Solvency ii News March 2012

Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.solvency-ii-association.com
Solvency II News, March 2012
Dear member,
Todaywewill start from Michel Barnier
“We areall sufferingthe effectsof the ongoingfinancial crisis. It began
in thebankingsector and hasspread to public finances.
It hasled to necessaryausterityprogrammesand impactedhard on the
real economy.
www.solvency-ii-association.com

Financial reform has a key role to play in stabilising the financial
sector, removing the inadequacies and abuses which existed, and
preventing or mitigatingfuture crises.
TheEU isin theend phaseof itsbiggest ever programme for financial
servicesreforms.
Around thirty measureshave been proposedor adopted, including
almost all thekey onesagreed at theG20.
My goal is for all new legislationto be in force by 2013.
It is an achievablegoal.
But financial reform is about more than prevention of thenext crisis.
It can alsoplaya rolein remedying the present crisis, by favouring
growth.
This booklet explainsour reforms, howtheywill contributetostability
and growth and how theyhelpto re-establisha prosperousEurope.”

TheEuropean Commission hasproposed all the main piecesof
legislationlinked to G20 commitment
Thebulk of thesenew rules is alreadygoing through thelegislative
process.
Theyensure safefinancial institutions,efficient and resilient markets
and appropriate consumer protection.
The programme isnot yet finished, there is still a challenging road
ahead, but the European Union is on the right track to have a new
legislativeframework for financial servicesin place by2013.
Aproperly supervised financial system
Strict supervision of thefinancesectoris essential. The crisisexposed
seriousdeficienciesin cooperation betweennational supervisors.

Toaddressthis,theEU hasestablishednew European Supervisory
Authorities(ESAs), operational sinceJanuary 2011:the European
BankingAuthority (EBA), theEuropean Insuranceand Occupational
PensionsAuthority (EIOPA)and the European Securitiesand Markets
Authority (ESMA).
Thesenew European institutionswork together withMember States’
supervisors fosteringharmonised rulesand ensuring strict and coherent
implementation.
Morespecifically, theycan:
• draw up specific rulesfor national authoritiesand financial institutions,
• take action in emergencies, including banningcertain products,
• mediateand settledisputesbetweennational supervisorsand
• ensureconsistent application of EU law
In addition, theEuropean SupervisoryAuthorities have extensivepowers
in emergencies.
If the EU Council decidesthat turbulent market conditionswarrant their
use,theycoordinatenational supervisorsand imposethe necessary
actionsin a harmonised wayacrossEurope.
Such measurescan includebanson short sellingof securitiesfor
example.
AEuropean Systemic Risk Board (ESRB) wasalsoestablishedto
monitorthreatstothe stabilityof the financial system.
TheESRB providesearlywarningsof system-widerisksthat may be
buildingup and issuesrecommendationsto deal withthem.

We will continuewith the letter from theEIOPA Chairman toMichel
Barnier, European Commissioner for InternalMarket and Services,on
theimplementationof SolvencyII

EIOPA haspublished its Action Plan 2012for Collegesof
Supervisors.
Thedocument representsa followup onsubstantial effortsalready made
by supervisorsand EIOPA in preparing, organizingand contributingto
thecollegesduring 2011.
The two key targets of the Action Plan 2012 are preparation for the
implementation of Solvency II and exchange of information within
colleges.
Thedocument foreseesthat collegesof supervisorswill establish a work
planrelatedtotheactivitiesof thecollege for an insurancegroup’s
internalmodel application.
Thecollegeswill alsosummarize thetasksthat should be performed in
relationtogroup supervision under SolvencyII.
TheAction Plan 2012envisagesthat supervisorsstart implementing
EIOPA’sguidelineson a regular exchangeof quantitativeand
qualitativeinformation withincolleges.
Theyare alsoexpectedto set up a coordinationarrangement for their
supervisoryactivities.
Accordingtothedocument, collegesof supervisorsshould set up an
emergencyplan of information exchangeand crisismanagement in case
of financial turbulencethat a group or asoloundertaking might face.
EIOPA alsomade publicly availabletheReport on the functioningof
collegesin 2011.
Thedocument inter alia statesthat despitethe lack of thefinal legal
basisfor the implementationof SolvencyII, collegesare making great
effortsto prepare for thenew regulatory regime.

Next
TheFinancial StabilityBoard (FSB) published the peer review report on
deposit insurancesystems.
FSB publishes peer review on deposit insurance systems
Theglobal financial crisisillustratedtheimportanceof effective
depositorcompensationarrangements.
In response,the Basel Committee on BankingSupervision (BCBS) and
theInternationalAssociation of Deposit Insurers(IADI) jointlyissued in
June2009the Core Principlesfor EffectiveDeposit InsuranceSystems.
Usingthe Core Principlesasa benchmark, the peer review takesstock of
deposit insurancesystems (DISs) in FSB member jurisdictionsand draws
lessonsabout theeffectivenessof reforms in responsetothecrisis.
Thespeedyadoption by many jurisdictionsof extraordinary
arrangementstoenhancedepositors’confidence during thefinancial
crisissignals theimportanceand necessityof having an effectiveDIS.
Explicit limiteddeposit insurancehasbecomethe preferred choice
amongFSBmember jurisdictions.
Thecrisisresulted in greater convergencein practicesacross
jurisdictionsand anemerging consensusabout appropriate DIS design
features.
Theseincludehigher coveragelevels;theeliminationof co-insurance;
improvementsin the payout process;greater depositor awareness;the
adoptionof ex-antefundingby more jurisdictions;and thestrengthening
of information sharing and coordinationwithother safety net participants.

