Solvency ii News November 2012


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Solvency ii News November 2012

  1. 1. Solvency ii Association 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.solvency-ii-association.comDear member,Today we will start from the workprogramme of the European Commission.Commission Work Programme 2013Todays absolute imperative is to tackle the economic crisis and put theEU back on the road to sustainable growth.This is the number one task forthis generation of Europeans.It calls for a Europe able tocompete in the global economy,reshaped to seize theopportunities of the future.It requires the stable macroeconomic environment which true economicand monetary union can bring.It needs a step change in the economy, to release the many strengthsEurope can bring to bear in tomorrows economy of high innovation andhigh skills.This demands changes to the business environment in the SingleMarket; it requires that the huge potential of Europes networks and ofthe IT revolution is fully exploited; it calls for new skills and help so thatthose shut out of the labour market today can make their contribution; _________________________________________ Solvency ii Association
  2. 2. and it must be shaped by the needs and opportunities of resourceefficiency.These are long-term challenges calling for a concerted effort from allsections of society – but in all cases, the EU contribution is aprecondition for success.This is why, in the State of the Union address, President Barroso calledfor new thinking for Europe – to draw the consequences of thechallenges we are now facing and that are fundamentally changing ourworld.There can be no growth without reform and no way of confronting ourchallenges unless we do it together.The State of the Union speech launched ambitious ideas for the longterm framing of the EU – a deep and genuine economic union, based ona political union.This vision must be translated into practice through concrete steps, if itis to address the lingering crisis that continues to engulf Europe, and theEuro Area in particular.This 2013 Work Programme sets out the long term vision of what the EUmight look like in key policy areas, summarises what is missing todayand explains how the Commission will tackle these challenges.By prioritising the right kind of initiatives, the EU can contribute togrowth and job creation and can step by step move closer to its longerterm vision.The Commission has already tabled a wide range of growth enhancingproposals which are now being negotiated by the co-legislators.Timely adoption and full implementation of these measures would senda crucial signal of confidence to citizens and to investors, helping to _________________________________________ Solvency ii Association
  3. 3. reinvigorate economic activity and stimulating much needed jobcreation.It would add up to a major record of EU action before the June 2014European Parliament elections.In 2013 the Commission will devote much effort to implementation as animmediate way of delivering on the benefits of EU action.Following the decisions to be taken on the multi-annual financialframework by the end of 2012, during 2013 the Commission will focus onfinalizing arrangements for rapid implementation, including through theuse of country-specific negotiation mandates to ensure that the prioritiessupported through EU-funded investment are clearly targeted on growthand jobs.Targeted investment supported by a modern, proreform EU budget canmake a decisive contribution to growth, jobs and competitiveness.The proposals in this work programme will be tabled during 2013 and inthe first part of 2014, bearing in mind the end of the current legislature.In the following sections some of the key action is highlighted to showhow the Commission will contribute to filling in the gaps between theEUs objectives and the current situation.Getting the foundations right: towards genuine Economic andMonetary UnionThe objectiveEuropes strength lies in the interconnection of our economies.The single market and the common currency have driven this forward,and the integrated economic policy making at the European level _________________________________________ Solvency ii Association
  4. 4. through the European semester is now drawing our economies togetheras never before.However, the crisis has shown that the single market for financialservices can only deliver financial stability, economic growth and jobs ifit is matched with a strong single regulatory and supervisory authority atEU level.The next step must be to deepen economic and monetary union with afully-functioning banking and fiscal union.What is missing today?A genuine EMU needs a comprehensive approach to tackle the viciouscircle of excessive private sector indebtedness, unsustainable sovereigndebt and banking sector weakness.The EU lacks a global framework which fills in the gaps in a fullyintegrated financial services policy, with a single supervisory mechanismfor banks and a single rule book to govern all financial institutions.It also needs to complete and implement the more effective mechanismsput forward to prevent and correct unsustainable fiscal policies andeconomic imbalances.Better coordination of tax policies will also be crucial.The progress made through the European semester has also not yetreached its potential in terms of carrying through recommendations intostructural reforms in the EU.While not yet complete, our economic governance has already beenthoroughly reinforced through the Europe 2020 Strategy, the EuropeanSemester, and the implementation of the Six-Pack legislation.Agreement on the Two-Pack legislation is urgent in order to completefurther the economic governance. _________________________________________ Solvency ii Association
