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Solvency ii News June 2012

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Solvency ii Association …

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

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

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

Register to receive Solvency II / Omnibus II related alerts, opportunities, updates, our monthly newsletter and limited time offers for our Solvency II / Omnibus II Training and Certification programs:
http://forms.aweber.com/form/28/1910009328.htm

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  • 1. Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Wecontinue to seethat SolvencyII is “futurerule” …Solvency ii Associationwww.solvency-ii-association.com
  • 2. Preparefor the OmnibusII DirectiveTheSolvencyII Framework Directive(2009) on the financial positionofinsuranceundertakingshashad to be adaptedin responseto:new architecturefor itsimplementingmeasuresintroduced in theLisbonTreaty(2009)Solvency ii Associationwww.solvency-ii-association.com
  • 3. new financial supervisionmeasuresintroduced in Regulation1094/2010establishingthe European Insuranceand OccupationalPensionsAuthority.Thesechangesare implemented through the“OmnibusIIdirective”, currentlyin negotiationsbetweenParliament and Council.Implementing MeasuresTheFramework Directiveisprinciples-based, and thedetailed rulesoftheSolvencyII regime will be contained in ImplementingMeasuresadopted by the Commission, and coveringabout 40 important areasintheFramework Directive.TheCommission will proposeimplementingmeasuresafter OmnibusIIdirectiveentersintoforce.Technical standardsand guidelinesTechnical standards:- concern purelytechnical matters(nostrategic decisionsor policychoices)- requirethe expertiseof supervisoryexperts- are adopted by theCommission based on draftssubmittedbytheEuropean Insuranceand Occupational PensionsAuthority (EIOPA).Regulatory Technical Standards(RTS)Theseare standardsfor the consistent harmonisation of rulesin EUlegislativeacts.Implementing Technical Standards(ITS)Theseare standardsfor the uniform applicationof legallybindingEUacts.Solvency ii Associationwww.solvency-ii-association.com
  • 4. Areas tobe covered, asproposed in theOmnibusII Directive, are:uniform reportingtemplatesharmonisedtechnical input tothestandard formulaharmonisedproceduresand templatesfor cooperationtheexchangeof information betweensupervisoryauthoritiesGuidelinesTheEuropean Insuranceand Occupational PensionsAuthority(EIOPA) can issueguidelinesto supervisorsand undertakingswhich isnot legallybinding, but companiesor supervisorsnot complying willhavetoexplaintheir reasons.Solvency ii Associationwww.solvency-ii-association.com
  • 5. Joint Consultation Paper on the proposed response to theEuropean Commission‟sCall for Advice on the FundamentalReview of Financial Conglomerates Directive14May 2012TheJoint Committeeof the European SupervisoryAuthorities(EBA, EIOPA and ESMA) is launchingtoday a three-month publicconsultation on theproposed responsetothecall for technical advicefrom theEuropean Commission on thefundamental review of theFinancial ConglomeratesDirective(“theFICOD“).This consultation covers three broad areas where advice is sought by theEuropean Commission: the scope of application, the group wide internalgovernance requirements and sanctions and supervisory empowermentsunder theFICOD.In its proposed response,the Joint Committeeissuesa seriesofrecommendationsfor the review of the FICOD, includingthe wideningofthescope of supervision, addressingrequirementsand responsibilitiestoa designated entitywithinthe financial conglomerateand theframeworkof supervisory powersprovided by the FICOD.Moreover, theJoint Committeewill be providing later thisyear, asupervisorycontribution to the widerfundamental review of theFICOD, whichis beingcarriedout by the European Commission.EBA, EIOPAand ESMA‟sJoint Consultation Paper on itsproposed response to the European Commission‟s Call forAdvice on the Fundamental Review of the FinancialConglomeratesDirectiveLondon, Frankfurt, Paris, 14May 2012Solvency ii Associationwww.solvency-ii-association.com
  • 6. 1.Responding to thisConsultationThethree European SupervisoryAuthorities, the European BankingAuthority (EBA), the European Insuranceand Occupational PensionsAuthority (EIOPA) and theEuropean Securitiesand MarketsAuthority(ESMA) invitecommentson all mattersin this.Commentsare most helpful if they:- Respond tothe question stated;- Indicatethe specific questiontowhichthe comment relates;- Contain a clear rationale;- Provideevidencetosupport the viewsexpressed/ rationaleproposed;and- Describeany alternativeregulatory choicesEBA/EIOPA/ESMA should consider.2. Executive Summary1.The Joint Committeeof theEuropean SupervisoryAuthorities‟SubCommitteeon Financial Conglomerates(JCFC) received a Call forAdvice from the European Commission inApril 2011to look at the(A)Scope of application, especiallythe inclusion of nonregulatedentities(B) Internal governancerequirementsand sanctions,and(C)Supervisoryempowerment of Directive2002/87/ EC on thesupplementarysupervisionof credit institutions,insuranceundertakingsand investment firmsin a financial conglomerate(FICOD).This advice shall contributetothe European Commission‟sfundamentalreview of the FICOD, followingthe short technical review,resultinginDirective2011/ 89/ EU (hereafter FICOD12).2.As a result of its analysis, theEBA, EIOPAand ESMA, hereinaftertheESAs, proposethe followinganswerstothequestionsrisenby theSolvency ii Associationwww.solvency-ii-association.com
  • 7. Commission in itsfourth Call forAdvice (hereinafterCfA):Question 1CfA: What shouldbetheperimeter of supervision, whenafinancial conglomerate is supervised on a group widebasis?3. Recommendation 1:ThePerimeter of supervision should be enlargedtoensurea morethorough group widesupervision and avoid possibleregulatoryarbitrage,by enhancingthegroupsof entitiesthat can be included in theidentificationof a financial conglomerate.Accordinglythe ESAs suggest to allowfor a more consistent and broaderidentificationof financial conglomeratesto modify thedefinition of“financial sector” [accordingtoArticle 2(8) FICOD] and/ orthedefinitionof “regulatedentities” [accordingtoArticle 2 (4) FICOD].Therefore, thedefinition of financial sector [Article 2 (8) FICOD] shouldbeenlarged to includeinsuranceancillaryservicesundertakingsand allspecial purposevehicles/entitiestoenable a broader identificationoffinancial conglomerates,and toenablethat the risksare appropriatelycaptured.4. The ESAshave assessedwhetherInstitutionsfor occupationalretirement provision(IORPs) should be included aspart of a financialconglomerate and are mindful of the national specificitiesof IORPs.TheESAs welcometheviewsof the stakeholderson the followingoptions:Option 1:IncludeIORPswithin thedefinitionof “financial sector”, in a similarmanner tothe inclusion ofAlternative Investment Fund Managers(AIFM) andAsset Management Companies(AMC) within FICOD, e.g.by enlargingthe definition of a regulatedentityaccordingtoArticle2 (4)FICOD and by amendingArticle 3 FICOD respectively.Solvency ii Associationwww.solvency-ii-association.com
  • 8. Option 2:Maintainthe statusquo; such that IORPs wouldnot beincludedwithingroup widesupervision at cross5sectorallevel, given that prudential risksposed by IORPstofinancial conglomerateshave not been demonstrated.However, thismight implythat relevant financial activitiesof IORPsmight not be taken intoaccount whenidentifying a financialconglomerate and applying supplementarysupervision.5. Recommendation 2:Mixedfinancial holdingcompanies(MFHCs), even ifunregulated, should be made subject tosupplementary supervisionor anytype of requirementsthat are proposed below.Accordingly, MFHCsshould be includedtogether with regulatedentitiesasthe legal addresseeof supplementarysupervision.6. Recommendation 3:Companiesundertaking solely industrial activities(with no financialservicesactivityat all), such asindustrial conglomerates, should not besubjecttodirect financial supervision asthesupervisoryfocusmight bediverted from financial undertakings.Mixedactivityholding companies (MAHCs) and mixed activityinsuranceholding companies(MAIHCs) should not become directaddresseesof FICOD, but the supervisor should have theability toaccessrelevant informationfrom such MAHC and MAIHC withinitssupervisorytool kit.The following supervisory tools are not mutually exclusive and the ESAswelcome the views of the stakeholders in order to assess the implicationof this recommendation further.7. Supervisorsshould be empowered:Solvency ii Associationwww.solvency-ii-association.com