Themandatesof deposit insurersalsoevolved, withmore of them
assumingresponsibilitiesbeyond a paybox function toinclude
involvement in failure resolution.
ThereviewedDISs are broadly consistent withthe Core
Principles,particularlyin areassuch asmandates,membership
arrangementsand adequacyof coverage.
However, there remain some areaswherethereappear tobe divergences
from, or inconsistencieswith, the Core Principlesthat need more time
and effort to address.
Theseincludeavoidingunlimited deposit coveragethat could adversely
affect theDIS’s effectiveness;ensuring that resources(includingback-
up funding options) are adequateand immediatelyavailabletomeet
financingrequirements;establishingand publicly communicatinga
prompt target timeframe for reimbursingdepositors;adjusting
governancearrangementsin deposit insuranceagenciesto ensure
adequatepublic oversight and to mitigatethe potential for conflictsof
interest;and formalisinginformation sharing and coordination
arrangementswithother safety-net participants.
Further enhancementsof DISs may benecessaryin theseareas.
In addition, there are certain areas in the Core Principles where more
precise guidance may be needed to achieve effective compliance or to
better reflect leadingpractices.
Theseincludedeveloping benchmarkstomonitor theeffectivenessand
adequacyof coveragelevels; identifying instrumentsand good practices
that can help mitigatemoral hazard; ensuring that there is effective
coordinationacrosssystems in jurisdictionswithmultiple DISs and that
anydifferencesin depositor coverageacrossinstitutionsoperating within
that jurisdictiondo not adverselyaffect thesystems’effectiveness;
conducting regular scenarioplanningand simulationsto assessthe

capabilityof making prompt payout; exploring the feasibilityand
desirabilityof greater useof ex-antefunding;and developingappropriate
mechanismstoregularlymonitor public awarenessof the DIS.
Additional guidancein these areasby relevant standard-settingbodies
wouldfurther enhancethe effectivenessof DISs.
Thereport containsfour recommendations:
Note DIS = Deposit InsuranceSystem
1. FSB member jurisdictions without an explicit DIS should establish
one in order to maintain financial stability by protecting depositors
andpreventingbank runs;
2. FSB member jurisdictionswithan explicit DIS shouldundertake
actionstofullyalign their DIS withthe Core Principlesin areas
wherethere appear tobe divergencesfrom, or inconsistencies
with, thoseprinciples;
3. IADI should, in consultationwiththe BCBSand other relevant
bodies whereappropriate, updateitsguidancethat pre-datesthe
financial crisis.
It should alsoconsider developingadditional guidance toaddress
areaswherethe Core Principlesmay need more precision to
achieveeffectivecomplianceor tobetter reflect leadingpractices;
and
4. TheFSB should review and evaluatetheactionstaken by its
membersin responseto the recommendationsin this report.
Mark Carney, Chairman of the FSB, said “National authorities have
madegood progressin strengtheningtheir deposit insurancesystems.

However, there is still room for improvement and effortsto achievefull
and consistent implementationshould continue.”
Tiff Macklem, Chairman of theFSB’sStandingCommitteeon Standards
Implementation (SCSI), said“Thefinancial crisisprovided a number of
useful lessonson deposit insurance.
We will monitor progressmade by our membersin adoptingthe report’s
recommendationstofurther strengthen their deposit insurance
systems, particularlygiven thelinkswiththe FSB’songoing workto
develop effectiveresolution regimesfor financial institutions.”

EIOPA PUBLISHES FINAL ADVICE ON THE IORP
DIRECTIVE REVIEW
- EIOPA proposesa “holistic balancesheet” asa meansof developing
a Europe widesupervisoryregime for IORPs
- EIOPA suggestsenhanced qualitativerequirementsfor governance
and risk management of IORPs
- EIOPA proposesstrengthened and consistent information
requirementsfor defined contribution schemes
Frankfurt, 15 February, 2012– TheEuropean Insuranceand
Occupational PensionsAuthority (EIOPA) published today its final
responseto theEuropean Commission’sCall forAdvice (CfA) on the
review of the IORP Directive.
In its CfAthe Commission expressed theintention tointroducea
harmonised, risk basedprudential regimefor IORPs.
Theobjectiveof theregime is toincreasethenumber of pan European
pension fundsfrom itscurrent lowlevel.
In addition, thenew framework should ensure regulatoryconsistency
betweensectorsand enhanceprotectionof members and beneficiaries.
Akey proposal of EIOPA isthe “holisticbalancesheet”, asa wayto
achievethe Commission’saim for harmonisation.
It will enableIORPsto take intoaccount thevariousadjustment
mechanisms(conditional indexation, reduction of accrued rights) and
securitymechanisms(regulatoryown funds, sponsorsupport, pension
protection funds) in an explicit way.
In other words,the approachproposed by EIOPAis toacknowledgethe
existingdiversityof occupational pension systems in theEU Member

States,while capturingall thesesystems intoa singlebalancesheet.
In its advice EIOPAunderlinestheimportanceof a quantitativeimpact
study(QIS) becauseit is crucial tofurther explorethe possibleimpact on
thefinancial requirementsfor pensionfundsthat theholistic balance
sheet and thevariouspolicy optionswithin that approach might have.
EIOPA is currentlypreparingfor a QIS exerciseand aimsto publish
resultsin thesecond half of 2012.
Besides thequantitativerequirements, EIOPA’sadvice alsocontains
proposalstoenhancequalitativerequirementsin such areasas
governanceand risk management.
Thesehave been modelled on SolvencyII withthe necessary
adjustmentsfor IORPs.
EIOPA advice callsfor the strengtheningof fit and proper criteria and
for a proportionate, i.e. adjustedfor the nature, size and complexityof
IORPs, implementationof robust internal and external controlsand
soundrisk management frameworks.
In addition, thedocument addressesinformationprovision and member
protection, particularlyin defined contribution (DC) schemes.
AccordingtoEIOPAadvice, information needsto be
relevant, correct, understandableand not misleading.
EIOPA callsfor theintroduction of a Key Information Document for all
definedcontribution schemeswhich wouldallowmemberstohave
confidencein the scheme irrespectiveof whereit is locatedin theEU.
Gabriel Bernardino, Chairman of EIOPA, said:“I am pleasedthat we
havebeen ableto make marked progressin theareaof European
regulation of DC schemes.

