Solvency ii News December 2012


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Solvency ii News December 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,We will start from a very interestingspeech:Gabriel BernardinoChairman of EIOPAEIOPA– Reflectingon theachievementsand preparingfor the newchallengesDistinguished Guests, LadiesandGentlemen,On behalf of EIOPA, I am delighted towelcome you to our secondAnnualConferencehere in the Frankfurt CongressCenter.In particular it is my pleasureto welcome all our panellistsandmoderators.I want to thank you all for coming and contributing to make thisone ofthe reference conferencesin the insurance and pension‟slandscape.I would alsolike to thank the City of Frankfurt and the State of H essen,for their welcome and support.Solvency ii
  2. 2. EIOPA greatly enjoysbeing herein a city which iscontinuously gainingglobal importance as a focal point for regulation and supervision of thefinancial system.I look forward to continuing in a spirit of enhanced co)operation in thefuture.We are happyto keep this tradition of annual conferences.For usthisis a very important way to maintain a constructive dialoguewith the insurance and occupational pensionsstakeholders– to find outmore about your concerns, challengesand of courseto answer yourquestions.The annual conference also represents a perfect opportunity for EIOPAto update you on our activities, on the achievements and the upcomingchallenges.I am pleasedto see that many membersof theEIOPA Board ofSupervisorsand Stakeholder Groupsare alsoattending the conferenceand I am sure that they are going to contribute to all the formal andinformal discussionsthat will take placetoday.I hope that all together we will make thisday interesting and fruitful. Inmy opening speech today I will sharewith you some thoughts aboutthe issuesat stake in each of the panel discussionsand I will provide ashort reflection on the achievements of EIOPA and some of thechallengesahead.Let me start by the Conference programme, which as usual reflectssomeof the most relevantissuesthat EIOPA has been focused on.Solvency ii
  3. 3. PensionsWe will start with pensionsbecausereshaping the European pensionssystem isone of the most challengingprojectsin the EU agenda, whichisvery important for all the EU citizens without exception.The EU Commission has launched thisyear a white paper called“Anagenda for adequate, safe and sustainablepensions”, identifying anumber of initiatives to be taken in the coming years.In thisdocument there isa clear recognition that complementary privateretirement savings have to playa greater role in securing the futureadequacy of pensions.This poseson all of usa great challengeand an enormousresponsibility.We need to review the European pension‟s regulatory framework toimprove the safety and affordability of private pensions and provideconfidence to consumers.This shouldbe done by developing a risk)based approach to theregulation of retirement savings, encompassing a number offundamental elements:1. Arealisticvaluation of pensionpromisesAll occupational schemesthroughout Europe shouldhave sufficientresourcesto meet their promisesunder a reasonable, but realistic andtransparent, framework.We have abundant lessonsfrom the consequencesof ignoring theeconomic based value of assets, liabilitiesand the inherent risks.That is why we recommended for theIORP Directive review theapplication of such principlesas the market consistent valuationsandSolvency ii
  4. 4. the inclusion of the actuarial value of all enforceableobligations of theIORP in the valuation.Taking due account of the diversity of IORPs, we proposed the conceptof a “holistic balancesheet” that will enablethe consideration of thevariousadjustment and security mechanismsin an explicit way.This will allow a better understanding of the economic value of assetsand liabilities and will give an indication of where the risk is and whobearsit.The “holistic balance sheet” should be seen as a prudential supervisoryassessment tool rather than a “usual” balance sheet based on generallyagreed accounting standards.2. Arobust solvencyregulationThe occupational pension‟ssolvencyregime shouldbe based on the“holistic balance sheet” and shouldincorporate appropriate periodsforthe achievement of the funding targets, taking into account the nature ofthe promise, the duration of the liabilities and other elementslikethesponsorsupport.It should alsobesufficiently flexibleto deal with short term volatility andavoid pro-cyclical behaviour, for exampleby using a corridor approachand allowing appropriate recovering periods.3. An enhancementof the governancerequirementsGood governance is crucial for the membersand beneficiaries of theoccupational pension schemes.It is essential that those who run IORPs are individualsof competenceand integrity, with respective education and work experience.Solvency ii
  5. 5. IORPs shouldalsobe subject to robust internal and external controlsinareas such as risk management, internal control and audit, appointmentsof a custodian and a depository.The SolvencyII principles shouldbe applied, taken into account dueproportionality.The regulatory framework should alsogive concrete incentivesto goodrisk management.The useof modern risk management toolslike diversification strategiesin asset allocationaccording to the duration of the liabilities, lifecycleapproaches, hedging techniquesand protection against shortfall riskscaneffectivelyprovide sponsorsand membersof pension schemesbetteroutcomes under a risk control environment.4. An increasein transparencyIt is crucial to maintain members and beneficiaries of pension fundsdulyinformed about their pension rights and prospectives.Furthermore, the move towards defined contribution (DC)schemes, where the risk isborn by the members, posesnew challengesin terms of transparency.That‟s why EIOPA‟s advice recommends the introduction in the IORPDirective of a Key Information Document (KID) to be distributed topotential members containing a set of basic elementslikerisks, costs, chargesetc.This will surelyimprove transparency.EIOPA iscontinuing its work on the occupational pension‟sarea byrunning a Quantitative Impact Study(QIS) exercise.Solvency ii