  5. 5. In 2013 the Commission will:- Launch the fourth European Semester through the Annual Growth Survey;- Follow up on the blueprint for a comprehensive and genuine EMU which it will publish before the end of 2012;- Propose additional legislation to further enhance stability, transparency and consumer protection in the financial sector (for example, on the systemic risks related to nonbanks and shadow banking).The legislation already in place and now being considered adds up to afundamental reshaping of the EUs financial system.Agreement on banking supervision will put the European financialsystem on far more secure foundations and act as a springboard forconfidence.2013 will see the implementation of many of the detailed rules of thispackage.The same is true for cohesion policy, where the key priorities for growth-enhancing measures and structural reforms brought out in the Europeansemester will be put at the core of new national and regionalprogrammes and where the focus will be on the finalisation of thecountry-specific mandates for the next generation of structural funds.The Commission will also take action to fight tax fraud and evasion,including an initiative on tax havens, bringing the EU dimension to bearon national efforts to consolidate public finances. _________________________________________ Solvency ii Association
  6. 6. Boosting competitiveness through the Single Market andindustrial policyThe objectiveSustainable growth and job creation need to combine a stable macro-economic environment with the ability to compete in the globaleconomy.Europe has strengths which can give it a competitive edge through amodernised social market economy and can help it to take the leadin the new industrial revolution.The Single Market and fair competition can come together with targetedinvestment and the right approach to entrepreneurship to exploit theopportunities for growth through new technologies and innovation.What is missing today?The Single Market needs to continue to adapt to reach the potential forbusinesses and consumers in a borderless Europe.Technological change offers huge possibilities, but it needs to beaccompanied by new approaches in areas like procurement, standards,and intellectual property.The EU needs a long-term framework for energy and climate policies sothat investment and policy target competitiveness and tackle climatechange.Europe falls short on innovation, with obstacles to building new marketsand investing in the technologies that will change the way we live, aswell as wider issues of attitudes to entrepreneurship and business failure.It also needs the right legal framework to move Galileo towardscommercial operations. _________________________________________ Solvency ii Association
  7. 7. This is exacerbated by the problems faced by companies, in particularSMEs, in accessing finance in the wake of the crisis, as well as theunnecessary costs of administrative burdens and the impact of someoutdated public administrations.Shortcomings in implementation also hold back the full benefits.The recent Single Market Act-II set out 12 new concrete priority actions,to reenergise the Single Market around four main drivers: networks,mobility, the digital economy and cohesion.Following up on its 2012 Communication on a new industrial policy, theCommission will take a fresh look at the single market for products,which makes up 75% of intra-EU trade.These actions follow on the priority actions under the first phase of theSingle Market Act, which now need to be agreed quickly.The Commission will work hard with the co-legislators in 2013 to bringthese proposals to fruition and full and effective implementation.Key proposals will include:- Initiatives to align rules and cut the costs of VAT compliance through a single declaration;- A legislative proposal to make e-invoicing mandatory for public procurement will facilitate business-to-government interaction, reduce costs and serve as a pilot for other sectors;- Initiatives to update and simplify the rules for the circulation of products in the single market, and identify gaps still blocking free circulation, as well as intensified work on standards, certification and labels;- As part of Horizon 2020, 2013 will see proposals to launch and develop a range of major public-private partnerships to bring private _________________________________________ Solvency ii Association
