Solvency ii News May 2012


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Solvency ii News May 2012

  1. 1. Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Todaywewill start from a very interestinginterview withGabriel Bernardino, Chairman of EIOPAInterview with Gabriel Bernardino, Chairman of EIOPAconducted byAnke Dembowski, Institutional Money(Germany)Insurance companiesvs.Occupational Retirement Provision(IORPs)EIOPA hassubmitteditsadvice fortheOccupational Retirement Provision(IORP)directive on15th of February2012.What is EIOPAs standpoint in this advice?Theintentionisnot tohave a copy - pasteexercisebetweenSolvencyII and thepensionsdirective.The intention is to find out the elementsthat in terms of risk are similar betweenthosetwo.If risks are similar, you should treat them ina consistent way.Solvency ii
  2. 2. And if risks aredifferent, you should treat them in a different way. That’swhat weadvocatein thisadvice.Whicharethemaindifferencesbetweenpensionsandtheinsurancesystem?One of thedifferencesis the type of involvement the sponsorcompany,i.e. theemployer hasin thepension fund.If there is a need for more capital within an insurancecompany, theshareholdersare often subject to a limitedliabilityregime.This is different in thepension fund area.Here, you dont have a transfer of the risk tothe pension fund.Thefund isonlya vehicle tofinancethe responsibilitiesof the employer.Consequently, if there is a need for capital, the employer may be requiredbysocial and labour law to put themoney in.Youwant to introduceaholistic balancesheet. Howdoesthat looklike?At the regulationlevel, weneed to take these differencesintoaccount.Thatswhywearetrying to develop theconcept of a holistic balancesheet, whereweintegrate not only the market value of the assets, butalsotheeconomicvalue of the liabilities.In addition, weare integratingother elementsthat takeaccount of thespecificitiesof the pensionarea.And there aredifferent elementsin eachcountry.For example, theDutchsystem, whereyou have thepossibilityto cutback thepension benefitsretroactively.Solvency ii
  3. 3. Or take thesystems whereyou can reducethe indexationsof thepensionsfor the future, et cetera.Thesespecificationshave an effect on the value of theliabilities, and youneed to take it intoaccount for theholisticbalance sheet.And whichsimilaritiesdoyou seebetweenpensionsand insurancecompanies?For example, all theelementsabout governance, risk management andtransparency.We firmly believe that the sound principlesof SolvencyII can alsobeappliedin a context of pension funds- provided of course, that you takeintoaccount thenecessaryproportionality.We are awarethat there are many pension schemesthat arequitesmallandthat wecannot fullyapplyin a mechanistic wayall the goodprinciplesof governance,risk management and control to them.What is thetimeframe for theSolvencyII andthepension directive?SolvencyII hasalreadybeen discussed for manyyears and weare now inthe last phasesof implementingmeasures.We intendtohavethe Solvency II frameworkimplementedin 2014.On the IORP side, theprocessis still at an earlystage.As you have mentionedin thebeginning, theEuropean Commission hasasked usa long list of questionsin a call for advice and wehaveansweredthem, on 15th of February.We believethat several testsneed tobe made, especiallyon thecalculationof thetechnical provisionsand of the solvency requirements.Solvency ii
  4. 4. Sowewant to run thefirst quantitativeimpact study (QIS) on thepension sidesoon.Will thoseQISstudiesbesimilar to theonesthat you havedoneontheinsuranceside?Again, there aresome elementsthat are common, but some differentelementswill be coming from theholistic balancesheet approach.And alsothe processin itselfis goingtobe different.In the insuranceQISwetriedtocapture most of the insurancemarket inEurope.But it is not thecasefor pensions,becausethe pensionsmarket is sodiverseacrossthe 27EU member countries.Therefore, weare goingto conduct the first QISstudy onlyin thosesevencountrieswheredefinedbenefit plansare more relevant: Germany, UK,Ireland, the Netherlands,Portugal, Sweden, and Belgium.We are workingon the common technical specificationsto be appliedinthetest and will discussthe timelinewiththe European Commission.TheCommission intendsto have a firstschedulefor proposal on therevisedIORP Directiveby theend of thisyear.And what qualitativemeasures arenecessary forpension funds?Also pension fundsneed to have a liquidityassessment and amanagement of their liquidityneeds.This is part of thequalitativepillar II requirements.But making an analysisof onesliquidityneedsis part of common goodmanagement rulesanyway.Solvency ii
  5. 5. Of course,a pension fund needstoknow thepensionsit hastopay intheyears to come and what itsrevenuesfrom theassetswill be.Onlythen the fund can try tomatch thosetwoand try to avoid surprises.2. Investment issuesfor insurance companiesInsurancecompanieshave been refinancing banks in thepast, andwecannot seebanksisolated from insurancecompanies. Basel IIIregulationisnowforcing banks toholdhigher equityratios. Willinsurancecompaniesunder SolvencyII beabletorefinancebanksastheyusedtoin thepast?Well, it is not the purposeof insurancecompaniestofinancebanks.Thepurposeof insurance companies istohave good productsfor theircustomersand to providelong term security for their customers.SolvencyII will not force insurancecompaniestoonly buy one type ofassets.But it is clear: Themore stability you havein the banking sector, thebetter it will be from the riskperspectivetoinvest intobanks.It is normal that whenbanks are in a stresssituation, or when there aredoubtsabout their capital capacity, investors- not only insurancecompanies - refrain from investinglong term intobanks.With the elements that have been introduced about recapitalizing thebanking sector, I believe that in the future, insurers will come back tofinancebanks.SoEIOPAsintention is not todisconnect theinsuranceand thebankingsector in ordertoreduce cyclical ties?No, with SolvencyII or any kind of regulatoryregime weare not tryingto intervenein that sense.Solvency ii
  6. 6. But what wewant todo is tointroducea risk basedsystem.We saythat themore risk an insurancecompanyhas, thebettercapitalized it must be.We donot saydont invest intorisky assets or only invest intosovereignbonds - that isnot up to thesupervisors.We onlysaythat thecapital hasto commensuratewiththe risk.An insurancecompany can have a bigger risk appetite, but then on theother side, it needstoprovidemore capital.That is a fundamental element in the wholefinancial system.Will SolvencyII have an effect ontheproductsthat insurance companieswill offer?I believethat withSolvencyII consumerswill continuetohave choicebetweendifferent products,with different types of guaranteesandliquiditycharacteristics.If an insurancecompany createsliabilitieswhichattract more risk - forexampleif it wantstooffer productswitha guaranteedinterestratefor20, 30or 40years, it can dothat, becauseconsumersvalue thoseproducts.But the riskinvolved needstobe priced correctly.We must not bringrisk intothe system without pricing it well. I thinkthat this isthe lesson weclearlylearnedfrom the financial crisis.What exactlywasthelesson theinsurance sector learned from thefinancial crisis?Solvency ii
