBoard (FSB) asa central locusof coordination, havefurther advanced thisfinancial reform programme, basedon clearprinciplesand timetablesforimplementation.TheFSB coordinatesand closelymonitorsthe national implementationof agreed G20and FSBfinancial reformsand is responsiblefor reportingon it tothe G20.TheFSB set up in October 2011a Coordination Framework forImplementation Monitoring (CFIM), in collaborationwithinternationalstandard-settingbodies (SSBs), to intensifyitsmonitoring and publicreporting on implementation, focusing in particular on priorityreformareas.This report details theprogressmade in global policy development andin implementation of global policyreformssincethe G20 CannesSummit in November 2011.Acentral pieceof theinternational policyreformsisstronger minimumstandardsfor bank capital and liquiditythrough implementation of BaselII, II.5and III requirements.Solvency ii
  72. 72. As of end-May 2012:- 20of 27member jurisdictionsof the Basel Committeeon BankingSupervision (BCBS) had implementedthe BaselII.5rulestostrengthen capital chargesfor banks‟tradingbooksand complexsecuritisations,whichweredue to come intoforce from end-2011.Six member countrieshave not issuedfinal regulationsin thisarea.- 20of 27BCBS member jurisdictionshave issued draft or final BaselIII regulations,implementation deadlinefor which is1January 2013.Sevenmember jurisdictionshave yet todo so, but themajorityofthesebelieve theycan issuefinal regulationsby theimplementationdeadline.Another central reform objective is ending “too big to fail” throughstrengthened resolution regimes and resolution planning for globalsystemically important banks(G-SIBs):- Encouraging progresshasbeenmade by major jurisdictions,includingthe US, UK and EU, toput in placeor proposelegislationtoestablish effectiveresolution regimes;- However, although cross-border crisis management groups(CMGs)havebeen establishedfor 24 of the 29G-SIBs, much further workisneeded to develop resolution strategiesand plans,and thecross-border co-operationagreementsneededtoensure the resolvability oftheseG-SIBs.With regard toreformstoover-the-counter(OTC) derivativesmarkets,all jurisdictionsand marketsneed toaggressively push ahead to achievefull implementationof market changesby end-2012tomeet the G20commitmentsin asmany reform areasaspossible:- Good progresshasbeen made by thosejurisdictionswiththelargestOTC derivativesmarkets, includingtheUnitedStates(US),European Union (EU) and Japan, in advancingnational legislationSolvency ii
  73. 73. and regulation and practical implementationof reformstomarketinfrastructures;- SSBshave alsomade significant progressin developing theinternational policiesthat are keyto advancingOTC derivativesreform implementationacrossjurisdictions.All jurisdictionsnow have sufficient informationabout internationalstandardsand policiestoput in placethe needed domesticlegislationand regulation.With regard toreform of compensation structuresat financialinstitutions:- Almost all FSB member jurisdictionshave now implementedthe FSBPrinciplesand Standards for sound compensation practicesinregulation or supervisoryguidance.SinceCannes, jurisdictionsthat showedsignificant gapshaveprogressed.However, sustainedsupervisoryand regulatoryattention will beneeded to achievelastingimprovementsin financial firms‟compensation structuresand practices.Sincethe CannesSummit, the FSB and itsmembershave made goodprogressin policy development in areaswhere G20objectiveshave beenagreed, includingdeveloping proposalsfor public consultation onextendingthe frameworkfor systemically important financial institutions(SIFIs) to cover global insurersand domesticbanks, measuresto addresstheregulation and oversight of shadowbanking, and thedevelopment ofa governanceframework for a global Legal EntityIdentifier (LEI) system.An important goal of the monitoring processisto highlight, forcorrectiveaction, areaswheretherearerisks that policyobjectiveswillnot be met, or whereimplementationis not meeting theagreedtimelines.Solvency ii