  8. 8. and public investment together with the EU budget to drive a common approach to key strategic sectors like pharmaceuticals, air traffic management and nanotechnology, leveraging some €9-10 billion in new investment;- Initiative on energy technologies and innovation to deliver a sustainable, secure and competitive energy system;- Proposing a series of major reforms to modernise state aid;- Modernise our approach to intellectual property rights to ensure that it is effective and consumer-friendly in the digital world.Energy efficiency is a key area for competitiveness.The Commission will reinforce its cooperation with Member States onthe implementation of the energy efficiency directive, the energylabelling and ecodesign legislation.Implementing the strategy for Key Enabling Technologies will also be akey lever of competitiveness.The Commission will deepen its work to help SMEs facing the challengeof financing and implement the Action Plan for entrepreneurship.Support from the European Regional Development Fund and theCOSME programme will be ready to roll out when the new financingperiod starts in 2014.New programming of the European Social Fund will also include aparticular focus on the provision of skills necessary for successfultransition from school to work and for increasing employability of theworkforce. _________________________________________ Solvency ii Association
  9. 9. Connect to Compete: Building tomorrows networks todayThe objectiveA fully integrated and interconnected European Single Market coveringtelecoms, energy and transport is a prerequisite for competitiveness, jobsand growth.Achieving this requires affordable, accessible, efficient and securenetwork infrastructure.Accelerating the roll out of the digital economy will bring benefits acrossall sectors, through enhanced productivity, efficiency and innovation.Europe must have state-of-the-art digital networks to retain and build itsglobal competitive position, to be able to handle the explosion ininternet use and exchange of data and to fully exploit the efficiency gainsand innovative services allowed by major online developments.In energy, significant investments in electricity grids and other energynetworks will help make energy supplies more secure, sustainable andcompetitive.On transport, a fully integrated single market and more efficientnetworks allowing to switch easily between different modes, would bringhuge benefits to citizens and companies, including in urban areas.What is missing today?National approaches and a variety of barriers hold back competitivenessand prevent the exploitation of networks on a European scale.Investment is not sufficiently galvanised to support projects which willbe the bedrock of Europes future prosperity and is held back byshortcomings in the regulatory environment. _________________________________________ Solvency ii Association
  10. 10. This also holds back the potential for innovation in areas like smart gridsand meters, and intelligent transport.A lack of interoperability increases costs and holds back the level playingfield.Gaps in the regulatory framework hold back business investment andconsumer confidence in key areas like payments.Gaps in infrastructure create extra costs and inefficiencies for energyconsumers, delay modernization of logistics, and prevent the fullexploitation of broadband.In order to continue to fill in the missing links in 2013/14, theCommission will make proposals to:- Modernise Europes transport and logistics to help companies save time and energy, as well as reduce emissions, through proposals on rail and freight transport, goods traffic between EU ports, and the Single European Sky;- Tackle the obstacles to electronic payments;- Support investment in high speed networks;- Boost the coverage and capacity of broadband by reducing the cost of its deployment and freeing up band width for wireless broadband.Alongside cohesion policy, the Connecting Europe Facility5 will be oneof the EUs most obvious contributions to cutting through theseobstacles by stimulating infrastructure.2013 should see the facility up and running and key choices made ontargeting.It should also see project bonds being rolled out to help harness privatesector investment. _________________________________________ Solvency ii Association
  11. 11. This will go hand in hand with consolidating regulation.More needs to be done to achieve a true European transport area withEuropean rules: proposals on connecting up in the rail sector and onaccelerating the implementation of the Single European Sky should betaken forward as priorities.In the field of energy, the latest phase of liberalisation towards thecompletion of the internal energy market by 2014 must be driven throughto make Europes future energy supply sustainable, competitive andsecure.A new framework for national interventions in the energy sector will be acore element to ensure that adequate investments are made and thatmarket interventions are necessary and proportionate.Growth for jobs: Inclusion and excellenceThe objectiveThrough its capacity to combine growth and inclusiveness, our socialmarket economy is one of Europes greatest assets.But today its economy and its society face the threat that the graveproblems of high unemployment, increased poverty and social exclusionrisk becoming structural.The EU dimension must be harnessed to assist Member States to findevery opportunity to help people looking for work and to address themismatch between labour supply and demand.This starts with an active employment policy to help them to have theright skills to be employed and which uses the potential of mobility tothe full. _________________________________________ Solvency ii Association