At themoment, 60million people rely on DC schemesand I have no
doubt that thisnumber will continuetogrow in the coming decades.
However, thisis not theend of the processof developing a European
frameworkfor occupational pensions, but merelythe beginning”, he
added. “In particular, wehave to ascertain ourselvesvia theQIS that the
proposed approach stimulatesaffordableyet secure occupational pension
provision in Europe”.
Note:
IORP Directive - Directiveon theactivitiesand supervision of
institutionsfor occupational retirement provision
In April 2011theEuropean Commission asked EIOPAfor advice on the
EU widelegislativeframeworkfor IORPs.
Thepublication of EIOPA FinalAdvice followsan extensiveperiod of
stakeholder consultation.
EIOPA made publicfor consultation a first draft responseon 8July 2011
coveringnine out of twentythree areasof the CfAon scopeand
governanceand a second draft responsetothe CfAaswholeon 25
October 2011.
The last consultation – which ran until 2 January 2012 – was commented
upon by 170 stakeholders from fourteen Member States and 20 European
and international organisations.
TheEuropean Insuranceand Occupational PensionsAuthority
(EIOPA) wasestablishedasa result of thereformstothestructure of
supervision of the financial sector in theEuropean Union.
Thereform wasinitiatedby theEuropean Commission, followingthe
recommendationsof a Committee of Wise Men, chaired by Mr. de
Larosière,and supported by theEuropean Council and Parliament.

EIOPA is part of theEuropeanSystem of Financial Supervision
consistingof three European SupervisoryAuthorities, the National
SupervisoryAuthorities and the European Systemic Risk Board.
It is an independent advisorybody to the European Parliament and the
Councilof theEuropean Union.
EIOPA’score responsibilitiesare tosupport thestabilityof the financial
system, transparencyof marketsand financial productsaswell asthe
protection of insurancepolicyholders, pension schememembers and
beneficiaries.
Cayman’sInsurance Law is almost there
TheCayman Island’snew InsuranceLaw 2010will tocome intoeffect in
March2012.
As of November 2011,theCayman Islandsis home to 731captiveswith
grosspremiumstotalingUS$9.6 billion.
Although the vast majority of Cayman-domiciled captivesciteNorth
America astheir primary risk location, thejurisdiction alsosupports
captivesfrom Europe,Africa, Asia, theMiddleEast and thePacific Rim.

The Joint Forum
Report on intra-group support measures, February 2012
A. Executivesummary
Theobjectiveof this report prepared by the Joint Forum is toassist
national supervisorsin gaininga better understandingof theuseof intra-
group support measures in timesof stressor unexpected lossby financial
groupsacrossthebanking, insuranceand securitiessectors.
Thereport providesan important overview of theuseof intra-group
support at a time whenauthorities areincreasinglyfocusedon waysto
ensure banksand other financial entitiescan bewound downin an
orderly manner during periodsof distress.
Thereport may alsoassist thethematic workcontemplated by the
Financial Stability Board (FSB) on deposit insuranceschemesand feed
intothe ongoing policy development in relationto recovery and
resolution plans.
Thereport is basedon the findingsof a high-level stock-takewhich
examinedtheuse of intra-groupsupport measuresavailableto
banks,insurersand securitiesfirms.
Thestocktakewasconducted through a surveyby the Joint Forum
WorkingGroup on RiskAssessment and Capital (JFRAC) that was
completed by 31financial institutionsheadquarteredin tenjurisdictions
on three continents:Europe, NorthAmerica andAsia.
Participantsweredrawnfrom thebanking, insurance and securities
sectorsand from many of thejurisdictionsrepresented by Joint Forum
members.
Many participatingfirms werelarge global financial institutions.

Thereport providesan overview and analysisof thetypesand frequency
of intra-group support measuresusedin practice.
It is based only on information providedby participantsin thesurvey.
Responseswereverified by supervisorsonlyin certain instances.
The survey’s main findingsare asfollows:
1.Intra-groupsupport measurescan vary from institutionto institution,
driven by the regulatory, legal and tax environment; themanagement
style of theparticular institution;and thecross-border nature of the
business.
Authoritiesshould be mindful of the complicatingeffect of these
measureson resolution regimesand the recovery processin theevent of
failure.
2.Themajorityof respondentssurveyed indicatedcentralisedcapital
and liquiditymanagement systems werein place.
Accordingtoproponents,this approachpromotestheefficient
management of a group’soverall capital level and helpsmaximise
liquiditywhile reducingthe cost of funds.
However, the respondentsthat favoureda “self-sufficiency” approach
pointed out that centralisedmanagement potentiallyhastheeffect of
increasingcontagion risk within a group in theevent of distressat any
subsidiaries.
Theuse of these systemsimpactsthe nature and design of intra-group
support measureswithsome firms indicatingthat the waythey managed
capital and liquiditywithin the group wasa keydriver in their decisions
about the intra-group transactionsand support measurestheyused.

3.Committed facilities, subordinated loans and guarantees were the
most widely used measures. This was evident across all sectors and
participatingjurisdictions.
4.Internal support measuresgenerallywereprovidedon aone-waybasis
(egdownstreamfrom a parent to a subsidiary).
Loansand borrowings,however, wereprovided in some groupson a
reciprocalbasis.
As groupssurveyed generallyoperated acrossborders,most indicated
support measureswereprovidedboth domesticallyand internationally.
Support measureswerealsoin placebetweenboth regulated and
unregulated entitiesand between entitiesin different sectors.
5.Thestudyfound noevidenceof intra-groupsupport measureseither
- a) Being implemented on anything other than an arm’s length
basis,or
- b) Resulting in the inappropriate transfer of capital, income or assets
from regulated entities or in a way which generated capital resources
within a group.
However, thisdoesnot necessarilymean that supervisoryscrutinyof
intra-groupsupport measuresis unwarranted.
As this report is basedonindustry responses,further in-depth analysisby
national supervisorsmay provide a more completepicture of the risks
potentiallyposedbyintra-groupsupport measures.
6.While the existingregulatory frameworksfor intra-group support
measuresare somewhat limited, firmsdohave certaininternal policies
andprocedurestomanageand restrict internal transactions.