  • 9. Tool1–Torequire the creationof an intermediatefinancial holdingwhichisresponsiblefor all the entities(or at least, all theregulated entities)carrying out financial activitiessubject to supplementarysupervisionandwhichwill be the“addressee” for supervision.Tool2–Todesignateone single“point of entry” at the top of theunregulatedentitiesin place of a formal „commonchapeau‟of the financial entitiesinthegroup.This point of entry isnot a legal person, but a simple referencefor thesupervisors(e.g. a specificteam or division or a member of theBoard oftheparent entity).Tool3–Todesignatea specified regulatedentityaspoint of entry whichdoesnot necessarilyneed to be thetop entityof the entire financialconglomerate.This option has merit if the enforcement requirements and sanctioningmeasures addressed to the top entity cannot be adequately enforced bythesupervisors.Question 2 CfA: Given your experienceand expertise,whichlegal entityin a conglomerateshould be responsibleand qualify for compliancewithgroup widerequirements,i.e. which legal entityshould be theresponsibleparent entity?8. Recommendation 4:TheEuropean Commission should identify and define an ultimateresponsibleentity for the financial conglomerateaccordingtothefollowingminimum criteria: control, thedominant entityfrom theSolvency ii Associationwww.solvency-ii-association.com
  • 10. market‟sperspective(market listedentity) and the ability tofulfilspecific dutiestowardsitssubsidiariesand itssupervisor.Question 3 CfA: Given your supervisoryexperienceand expertise,whichrequirementsshould be imposed on this qualified parent entityin thecontext of group widesupervision?9. Recommendation 5:This ultimateresponsibleentityshould be responsiblefor compliancewith group wide requirements.TheEuropean Commission should explicitlyrequirethe ultimateresponsibleentitytohave a coordinating and directingrole over theother entitiesof the conglomerate.Moreover, some existingrequirementsfor regulatedentities andrequirementsthat can be derived from theESAs‟guidelineson InternalControlsshould alsobe applicablefor the top parent entity, whethertheregulated entityis a HoldingCompany or a Financial HoldingCompany(FHC), InsuranceHolding Company (IH C) or a MFHC.Question 4 CfA6: Given your supervisoryexperienceandexpertise, whichincentives(special benefitsor sanctions) wouldmake theenforcement of thegroup widerequirementsmorecredible?10.Recommendation 6:In order toensurethat the group widerequirementsare enforceable, theEuropean Commission should develop an enforcement regime towardstheultimateresponsibleentityand itssubsidiaries.This would implya dual approach withenforcement powerstowardsthetop entityfor group widerisksand towardsthe individual entitiesfortheir respectiveresponsibilities.Solvency ii Associationwww.solvency-ii-association.com
  • 11. Correctivemeasuresshould be directed towardsthe entitythat isresponsiblefor the respectivebreach.11.Recommendation 7:In any case, the supervisor should have a minimum set ofmeasures,consisting of informative and investigativemeasures,athand (seeRecommendation 3).Supervisorsshouldbe able to administer sanctionmeasuresaddressed attheMAHC or MAIHC, wherethisentitydoesnot to providetherequested information.Moreover, when(under Tool 1,Recommendation 3) an intermediatefinancial holding companyhasbeen established, supervisorsshouldbeableto administersanction measuresat this intermediatefinancialholding company.Question 5 CfA: When reflectingupon this advice, wouldsupervisorsinEurope need other or additional empowerment in their jurisdictions?12.Recommendation 8:Whilst theFICOD provides theESAsand the supervisorswitha largesupervisorytool kit, supervisor‟sactual useof this tool kit should beenhanced.Further a minimum set of enforcement measuresthat nationalsupervisorsshouldhaveat their disposaltowardsthe group (Article 16FICOD), should be achieved by theESAsdeveloping guidelinesor bybeingasked to develop bindingtechnicalstandardsfor a commonreporting scheme on risk concentrationsand intra grouptransactions,(includingthepossibledevelopment of guidelinesforquantitativelimitsunderArticle 7 (3) and 8 (3) FICOD).Solvency ii Associationwww.solvency-ii-association.com
  • 12. This alsoimpliescreatinga minimum set of sanctioningmeasuresthatshould be applied towardsthe group in caseof a breach of group widerequirements.In addition, theEuropean Commission should takeintoaccount sectoraldifferencesthat may arise betweenCRD IV and SolvencyII.Structuresof a financial conglomerateThefollowingexampleillustratesthat there are some group structuresthat make it very difficult toidentify a financial conglomerate:In some casesa subgroup within a largecomplex group (hereafter LCG)qualifiesasa financial conglomerate. But after calculatingthethresholdfor the entire group (includingthe “real” industry) this group doesnotfulfil the FICOD‟s40% threshold and, therefore,the wholegroup will notbesubject tosupplementarysupervision.This situationmay alsobe a wayof avoidingsupplementarysupervision.Solvency ii Associationwww.solvency-ii-association.com
  • 13. By settingup a chain of holdingcompanies with subsidiariesof “real”industrythe 40%5threshold will not be fulfilledafter a certainpoint.Currently, the supervisor isonlyallowedtoaddresstheregulatedentity(e.g. in order to get information).Theregulatedentityhas tocooperatewithitsparent entity(and isresponsiblefor the deliveredinformationto the supervisor) but has(under company law) no powersto get necessaryinformation.Thereforethepossibilityto addresssupervisoryissuesconcerninginformation and sanctionstoholdingcompaniesshould bestrengthened.In addition, there might be structureswhich are even more complex.In thesecasesindustrial groupsmay have many different regulatedentitieswhichare not held by one parent entitybut arespread over thegroup.Solvency ii Associationwww.solvency-ii-association.com
  • 14. In thiscase,it is almost impossiblefor supervisorstoidentify theholdingcompany whichmay qualify asMAHC or MAIHC.Further, supervisorsmight not be abletosupervisethe group on agroupwidelevel toavoid double gearing;but the regulatedentitiesof thebankingand insurancesector are all supervisedon a sololevel.Thepotential negativeeffects(arisingfrom intragroup transactionsorrisk concentrations) are scarcelyvisible.This may lead tospillovereffects(either from theindustrial part to thefinancial part or vice versa).Solvency ii Associationwww.solvency-ii-association.com
  • 15. Consequently, supplementarysupervision on a group widelevel wouldhelp (if this group doesnot qualify asa financial conglomerateaccordingtoArticle 3FICOD).Thus, introducinga responsibleentitywithinthe group asan addresseefor supervisoryactionswouldlead to more clarityfrom a supervisorypoint of view.Tolearn more:http:/ / www.eba.europa.eu/ cebs/media/ Publications/ Consultation%20Papers/2012/JC%2001/JC-CP-2012-01--ESAs-Joint-CP----EC-call-for-advice-on-fundamental-FICOD-review-.pdfSolvency ii Associationwww.solvency-ii-association.com
  • 16. The fit and proper requirements…Tribunal upholds FSAdecision to ban and fine former UBSadvisers£1.3m for not being fit and proper in relation to anunauthorised trading scheme21May 2012TheUpper Tribunal (Tax and Chancery Chamber) hasdirected theFinancial ServicesAuthority (FSA) to fineSachin Karpe £1.25millionand Laila Karan £75,000and ban them both from performing any roleinregulated financial servicesfor failing toact withintegrity, in breach ofPrinciple1of the FSA‟s Statementsof Principlesand Code of ConductforApproved Persons(“APER”) and for not beingfit and proper persons.Between January 2006 to January 2008, Karpe wasDesk Head of the AsiaII Desk at UBS AG (UBS) international wealth management business inLondon.BetweenFebruary 2007and January 2008, Karan worked asa ClientAdvisor on theAsia II Desk, reporting directlytoKarpe.TheAsia II Desk providedservicestocustomersresident in India, or ofIndian origin.KarpeDuring the relevant period Karpecarriedout substantial unauthorisedtrading, predominantlyin FX instruments,witha grossvalueof billionsof poundsacross39customer accounts.He alsomade unauthorisedtransfers and loansbetweenclient accountsin order to conceal lossesarisingfrom theunauthorised trading.Solvency ii Associationwww.solvency-ii-association.com
