Solvency ii News January 2012


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Solvency ii News January 2012

  1. 1. Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comSolvency II News, January 2012Dear member,Basel iii (theCapital RequirementsDirective 4 (CRD IV) in theEuropean Union) and Solvencyii becomemoresimilar monthaftermonth.With the CRC 4 theEuropean Commissionhasbrought forwardproposalstochangethebehavior of the 8000banksthat operateinEurope.The overarching goal is to strengthen the resilience of the EU bankingsector while ensuring that banks continue to finance economic activityand growth.Well, the Basel iii / Capital RequirementsDirective 4 in EU, is not adirectiveany more. It is a directiveand a regulation.Thedirective governsthe accesstodeposit-takingactivities.Theregulation governshow activitiesof credit institutionsandinvestment firmsarecarried out.While Member Stateswill have to transposethedirectiveintonationallaw,the ***regulation is directlyapplicable***, whichmeansthat itcreateslaw that takesimmediateeffect in all MemberStatesin the samewayasa national instrument, without anyfurther action on the part ofthenational authorities.Solvency ii
  2. 2. This removesthemajor sourcesof national divergences(differentinterpretations,gold-plating).It alsomakestheregulatory processfaster and makesit easier toreact tochangedmarket conditions.It increasestransparency, asone rule aswrittenin the regulationwillapplyacrossthe singlemarket.But, th e Solv ency II Direct iv e is a… direct iv e . Whereistheregulation?Isn’t it a regulatoryarbitragechallenge(or opportunity)?This is goingto change.Todaywehave a clear opinion:JulianAdams, Director of Insurance,Association of British Insurers, said that “weexpect the Level 2text tobeimplemented by wayof a Regulation, meaning that it will not berequiredto be transposed intoour Handbook”Isn’t it interesting?Solvency ii
  3. 3. Solvency II: what to expect over the coming monthsSpeechby JulianAdams, Director of Insurance,Association of BritishInsurers, SolvencyII Conference, 8 December 2011Many of you will have been at theFSA’s ownevent on SolvencyII inearlyNovember, whereweset out some more detail about how weintendto approach internal model approval in light of our revisedexpectationsabout whenthe SolvencyII Directivewill be implemented.I don’t intend to rehearsethe content of that event here; rather I’d like tofocus on three subjects.While thesewill mainlybe pertinent to internal model firms, I hopetheywill be of wider interest, not least becausethey provide some insight intothewayin whichwearetrying to deal withthe ongoing policyuncertaintysurrounding SolvencyII.Thefirst isthe approach wewill take withthosefirmsthat wishtousetheir SolvencyII worktomeet the current ICASrequirementstoremovetheneed for parallel running of twodifferent models.Second, I’d like toclarifythebasis on which applicationsfor internalmodelsshould be submittedaswereceiveda question about whetherthisshould bethe ContentsofApplication or the Commission’sLevel 2text.Thethird subject isgroup supervision, particularlyin relationto collegesof supervisorsand the importanceof thisforum in decision makingforregulated firms and groupswith cross-borderoperations.When wespoketo the industry about internal model approval last month,weset out how wewouldmake useof theadditional timecreatedby thebifurcation proposal, whichweexpect to form part of the final packageofmeasuresin theOmnibusII Directive.Solvency ii
  4. 4. In order tomaintain momentum, and tobuild on thevaluableworkyouhavedone already, wehave set out submission slotsto firmsfor when weexpect to receiveapplicationsfrom them, both for internal modelapproval and alsofor other approvalswhich theywill be seekingto havein placefrom Day One.While the general responsetothisinitiativehasbeen positive, wehavereceivedtwospecificchallenges,and I thought it wouldbehelpful torespond to thesemore fully today.Thefirst of thesechallengeswason the interactionbetweenSolvencyIImodelsand existingICAS requirements, particularlytheeffectiverequirement on firmsto run their ICASmodelsasa regular assessmentof their capital position.We have previouslyset out an aspirationto allowin effect earlyuse ofSolvencyII modelswherethis is appropriate, and I want to explain howwewouldseek to achievethis.As I said last month, wehave to be clearthat our current ruleswill remainin force for all firms until theSolvencyII regime comesintoforce forfirms on 1January 2014.Aregimethat allowedselectiveremoval of current rulesin anticipation ofnew requirementsthat werenot yet in force wouldnot appear tousto bejustifiedfrom a policy point of view.What weare in a position to do, however, is to invitefirmsto considerhow theythink their work on their SolvencyII model could be used tomeet thosecurrent rules,therebyremovingthe need for parallel runningof twodifferent models.When wereceivea firm’s model submission, wewill review it and expecttoreach a point whereweare abletoform a view onthat submission,whichcould be wellin advance of the implementationdate.Solvency ii
