Solvency ii News August 2012


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Solvency ii News August 2012

  1. 1. Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Todaywewill start from a reallyinterestingpresentation.Solvency ii
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  14. 14. EIOPA Final Report on Public ConsultationsNo. 11/ 009 and11/ 011On the Proposal for the Reporting and DisclosureRequirements1. Scope1.This Final Report containsthe outcome of twoPublicConsultations,No. 11/ 009and No. 11/ 011, whichwerelaunchedbyEIOPAon November 8 2011and on December 212011on the proposal forreportingand disclosurerequirementson insuranceand reinsuranceundertakingsand insurancegroups.2.It includesa feedback statement withEIOPA‟s opinion on themaincommentsreceived during the Public Consultation.3.In theAnnexes, stakeholderscan find the detailed resolution templatewithEIOPA‟s feedbackon all commentsreceived(Annex I), togetherwithupdated reportingand disclosuredocuments,which havebeenrevised asa result of the commentsreceived(Annex II).4.In relation to thedraft Guidelineson Solvencyand FinancialConditionReport and the Regular SupervisoryReport, Reportingunderpredefined eventsand undertaking‟sProcessesfor Reporting &Disclosure, EIOPAhasincluded the explanatorytext in thisFinalReport, asit did in the ConsultationPapers,in order toassist readers inunderstandingthe thinkingbehind specific pointsin the Guidelines.5.Therequirementson reporting and disclosuretemplatesdescribed inthisFinal Report will be reflectedin a technical standard tobe drafted bySolvency ii
  15. 15. EIOPA and endorsed by the European Commission (EC) accordingtoArticle 10 and 15of EIOPA Regulation.6.Thedraft Guidelinesin thisFinal Report may still be subject toamendmentsin order toreflect future developmentsof anyunderlyinglegallybindingUnion acts.7.TheOmnibusII Directive(OMDII) will set thedate of entry intoforceof theSolvencyII regime.EIOPA stronglysupports,within the constraintsof thefinal decisionsoftheParliament and the Council on the timelineand the scope of thetechnicalstandards,the entry intoforce of SolvencyII from 1January2014.2. Purpose1.EIOPAacknowledgesthat the effectivetransitiontotheSolvencyIIregimeand in particularcompliancewiththe reportingand disclosurerequirementsfrom dayone requires that earlypreparationsare made forimplementation.2.Consequently, EIOPA hasperformed informal consultationswithstakeholdersover thelast few years and this wasfollowedbya period offormal public consultationat the end of 2011on , Consultation Paper 9(CP No. 11/ 009) and Consultation Paper 11(CP No. 11/ 011).3.CP No. 11/ 009included the draft proposal on QuantitativeReportingTemplatesand Draft proposal for Guidelineson NarrativePublicDisclosure & SupervisoryReporting, Predefined EventsandProcessesfor Reporting& Disclosure.This consultation, included:a)IssuesPaper;b) Excel templatesfor reporting and disclosure;Solvency ii
  16. 16. c)Summary docsfor each template;d) LOGs for each template;e)Proposal for a Guidelineon NarrativePublicDisclosure &SupervisoryReporting, Predefined Eventsand Processesfor Reporting& Disclosure;f)ImpactAssessment.2.4. CP No. 11/ 011introducedinformationneedsrequired from insurersfor financial stability purposes.This consultation included:a)IssuesPaper;b) Excel templatesfor reporting and disclosure;c) LOGs for each template.5.Thepackagein thisFinal Report reflectsEIOPA‟s position on thecommentsreceived on CP No. 11/ 009and CP No. 11/ 011.6.EIOPAconsidersthat it is crucial for theeffectiveand timelyimplementationof SolvencyII reportingand disclosurerequirements(includingthereportingneeded for EIOPAfinancial stabilitypurposes)that anupdatedpackageis provided, which undertakingscan use asthebasisfor their preparations.Furthermore, EIOPA believes that the package represents a stable viewof the level of granularity of the information that supervisory authoritieswill need to receive.7.Changesarising from thediscussionsof OMDII and theimplementingmeasuresarenot expected to be major and maypotentiallyincludeamendmentsin the followingtemplates:a) Scopeof the quarterlyreporting;Solvency ii
  17. 17. b)Ownfunds;c) SolvencyCapital Requirements(SCR) specificrisk modules;d) Life TechnicalProvisions;e) Activity by country;f)Templatesapplicableto Ring FencedFunds(RFF) (asthematchingpremium may impact RFF treatment).8.Additionally, further clarificationswill need to bedevelopedregardingthe use of thetemplatesby undertakingsthat usethesimplificationson technical provisionsand SCR calculationsto bedefinedby implementingmeasures.9.Theapplicationof reporting and disclosurerequirementsto thirdcountry brancheslocated in theEU will alsobe consideredfollowingthispublication.10.TheEuropean MarketsInfrastructureRegulation (EMIR)consultation package, expectedin Julyof 2012will lead to an assessmenton theneed to revisethetemplateson derivatives.Afull convergence of requirementsis not envisaged sinceEM IR servesadifferent purposetoSolvencyII.However, EIOPAbelievesit isimportant to align the requirementsasfaraspossibleto limit the reportingburden on undertakings..11.Finally, the packagemay be amendedduring the implementationphase,in particular due tothedevelopment of the data point modellingand eXtensibleBusinessReporting Language(XBRL) taxonomy, thetemplatesmay require design or structural changes,but these will notaffect their content.12.Thepackagepublished in this Final Report includes:a) FeedbackStatement for CP No. 11/009 and for CP No. 11/011;b) Updated Excel templates(coveringsolo, groupsand financialstability);Solvency ii
  18. 18. c)Updated Summary docs(coveringsolo, groupsand financialstability);d) Updated LOGs(coveringsolo, groupsand financial stability);e)Updated proposal for the SFCR and narrative RSR, reportingunderPredefined Eventsand undertakingsown Processesfor Reporting&Disclosure;f) Commentstemplate.2.13. The updatedExcel filesare presentedin a different wayto the filesin CP no. 11/ 009and CP No. 11/ 011sincethis providesfor betterunderstandingThepackage now includessix Excel files, listedin thetablebelow,thatincludeinformation for supervisorypurposesand for financial stabilitypurposes.Thecontent for thesefiles is described at the end of the FeedbackStatement.14.TheSummary docs, LOG filesand theproposal for theSFCR andnarrativeRSR, reportingunder Predefined Eventsand undertakingsownProcessesfor Reporting& Disclosurewereupdated accordingto thechangesmadetothetemplatesand further clarificationsrequestedfromstakeholders.Future full and final package on Reporting and Disclosure15.EIOPA expectsthat the final packageon reportingand disclosurewill be published during the courseof 2013and that it will incorporatethepackagenow approved along withall foreseen changesdescribed atparagraphs2.1to 2.10, and will include:Solvency ii
  19. 19. a) Draft Technical Standard(includingsolo, groups, financial stabilityrequirementsandrequirementsfor third country branches):i.Articles (will includecontent of IssuesPaper asconsultedand part ofthecontent of summary docsand LOGs that are “requirements”)ii.Technical annexes(will includetemplatesplusdescriptionof theitems, basedon LOG files)iii. Validation rules(tobe confirmed)b) Guidelines(includingsolo, groups, financial stabilityrequirementsandrequirementsfor third country branches), covering SFCR, RSR, pre-defineseventsand undertaking‟s policies:i. Guidelines(wherea moreclear link betweentheSFCR and templatestobe disclosed will be done)ii.Excel templates(if needed– dependsof the format tobe usedin theTechnicalannexesof the Technical Standard)iii.Summarydocs(if needed, withinformationnot used in theTechnicalStandard but consideredhelpful for stakeholders)iv.LOGs files(if needed, withinformationnot usedin the TechnicalStandard but consideredhelpful for stakeholders)c) Guideline on XBRL3. Feedback StatementI. Introduction1.EIOPAwouldlike to thank all respondentswhoprovidedcommentson theCP No. 11/009and CP No. 11/ 011.Solvency ii
  20. 20. These provided valuable suggestions for improving the reporting anddisclosure requirements package and helped to identify areas needingfurther clarification.2.Theamendmentsmade cover not only clarifications,includingtheacceptanceof a number of rewordingsuggestionsfrom respondents,butalsosome changestothecontent of theGuidelinesand theaccompanyingexplanatorytext.3.Thefeedbackstatement outlinesfirst the commentsreceivedfromrespondentstoCP No. 11/ 009and CP0No. 11/ 011and second thereview and resulting changesmade tothereportingand disclosurepackage.4.Thecommentsfrom theInsuranceand ReinsuranceStakeholders‟Group are addressedin a specific section at the end of the feedbackstatement.II. Comments in generalImplementation and maintenance costs5.Respondentsstated that the proposedreporting templateswouldput aheavyburden on undertakings.Thecostswill not onlybetheimmediatecostsof changing IT-systems.They believe that there will also be a permanent increase in costsforreporting because additional human resources will be required in allcompany functionsinvolved in reporting.Timing 18 monthsfor implementation6.If XBRL is chosen asthenew technical format for reporting templates,respondentsstated that the industrymay require up to 2 years toimplement and test thenecessarysystems.Solvency ii
  21. 21. Respondentsurged EIOPA tocommunicatetheir decision on the formatof reporting templatesassoon aspossibleto allowsufficient time forindustrypreparation.Proportionality in general7.Respondentsbelievethat the principlesof proportionalityandmaterialitywerenot adequately consideredin the general reportingrequirementsaswell asin theamount of informationto be reported.Theyproposed that a cleardefinitionof materialitythresholdsshould beconsideredin several templates(e.g. reinsurance, technicalprovisions,reposand securities lending, balance-sheet – in this caserespondentsrequested clarityon the criteria to report thebalancesheetquarterly).8.Respondentsstated that assuranceshould be provided that thedefinitionof whichundertakingsare exempted from quarterlyreportingwill remain stableand that thismight bedone through a larger period ofobservation of the conditionsfor inclusionand exclusion.It wasstatedthat it isnot clear whodecideswhichundertakingsarewithin thethreshold and for how long.Threshold of 6bn for financial stability information9.Respondentsbelievethe threshold is toolowand will includeinsurerswith no relevancefor financial stability.In particular in largecountries,a relatively high number of insurerswillbeincluded.10.Other respondentsexpressed some concern that a threshold of EUR 6bn might have a negativeimpact on thesector coveragefor small andmedium sizedcountries.Solvency ii