  12. 12. The goal should be to find innovative ways to increase educationalattainment and labour market participation.Adequate and sustainable social policies and more accessible socialservices are needed to promote social inclusion and entry into the labourmarket.The job creation potential of key growth sectors, such as the greeneconomy, ICT and health and social care sectors needs to be fullytapped.To maintain its workforce in the longer term perspective ofan ageing society, European labour markets need to be inclusive,mobilising employees of all ages and at all level of qualifications.What is missing today?Public employment services and employers face a major challenge withthe scale of unemployment in Europe, in particular among youngpersons.To boost the employability levels is key to re-launch growth, taking alsointo consideration vulnerable groups.The potential for job creation in sectors such as the green economy, ICT,health and is not fully exploited.Education and training systems are not keeping up with changinglabour market needs – resulting in shortages in key areas like science,mathematics and e-skills.Higher education is not sufficiently connected to research andinnovation activities and is slow to build capacity in areas like ICT –which both reflects and contributes to a lack of internationalisation.Life-long learning is still developing, and public policy and business _________________________________________ Solvency ii Association
  13. 13. practices do not reflect the need for older workers to extend theirworking careers.Undeclared work creates an extra challenge.Social protection and social investment should be more effective.Vulnerable groups find it particularly difficult to get into or to return tothe labour market.And the potential for labour mobility to fill gaps is held back byproblems in the recognition of qualifications, documentation and skillsacross Member States.Supporting Member States policies on employment and job creation isone of the highest priorities of the European semester.The Commission will continue in 2013 to work actively with MemberStates and social partners, in particular on the basis of the youthguarantee and traineeship initiatives to be set out later this autumn.In order to continue to fill in the missing links in 2013/14, theCommission will make proposals to:- Help improve the performance of public employment services and networking between national employment agencies;- Harness social investment for inclusive growth, through guidance for policy reforms identified in the framework of European semester, supported by the EU funds such as the European Social Fund;- Furthering the internationalisation efforts of higher education, to prepare Europeans for an increasingly global, open and competitive labour market;- Put in place the right framework for the institutions handling occupational pensions. _________________________________________ Solvency ii Association
  14. 14. Obstacles to mobility remain one of the main lost opportunities of theSingle Market.Adoption and implementation of the revision of the ProfessionalQualifications Directive will be an important step to open up professions.Work should continue to examine and reduce unnecessary restrictionsfor regulated professions limiting the ability of professionals to work inanother Member State.Preparing the new generation of programmes under the European SocialFund will be a major goal for 2013, to ensure that this brings the quickestand most effective support to the modernisation of labour marketpolicies and social inclusion policies, strengthening of education andlifelong learning systems, to ensure that groups like young and long-term unemployed have the right skills for the jobs of the future.A wide range of EU programmes will contribute to these goals,including the European Regional Development Fund, Horizon 2020 andErasmus for all.Using Europes resources to compete betterThe objectiveCompetitiveness today must be geared to competitiveness tomorrow.There is untapped potential for the EU economy to be more innovative,productive and competitive whilst using fewer resources and reducingenvironmental damage.Less waste should be produced and more re-used and recycled in linewith the practice of the best performing Member States.Greater resource efficiency would contribute to growth, jobs andenhanced competitiveness, with reduced costs for business as well as _________________________________________ Solvency ii Association