Respondentspointedout that theregulatory and legal frameworkcan
make it difficult for some forms of intra-groupsupport to come into
forcewhilesupervisorsaim toensurethat both regulated entitiesand
stakeholdersareprotected from risksarisingfrom the use of support
measures.
For instance, upstream transfers of liquidity and capital are monitored
and large exposure rules can limit the extent of intra-group interaction
for risk control purposes.
Jurisdictional differencesin regulatorysettingscan alsoposea challenge
for firms operatingacrossborders.
7. Based on the survey and independent of remainingconcernsand
information gaps, singlesector supervisorsshouldbe awareof the risks
that intra-group support measuresmay poseand should fullyunderstand
themeasuresusedbyan institution, includingitsmotivationsfor using
certainmeasuresover others.
In order toobtain further insight intotheintra-groupsupport measures
put in placeby financial institutionswithin their jurisdiction, national
supervisorsshould, where appropriate, conduct further analysis in this
area.
Scope
Financial groupswhich encountered problemsor whichfailed between
2007and 2009during the financial crisistypically had to consider the
question of whethertosupport a subsidiaryor relatedentity.
Although thesedecisionslargely hingeon the potential damage to
franchiseand reputation, thestartingpoint for making such decisionsis
based on intra-group contractual and legal obligations.

Thelevel of intra-group support and interconnectednessof legal entities
within thegroup affectsthe extent to which thefailureof one entity
posescontagion riskfor other entitieswithin thegroup.
It is alsothesecontractual obligationswhichdeterminethe losses
ultimatelysuffered by creditorsof each entityin the group.
Definition of “intra-group support measures”
Intra-group support consistsof varioustypesof support measures,in
particular capital and liquiditysupport measures,extended between
entitieswithin a group in timesof stressor unexpected loss.
For thepurposeof this study, intra-groupsupport measuresare
- Legallyenforceablecommitmentsfor financial assistanceor
assurancemade byone group entity (usuallya parent) upon which
another group entity(usuallya subsidiary) can call in timesof stress
or unexpected loss;or
- Commitmentswhichregulatorswouldregard asreliablemeansof
support.
Thesemeasurestypically increasethe risk of lossto theprovider when
calledupon by a beneficiary that subsequentlyfails.
Support measurescan vary betweenjurisdictionsdue to differing
regulatory, legal or tax regimes.
Support measurescan stem either from contractual agreementsor asa
matter of law or regulation.
Theycan taketheform of ongoing or contingent support, secured or
unsecured, within national boundariesor cross-border.

Theseintra-group support measuresmay existbetween regulated entities
or between regulated and unregulated entitiesand can take placeon a
cross-sectoralbasis.
Thedirectionof support may alsovary in relationto the hierarchyof the
group’slegal control structure.
Support providedby a subsidiarytoitsparent isreferred to as
“upstream” support whereassupport providedbya parent to its
subsidiary isreferred to as“downstream” support.
Differingregulationsrelated to intra-group support measuresand the
varying types of contractual agreementsdetermined by specific market
practicesand/ or businessmodelshave resultedin a broad range of
intra-groupsupport measuresacrossfinancial groups.
Concernsrelating to intra-group support
Theimportanceand variety of intra-group support measureswithin
financial groupshasincreasedthe supervisorychallengesof ensuring
that regulatedentitiesand their stakeholdersareprotectedfrom risks
arisingfrom theuseof such support measures.
In general, supervisoryconcernsarise whenintra-group support
measures:
- Result in capital, income or assets being inappropriately transferred
from the regulated entity, or result in intra-group creation of capital
resources(ie doubleor multiplegearing);
- Are used asa substitutefor financial resources(egusing a guarantee
or loanrather than capital held at the subsidiary);
- Are implemented on termsor under circumstanceswhichthird
partieswouldnot accept;

- Adversely affect thesolvency, liquidityand profitabilityof individual
entitieswithin a group;
- Result in contagion risk, therebyprecipitatingknock-on effectson
financiallysound entitieswhenone entitywithinthe group
experiencesstress;
- Complicate group structuresand therefore obscure thesupervisor’s
view of the group and/ or legal entitiesthat operate withintheir
jurisdictions,thusaffectingboth the abilitytosuperviseon an
ongoing basis, and resolution and recoverability; and
- Are used asa meansof regulatory arbitrageto evade capital or other
regulatoryrequirementsaltogether.
There may however be positive aspects to intra-group support measures
as they can provide financial resilience and create a stabilising effect on
thewider group.
Intra-group exposures/ transactions
Intra-group exposures/transactionstake theform of an often complex
nettingof direct and indirectclaims whichentitieswithinfinancial
groupstypicallyhold on eachother.
Themost transparent form of intra-groupexposure isa credit or a lineof
credit which either the parent grantsto a subsidiary or one subsidiary
makes availabletoanother subsidiary.
Intra-groupexposures,however, can originatein a varietyof other ways:
for examplethrough
- (a) intragroup crossshareholdings;
- (b) trading operationswherebyone group entitydealswithor on
behalf of another group entity;

- (c) central management of short term liquiditywithinthe group and
- (d) guaranteesand commitmentsprovided to or received from other
companies in thegroup.
For thepurposesof this report, intra-group support measuresshouldbe
considereda subset of intra-group exposures/ transactions.
Wider intra-groupexposures/ transactionsrelatingto “businessas
usual” activities arenot consideredtobeintra-groupsupport measures.
Instead thispaper focuseson intra-groupsupport measuresthat areput
in placein timesof stressor unexpected losses.
Wider intra-groupexposures/ transactionsnot captured by this narrower
definitionof intragroup support may be put in placefor the following
reasons:
- Topromotethedevelopment of group businessactivities(eg
facilitate acquisitions,integrationof acquired business,distribution
arrangements,internal restructurings,salesor other disposalsof
assetsor businessesor similar transactions);
- Toenablethe group to operate on an integratedbasisacross
different legal entities,some of whichmay not be in the same
jurisdictions;
- Tosupport entitycredit ratingsin a group (egparental support of an
entityin order toobtain the same credit rating asthe parent entity)
andthereforeensuring competitivefinancingtermsfor entitiesof the
group;
- Topromoteefficient use and fungibility of the group’s capital
resourcesacrossthedifferent legal entities;and