  7. 7. In the bankingsector wehave seen that there waspoor underwritingonthe subprime business, whereriskswerebrought intothesystem withoutbeingpriced correctly.We have alsoseen that if you bring risk intothe system, it will neverdisappear, no matter how much packagingand re-sellingyou do withit.Therisk remains there and you need to manageit.If it is not well priced, someone will pay in theend, either thecompanies, the consumersor the taxpayer.Doestheregulation intend to reducetherisk to aminimum?No!When thefinancial system isrisk averse, theeconomywill not work.Look what the insurersare doing for usasindividuals:We transferourrisksto them.Insurersbydefinitioncannot be riskaverse,becausedealingwithriskandmanagingis their core business.As regulators, our duty for thesocietyistohave a good balancebetweensecurityand growth.If you want to havea system with 100Percent security, it will beunaffordable.SoI am not advocatingthat wehave capital requirementsthat arebulletproof.In Solvency II, weare buildinga system based on a with a 99.5percentconfidencelevel.Solvency ii
  8. 8. But in an extreme situation, an insurancecompany can becomeinsolvent.What wewant to assure is that insurerswill have excellent riskmanagement systemsthat will help them tomanage prudentlytheirrisks.Looking at thelowinterest environment: Doyou think that lifeinsurancecompanieswill need to changetheir businessmodels, forexampletoavoid thelongguaranteesthat stretch over thelifetime of aman?Yes,wewill probablyseesome changesin the products.But it is not becauseweare applying SolvencyII, that long lastingguaranteesare problematic - theproductsexist already.What SolvencyII brings, is more market consistent pricingof risk, sothat wecan seeclearerwherethe difficultiescould lie whengoingforward.Someof the risksof long lastingguaranteesneed to be better assessed,andprobablysome of theseproductswill costa bit more in the future.What happensif an insurancecompanyfallsbelowthesolvencycapitalrequirement?Thenthe supervisor and theinsurancecompanywill need tomaintainaclosedialogue, and together theyanalyze the reasonsbehind it.Thecompany will havetopresenta plan how it intendstorecover itscapital or reduceitsrisk.Sothis approachisanti-cyclical.Thecompanydoesnot immediatelyneed to reinforcecapital, asthiswouldhave a procyclical effect on themarket.Solvency ii
  9. 9. However, if thingscontinuetogo wrongand the capital fallsbelow theminimum capital requirement, thesupervisorhastheduty toclosethebusinessand in drastic situationseven toclosethe company, becausethen thepolicy holders rightsare at stake.Thesystem is designedin a waythat it isnot a safeheaven, it’snot azero failure system, but it hasdifferent levelsof protection.How doestransparencyhelp investors?From the investors perspective, SolvencyII is a system that givesfarbetter information todecide on an investment.That is thebiggestadded valuea regulatoryregime canhave.Theworst thing wouldbe togive an incentivetohidethe risk.In the current system, the solvencyfiguresin the insurancesector arecompletelystable, astheyare not based on the market value of theassets.But weall know that marketsare volatile, soinvestorsfeel thatsomethingiswrong. Under SolvencyII, the solvencycapitalrequirementswill be more volatile.You can have a situationwherein onequarter you have 160percent ofyour capital requirements,and in the next quarter only 120percent.Is moretransparency alwaysbetter?Under the SolvencyII regime, insurancecompanieswill be disclosingmore information, and the information given will be much more linkedtothe realityof therisks and themarkets.At first sight, it will seem that figuresare more volatile, but this is duetothehigher transparencywewill have, not becausethe insurancecompany hasintrinsicallya more volatile business.Solvency ii
  10. 10. We assupervisorsknow this,and wehope that analystsand investorswill understand this aswell and will not penalize insurancecompaniesbyhigher cost of capital.Underthecurrent SolvencyII regime, government bondsfrom OECDcountriesdonot have anycapital requirementsat all.This seemsabit odd, consideringtheproblemsthat someEuropeancountriesare currentlyfacing.What is thereason whycapital requirementsforgovernment bondsarenot pegged to their rating, like it isthecasefor corporate bonds?And arethereplansthat thispolicy will bechanged in thefuture oris that averypolitical issue?Before the euro areadebt crisisgovernment bondswerewidelyconsideredasrisk free instrumentsthat iswhythere wasnoneed topegcapital requirementsfor government bondstotheir rating.Naturallyin this area asin othersthe perception of risk is constantlyevolvingand soI believethat in thefuture weneedtoexploreways todeal more properlywiththe risksof sovereign exposuresand find asuitablewayto integrate them in the overall risk-based framework.Shouldtheinsurance supervision bedirectiveorpre-emptive?We want to havea supervisory system wherewecapture thingsinadvance.We donot want to be like firemen that arrive whenthere is alreadya fire.We want to see thingsin advanceand toavoid the fires. This ispreventivesupervision.What givesyou sleeplessnightsat themoment?Solvency ii
  11. 11. I think that the overall market situationcertainlyworriesall of usbecauseit definitelyhasan impact on thewholefinancial system.Insurersbasicallyneedtwothings:Stabilityof the marketsand a wellfunctioningeconomy.This alsoincludesa certain level of interest rates,sothat insurancecompanies can fulfil their role of providinglongterm guarantees.Havingthelow interest ratesweare seeing now, is of coursea difficultsituation for insurancecompanies.But … I am still sleepingwell.Solvency ii