  5. 5. Wherethisis the case, wewill communicate this tothefirm, and mayalsogive individual capital guidancefor the interim period based on themodel.As the current requirementswill remain in force, it will be incumbent onfirmsto satisfythemselvesthat theSolvencyII model, alongsidetheirwidersystem of risk management and governance, meetstheexistingrequirementsin our Handbook.By approachingtheissuein this way, weintendto avoid theneed forfirmsto applyfor a complicatedseries of waiversor toseek specificpermission from ustomake thetransitionearly.We believethis is both proportionate and appropriate, given the amountof review work wewill have done withfirms followingsubmission oftheir SolvencyII model application tous.As an aside, I should mention alsothe position for firmsintendingto usethestandard formula.Here, wehave said that wewill review theappropriatenessof theproposed useof thestandard formula in 2013, by which time weexpectthat the standard formula calibrationswill have been finalised, and firmswill have had the opportunitytoapplythem.Given the proximityof this worktotheimplementation dateof 1January2014,weexpect standard formula firms tocarry on using their existingICAS models for solvencypurposesup totheSolvencyII implementationdate.Thesecond area I’d like to cover is the basison whichapplicationsforinternalmodels should be submitted.Solvency ii
  6. 6. We wereasked whethertheyshould be basedon thepreviously-publishedContentsofApplication or on theLevel 2 text that theCommission circulatedin November, acceptingthat this isnot yetpublished or finalisedand is subject tochange.This point is becoming pressing, given that we will be issuing guidancematerials to firms in February of next year on our application processesandthesupportingmaterialsyou will be required tosubmit tous.It is clearthat the Level 2 text – and, in due course,theLevel 3 textwhichwill supplement it – ismore appropriateto useasa matter ofprinciple,sincethis setsout much more clearlythebasis on whichweare expected to assessfirms’applications,and it is thestandard againstwhichyou and wewill ultimatelybe judged.Usingthe recent version of the Level 2 text in the context of ourimplementationactivitieswould, however, posetwoparticularchallenges.Thefirst isquitesimplythat thetext asit standshasnot been published,and isnot technicallyin thepublic domain.We are awarethat anumber of firms have it, but weare not in a positiontomake it availabletoeveryone asit is not oursto publish.Thesecond is that the text is not yet final, and will not even be releasedfor consultationuntil after OmnibusII is finalisedin the first quarter ofnext year. So, wedo not expect to have final Level 2 text until themiddleof 2012at the earliest.On theother hand, theContentsofApplication are out of date, havingbeen publishedinApril 2010and not reviewedin light of more recentlegislativedevelopments, but theydo represent an internally-agreed andpublic standard for the workthat hasbeen done todate, whichwehaveconsistentlyappliedto firms in our pre-applicationprocess.Solvency ii
  7. 7. Theythereforerepresentthebasisof most workdone by firmsto date.On balance, wefeel that basingour applicationapproach on the Level 2text is themost sensiblewaytoproceed, and wepropose to dothisis bycross-referencingthe Level 2 text in the guidancematerialswewill bemakingavailabletofirmsin Februaryof next year.Thereason for this isthat weexpect theLevel 2 text to be implementedbywayof a Regulation, meaning that it will not be required tobetransposed intoour Handbook.It will thereforebe incumbent on firms tocomply with thoserequirementsdirectly, and wethink that thisis themost appropriateapproachin the run up toimplementationasit will mirror the post-implementationregime.We accept that thisapproach meansthat the criteria may change overtime, but the text which is available now representsthe best and mostup-to-dateview of what the final positionis likely tobe.Any attemptsbyustointerpret or transposethis text now or in the futurewouldgive riseto legal risk for usand firms.I am awarethat this will meanthat some firmsmay feel that their effortsin followingtheContentsofApplicationapproachwill have been wasted,and I wouldlike toreassure you that this is not the case.We will expect you tosubmit ***documentary evidence*** that you meettherequirementsset out in theDirective, and completion of theContentsofApplication is likelyto goa long waytowardsdemonstratingcompliancewiththe Level 2 requirements, but it isthose Level 2requirementswhichwill be definitive.Solvency ii
  8. 8. As I have alreadymentioned, weintendtomake availableto you asmuch supportingmaterial aswecan tohelp you make the necessaryapplications,and intend todothis in February 2012.What I have attempted to do today is give some additional clarity aroundissues that we know are of particular interest to firms and that have beenraisedwith us.If there are other, similar issues,or if our timescalesare likely tocauseyou issuesof any kind, pleasefeel free tospeak toyour usual supervisorycontact.I’d like toturn finallyto group supervision.Theconcept and scope of group supervisionunder SolvencyII is muchwiderthan under thecurrent Directives,and will require a cultural aswell asa procedural shift, both on the part of regulatorsand firms.Theroleof a college is significantlyenhanced under theSolvencyIIDirective.Theremit of thecollege encompassesall three pillarsof SolvencyII, andthecollege will be expectedtoform a collectiveview on issuessuch asstrategyand governance, and totake a more prospectiveview.We are alreadyworkingaspart of collegesfor firmsintendingto applytousean internal model, both for UK groupswhereweare thegroupsupervisor,and alsowherewesupervisesubsidiariesof groupsthat arebased elsewhere.Collegesare, however, just asimportant in the context of standardformula groups, asdecisionswill still need to be takenat thegroup levelon issuesrequiring supervisory approval, such asthe choiceofcalculationmethod.Solvency ii