  • 17. He directed others(includingKaran) toassist him in arranging thetransfersand loans,and creatingfalsedocumentation for theunauthorisedtrading.His scheme resulted in substantial lossesfor 21customers.UBS hassincepaid compensation to theaffected customersin excessofUS$42million.Karpe also established an investment structure to enable a major (Indianresident) customer (via an investment fund incorporated in Mauritius) tobreach Indian law in clearcontravention of UBS guidelines.Ultimately, the customer invested over US$250million in the fund.Karpe deliberatelyand repeatedlymisled compliancein order toaccommodatehiscustomer.Karpe alsomisled UBS and senior management about payingcompensationto a customer using moniesfrom another customeraccount.TheTribunal found that:“Mr Karpe induced others serving on his desk toparticipatein what wasan obviouslydishonest course of conduct...weinfer that the wholemotivation wastobenefit him indirectlyand in the longterm byobtainingnew clientsthrough his apparent prestige, increasingfundsunder management and therebyadvancing his career and increasinghisbonuses.”TheTribunal acceptedthat the compliancefailings at UBSmight havecreated an environment withinwhichstaff could “get awaywith”misconduct – however, this wasnoexcusefor Karpe‟ssustaineddishonesty.KaranKaran did not instigate theunauthorised trading; however, she wasawarethat unauthorised activitywasoccurringon some customeraccountsfor whichshe wasresponsible.Solvency ii Associationwww.solvency-ii-association.com
  • 18. BetweenFebruary2007and January 2008, rather than escalatingthisknowledge, Karan assisted Karpe in concealing the unauthorised activity.In particular, Karan preparedfalse, handwrittentelephoneattendancenotespurportingto recordcustomer instructionsshe had received whenshehad taken no such instructions;routed transactionsthrough asuspenseaccount in order toconceal their origin and destination;signeda number of UBSdocumentsrecordingthe approval of transactionsontheaccountswithout having received instructionsor authorisation fromthecustomers;and failed to escalateher knowledgeof unauthorisedloansbetweencustomers.Ms Karan alsofailedto escalate her knowledgethat Mr Karpe hadmisled UBSand senior management about paying compensation to acustomer usingmonies from another customer account.TheTribunal noted that:“We recognisethat Ms Karan had been placed in an extremely awkwardsituation through the manipulation of Mr Karpe.Thefact, however,is that over and over again shechosetogoalong withand, on occasions,tofacilitateMr Karpe‟s wrongdoing.”TraceyMcDermott, actingdirector of enforcement and financialcrime, said:“Karpeexploitedand abused his positionof trust, and persuaded morejunior employees toengagein misconduct to assisthim.Such behaviour is in breach of his obligationsto his employer, his clientsandhis colleaguesaswellasto the regulator.It hasnoplacein the financial servicesindustry.We welcomethe Tribunal‟sconfirmation that aswell asbanningKarpe, a significant financial penaltyshould alsobe imposed.This sendsa clearmessageof theconsequencesof such behaviour.Solvency ii Associationwww.solvency-ii-association.com
  • 19. “Karan sought to categorise herself as a victim in this matter. TheTribunal (as had the FSA) recognised that she did not initiate themisconduct, and wasplaced in a difficult positionby Karpe.However, the findingsand the resultingsanctionssenda clear messagethat an approved personmust take responsibilityfor their own actions.Wherean approved person is awarethat colleaguesareengaginginmisconduct, weexpect them toblow thewhistle,not to become involvedthemselves.“Thosewhotake on the responsibilityof beingan approvedpersonshould be in nodoubt about our commitment totake thestrongestaction totacklebehaviour whichfallsbelowthe high standardsweexpect.”In November 2009the FSAfined UBS£8million for systemsandcontrolsfailuresin relationto theunauthorised activitywhichoccurredon theAsia II Desk.In December 2011Jaspreet SinghAhuja and in November 2009AndrewCumming, both former Asia II Desk client advisers,werebannedandfined £150,000and £35,000respectively.Solvency ii Associationwww.solvency-ii-association.com
  • 20. Gabriel Bernardino, Chairman of EIOPAEIOPA, Solvency II and the LossAdjusting ProfessionGeneralAssembly of the European Federation of LossAdjusting ExpertsLadies and Gentlemen,It is a privilegeand pleasure tobe here at the GeneralAssembly of theEuropean Federation of LossAdjusting Experts.I wouldlike tostart with a thank you totheorganizersand tothePresident of FUEDI Mr. Rui deAlmeida for invitingme to participateinthisevent.In my presentationtoday, I will touchon three main issues:I.What is EIOPA, the European Insuranceand Occupational PensionsAuthority for whom I have theprivilegetoserveaschairman;II.How SolvencyII can contributeto theimprovement of riskmanagement;III.Thelossadjustingprofession, its relevancefor the insurancemarketandthe overall society.Solvency ii Associationwww.solvency-ii-association.com
  • 21. What is EIOPA?EIOPA is the European supervisoryauthority for the insuranceandoccupational pensionssectors.We are a young organisation:in January, wecompleted our first year asaEuropean agency, one of thethree European SupervisoryAuthoritiesinthe financial system.We are an independent Union body withlegal personality, accountabletothe European Parliament and the Council.We clearlyseeour mission, tasksand responsibilities.We see EIOPA‟s mission in protectingpublic interest by contributingtotheshort, medium and longterm stabilityand effectivenessof thefinancial system, for theEU citizensand economy.This mission ispursuedbypromotinga sound regulatory frameworkand consistent supervisorypracticesin order toprotect the rightsofpolicyholders, pension scheme membersand beneficiariesandcontributeto the public confidencein the European Union‟sinsuranceand occupational pensionssectors.This is a very important mission if werealize the relevanceof insuranceand occupational pensionsin thedaily life of citizensand on thedevelopment of theeconomy.Theobjectivesof the new European supervisoryauthorities,andparticularlyof EIOPA, are extremely relevant:- Contributetoa stableand effectivefinancial system;- Promote sound regulationand supervision;- Enhancecustomer protection;Solvency ii Associationwww.solvency-ii-association.com
  • 22. - Ensure thetransparent, efficient and orderlyfunctioningof themarkets;- Contributetointernational supervisorycoordination;- Avoid regulatory arbitrage;- Ensure equal conditionsof competition;and-Implement appropriate regulation and supervision of risks. Inorder tofulfil theseobjectives,EIOPAhas important powers.We develop technical standardsthat become bindingfor all insuranceundertakingsin theEU and issueguidelinesand recommendationsthatnational supervisorsapplyon a “complyor explain” basis.We settledisagreementsbetween national supervisory authoritiesincrossborder situationsand have a coordinatingrole in crisissituations.EIOPA monitorsthecorrect application of the EU law in thedifferentMemberStates, byusing, if necessary, its powersof investigation in localmarkets.EIOPA and national supervisorsare independent from one another, butcloselycooperatewithone another.EIOPA doesnot substitutelocalauthorities.It hasitsown powersand responsibilities,but day to day supervisionremainsa task of thenational authorities.Thekey decision organ of EIOPAis theBoard of Supervisors,wheretheheadsof the national supervisory authorities are represented.Solvency ii Associationwww.solvency-ii-association.com