  12. 12. EIOPA - Report onGood Practices for Disclosure and Selling of VariableAnnuities1.This Report summarisesthe findingsof an Expert Group, set up inMay 2011under the auspicesof EIOPA’sCommitteeon ConsumerProtection and Financial Innovation (CCPFI) withthe aim ofestablishinggood disclosureand sellingpracticesfor variableannuities(VA).2.It seekstoinform the debateonvariable annuitiesfrom a consumerprotectionperspectivewiththeaim ofpromotingcommon supervisoryapproachesand practices.However, it doesnot set forth anyguidelinesor recommendations.3.TheExpert Group has been abletodraw on the conclusionsof a previousTaskForce, establishedby EIOPA’spredecessor, theCommitteeof InsuranceandOccupational PensionsSupervisors(CEIOPS), whichhad assessedvariableannuitiesfrom a prudential perspective.In addition theExpert Group hasbeenassistedin its workby the analysisonmarket structure and basic productfeatures,undertaken by EIOPA’s Financial Stability Committee.Theoutcome of this analysishasbeen published in EIOPA’sFinancialStabilityReport for Spring20112.TheExpert Group alsobenefitted from commentsreceivedduringpublic consultationand from a Feedback Statement by EIOPA’sInsuranceand ReinsuranceStakeholder Group (IRSG).Solvency ii
  13. 13. 4.In responseto the lossessuffered by some large insurancegroupsontheir VA booksduring the recent financial crises,product characteristicshavechanged significantlyto allowfor better risk management.As a consequenceof an increased focuson risk management, insuranceundertakingshave had to reflect the associatedcostsin the chargingstructure for variableannuityproducts,thusreducingthe potentialbenefitsto customerscompared to pre-crisesproduct offerings.5.TheExpert Group referencedthecross-border businessmodel oftenencounteredin relationto thewritingand saleof variableannuities.Many largeinsurancegroupshave set up specialisedsubsidiariesdedicatedtothisbusiness(“VAproduct companies”), whichunderwritevariable annuitiesin several Member Statesthrough freedom ofestablishment or freedom of services.TheGroup alsoconsideredtheobjectivesof consumerswhoinvest inthesepolicies.Consumersmay purchasethem asa meansof saving fortheir retirement or for investment purposesmore generallyasanalternativetotraditional life insurance or other savingsproducts.Both the businessmodel and the objectivespursued by customershave abearingon what constitutesgood disclosureand sellingpractices.6.Good disclosurepracticesattempt toensure that customerscan maketheir choiceson an informed basis.Customersneed tobe informedhow theproduct worksunder differentmarket conditions, what they are charged and which optionstheycanexerciseduring the life of the contract.In addition theyneed to be providedwith some general informationontheproduct provider, thelaw governing the contract and details on therelevant supervisoryauthoritiesto take account of the common cross-border businessmodel referredto above.Solvency ii
  14. 14. Theuse of “frequentlyasked questions”isconsideredto be atransparent wayof communicatingthe relevant information.7.Good sellingpracticesfor variableannuitieshave to ensure that thedemandsand needsof a customer are taken intoaccount.Becauseof their inherent complexity, variable annuitiesshould always besold on an advised basisvia a salesperson, whichmay bean insuranceintermediary or an agent or employee of the insuranceundertaking.Toavoid therisk of missellinga number of areas, in particular, shouldbeaddressed by the salesperson.TheExpert Group hassuggestedan indicativelist of questionsthatcould be used in thiscontext.8.Finally, chapter 4.2. examinesgood practicesby theproduct providerwhereit doesnot control the salesprocess.Insuranceundertakingsshould still ensure that salesare adequateby,interalia, carrying out a duediligenceon the intermediary firms aswellasreviewingthe clientsthey havetaken on to ensure that theyare asexpectedregardlessof whocontrolsthe salesprocess.9.Themain findingsof theReport arethat good practices• in relation to disclosureso should provide general information on the insurance undertaking andthe legal and supervisory regime it operates under to take account of thecross-border nature of thisbusinessoshould alsoincludeproduct specificinformation toaddressproductcomplexity• in relation to sellingpracticesSolvency ii
  15. 15. oshould ensure that variableannuities are alwayssold on an advisedbasis,even whentheyare solddirectlyby thecompanyoshould focuson thecustomer’sobjectivestodeterminehisdemandsandneeds.2. BACKGROUND TO THE REPORT1. MANDATE AND SCOPE OF WORKMandate10. This Report examines,specificallyin relationto variableannuities, good practiceson product disclosureand sellingarrangements.Theseissueshad not been covered by themandate of thepreviousCEIOPSTaskForcethat focused only on prudential matters.11. Followingtheadoption of therecommendationsput forward bythepreviousTask Force, theBoard of SupervisorsthereforerequestedtheCommitteeon Consumer Protection and FinancialInnovation (CCPFI) to look intotheseconsumer- related issues.Tothisend, the CCPFI set up a subgroup (Expert Group) toassist itin itswork.This exercise wasinformed by the potential of somevariable annuitiesproductsto achieveoutcomesthat are noteasyfor the consumer to understand.12.TheReport benefitted from thecommentsreceived during publicconsultation and from the Feedback Statement preparedbyEIOPA’sInsuranceand ReinsuranceStakeholder Group (IRSG).Scope13. Concerningproduct disclosures,theobjectiveis toidentify goodpracticesregardingthe product-specific information aimed atprovidinga proper understandingof therisks assumed by thepolicyholder in a variableannuitycontract.Solvency ii
  16. 16. Thesedisclosurerequirementsapplyin addition to the informationthat needsto be providedon the life insuranceundertakingandon thecommitmentstheundertakingassumesvis-à-visthepolicyholders.14.In this context, particular attention should be paid to the multi-layered charging structure oftenencountered in variableannuities.15. Concerningsellingpractices, the aim is tolook at good practicesregardingadvicegiven to customers,whichshould be basedontheir demandsand needs.Wherethe salesprocesstakesplacethrough insuranceintermediariesasdefined in the IMD, it hasalsobeen assessedhow insuranceundertakingsshouldensure that salesare appropriate.16.This Report hasbeen prepared in responsetoEIOPA’smonitoringrole in relationto new financial activities.Variable annuitiesfall within the broader category of insurancecontractswithan investment element.Bearingin mind that at a European level there are several legislativeinitiativesunder way, whichmay have an impact on the salesofvariable annuities,namely on product disclosureand on sellingpractices(such asthe upcominglegislativeproposal on PackagedRetail Investment Products–PRIPS- and therevision of theInsuranceMediationDirective-IM D), thepurposeof theReport islimitedtoanalysing good practices,to promotecommonsupervisoryapproachesand practices, and toinform the debate onthistopic.However, its aim is not to pre-empt theabovementioned legislativeproposalsnor doesit set forth any guidelinesorrecommendations.17.TheReport hasa clearproduct-specific focusin linewithitsmandate, whichhasdriven the rangeof topicsthat have beenanalysed by theExpert Group.Solvency ii