  6. 6. The QISexercise aims to assessthe financial impact on IORPs ofvaluing assetsand liabilitiesin the holistic balancesheet andintroducing a solvency capital requirement (SCR) under various policyoptionsof the EIOPA‟s Advice.We expect to finalize the report on the QIS findings in spring 2013.Finally, we should not forget that there isalsoa need to look at theindividual retirement savings in the EU.The current framework applicableto 3rd Pillar productsis very muchfragmented with a number of different vehiclesbeing subject to differenttypesof EU regulations.I believe that there are merits in developingan EU wide framework forthe activities and supervision of individual retirement savings,containing both prudential and consumer protection measures.Improving consumer information and protection is necessaryto enhancecitizens‟ confidence in financial productsfor retirement savings.In thiscontext, I believe that we shouldexplorethe development of an“EU retirement savings product”.This product could be developedto finance individual or collectiveDC plansand should clearlydifferentiate from other typesof investmentproductsby being focused on the long)term nature of their objective(retirement savings), avoiding thetrapsof the short term horizon.It should be based on a simpleframework, allowing for reduced coststructuresand be managed using robust and modern risk managementtools.It should rely on clear and transparent governance structuresandprovide full transparency to itsmembers and beneficiaries.It should have accessto a European passport allowing for cross)borderselling.Solvency ii
  7. 7. An EU certification scheme could give to EU citizens a certainty in thequality of all marketed “EU retirement savings products”.In my view these productscould alsoplayan important role in the EUeconomy by assuring a focuson long)term investmentsand, thus,fostering the sustainable growth.InsuranceRegulationOur second panel session isdedicated to the insurance regulation.We calledit “The Way Ahead” and I am sure that we will have athoughtful discussion not only on SolvencyII but alsoon internationaldevelopments.The European Union isfaced today with an outdated and fragmentedregulatory and supervisory regime on insurance.The SolvencyI regime isnot risk sensitive, containsvery few qualitativerequirements regarding risk management and governance and doesnotprovide supervisorswith adequate information on the undertaking‟srisks.Consequently,national authorities have been introducing differentelementson their regimes in order to cope with market developments.Solvency II was built with the objective of an increased policyholderprotection, using the latest international developments in risk basedsupervision, actuarial science and risk management.Coming back to the basics, it isfair to saythat SolvencyII isbased onfundamentallysound principles:•A total balancesheet approach and a market consistent valuation ofassetsand liabilitiesin order to have a realistic basisfor assessing risks;Solvency ii
  8. 8. •Two capital requirements, MCR and SCR, assuring a risk basedcalculationbut alsoa more robust and simpler floor designed forultimate supervisoryaction;• An overall level of prudence for the calibration of capital requirements;• The explicit recognition of risk diversification;•The possibility to use internal modelsafter a processof validation bysupervisorsthat isfocused not only on the quality of risk modelling butalsoon the actual use of the model in the day to day businessdecisions;•An updated group supervision approach with the definition of a groupsolvencyrequirement and clear powersassigned to the group supervisor;•A robust system of governance, including the definition of a number ofkey functions;•An Own Risk and SolvencyAssessment (ORSA) that isnow consideredas the best practice at an international level;• EU harmonized templatesfor supervisoryreporting;• Enhanced public disclosure.In the meantime the financial crisishad a number of consequencesonthe discussionson SolvencyII.Some of them were dealt earlyin the project, some are still creatinguncertainties on the final design and calibration of the regime.The huge market volatility proved to be a challengein a marketconsistent regime, especiallyfor longterm guarantees.The sovereign crisis led to questionson the concept of the risk free rate.Solvency ii
  9. 9. The changesin banking regulation make more important the role ofinsurersasproviders of long-term bank funding.The lowinterest rate scenario isthreatening some insurance businessmodels.Without diminishing all thesechallenges, I believe it istime to move on.This reform is important and isneeded.In order to keep the momentum and to be consequent with all thefinancial and human resourcesalreadydedicated to thisproject both bysupervisorsand the industry we need to move forward.So, what stepsdo we need to take?In first placewe need a strong commitment from the EU politicalinstitutions towardsthe implementation of SolvencyII.This shouldprompt the definition of a clear and credible timetable basedon a realistic assessment of theexpected time needed to deliver thedifferent milestonesof the regime.Secondly, we need to agree on a sound and prudent regime for thevaluation of longterm guarantees.A regime that preservesthe risk based economic approach on thevaluation and assessment of risk and that adequatelycapturesthecharacteristics of certain long term liabilitieswith sufficiently predictablematchable cash flows.This shouldbe viewed as an opportunity to continue to offer long termguaranteesto consumers, but under a robust framework that would pricecorrectlyany options embedded in the contracts.Solvency ii
  10. 10. The new regime should not work as an incentive to maintainunsustainablepracticesand productsthat are alreadychallengedby theeconomic reality.We welcome the role that the EU political institutions are willing toattribute to EIOPA on the assessment of the long term guaranteepackage and we hope to receive a clear mandate within the terms ofreferencein order to start the assessment assoon as possible.Thirdly, even if a credible timetable will probablypoint out to animplementation date not earlier than 2016, it should bepossible in aninterim phase to start to incorporate in the supervisory processsome ofthe key featuresof SolvencyII.EIOPA isexploringthis possibility, based on its powersunder theEIOPA Regulation.This interim phase should be coordinated by EIOPA in order to ensure aconsistent application throughout the EU.SolvencyII hasbeen viewed internationally asa reference in risk basedregulation of insurance.In that sensemany countrieshave considered elementsfrom Solvency IIwhile developingtheir own regimes.The lack of certainty about SolvencyII implementation ischallengingthe EU credibility in the international discussions.FinancialStabilityOur third panel session will focuson financial stability and on the role ofinsurers.The crisisprompted a new look at systemic risk, including in theinsurance sector.Solvency ii