  22. 22. Deadlinesfor financial stability information11.Respondentsexpressed seriousconcern regarding the introduction ofshorter deadlinesfor groups. Several respondentsexpressedthat theywouldfacesevere difficultiesin preparingconsolidateddata with theshorter deadlinesand on a quarterly basis.12.Other respondentsconsidered timelyinformation essential forfinancial stabilityanalysis.Quarterly reporting and 4th quarter reporting13.Respondentsbelieve that national regulatory authoritiesshould begiventhe flexibility of exempting companies with a stablerisk profilefrom quarterly reporting in accordancewith the principleofproportionality.14.Reportingof the4th quarter template isconsideredveryburdensomeasit duplicatesa processwhichmust bedone at a later point again.It is questioned whythesupervisory authorityrequestparts of theinformation already9 weeksbeforetheannual report will be submitted.Standard codesto be used in the reporting15.Respondentshave many doubtson how the several codesrequired aremaintained, e.g. codesfor reinsurers,issuers,issuer group, issuer sectorand counterparties.Respondentswelcomed the possibilitythat EIOPAintroducesentity scodesto avoid incorrect legal namesof involved entities.Howeverit isstill unclear whetherthese codeswill be determined by theundertakingor by EIOPA.16.On theCIC codesrespondentswelcomestandardised rules.Solvency ii
  23. 23. Theysaythat a possibilitywouldbe EIOPAtoappoint providersfordeterminingthe CIC Codesfor listedsecurities and providingguidanceon CIC mapping for unlisted securities,for examplevia a guidancecommittee.Technical provisions by line of business for financial stabilityinformation17.Respondentswereconcernedabout the request of technicalprovisionsby lineof businessfor groupsasthey saw it to re-introducerequirementson group level whichwerenolonger part of themicro-prudential package.Groupsare not required tofill in thetechnical provisionstemplatesinthemicro-packagebylineof business.Quarterly SCR for financial stability information18.Respondentsraised concernsabout providing quarterlyupdateson abest effort basisof SCR if thisincludesa volatile element, in particularfor groups(for micro-prudential purposes,there is norequirement topresent either a soloSCR nor a SCR group calculationon a quarterlybasis).19.Other respondentsstressed theimportanceof the reportingofquarterlySCR, either soloor at a group level, important for financialstability analysis.Statutory accountsfor financial stability information20.Respondentsraised concern regardingthe reportingof quarterlystatutoryaccountsasmany insurersonly disclosesemi-annualinformation.Solvency ii
  24. 24. In particular, this concern related to the overall P&L figure, althoughissues were also raised with the other statutory account figure of totalbalancesheet.Detailed list of assets and look-through principle21.Respondents,and assetsmanagersin particular, expressed concernabout confidentiality, costsof provision of ratingsand availability ofinvestment returnson group level.22.Respondentsbelieved the look-through principleof investment fundswouldbe challengingto meet.Best effort for financial stability information23.Respondentsrequested clarityor guidanceregarding thecontent ofthebest effort principleto be applied for financial stabilityreporting.Legal hook for financial stability information24.Respondentsrequested clarityon thelegal hook for a separate requestfor data for financial stabilitypurposesand arguedthat it wouldbeinsufficient tobasethe reportingrequirement on SolvencyIIrequirements.Lapse ratesfor financial stability information25.Respondentsbelieved that lapserates, especiallynumber ofcontracts,wouldnot provideuseful informationtoEIOPA.Duration of liabilities for financial stability information26.Respondentsquestioned theusefulnessof this information and arguedthat it wouldbe difficult tocalculate, especiallyon a group basis.Solvency ii
  25. 25. III. Specific issuesraised by respondentsBalance Sheet27.Thedisclosureof theAccounting BalanceSheet together with theSolvencyII BalanceSheet wasconsidered asmisleading and addingnoadditional benefit.Respondentsbelieved that only the SolvencyII BalanceSheet should bepublicallydisclosed along witha narrativestatement explainingdifferencesthat have arisenbetweenthetwobalancesheets.CountryK128.Respondentsproposed tointroducea threshold for theEEA branchesreporting.Own funds29.Respondentscommentedon the apparent complexityof the ownfundstemplate.Variation analysis30.Respondentsmain commentswere:a)No split by linesof business(LoB) should be required;b)Theaccident Year and UnderwritingYear approachesfor explainingvariationsdue totechnical provisionsshould be authorised;c)Thesplit of analysis betweenperiodsand detailedbreakdownonreinsurancerecoverablesis considereddemanding;d)Concernsaround the request of cash flowinformation (asopposed toaccountingor accrual based information);Solvency ii
  26. 26. e) Cost and timelinessissues.31.Majorrespondentsrequested further discussionsto be held withEIOPA on thesetemplates.MCR / SCR32.Respondentsaskedif a tool will be produced by EIOPAtohelpundertakingsto calculate theSCR.33.Doubtsregarding theapplicabilityof the templatesto companiesusinginternal models whenan estimateof the SCR is requestedunderarticle 112of the Directive.34.Respondentscommentedon the level of detail of thecatastrophicrisktemplate(B3F).Assets35.Proposalstodeletesome columns, e.g. delta, rating, etc., that can beretrieved form financial sources.36.Commentsstatedthat the reportingof informationon credit ratingmay have additionalcosts.37.Respondentsstatedthat assetsof unit linkedproductsshould not bereported.38.Respondentsaskedfor the possibilityof allowingfor simplificationsin thereportingof investment fundsusing thelook-through approach.Technical provisions Non-Life39.There wasa request for guidanceon simplificationsand clarificationof the meaningof best effort basisregarding quarterlyreporting.Solvency ii
  27. 27. 40.There wasa request for revisitingthresholdsregardingthesplit ofrun-off trianglesbymaterial currency –41.Respondentsquestioned the need for reinsurancetriangles.Technical provisions Life42.Commentsregardingthequarterly reporting – There wasa request forguidanceon simplificationsregarding the quarterly reportingand forclarification on themeaningof best effortsbasis.Reinsurance43.Commentswerereceivedregarding the request of information onreinsurerscredit ratingand eventual costs(sameissueon assets), andtherequested materialitythresholds.Specific commentson groupstemplatesBalance-sheet44.Respondentsbelieved that theapplicability of thetemplatewasnotclear (Deduction & Aggregation method: doubtson how to fill in thetemplate).Also, theybelieved that onlythe Solvency II BalanceSheet should bepublicallydisclosed alongwitha narrativestatement explainingthedifferencesthat have arisenbetweentheSolvencyII BalanceSheet andaccountingBalanceSheet (consolidation scopemay even be different).Own funds45.Respondentsquestioned thequarterlyfrequency, thelevel of publicdisclosureand the treatment of non-EEAentities.Solvency ii
  28. 28. SCR46.Doubtswereexpressed on how the templatesshould be filled in whena combination of methodsare used.Assets47.Respondentsrecommendedthat the scope of assetsreported at grouplevel should be reviewed. Respondentsconsidered that it ismore relevantfor assetsbereported on a consolidatedbasisfor the wholegroup(insteadof theproposed requirement of reportingbeing limitedto non-EEAentities and non-insuranceand non- regulated entities)Intra Group Transactions (IGT)48.Reportingat different levelswasconsidered to be excessive(sub-groupsand groups).It wasstatedthat thedefinitionsof “significant” and “very significant”should be risk based; it wasalsoqueriedwhetherall IGTsshould bereported, particularlythoseterminated during theperiod.49.It wassuggestedthat transactionsshould be reported in thecurrencyof the group rather thanthecurrencyof thetransactionRisk Concentration (RC)50.Respondentscommentedthat the reportingof RC should not bestandardised.Respondentsbelievethat thetemplate doesnot achievetheintendedpurpose, and that thereportingof risk concentrationsshould beperformed on a qualitativebasis(in combination withquantitativereporting).Solvency ii
  29. 29. Specific commentson Narrative reporting and disclosure51.Regardingthe narrativepart, respondentscommentsaddressedmainlythe SFCR:a)Theamount of informationproposed for public disclosureis seen asexcessivein general;b)Theindustryperception isthat requirementsgobeyond what isdefinedin Level 2;There is perceived tobe a duplicationof informationbetweentheSFCRandquantitativetemplatesdisclosed.IV. EIOPA review of the Guidelines based on the commentsreceivedImplementation and maintenance costs52.EIOPAacknowledgestheimplementation and maintenancecostsofthereportingpackage, but it should be consideredwithinthe context oftheoverall SolvencyII implementationEIOPA hasassessed thecostsand benefitsarisingfrom thereportingpackageand believesthat therevisedpackagerepresentsan appropriatebalance betweencostsfor theundertakingsand theneedsof supervisoryauthoritiesto ensure theprotection of policyholders and theassessment of financial stability.Furthermore, part of thecostsassociatedto thispackageshould not beconsideredsimplyassupervisoryreportingcosts,sincethe detailedinformation reported is alsoneeded for the calculationof financialrequirementsand the proper management of theundertaking.Timing of 18 months for implementation53.EIOPAis awareof and sharessome of respondentsconcernsregardingthetimingfor implementation.Solvency ii
  30. 30. This is thereason whyCP No. 11/009 and CP no. 11/ 011wereconsultedwithrespondentsin advanceof other SolvencyII technical standardsandguidelinesand whyan updated packageis now beingpublished.However, it should be noted that EIOPAis dependent on a number ofexternal factors.TheOMDII and theimplementingmeasures,whicharestill underdiscussion, areexpected to lead to changesin the reportingpackageandthefinal draft of TechnicalStandard tobe developed by EIOPAwill havetoincorporate thosechanges.54.Despitetheseexpectedchanges,EIOPAbelievesthat thispackagerepresentsa stableview of the level of granularityof the informationthatsupervisoryauthoritieswill need to receive.Proportionality in general55.Theprincipleof proportionalityis considered in thereportingpackagein threedifferent ways.Firstlyit is inherent, in that a company withlesscomplexityin theirbusinesswill consequentlyhave lesscomplexitytotheir reporting, forexamplefewerLinesof Business,currencies,and noderivativestoreport.Secondly, for some templatessuch asthedetailed list ofassets,thresholdsbased on size aredefined.Thirdly, materialitythresholdsare considered in several templates.56.In the revised package, thepotential for exemptionsand theapplication of materiality principleswererevised and madeclearer.Solvency ii
  31. 31. Threshold of 6bn for financial stability information57.In linewiththeproportionalityprincipleand takingthe concern of theindustryintoconsideration, the threshold will be increasedto12 billionEurosin assetsat SolvencyII balancesheet.58.Anational market coveragesurveyindicatedthat for a fewcountries,national market coveragewouldbe very limited.In order toensurea minimum national market coverage, the12 billionthreshold will thereforebe complementedwitha criterion for obtainingat least50 per cent coverageon a national level.59.It is clarifiedthat thethreshold relatesto the SolvencyII balancesheet.60.It is noted that thesecriteria may besubject toa review (3 years afterthestart of reporting) followingmarket developmentsin order toensurethat reasonablesamplecoverageis obtainedfor financial stabilitypurposes,and alongthe further developmentsin thedefinitionofsystemic importance.Deadlinesfor financial stability information61.It is acknowledgedthat time is required for consolidationof the soloreports.Takingintoconsiderationthe concernsof industry, but alsothe tightdeadlinesEIOPAis bound by, 1additional weekwill be allowedforgroup consolidationfor the Financial Stability reporting, resultingin aFS deadlineof 6 weeksafter transition.For soloundertakingsfallingwithinthethreshold and that donot reportat a group level thereporting wouldneed to be made within5weeksforthefinancial stabilityitemswhich are in themicrosolopackageand 6weeksfor the onesthat are not in themicro solopackage.Solvency ii