  • 23. However, it is very important tomention that theEIOPARegulationprovidesthat membersof the Board of Supervisorsmust act withindependenceand withinthesole interest of the European Union.Most of our decisionsare taken by simplemajority, some by qualifiedmajority.EIOPA wantstorepresent an addedvalueto European consumersandtothe European supervisorylandscape.In order tofulfil its mandate, EIOPAis buildingup itsownresourcesand exploitingthe knowledgeand experienceof itsMembers.This is a very important element.We want to createa truly European supervisoryculture.Aculture based on best and robust practices.In order tocreatethisculture, I want to bring together all thenationalsupervisoryauthorities.All of them have an important contribution to make.EIOPA‟s regulatory tasksEIOPA hasbeen workingon Solvency II, advisingtheEU Commissionon theLevel 2 implementingmeasures.We have alsobeen developingdraft technical standardsand guidelineson around 40different areasof SolvencyII.We are doingthisin a transparent waybyinformallyconsultingwithkeystakeholders.We planto publicly consult assoon asthe legal framework will allow ustodo that.Solvency ii Associationwww.solvency-ii-association.com
  • 24. In order tofacilitatethepreparatory work of insuranceundertakingsforSolvencyII, welaunched a number of important public consultationsinareassuch astheOwn Risk and SolvencyAssessment (ORSA) andSupervisoryReporting and Public Disclosure, includingtheSolvencyIIXBRL Taxonomy.We continuedtowork on the SolvencyII specificationsfor examplebyissuinga joint report on calibrationof non life risk factorsin thestandard formula.EIOPA alsoprovided input intothe Commission‟srevision of theInsuranceMediationDirective(IM D) by carrying out an extensivesurveyof national lawsprovidingfor sanctions(both criminal andadministrative) for violationsof the provisionsof the IM D.The Commission‟s legislative proposal (IMD2) is expected soon and Iam aware that the Commission intends to capture loss adjusters underthescope of IMD2.Also, on the regulatoryside, wedeliveredour advice tothe Commissionon the revisionof theIORP Directive.Stabilityand consumer protection wereat thecore of our advice.We advocatetheuse of a consistent and realisticmeasurement of allassetsand liabilitiesand proposed theadoption of a Key InformationDocument (KID), containingthe fundamental elementsaboutperformance, costs, chargesand risksof definedcontribution schemes.I believethat thiswill help toincreasetheconfidenceof consumersinthistype of plans.OversightSolvency ii Associationwww.solvency-ii-association.com
  • 25. At EIOPA, we are committed and motivated to contribute to the creationof a truly European supervisory culture: a culture that promotesstability, enhancestransparencyand fostersconsumer protection.Aculture based on intelligent and effectiveregulation whichdoesnotstifleinnovation.That is whyin the area of oversight wetook asa priorityourparticipationin thecollegesof supervisors,contributing to a moreconsistent practice.In the courseof 2011, collegesof supervisorswithat leastonephysicalmeetingor teleconferencewereorganized for 69European insurancegroups.Last year, weset an annual action plan for collegesof supervisorsandweremonitoring its actual implementation.In February 2012,EIOPAissued the report on thefunctioningofcollegesin 2011and theAction Plan 2012for collegesof supervisors.In theAction Plan, wedefined clear timelineswithinthe collegesfor thesettingup of an appropriateworkplan to deal withthe group internalmodel validation process.Consumer protection and financial innovationConsumer protection and financial innovationarepriority areasforEIOPA.We have prepared Guidelinesand a Best PracticesReport on ComplaintsHandlingby Insurers.With these Guidelines,weintend tofill an existingregulatory gap at EUlevel and promote convergenceof regulatorypractice.Solvency ii Associationwww.solvency-ii-association.com
  • 26. Theywerethe subject of a public consultationat the end of last year andare dueto be finalised in thesecond quarter of 2012.At the end of last year, EIOPApublisheda Report on Financial Literacyand Education Initiativesbynational competent authorities;it wasastocktake of existingstructures/ processesin Member States.This wasin linewitha requirement under our empoweringlegislationtoreview and coordinatesuch initiatives.We collecteddata on consumer trendsamongst our Membersauthorities.This helped usto prepare an Initial Overview, analysing and reportingon thosetrends.ThisOverview waspublished thisyear in February.TheOverview identified three keytrends:(i)Consumer protection issuesaround Payment Protection Insurance(PPI)(ii)Development of unit linked life insuranceand(iii)Increaseduseof comparison websitesby consumers. Thisis just thestart of our ongoingmonitoring of consumer trends.And finally, wefocusedon disclosureand sellingpracticesof VariableAnnuities.This exercisewasbrought about by the fact that some variableannuitiesproductsmay achieveoutcomesthat arenot easyfor consumerstounderstand.We consulted on a draft Report at the end of last year and itsfinalversion waspublishedthis year in April.Solvency ii Associationwww.solvency-ii-association.com
  • 27. Finally, last year, weorganized our first EIOPA Consumer Strategy Daywherewehad the opportunitytodiscussimportant consumer issueswithdifferent stakeholders.Financial stabilityEIOPA wasalsoactivein thefinancial stabilitydomain by assessingtheresilienceof the EU insurancesector tomajor shocksthrough the EUwidestresstest exerciseand by testingdifferent scenarios on the lowyield stresstest whichshowsthat the insuranceindustrywouldbenegatively affected if a scenario weretomaterialize whereyields remainlowfor a prolongedperiod of time.EIOPA alsoissues,on a bi-annual basis, Financial StabilityReports.One of theconclusionswemade in our December publicationis that“duetosignificant natural catastrophesduring theexamined period,reinsurerssuffered above averagelosses.Furthermore, life insurersmay besubject to the risk of havinginsufficient liquidity, which can be emphasised by banking-relatedtransactions,e.g. through “liquidityswaps”and similar productsaswellasdue toincreasingsurrenders”.Furthermore, EIOPA is contributing to macro-prudential discussionsand risk analysis in the context of the European Systemic RiskBoard, supported by the establishment of theEIOPA RiskDashboard.International relationsEIOPA is fully awareof the importanceof international relationsin aglobalizedworld.In this area, we provided final advice to the European Commission onthe assessment of the Solvency II equivalence of the Swiss, Bermudanand Japanesesupervisory systemsand wehave started to contributetoSolvency ii Associationwww.solvency-ii-association.com
  • 28. thedevelopment of robust international standardsby activelyparticipatingin theworkof the InternationalAssociation of InsuranceSupervisors(IAIS).During 2011, EIOPAmaintainedits regulatoryand supervisory dialogueswith the US NationalAssociation of Insurance Commissioners(NAIC), the China InsuranceRegulatoryCommission, the JapaneseFinancial ServicesAuthority and the Latin AmericanAssociation ofInsuranceSupervisors.EIOPA alsoenhanceditsregular exchangeswiththe US FederalInsuranceOffice (FIO) in the context of FIO‟s responsibilitiesforinsurancelaw harmonisationat US federal level and in the area ofinternational relations.EIOPA‟s valuesI wouldlike tosaya couple of wordsabout EIOPA‟svalues.In our daily activitiesand relationswithour membersandstakeholders,weare governed by theprinciplesofIndependence,Responsibility, Integrity, Transparency, EfficiencyandTeam Spirit.We aim to be a modern, competent and professional organization that isaware of the expectations of European citizens and wants to ensure thattheyall are taken on board in our strategiesand actions.Our goal is toact independentlyin an effectiveand efficient waytowardsthecreation of a common European supervisoryculture – and thisshouldnot be just empty words.We consider it our shared responsibilitytobuild a sound frameworkforthefuture of insuranceactivities;a frameworkthat takesintoaccount thespecificitiesof their businessmodels.Solvency ii Associationwww.solvency-ii-association.com