  17. 17. Thescope of previousworkby EIOPA’spredecessorCEIOPSin theform of technical advice tothe European Commission on PRIPSand on IMD had been determined by the respectivecall for adviceand, in relation to sellingpractices, covered a number of areas(such astransparencyof remuneration, conflictsof interestsandinducements), whichare not dealt with in this Report.Theseaspectsare broader in nature and should be developedfurtherasthe widerlegal frameworkevolves.18.In identifying good practices, the Expert Group hastaken existingEU legislationfor theinsurancesectorasa starting point.In the future, legal conceptsoriginallydevelopedfor other financialsectors(such astheKIID for pre-contractual disclosuresorMiFID for rules on sales) may be increasinglyrelevant asabenchmark for the insurancesector.As these issuesare equallyof a wider nature, the Expert Group didnot want to anticipateany developmentsin this respect.19.Thefocusof thisReport ison good practicesat the point of sale.Given the long term nature of many VAcontractswithoptionsthat can be exercisedover the lifetime of thepolicy, theCCPFInotedthe importancefor policyholderstoreceivetimelyand clearinformation on the performanceof their account value, sothattheycan exercisetheir optionson an informed basis.2.2. BASIC PRODUCT FEATURES20.Variable annuities(VAs) are unit-linkedlife insurancecontractswith investment guaranteesprovided by the insuranceundertakingwhich, in exchangefor singleor regular premiums, allowthepolicyholder tobenefit from theupsideof the unit, but be partiallyortotallyprotected whentheunit losesvalue.21.Acommon businessmodel pursued by many larger insurancegroupsconsistsof settingup specific subsidiariesdedicated tovariable annuitiesbusiness,whichunderwrite in several MemberStates,through freedom of establishment or freedom of services.Solvency ii
  18. 18. 22.In the US (wherevariableannuitieshavebeen sold in a significantwaysincethe1990s) aswellasin some other marketssuch asJapantheseproductsare very popular.In Europe, VAshave becomeincreasinglywidespreadtoo, asthepossibilityto gain from theexposure tospecificunderlying assetsandbeingprotectedagainst a depreciationof theseassetsat the same timemakes them quite appealing.23.Recently, in somecountriesnew variantsof unit-linkedpolicieshaveemerged that equallyaim toprovidesome downsideprotection,but whichdonot includea guaranteebythe insurancecompany.24.As per the previouspaper, thesetypesof contractsfall outsidethescopeof this report.25.In their basic form, the guaranteesembedded in variableannuitiescover the amount of premiumspaid, but quite oftentheyentailadditional features,for instance, that the premiumspaid yield at leastat a pre-defined interest rate (roll-up).Alternatively, theguarantee may be reset to the highestaccount valuethroughout the insuranceperiod, evaluated in accordancetoa set ofpre-definedtimeframes (ratchet).26.Policyholders’entitlementsare determinedon the basisof theguaranteedminimum benefits, if the underlying fundsdepreciateinvalue(or gain lessthan warrantedby the roll-up rate).In all other instances,their claims are determined by theperformanceof the underlying funds.27.Regardingthe size and the characteristicsof the VAmarketEIOPA haspublished the key findingsof a surveyconcentratingonlarger insurancegroupsin itsFirst Half Year Financial StabilityReport 2011.From a consumer perspectiveit is important tolook at thetype ofminimum benefit beingoffered.Solvency ii
  19. 19. 28. There are several kindsof guaranteesor minimum benefitsthatcan be embedded intoa VA contract. Examplesof common offeringsinclude:•GMDB (guaranteed minimum death benefit):Minimum benefit incaseof death;•GMAB (guaranteedminimum accumulationbenefit): Minimumguaranteedcapital after a predefinedperiod;•GM IB (guaranteedminimum income benefit):Minimum guaranteedlifetimeor term annuitystartingat a predefinedageon a definedbenefit base;•GMWB (guaranteed minimum withdrawalbenefits):deferred orimmediate, temporaryor lifelongincome stream.29.TheFinancial StabilityReport indicatesthat most contracts(72.2% of grosswrittenpremiums) includea minimum death benefit.Regardingminimum livingbenefits,GMAB seemsthe most frequentfeature,followedby GMWB and GM IB.Most policiesare singlepremium contracts.30.There aretwomajor marketsfor these products.Somevariableannuitycontractsare intended for specificpurposes(such asfor private retirement savings) and seek toattract specificcustomer groups(such asaffluent individualsapproachingretirementage), often whentheproductsare offeredin tax preferred wrappers.In relationto theseproducts,the “insuranceelement” (i.e. theguaranteedminimum livingbenefits) typicallyplaysa prominent rolein their marketing.31.Other offeringsare lessfocused in termsof thetarget clientsandtheir goals.Solvency ii
  20. 20. Theylook to attract a broad range of customersbypromotingvariableannuitiesasan investment opportunitywithlimiteddownsiderisk.For theseofferings,more emphasisis generallyplaced on the“investment element” (i.e. theunderlying funds).3. CURRENT TRENDS IN PRODUCT DEVELOPMENT32.Current trendsin product development can be traced back, to alargeextent, to thelessonslearned duringthe recent financial crises,whichresulted in severe lossesfor some important insurancegroups.To mitigate the effects of losses, these groups had, for example, toinject significant levels of capital into VA subsidiaries, halt productofferingsand/ or withdraw from certain markets.Thecomplexityof the productsoffered, market volatility, inadequatehedgingand poor product design weresome of the main reasonswhytheselossesoccurred.33.One of the key featuresof many variableannuityproductsis thelong-term nature of theguaranteein the form of livingbenefits.In addition, policyholders areusuallygiven a number of choicesandoptions– for instancein relationtofund selection - whichthey canexerciseat inceptionor during the life of thecontract.Thesetwofactorscombined tend to make variableannuitiesofferingsparticularlycomplex from a risk management perspective.In particular, theimplementationof a robust hedging programme,designed to ensure that the movementsin the liabilitiesare offset bythemovement in thefinancial derivativeinstrumentsused forhedging, presentsa huge challengefor VAproduct companies.Thelossesexperiencedin the courseof the financial criseshaveevidencedthat the risksassociatedwiththeseproductsare difficult tounderstand and toriskmanage.Solvency ii