  32. 32. 62.This should enablereportingundertakingstotake full advantage ofthetime allowedfor soloreporting(5 weeksafter transition), and thenhave1weekfor consolidatingon a best effort basisfor financial stabilityreporting.63.During thetransition period, the deadlinesfor financial stabilitywillfollowthesolodeadlines,plus1week (i.e. envisaged 8+1 week the firstyear decreasingto5+1 weekfour years after implementationof SolvencyII).Quarterly reporting and 4th quarter reporting64.Frequencyand timelinessof reportingis crucial for the adequatesupervision of insuranceundertakings.In thisregard, quarterlyreportingis crucial for thesupervisory processwhichis whyit alreadyexistsunder SolvencyI.Under SolvencyII, quarterlyreportingis kept toa minimum of theinformation needed.65.However, followingthe consultation on thefinancial stabilityreporting, EIOPAhasidentified several areaswhere it wasabletoreducethe reportingburdentoinsurers,and under the CP No. 11/009packageEIOPAhasreviewedthethresholdsand criteria relatedtoquarterlyreporting, notablyasregardsAssetsD4.66.Also, EIOPAagreesthat insurersshould not havetoreport the sameinformation twice.Thereforesome changeswereintroduced in thesplit betweenquarterlyand annual information.In the current packagethetemplatesAssetsD1,D2O and D2T arequarterlytemplatesonly, although theyare tobe reported on thefourthquarter by every undertaking, withno exemptionsand withinthequarterlydeadline.Solvency ii
  33. 33. Theywould onlyneed to occur after theduedate for thefourth quarterreporting.Standard codesto be used in the reporting67.EIOPAacknowledgesthe concernsin this area.Howeverit considersthat full harmonisationof the codestobe used iscurrentlynot possible.Afirst step will be done witha reinsuranceundertakingscodificationthat will be developed and maintainedbyEIOPAtoguaranteeacommon identifier of the reinsuranceundertakings.Regardingthe other codes, codesavailablein the market will be used.Additionally, in relation toEIOPA‟s dutiestoset up a register of all EUinsuranceand reinsuranceundertakings, harmonised codeswill beimplementedand will be made available.68.In relation to the CIC codes, the aim of these codesis primarily toassess an undertaking‟s ability to identify the risks of the investmentsthat it holds.This is thereason whya harmonisation of the code isnot envisagedwithin theshort term.Theuse of this code by supervisorsto perform cross-sectorand marketanalysisis a secondary aim.This secondary purposeis not underminedby the lack of thelack ofharmonisationof theCIC, asit can be overcome by adequatesupervision and useof financial information from serviceproviders.Solvency ii
  34. 34. Technical provisions by line of business for financial stabilityinformation69.EIOPAacknowledgesthat thiswouldbe demanding for insurersandwill not require technical provisionsby lineof businessfor groups.70.Instead, and astheSII Balance-sheetwill be required quarterly forboth soloand groups, technicalprovisionsitemswill be requestedfromtheBalanceSheet templatequarterlywiththefollowingsplits:i) Non-life (excludinghealth),ii) Health (similar tonon-life),iii)Health (similar tolife),iv) Life (excludinghealth and index-linkedand unit-linked), andv)Index-linkedand unit-linked.Quarterly SCR for financial stability information71.As quarterlyinformationon the solvencycapital positionofundertakingsis consideredcrucial for financial stability purposes,theoverall SCR isrequested quarterlyfor undertakingswithintheFS scope.However, asindicatedin CP no. 11/ 011, theSCR should onlybe updatedwith volatile elements,and onlyon a best effort basis. See alsosub-section f) on the best effort.72. For (partial) internal model usersthiscan be based on their usetest.73.Standard formula usersshould re-calculate the volatile componentsof the SCR (this wouldusuallybe themarket risk module) in order toreport theoverall SCR on best effort basis.Solvency ii
  35. 35. Statutory accounts(i.e. P&L and Balance Sheet) for financialstability information74.Takingthe concernsof the industry intoconsideration, profit andlossinformationwill be requested on a semi-annual basisand notquarterly.Theoverall profit and loss(P&L isseen asan important overallperformanceindicatorthat is not part of SolvencyII reportingfor microprudential purposes.75.Based on industrycomments, semi-annual reporting should not betooburdensome.76.Theother statutory accountingbalancesheet items(balancesheettotal, and capital and reserves) proposedin CP no. 11/011 areno longerrequested asthis will be reportedquarterlyon a Solvency-II basisforsupervisorypurposes(seeitem Balancesheetsunder commentsonspecific templates).Detailed list of assets77.TheSolvencyII framework givesundertakingsextensive freedom toperform their activitiesastheyseefit.Aprinciplebasedregime, with a reduction in the prescribedconstraintson thewayundertakingsare managed should be balancedwitha higherdegreeof information to supervisoryauthoritiestoallowthelattertodischargetheir duties.Furthermore, the information required for reporting purposes will alsobe needed by undertaking to properly manage their investments underSolvencyII.78.In termsof the look-through approach, EIOPAnotesthat thequarterlyreportingisonlyrequired from undertakingsthat hold moreSolvency ii
  36. 36. than 30% of their portfolio in investment funds(the threshold wasraisedfrom 20% to 30%) and templateAssetsD4 only requiresthelook throughapproachregarding theasset category, geographical exposureandcurrencyexposure (and thereforenot a completelook-through).Best effort for financial stability information79.EIOPAacknowledgesthe need for Guidelineson best effort forfinancial stabilityreporting.80.As a principle,best effort isintended toprovidea limitedroom forindividual optimisation in data-provisionfor reporting undertakings,while requiring a certain level of internalgovernance(not necessarythesamelevel asgovernanceasfor regular reporting) to ensure thenecessaryquality.While data provided need to be exact enough toserve asan indicator onaggregate, there needstobe a clear distinction from theexactnessofdata for supervisory use.81.MoreGuidelinesfrom EIOPAwill be availablefrom the start of thereporting. TheseGuidelineswill includespecific information on the useof estimationsfor particularitemsand thepreliminarystatusof thefigures.Legal hook for financial stability information82.Followingindustryconcern, EIOPAclarifiesthat thespecific reportingrequirementsfor financial stability are based onArticle 35of theEIOPAregulationwhichprovidestheAuthoritywith thepossibilitytocollect allthenecessaryinformation tocarry out thedutiesassignedto it, i.e. tomonitor and assessmarket development.Solvency ii
  37. 37. Lapse ratesfor financial stability information83.EIOPArequiresan indicator for thepotential liquiditydrain duetopolicyholder behaviour for life business.Although lapseratesby volume and number of contractsarenot perfectmeasures,EIOPAconsidersthis information to be available on a best-effort basistoundertakingsand that thebenefitsoutweigh thecostsofthisrequest.Duration of liabilities for financial stability information84.EIOPArequiresan indicator for theinterest rate sensitivityof thetechnicalliabilities, the risk-mitigatingeffect of hedging via derivativesandpotential asset-liabilitymismatches.EIOPAconsidersthis informationtobe availableon a best-effort basistoundertakingsand that the benefits outweighthecostsof this request.On the specific templatesBalance-sheet85.EIOPAagreed on respondent‟scommentsregarding the disclosurerequirementsand hasprovided that for disclosurepurposesonlythe SIIBalanceSheet should be disclosed, both at soloand at group level.86.As for thequarterlyreportingrequirement, CP No. 11/ 009proposedthat undertakingswereexempted from thequarterlyreportingof theBalancesheet accordingtoa threshold and thiswaswelcomed byrespondents.However, respondentscomplained that the threshold wasdifficult toapply, creatinguncertaintyon the quarterlyrequirementsfor eachundertaking.Solvency ii
  38. 38. No solution waspresented by respondentstoovercome this problem andanyrisk-basedthreshold that could be developedwould alwaysbesubjecttocriticism.87.Moreover, respondentshighlighted that undertakingswouldhave toestablisha balancesheet in anycasetoreport ownfundsinformationquarterlyand EIOPAconsidersquarterly ownfundsinformation ascrucial tosupervisethe MCR, asdefinedin the Directive.88.Finally, respondentscorrectlyhighlightedthat thethresholdproposedunder CP No. 11/ 009wasnot possibletobe applied to groups.89.Takingall this intoconsideration, EIOPAbelievesthat, both from asupervisorypoint of view and from an operational point of view forundertakings,the request of the balance-sheet quarterly withoutexemptionsisthe best approach.CountryK190.EIOPAdid not include, asrequested, a threshold sinceinformationfrom all EEA branchesneedstobe reported (and exchangedbetweensupervisoryauthorities), accordingto theSII Directive.91.Regardingthe non-EEAbranchesthethreshold wasremoved astheimpact will be minor, and for the undertakingswherethe impact is notminor theinformationon all non-EEA branches iscrucial forsupervision.Own funds92.Amendmentsto thistemplatewereintroduced tobetter reflect therequirementsand a specific template on participations,withmaterialitythresholds,wasadded.Solvency ii
  39. 39. Variation analysis93. EIOPAengaged in a discussion withsome respondentsand thecurrent proposal representsa balancedapproach betweensupervisoryneedsand respondentscomments:a)Thetemplateswererevisedin general to providea better link totheother templatesand a reduced burden in some areas(oneof the fourtemplatewasremoved);b)It wasclarifiedthat both accident and underwritingbasisare allowed– in linewiththe approach for TP templatesreporting;c)Thedetailed breakdownon reinsurancerecoverableswasremoved;d)Theorder of calculationin the roll-forwardof Best estimatewasmodified;e)Thesplit per period waskept withinformationby LoB on Non-Life;f)Theinformation on technical flowsarenow required on an accrualbasisinstead of a cash-flowbasis.94. With respect totheinformation in thesplit per period in Life, it wasconsidered that a breakdownbetweenLife and Health could besufficient.For Non-Life, consideringthe very different types of LoB, a breakdownbyLoB wasconsidered crucial.Theintroduction of thresholdswasconsidered aslikely tointroducegapsin the information from one reportingyear tothe next that wouldrender the informationreported unusablefor supervisorypurposes.For theanalysis of this information themaintenanceof historical datawith no gapswasconsidered asfundamental.Solvency ii