  • 29. I wouldlike toassure you that weare ambitiousin fulfillingourobligationstowardsEU citizensand businessesand I am confident thattogether wewill succeed.Solvency IIAs you know, SolvencyII is thenew regulatory regimefor theEUinsuranceindustry and will be implementedon 1January 2014.SolvencyII will bring a better alignment betweenrisk andcapital, promotinggood riskmanagement practicesand fosteringtransparency.Regulatoryregimesare alwaysa result of a balancingact betweendifferent objectives.SolvencyII will providean appropriate basisfor increasedpolicyholderprotection and will contributetoreinforcefinancial stability, allowinginsurancecompaniesto continuetoplay their natural countercyclicalrolein timesof stressedmarkets.Gladly, the SolvencyII regimeis increasinglybeingperceived asmorethan a “check thebox” regulatoryexercisethat determinescapitalrequirements.It requires the European insuranceindustryto criticallyanalyze itsrisks,and in theprocess, assessthetrue costsattached tothem.Today, I wouldlike totalk to you particularlyabout riskmanagement, whichI think isof particularrelevancefor yourprofession.Now, more than ever, insurersneed torelyon strong risk managementcapabilitiesin order todeal withthe different challengesposed by theeconomicslowdown, the financial market volatility, the stressonsovereigndebt, thedemographic changesand the evolving pattern ofnatural catastrophes.Solvency ii Associationwww.solvency-ii-association.com
  • 30. During the last decade, not only riskmanagement itselfbut alsoitspractical application underwent amajor transformation.Improvementsin modellingmethodology, significant development ofnew internal control instruments, increasinginvestors‟and analysts‟pressure aswell asa new generation of risk managerswitha moreholistic view arriving in thecompany‟s alsotriggeredchange.Companieswhichinvested, earlyand continuously, in establishinganeffectiveand well integratedrisk management arenow takingthebenefitsfrom that strategic decision.It should not come asa surprise that insurance and reinsuranceundertakingsare at the forefront of applying sound and robust practicesof risk management.After all, insuranceisin itselfa risk management tool and thustheindustrypossessa widerange of specific know-howand experienceinthisarea.Nevertheless, from an historical perspective, risk management hasnotbeen viewedasa relevant element of theinsuranceregulatoryregime.This haschanged withSolvency II.I believethat appropriate risk management isa cornerstoneof anymodern risk-basedregulatory regime and consequentlyhasitsown rolein thesupervisoryprocess.SolvencyII is mostlyknown for itsrisk-basedcapital requirementcalculation.However, it is essential torecognize that one of the most importantelementsin thisregime is the heavy relianceon robust risk managementpractices.Solvency ii Associationwww.solvency-ii-association.com
  • 31. Under the SolvencyII regime, insuranceand reinsuranceundertakingsmust havein placean effectiveriskmanagement system comprisingstrategies,processesand reportingproceduresnecessarytoidentify, measure, monitor, manage and report, on a continuousbasistherisks, at an individual and at an aggregated level, to whichtheyare orcould beexposed, and their interdependencies.Importantly, risk management cannot beseen asa point in timeprocedure.It is a continuousprocessthat should be used in theimplementationoftheundertaking‟s overall strategy and should allowan appropriateunderstandingof the nature and significanceof theriskstowhich it isexposed, includingitssensitivityto thoserisks and itsability to mitigatethem.Takingintoconsiderationsome lessonslearned from thefinancialcrisis, SolvencyII identifiesa number of elementswhichareparticularlyrelevant for a robust implementation of a risk management system:•First of all, it is paramount to recognize theultimateresponsibilityofthe management body in ensuringthat the implemented riskmanagement system is suitable,effectiveand proportionatetothenature, scaleand complexityof the risksinherent in thebusiness.•Secondly, the risk management system needstobe documented andcommunicatedtothe relevant management and staff, to ensure it isembedded withinthebusiness.•Thirdly, an effectiverisk management system should cover all materialriskstheundertaking might be exposedto.•Finally, and significantly, the risk management system must beintegratedintothe organizational structureof theundertaking and itsdecision-makingprocesses.Solvency ii Associationwww.solvency-ii-association.com
  • 32. From a supervisoryperspective, the insuranceundertaking‟sriskmanagement system must be comprehensive, coveringat least areaslikeunderwritingand reserving, asset–liabilitymanagement, investment,liquidityand concentrations,operational risk and reinsuranceand otherrisk mitigationtechniques.In each of theseareas,supervisorshave been transparent in theirexpectationstowardsundertakings.Let me touch particularlyon the area of underwritingand reserving.Underwritingrisk isat the centreof the insurancebusiness.The risk of loss or of adverse change in the value of insurance liabilities,due to inadequate pricing and reserving assumptions is clearly related tothequalityof the informationavailableand itsmanagement.Consequently, supervisorsexpect that suitableprocessesand procedureswill be in placetoensure the reliability, sufficiencyand adequacyof boththestatistical and accounting data tobe considered both in theunderwritingand reserving processes.As part of the system of governance, insuranceundertakingsshould berequiredto employpersonnel with the skills,knowledgeand expertisenecessaryto dischargethe responsibilitiesallocated tothem properly.Furthermore, insuranceundertakingsshould ensure that effectivesystems arein placetoprevent conflictsof interest and that potentialsourcesof conflictsof interest are identified and proceduresareestablished in order toensurethat thoseinvolvedwith theimplementationof the undertaking‟sstrategiesand policies understandwhereconflictsof interest could ariseand how suchconflictsareto beaddressed.Furthermore, the undertakingshould ensure that all policiesandproceduresestablishedfor underwritingare appliedby all distributionchannelsof theundertakinginsofar astheyare relevant for them andSolvency ii Associationwww.solvency-ii-association.com
  • 33. that theyhavein placeadequateclaimsmanagement procedureswhichshould cover theoverall cycle of claims: receipt, assessment, processingand settlement, complaintsand dispute settlement and reinsurancerecoverables.I believethat thepractical implementation of theserequirementsis offundamental relevancefor the lossadjustingprofession.The LossAdjusting professionTheprofession of lossadjuster is crucial for the insurancebusinessandfor the society.Theservicesprovided by lossadjusterstoinsurersand other customersshould be basedon professionalism, independenceand impartial andaccurateassessment of claims.Theseare indeed thekey wordsof your federation.Your roleis particularlysensitivein the relationship betweeninsurersandtheir clientsand claimants.You have a particularlyrelevant role whendealing withmajorcatastrophes.I am awarethat, during the yearsof itsexistence,FUEDI made a lot ofeffortsin maintaininghigh standardsof professional conduct andcompetence, high educational standardsaswell asunified standardsofcustomer services.I believe that these efforts represent a priceless contribution to the fullyintegrated and reliable insurance market of the European Union and totheoverall reinforcement of consumer protection.I am sure that, in thenear future, thelossadjustingprofessionwill befurther recognizedat the EU level.Solvency ii Associationwww.solvency-ii-association.com
  • 34. In my opinion, it is fundamental to assurethat all lossadjustersworkingin theEU followstrict rulesof professional conduct includingmaintainingqualitiesof integrityand impartialityand arebound bysoundlossadjustingpractices.It is alsomy belief that proper self-regulationis an important tool in thisarea, but nevertheless,somebasicprinciplesshould be incorporated intheEU regulatoryframework.I am lookingforwardto work in closecooperation with your professionand withtheinsuranceindustryto ensure increasedconfidenceforpolicyholders and beneficiariesin the insurancesector. Thank you.Solvency ii Associationwww.solvency-ii-association.com
  • 35. SpeechGabriel Bernardino, Chairman of EIOPAEIOPA, Solvency II and the LossAdjusting ProfessionGeneralAssembly of the EuropeanFederation of LossAdjusting ExpertsPorto, 11May2012Important partsI will touch on three main issues:I.What is EIOPA, theEuropean InsuranceandOccupational PensionsAuthority forwhom I have theprivilegetoserve aschairman;II.How SolvencyII can contributeto theimprovement of risk management;III.Thelossadjustingprofession, its relevancefor the insurancemarketandtheoverall society.What is EIOPA?EIOPA is the European supervisoryauthority for the insuranceandoccupational pensionssectors.We are a young organisation:in January, wecompletedour first year asaEuropean agency, one of thethree European SupervisoryAuthoritiesinthefinancial system.We are an independent Union body withlegal personality, accountabletothe European Parliament and the Council.Solvency ii Associationwww.solvency-ii-association.com