  11. 11. The identification and regulation of GloballySystemically ImportantInsurersiscurrently being discussed under the umbrellaof the FinancialStability Board and the International Association of InsuranceSupervisors(IAIS).EIOPA is keen to contribute to a robust identification process of G-SIIsand to develop appropriate regulatory and supervisory tools to deal withtheir characteristics.Traditionally, systemic risk wasabanking concept.H owever, the recent crisisshowed usthat certain activities developedunder the insurance sector can alsopose systemic risk.Insurancecompanies or groupsthat engage in non-traditional, or non-insurance, activities (for example:CDS, financial guaranteesorleveraging assetsto enhance investment returnsthrough securitieslending) are more vulnerableto financial market developmentsand,importantly, more likelyto amplify, or contribute to systemic risk.Of course, thisassessment may change over time, depending on theinnovations and changesin insurance businessmodels, especiallyin lifeinsurance, as well as in the complex interactions between insurancegroupsand financial markets.We shouldbe especiallyattentive to any kind of maturity transformationand leveraging occurring in the insurance sector.Also extremelyrelevant are the policy measuresunder discussion.In line with the FSB recommendations, the IAISproposed measuresonenhanced supervision, effective resolution and higher lossabsorbency.I welcome thisapproach.We need to be clear and transparent on the objectivesof the framework.Solvency ii
  12. 12. If insurance groupsheavily develop their business into non -traditional ornon-insurance activities than they should expect to be treated in relationto those businessesas if they were banks.We need to limit any potential incentive for typical banking risks to betransferred to the insurance sector because some stricter regulation ofsystemic risk is applied in the banking sector.As the development of the international approachesto deal withsystemic risk in insurance iscloser to an end, EIOPA willproceed, according to its regulation, and in consultation with theESRB, with thedevelopment of criteria for theidentification andmeasurement of systemic risk that may be posed byinsurance, reinsuranceand occupational pension‟sinstitutions withinthe EU context.EIOPA‟sachievementsand challengesLet me finalize by sharing with you some of EIOPA s achievementsandhighlight a number of challengesahead.In spite of the natural constrains on human and financial resourcesandthe huge challengesposed by the crisis, I believethat EIOPA hasbeenquite successful in delivering an ambitious plan covering all areasassigned to usby the European Law.I‟ve alreadycommented on the huge work developedby EIOPA on theregulatory side both on insurance and on occupational pensions.Let me now turn to supervision.EIOPA hasan enhanced role asa member of the collegesof supervisors.We developedan Action Plan with concrete deliverablesand timings forthe Colleges.Solvency ii
  13. 13. This has clearlyincreased the consistency of the work of the collegesandimproved the exchangeof information between supervisors.During thiscrisis EIOPA has been monitoring and assessing marketdevelopmentson a permanent basis, by using efficiently the publicinformation availableand collecting more granular information directlyfrom the national supervisory authorities, both through specificquantitative and qualitative queriesand by dedicated visitsby EIOPAstaff.This allowedusto reinforce the coordination of the EU supervisor‟sactions, highlight particular risksand activities that need to be furthermonitored and overall to be better prepared in the case of adversedevelopments.On consumer protection, that was identified as one of EIOPA‟spriorities, I am very proud to mention that our first set of Guidelines wasdevelopedin the consumer protection area.The Guidelineson complaintshandling byinsurers fill an importantregulatory gap at the EU level and are an important step towardspromoting more transparency, simplicity and fairnessin the market forconsumer financial productsand services.Furthermore we issued a Good Practices Report analyzing the disclosureand saleof variable annuities that identifies how consumer interestscanbe better protected as regardsthe salesof this type of complex products.We have alsopublished an initial overview of consumer trendsin theEuropean insurance and occupational pensionssectors, identifying threekey consumer areas that are presentlysubject to further review andanalysis:(1) Consumer protection issuesaround payment protection insurance;(2)Increased focuson unit-linked life insuranceproducts andSolvency ii
  14. 14. (3) Increased use of comparison websites by consumers.On financial stability, I want to emphasize the development andpublication of EIOPA‟s risk dashboard containing a set of quantitativeand qualitative indicators that helpto identify and measure the evolutionof risk in the EU insurance market.EIOPA hasalsorun a low-yield stresstest for the insurance sector thatshowed that the insurance industry would be negatively affected if ascenario were to materialize where yieldsremain low for a prolongedperiod of time.In the international relationsarea, EIOPA has been quite active,performing SolvencyII full equivalence assessmentsof the Swiss,Bermudan and Japanesesupervisory systemsand running gap-analysesof the regulatory regimes of 8 further countries that had expressed aninterest in being included in a transitional regime.Furthermore, EIOPA hasdedicated a special effort to a project with theUSfederal and state insurance authorities aimed to increase mutualunderstanding and cooperation with a view to promote businessopportunities, consumer protection and efficient supervision.The public report that identifyies in a factual way the main similaritiesand differences of the insurance regulatory and supervisory regimes inthe EU and in the USis a very important step forward.As you can see EIOPA hasalreadymade a significant impact in the EUregulatory and supervisory landscape.This was only possible becauseof the dedication of our staff and theexcellentcontribution from expertscoming from the NationalSupervisory Authorities.It is their knowledge, experience and dedication that allowusto fulfilour mandate and respond to an increasingly demanding environment.Solvency ii