  40. 40. MCR / SCR95.Atool for thecalculationof theSCR may be consideredin future butsuch a tool will not be used for reporting purposes.96.It wasclarifiedthat whensupervisoryauthoritiesrequire an estimateof the SCR in accordancewitharticle 112(7), asdefault, only SCR-B2Ashould be used for the reportingof the estimate.97.Thecounterpartydefault risk SCR templatewasadapted tobetterreflect the SCR calculationrationale.98.Regardingthe CatastrophetemplateEIOPA believesthat theinformation containedwithin thetemplateis required in order for thesupervisortounderstand thematerial risk exposureswhichdrive thecatastrophecapital charge and to challengetheundertaking asappropriate.99.Usuallyundertakingsdonot have all typesof risks,sothe templatesare onlypartiallyapplicabletomost of the undertakings.For undertakingsthat are exposed to all types of risksall informationneedstobe reported duetothecomplexityof the portfolio.100.Theapplicabilityof thesetemplatestoRFF waskept.101.Finally, reporting requirementsfor undertakingsthat usesimplificationsin different riskmodulesneedstobe addressed after theOMDII and the implementingmeasuresare known.Assets102.ThegranularityofAssetsD1waskept asthe templateisa crucialtool for the supervisionof the prudent personprinciple.103.Applicabilitytounit linked, includingthelook-throughtemplate,waskept asit is understood that theprudent personprincipleappliesSolvency ii
  41. 41. alsototheinvestmentsunderlying theseproductsand thisshould besupervised asrisks,such asthe reputational risk, could be faced.104.Thefrequencyof AssetsD4 waskept, howeverthethreshold wasincreasedfrom 20% to30%. EIOPAhighlightsthat the templateAssetsD4 only requireslook-through of asset category, three geographicalzoneand currencyidentification(aslocalor foreign), not a full look-through ofinvestment fundsasrequired for SCR calculation.Technical provisions Non-Life105.EIOPAproposesthat the simplificationstobe used in thequarterlycalculationof technicalprovisionsarethe onesforeseen in thelegislationand will be further developedin theGuidelineson the ValuationofTechnicalProvisions.106.Thethresholdsapplicabletothe templateswereclarified.107.Thereinsurancetriangleswerekept however the“salvagesandsubrogation” trianglesweredeleted.108.Thescope of thereportingof the cash-flowprojectionbyundertakingsthat use simplificationswasreduced but will still berequested in definedsituations.Theobligationto report futureexpected cash-flowswaskept for reportingpurposesonlywherea material part of TP (more than 10%) hasa longsettlement period, whileundertakingswill be allowedto excludefromtemplateE2 and F2 the cash-flowsrelatedtoTechnical Provisionswith ashort settlement period (lessthan 24months).Technical provisions Life109.EIOPAproposesthat the simplificationstobe used in thequarterlycalculationof technicalprovisionsarethe onesforeseenin thelegislationand will be further developedinActuarial Guidelines.Solvency ii
  42. 42. Reinsurance110.No materiality threshold wasintroduced in thesetemplates,buttemplatesJ1and J2weresimplified (divided) toavoid theduplication ofinformation asmuch aspossible.Also, the frequencyof template J2wasrevised.Specific commentson groupstemplatesBalance-sheet111.Thedoubtsraised on theapplicabilityof the template wereclarified.112.EIOPA agreedwith respondent‟scommentsregarding thedisclosurerequirement and hasprovided that for disclosurepurposesonlythe SII BalanceSheet should be disclosed, both at soloand at agroup level.Own funds113.Quarterlyown-fundsrequirementswerekept astheyare deemedrelevant at group level aswell.However, the quarterly template islessdetailedcompared tothe annualtemplate.114.Amendmentstothe annual template wereintroducedtobetterclarify themeaningand thecalculation of some cells(for exampletreatment on non-EEA entities,reconciliation reserve, calculationofnon-availableown funds).115.At both soloand group level, thepart for the publicdisclosure hasbeen clearlyindicated.SCR116.Thedoubtsraised wereclarified.Solvency ii
  43. 43. Assets117.EIOPA agreedwith the commentsreceivedand the scope of thetemplatewasamended.Thetemplatewill be applicablefor all methods(Accountingconsolidation-basedmethod and Deduction andAggregation methodand a combination of both methods).Intra Group Transactions118.Article 216of SII Directiverequiresthat if a national subgroup isestablished, it is subject to group supervision.As reportingis part of group supervision all reportingtemplatesmust bereported at this level.119.Definitionsof what constitutesthe „significant‟and „very significant‟will be addressedbyseparately aspart of the overall SolvencyII package.Thecollege will be ableto amend thesedefinitionstoaccount for groupspecificities.120.All IGTsthat occur or terminateover the period are to bereported.This is alignedwiththe SII Directive(art. 245(2)).121.Transactionsare to be reported in thecurrencyof the group, theLOGS havebeen updatedtoreflect this.Risk Concentration122.Reportingof risk concentrationswill be done in a quantitativeformthrough a RC template and will be binding for all insurancegroups.Additionally, qualitativeinformationmay be reported. Duetostrongconcernsfrom of theindustry, public disclosureisnolonger requested.Solvency ii
  44. 44. Specific commentson Narrative reporting/ disclosure123.EIOPAconsidersthat thenarrativereporting Guidelinescomplement what will be prescribedunder the Directiveand theimplementingmeasuresand givesimportant guidanceon the expectedlevel of reporting and disclosure.However, the content of the SFCR wasrevisedand whereappropriatesome informationwasmoved tothenarrative part of the RSR.Toread more: ii
  45. 45. EIOPA HOSTSAMEETING OF THE EU - USINSURANCE DIALOGUEThemeeting further enhancedmutual understandingand cooperation intheinsurancesectorTheEuropean Insuranceand Occupational PensionsAuthority (EIOPA)hostedon 11Julya SteeringCommitteeMeetingof the EU/US insurancedialogueproject.The4th SteeringCommitteeMeetingwashosted by GabrielBernardino, Chairman of EIOPA.TheEU and theUS have recentlystarteda dialogueto increasemutualunderstandingand cooperation witha view toidentifying themaincommonalitiesand differencesof thetwoinsurance regulatory andsupervisoryregimes.This dialoguewill allow regulatorsat both sidesof theAtlantic to findareaswherefurther compatibilityand convergencewill be possibleandcould pave the wayfor future decisions.Gabriel Bernardino, Chairman of EIOPA, said:“Financial systemsin theEU and the USstill have significant differencesand some of thesearedictatedby cultural differencesand legitimatepolitical options.However, webelieveit is the responsibilityof public authoritiestocreateconditionsto foster consumer protection, facilitatebusiness relationshipsand enhancetheefficiencyof supervision.Solvency ii
  46. 46. We are certainlycommittedtotheseobjectives”.MichaelMcRaith, Director of the USFederal InsuranceOffice,underlined:“Theinsurancedialoguebetweenthe EU and USis criticaltothe promotion of transatlantic understandingand cooperation, and tothepromotion of greater consistencyand alignment in insuranceregulation.We look forwardtocontinuingour workwith our EU counterpartsandUS state regulatorsfor thebenefit of insurance consumer protectionandbusinessopportunityin both jurisdictions.”In addition toGabriel Bernardino, Chairman of EIOPA, and MichaelMcRaith, Director of FIO, themeetingwasattendedby EdwardForshaw, Managerin the Prudential Policy division, UK FinancialServicesAuthority, Charlotte Paterson, Internal Market and ServicesDirectorateGeneral of the European Commission, Susan Voss, IowaCommissioner and ImmediatePast President of the USNationalAssociation of Insurance Commissioners(NAIC), and Terri Vaughan,NAIC ExecutiveDirector.Themeeting focused on theprogressin the analysis of the EU and USregulatoryand supervisorysystems.This analysisis relatedto seven keyareas:professional secrecy; groupsupervision;solvency& capital requirements;reinsuranceandcollateral requirements;supervisoryreporting, data collection& analysisandtransparencyto the market; supervisorypeer reviews;independentthird partyreview and supervisoryon/ siteexams/ inspections.Thenext SteeringCommitteemeetingisscheduledfor October 2012andwill take placein Washington (USA).Note for Editors:TheEuropean Insuranceand Occupational PensionsAuthority(EIOPA) wasestablishedasa result of thereformstothe structure ofsupervision of the financial sector in theEuropean Union.Solvency ii
  47. 47. Thereform wasinitiatedby theEuropean Commission, followingtherecommendationsof a Committee of Wise Men, chaired by Mr. deLarosière,and supported by theEuropean Council and Parliament.EIOPA is part of theEuropeanSystem of Financial Supervisionconsistingof threeEuropean SupervisoryAuthorities, the NationalSupervisoryAuthorities and the European Systemic Risk Board.It is an independent advisorybody to the European Commission, theEuropean Parliament and the Council of the European Union.EIOPA‟score responsibilitiesaretosupport thestabilityof thefinancialsystem, transparencyof marketsand financial productsaswell astheprotection of insurancepolicyholders, pension schememembers andbeneficiaries.Solvency ii
  48. 48. Updated list of identified Financial ConglomeratesEBA hasjointlypublishedwithEIOPAand ESMAthe list of identifiedFinancial Conglomerates, asat 1st July2012,asrequired underArticle4(3) of theFinancial ConglomeratesDirective.Joint CommitteeTheJoint Committeeis a forum for cooperationthat wasestablishedon1stJanuary 2011, withthegoal of strengtheningcooperationbetweentheEuropean BankingAuthority (EBA), European Securitiesand MarketsAuthority (ESMA) and European Insuranceand Occupational PensionsAuthority (EIOPA), collectivelyknownasthe three EuropeanSupervisoryAuthorities (ESAs).Throughthe Joint Committee, thethreeESAs cooperateregularlyandcloselyand ensure consistencyin their practices.In particular, theJoint Committeeworksin theareasof supervisionoffinancial conglomerates,accountingand auditing, micro-prudentialanalysesof cross-sectoraldevelopments, risksand vulnerabilitiesforfinancial stability, retail investment productsand measurescombatingmoneylaundering.In addition tobeinga forum for cooperation, the Joint Committeealsoplays an important role in theexchangeof information withtheEuropean Systemic Risk Board (ESRB) and in developingtherelationship betweenthe ESRB and theESAs.Solvency ii
  49. 49. Solvency ii
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  55. 55. Solvency II NewsAshort amending Directivewasadopted on 3 July.This meansthat theoriginal implementationdate of1November 2012in theSolvency II Directivehasbeen changed, withthe new timetablerequiringtranspositionby MemberStateson 30 June 2013and implementationbyfirmsfrom 1January 2014.Article 1Directive2009/ 138/ EC is herebyamended asfollows:(1) Article309(1) is amended asfollows:(a)In the first subparagraph, thedate"31October 2012" isreplacedbythat of "30 June 2013";(b)After the first subparagraph, the followingsubparagraph is inserted:"Thelaws,regulationsand administrativeprovisionsreferred to in thefirst subparagraph shall applyfrom 1January 2014.";(2)In thefirst paragraph ofArticle 310, thedate"1November 2012" isreplaced by that of "1January 2014";(3)In thesecond paragraph ofArticle 311,thedate "1 November 2012" isreplaced by that of "1January2014".TheEuropean Parliament isnow in recessand theOmnibusII Directiveis scheduled for a plenary vote on 22 October.We will continuetomonitor developmentsover thecoming monthsandconsider anyimplicationsfor our domesticimplementationplan.In the meantime, wewill continueto work withfirms towardstheimplementationdateof 1January 2014.Solvency ii