  • 36. We clearlysee our mission, tasksand responsibilities.We seeEIOPA‟smission in protectingpublic interestbycontributingtothe short, mediumand longterm stabilityand effectivenessof the financial system, for theEU citizensand economy.This mission ispursuedbypromotinga sound regulatory frameworkand consistent supervisorypracticesin order toprotect the rightsofpolicyholders, pension scheme membersand beneficiariesandcontributeto the public confidencein the European Union‟sinsuranceand occupational pensionssectors.This is a very important mission if werealize the relevanceof insuranceand occupational pensionsin thedaily life of citizensand onthedevelopment of theeconomy.Theobjectivesof thenew European supervisoryauthorities,andparticularlyof EIOPA, are extremely relevant:Contributetoa stableand effectivefinancial system;Promote sound regulationand supervision;Enhancecustomer protection;Ensure thetransparent, efficient and orderlyfunctioningof themarkets;Contributetointernational supervisoryco2ordination;Avoid regulatory arbitrage;Ensure equal conditionsof competition;andImplement appropriate regulation and supervision of risks.In order tofulfil theseobjectives,EIOPAhas important powers.We develop technical standardsthat become bindingfor all insuranceundertakingsin theEU and issueguidelinesand recommendationsthatnational supervisorsapplyon a “complyor explain” basis.We settledisagreementsbetween national supervisory authoritiesincrossborder situationsand have a coordinatingrole in crisissituations.Solvency ii Associationwww.solvency-ii-association.com
  • 37. EIOPA monitorsthecorrect application of the EU law in thedifferentMemberStates, byusing, if necessary, its powersof investigation in localmarkets.EIOPA and national supervisorsare independent from one another, butcloselycooperatewithone another.EIOPA doesnot substitutelocalauthorities.It hasitsownpowersand responsibilities,but day todaysupervisionremainsa task of thenational authorities.Thekey decision organ of EIOPAis theBoard of Supervisors,wheretheheadsof thenational supervisory authorities arerepresented.However, it is very important tomention that theEIOPA Regulationprovidesthat membersof the Board of Supervisorsmust act withindependenceand withinthesole interest of the European Union.Most of our decisionsare taken by simplemajority, some by qualifiedmajority.EIOPA wantstorepresent an addedvalue to European consumersandtothe European supervisorylandscape.In order tofulfil its mandate, EIOPAis buildingup itsownresourcesand exploitingtheknowledgeand experienceof itsMembers.This is a very important element. We want tocreatea trulyEuropeansupervisoryculture. Aculture based on best and robust practices.In order to create thisculture, I want to bring together all the nationalsupervisory authorities. All of them have an important contribution tomake.Solvency ii Associationwww.solvency-ii-association.com
  • 38. EIOPA‟s regulatory tasksEIOPA hasbeen workingon SolvencyII, advising the EU Commissionon theLevel 2 implementingmeasures.We have alsobeen developingdraft technical standardsand guidelineson around 40different areasof SolvencyII.We are doingthisin a transparent waybyinformallyconsultingwithkeystakeholders.We planto publicly consult assoon asthe legal frameworkwill allow ustodo that.In order tofacilitatethepreparatory work of insuranceundertakingsforSolvencyII, welaunched a number of important public consultationsinareassuch astheOwnRisk and SolvencyAssessment (ORSA) andSupervisoryReporting and Public Disclosure,includingtheSolvencyIIXBRL Taxonomy.We continuedtowork on the SolvencyII specificationsfor examplebyissuinga joint report on calibrationof non life risk factorsin thestandard formula.EIOPA alsoprovided input intothe Commission‟srevision of theInsuranceMediationDirective(IM D) by carrying out an extensivesurveyof national lawsprovidingfor sanctions(both criminal andadministrative) for violationsof the provisionsof theIMD.The Commission‟s legislative proposal (IMD2) is expected soon and Iam aware that the Commission intends to capture loss adjusters underthescope of IMD2.Also, on the regulatoryside, wedeliveredour advice tothe Commissionon the revisionof theIORP Directive. Stabilityand consumer protectionwereat the core of our advice.Solvency ii Associationwww.solvency-ii-association.com
  • 39. We advocatetheuse of a consistent and realisticmeasurement of allassetsand liabilitiesand proposed theadoption of a Key InformationDocument (KID), containingthe fundamental elementsaboutperformance, costs, chargesand risksof definedcontribution schemes.I believethat thiswill help toincreasetheconfidenceof consumersinthistype of plans.OversightAt EIOPA, we are committed and motivated to contribute to the creationof a truly European supervisory culture: a culture that promotesstability, enhancestransparencyand fostersconsumer protection.Aculture based on intelligent and effectiveregulation whichdoesnotstifleinnovation.That is whyin the area of oversight wetook asa priorityourparticipationin thecollegesof supervisors,contributingto a moreconsistent practice.In the courseof 2011, collegesof supervisorswithat leastonephysicalmeetingor teleconferencewereorganized for 69European insurancegroups.Last year, weset an annual action plan for collegesof supervisorsandweremonitoring its actual implementation.In February 2012,EIOPAissued the report on thefunctioningofcollegesin 2011and theAction Plan 2012for collegesof supervisors.In theAction Plan, wedefined clear timelineswithinthe collegesfor thesettingup of an appropriateworkplan to deal withthe group internalmodel validation process.Solvency ii Associationwww.solvency-ii-association.com
  • 40. Consumer protection and financial innovationConsumer protection and financial innovationarepriority areasforEIOPA.We have prepared Guidelinesand a Best PracticesReport on ComplaintsHandlingby Insurers.With these Guidelines,weintend tofill an existing regulatorygap at EUlevel and promote convergenceof regulatorypractice.Theywerethe subject of a public consultationat the end of last year andare dueto be finalised in thesecond quarter of 2012.At the end of last year, EIOPApublisheda Report on Financial Literacyand Education Initiativesbynational competent authorities;it wasastocktake of existingstructures/ processesin Member States.This wasin linewitha requirement under our empoweringlegislationtoreview and coordinatesuch initiatives.We collecteddata on consumer trendsamongst our Membersauthorities.This helped usto prepare an Initial Overview, analysing and reportingon thosetrends.This Overview waspublished thisyear in February.TheOverview identified three keytrends:(i)Consumer protection issuesaround Payment Protection Insurance(PPI)(ii)Development of unit linked life insuranceandSolvency ii Associationwww.solvency-ii-association.com
  • 41. (iii) Increaseduseof comparison websitesby consumers.This is justthestart of our ongoing monitoring of consumer trends.And finally, wefocusedon disclosureand sellingpracticesof VariableAnnuities.This exercisewasbrought about by the fact that some variableannuitiesproductsmay achieveoutcomesthat arenot easyfor consumerstounderstand.We consulted on a draft Report at theend of last year and itsfinalversion waspublishedthis year in April.Finally, last year, weorganized our first EIOPA Consumer Strategy Daywherewehad the opportunitytodiscussimportant consumer issueswithdifferent stakeholders.Financial stabilityEIOPA wasalsoactivein thefinancial stabilitydomain by assessingtheresilienceof the EU insurancesector tomajor shocksthrough the EUwidestresstest exerciseand by testingdifferent scenarios on thelowyield stresstest whichshowsthat the insuranceindustrywouldbenegatively affected if a scenario weretomaterialize whereyields remainlowfor a prolongedperiod of time.EIOPA alsoissues,on a biannual basis, Financial Stability Reports.One of the conclusionswe made in our December publication is that“due to significant natural catastrophes during the examined period,reinsurerssuffered above averagelosses.Furthermore, life insurersmay besubject to the risk of havinginsufficient liquidity, whichcan be emphasised by banking relatedtransactions,e.g. through “liquidityswaps”and similar productsaswellasdue toincreasingsurrenders”.Solvency ii Associationwww.solvency-ii-association.com