  15. 15. Furthermore, the continuouscommitment and cooperation of themembers of the Board of Supervisorsand Management Board was of theutmost importance in fulfillingour mission and vision.Paramount to our activity was alsothe constant involvement with theInsuranceand Reinsurance Stakeholder Group and the OccupationalPensionsStakeholder Group.The exchange of viewsand the opinions from the Stakeholder Groupswere essential in the development of EIOPA‟s work.Looking forward, I am convinced that in a few yearsthe setting up of theEuropean Supervisory Authorities will be recognized asone of the mostfundamental reformsin the European financial sector coming from thefinancial crisis.The potential benefits from thecreation of a single rule book are huge,both for stability and consumer protection within the internal market.Nevertheless, EIOPA is confronted with a number of importantchallenges.Let me mention threerelevant ones:1. How to assurethe consistencyof supervisory practices?I firmly believe that theconsistency of supervisory practicesisasimportant asthe single rule book.Onlyby assuring that day-to-daysupervision of financial institutions isdone within a consistent framework, we can effectively contribute to anincreased level of protection of policyholdersand beneficiaries in theEuropean Union.The single market requiresit and EIOPA iscommitted to deliver it.Solvency ii
  16. 16. A first step should be the development of a Supervisory H andbook thatwould work as a guidebook for supervision in Solvency II, setting outgood practicesin all the relevant areas of supervision.This handbook will foster the implementation of a more consistentframework for the conduct of supervision. EIOPA isstarting to work inthisarea.On the institutional side we observe the evolution in the banking areawith the proposalsto create a single supervisory mechanism for the Euroarea banks.As a truly convicted European I welcome this step.I alsorecognize that the insurance sector is in a different situation.Insuranceis not banking.There are indeed fundamental differenceson the risksand on thebusinessmodels.Nevertheless, I believe that it is fundamental to rely on the experience ofwhat has been already achieved by EIOPA under the current Regulationand to start a reflection on further tasks, powers and resources needed todeliver a truly consistent supervisory process and, in particular, to assurea more consistent oversight of cross-border insurancegroups.In the short term EIOPA should be ready to playits challengingoversight role according to the Regulation, by conducting inquiries intoa particular type of financial institution, or type of product, or type ofconduct in order to assesspotential threatsto the stability of thefinancial system and make appropriate recommendations for action tothe competent authorities concerned.In order to perform thisindependent assessment in a transparent,efficient and risk-based way, EIOPA needsto reinforce itshumanresources, should have accessto the relevantindividual informationSolvency ii
  17. 17. availableto the national supervisorsand alsohave direct accessto theindividual institutions.In the medium term the evolution to a more European focusedsupervision for the EU cross-border insurance groupsshouldalsobediscussed, namely in face of the potencial arbitrage opportunitiescoming from the new supervisoryreality in the banking sector.2.Thepower to ban or restrict financialactivitiesOn the Consumer protection area I want to highlight the urgent need toinclude provisions in the insurance and pension DirectivesallowingEIOPA to ban or restrict financial activities as established in Article 9 ofthe EIOPA Regulation.This will assurean effective way to deal, for example, with situations offlawed product design or governance that could lead to severe consumerdetriment.Without theseprovisions EIOPA cannot fulfill itsmandate as describedin the Regulation.3. Competenceon 3rd Pillar pensionsIn the pensionsarea EIOPA‟s mandate onlycoversoccupationalpensions, the so called2nd pillar.H owever, I believe that the implementation of the EU agenda foradequate, safe and sustainablepensionscallsfor a sufficient level ofregulation and supervision of personal pensions, the so called3rd pillar.Consequently, EIOPA‟s mandate should beextended to all 3rd pillarpensions.Solvency ii
  18. 18. This isalsorecommended by EIOPA‟s Occupational PensionsStakeholder Group in their comment to the Commission‟s White paperon Pensions.Ladiesand gentleman,My vision is to build up EIOPA as a modern, competent andprofessional organization that actsindependentlyin an effective andefficient way towards the creation of a common European supervisoryculture.We are living extraordinary times and we should feel priviledged to bepart of this process.AsBob Dylansonicelysinged: The timestheyarea-changin.Thank you.Solvency ii