  56. 56. On 18 July, weupdatedour internal model approval process(IM AP)pageswith the question bank for life insurers,aspart of our review oftechnical provisions.On 11Julywepublishedthe second in a seriesof Consultation Papers totransposetheSolvencyII DirectiveintotheUK Handbook.Thefull paper CP12/ 13and further informationisavailableon ourconsultationson SolvencyII page.http:/ / 2012/12-13.shtmlOn 10 and 12July EIOPApublished theoutcomesof itspublicconsultationson reportingand the OwnRiskand SolvencyAssessmentrespectively. We will update our Pillar 2 and Pillar 3 pagesfrom 23Julyonwardswithmore information.Followingour industry briefing on 27 February 2012,wegavefurtherinformation about our approach tothe review of technical provisionsinour workwithfirmsin our internal model approval process.Solvency ii
  57. 57. Report on the Role of Insurance Guarantee Schemes in theWinding Up Proceduresof Insolvent Insurance Undertakingsin the EU/ EEA1. IntroductionThis report isprepared aspart of EIOPA‟s input tothe EuropeanCommission‟spolicymaking on InsuranceGuaranteeSchemes(IGSs)and asspecifiedin the mandate of the Task Forceon InsuranceGuaranteeSchemes.Thepurposeof the report is tosummarisethe findingsof a mappingexerciseon the roleof the IGSin the windingup proceduresof insolventinsuranceundertakingsacrossthe EU /EEA.Aquestionnairewasused for the purposeof thisexerciseand sent to30EU/EEA states.MemberStatesresponded. Where referencesare made tothemajority orminority of MemberStates,thisrefers to thenumber of respondentsrather than the full membership of theEU/EEA.For thepurposeof this report, an IGSis a body that provideslast resortprotectiontoconsumerswheninsuranceundertakingsare unabletofulfil their contractual commitments.Motor insuranceguarantee schemesarecovered in this report only totheextent that theyprovide cover in such windingup situations.Solvency ii
  58. 58. An IGSmay have a wideranging scope, coveringlife, non lifeor bothtypesof insurancecontracts.In the majorityof MemberStates‟jurisdictions,onlycertain classesofinsurancecontractsare covered.2. Topics coveredThefollowingareasare coveredin this report:(1)Typesof IGSs(thediversity of IGSsin the EU/ EEA, crossborderIGS membership and the permanent or ad hoc character of the IGS);(2)Roleof the IGSprior toinsolvency(formal or informal pre-warningsystems, freeexchangeof information betweentheIGSand thesupervisoryauthorityand preventativemeasurestaken by theIGS);(3)Roleof the IGSin theinsolvencyprocess(decidingwhentointervene, optionsfor exit from insolvency, continuanceofcoverage, criteria taken intoaccount by an IGSfor portfolio transfer, roleof theIGSwhenan insuranceundertakingbecomesinsolvent, cross-border co- operation and co-ordinationarrangements);(4)Roleand interaction of other bodieswith the IGS(roleof thesupervisoryauthority, differencesbetweenlife and non-life insuranceinsolvencyand their treatment by thesupervisoryauthority);(5)Roleof the court in winding-up proceedingswhentheinsolvencyproceduresare initiatedand/ orthroughout theinsolvencyor thewinding-upprocedures;and(6)Roleof the IGSin theclaimsprocess(time limit for claimspaymentsand observed payment times,treatment of unearned premia, fundingpayment of claims, rightsof policyholdersto taketheIGStocourt, payment of claimsupfront and reimbursement, subrogation rightsof theIGS,other rightsand rightsof creditors).Solvency ii
  59. 59. 3. Summary of findings3.1Types of IGSs3.1.1Diversity of IGSsin theEU/ EEAOnlytworespondents(IS and SE) reportedhaving no IGSat all.TwoMember Stateshave a dedicated IGSfor accidentsat work (incertainjurisdictionsthisrisk is coveredbya public social securityscheme).Seven respondentshavea life insuranceIGSand five havea non_lifeinsuranceIGS.Fivehave IGSswhichcover both sectors.This sampleof MemberStatesis not representativeand cannot lead toan obviousconclusion concerning MemberStates‟appetitetohaveseparateor common IGSs.Theconclusion tobe drawnfrom this isthat although nearlyall MemberStatesprovidesome form of coverage, comprehensiveprotection isscarceand cover is often limitedtothe motor insurancesector.18respondentsreportedhavingan IGSwhichcoversmotor insurance.Of these18countries,ninehave reported that the IGScoveringmotorinsuranceis theonly IGSin their country.Motorinsuranceguarantee schemesare well developed throughoutMemberStatesand some of thesecountries have extended thescope oftheir guaranteefundsset up under theEU MotorDirectivestoincludeinsolvencycases.3.1.2IGSmembership – crossborderSolvency ii
  60. 60. MemberStateswereasked whethera foreign insuranceundertaking (3rdcountry insuranceundertakingsor insuranceundertakingsestablishedinMemberStatesor both) withbranchescould become a member of an IGSin their jurisdiction (either on a voluntary or compulsorybasis).For life and non-life IGS(11respondents), the answerscan be dividedintotwogroups, for branchesfrom third countriesand for branchesfromEU/EEA Member States:- For branchesfrom non EEAthird countries, eight respondentsreportedthat theseinsuranceundertakingscan (sometimessubjecttocertain conditions) become a member of an IGS, either on avoluntary or mandatory basis.- For branchesfrom EU/EEA Member States:_ four reported that such insuranceundertakingscannot become amember of their IGS;_ three answeredthat theycan become amember of their IGS(either ona compulsory or voluntary basis);and_ in a few Member States, branchesof insuranceundertakingsestablished in other Member Statesare required tobecome membersofthehost stateIGSonlywherethe IGSin thehome state doesnot provideequivalent protection to policyholdersestablishedin the host MemberStates.Theseanswersmay reflect the principle(home or host stateprinciple)chosenby thecountries.For motor IGS,13 respondents(of 18Member Statesconcerned)answeredthat foreign companiesmust becomemembers of their IGS.In summary, it appearsthat wherecross-border operationsfrom thirdcountrieshavebeen addressed(eight respondents), MemberStatesaremore likely torequire mandatory membership for third countriesSolvency ii
  61. 61. insuranceundertakingsoperating in their jurisdictions,whereasforoperationsfrom other Member States,membership isoften on avoluntarybasis.3.1.3Permanent or ad hoc character of theIGSAlmost all IGSsare “active” at all times.However, there seemstobe a varietyof definitionsof what “active”means,ranging from being fullyoperational permanent institutionstoamore reducedpresence(that isto sayonlythe legal framework existswithout theadministrativefunctionsin place).All life insuranceIGSsare operational at all times.Five out of six non-lifeIGSsare alsooperational at all times.3.2 Role of the IGSprior to insolvency3.2.1Formal or informal pre-warningsystemswhenan insuranceundertakingwill soon be subjectedtoliquidationproceedings(a) Pre-warningan IGSPre-warningan IGSthat an insuranceundertakingwill soon besubjectedto liquidation proceedingsis important for organisational andfinancial reasons.Keepingthe IGSinformed of any potential insolvencyenablesthem tobebetter prepared toperform their function.Although onlyFR reportedthe existenceof a legal provisionbetweenthesupervisorsand the IGS, variousMember States:- suggestedthe existence(or potential existenceif needed) of aninformal flowof informationbetweenthesupervisorand theIGSSolvency ii
  62. 62. beforethedecision towindup the insuranceundertaking(fourMember States);- emphasizedthe absenceof legal constraintstosuch flowofinformation, or the empowerment of thesupervisortodeliver suchinformation (four Member States).Eight Member Statesreported an absenceof a pre-warningsystem.TwoMember Statesnotedthat the supervisoryauthority shall warntheIGSof the withdrawal of the insuranceundertaking‟sauthorisation.Overall, Member Statesreportedthat such pre-warningsystems arenotaswidelyused asin the US, wherethere is a very activebut informalsystem of pre-warningbetweenguarantyassociations(GA) of probableinsolvenciesof insuranceundertakingswhichcould affect multiplestates.(b) Pre-warningof the supervisoryauthorityBesides thesupervisor‟sregular monitoring of the insuranceundertaking, (and the insurance undertaking‟sobligationtoinform thesupervisorof non-compliancewithfinancial requirements), in generaltheinsuranceundertaking‟sdecision to liquidateitself(voluntarydissolution or petition to thecourt) is subject toauthorisation/ non-oppositionby thesupervisor.3.2.2Free exchangeof information betweenIGSsand the supervisoryAuthorityMemberStateswereasked whetheran IGSand the supervisory authoritycould freelyexchangeinformation necessarytoperform theirduties,particularlywhenthe supervisoryauthoritydetectsproblemswithaninsuranceundertakingwhichislikely toresult in intervention by thescheme.Solvency ii
  63. 63. 12Member Statesreported theexistenceof a free exchangeofinformation (without legal or other barriers) betweenthesupervisoryauthorityand theIGS.In some Member Statessuch exchange is due to institutional aspects –the fact that the supervisory authority is the manager of the IGS (notedby two Member States), or the supervisor of the IGS (observed by threeMemberStates).Three MemberStatesemphasized that such flowisnot blocked byprofessional secrecynormsbecausetheneed tocomplywiththesecrecyregimewouldhavebeen communicatedto theentity whichreceivestheinformation.Onlyone Member State reported that such flowof information is basedon a formal agreement.3.2.3Preventativemeasurestakenby theIGSAlthough noMember State reported that their IGShaspowersto act on apreventativebasis,a few noted that their IGScan takecertain measurestoenableinsuranceundertakingsto continueto meet their contractualobligationsunder certain conditions:In IE, if the non-life insuranceundertakingaveraged over 70% of theirbusinessin IE, (over thethree yearsprior to theappointment of theadministrator) theAccountant of theHigh Court can sanctionpaymentsfrom theIGSto enablean administratorto carry on the businessof thenon-life insuranceundertaking and run the businessasa going concern.In the UK, wherean insolvencyevent hasoccurredor the regulatordeterminesthat the insuranceundertakingcannot pay claimsagainstit, the IGScan seek tosecure continuityof cover.This can include giving assistance to the insurance undertaking toenable it to continue to effect contractsof insurance or to carry outcontractsof insurance,if certain criteriaare met.Solvency ii