  9. 9. Supervisorycollegesarethemain mechanism wewill use to put some oftheDirective’sintentionsintoaction.We are workinghard to coordinate our workwith colleaguesin othermember statestomake surethat collectivelyweare ableto makedecisionsat the right point in time.We are committed toour role in deliveringthe potentiallysignificantbenefitsassociated witha meaningful and forward-lookinggroupsupervision regime, which goeswell beyond a narrow comparisonofsolvencypositionsand lookscloselyat the group’s overall strategic andeconomicposition.This takesustotheprincipal aim of SolvencyII to deliver policyholderprotection in a consistent wayacrossEurope, withthe addedbenefitsoffacilitating financial stability and levellingtheplaying field in the singlemarket.In deliveringthisapproach wewill of coursebe assisted by ourcolleaguesin EIOPA, whoserole will develop aswemove toimplementationand beyond.EIOPA alreadyattend supervisorycollegemeetings,and their role willtake account of issuessuch asconsistencyof approach, astheywill havea better view than most of thepotential for successto be achieved in thegroup supervision space.Collegesare primarilya supervisoryprocess, howeverthere are ways inwhichfirmsand groupscan assistin making this processasefficient aspossible– both for regulatorsand for them – and wewouldencourageyou toengagewith supervisory collegeactivitywherethis ispossible.I wouldalsourge you to recognisethe increasingfocuson group-levelissuesastime progresses, and to respond to group discussionsin theSolvency ii
  10. 10. samethoughtful and constructivewayasyou alreadydo withdiscussionson individual entities.Before closing, I wouldlike to highlight toyou again the consultationsthat are currentlyopen for your comment from theFSA, theTreasuryand EIOPA.Theseconsultationsgive you an opportunityto influencethedevelopment of policyand the approachto implementation, and I urgeyou torespond tothem.I hopethat today I havebeen able toprovideyou with some greaterclarityabout how wein the UK are going to manage implementation andtransitionfor internal model firms, aswell asgiving you some insight intothepracticalitiesof the group supervisionregime.Someof my colleaguesare participatingin a number of thepanelsessionstakingplacethroughout theday, and theywill be in a positiontoprovideany further detail you may require.In the meantime, thank you onceagain totheABI for givingme theopportunitytospeak to you today and thank you for your attention.Solvency ii
  11. 11. Investigating the EIOPA presentations …Note:This is another opportunityto seethat it will take some time until weputour handson the final Level 2 measures.Solvency ii
  12. 12. Note:Will wehave a countercyclical buffer similar to the Basel iii one?In Baseliii wehavethecountercyclical capital buffer, toachievethebroader macroprudential goal of protectingthe bankingsector fromperiodsof excessaggregate credit growth that haveoften beenassociatedwiththebuild up of system-widerisk.Protectingthe banking sector in this context is not simplyensuringthatindividual banksremain solvent through a period of stress, astheminimum capital requirement and capital conservation buffer aretogether designedto fulfil this objective.Rather, the aim is toensure that the bankingsector in aggregate hasthecapital on hand to help maintain the flow of credit in theeconomySolvency ii
  13. 13. without itssolvencybeingquestioned, whenthe broader financialsystem experiencesstressafter a period of excesscredit growth.This should help to reducethe riskof the supplyof credit beingconstrained by regulatory capital requirementsthat could underminetheperformanceof the real economy and result in additional credit lossesinthebanking system.In addressingthe aim of protectingthebankingsector from the creditcycle, thecountercyclical capital buffer regime may alsohelp to leanagainst the build-upphaseof thecycle in thefirst place.This would occur through the capital buffer acting toraisethecost ofcredit, and thereforedampen its demand, whenthere is evidencethat thestockof credit hasgrowntoexcessivelevelsrelativetothebenchmarks ofpast experience.This potential moderatingeffect on thebuild-up phaseof the credit cycleshould be viewedasa positivesidebenefit, rather than the primary aim ofthecountercyclical capital buffer regime.Did wehavesomethinglike that in theSolvencyII Directive?Not in theDirective. Yesin thediscussionsafter the final Basel iii rules.There are manyunknown unknownsto the moment…Solvency ii
  14. 14. Theabbreviation CCCP wasa nightmareduringthecold war (CCCP wastheRussianabbreviationfor the Soviet Union).Now it becomesa Solvencyii nightmare … astheEuropean Commission hasintroducedaCounter-Cyclical Capital matching Premium(CCCP) asan alternativeto the liquiditypremium. We do not know thedetails yet.We know that “EIOPAshall publishtechnical information”Timetohave a look at Article 77aof theOmnibusII Directive:Solvency ii