- Tomanage and provide liquidityand capital resourcesacrossthe
group.
Notwithstandingtheir economic and commercial benefits, both intra-
group exposures/ transactionsand support measureshavethe potential
toadversely affect thesolvency, liquidityand profitabilityof individual
entitieswithin a group.
Theycan impede effectivesupervision and resolution efforts, and
increasecontagion risk acrossthe group.
Gatheringinformation on existing“businessasusual” intra-group
exposures/ transactionswasnot an objectiveof this study.
However, it should be noted that makinga clear separation between
intra-groupexposures/transactionsand intra-groupsupport measures
wasnot alwayspossiblein practice.
For this reason, “businessasusual” intra-group exposures/ transactions
wereconsideredtothe extent that theymight changemateriallyor be
extended in timesof stressor unexpectedloss(thusbecoming forms of
“intra-groupsupport” asdefined for thisstudy).
Table of participating firms
Thefollowingtableshowsthe sector and continent (Europe, North
America and/ orAsia) of origin of the 31financial groupsfrom ten
countrieswhichparticipatedin thesurvey.
Both for confidentialityreasonsand becausemanyresponsesprovided
byfirms werehigh-level rather than detailed, firm namesand firm-
specific responsesto thequestionnaire havenot been included.
Anonymous and summaryextractsand themeshave insteadbeen
provided.

Key findings
1. General overview
Responsesillustrated a varying understanding of the term “intra-group
support” ascertain firmsprovided informationon “intra-group
exposures”more generallyrather than on intragroup support-measures.
Information on intra-group exposures can provideinsight intothe
interconnectednessof financial groups,sheddinglight on avenuesfor
contagion and onthe group’sabilityto stand asan integratedsingle
entityagainst adverse conditions.
However, thiscan complicate thedistinctionbetweenwhat is“business
asusual” and what isextraordinarysupport in timesof stress.
Ameasure can be part of normal businesspractices, but can also
become a support measurein a financial crisis(egthe extension of a
credit line).
As such, intra-groupexposuresthat are likelyto become a support
measure in timesof stressweregiven consideration.
Thesurvey found that the measuresused varied from institutionto
institution. Threeinstitutionsstatedthat intra-groupsupport measures
represent a very small portionof total intra-group exposures.
Another group expresslystated that theydonot have any prearranged
support mechanismsin place, but decideon a case-by-casebasisif and
howtheycan support a group entityin timesof stress.

Theypointed out that this isa crucial part of themanagement function
andthey choose mainlybetweenguarantees, loansand equity injections.
Akey factor toconsider whenassessingthe interconnectednessof group
entitiesis whetherthe groupsmanagecapital and liquidityon a
centralisedbasisor whethereach entitymanagesin a self-sufficient or
self-containedmanner.
Themodel chosen impactsthe nature and design of intra-groupsupport
measures.
Certainfirms statedthat the management of group-wide capital and
liquiditywasa keydriver of intra-group transactionsand support
measures.
Themost common support measuresused by groupswerecommitted
facilities(senior loans), subordinatedloansand guarantees.
Insurancegroupsand conglomeratesuseinternal group
reinsurance, however, due tothenature of reinsurance, it wasnot
considered a support measure for thepurposesof this study asit is
generallycalledupon onlywhencertain eventsspecified in thecontract
materialiseand generallynot whenother stressful eventsoccur.
Internal support measuresgenerallywerefound to be providedon a one-
waybasis(egdownstreamfrom a parent toa subsidiary).
Loansand borrowings,however, werefound in some groupson a
reciprocalbasis.
Thegroupsincluded withinthesurveygenerallyoperate acrossborders
and, assuch, statedthat their support measureswereprovided
domesticallyaswell asinternationally.
Support measuresalsotake placebetweenregulatedand unregulated
entities.

Of the groupswhichhad activitiesboth in the banking and insurance
sectors, three out of five respondentsindicatedthat intra-groupsupport
occurred on a cross-sectoralbasis.
Thefollowingsectionsset out
- Adescription of, includingadvantagesand disadvantages
of, centralised and decentralisedcapital and liquiditymanagement
asexplainedby firms - an important driver for engagingin intra-
group support in timesof stress;
- Thenature and frequencyof thespecific types of intra-groupsupport
measurescommonly used by respondent firmsincludingtherationale
that firmsput forwardin relationto theadvantages/ disadvantagesof
different types of intra-groupsupport measures;
- Respondents’viewson the restrictionsand regulatory requirements
whichapplytointra-group support measures.
2. Centralised and decentralised capital and liquidity
management
(a) Centralised capital management
Seventeen of 25respondentsaddressingthisissuestated that they
centralisetheir capital management.
Respondentscommentedon the centralisedcapital management
arrangementstheyusedand their advantages:
- Respondentsconfirmed that activecentralisedcapital management
increasesthe efficiencyof a group’s overall capital management.
Agroup’savailablefinancial resourcescan be managedtocover the
capital requirementsdetermined both bythe internal risk model and

bythe requirementsof supervisoryauthoritiesand rating agencieson
a consolidatedbasis.
- One respondent statedthat it used centralised capital management
at a regional level.
That is, centralisedcapital management is takingplace not at the
parent level but on regional level coveringall thegroup entities
(branchesand subsidiaries)that are locatedin that region.
- One respondent statedthat it operatesin such a waythat itsvarious
businessesoperateon a standalonebasisand thereforeneed fewer
intra-groupsupport measuresthan wouldbe expected for a similar
group.
Notwithstandingthis, itsgroup aimstomaintain excesscapital
centrallyin order toallowmaximum flexibilityand to deliver on its
longterm strategy.
- One respondent advised that theymanage capital on a group basis
wherebycapital is raised at theparent holdingcompany and then
injectedasrequired intosubsidiaryentities.
Thefirm statedthat anyexcesscapital generated by a subsidiary is
repatriated by theparent holding companyunlesslocaltax or
regulatorycapital requirementsjustify retainingit.
Capital re-allocationfrom the group parent tosubsidiariesisthen
governedby a “group application” processwith a goal of optimising
theuse of capital acrossthegroup.
- One respondent noted that it managesitsmaterial subsidiarieson an
“arm’slength basis” wherebyeachsubsidiary is required to manage
itsown capital (and liquidity) resourceswithout relianceon other
group entitiesexcept wheresupport isexplicitlyapproved.