  64. 64. Thecriteria arethat it wouldbe generallybeneficial tothe eligibleclaimscoveredby the proposed assistanceand, wherethe cost of providingassistancemight exceed thecost of paying compensation, any additionalcost islikely tobe justifiedby the benefits.TheIGScannot exercisethesepowerson a preventativebasisto keep aninsuranceundertakingsolvent.In conclusion, the IGSsappear to be more of a last-resortscheme, interveningonly whenall other measureshave beenexhausted, rather than competent to act on a preventativebasis.3.3 Role of the IGSduring the insolvency process3.3.1Decidingwhento interveneWhen asked which authority takes the decision on when to intervenewhen an insurance undertaking becomes insolvent, about half of therespondents reported that this is the responsibility of the supervisoryauthority.However, the situationis not harmonised throughout Member Statesand/ orsectors.For life and non-life IGS,seven countrieshave reported that thesupervisoryauthoritygenerallydecideswhento intervene, whenaninsuranceundertakingbecomesinsolvent.In one MemberState, only the court can initiate the procedure.In another, theprocedureis initiatedbyitsIGS.One Member State alsoreported that either the court, thesupervisoryauthorityor theinsuranceundertakingcan initiatethe procedure.Solvency ii
  65. 65. For motor IGS,seven Member Statesreported that thedecisiontointerveneistheresponsibilityof thesupervisoryauthority; for five this istheresponsibilityof the court; for three, it is the IGSand for twoMemberStates,the insuranceundertaking.2.Optionsfor exit from insolvencye.g. schemesof arrangement ortransferof businessAlthough there appears to be no mechanism for exit from insolvency, sixMember States noted that certain remedial measures such as a partial ortotal portfolio transfer may be possible.One Member State alsoreported that thetermsof the insuranceagreementscan be amended.3. Continuanceof insurance coverMemberStateswereasked whethertheir IGSprovidescontinuedinsurancecoverageoncethe winding-upbegins.14Member Statesreported that their IGSdoesnot provideforcontinuanceof insurance cover once thewinding-upbeginsalthoughonenoted that portfolio transfers may havethesimilar effect forpolicyholders astheir contractswouldstill be in place.In other Member States (ninein total), theIGSprovidescontinuanceofcover oncethewindingup of the insuranceundertaking begins.This seemsto be more prominent in thecaseof life business(asin theUS law model) and compulsory insurance.3.3.4Criteria taken intoaccount by an IGSfor transferringtheportfolioof a failing insuranceundertakingFew Member Statesreported havingcriteria for transferringportfoliosofbusiness.Solvency ii
  66. 66. For some Member States, it fallsoutsidethescope of their IGStobeinvolvedin portfolio transfer.For the five Member States that reported that their IGSs may be involvedin portfolio transfer, four Member States noted that various criteria mustbemet:In DE, both for the life and health insuranceguaranteeschemes,theportfolio transfer is the solution of last resort, i.e. it is taken intoaccountwhenother measuresdesigned tosafeguard the interestsof theinsuredare deemed insufficient.In IE, the court appointedadministratorshall have all such powersnecessaryfor their functionsin relationtothe insuranceundertaking.This would extend topowersover portfolio transfers, albeit that anysuchportfolio transfer wouldrequire prior approval from the supervisoryauthorityand theHigh Court.In PL, the IGSmay grant a loantothe insuranceundertakingtakingover the compulsoryinsuranceportfolio of the insuranceundertakingbeingwoundup, up to theamount of technicalprovisionscalculated inrespect of thetaken over insuranceportfolio.In the UK, wherean insolvencyevent hasoccurredor the regulatordeterminesthat the insuranceundertakingcannot pay claimsagainstit, the IGShasdutiesand powersto seek tosecureportfolio transfer.Theobjectiveis toprotect consumers rather than insuranceundertakings.Thecourts wouldexerciseoversight.For life insuranceundertakingsthe IGSmust, and for general insuranceundertakingsthe IGSmay, seek to securea transfer and alsoprovidefundsto support thetransfer in caseswhere:Solvency ii
  67. 67. - it is reasonablypracticableto secure a transfer;- a transfer wouldbe beneficial topolicyholders; and- wherethe costsexceedthe cost of paying compensation, anyadditional cost is likelytobe justified bythebenefits.5. Role of the IGSwhenan insuranceundertakingbecomesinsolventGenerallythe vast majority of MemberStates‟IGSsare either directlyresponsiblefor payment of claims(15Member States) or for supportingor ensuring such paymentsare made (twoMember States), or both (oneMemberState).However, payment arrangementsaswell asother duties of IGSswhenaninsuranceundertakingbecomesinsolvent vary significantlyacrossMemberStates.Themain differencesare:- some IGSscan either pay compensationor seek portfolio transfer;- assessment of claimscan be the responsibilityof:thecourt or theliquidatorsappointedby the court;theinsuranceundertakingsof the claimants; ortheIGS;- theIGSmay be responsiblefor auditingclaims_assessmentprocesses(toensure claims arebeinghandled effectively and/ oreconomically);- theIGSmay grant a loanto the insuranceundertakingtakingoverthetransferredportfolio; andSolvency ii
  68. 68. - thepayment may bepossibleonlyafter the insuranceundertaking‟sauthorisationhasbeen revoked by itssupervisoryauthority.3.3.6Cross-border cooperation and coordinationarrangementsMember Stateswereasked what cross-border dimensionsare taken intoconsiderationby their IGSwhenan insuranceundertakingisbeingwoundup.Respondentsmostlyreferred to the European Passport, withsituationsdifferinglargely with regardstothehome stateor host stateprincipleadopted.For life and non-life IGS,most MemberStatesconcerned reported noactual or potential cross-border dimensions.Onlythree countriesreported cross-border dimensionssuch asdirectcontact betweensupervisoryauthoritiesor the relationship betweentheIGSs.For IGSfollowingthehost stateprinciple, or mixed home/ hostprinciple,cross-borderdimensionsconsist mainlyof claimspayments.For motor IGS,seven Member Statesstatedthat cross-borderdimensionsare not taken intoaccount besideswhat arisesfrom theinternational nature of the coverageof compulsory motor insurance(obligation of payment irrespectiveof the accident location).In its report (CEIOPS_DOC_18/09) “CEIOPSInput to theEC workonInsuranceGuarantee Schemes”, CEIOPShighlighted the importanceofharmonisingthegeographical scope of an IGS, and expressed apreferencefor thehome state principle, sothat insuranceundertakingsare coveredby the IGSin thestate wheretheinsuranceundertakingwasauthorised.This includesthe insuranceundertaking‟sbranch and servicebusinessesthroughout the EEA.Solvency ii
  69. 69. 3.4 Role and interaction of other bodies with the IGS3.4.1Roleof thesupervisoryauthority whenan insuranceundertakingbecomesinsolventMemberStateswereasked whetherthesupervisory authoritywasthecompetent authorityfor the winding-upof an insolvent insuranceundertaking.Under Directive 2001/17/EC on the reorganisationand winding-upofinsuranceundertakings,“competent authorities” of theMemberStatesare responsiblefor decidingon the commencement of winding-upproceedings.Thecompetent authoritiesmay be judicial or administrativedepending, upon Member State‟slegislation.Insolvencylawsand in particular insolvencyproceduresappear tovaryquitesignificantlythroughout Member States.Accordingly, Article 9 of thesaid Directivestatesthat thedecisiontocommence winding-upproceedingsfor an insuranceundertakingshallbegoverned by thelaws,regulation and administrativeprovisionsapplicablein itshome state.Responsesindicatedthat the supervisoryauthorityplaysa pivotal rolewhenan insuranceundertaking becomesinsolvent.NineMember Statesreported that the supervisoryauthorityhassoleresponsibilityfor decisionsregardingre-organisational measures(transfer of portfolio, stay in payments, etc).Three MemberStatesreported that the court‟s authorisation is required.Most replieshowever, indicated that theliquidation procedure is judicialand governed by thecourts(20Member States), although four MemberSolvency ii
  70. 70. Statesnoted that there are caseswheretheprocedure is administrative,with the supervisoryauthoritydecidingthetiming, nominatingtheliquidatorand monitoring the merit and thelegalityof the proceedings.In the caseof judicial liquidation:- in some Member States,winding-upproceedingscannot be initiatedwithout theconsentof the supervisoryauthority;- thesupervisory authority oftenhasthepowerto advise thecourt onthenomination of theliquidator(notedby nineMemberStates);- two Member Statesnoted that a condition of the court issuing theliquidation decree is the supervisory authority‟s withdrawal of theinsuranceundertaking‟sauthorisation.Most replies alsogave prominencetotherole of theliquidator(administratorof the insolvency, or bankruptcy) whois responsiblefortheday-to-day activitiesof the liquidationprocedure.Theliquidatoris appointed by the competent authoritiesasreferred toabove.One Member State emphasizedthefact that the liquidationdoesnotprevent the supervisoryauthority from exercisingits general power/ dutyto supervisetheinsuranceundertaking‟sactivities.Thediversityof regimesacrossMemberStatesindicatesthat anyfutureproposalfor EU harmonisationregardingIGSshould leavethe role ofthesupervisory authority to theindividual MemberStates.However, the diversity of situationsalsohighlightsthe importanceofaddressingthe issueof cross-border communicationbetweensupervisoryauthoritiesin any futuredirective.3.4.2Differencesbetweenlife and non-life insuranceinsolvencyand theirtreatment by thesupervisoryauthoritySolvency ii
  71. 71. MemberStateswerealsoasked whetherthere weresignificantdifferencesbetweenlife and non-life insuranceundertakingswithregards tothewinding-upproceduresand the roleof the supervisoryauthority.Themajority(15MemberStates) stated that noapparent differencesexisted, witha few indicatingminor differences(for exampleoneMemberState observedthat the court hasgreater powersover thecontinuation of life businessand thetermsof life insurancecontracts).Therepliesindicatedthat Member Statesdonot generallytreat theinsolvencyof life or non-life insuranceundertakingsdifferently.There is nothing in thewinding-upproceduresthereforethat wouldprevent a potential directiveon IGSfrom addressing both sectorsat thesametime, and contributingto the creationof general IGSsforenhancingconsumer protection and confidencein financial services.3.5 Role of the court in winding-up proceedings3.5.1During winding-upproceedingsDirective2001/17/ EC on the reorganisation and winding-upofinsuranceundertakingssetsout theprovisionswhichmust be followedbyinsuranceundertakingsthat are being wound up.Article 9 of thesaid Directivealsoprovidesthat the winding-upproceedingsand their effectsshall be governedby the laws,regulationsand administrativeprovisionsapplicablein each home MemberStateunlessotherwiseprovided inArticles 19to26of the same directive.In linewiththisapproach, it appearsthat most Member Statesreferredtothe general lawsrelatingtothe insolvencyof companieswhendescribingthe roleof the court in this question.Solvency ii