  21. 21. 34.VA product companieshaveput in place variousinitiativeswith theaim toreducethe risk embeddedin VA contracts. Thesetrendsinproduct development include, amongothers,the useof volatility limitsandthe reduction of fund options(for example, through only allocatinginvestmentstoindex basedfunds).This Report hasasitssoleobjectivetoevaluate the impact of suchinitiativeson consumers, but doesnot assesstheir effectivenessfrom arisk management perspective.35.It should be noted, however,that the costof hedging and relatedrisk-mitigation must be fully reflectedin the chargingstructurefortheseproducts, thusreducing thepotential benefits toconsumerscompared to pre-crisesofferings.It is, therefore,important that theproduct informationprovidedissufficientlycleartoenableconsumerstofully understand theVAcontract theyhavebeen presentedwith.3.DISCLOSURES1.GENERAL AND PRODUCT SPECIFICDISCLOSURES36. Thepurposeof this section is tooutlinea possibleapproachto good disclosurepracticesfor variableannuities.Under current EU law, insurancecompanies are obliged to provide acertain set of pre-contractual informationon the life insurancepoliciestheyoffer, but the format, in whichit ispresented, is uptotheir discretion.Toconveythe essential product characteristicsin a short documentinsurersoftenuse a key featuresdocument, whichis prescribedbynational law in some jurisdictions.37. Thekey featuresdocument and any promotionalmaterial thatmaybe used for pre-contractual informationmust be consistentwithSolvency ii
  22. 22. thegeneral termsand conditionsapplicableto a variableannuitiesoffering.It is thereforeseen asgood practicefor the promotional material torefer, whereappropriate, tothe relevant sectionsof thegeneraltermsand conditions.In doing so, the insurance companies can ensureconsistencybetweentheir disclosure documentsand the actual provisionsin thecontract, but it alsoallowscustomerstoseehow thepre-contractual information theyreceiveisreflectedin the generaltermsand conditions.38.It is essential for the product provider to explain a number of areasof relevance to a customer in terms that are easily understandable,clear, fair and not misleading.In relationto variableannuitiessome of the features,whichneed tobeconveyed, are veryproduct specificsuchasthosethat resultfrom theinterplayof minimum benefits and theperformanceoftheunderlying funds.Others concern general informationon the product provider, the lawgoverningtheproduct offeringand thesupervisory regime. Theirrelevanceis due to the cross-borderbusinessmodel generallyfound withvariableannuities.39.EIOPA recognises that consumers in different European countriesmay have different preferences for the types of product disclosuresreceived.One wayof addressingconsumer information needsis through theuseof frequently-asked-questions(FAQs).Thequestionsbelow, whichcould be presented to the potentialcustomer both in thepromotional material and in the pre-contractual information documents, are aimed at ensuring thatanyreader will havea good understanding of the product, thecharges,termsin relation to redemption/ maturityand anyspecific risksthat theyshouldbe awareof.Solvency ii
  23. 23. Thesehave thereforebeen grouped under 5 headings,although theseare by nomeansexhaustive.Notwithstandingthequestionsbelow, insurancecompaniesmustfollowall legal and regulatory requirementsthey are subject to.Finally, the questionsaslaid out below are indicativeonly, andcompanies may beflexiblein their presentation of thesetoprospectivecustomers,for exampleusingscenarios,tables,graphicsand “frequentlyasked questions”toensure that theinformation is portrayed in a consumer-friendly manner.1. THE PRODUCT•What isthe product and how doesit work?(This shoulddescribethe main featuresof the product and the type ofguarantee(s) offered. It should clearlystate at what point anymoniesarepayable and how much thesewill be.)•What choice does the policy holder have in where premium(s)are invested and what are those choices?(This should describethe underlying funds in which monies may be invested and theabilityof the investor tochoose)•What are the mainfeaturesof these fundsin termsof investmentobjectiveand risk profile?(This should describethe investmentobjectiveof the underlying fundsin a clearmanner withanindication of riskwhich should followthe same approach asthatused for UCITS)•How does the guarantee work?(This should describe how theinvestment works, how the guarantee works and the interactionbetween thetwo)•Is the insuranceundertakingentitledtounilaterallymodify thedegreeof the guarantee?If so, is the minimum degreeof theguaranteedetermined?•Dotheguaranteebenefitsriseor fall under any circumstances?(If theproduct is subject tomechanismssuch asroll-up orratchet, this should clearlydescribehow thesemechanismswork)Solvency ii
  24. 24. •Are thereany circumstanceswheretheguaranteewill not beapplicable?(Thisshould clearlystate any circumstanceswheretheguaranteewill ceasetoexist or clearlystatethat theguaranteewillapplyin all eventualities)•If the underlying fundslosemoney, what will be impact on thepolicy?(This should describe, perhapsbywayof a simpletableorgraph, what happensto thepayout tothepolicy holder in certainsituations)•May thepolicy-holder changethe fundsin whichmoney isinvested?(This will describethe processwherebya policy-holdermay or may not have discretion on allocation, and if thereisdiscretion, how often and to what extent that canbe exercised)• Will changingallocation cost thepolicy holder anything?3.1.2. CHARGES• What chargesare applicableto thepolicyand how much arethey in percentageterms?• How much of the initial premium(s) is/ areused to pay thevariouschargespayable under the policy?• What charges are payable on a regular basis and what is theimpact of these? (This will describe the effect the regularchargeshaveon the return on thepolicy)• If the policy-holder redeemsearly, will there be a cost associatedwith that?Or how long doesthe policy-holder have tostayin thepolicy toavoid any such surrender cost?• In casethe chargescan bemodified unilaterally, is themaximum amount of thosechargesdetermined?3.1.3. SURRENDERS/REDEMPTIONS/ MATURITY• When doesthe policy mature?• What doesthe policy-holder receiveon maturity?Solvency ii
  25. 25. • Can thepolicy be surrendered earlier than maturity?• What happensif surrenderedearlyand isthere a cost associated?• Doesthe guaranteelapseif surrendered earlier thanmaturity?• Are thereany bonuspaymentspayable?• Can thebenefitsof thepolicy be transferredtosomeone else?• If so, how will this affect the policy?3.1.4. RISKS• Isthere any risk that the insurancecompany will not beabletopaythebenefits?• How exposed is the policy-holder tothe riskinessin theunderlying funds?• Are thereany circumstanceswherethepolicy-holder may notobtain the guarantee?• Isthe policy-holder exposed to therisk that thefundswillperform badly?• How doesthe policy-holder know that the premiumsarebeinginvested asrequested?3.1.5. COMPLAINTS/ LEGAL/TAX/REGULATION• Which company doesthepolicy-holder have a contract with?• What isthe name and addressof the regulatory body of theinsurancecompany that thepolicy-holder hasa contract with?• Which regulatorybody doesthe policy-holder contact in theevent of a complaint?Doeshe have accesstoanAlternativeDisputeResolution (ADR) system?Solvency ii