Thefirm statedthat the group’score capital is allocatedto
subsidiariesin linewith their localregulatory capital requirements
and subsidiariesare then required togenerate an appropriate return
on theseresources.
- One respondent statedthat it managescapital centrallyat its
corporatetreasury under a framework of internal governancerules.
Thefirm noted that their treasury department setsdomestic and
international legal entityrisk-basedcapital and solvencytargetsin
linewithregulatoryand competitivebusinessrequirements.
Capital plansare alignedtotargetsand monitoredand updated
throughout the year.
Excesscapital is directed tothe holdingcompany and managed
centrally.
- One respondent noted that the objectivesof their capital
management processensure that thegroup optimisescapital whilst
minimisingtax through governance and control of external and
internalcapital movements(eg betweensubsidiaries).
Somerespondentsnoted disadvantagestocentralisedcapital
management includingthe potential for a deterioration of the
capital/ fundingposition of a subsidiary tohave contagion effects
acrossthe group.
(b) Centralised liquidity management (cash pooling)
In general, many of therespondentsthat had centralised capital
management in placealsoused centralisedliquiditymanagement.
- Tworespondentswhousedcentralisedcapital management also
statedthat thegroup’s liquiditywasmanagedcountry by country.

- One of thesefirmsexplained that itsgroup treasury function
determinesthe policies, processes,controls, systemsand reporting
requirementsfor each country treasurywhichthen isresponsiblefor
applying thosecontrolsacrossthe activitiesof all businessunitsin
their respectivecountry.
- Another respondent statedthat itsgroup pooling activitiestake place
onlyin certain legal entities.
One group stated each currencyis managedin one geographic
competencycentre for the entire group (eg thedollar is managed
from NewYork, Sterlingand theEuro from Brussels, etc) with
consolidatedmonitoring of all currenciesby the treasury at group
level.
Thesefirmsdid not however provide further information astowhy
their capital and liquiditywasnot managed onthe same basis.
- One respondent statedthat it runsa centralisedliquiditystress
modellingprocessaswellasa separatelegal entitystressmodelling
processwhen required by host country regulators.
This group maintainsa combination of substantial pools of liquidity
held in variousareas(in variousentities,eg broker dealers).
Thesespoolsare held on an as-neededbasis(entityby entity) or as
requiredby locallaw/ regulation.
This group stated that it is unable to allocate liquidity across sectors
from a bank to a non-bank affiliate as regulatory guidelines generally
prohibit support acrosssectors.
- Another respondent noted that it maintainsanexcesspool of
liquiditysufficient tomeet requirementsin both a normal
environment and amodelled stressenvironment.

Potential outflowsin a stressed environment are determinedthrough
an internal stressanalysis.
The group’s excess liquidity is held at the group level as well as at
the level of major operating entities which also maintain their own
pools.
CorporateTreasurymanagesthefundscentrally.
For subsidiaries with no legal, regulatory, tax or other restrictions, the
group employs a central cash management framework it receiving and
distributingcashtoentitiesasrequired.
With certain exceptions,most loanstoaffiliateshave open/ overnight
maturities in order toallowfor maximum flexibility.
Respondentsusingcentralisedliquiditymanagement outlined their cash
management objectivesasmaximisingliquiditywhile minimisingthe
cost of funds.
One respondent noted that the objectiveof its liquiditymanagement is
tomeet the group’scommitmentsastheyfall due whilst maintaining
market confidencein the firm.
Respondentsstatedthat central liquiditymanagement enabledtheir
groupstopreparefor and mitigatevariousrisksto the group’sliquidity
position.
Theynoted that this ensured sufficientlyhigh liquid assetsat all timesin
theevent of potential liquidityoutflowsunder both normal and stress
conditions,includingacutestressconditions(eg in the caseof a potential
downgradeof the credit ratingat theparent or locallevel).
Certainrespondentsalsoexplained that cash pooling isimportant
becauseit can reduceconsolidatedleverage.

It can alsoreducetheneed for third-partyplacementsat the subsidiary
level (and thecredit risk attached) becausethehighest ratedentityin the
group, the parent company, is best positioned to accessthemost cost-
effectivefunding, providea singleface tothemarket and effectively
managethe relationshipswithratingagenciesand institutional investors.
Unlike manyof thesubsidiaries, theparent alsohasfewerrestrictionson
both lendingand recoupingfunding to and from subsidiaries.
One respondent stated that centralised liquidity management had been
particularly beneficial to them during the 2007-2009 financial crisis, as it
limitedtheir potential exposure to banksthat ultimately failed.
Another respondent pointed out that in many casesthere isan economic
trade-off betweenintra-groupsupport measures(eg guarantees) and
intra-groupfundingin the normal courseof business.
Adecisiontoreducecentralisedfunding requires higher amountsof
fundingto be obtained by subsidiariesin their localmarkets.
In order todo soeconomically, subsidiarieshave a greater incentiveto
usethe stronger name of the parent through a parental guarantee.
(c) Decentralised capital and liquidity management
(“subsidiary self-sufficiency”)
In contrast, ten of 25respondentsthat addressedthis issuestated they
did not operateon a centralisedbasis, but rather relied on decentralised
management - an operatingmode premisedon the self-sufficiencyof
subsidiarieswithina group.
Tworespondentsexplainedthat they demand that individual
subsidiariestry toobtain resources(eg capital and funding) themselves
from their own markets, rather than usingcentralisedresources.