  19. 19. Opinionof the EuropeanInsuranceandOccupationalPensionsAuthorityof oninterim measuresregardingSolvencyIILegalBasis1.This opinion is issued under the provisions of Article 29(1) (a) ofRegulation (EU) No 1094/ 2010 of the European Parliament and of theCouncil of 24 November 2010 (hereafter the „Regulation‟) in conjunctionwith Directive 2009/ 138/ EC of the European Parliament and theCouncilof 25 November 2009on the taking-up and pursuit of thebusinessofInsurance and Reinsurance (hereafter SolvencyII Directive).2.As established in Article 29(1) (a) of the Regulation, EIOPA shall playan active role in building a common Union supervisory cultureandconsistent supervisory practices, as well as in ensuring uniformproceduresand consistent approachesthroughout the Union.3.As established under Article 1(6) of the Regulation EIOPA shallcontribute to improving the functioning of the internal market, includingin particular a sound, effective and consistent level of regulation andsupervision, (Art. 1(6)(a)) preventing regulatory arbitrage and promotingequal conditions of competition (Art. 1(6)(d)). EIOPA shall alsocontribute to enhancing consumer protection (Art. 1(6)(f)).4.As established under Article 8 (1) of the Regulation EIOPA‟s task is tocontribute to the establishment of high quality common regulatory andsupervisorystandardsand practices(Art. 1(6)(a)) and to contribute to theconsistent application of legallybinding Union acts ensuringconsistent, efficient and effective application of the actsreferred to in Art.1(2) of the Regulation (Art. 1(6)(b)).The fact that the Solvency II Directive has entered into force, meansthatit isconsidered “Union law”, but it will not have legallybinding effectuntil after the date of itsapplication, which iscurrentlyset to 1Solvency ii
  20. 20. January 2014 in accordance with the ("Quick Fix") Directive2012/ 23/ EU of 12 September 2012.5.This opinion is addressed to the national competent authoritiesrepresented in EIOPA‟s Board of Supervisors.Context6.During the Board of Supervisors(BoS) meeting of September 2012,Membersexpressed their strong concernswith respect to the currentstatusof the OMNIBUS II negotiations which might further delaytheapplication of the Solvency II Directive.7.In itsexplanatorymemorandum to the Proposal for theSolvency IIDirective the European Commission states:“The present solvencyrulesare outdated.They are not risk sensitive, they leave too much scopeto Member Statesfor national variations, they do not properly deal with group supervisionand they have meanwhile been superseded by industry, international andcross-sectoraldevelopments.This isthe reason why a new solvencyregime, calledSolvencyII, whichfullyreflectsthe latest developmentsin prudential supervision, actuarialscience and risk management and which allowsfor updatesin the futureisnecessary.”8.In addition, in the absence of a final agreement on SolvencyII,European supervisorsmay be forced to developnational solutionsinorder to ensure sound risk sensitive supervision.Instead of reaching consistent and convergent supervision in the EU,different national solutionsmay emerge to thedetriment of a goodfunctioning internal market.Solvency ii
  21. 21. 9. The BoSmandated the Chair of EIOPA to write to theOMNIBUS IItrialogue partiessetting out its concerns.In hisletter, dated 4 October 2012, theChair not onlyexpressedthe needfor a stableand reliabletime plan but alsothe need to reflect on anearlier implementation of some SolvencyII elements.{Note: Do you remember theletter?}Undertakings which arewell-governed and which, in particular, measurecorrectly, mitigate and report the riskswhich they face will be morelikelyto be prepared for the new regulatory framework and act in theinterestsof policyholders.Solvency ii
  22. 22. 10.In that regard it is of key importance that there will be a consistentand convergent approach with respect to the preparation of SolvencyII.In the run-up to the new system thefollowing key areas of Solvency IIneed to be addressed in order to ensure proper management ofundertakings and to ensurethat supervisorshave sufficient informationat hand.These are the system of governance, including risk management systemand a forward looking assessment of the undertakings own risks (basedon the ORSA principles), pre-application of internal models, andreporting to supervisors.11.EIOPA setsout belowits expectations for the national competentauthorities.These actions are consistent with EIOPA‟s obligation to fostersupervisoryconvergence.12.EIOPA will, taking into account its objective under Article 1Para 6and itstasksand powersunder Article 8 of the Regulation, contribute tothe consistent efficient and effective preparation of supervisorsandinsurance and reinsuranceundertakings for the application of theSolvencyII Directive.13.As a follow-upto the opinion, and by making useof its powersunderArticle 16 of the Regulation, EIOPA will publish guidelinesaddressed tonational competent authorities on how to proceed in the interim phaseleading up to SolvencyII.14.Within 2 months of the issuance of the guidelines, each nationalcompetent authority shall confirm whether it complies or intends tocomplywith theguidelines.In the event that a national competent authority does not comply or doesnot intend to comply, it shall inform EIOPA, stating itsreasons.Solvency ii
  23. 23. 15.EIOPA will publish thefact that a national competent authority doesnot comply or doesnot intend to complywith that guideline.Proposedactionsby national competentauthorities16.As part of the preparation for SolvencyII, national competentauthorities should put in place, starting on 1January 2014 certainimportant aspectsof the prospective and risk based supervisoryapproach to be introduced in order to addressthe concernsset outabove.17.National competent authorities are expected to ensure that insuranceand reinsurance undertakings have in placean effective system ofgovernance which providesfor sound and prudent management of theundertaking and an effective risk management system including aforward looking assessment of the undertakings own risks(based on theORSA principles).18.National competent authorities are expected to ensure that insuranceand reinsurance undertakings have in placean effective risk-management system comprising strategies, processesand reportingproceduresnecessaryto identify, measure, monitor, manage and report,on a continuousbasisthe risks, at an individual and at an aggregatedlevel, to which they are or could be exposed, and their interdependencies.19.National competent authorities are expected to review and evaluatewith respect to the undertakings concerned the system of governance,the assessment of therisks which those undertakings face or may faceand the assessment of the ability of thoseundertakings to assessthoseriskstaking into account the environment in which the undertakings areoperating.20.Through internal model pre-application processes, nationalcompetent authorities engaged in pre-application of internal modelsSolvency ii