  • 42. Furthermore, EIOPAis contributingto macroprudential discussionsandrisk analysis in thecontext of the European Systemic RiskBoard, supported by the establishment of theEIOPA Risk Dashboard.International relationsEIOPA is fully awareof the importanceof international relationsin aglobalizedworld.In thisarea, weprovided final advice to theEuropean Commission ontheassessment of theSolvency II equivalenceof theSwiss, Bermudanand Japanesesupervisory systemsand wehave started to contributetothedevelopment of robust international standardsby activelyparticipatingin theworkof the InternationalAssociation of InsuranceSupervisors(IAIS).During 2011, EIOPAmaintainedits regulatoryand supervisory dialogueswith the US NationalAssociation of Insurance Commissioners(NAIC), the China InsuranceRegulatory Commission, the JapaneseFinancial ServicesAuthority and the LatinAmericanAssociation ofInsuranceSupervisors.EIOPA alsoenhanceditsregular exchangeswiththe US FederalInsuranceOffice (FIO) in the context of FIO‟s responsibilitiesforinsurancelaw harmonisationat US federal level and in the area ofinternational relations.EIOPA‟s valuesI wouldlike tosaya couple of wordsabout EIOPA‟svalues.In our daily activitiesand relationswithour membersandstakeholders,weare governed by the principlesofIndependence,Responsibility, Integrity, Transparency, EfficiencyandTeam Spirit.Solvency ii Associationwww.solvency-ii-association.com
  • 43. We aim to be a modern, competent and professional organization that isaware of the expectations of European citizens and wants to ensure thattheyall are taken on board in our strategiesand actions.Our goal is toact independentlyin an effectiveand efficient waytowardsthecreation of a common European supervisoryculture – and thisshouldnot be just empty words.We consider it our shared responsibilitytobuild a sound frameworkforthefuture of insuranceactivities;a frameworkthat takesintoaccount thespecificitiesof their businessmodels.I wouldlike toassure you that weare ambitiousin fulfillingourobligationstowardsEU citizensand businessesand I am confident thattogether wewill succeed.Solvency IIAs you know, SolvencyII is thenew regulatory regimefor theEUinsuranceindustry and will be implementedon 1January 2014.SolvencyII will bring a better alignment betweenrisk andcapital, promotinggood riskmanagement practicesand fosteringtransparency.Regulatoryregimesare alwaysa result of a balancingact betweendifferent objectives.SolvencyII will providean appropriate basisfor increasedpolicyholderprotection and will contributeto reinforcefinancial stability, allowinginsurancecompaniesto continuetoplay their natural countercyclicalrolein timesof stressedmarkets.Gladly, the SolvencyII regimeis increasinglybeingperceived asmorethan a “check thebox” regulatoryexercisethat determinescapitalrequirements.Solvency ii Associationwww.solvency-ii-association.com
  • 44. It requires the European insuranceindustrytocriticallyanalyze itsrisks,and in theprocess, assessthetrue costsattached tothem.Today, I wouldlike totalk to you particularlyabout riskmanagement, which I think isof particular relevancefor yourprofession.Now, more than ever, insurersneed torelyon strong risk managementcapabilitiesin order todeal withthe different challengesposed by theeconomicslowdown, the financial market volatility, the stressonsovereigndebt, thedemographic changesand the evolving pattern ofnatural catastrophes.During the last decade, not only riskmanagement itselfbut alsoitspractical application underwent amajor transformation.Improvementsin modellingmethodology, significant development ofnew internal control instruments, increasinginvestors‟and analysts‟pressure aswell asa new generation of riskmanagerswith amoreholistic view arriving in thecompany‟s alsotriggeredchange.Companieswhichinvested, earlyand continuously, in establishinganeffectiveand well integratedrisk management arenow takingthebenefitsfrom that strategic decision.It should not come asa surprise that insurance and reinsuranceundertakingsare at the forefront of applying sound and robust practicesof risk management.After all, insuranceisin itselfa risk management tool and thustheindustrypossessa widerangeof specific know how and experienceinthisarea.Nevertheless, from an historical perspective, risk management hasnotbeen viewed asarelevant element of theinsuranceregulatory regime.This haschanged withSolvency II.Solvency ii Associationwww.solvency-ii-association.com
  • 45. I believethat appropriate risk management isa cornerstone of anymodern risk basedregulatory regime and consequentlyhasitsown rolein thesupervisoryprocess.SolvencyII is mostlyknown for itsrisk basedcapital requirementcalculation.However, it is essential torecognize that one of themost importantelementsin thisregime is theheavyrelianceon robust risk managementpractices.Under the SolvencyII regime, insuranceand reinsuranceundertakingsmust havein placean effective riskmanagement system comprisingstrategies,processesand reportingproceduresnecessarytoidentify, measure, monitor, manage and report, on a continuousbasistherisks, at an individual and at an aggregated level, to whichtheyare orcould beexposed, and their interdependencies.Importantly, risk management cannot beseenasa point in timeprocedure.It is a continuousprocessthat should be used in the implementationoftheundertaking‟soverall strategyand should allowan appropriateunderstandingof the nature and significanceof theriskstowhichit isexposed, includingitssensitivityto thoserisksand itsability to mitigatethem.Takingintoconsiderationsome lessonslearned from thefinancialcrisis, SolvencyII identifiesa number of elementswhichareparticularlyrelevant for a robust implementation of a risk management system:•First of all, it is paramount to recognizethe ultimateresponsibilityofthe management body in ensuringthat the implemented riskmanagement system is suitable, effectiveand proportionatetothenature, scaleand complexityof the risksinherent in thebusiness.Solvency ii Associationwww.solvency-ii-association.com
  • 46. •Secondly, therisk management system needstobe documented andcommunicatedtothe relevant management and staff, to ensure it isembedded withinthebusiness.•Thirdly, an effectiverisk management system should cover all materialriskstheundertaking might be exposedto.•Finally, and significantly, the riskmanagement system must beintegratedintothe organizational structureof theundertaking and itsdecision making processes.From a supervisoryperspective, the insuranceundertaking‟sriskmanagement system must be comprehensive, covering at least areaslikeunderwritingand reserving, asset–liabilitymanagement, investment, liquidityand concentrations,operational riskand reinsuranceand other risk mitigationtechniques.In each of theseareas, supervisorshave been transparent in theirexpectationstowardsundertakings.Let me touch particularlyon the areaof underwritingand reserving.Underwritingrisk isat the centreof the insurancebusiness.The risk of loss or of adverse change in the value of insuranceliabilities, due to inadequate pricing and reserving assumptions is clearlyrelatedtothequalityof the informationavailableand itsmanagement.Consequently, supervisorsexpect that suitableprocessesand procedureswill be in placetoensure the reliability, sufficiencyand adequacyof boththestatistical and accounting data tobe consideredboth in theunderwritingand reserving processes.As part of the system of governance, insuranceundertakingsshould berequiredto employpersonnel with the skills,knowledgeand expertisenecessaryto discharge theresponsibilitiesallocatedtothem properly.Solvency ii Associationwww.solvency-ii-association.com