  72. 72. 3.5.2When the insolvencyproceduresare initiatedIn most Member States,the court issuesan order initiatingtheinsolvencyprocedure, unlessit isa voluntary winding-upprocedure.Most MemberStates(17) reported that theroleof the court is toensurethat orderlyand effectiveinsolvencyprocedures are in place.Thecourt is responsiblefor initiatingliquidationproceedings,issuingabankruptcydecreeand appointing a person responsiblefor the winding-up of theinsuranceundertaking, usuallyreferred to in Member States‟legislationasa liquidator, receiver, administrator or trustee.Throughout the winding-upprocess, thecourt‟sroleis mainly tomonitor and supervisethe process, tooverseethe actionsandarrangementsproposedby the trustee, receiver or liquidatorand toapprovereportsrelatingto thewindingup.Thecourt monitorstheprocessand is referredtowhenthere isdisagreement or theneed for direction.We notethat the roleof the court in winding-upproceedingsasreportedin themajorityof responses, isakin totheUS regime, with thedistinctionthat in theUS the supervisoryauthority(theinsurancecommissioner) is itself the liquidator appointed by thecourt.Afew Member States(four) statedthat thecourt isnot involvedinwinding-upprocedures.One Member State reportedthat the court plays norole in the IGStasksasa portfolio transfer takesplacebeforetheinsuranceundertakingbecomesinsolvent, whilst another noted that, sincetheprocessisentirelyconducted by the supervisoryauthority, the role of the court ismerelyasa last resort to resolve conflictsregardingtheverification, valuation, graduation and payment of claimsby theliquidationprocedure.Solvency ii
  73. 73. 3.6 Role of the IGSin the claimsprocess3.6.1Timelimit for IGSpay-outsand observed payment timesMemberStateswereasked whetherthere are any specific timelimitsfortheIGStopayclaims.Onlysix Member Statesreported havinga prescribed time limit:•In four Member Statesthetime limit is fixedby law and in twoMemberStates, by thesupervisoryauthority.•Thetimelimit is triggeredby declarationof bankruptcy, request/ reportof claim or end of calculation(reported by twoMember Statesin eachcase).•Thetimelimit variesfrom 15days tothree months. In some casesthelimit can be extended for another twoor three months.One Member Statenotedthat the timeperiod starts from whentheliability of theinsuranceundertakingand theamount of the claim havebeen established.Most of theMemberStatesdid not provide any information about thepayment timesobserved.Somerespondentsindicatedthat theycannot report time limitsdue tono(or only a small number of) insolvencycaseswiththe involvement ofan IGS.One respondent‟sexperienceisthat the timescalesfor windingup ofinsuranceundertakingsand paymentsof dividendsare lengthy.OnlyNorway reportedobservedtime limitsfrom one week to threemonths(from whenthe individual claim hasbeen regulated/ adjustedbytheinsolvencyadministrator) in practice.Solvency ii
  74. 74. 2. Treatment of unearnedpremiaMemberStateswereasked whethertheir IGStreatsunearnedpremiadifferentlyfrom other insuranceclaims.About half of respondentsreported that the treatment of unearned premiais not applicableto their IGS,astheir scheme providesnocover forunearned premia, or in other casesMember Statesonlyhave schemesformotor insurancewhichcover claimsbut not unearned premia.Anumber of Member Statestreat unearnedpremia on equal termswithother insuranceclaims(six MemberStates) although a few treat themseparately(twoMemberStates).TwoMember Statesreported no relevant legal provisions.3. Funding payment of claimsMemberStateswereasked what happensif there are insufficient fundsin theIGStopay all claimants.Some Member States just explained the way the IGS is financed andreported capsfor the coverage without giving a precise answer to thequestion.Others reported a range of solutions,whichincludea proportionatereduction of claimson a pro rata basis, full payment of all claims withadditional ex post contributionsby IGSmembers, loans(withandwithout stateguaranteefor the repayment), the ability to requestborrowingfrom thegovernment/ other sourcesand additional publicmoney.Themost reportedsolution is additional contributionsby schememembers.4. Rightsof policyholders to take IGSto courtSolvency ii
  75. 75. Most MemberStates(15) reported that policyholders have onlygenerallegal rightsto contact the IGSor totake it to court.FiveMember Stateswith only a motor IGSstated that third partyclaimants/ injuredparty/victimshavethoserightsrather thanpolicyholders.3.6.5Payment of claimsupfront and reimbursementThevast majority of IGShave the abilitytopay out claimsup front:•In Member Stateswithlife, non-life or more general schemesinplace,11out of 12IGSsmay pay out claimsupfront.•Eight Member Stateswithan IGSexclusivelyfor compulsorymotorinsurancereported that thescheme hasthe ability topayout claimsupfront.However, wheninterveningin caseof the insolvencyof an insuranceundertakingor in thecaseof a winding-up, the vastmajorityof IGSshavepowerstopay out claimsup front (in the sensethat theyofferpayment tothe clientsonceeach claim hasbeen established), whichisin theinterest of policyholders.3.6.6Subrogationrightsof the IGSProvidingan IGSwithsubrogation rightsallowsthe IGSto take over therightsof policyholders against the insuranceundertakingand thereforereceiverecoveriesagainst compensationpaymentsit hasmade directly.Amajorityof respondentsindicated theexistenceof subrogationrights(20Member States) without commentingspecificallyon whethertheIGSis subrogatedwith the same priorityasdirect insuranceclaims.It seemsappropriatefor a directivetoprovidefor IGSsto havesubrogationrights.Solvency ii
  76. 76. It alsoappearsbeneficial to provideIGSswiththeright to benefit fromthesame level of priority aspolicyholders(i.e. preferential treatmentwherebythe policyholder‟sclaim isprioritisedabove most othercreditors).Unlessthe IGStakesover the same creditorpriority asheld by thepolicyholder, it will be unlikely for the IGSto recover itscompensationpayments.This will increasetheIGS‟sfunding requirements.This alsomeansthat the IGSwill effectivelybesubsidisingthepaymentof other creditorsand giving them a greater chanceof gettingtheirmoneyback (whichshould not be the purposeof the IGS).3.6.7Other rightsof the IGSincludingapply tothe court for a winding-up OrderAnother important right that some IGSsmay have isthe right to be amember of thecreditors‟committee.Themajorityof respondentsstated that their IGSshave no specificrightsin thisregard (13Member States).Four Member Statesreportedthat thisquestion is not applicable.One Member State reportedthat their IGSmay appoint a member in thecreditors‟committee, whilstanother noted that the IGShastheexpectation, but not the right, tohave a representativeasa member ofthecreditors‟committee.In another, the IGSor other creditorsmay be appointed in thecommitteeby the judgecommissioner.Four Member Statesnoted that their IGSshave general/ standard rightsin their capacityascreditorsof an insuranceundertaking(e.g. to be amember of thecreditors‟committee,topresent proposals, to fileSolvency ii
  77. 77. petitionsagainst decisionsof creditorsmeetings,tobe heardby thecourt and to file appealsagainst court decisions).3.6.8Rightsof creditorsSix Member Statesreportedthat creditorshave rightsto be heard bythecourt.4. ConclusionsThefindingsof the report highlight the lack of harmonisationin anumber of areassuch as:- whichauthoritytakesthe decisiontointervene whenan insuranceundertakingbecomesinsolvent;- theabilityto providefor portfolio transfer;- a lack of pre-warningsystem when an insuranceundertakingis indifficulty; and- therole of thesupervisoryauthority when an insuranceundertakingbecomesinsolvent.Overall thereport highlightsthe diversityof regimes acrossMemberStatesand the importanceof cross-border communication betweenMemberStates.Thereport alsoillustrateshow MemberStateshave exercisedtheirdiscretionin implementingDirective2001/17/ EC on the reorganisationand winding-upof insurance undertakingstofit withtheir legal andinstitutional framework.This pointstothepotential need for anyfuture directiveon IGStoprovideMember Stateswithsufficient flexibility to adapt thedirective‟srequirementstofit with their national framework.Solvency ii
  78. 78. ____________non.comIs globalisation great?StephenCecchettiEconomicAdviser at the Bank forInternational Settlements(BIS), and Headof itsMonetaryand EconomicDepartmentSolvency ii Associatiowww.solvency-ii-associati
  79. 79. Remarksprepared for the 11th BIS AnnualConference, Lucerne, Switzerland, 21–22June2012It is my pleasure and privilegeto welcomeall of you tothe 11th BISannual conference.This year our theme is thefuture of financial globalisation.Anyone whohaslived through the last five years must surely ask:Isglobalisationgreat?Given the orientationof the BIS, weareforced toask this question.In fact, I am ledtoask twoquestions, namely: how much globalisationisgood and how much financeis good.Over thenext twodays wewill reflect on thesequestions. Let me giveyou my answersto my questionsup front: financial deepeningisgreat, but only up toa point.And, thismeansthat theglobalisationof financeis great, too;but onlyup toa point.ToseewhyI have come totheseconclusions,I will take a minutetodescribethe relationshipof financetogrowthin general, and then drawout implicationsfor cross-border banking;that is, thepart related to theglobalisationof finance.My commentsbuild on workthat hasbeen goingon at theBISfor sometime.For most people, theterm globalisationmeanscross-bordertrade in realgoodsand services;somethingthat wewouldall agree hasbrought thegreatest benefits toa largenumber of people.Solvency ii
  80. 80. Tradevery clearlysupportsmiddle-classlivingstandards, among otherthingsputtingliterallytensof thousandsof different productson theshelvesof even a modest-sized supermarket.But thisreal sideof globalisationrelieson financial intermediaries tofund the tradingof all this stuff acrossborders.And the recent crisisshowedhow problemsboth on and off theintermediaries‟balancesheetscan havevery large, very real and very badimplications.Many of ushave startedtoask if financehasa dark side.First, can a financial system get toobig? Put differently, is there someoptimal size for the financial industryafter whichit dragsdown the restof the economy?Second, how far should countries go in outsourcing the provision offinancial services?Does specialisation in financial services by somecountriesimposevulnerabilitieson others?How we think about and answer these questionswill surely have animpact on the financial system‟s structure and thus on the future ofglobalisation.Turning to some facts,consider the relationshipbetweenthesizeof acountry‟sfinancial system and growth.We teach that, becauseit allocatesscarceresourcestotheir mostefficient uses, one of thebest waysto promote long-run growthis topromotefinancial development.And, a sufficientlywell-developed financial system providestheopportunityfor everyone – households,corporationsand governments–toreducethe volatilityof their consumption and investment.Solvency ii
  81. 81. It sure soundslike financeis great. But experienceshowsthat a growingfinancial system is great for a while– until it isn‟t.Look at how, by encouragingborrowing, thefinancial systemencouragesan excessiveamount of residential construction in somelocations.Theresults, empty three-car garagesin thedesert, do not suggest a moreefficient useof capital!Financial development can createfragility.When credit extension goesintoreverse, or even juststops,it can induceeconomicinstabilityand crises.Bankruptcies,credit crunches,bank failuresand depressedspending arenow theall-toofamiliar landmarksof thebust that followsa credit-inducedboom.What is more, financial development is not costless.Theexpansion of financeconsumesscarceresourcesthat could be usedelsewhere.And finance‟slargerewardsattract the best and thebrightest.When I wasa student, my classmatesdreamed of curingcancer, unifyingfieldtheory or flying to Mars.Thosein today‟scohort want tobecome hedgefund managers.Given finance‟sbooms and busts, is this themost efficient allocationforsuch scarceresources?I doubt it.So, when does financial deepening turn from good to bad and become adrag on the economy? Somewhat surprisingly, we get a consistent storyregardless of how wemeasure financial development.Solvency ii