  24. 24. shouldcontinue to work with undertakings to form a view onundertakings‟ degree of readinessfor internal model applications, andshouldalsofollowsubsequent evolutionsto the internal modelframework.21.National competent authorities are encouraged to request all theinformation necessaryfor applying a prospective and risk basedsupervisoryapproach.22.National competent authorities are expected to ensurethat therequirements mentioned aboveare applied in a manner which isproportionate to the nature, scaleand complexity inherent in thebusinessof the insurance and reinsuranceundertaking.Solvency ii
  25. 25. Aruoba-Diebold-ScottiBusinessConditionsIndexThe Aruoba-Diebold-Scotti businessconditions index isdesigned totrack real businessconditions at high frequency.Itsunderlying (seasonallyadjusted) economic indicators (weekly initialjoblessclaims; monthly payroll employment, industrialproduction, personal income lesstransfer payments, manufacturing andtrade sales;and quarterlyreal GDP) blend high- and low-frequencyinformation and stock and flow data.The average valueof the ADS index iszero. Progressivelybigger positivevaluesindicate progressivelybetter-than-average conditions, whereasSolvency ii
  26. 26. progressivelymore negative valuesindicate progressivelyworse-than-average conditions.The ADS index may be used to compare businessconditions at differenttimes.A value of -3.0, for example, would indicate businessconditionssignificantly worse than at anytime in either the 1990-91or the 2001recession, during which the ADS index never dropped below -2.0.The vertical lineson the figure provide information as to whichindicators are available for which dates.For datesto the left of the left line, the ADS index isbased on observeddata for all six underlying indicators.For datesbetween the left and right lines, theADS index is based on atleast two monthly indicators (typicallyemployment and industrialproduction) and initial joblessclaims.For datesto the right of the right line, the ADS index is based on initialjoblessclaimsand possibly one monthlyindicator.Solvency ii
  27. 27. Solvency ii
  28. 28. Financialservicessupervision:CommissionrequestsBelgium,France, Greece, Luxembourg,PolandandPortugal to implementEU rulesThe Commission has requestedBelgium, France, Greece, Luxembourg, Poland and Portugal to notifywithin two monthsmeasuresto implement EU rulesin the financialsector (Directive 2010/ 78/ EU) concerning the powersof the three newEuropean supervisory authorities for banks(European BankingAuthority), insurance and occupational pensions(European Insuranceand Occupational PensionsAuthority) and securities(EuropeanSecuritiesand MarketsAuthority).The Directive aims at adapting the provisions of key financial servicesDirectives to the new supervisoryframework.This will make sure that European Supervisory authorities will be fullyallowed to carry out all the tasksconferred upon them.Member Stateswere due to implement theDirective, nolater than 31December 2011.The Commissions requeststake the form of reasoned opinionsunderEU infringement procedures.If the Member Statesfail to notify measuresto implement the Directivewithin two months, the Commission may decide to refer them to the EUCourt of Justice.Electronic money: Commission asks Court of Justice tofineBelgium for not implementingEU rulesThe European Commission has decided to refer Belgium to the Court ofJustice of the EU for failing to implement the Directive on the takingup, pursuit and prudential supervision of the business of electronicmoney institutions.Solvency ii
  29. 29. The Commission has also decided to ask the Court to impose dailypenaltypaymentson Belgium, until it fullyimplementsthe Directive.The Commission proposes a daily fine of € 59 212,80 which would bepaid as from the date of the Courts ruling until Belgium notified theCommission that it had fullyimplemented the rulesinto national law.Solvency ii
  30. 30. Basel 3 –TheTimingDilemmaLast month the United States(US) regulatory authorities announced thatthey did not expect their rulesimplementing Basel 3 would becomeeffective on 1January 2013, although they are working as “expeditiouslyas possible” to complete their rulemaking process.Similarly in the European Union (EU), the trilogue between theEuropean Commission, the European Parliament and the Council ofMinisters to agree the text of Capital Requirements Directive IV (CRDIV, the EU version of Basel 3 is still ongoing and, even if a politicalagreement can be reached by year-end (which still appearsto be theintention), it isrecognised in the EU that therewill not besufficient timefor CRD IV to be codified as legislation and put into effect on 1January2013.So, doesit necessarilyfollowthat we should delayBasel 3implementation in H ong Kong becausethe US and the EU cannot meetthe internationally agreed timeline?Or should we followthe timeline set by the Basel Committee on BankingSupervision and begin the first phaseof Basel 3 implementation from 1January 2013?Our Basel 3rules(the Banking (Capital) (Amendment) Rules2012) arecurrentlytabled at LegCo and notwithstanding the expected delaysin theUSand the EU, the Basel Committee‟s timeline remains unchanged.Itsgradual phase-in of the new capital standardsover six years beginsfrom January2013 and extendsuntil 2019.In resolvingthe timing dilemma, it might first be instructive to remindourselvesthat Basel 3 isbeing introduced to rectify weaknessesmade alltoo starkly apparent in the recent global financial crisis.Solvency ii
  31. 31. Or, put another way, Basel 3 isconsidered good for financial stability.The Basel 3 capital standardsare designed to strengthen banks‟resilienceby requiring more and better quality capital and by addressingand capturing risksnot adequatelyrecognised previously.The aim is to ensurethat bankscan weather future financial stormswithout disruption to their lending.This shouldin turn make them lesslikely to create or amplify problemsin other areas of the economy and facilitate their contribution to long-term sustainableeconomic growth.The roller-coasterof excessiveleveragepre-crisisand excessivedeleveraging post-crisisis not conducive to sustainablegrowth.Regulation isall about balance.If regulation is too lax, excessiverisk-taking may resultwith devastatingeffects.If regulation is too tight, it may suppressbeneficial financial activity andreducegrowth.In our view, Basel 3 representsan appropriate balancein bolsteringresiliencewhilst at the same time (with its extended phase-in) notundulyhampering lendingto businessand householdstoday andensuring bankscan continue to lendin any downturn tomorrow.For this reason we propose to begin implementing Basel 3 from 1January 2013.We are not alone in this.Our regional peers, Mainland China, Japan, Singapore andAustraliahave all publishedtheir final rulesfor Basel 3 implementation next year.Solvency ii