Even though this strategyimpliesan increasein cost, accordingto these
groups,it providesbetter diversification and clearliabilitypricing(ie cost
pricing).
One respondent noted that although their group corecapital (ie equity) is
allocatedto subsidiaries,thiscould besupplemented by locallyissued
Tier 2 capital (ie debt).
Respondentssuggestedthat soundnessof capital and liability pricingat
thesubsidiary level iscritical and that groupsoperatingwithout it cannot
truly understandtheir cost of resources, making them susceptibletoless
rational group capital allocationdecisionsover time.
Furthermore, centralisationcan result in subsidiariesbecoming too
dependent on their group parentsfor other functions(eg risk
management and strategic decisions).
Domestic riskmodelstranslatethe group’srisk expertiseintoa local
implementationof riskassessment strategies.
Akey advantagenotedby respondentsoperatingself-sufficient
subsidiarieswasthat theyallowfor easier separationfrom therest of the
group - for example, in termsof thesaleof anyparticular unit for
commercial gain or in situationswhenit is necessarytoisolatean
entityduring a crisis to limit contagion totherest of the group.
One respondent from the insurancesector explainedthat theydo not
manageliquiditycentrally.
Various insurance subsidiaries in the group write different product mixes
in different jurisdictions, resulting in claim patterns that can vary locally.
Liquidityneedscan thereforevary with localconditions.
However, there is central control over what investmentsa subsidiaryis
permittedtomake, and localsubsidiarieshave accessto crisiscapital
from theparent.

Glossary
Committed facilities(senior loans):
Are an extensionof credit wherebythe lender contractstolend up toa
specific sum under pre-definedtermsand conditions.
Subordinated loans:
Atype of loan that is junior toother debtsshould a company be wound
up.
Typical providers of subordinated loansare major shareholdersor a
parent company.
Athird-partyprovidingfundsthrough a subordinated loanwouldseek
higher compensation (eg higher interest) relative toa senior loandue to
theloan's subordinatedstatus.
(Aloan's status,whethersubordinated, secured or unsecured, is spelled
out in the contract betweenborrowerand lender.)
Letter of credit:
Alegal commitment issued by a bank or other entitystatingthat, upon
receipt of certain documents,thebank will pay against draftsmeeting
thetermsof theletter of credit.
Lettersof credit arefrequentlyused for risk financingpurposesto
collateralisemoniesowedby an insuredunder variouscash flow
programssuch as:incurredbut not paid lossesin paid lossretrospective
ratingprograms, a meansof meeting thecapitalisation requirementsof
captives,and to satisfy the securityrequirementsof theexcessinsurer in
"fronted" deductibleor retention programs.
For captives, lettersof credit serve twopossiblepurposes: theymay be
used in lieu of or in addition tocash or other securities ascapital, and/ or
tosecuritisethe fronting insurer's reinsurancereceivablecreated by a
non-admittedreinsurer.

Letter of comfort:
Aletter issued to a lendinginstitutionby a parent company
acknowledgingthe approval of a subsidiary company's attempt for
financing.
The'letter of comfort' in nowayguaranteestheloan of the subsidiary
company.
It merelygivesreassuranceto thelender that theparent company is
awareand approvesof the situation.
Declarationof backing:
Unrestricted letter of comfort. With a declaration of backing the
issuer ensures(withonlycertain specific exception, eg in thecaseof
politicalrisk) that selectedgroup entitiesare able to meet their
contractual liabilities.
If this should not bethe case, the receiver of this declaration(typically a
lendertoone of theselectedgroup entities)can suetheissuer for
damages.
Profit transfer agreement:
In a profit transfer agreement, one company agreesto transfer itsprofits
toanother company.
This type of contract is used in Germany.
Theprofit transferagreement isusedtoconsolidateprofits between
companies.
Thecontrollingcompany in thisarrangement is the one that receivesthe
profitsof thecontrolledcompany.
Under the rulesof theagreement, thecontrolledcompany must act and
operatein the best interestsof the controllingcompany.
Thearrangement isessentiallythat of a parent company and subsidiary.

However, if the controlledcompany suffers losses,the controlling
company is obliged toprovide it compensation for itslosses.
Guarantee:
Non-cancellableindemnitybond that guaranteestimely payment of
interest and repayment of principal tothebuyers (holders) of a debt
security.
Equityinjections:
Theprovision of cash by one entitytoa secondentity in the form of
equitycapital (ie permanent capital withnolegal obligationof capital
return or fixed payment) of thesecond entity.
Bond swaps:
Astrategy in whichan investor sellsa bond and simultaneously
purchasesa different bond withthe proceedsof sale.
There areseveral reasonswhyentitiesuse a bond swap:for tax benefits,
toalter investment exposures(eg to upgradea portfolio'scredit quality
or speculateon the performanceof a particular bond).
Bond/securitylendingagreements:
An agreement betweenentities(eg parent and subsidiary) accordingto
whichtheparent can borrow securitieson the balancesheet of the
subsidiary in order toimprovetheliquiditypositionof the parent.

Solvency II SpeakersBureau
TheSolvencyII Association hasestablishedthe SolvencyII Speakers
Bureau for firmsand organizationsthat want to accesstheexpertiseof
Certified Solvencyii Professionals(CSiiPs) and Certified Solvencyii
EquivalenceProfessionals(CSiiEPs).
TheSolvencyII Association will be the liaison betweenour certified
professionalsand theseorganizations,at no cost. We stronglybelieve
that this can be a great opportunity for both, our certified professionals
andtheorganizers.
Tolearnmore:
www.solvency-ii-association.com/ Solvency_II_Speakers_Bureau.html
Course Title
Certified Solvency ii Professional (CSiiP):
Preparing for the Solvency ii Directive of the EU (3 days)
Objectives:
This coursehasbeen designed toprovidewiththe knowledgeand skills
needed to understand and support compliancewiththe Solvencyii
Directiveof theEuropean Union.
TargetAudience:
This course isintendedfor decision makers, managers, professionals
and consultantsthat:
A.Work in Insuranceor Reinsurancefirmsof EEAcountries.
B.Work in Groups- Financial Conglomerates(FC), Financial Holding
Companies(FHC), MixedFinancial Holding Companies
(MFHC), InsuranceHolding Companies(IH C) - providing insurance
and/ orreinsuranceservicesin theEEA, whoseparent islocatedin a
country of theEEA.