  82. 82. In our 2011paper for the Federal ReserveBank of KansasCity‟s JacksonHoleSymposium, MadhuMohanty, Fabrizio Zampolli and I found thattheeffect of debt – public, household or corporate– turnsfrom good tobad, whenit reachessomethinglike 90% of GDP, regardlessof thetypeof debt.Toprevent adversedevelopments– both natural and man-made– policyshouldnormally striveto keep debt levelswell below thisline.If wemeasure the scaleof the financial industry byemployment oroutput, asEnisseKharroubi and I do in a paper completed earlier thisyear, wecome tothe sameconclusion.When average growth in output per worker is plotted, as shown in Graph1, against the share of employment in finance on the left and value addedon theright, a parabola summarisesthescatter.(Notethat a multivariate regression lies behind thesegraphs, sothat theparabola isa slice out of a more complex surface.)Again, the conclusion emergesthat there is a point whereboth financialdevelopment and the financial system‟s sizeturn from good tobad.That point lies at 3.2% for the fractionof employment and at 6.5% for thefractionof value addedin finance.Basedon 2008data, theUnited States,Canada, the United Kingdom andIreland wereall beyond thethreshold for employment (4.1%, 5.7%, 3.5%and 4.5%).And the UnitedStatesand Ireland werealsobeyond thethreshold forvalueadded (7.7% and 10.4%).Solvency ii
  83. 83. Moreover, theevidencesuggeststhat a growingshare of thefinancialsystem actuallyslowsoverall economicgrowth.Financial sector booms consume scarceresources, especiallyskilledlabour and specialisedcapital.Panel regressionsof the five-year averagegrowthrateof labourproductivityon, among other variables,the growthrate of theshare offinancein total employment yield thestrong negativerelationshipdisplayed in Graph 2.Solvency ii
  84. 84. Faster-growingfinancial employment hurts averageproductivitygrowth, asdoes“toomuch” value added.In particular, a 1percentage point increasein the growth rate infinance‟sshare of employment cutsaverageproductivity growthbynearlyone-third of one percentagepointsper year.Combined, thesefactsleadtothe inescapableconclusion that, beyond acertainpoint, financial development is bad for an economy.Solvency ii
  85. 85. Instead of supplying the oxygen that the real economy needs for healthygrowth, it sucks the air out of the system and startsto slowly suffocate it.Householdsand firms end up withtoo much debt.And valuableresourcesare wasted. We need todo something about this.If financial development is onlygood up to a point, it followsthatfinancial globalisationmight onlybegood up to a point.Financial globalisation is about making it irrelevant to investors andborrowerswhere the services and the funds they draw on are actuallylocated.But thespilloversduring thefinancial crisis, whenone country‟s troublesspread to others,raisethe question:doesit matter wherethefundsarecomingfrom?That is, how should wethink about cross-borderflowsand financialspecialisation?As economists,weare trainedtothink that specialisationisgreat.Withinan economy, webelievethat when individualsexploitcomparativeadvantage, it benefitseveryone.And, wehave created an entire infrastructurewhere, for example, I amableto writeand speak about macroeconomic and financial stabilitypolicy full time, but still purchasegroceries.Thealternative, whereI wouldbarter my insightsfor food, wouldsurelynot work aswell.I‟ll let you be the judgeof whether, in my specific case, the market isyielding the right social solution.But for the worldasa whole, global welfareis enhanced when weencourageinternational trade in goodsand services.Solvency ii
  86. 86. And international tradebenefitsemerging and advanced countries alikewhenit exploitscomparativeadvantage.And this inevitablyleadstospecialisation.Tradeand specialisationreach their limitswhereeconomicsmeetsnational security.As an individual, I can relyon someone elsetoproducemy food, trustingthat some combinationof the market and the legal system will look outfor me.But woulda country want tooutsourceitsentire food production?Andwhat about energy?National securityconcernsdictate that some amount of self-sufficiencyis cultivated, simplyasa precaution.Someconcern about food and energy security is certainlywarranted.Thesame is probablytrue for strategic technologies.But clothingor coffee securityis probablynot worthworryingabout.Wheredoesfinancestand on thisspectrum betweenthe essential andthesuperfluous?Morespecifically, can countries becomevulnerable by excessivelyspecialisingin financeor by overly relying on peopleoutsidetheirbordersfor the provision of financial services?Has financialglobalisationgone toofar in some countries?Over the past 30 years, the international financial system hascome to bedominated by a relatively small number of large banks headquartered ina handful of advancedcounties.Their growthhascoincided witha push toremove impedimentsto thefreeflowof capital.Solvency ii
  87. 87. As a result, a highly concentratedbankingsector dominatestheinternational provisionof capital and maintainslargebalance sheetpositionswithrespect to many countries.And when these balance sheet linkages are large (relative to GDP or thecapital stock or domestic tax base), problems in one country‟s financialsector quickly transmit themselvesto other countriesand markets.In short, financial globalisationis bound up witha specialisationinfinancial servicesthat makescountriesmuch more vulnerableto eachother‟smishaps.Theexperienceof some countriesduringthe crisissuggeststhat toomuch international capital, like too much debt, can be bad.For example, credit booms in the yearsprecedingthecrisistended tooutrun domestic fundingand todepend on fundsfrom abroad at themargin.Countries that relied heavily on international credit sources to financedomestic booms found themselves high and dry when these off-shoresources of funding went into reverse – which happened assoon astheforeign creditorbanks ran in totrouble.Afew examplesillustrate justhow important cross-border credit canbecome.Graph 3 showsthe casesof Ireland and Latvia.Thelight shaded areasdepict credit provided bydomestic banksto non-bank borrowers,that is,domestic credit.As you can seefrom thepicture, Ireland‟snon-bank borrowersalsodirectlytapped cross-borderbank credit (shownhere asthe greenshaded area).Such credit – whichbypassesthedomestic banking system and, asaresult, is difficult for localauthoritiestomonitor, much lesstoconstrainSolvency ii
  88. 88. – accounted for almosthalf of total credit to non-financial borrowersinIreland during thelast decade!International credit can alsoflowintoa booming economy indirectly. InLatvia, shown in theright-hand panel of Graph 3, banks financed theirdomestic credit expansion by borrowingfrom abroad.This indirect financing of domestic credit is shown as the dashed brownline. While the credit was actually extended by domestic banks (or localsubsidiariesof foreign banks), the fundswereraised cross-border.Solvency ii
  89. 89. This indirect form of international credit – from a foreign bank toadomestic bank and then on toa domesticborrower – is often overlookedwhenpeople analyse credit booms.However, by some measures,it is at leastasimportant asdirect cross-border credit.Graph 4 showson thevertical axesthechangein thecredit-to-GDP ratioin emergingmarketsbetween2002and 2007.In the left-handpanel, thehorizontal axisplotsthe changein directcross-border credit;in theright-hand panel, the horizontal axisplotsdirect plusindirect cross-border credit.Thefaster cross-bordercredit grows,thefaster domestic credit grows.And, the relationshipin the right-handpanel includingindirect cross-border credit is much stronger both statisticallyand economically.Solvency ii
  90. 90. A1percentagepoint increasein direct and indirect cross-border credit isassociatedwitha 1.6percentagepoint increasein theratio of credit toGDP.While, in principle,financial over-development and financialglobalisationmay beorthogonal, in practice, cross-borderfinanceseemstobe implicatedin financial over-development.After trying toconvinceyou that financeis only great up toa point, Ihavetried to persuadeyou that the same may applyto financialglobalisation, at least in the form of cross-borderbanking.It providesuswithopportunities, but there are alsosome pitfalls.As is often the case, you can havetoomuch of a good thing.But I have lesscompellingevidencehere, soI am left witha moretentativeconclusion:financial globalisationis great most of thetime butnot always.During the conference,Philip Lane, in his paper on financialglobalisationand the crisis,digs deeper intothe roleof globalimbalancesin driving cross-border balancesheet integrationin thepre-crisisyears.Then, Alan Taylor systematically studiesthe relationship betweencreditand financial crisesover thelong haul.Tomorrow morning, Pierre-Olivier Gourinchas and Olivier Jeanne offerus a view into a world in which safe and unsafe assets fight for room inglobal portfolios.And, finally, Hyun Song Shin, in his paper with ValentinaBruno, providesa model for cross-border capital flows, includingtheir dark side.Solvency ii
  91. 91. Thesepresentationsand the discussionsthat theyspawn will give usnew perspectiveson thepositiveand normativeaspectsof financialglobalisation.We hope to come away with a better understanding of both what mayhappen and what should happen to ensure that financial globalisationmakes a positivecontribution to growthand worldwelfare.Thank you all for coming, and I look forwardto the next day and a halfof discussion.Solvency ii
  92. 92. Synthesisof the Commentsfrom theCall for Evidenceof the Internal Marketand ServicesDirectorate –General on the fundamental review oftheFINANCIAL CONGLOMERATESDIRECTIVEEXECUTIVE SUMMARYTheCall for Evidencefor theFundamental Review of theFinancialConglomeratesDirective (hereafter"FICOD"), whichwasannounced in February 2012,aimed at engaginginterestedstakeholderswith thedebateon the supervision of largecomplex financial groupsin Europe in thecontext of theFinancialConglomeratesDirective review.TheEuropean Commission asked interestedstakeholdersto reply tothreesetsof questions,relatingto:a)Thegeneral concept of supplementarysupervisionon groupsthatmeet certain thresholds;b)An invitation for commentson the European specific perspectiveonJoint Forum principlesof supervisionin their five areas(Supervisorypowers,Supervisory Responsibilities, Governance, Capital adequacyandliquidityand Risk management),c)Certain specific elementsof the Financial ConglomeratesDirective.TheCommission received13responsestothe Call for Evidence. Morethan half of respondentsrepresent banking and insuranceindustryviews.Other respondentsconsist of privatestakeholdersand one supervisoryauthority.Solvency ii