  32. 32. As hasSwitzerland, another important financial centre.But notwithstanding the intrinsic benefitsof Basel 3, shouldweneverthelessbe swayed by the argument put to usthat Asia is taking the“medicine” designed for the countriesworst affected by the crisis, whilstthe intended “patients” defer and thereby give their bankssignificant“competitive advantages” over our own?This competitive advantage argument would seem to be based on twoassumptions.First that US and EU global banks (i.e. those banksthat couldrealisticallycompete with our own) are currently holding much lowerlevelsof capital than required by Basel 3 (and hence will have a genuinecost advantage);and second that our bankswill, come 1January 2013, have to hold morecapital than they currentlyhold(and hence will incur additional cost).Are these assumptionscorrect?Well even though adoption of Basel 3 is delayed in the US and the EU,this certainly does not mean that banks in these regions remain at theirpre-crisiscapital levels.There hasbeen significant re-capitalisation.The Dodd Frank Wall Street Reform and Consumer Protection Act in theUSalreadyrequiresthe regulatory agencies to conduct stress-testingprogrammes to ensurebanksand other systemicallyimportant financialinstitutions have enough capital to weather severefinancial conditionsand, even before the passage of the Dodd Frank Act, the USFederalReserveBoard put some of the largest USbank holding companiesthrough stress-tests, theresultsof which have led to significant increasesin capital.By 2012, the 19 bank holding companies subject to the Fed‟sComprehensive Capital Analysisand Review had increased theirSolvency ii
  33. 33. aggregate tier 1common capital to US$803 billion in the second quarterof the year from US$420 billion in the first quarter of 2009, with their tier1common capital ratio (which compareshigh quality capital to assetsweighted according to their riskiness) doubling to a weighted average of10.9% from 5.4%.In the EU, under a recapitalisation exercisein 2011that covered 71of theEU‟s major banks, the European Banking Authority (EBA) requiredmost to attain a “core tier 1ratio” of not lessthan 9% by the end of June2012.In October 2012, the EBA indicated that it will focuson capitalconservation to “support a smooth convergence to the CRD IV…..regulatory requirements” and require the banksto maintain an absoluteamount of core tier 1capital corresponding to the level of the 9% coretier 1ratio.So even absent formal adoption of Basel 3, the capital levelsof thelargest banksin the USand the EU have increased significantly post-crisisto levelscomparablewith, or even in excessof, those requiredunder Basel 3 and so the prospect of such banks“competing” by beingallowedto maintain much lower capital levelsthan Basel 3 bankswouldseem more apparent than real.Turning to the second “competitive” assumption, will the first phase ofBasel 3, which startsnext year, require local banksto hold significantlymore capital than theydo at present, to the extent that they may becomeconstrained in their ability to lend and compelledto passon the costsofthe extra capital to borrowers?Well,the resultsof the H KMA‟s quantitative impact studiestell usthatour local banksare alreadyvery well-placedto meet the new Basel 3capital ratios.Their capital levelsare alreadyin excessof the standard taking effect on1January 2013 and the issuance of ordinary shares(common equity)alreadyaccountsfor a very significant proportion of their capital base,Solvency ii
  34. 34. positioning them well for Basel 3‟snew focuson common equity as thehighest qualitycapital for the purpose of lossabsorption.In summary then, irrespective of any delay in formal implementation ofBasel 3, major banks in the US and EU are inexorably moving to higherlevelsof capital.This, together with the benefitsoffered by Basel 3 and the relative easewith which local bankscan comply, servesto underpin our view that weshouldproceed to implement the first phase of Basel 3 in line with theBasel Committee‟s timeline.Generallyspeaking, jurisdictions in Asia have in the past tended to adoptregulationsthat are in some respectshigher than the Basel Committee‟sminimum standards.This may have helpedAsia weather the global financial crisisrelativelyunscathed when compared with the jurisdictions worst affected.There would, therefore, seem littleto begained from seeking to engagein, or indeed prompt, a “race-to-the-bottom” in regulatory terms bydeliberatelydelaying the introduction of Basel 3 at this point in time.In implementing on 1January2013, we will be fulfillingour commitmentboth as an international financial centre which customarily adoptsbestinternational standardsand as a member of the Basel Committee onBanking Supervision.Karen KempExecutive Director (Banking Policy)Solvency ii
  35. 35. Dear member,The regulatory arbitrage challengesand opportunities between thebanking and the insurance sector are alwaysimportant and profitable formany, especiallyfor consultantsthat are expertsin both areas.For example, you can see an interesting job description:“H ead of Risk & Compliance - Up to £ 200,000package”The candidate needsto have strong expertisein the core RiskManagement areas like:- Compliance to Basel II, II.5 and Basel III- Compliance to SolvencyIIYou can read more at:http:// getjob.aspx?jobid=115693460&WT.mc_n=Indeed_UK&from=indeedI have to confess: I am a collectorof ideas that lead to regulatoryarbitrage opportunities, especiallybetween the banking and theinsurance balancesheet.Almost every financial product is subject to some formof supervision andregulation, which is usuallydifferent in banking and insurance. Thisisanopportunity. The same product can be structured to become a “bankingproduct” or an “insurance product”.I know. Basel iii and Solvencyii are supposed to eliminate regulatoryarbitrage opportunities.Every time I think something likethat, I have to admit that firms (andcountries) will alwaysdo their best to exploit opportunities and havecompetitive advantages.This week I will start from an interesting phrase:Solvency ii