  15. 15. "Technical information produced by theEuropean InsuranceandOccupational PensionsAuthorityEIOPA shall publish technical information includingthe relevant risk-freeinterest rateterm structure.WhereEIOPAobservesan illiquiditypremium in thefinancial marketsin periodsof stressed liquidity, informationrelatingto the illiquiditypremium, includingits size shall alsobepublished.EIOPA shall carry out the observation of the illiquiditypremium and thederivationof theinformation on a transparent, objectiveand reliablebasis.Information for all these purposesshall be derived accordingto methodsand assumptionswhich may includeformulae, or determinationsmadebyEIOPA.”Solvency ii
  16. 16. Note:The moral of the story is that if our risk management structure is notgood enough, theywill not even consider thePillar 1numbers…At least EIOPA isnot brainwashing the Solvency ii professional intobelieving that they must understand what Warren Buffett has said inorder to understand Solvencyiii…… ornot?(next slide)Solvency ii
  17. 17. Solvency ii
  18. 18. First EIOPA Conference, Frankfurt, 16November, 2011TheEuropean Insuranceand Occupational PensionsAuthority hosteditsfirst Annual Conferencein Frankfurt.Around 350participantsfollowedexpertsdiscussinginsuranceandoccupational pensionssupervision and regulation.Themajor topicsaddressedat the conferencewere SolvencyII, theFuture of Occupational Pensions, Challengesand Opportunities for EUInsuranceRegulation aswell asConsumer Protection.Additionally, EIOPAprovided an updateon itson-goingwork forpreparingthefuture implementationof theSolvencyII directive, whichaddressestheneed of the national supervisory authoritiesand theinsuranceindustry for clarity on the content of the standardsandguidelinesfor SolvencyII aswell ason the timelineof activitiesnecessaryto preparefor SolvencyII.*** Th e nex t st ep on EIOP A’s work p lan is the lau nchof a pu b lic consultationondraft standardsand guidelinesforSolvencyII ***.Theconsultation isscheduledto start in May2012.After the consultationEIOPA aimsto ***finalise itsproposalsin September 2012***.Thetiming of theseactivitiesisbasedon some assumptionson thedevelopment of thepoliticalprocess:First of all, the approval of theOmnibusII directiveby the EuropeanParliament and theCouncil of theEuropean Union and the publicationof the proposalfor a DelegatedAct by the Commission in the first half of2012;Secondly, a phasing-in period of thenew regimeduring 2013;Solvency ii
  19. 19. Finally, theapplicationof SolvencyII asof 1January2014for theconsultation may be adjusted depending on the realisation of theseassumptions.Amended rulesfor financial conglomerates supervisionAmended European rules on thesupervision of financial conglomeratesgivingnational financial supervisorsnew powerstobetter overseetheconglomerates parent entities,suchasholdingcompanies,come intoforce( Directive2011/89/ EU).Thenew rules will allowsupervisorstoapplybankingsupervision,insurancesupervision and supplementarysupervisionat the sametime,asappropriateand necessary, therebyremedying theunintendedloopholesidentifiedduring thefinancialcrisis.In thisway, supervisorsshouldbe ableto obtain better information at anearlier stageshoulda financial conglomerate run intotroubleand bebetter equipped to intervene.In addition, banking groups, insurancegroupsand conglomerateswill beobligedtopublish basic elementsof a resolution plan for the group orconglomerate, their legal structure ascompared totheir businessstructure.Finally, managersof alternativeinvestment funds(for examplehedgefund managers) will be includedin the scope of supplementarysupervision whentheyare part of a conglomerate.Financial conglomeratesare financial groupsthat are often activeinmore than one country and operatein both the insuranceand bankingbusinesses.Solvency ii
  20. 20. FrequentlyAsked Questions1) What are financial conglomerates?Financial conglomeratesare financial groupsthat are activein one ormore country and operatein both the insuranceand bankingbusiness.Theyare oftenlargeand complex.Due to their size, financial conglomeratesare often of systemicimportancetoour economy: either for one or more Member Statesoreven for theEU asa whole.Thefact that financial conglomeratescan impact our economy washighlighted during thefinancial crisisin 2008.Anumber of financial conglomerateshad difficultiesand governmentsacrossEurope had toresort tolargefinancial injectionsin order tokeepthesefinancial conglomeratesafloat.2) How are financial conglomeratescurrentlysupervised?Currently, supervisionin Europe is mainlydone at the national level.Each singlelegal entitythat wantstooperate in the banking sector in anEU Member State needsauthorisation from the national financialsupervisorand needsto complywith therelevant banking regulation.Thesame applies for legal entitiesthat want to operatein theinsurancesector:such entitiesneed to be authorized asinsurancecompaniesandmust complywiththerelevant insuranceregulation.Supervision rulesalsoallowfor a group of authorisedbanking entitiestobesubject toconsolidatedbankingsupervision.Similarly, in the insurance sector, a group of authorised insuranceentitiescan be subject to insurancegroup supervision.Solvency ii