C.Want tounderstand thechallengesand the opportunitiesafter the
Solvencyii Directive.
This course ishighlyrecommendedfor supervisorsof EEA countries
that want to understand how countriesseeSolvencyII asa Competitive
Advantage.
This course is also recommended for all decision
makers, managers, professionalsand consultantsof insurance and/ or
reinsurancefirmsinvolved in risk and compliancemanagement.
About the Course
INTRODUCTION
TheEuropean Union’sLegislativeProcess
Directivesand Regulations
TheFinancial ServicesAction Plan (FSAP) of theEU
ExtraterritorialApplication of European Law
ExtraterritorialApplication of the SolvencyII Directive
Solvencyii and theLamfalussyProcess
Level 1:FrameworkPrinciples
Level 2: Detailed Technical MeasuresLevel3: Strengthening
CooperationAmong Regulators
Level 4: Enforcement
Weaknessesof SolvencyI
From SolvencyI toSolvencyII
Solvencyii Players
Solvencyii Objectives
THE SOLVENCY II DIRECTIVE
AUnified LegislativeBasisfor Prudential Regulation of Insurers
andReinsurers
Risk-BasedCapitalAllocation
Scope of theApplication

Important Definitions
Value-at-Riskin SolvencyII
Authorisation
CorporateGovernance
GovernanceFunctions
RiskManagement
CorporateGovernanceand Risk Management - Level 2
Fit and proper requirementsfor personswhoeffectivelyrun the
undertakingor haveother key functions
Internal Controls
InternalAudit
Actuarial Function
Outsourcing
Board of Directors:Role and Solvencyii Responsibilities
12Principles– System of Governance (Level 2)
PILLAR 2
SupervisoryReview Process(SRP)
Focuson Risk Management and Operational Risk
Own Risk and SolvencyAssessment (ORSA)
ORSA- TheInternal Assessment Process
ORSA- TheSupervisoryTool
ORSA- Not a Third Solvency Capital Requirement
Capital add-on
PILLAR 3
DisclosureRequirements
TheSolvencyand Financial Condition Report (SFC)
PILLAR I
ValuationOf AssetsAnd LiabilitiesTechnicalProvisions
TheSolvencyCapital Requirement (SCR)

TheValue-at-RiskMeasureCalibratedtoa 99.5% Confidence
Level over a 1-year Time Horizon
TheStandardApproach
TheInternal Models
TheCollectionofAdditional HistoricalData
External Data
The Minimum Capital Requirement (MCR)
Non-CompliancewiththeMinimum Capital Requirement
Non-CompliancewiththeSolvencyCapital Requirement
Own Funds
Investment Rules
INTERNAL MODEL APPROVAL
CEIOPSLevel 2 - Testsand Standardsfor Internal Model
Approval
CEIOPSLevel 2 - The procedure tobe followedfor theapproval of
an internal model
Internal ModelsGovernance
Group internal models
Statistical qualitystandards
Calibrationand validationstandards
Documentation standards
SOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIES
SolvencyI: SoloPlusApproach
Group Supervisionunder SolvencyII
Rightsand dutiesof the group supervisor
Group Solvency - Methodsof calculation
Method1(Default method):Accounting consolidation-based
method
Method2 (Alternative method): Deduction and aggregation
method

Parent UndertakingsOutsidethe Community- Verification of
Equivalence
Parent UndertakingsOutsidethe Community - Absence of
Equivalence
Thehead of thegroup isin theEEA and the third country regime
is not equivalent
Thehead of thegroup isin theEEA and the third country regime
is equivalent
Thehead of thegroup isoutsidethe EEAand the third country is
not equivalent
Thehead of thegroup isoutsidethe EEAand the third country
regimeisequivalent
Small and Medium-SizedInsurers:The ProportionalityPrinciple
Captivesand SolvencyII
EQUIVALENCE WITH SOLVENCY II AROUND THE WORLD
Solvencyii and Countriesoutsidethe European EconomicArea
TheInternationalAssociation of InsuranceSupervisors(IAIS)
TheSwissSolvencyTest (SST) and Solvencyii:
Solvencyii and theOffshoreFinancial Centers(OFCs)
Solvencyii and theUSA
Solvencyii and theUS NationalAssociation of Insurance
Commissioners(NAIC) - The Federal InsuranceOffice created
under the Dodd-Frank Wall Street Reform and Consumer
ProtectionAct in theUSA, and the ORSAin theUSA
FROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY II
DIRECTIVE
Directive2005/ 68/ EC of 16November 2005on Reinsurance- The
ReinsuranceDirective(RID)
CLOSING
TheImpact of Solvencyii OutsidetheEEA
ProvidingInsuranceServicestotheEuropean Client

Competing withBanks
Learningfrom theBasel ii Framework
RegulatoryArbitrage:AMajorRisk for Countriesthat see
Complianceasan Obligation, not anOpportunity
Basel II, Basel III, SolvencyII and RegulatoryArbitrage
Challengesand Opportunities:What is next
RegulatoryShopping after SolvencyII
Tolearnmore about theonlineexam you may visit:www.solvency-
ii-
association.com/ CSiiP_CSiiEP_Frequently_Asked_Questions.pdf
www.solvency-ii-association.com/ CSiiP_CSiiEP_Certification_Steps.pdf
Tolearnmore about thecourse:
www.solvency-ii-association.com/ Certified_Solvency_ii_Training.htm

Solvency ii News March 2012

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