  26. 26. • Isthat company a member of an InsuranceGuaranteeScheme?In what country?• What arethelegal consequencesfor the policy-holder in theevent that the insurancecompanybecomesinsolvent or windsup?• In the event of a legal disputebetweenthepolicy-holder andtheinsurancecompany, under whichjurisdictionwill thelegalproceedingshappen (i.e. the governinglaw of thecontract)?• Are thereany tax or legal issuesthat thepolicy-holdershould beawareof?3.2. ILLUSTRATIONS40. Theuseof illustrationsis governedby EU legislationin anumber of aspects.For theinsurancesector Directive2009/138/EC (“SolvencyII”), inparticular, setsforth certain requirementson insuranceundertakings,whenthey providefiguresrelatingtopotentialpaymentsabove and beyond the contractuallyagreed payments.Thesealsoapplyin relation to variable annuitycontracts, astheguaranteedbenefitsconstituteminimum promises, whichmaybeincreasedin theevent that the underlying fundsappreciateinvalue.Thefollowingexamplesillustrate, specificallyfor variable annuities,good practicein implementingtheselegal requirements.41. Illustrationsshould be used to give customers an understandingof what payoutsthey mayreceive and what it might cost them inagiven set of circumstances.It is usuallysensibleto show thison a number of different basesderived from the specific details of the case.Solvency ii
  27. 27. Other illustrationson top of thesecould be provided but theseshouldnot assume investment growth abovethe top rate of thecoreillustration.42. By contrast, the systematic useof favourable scenarios(whenall scenariospresented lead to a positiveoutcome) wouldbemisleading.Unfavourablescenarios should alwaysalsobe presented andillustrated;otherwisethe customer could wronglyassumethathis contract hasnodownside.Thescenariosshould alsomake clear themaximum riskassumed bythecustomer.43. In additiongiventhat many of thechargesapplied totheseproductsare based on the underlying investment it is alsogoodpracticetoshowthe effect of thesechargeson the growthof thefund.This can be done asan effectivereductionon the yield of theinvestment or asan effect of chargescalculation(based on astandard investment growth rateor indeed no growth).44. Furthermore it is alsoreasonabletousecasestudies toshowwhat might happen in certain circumstancesbut theseshouldnot bemisleading, should show thenegative casesaswell asthepositiveonesand should not take awayfrom the standardillustrationsabove.45. All of the above should be caveated with the fact that these arejust illustrations and should not be seen to give any promise thatthiswill be what the customer will actuallyget.4. SELLING PRACTICES1. DEMANDS AND NEEDS OF THE CUSTOMERSolvency ii
  28. 28. 46. This section identifies good sellingpracticesfor variableannuitiesirrespectiveof the distributionchannel via whichtheyaresold (direct salesor through intermediaries).For theinsurancesector, current EU legislationonly coverssalesbyinsuranceintermediaries, defined asanyperson who, forremuneration, takesup or pursuesinsurancemediation.Insuranceintermediariesshall specify prior to the conclusion of anyspecific contract, in particular on the basis of informationprovided by the customer, thedemandsand needsof thatcustomer aswell asthe underlying reasonsfor anyadvice giventothe customer on a given insuranceproduct.47. In view of the complexityof many VAofferings,their long-termnature and theimportancethese productsfrequentlyhave in thecontext of privatewealthmanagement, it is good practicetoapplytheseprinciplestothe distributionof variableannuitiesgenerallyas, irrespectiveof thedistribution channel, thedemandsand needsof a customer should alwaysdeterminethetype of contract that is being offered.Thesalesprocessshould be conductedby suitablyqualifiedsalespersons.48. Theobjectivepursued by a customer, based on the material factsthat he hasdisclosed, should be a key consideration in assessinghis demandsand needs.Determining whether a certain product offering is suitable will namelydepend on whether it is used for private retirement savings or asinvestment opportunitymore generally.49. TheExpert Group identified a number of areaswherethere isapotential risk of mis-selling(advicebased onpersonalcircumstances, useof clear projections,useof clear language).Thequestionsbelow are intended to prevent such risk frommaterialising.Solvency ii
  29. 29. It should be noted that thislist isindicative.4.1.1. PERSONAL CIRCUMSTANCES• Doesthe salesperson askfor customer’sage, financialsituation, personal demand, knowledgeof financial marketsand the time horizon for hisinvestment (short, medium orlong-term) etc.?• Basedon this demanddoesthesalespersonoutlinealternativeproducts(direct investments,unit-linkedcontractsetc.) to VAproducts?Which featuresshould the customer focuson whencomparing VAtoother products?• Is the VA product tailoredto thecustomer’sdemand(privatepension plan, investment)?• Are thereanypersonal circumstancesunder whichthesalesperson should not adviseVA?4.1.2. USE OF CLEAR PRODUCT DESCRIPTIONSINCL.ILLUSTRATIONSThesalesperson should inform the customer in a clear andcomprehensivewayabout the relevant aspectsof the VAproduct to ensure thecustomer understandscorrectlytheproduct he wantstobuy.• Have potential risksof the VAproduct been explainedin detail?• Has thefund performance been illustratedby adequateandplausiblescenarios?(An adequatedepiction includespositivescenariosaswellasnegativedevelopments.It should alsoincludea worstcasescenario.)• What are the benefitsof the contract in caseof surrender anddeath and have thesebeen clearlyillustrated?Solvency ii
  30. 30. • Doesthe insuranceundertakingprepare information sheetsforthesalesperson/ intermediarythat theyshould usewheninformingthecustomer?• Doesthe insuranceundertakingmonitor the intermediary?• Doesthe customer have toconfirm in writingthat he understoodtheinformation received?4.1.3. USE OF CLEAR LANGUAGEThesalesperson should be able to illustrateall relevant aspectsof theVA product without using too manytechnical termstoavoid anyconfusion.If technical termsare used, for instancein writtenproduct information(e.g. volatility), theintermediary should be able toexplain themin a clear manner.Thecustomer should be ableto take purchasedecisionsand toexercisehis optionsduring the contract period on an informedbasis.• Doesthe salesperson usetermswhichare understandablealsofor non experts?• Isthe salespersontrainedto explainthecomplex basisof theVA products?• Doesthe salesperson explain the writtenproduct information tothecustomer?4.1.4. UNDERSTANDING POTENTIAL FUTUREOUTCOMESTheperformanceof fundsunderlying VAcontractsdependsondifferent economicvariables and conditions.Solvency ii