  21. 21. Financial conglomeratesare often activein both bankingand insurancebusinessand operatein several EU MemberStates.The Financial Conglomerate Directive (2002/ 87/ EC) gives nationalfinancial supervisors additional powers and tools to watch over thesefirms.Morespecifically, theDirectiverequires supervisorstoapplysupplementarysupervisionon these conglomerates,in addition to thespecific bankingand insurancesupervision.3) What is supplementarysupervision?Supplementarysupervisionbecomesrelevant whena financial group (ora"conglomerate") consistsof several legal entitiesthat are authorisedtodobusinessin banking, insuranceor other sectorsof thefinancialservicesindustry.Thenumber of legal entitieswithin a conglomeratecan exceed500oreven 1.000.All of these entities are controlled by a parent entity, where decisions aremade regarding business strategies, internal governance and group-widerisk management.While a parent entitycan be a regulatedentityitself, such asa bank or aninsurancecompany, it can alsotakethe form of a holding company.Supplementarysupervisionfocuseson problemsthat can arisefrom:Multipleuse of capital: supervisorsare tomake sure that capital is notused twiceormorewithin a conglomerate. For example, fundsmay notbeincludedin the calculationof capital on both the level of the singleentityand the parent entity.Solvency ii
  22. 22. Group risks:Group risksare risksthat arisefrom the group structure andwhicharenot related to specific banking or specificinsurancebusiness.Theyrefer torisksof contagion (whenrisksspread from oneend of thegroup toanother), management complexity(managing more than 1.000legal entities isa far more difficult challengethanmanaging20legalentities),risk concentration (thesame riskmaterialisingin several partsofthegroup at the same time), and conflictsof interest (e.g. one part of thegroup hasan interestin sellingan exposure, while another part of thegroup hasan interest in keepingthat exposure).The2002Financial ConglomeratesDirectiveallowsnational supervisorstomonitor thoserisks, for exampleby requiringconglomeratestoprovideadditional reporting.Supervisorscan alsorequire conglomeratestopresent additional riskmanagement or internal governancemeasures.TheDirective alsorequiressupervisorstocooperateacrosssectorsandacrossborders in order tocontrol possiblegroup risks.4) Why istheCommission now proposing a revision of theFinancialConglomeratesDirective?In the light of thefinancial crisis, the Commissionevaluated theeffectivenessof theFinancial ConglomeratesDirectivein 2008.It found that supplementarysupervision, asstipulatedin theDirective,could not be carriedout on certain financial groupsbecauseof their legalstructure.In some cases,national financial supervisorswereleft without theappropriatetoolsbecausetheyhad been obligedtochooseeither bankingor insurancesupervisionunder thesector-specific directivesorsupplementarysupervisionunder the Financial ConglomeratesDirectiveSolvency ii
  23. 23. as the definitions for banking and insurance holding companies in thesector-specific directives and for mixed holdings in the ConglomeratesDirectiveweremutuallyexclusive.Themain objectiveof the revision of theDirective is tocorrect thisunintended consequenceof the current rules.5) What is tochangeunder theCommissionsproposal?Theproposed amendmentstothe 2002Directivecan be summarised asfollows:Under the current rules, supervisors have to choose which supervisionthey apply when a group acquires a significant stake in another sectorand when the parent entityisa holdingcompany.It is now proposedtochangethis: both sector-specific (bankingandinsurance) supervisionand supplementary supervision could be appliedon theconglomerates parent entity, alsoif it concernsa holdingcompany.Bankingsupervisionwouldthereforeremain applicableeven if thebankinggroup acquires a significant stake in an insurancebusiness.By the same token, insurancesupervision wouldalsoremain applicable iftheinsurancegroup acquiresa significant stake in a banking business.When justified by potential group risksasa whole, financial supervisorsshould be allowedtoidentify a group asa financial conglomerate andapplysupplementarysupervision.Theidentificationprocessof financial conglomeratesshould allowforrisk-basedassessments,in addition toexistingdefinitionsrelatingtosize("quantitativeindicators").Solvency ii
  24. 24. Under the current rules,thebalancesheet figures are determinativewhenidentifying conglomerates.This approachsometimesresultsin a list of conglomeratesthat are notnecessarilyexposedtogroup risks, while groupsthat areevidentlyexposedtogroup risksarenot alwaysincluded withinthe scope ofsupplementarysupervision.Financial supervisorsshould be allowedto waivea group fromsupplementarysupervisionif it issmall (smallerthan 60 billiontotalassets) and if the supervisorassessesthe group risksto benegligible, even if the small group meetsthequantitativeindicators.This should enable supervisors to allocate their resources to thesupplementary supervision of larger and systemically importantconglomerates.Theproposed revisionof the2002Financial ConglomeratesDirectivealsoamendsthe relevant banking and insurancesupervisionlegislation, namely the Capital RequirementsDirective(2006/ 48/ ECand 2006/ 49/ EC) and theDirectiveon SupplementarySupervision ofInsuranceUndertakingsin InsuranceGroups(98/78/ EC).TheCommission is alsocurrentlyreflectingon tying in thisinitiativewith SolvencyII, thenext generationof supervisory rulesfor insuranceand reinsurancecompaniesin theEU.6) How doesthis proposal tie in withthewiderworkon crisispreventionand management the EU is doing?Will theEuropean FinancialSupervisionAuthorities be involved?Themain objectiveof this initiativeis torestorethe full spectrum ofsupervisorytoolsand powers,regardlessof the legal structuresoffinancial conglomerates.Solvency ii