  • 47. Furthermore, insuranceundertakingsshould ensure that effectivesystems are in place toprevent conflictsof interest and that potentialsourcesof conflictsof interest areidentified and proceduresareestablished in order toensurethat thoseinvolvedwith theimplementationof the undertaking‟sstrategiesand policiesunderstandwhereconflictsof interest could ariseand how suchconflictsareto beaddressed.Furthermore, the undertakingshould ensure that all policiesandproceduresestablishedfor underwritingare appliedby all distributionchannelsof theundertakinginsofar astheyare relevant for them andthat theyhavein placeadequateclaimsmanagement procedureswhichshould cover theoverall cycle of claims: receipt, assessment, processingand settlement, complaintsand disputesettlement and reinsurancerecoverables.I believethat thepractical implementation of theserequirementsis offundamental relevancefor the lossadjustingprofession.The LossAdjusting professionTheprofession of lossadjuster is crucial for the insurancebusinessandfor the society.Theservicesprovided by lossadjusterstoinsurersand other customersshould be basedon professionalism, independenceand impartial andaccurateassessment of claims.Theseare indeed thekey wordsof your federation.Your roleis particularlysensitivein the relationship betweeninsurersandtheir clientsand claimants.You have a particularlyrelevant role whendealing withmajorcatastrophes.Solvency ii Associationwww.solvency-ii-association.com
  • 48. I am awarethat, during the yearsof itsexistence,FUEDI made a lot ofeffortsin maintaininghigh standardsof professional conduct andcompetence, high educational standardsaswell asunified standardsofcustomer services.I believe that these efforts represent a priceless contribution to the fullyintegrated and reliable insurance market of the European Union and totheoverall reinforcement of consumer protection.I am sure that, in thenear future, the lossadjustingprofessionwill befurther recognizedat the EU level.In my opinion, it is fundamental to assurethat all lossadjustersworkingin theEU followstrict rulesof professional conduct includingmaintainingqualitiesof integrityand impartialityand arebound bysoundlossadjustingpractices.It is alsomy belief that proper selfregulationis an important tool in thisarea, but nevertheless,somebasicprinciplesshould be incorporated intheEU regulatoryframework.I am lookingforwardto work in closecooperation with your professionand withtheinsuranceindustryto ensure increasedconfidenceforpolicyholders and beneficiariesin theinsurancesector.Solvency ii Associationwww.solvency-ii-association.com
  • 49. Solvency II SpeakersBureauTheSolvencyII Association hasestablishedthe SolvencyII SpeakersBureau for firmsand organizationsthat want to accesstheexpertiseofCertified Solvencyii Professionals(CSiiPs) and Certified SolvencyiiEquivalenceProfessionals(CSiiEPs).TheSolvencyII Association will be theliaison betweenour certifiedprofessionalsand theseorganizations,at no cost. We stronglybelievethat this can be a great opportunity for both, our certified professionalsandtheorganizers.Tolearnmore:www.solvency-ii-association.com/ Solvency_II_Speakers_Bureau.htmlCourse TitleCertified Solvency ii Professional (CSiiP):Preparing for the Solvency ii Directive of the EU (3 days)Objectives:This coursehasbeen designed toprovidewiththe knowledgeand skillsneeded to understand and support compliancewiththeSolvencyiiDirectiveof theEuropean Union.TargetAudience:This course isintendedfor decision makers, managers, professionalsand consultantsthat:A.Work in Insuranceor Reinsurancefirmsof EEAcountries.B.Work in Groups- Financial Conglomerates(FC), Financial HoldingCompanies(FHC), MixedFinancial Holding Companies(MFHC), InsuranceHolding Companies(IH C) - providing insuranceand/ orreinsuranceservicesin theEEA, whoseparent islocatedin acountry of theEEA.Solvency ii Associationwww.solvency-ii-association.com
  • 50. C.Want tounderstand thechallengesand the opportunitiesafter theSolvencyii Directive.This course ishighlyrecommendedfor supervisorsof EEA countriesthat want to understand how countriesseeSolvencyII asa CompetitiveAdvantage.This course is also recommended for all decision makers, managers,professionals and consultants of insurance and/ or reinsurance firmsinvolvedin risk and compliancemanagement.About the CourseINTRODUCTIONTheEuropean Union‟sLegislativeProcessDirectivesand RegulationsTheFinancial ServicesAction Plan (FSAP) of theEUExtraterritorialApplication of European LawExtraterritorialApplication of the SolvencyII DirectiveSolvencyii and theLamfalussyProcessLevel 1: FrameworkPrinciplesLevel 2: Detailed Technical MeasuresLevel3: StrengtheningCooperationAmong RegulatorsLevel 4: EnforcementWeaknessesof SolvencyIFrom SolvencyI toSolvencyIISolvencyii PlayersSolvencyii ObjectivesTHE SOLVENCY II DIRECTIVEAUnified LegislativeBasisfor Prudential Regulation of InsurersandReinsurersRisk-BasedCapitalAllocationScope of theApplicationImportant DefinitionsSolvency ii Associationwww.solvency-ii-association.com
  • 51. Value-at-Riskin SolvencyIIAuthorisationCorporateGovernanceGovernanceFunctionsRiskManagementCorporateGovernanceand Risk Management - Level 2Fit and proper requirementsfor personswhoeffectivelyrun theundertakingor haveother key functionsInternal ControlsInternalAuditActuarial FunctionOutsourcingBoard of Directors:Role and Solvencyii Responsibilities12Principles– System of Governance (Level 2)PILLAR 2SupervisoryReview Process(SRP)Focuson Risk Management and Operational RiskOwn Risk and SolvencyAssessment (ORSA)ORSA- TheInternal Assessment ProcessORSA- TheSupervisoryToolORSA- Not a Third Solvency Capital RequirementCapital add-onPILLAR 3DisclosureRequirementsTheSolvencyand Financial Condition Report (SFC)PILLAR IValuationOf AssetsAnd LiabilitiesTechnicalProvisionsTheSolvencyCapital Requirement (SCR)TheValue-at-RiskMeasureCalibratedtoa 99.5% ConfidenceLevel over a 1-year Time HorizonSolvency ii Associationwww.solvency-ii-association.com
  • 52. TheStandardApproachTheInternal ModelsTheCollectionofAdditional HistoricalDataExternal DataThe Minimum Capital Requirement (MCR)Non-CompliancewiththeMinimum Capital RequirementNon-CompliancewiththeSolvencyCapital RequirementOwn FundsInvestment RulesINTERNAL MODEL APPROVALCEIOPSLevel 2 - Testsand Standardsfor Internal ModelApprovalCEIOPSLevel 2 - The procedure tobe followedfor theapproval ofan internal modelInternal ModelsGovernanceGroup internal modelsStatistical qualitystandardsCalibrationand validationstandardsDocumentation standardsSOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIESSolvencyI: SoloPlusApproachGroup Supervisionunder SolvencyIIRightsand dutiesof the group supervisorGroup Solvency - Methodsof calculationMethod1(Default method):Accounting consolidation-basedmethodMethod2 (Alternative method): Deduction and aggregationmethodParent UndertakingsOutsidethe Community - Verification ofEquivalenceParent UndertakingsOutsidethe Community - Absence ofEquivalenceSolvency ii Associationwww.solvency-ii-association.com
  • 53. Thehead of thegroup isin theEEA and the third country regimeis not equivalentThehead of thegroup isin theEEA and the third country regimeis equivalentThehead of thegroup isoutsidetheEEAand the third country isnot equivalentThehead of thegroup isoutsidethe EEAand the third countryregimeisequivalentSmall and Medium-SizedInsurers:TheProportionalityPrincipleCaptivesand SolvencyIIEQUIVALENCE WITH SOLVENCY II AROUND THE WORLDSolvencyii and Countriesoutsidethe European EconomicAreaTheInternationalAssociation of InsuranceSupervisors(IAIS)TheSwissSolvencyTest (SST) and Solvencyii:Solvencyii and theOffshoreFinancial Centers(OFCs)Solvencyii and theUSASolvencyii and theUS NationalAssociation of InsuranceCommissioners(NAIC) - The Federal InsuranceOffice createdunder the Dodd-Frank Wall Street Reform and ConsumerProtectionAct in theUSA, and the ORSAin theUSAFROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY IIDIRECTIVEDirective2005/ 68/ EC of 16November 2005on Reinsurance- TheReinsuranceDirective(RID)CLOSINGTheImpact of Solvencyii OutsidetheEEAProvidingInsuranceServicestothe European ClientCompeting withBanksLearningfrom theBasel ii FrameworkRegulatoryArbitrage:AMajorRisk for Countriesthat seeComplianceasan Obligation, not anOpportunitySolvency ii Associationwww.solvency-ii-association.com
  • 54. Basel II, Basel III, SolvencyII and RegulatoryArbitrageChallengesand Opportunities:What is nextRegulatoryShopping after SolvencyIITolearnmore about theonlineexam you may visit:www.solvency-ii-association.com/ CSiiP_CSiiEP_Frequently_Asked_Questions.pdfwww.solvency-ii-association.com/ CSiiP_CSiiEP_Certification_Steps.pdfTolearnmore about thecourse:www.solvency-ii-association.com/ Certified_Solvency_ii_Training.htmSolvency ii Associationwww.solvency-ii-association.com
  • 55. Solvency ii Associationwww.solvency-ii-association.com