  15. 15. significant benefits for health and the environment, lower greenhousegas emissions, contained energy bills and new opportunities created forinnovation and investment.The EU is particularly well-placed to give policy the long-termdimension required.What is missing today?European society and the European economy do not yet exploit the fullpotential for resource efficiency.Much recyclable waste is either exported or sent to landfill.A lack of long-term frameworks holds back planning and investment,most obviously on a climate and energy framework beyond 2020, but alsoon long term sustainable use of key resources such as air, soil, energy,water, fish and biomass.At the same time, such frameworks can help to galvanise the innovationneeded to exploit the potential of the transition to a low-carboneconomy in areas like transport, energy and agriculture.In order to continue to fill in the missing links in 2013/14 theCommission will make proposals to:- Provide a long-term perspective on how the EU will move ahead from its 2020 targets to continue the trajectory towards a low-carbon economy through a comprehensive framework for the period to 2030;- Frame a new strategy on adaptation to climate change to make Europe more resilient;- Review the waste legislation, to look at how new markets and better recycling can contribute to growth; _________________________________________ Solvency ii Association
  16. 16. - Adapt the EU policy framework for air quality.At the same time, the finalisation of the new generation of agricultureand fisheries policies and regional and rural development programmeswill maximise the opportunity to bring together innovation and jobcreation with a focus on sustainability.The promotion of a resource efficient "blue economy" will help torelease the potential of Europes maritime areas to contribute to growth.2013 will also bring the start of the 3rd phase of the EU EmissionTrading System (2013-2020).Building a safe and secure EuropeThe objectiveThe EU needs to protect its citizens and their rights from threats andchallenges and further remove obstacles to circulation of citizens inEurope.This includes fighting crime and corruption, controlling our externalborders and ensuring the respect of the rule of law and offundamental rights, with the right balance between security and mobility.It also needs a well functioning and efficient justice system to supportgrowth, entrepreneurship and attract investors.Equally, the EU works to proactively reduce risks to health, food andproduct safety, critical infrastructures and disasters.Safe and sustainable use of nuclear energy is a key element. _________________________________________ Solvency ii Association
  17. 17. What is missing today?Threats to safety and security evolve, and the EUs response needs toreflect this by using technology to tackle safety in food or nuclear energy,by working for the swiftest and most effective disaster response and bydeepening cooperation in tackling the increasing cross border dimensionof crime.Areas like terrorist financing and the cross border traffic in weaponsneed particular attention.The EU has a particular responsibility to protect its own financialinterests against fraud and corruption, but lacks the full institutionalframework required.Mutual trust in areas of safety, security and justice needs to be earned,and the networks and exchanges needed to build this are not alwayspresent.Vigilance is also needed to ensure that the fundamental rights of citizensin the EU are protected in full.If people and businesses are to take full advantage of their rights, theyneed easy access to justice, on equal terms in all countries in cases ofcross-border litigation.The Commission will make proposals to continue to fill in the missinglinks:- Establish a European Public Prosecutors Office to fight against crimes affecting the EU budget and protect its financial interests;- Fight traffic in firearms;- Improve judicial cooperation in both criminal and civil matters; _________________________________________ Solvency ii Association
  18. 18. - Revise legislation on nuclear safety and propose new legislation on nuclear insurance and liability;- With 2013 marked as the European Year of Citizens, the Citizenship Report will review progress in ensuring that EU citizens can readily exercise their rights and identify future action.The Commission will also implement a variety of important initiatives topromote a virtuous circle of cooperation between nationaladministrations and judicial systems.The ongoing work of the Consumer Protection Cooperation network ofenforcement authorities is a core tool for practical enforcement.The first anti-corruption report and the first judicial scoreboard will bothoffer new tools to encourage best practice to be identified and pursued.Agreement on new arrangements for Schengen governance would alsogive Member States an important new tool to consolidate mutualconfidence in common control of borders.Efforts to reinforce application of existing solidarity mechanisms inimmigration will be continued.Pulling our weight: Europe as a global actorThe objectiveThe EUs interests and commitment to values of democracy, the rule oflaw and human rights depend heavily on what happens beyond itsborders.Promoting our values in our immediate neighbourhood and beyond is apriority, by building partnerships with third countries and promotingmultilateral solutions to common problems. _________________________________________ Solvency ii Association