  31. 31. Despitea varietyof illustrationsthe customer may not be able toassess, whichscenario is more realistic, if he is unawareof thesevariablesand how theymay affect theperformanceof fundinvestmentsunderlying hispolicy and ultimatelyhis accountvalue.Customersshould be made awarethat the performanceof theiraccount valuedependson how theseeconomic variablesandconditionschangeover time in a way, whichis comprehensibletothem. Onlythen can theydecide whichillustrationtheyconsider more realistic.• Doesthe salesperson explain how external factorse.g. oncapital marketscan affect thefund development?• In order toexplain how external factorscan affect the funddevelopment, doesthe salespersonrefer to fund developmentsof the past?Doeshe explain that pastperformanceis not necessarilyan indicationof future performance?• How doesthe salespersonmeasure that the customerhasunderstood the informationreceived?Themechanicshow a VA-product generatesprofitsor lossesmay bevery complex.Even if the customer can assesswhichscenariois more realistic, hedoesnot know whetherhehaslossesor profitsin such ascenario.• Doesthe salesperson explain thebasic featuresandunderlyingsof the VA-product in question?• Dependingon thetype of the VA-product, doesthe salespersonshow the differencebetweena classical unit-linkedproduct and aVA-product (Type of guarantee, contractual claimsin caseof apositiveor negativefund development, structure of charges)?Solvency ii
  32. 32. • Doesthe salesperson explain what kind of different optionsthe customer can exerciseduring the duration of the contractandhow thiscan affect the fund development?• Does the sales person explain in which cases the customer getsonly the guaranteed benefits at the end of the contract duration(e.g. adverse fund development) or to what extent he benefitsfrom a positivefund performance?Solvency ii
  33. 33. Learningmore about SupervisoryAgenciesBaFin - Bundesanstalt für FinanzdienstleistungsaufsichtBundesrepublik Deutschland (Federal Republic of Germany)Sinceit wasestablishedin May2002, the Federal Financial SupervisoryAuthority (Bundesanstalt für Finanzdienstleistungsaufsicht - knownasBaFin for short) hasbrought the supervisionof banks and financialservicesproviders,insuranceundertakingsand securities tradingunderoneroof.BaFin isan independent public-lawinstitutionand is subject to thelegalandtechnical oversight of the Federal Ministryof Finance.It is funded by feesand contributionsfrom theinstitutionsandundertakingsthat it supervises.It is thereforeindependent of the FederalBudget.OrganisationBankingSupervision, InsuranceSupervision and SecuritiesSupervision/ Asset Management arethreedifferent organisational unitswithin BaFin – theso-calledDirectorates.InternationalThelargenumber of players operatingon theglobal financial marketshasbeen increasingsteadily for many years now.Even though there isnolegal framework that is bindinginternationally,marketsare still expandingacrossborders.Solvency ii
  34. 34. Financial supervision, however, is still largely inward-looking, sincesovereignpowersusuallyend at thenational border.FunctionsBaFin operatesin thepublic interest. Itsprimaryobjectiveis to ensuretheproper functioning, stabilityand integrity of the German financialsystem.Bank customers, insurance policyholders and investors ought to be ableto trust the financial system. BaFin has over 1,900 employees working inBonn and Frankfurt am Main.Theysupervisearound 1,900banks,717financial servicesinstitutions,approximately600insuranceundertakingsand 30 pension fundsaswellasaround 6,000domesticinvestment fundsand 73 asset managementcompanies (asof March2011).Under itssolvencysupervision, BaFin ensuresthe abilityof banks,financial servicesinstitutionsand insuranceundertakingsto meet theirpayment obligations.Through itsmarket supervision, BaFin alsoenforcesstandardsofprofessional conduct whichpreserve investors trust in the financialmarkets.As part of itsinvestor protection, BaFin alsoseeksto preventunauthorisedfinancial business.Legal basisBaFin’s By-Laws represent a major set of preceptsfor how it acts. Theycontain regulationsgoverningitsstructure and organisationand itsrightsand obligations.Solvency ii
  35. 35. Theyalsogovern thefunctionsand powersof BaFin’ssupervisorybody,itsAdministrative Council (Verwaltungsrat), and detailsof itsbudget.BaFin alsobasesthewayin whichit carries out itssupervisoryactivitieson theMissionStatement it gave itselfshortly after it wasestablished.Accordingtothis MissionStatement, BaFin’sfunction is tolimit riskstotheGerman financial system at both thenational and international levelandtoensure that Germanyasa financial centre continuesto functionproperlyand that itsintegrityispreserved.As part of the Federal administration, BaFin issubject to the legal andtechnicaloversight of the Federal Ministryof Finance, withtheframeworkof whichthelegalityand fitnessfor purposeof BaFinsadministrativeactionsare monitored.BaFin Text - Solvency IIAmong other things, SolvencyII – theproject toreform the Europeanlegal frameworkfor insurancesupervision – harmonisesthesolvencycapital requirementsfor insurancefirmsand groups.Followingtheadoption of theSolvencyII Directivein November 2009,thefocusin 2010wason developing the implementingmeasuresthat aretobe adoptedand on performingthe fifth quantitativeimpact study(QIS5).It is currentlyplannedto make theinitial amendmentstothe SolvencyIIDirectiveat the end of 2011by wayof the OmnibusII Directive, for whichtheEuropean Commissionpresenteda proposal on 19January2011.This containsamendmentstotwo keyareasof legislation.Firstly, it amendsdirectivesgoverning insuranceand securitiesprospectusestoreflect the new EU ruleson financial market supervisionSolvency ii
  36. 36. and in particular thenew EU financial supervisory authoritiesthat beganworkon 1January 2011.For example, EIOPAis incorporated intotheSolvencyII DirectiveasthesuccessortoCEIOPS.Provision isalsomade for the bindingsettlement of disputesby EIOPA.Secondly, theproposal containsamendmentstotheSolvency IIDirective.For example, theDirectiveprovidesfor theimplementationof SolvencyII tobe postponed by twomonthsuntil 1January 2013.TheOmnibusII Directivealsoenablesthe European Commission tospecify transitional requirementsfor individual elementsof theFrameworkDirective, withdifferent maximum transition periodsbeingset for each area.TheOmnibusII Directiveisof considerablesignificancefor thecontinuing evolution of Solvency II.For technical reasons, the European Commission cannot present theofficial draft of the Solvency II implementing measures until after theOmnibusII Directivehasbeen adopted.TheOmnibusII Directivewill thereforehavea significant influenceontheongoing workon the implementingmeasures.Implementing measuresTheSolvencyII Directivegivesthe European Commission the authoritytoadopt implementingmeasuresfor particular areas.Theseare intended toadd detail tothe Directiveand henceimprove theharmonisationand consistencyof supervisionin Europe.Solvency ii