  25. 25. This unintended consequenceof thecurrent rulesneedstobe addressedassoon aspossible.Nevertheless, theinitiativewill alsostrengthen the effectivesupervisionof financial conglomerates.TheCommission believesthat supplementarysupervisionof large,complex groups, operatingin several countries, can onlybe effectiveifthesame supervisoryapproach isapplied consistentlyacrossall EUMemberStates.As regardsfinancial conglomeratesoperating in several EU countries,closercoordinationbetweennational financial supervisorswill berequired, particularlythrough the new European Financial SupervisionAuthorities.TheproposalsregardingthoseAuthoritiesare currentlybeing negotiatedbetweenthe Council and theEuropean Parliament.Thenew EuropeanBankingAuthority (EBA) and the new EuropeanInsuranceand Occupational PensionsAuthority (EIOPA) are toform aJoint Committee to overseecooperationand coordination betweennational supervisorsin thecaseof financial conglomerates.As a followup tothisproposal and in order to assistthe Commissioninproposingfurther improvementsof theframework of supplementarysupervision, the Joint Committeeis alsoexpected to look intoextendingthescope of supplementarysupervisionto non-regulated entitiessuch asSpecial Purpose Entities.Theseare legal entities whereassetsarestored off the groups balancesheets.During the crisis, it became clear that contagion and risk concentrationoriginatedalsofrom non-regulatedpartsof financial conglomerates.Solvency ii
  26. 26. This issuehasbeenhighlightedalsoon international level in thecontextof the G20 work.It is theCommissions intention to continueto work on thisissueandpresent further amendmentsto the Directive on FinancialConglomeratesasregards this matter aswellasother issueslinked inparticular tothe new Europeansupervisory structure.The invisibilitieswithin the most visibleIn order to understand better all the above, it istime to remember the importantspeechfor Michel Barnier, member of the European Commission responsible for theInternal Market and Services,delivered by Paulina Dejmek, Financial expert inBarniers cabinet. More than 200participantsattended the CommissionsConglomeratesConferenceon 7 June2010in the Charlemagnebuilding in Brussels.Ladies and gentlemen, you and I have been readingthousandsofopinionson how toimprove the regulatoryframeworkfor large, complexfinancial institutions.May I kick off thedebateof todayby agreeingwithyou, that wedon’tneed more regulation.However, asyou know,Commissioner Barnier is committed to makeregulation intelligent and effective. When it comesto the supervision oflarge, complex financial institutionslike conglomerates,the topicofthisconference,thereis a lot of work on our plateto get to intelligentand effectiveregulation.JOINT FORUM PRINCIPLESTen yearsago, theG10s Joint Forum of financial sector supervisorsreleasedthe principlesof supervisingfinancial conglomerates.Solvency ii
  27. 27. Theleading ideawasthat groupsin thefinancial sector, whichareoperatingin several marketsand withmanyregulated entities,wereexposedtorisks, which had nothing to dowiththe banking businessorwith the insurancebusiness,but whichhad everything to dowith thechallengeof controllinga group of manydifferent legal entities.Thesegroup risks,the risksof contagion, of risk concentration, ofmanagement complexityand conflictsof interest, justifiedmore intense,and a different kind of supervision of the larger, more complex groups,than of the smaller,simpler groups.An illustrative example that makes clear to me what supplementarysupervision is about is the supervision on the Australian MacquarieGroup.We look forwardtohearingCharlesLittrell this afternoon, explaininghowAPRA proposesto supervisegroupslike that, but let me try toexplain.If a company hasboth a bank and an airport under itscontrol, thebankingcapital ruleswouldrequire thebank tocalculatethe correct riskweightsof the exposuresrelatedtothe airport, or maybe even to deductcertainexposuresrelated to theairport from own funds.This is becausethebankingrulesrequirethe bank tohold adequate, riskbased, capital buffers.Thesupplementaryrules, however, wouldrequire MacquarieGroup tobeawareof thepotential contagion coming from the airport tothebank.For example, a terrorist attack on Zaventem airport (for thatspartlyownedby Macquariethrough an investment fundsentity!) may inducedepositorsat Macquarie Bank torun and withdrawtheir savingsaccounts.Solvency ii
  28. 28. Thesupplementaryrules wouldincludebroader governanceand riskmanagement rulesthat require theboard of Macquarietohave, forexample, contingencyplansand ring fencingpoliciesavailable, or takeother measuresto control the group risks.TheCommission supportstheprinciplesof theJoint Forum toapplysupplementarysupervisionwhen appropriate.REVIEWIn 2002, the European institutionsendorsedthe principlesin a directivefor conglomerates,theFICOD, definingconglomeratesasgroupswithboth insuranceand bankingactivities.Thereview that theCommission Servicescarried out for the last twoyears, with your kind cooperation, showedthat the regulatoryframeworkin placeworked well for those whocould apply it.However, not all supervisorscould applyit asit wasmeant tobe.Thecombination of applicabledirectivesin thefinancial sector created asituation wheresomesupervisorshad to chooseeither one or the otherdirective, if the legalstructure wasorganizedunder a holding company.This wasnot our objective.Even more so, for thosesupervisorswhoneed thesespecificpowers,supplementarytotheir sectoral powers,this problem is urgent.This is whythe Commission will proposea quick fix next month, whichmust ensure that supplementarysupervisioncan be applied in additiontosectoral supervisionregardlessof legal structures.But the review revealedthat more improvementswereneeded.Solvency ii