  19. 19. Collectively, the EU is the largest donor of funds for developmentcooperation, climate finance and humanitarian aid in the world.We are also the worlds largest trading partner.When we can deploy the Unions and Member States resources in aneffective and consistent way beyond our borders, and bring together thewide range of instruments available, the EU can have greater impact andinfluence on the world around us.This helps to deliver the goals of growth, stability and democracy and tomeet the goals of policies like tackling poverty and boosting peace andsecurity, as well as pursuing policies like addressing climate change, theenvironment, transport and energy, and optimising the opportunities forinternational cooperation in areas such as science and technology.In the year of Croatias accession, the enlargement process and theneighbourhood strategy continue to provide key tools to supportpositive change in partners on the EUs doorstep.What is missing today?On the global stage the EU is a key actor; but more can be done todevelop a truly unified approach using different strands of policy anddifferent instruments to reinforce each other.The EU should also ensure closer monitoring of the implementation ofits commitments, notably as part of the support provided to countries intransition in its neighbourhood.The external dimension is integral to promoting growth andcompetitiveness in 2013 and beyond.The EU is pursuing a bilateral trade and investment agenda ofunprecedented ambition to complement its efforts at the multilaterallevel. _________________________________________ Solvency ii Association
  20. 20. Negotiations are close to conclusion with such important partners asCanada, Singapore and India, and will hopefully soon be launched withJapan.The final recommendations of the EU-US High Level Group on Jobsand Growth may also pave the way for negotiations on an ambitious andcomprehensive transatlantic partnership.Japan and the United States are such key partners that successfulagreements with these two countries could add 1-1½% to EU GDP andcreate almost a million jobs.Such agreements would support multilateral liberalisation and regulatorydialogue, and open new markets for European products and services.Scoping exercises with other partners are currently being conducted.2013 will see a particular focus on consolidating the rule of law firmly atthe centre of enlargement policy, consolidating economic and financialstability and promoting good neighbourly relations and closer regionalcooperation in areas like trade, energy and transport.Neighbourhood policy will continue to centre on an incentive drivenapproach, where EU support for reforms follows a clear progress inbuilding democracy and the respect of human rights.Priorities in 2013 will be the Deep and Comprehensive Free TradeAreas, mobility partnerships and visa facilitation.The EU has responded to the rapid change in our neighbourhoodthrough the framework of the revised European Neighbourhood Policy,consolidating the Eastern partnership and launching a partnership forshared democracy and prosperity with the Southern neighbours.Our focus in 2013 with our Southern neighbours will be onimplementation and delivery, using innovative ways to mobilise politicaland economic resources to mutual benefit. _________________________________________ Solvency ii Association
  21. 21. As the Millennium Development Goals (MDG) Summit approaches in2015, the EU is working to fulfil its commitments on developmentassistance, as well as pursuing specific goals of sustainable growth andresilience in the face of crisis.It also continues to pursue key negotiations such as reaching a newinternational climate agreement by 2015.At the same time, as the new generation of external action instruments isfinalised, 2013 will be a key year for ensuring that the EUs newdevelopment policy orientation – the Agenda for Change – ismainstreamed throughout our relationship with our partners, with a newfocus on good governance, inclusive and sustainable growth andstimulating investment in developing countries.It will also see further steps in ensuring an effective and swift crisisresponse capacity and developing a comprehensive response to crisisprevention, management and resolution.In order to continue to fill in the missing links in 2013/14 theCommission will make proposals to:- Assuming success in ongoing scoping exercises and in current preliminary discussions, propose negotiating directives for comprehensive trade and investment agreements with relevant partners;- Put forward coherent EU positions bringing together the Millennium Development Goals, the post-2015 development agenda and Rio+20. _________________________________________ Solvency ii Association