  36. 36. “The changesin banking regulation make more important the roleofinsurers asproviders of long-term ***bank funding***”Whosaid that?Gabriel Bernardino, the Chairman of EIOPA (the European Insuranceand Occupational PensionsAuthority, one of three EuropeanSupervisory Authorities).Solvency ii
  37. 37. Solvency II SpeakersBureauThe SolvencyII Association hasestablished the SolvencyII SpeakersBureau for firmsand organizations that want to accessthe expertise ofCertified Solvencyii Professionals(CSiiPs) and Certified Solvency iiEquivalenceProfessionals(CSiiEPs).The SolvencyII Association will be the liaison between our certifiedprofessionalsand theseorganizations, at no cost. We strongly believethat this can be a great opportunity for both, our certified professionalsand the organizers.To learn Solvency_II_Speakers_Bureau.htmlSolvency ii
  38. 38. Course TitleCertified Solvency ii Professional (CSiiP):Preparing for the Solvency ii Directive of the EU (3 days)Objectives:This coursehas been designed to provide with the knowledge and skillsneeded to understand and support compliance with the Solvency iiDirective of the European Union.Target Audience:This courseis intended for decision makers, managers, professionalsand consultantsthat:A.Work in Insuranceor Reinsurance firms of EEA countries.B.Work in Groups - Financial Conglomerates(FC), Financial H oldingCompanies (FH C), Mixed Financial H olding Companies(MFH C), InsuranceH olding Companies(IH C) - providing insuranceand/ or reinsurance servicesin the EEA, whose parent is located in acountry of the EEA.C.Want to understand the challengesand the opportunities after theSolvencyii Directive.This courseis highly recommended for supervisorsof EEA countriesthat want to understand how countriessee SolvencyII as a CompetitiveAdvantage.This course is also recommended for all decisionmakers, managers, professionals and consultants of insuranceand/ or reinsurance firms involved in risk and compliancemanagement.Solvency ii
  39. 39. About the CourseINTRODUCTIONThe European Union‟s Legislative ProcessDirectives and RegulationsThe Financial ServicesAction Plan (FSAP) of the EUExtraterritorial Application of European LawExtraterritorial Application of the SolvencyII DirectiveSolvencyii and the LamfalussyProcessLevel 1: Framework PrinciplesLevel 2: Detailed Technical MeasuresLevel 3: StrengtheningCooperation Among RegulatorsLevel 4: EnforcementWeaknessesof SolvencyIFrom SolvencyI to SolvencyIISolvencyii PlayersSolvencyii ObjectivesTH E SOLVENCY II DIRECTIVEA Unified Legislative Basisfor Prudential Regulation of Insurersand ReinsurersRisk-Based Capital AllocationScope of the ApplicationImportant DefinitionsValue-at-Risk in SolvencyIIAuthorisationCorporate GovernanceGovernanceFunctionsRisk ManagementCorporate Governance and Risk Management - Level 2Fit and proper requirements for personswho effectivelyrun theundertaking or have other key functionsInternal ControlsSolvency ii
  40. 40. Internal AuditActuarial FunctionOutsourcingBoard of Directors: Roleand Solvencyii Responsibilities12 Principles – System of Governance(Level 2)PILLAR 2Supervisory Review Process(SRP)Focuson Risk Management and Operational RiskOwn Risk and SolvencyAssessment (ORSA)ORSA - The Internal Assessment ProcessORSA - The Supervisory ToolORSA - Not a Third SolvencyCapital RequirementCapital add-onPILLAR 3DisclosureRequirementsThe Solvencyand Financial Condition Report (SFC)PILLAR IValuation Of AssetsAnd Liabilities Technical ProvisionsThe SolvencyCapital Requirement (SCR)The Value-at-Risk Measure Calibrated to a 99.5% ConfidenceLevel over a 1-year Time H orizonThe Standard ApproachThe Internal ModelsThe Collectionof Additional H istorical DataExternal DataThe Minimum Capital Requirement (MCR)Non-Compliance with the Minimum Capital RequirementNon-Compliance with the Solvency Capital RequirementOwn FundsInvestment RulesSolvency ii
  41. 41. INTERNAL MODEL APPROVALCEIOPS Level 2 - Testsand Standardsfor Internal ModelApprovalCEIOPS Level 2 - The procedure to be followedfor theapproval ofan internal modelInternal ModelsGovernanceGroup internal modelsStatistical quality standardsCalibration and validation standardsDocumentation standardsSOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIESSolvencyI: Solo PlusApproachGroup Supervision under Solvency IIRights and dutiesof the group supervisorGroup Solvency- Methodsof calculationMethod 1(Default method): Accounting consolidation-basedmethodMethod 2 (Alternative method): Deduction and aggregationmethodParent Undertakings Outside the Community - Verification ofEquivalenceParent Undertakings Outside the Community - Absence ofEquivalenceThe head of the group isin the EEA and the third country regimeisnot equivalentThe head of the group isin the EEA and the third country regimeisequivalentThe head of the group isoutside the EEA and the third country isnot equivalentThe head of the group isoutside the EEA and the third countryregime isequivalentSmall and Medium-Sized Insurers:The Proportionality PrincipleCaptivesand SolvencyIISolvency ii
  42. 42. EQUIVALENCE WITH SOLVENCY II AROUND TH E WORLDSolvencyii and Countriesoutside the European Economic AreaThe International Association of Insurance Supervisors(I AIS)The SwissSolvencyTest (SST) and Solvencyii:Solvencyii and the Offshore Financial Centers(OFCs)Solvencyii and the USASolvencyii and the USNational Association of InsuranceCommissioners (NAIC) - The Federal Insurance Office createdunder the Dodd-Frank Wall Street Reform and ConsumerProtection Act in the USA, and theORSA in theUSAFROM TH E REINSURANCE DIRECTIVE TO TH E SOLVENCY IIDIRECTIVEDirective 2005/ 68/ EC of 16 November 2005 on Reinsurance - TheReinsurance Directive (RID)CLOSINGThe Impact of Solvencyii Outside theEEAProviding InsuranceServicesto the European ClientCompeting with BanksLearning from the Basel ii FrameworkRegulatoryArbitrage: A Major Risk for Countries that seeCompliance as an Obligation, not an OpportunityBasel II, Basel III, SolvencyII and Regulatory ArbitrageChallengesand Opportunities: What isnextRegulatory Shopping after SolvencyIITo learn more about the Certified_Solvency_ii_Training.htmSolvency ii
  43. 43. Solvency ii