  29. 29. When asking you what should be improved, you replied that capitaltreatmentsshould be much more consistent acrosssectors, and thatsupervisoryreview processesfor thelargecomplex groupsshould not bedone in a fragmented, sector basedway, but on a group widebasis.You alsoasked ustodetermine whoshould be subject to supplementarysupervision in a more risk basedmanner.Last year, asa lesson learnt during thecrisis, alsothe Financial StabilityBoard realizedthat the supervision on large, complex groupscould beimproved.TheyaskedtheJoint Forum toinvestigatethe differentiated nature andscopeof regulation:“Theappropriatebodiesshould review thedifferentiated nature ofregulationin thebanking, securities, and insurancesectorsand provideareport outliningtheissueand makingrecommendationson neededimprovements.Areview of thescopeof financial regulation, withaspecial emphasisoninstitutions,instruments, and marketsthat are currentlyunregulated,alongwithensuringthat all systemically-important institutionsareappropriately regulated, should alsobeundertaken.”TheFSB realized, that the set of available rules for the financial sectorwhichweremeant toprotect citizensfrom the abuse of informationasymmetry, from theabuse of not knowingor seeingwhat theymightneed to know or see, might be outdated.Therulesworkedaslongasthe rules, thebusiness, and thecitizensweredealingwiththe same packageof services.Thefragmented framework worked aslongasthebusinesswasfragmented. Citizenscould trust that thesupervisorwouldsee what thecitizendid not see.Solvency ii
  30. 30. Today, businessstructuresevolved to combinationsof licensesfor allkindsof financial services.Both citizens and corporates are benefiting from packages of financialservices, combinations of banking, insurance and investment productsand services.Companiesin the financial sector innovated the waytheycontrolthemselves,includingnon-regulated entities.Fiveof them, all very different from each other and all subject to thesameset of directives,will tell us how theycontrol themselvesasa group thisafternoon.Therulesworkedfor one licensebusinesses,one bank, one insurers, oneasset manager.Maybe it workedfor twolicensefirms, a firm with one bank licenseandoneinsurancelicense.Doesit workfor firmsof 100licenses?Doesit workfor firmsof 2000 legal entities, of which1000 authorized todowhatever theywishin thefinancial sector?Where businessstrategies of the most visible financial servicesprovidersin this society are built upon a patchwork of regulated and nonregulatedentities, do supervisors and regulators still seeall the risks that theyneedtosee?Can citizenstrust that norelevant risksremain invisible?This is what theFinancial Stability Boards question wasabout.TheJoint Forum delivered, and the FSB endorsedtheir advicelastJanuary.Solvency ii
  31. 31. Thesupervisorsin the first panel of today will explain you all about it,andnodoubt theywill explain that wecan no longer ignore the riskscomingfrom non-regulatedpartsof theconglomeratesin the financialsector.As theyput it: "Policymakers should ensure that all financial groups(particularlythose providing cross-border services) are subject tosupervision and regulation that capturesthefull spectrum of theiractivitiesand risks."OUTLOOKThis is some work,ladiesand gentlemen. We know youre worried aboutmore work, whichmay digup thingsyou rather didnt see.We shouldntbeafraid. Thisis alsoan opportunityto tidyup and get to moreintelligent and effectiveregulation.Todaywestart a debate whichmay last for another 18months, andwhichwill not be easy.We will publish thequick fix FICOD I proposal in order toallowsupervisorstoapplyall the powersthey need giventhe defined scope inthecurrent FICOD.But wemay want to talk about the adequacyof that scope.TheCommission is committed to prepare a FICOD II whichdoesachievethe objectiveof supplementarysupervision, the control of grouprisks, whereever theycome from.In the end, the overall objectiveremainsthe same: the protection ofcitizensfrom financial instability.May weinviteyou tospeak up and shareyour viewswithusabout thefollowingquestions:Solvency ii
  32. 32. Doestheregulatory framework still fit our aim toprotect citizensfromwhat theycannot see?How canyou andweenforcesupplementary supervision that makesvisiblewhatever isstill invisibletoday?We look forwardtoan interestingdebate.Solvency ii