  37. 37. In spring 2010,CEIOPSsubmitted itsproposalsin thisarea totheCommission, whichat the end of 2010presented an initial informal fulldraft of the implementingmeasuresbased on theproposals.In 2011, thisdraft will be discussedfurther withthe member states,withspecific considerationbeing given tothe findingsof QIS5.Theofficial draft of the SolvencyII implementingmeasureswill not bepresentedbythe Commissionand discussed withthe Council and theParliament until after theOmnibusII Directivehasbeen adopted.Impact studiesTheQIS5studyconducted by the Commission in the year under reviewis basedon theSolvencyII Directiveand reflectsthe implementingmeasuresdeveloped up until that time.Theobjectivewasto test the quantitativeimpact of SolvencyII in detail.European insurancefirms and groupswereasked to take part in thestudybetweenJuly and November 2010.Theresultsreceivedfrom solofirms wereinitiallyevaluated by thenational supervisoryauthorities,while thedata received from groupswereanalysed by CEIOPSor EIOPA.All resultsand findingswereincorporatedintoa European report, whichEIOPA presented to theCommission in March2011.In addition, BaFin published a national report.Theresultsof the studywill have a major influenceon the discussionregardingtheSolvencyII implementingmeasuresSolvency ii
  38. 38. Guidelines for supervisorsIn future, the provisionsof theDirectiveand theimplementing measuresadopted by the European Council and theEuropean Parliament will becomplementedby guidelinesfor supervisorsadopted by EIPOA, with theaim being to further harmonise supervisorypracticein Europe.Thefour existingCEIOPSand EIOPAworkinggroupsbegan workontheseguidelinesin the year under review.In addition, EIOPAwill develop bindingstandards(on the design of theyield curve, for example).One of theworkinggroups, the Financial RequirementsExpert Group(FinReq), hasthreeareasof work:capital requirements(SCR/ MCR), thestatement of technical provisionsand own funds.Among other things,it hasdrawn up initial proposalsfor guidelinesrelatedtotheprocedure tobe followedfor the approval of undertaking-specific parametersfor usein calculatingthesolvencycapitalrequirement and therecognitionof ancillaryown funds.In cooperation with the Groupe Consultatif, a forum of Europeanactuarial associations, it is also developing actuarial standards forcalculatingtechnical provisions.TheInternal Governance, SupervisoryReview and Reporting ExpertGroup (IGSRR) is responsiblefor the requirementsfor public disclosureand supervisory reportingby undertakings,capital addonsand thevaluation of assetsand liabilities,and is developing guidanceforsupervisorson what thesupervisoryprocessmay look like underSolvencyII.Solvency ii
  39. 39. In doing so, it isfocusingspecificallyon the evaluation of theownriskand solvency assessment (ORSA) and the templatesfor futurereportingtosupervisors.On a closelyrelated topic, consideration is being given tohow andwhichdata may in future beexchanged electronicallybetweennationalsupervisoryauthoritiesand with EIOPA.In 2010,the InternalModels Expert Group (IntMod) developed guidanceon theusetest and on calibration, showingsupervisorsand the insuranceindustryhow they can fulfil the future requirements.TheGroup alsodrew up general guidelineson hithertoless-discussedtopics, such asthe inclusion of profit and lossattribution in the internalmodel.Thefourth CEIOPS/ EIOPAworkinggroup, the InsuranceGroupsSupervision Committee(IGSC), is drawingup guidanceon practicalcooperationin the collegesand in coordinatingmeasures.Theworkinggroup isalsodevelopingharmonised approachesforidentifying, reportingand assessingrisk concentrationsand intragrouptransactions.Solvency ii
  40. 40. Solvency ii
  41. 41. 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 course isintendedfor decision makers, managers, professionalsand consultantsthat:A.Work in Insuranceor Reinsurancefirmsof EEAcountries.B.Work in Groups- Financial Conglomerates(FC), Financial HoldingCompanies(FHC), MixedFinancial Holding Companies (MFHC),InsuranceHolding Companies(IH C) - providing insuranceand/ orreinsuranceservicesin the EEA, whoseparent islocated in acountry oftheEEA.Solvency ii
  42. 42. 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 theEUExtraterritorial Application of European LawExtraterritorialApplication of the SolvencyII DirectiveSolvencyii and theLamfalussyProcessLevel 1: FrameworkPrinciplesLevel 2: Detailed Technical MeasuresLevel3: StrengtheningCooperationAmong RegulatorsLevel 4: EnforcementWeaknessesof SolvencyIFrom SolvencyI toSolvencyIISolvencyii PlayersSolvencyii ObjectivesTHE SOLVENCY II DIRECTIVEAUnified LegislativeBasisfor Prudential Regulation of InsurersandReinsurersRisk-BasedCapitalAllocationSolvency ii
  43. 43. Scope of theApplicationImportant DefinitionsValue-at-Riskin SolvencyIIAuthorisationCorporateGovernanceGovernanceFunctionsRiskManagementCorporateGovernanceand Risk Management - Level 2Fit and proper requirementsfor personswhoeffectively run theundertakingor haveother key functionsInternal ControlsInternalAuditActuarial FunctionOutsourcingBoard of Directors:Role and Solvencyii Responsibilities12Principles– System of Governance (Level 2)PILLAR 2SupervisoryReview Process(SRP)Focuson Risk Management and Operational RiskOwn Risk and SolvencyAssessment (ORSA)ORSA- TheInternal Assessment ProcessORSA- TheSupervisoryToolORSA- Not a Third Solvency Capital RequirementCapital add-onPILLAR 3DisclosureRequirementsTheSolvencyand Financial Condition Report (SFC)PILLAR IValuationOf AssetsAnd LiabilitiesTechnicalProvisionsTheSolvencyCapital Requirement (SCR)Solvency ii
  44. 44. 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 calculationMethod1(Default method):Accounting consolidation-basedmethodMethod2(Alternative method): Deduction and aggregationmethodParent UndertakingsOutsidethe Community - Verification ofEquivalenceSolvency ii
  45. 45. Parent 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 IIDIRECTIVEDirective2005/ 68/ EC of 16November 2005on Reinsurance- TheReinsuranceDirective(RID)CLOSINGTheImpact of Solvencyii OutsidetheEEAProvidingInsuranceServicestotheEuropean ClientCompeting withBanksSolvency ii
  46. 46. Learningfrom theBasel ii FrameworkRegulatoryArbitrage:AMajorRiskfor 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
  47. 47. Solvency ii