  33. 33. Solvency II SpeakersBureauTheSolvencyII Association hasestablishedthe SolvencyII SpeakersBureau for firmsand organizationsthat want to accesstheexpertiseofCertified Solvencyii Professionals(CSiiPs) and Certified SolvencyiiEquivalenceProfessionals(CSiiEPs).TheSolvencyII Association will be theliaison betweenour certifiedprofessionalsand theseorganizations,at no cost. We stronglybelievethat this can be a great opportunity for both, our certified Solvency_II_Speakers_Bureau.htmlCourse TitleCertified Solvency ii Professional (CSiiP):Preparing for the Solvency ii Directive of the EU (3 days)Objectives:This coursehasbeen designed toprovidewiththe knowledgeand skillsneeded to understand and support compliancewiththeSolvencyiiDirectiveof theEuropean Union.TargetAudience:This courseisintendedfor decision makers, managers, professionalsand consultantsthat:A.Work in Insuranceor Reinsurancefirmsof EEAcountries.B.Work in Groups- Financial Conglomerates(FC), Financial HoldingCompanies(FHC), MixedFinancial Holding Companies (MFHC),InsuranceHolding Companies(IH C) - providing insuranceand/ orSolvency ii
  34. 34. reinsuranceservicesin the EEA, whoseparent islocated in acountry oftheEEA.C.Want tounderstand thechallengesand the opportunitiesafter theSolvencyii Directive.This course ishighlyrecommendedfor supervisorsof EEA countriesthat want to understand how countriesseeSolvencyII asa CompetitiveAdvantage.This course is also recommended for all decision makers, managers,professionals and consultants of insurance and/ or reinsurance firmsinvolvedin risk and compliancemanagement.About the CourseINTRODUCTIONTheEuropean Union’sLegislativeProcessDirectivesand RegulationsTheFinancial ServicesAction Plan (FSAP) of theEUExtraterritorialApplication of European LawExtraterritorialApplication of the SolvencyII DirectiveSolvencyii and theLamfalussyProcessLevel 1: FrameworkPrinciplesLevel 2: Detailed Technical MeasuresLevel3: StrengtheningCooperationAmong RegulatorsLevel 4: EnforcementWeaknessesof SolvencyIFrom SolvencyI toSolvencyIISolvencyii PlayersSolvencyii ObjectivesTHE SOLVENCY II DIRECTIVESolvency ii
  35. 35. AUnified LegislativeBasisfor Prudential Regulation of InsurersandReinsurersRisk-BasedCapitalAllocationScope of theApplicationImportant DefinitionsValue-at-Riskin SolvencyIIAuthorisationCorporateGovernanceGovernanceFunctionsRiskManagementCorporateGovernanceand Risk Management - Level 2Fit and proper requirementsfor personswhoeffectivelyrun theundertakingor haveother key functionsInternal ControlsInternalAuditActuarial FunctionOutsourcingBoard of Directors:Role and Solvencyii Responsibilities12Principles– System of Governance (Level 2)PILLAR 2SupervisoryReview Process(SRP)Focuson Risk Management and Operational RiskOwn Risk and SolvencyAssessment (ORSA)ORSA- TheInternal Assessment ProcessORSA- TheSupervisoryToolORSA- Not a Third Solvency Capital RequirementCapital add-onPILLAR 3DisclosureRequirementsTheSolvencyand Financial Condition Report (SFC)Solvency ii
  36. 36. PILLAR IValuationOf AssetsAnd LiabilitiesTechnicalProvisionsTheSolvencyCapital Requirement (SCR)TheValue-at-RiskMeasureCalibratedtoa 99.5% ConfidenceLevel over a 1-year Time HorizonTheStandardApproachTheInternal ModelsTheCollectionofAdditional HistoricalDataExternal DataThe Minimum Capital Requirement (MCR)Non-CompliancewiththeMinimum Capital RequirementNon-CompliancewiththeSolvencyCapital RequirementOwn FundsInvestment RulesINTERNAL MODEL APPROVALCEIOPSLevel 2 - Testsand Standardsfor Internal ModelApprovalCEIOPSLevel 2 - The procedure tobe followedfor theapproval ofan internal modelInternal ModelsGovernanceGroup internal modelsStatistical qualitystandardsCalibrationand validationstandardsDocumentation standardsSOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIESSolvencyI: SoloPlusApproachGroup Supervisionunder SolvencyIIRightsand dutiesof the group supervisorGroup Solvency - Methodsof calculationSolvency ii
  37. 37. Method1(Default method):Accounting consolidation-basedmethodMethod2 (Alternative method): Deduction and aggregationmethodParent UndertakingsOutsidethe Community - Verification ofEquivalenceParent UndertakingsOutsidethe Community - Absence ofEquivalenceThehead of thegroup isin theEEA and the third country regimeis not equivalentThehead of thegroup isin theEEA and the third country regimeis equivalentThehead of thegroup isoutsidethe EEAand the third country isnot equivalentThehead of thegroup isoutsidethe EEAand the third countryregimeisequivalentSmall and Medium-SizedInsurers:TheProportionalityPrincipleCaptivesand SolvencyIIEQUIVALENCE WITH SOLVENCY II AROUND THE WORLDSolvencyii and Countriesoutsidethe European EconomicAreaTheInternationalAssociation of InsuranceSupervisors(IAIS)TheSwissSolvencyTest (SST) and Solvencyii:Solvencyii and theOffshoreFinancial Centers(OFCs)Solvencyii and theUSASolvencyii and theUS NationalAssociation of InsuranceCommissioners(NAIC) - The Federal InsuranceOffice createdunder the Dodd-Frank Wall Street Reform and ConsumerProtectionAct in theUSA, and the ORSAin theUSAFROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY IIDIRECTIVESolvency ii
  38. 38. Directive2005/ 68/ EC of 16November 2005on Reinsurance- TheReinsuranceDirective(RID)CLOSINGTheImpact of Solvencyii OutsidetheEEAProvidingInsuranceServicestotheEuropean ClientCompeting withBanksLearningfrom theBasel ii FrameworkRegulatoryArbitrage:AMajorRisk for Countriesthat seeComplianceasan Obligation, not anOpportunityBasel II, Basel III, SolvencyII and RegulatoryArbitrageChallengesand Opportunities:What is nextRegulatoryShopping after SolvencyIITolearnmore about theonlineexam you may CSiiP_CSiiEP_Certification_Steps.pdfTolearnmore about Certified_Solvency_ii_Training.htmSolvency ii