  22. 22. Guidelines on Complaints-Handlingby Insurance UndertakingsEIOPA Guidelines on Complaints-Handling by Insurance Undertakingstranslated into all the official EUlanguagesEIOPA has published the translation of Guidelines on Complaints -Handling by Insurance Undertakings into all official languages of theEuropean Union.The Guidelines, which are addressed to national competent authorities(NCAs), aim to provide guidance on appropriate internal systems andcontrol for complaints-handling by insurers (such as having a complaintsmanagement policy and complaints management function in place),render them more effective and provide guidance on the provision ofinformation and procedures for responding to complaints, therebyensuring the adequate protection of policyholders and beneficiaries.By having translated the Guidelines into all the official languages of theEU, today’s publication triggers a transitional period of two months until15 January 2013, within which national supervisors have to declarewhether they intend to comply with the Guidelines or otherwise explainthe reasons for non-compliance, which may be made public by EIOPAon a case-by-case basis.According to Article 16(3) of the Regulation establishing EIOPA,national supervisors have to make every effort to comply with theGuidelines. _________________________________________ Solvency ii Association
  23. 23. 1. GuidelinesIntroduction1. According to Article 16 of the EIOPA Regulation and taking intoaccount Recital 16 and Articles 41, 46, 183 and 185 of Directive2009/138/EC of the European Parliament and the Council of 25November 2009 on the taking-up and pursuit of the business ofInsurance and Reinsurance (“Solvency II”), which provide for thefollowing:- “The main objective of insurance and reinsurance regulation and supervision is the adequate protection of policyholders and beneficiaries…..”.- “Member States shall require all insurance and reinsurance undertakings to have in place an effective system of governance which provides for sound and prudent management of the business”.- “Insurance and reinsurance undertakings shall have in place an effective internal control system. That system shall at least include administrative and accounting procedures, an internal control framework, appropriate reporting arrangements at all levels of the undertaking and a compliance function”.- In the case of non-life insurance, a duty for the insurance undertaking to “inform the policyholder of the arrangements for handling complaints of policyholders concerning contracts including, where appropriate, the existence of a complaints body, without prejudice to the right of the policy holder to take legal proceedings”.- In the case of life insurance, the duty for the insurance undertaking to communicate to the policyholder, in relation to the commitment, “the arrangements for handling complaints concerning contracts by _________________________________________ Solvency ii Association
  24. 24. policyholders, lives assured or beneficiaries under contracts including, where appropriate, the existence of a complaints body, without prejudice to the right to take legal proceedings”.2. To ensure the adequate protection of policyholders, the arrangementsof insurance undertakings for handling all complaints that they receiveshould be subject to a minimum level of supervisory convergence.3. These Guidelines shall apply from their final date of publication.4. These Guidelines are issued by EIOPA under the powers set out inArticle 16 of the EIOPA Regulation.5. These Guidelines apply to authorities competent for supervisingcomplaints-handling by insurance undertakings in their jurisdiction.This includes circumstances where the competent authority supervisescomplaints-handling under EU and national law, by insuranceundertakings doing business in their jurisdiction under freedom ofservices or freedom of establishment.6. Competent authorities must make every effort to comply with theseGuidelines in accordance with Article 16(3) in relation to thearrangements of insurance undertakings for handling all complaints thatthey receive.7. For the purpose of the Guidelines below, the following indicativedefinitions, which do not override equivalent definitions in national law,have been developed:Complaint means:A statement of dissatisfaction addressed to an insurance undertaking bya person relating to the insurance contract or service he/she has beenprovided with. _________________________________________ Solvency ii Association
  25. 25. Complaints-handling should be differentiated from claims-handling aswell as from simple requests for execution of the contract, information orclarification.Complainant means:A person who is presumed to be eligible to have a complaint consideredby an insurance undertaking and has already lodged a complaint e.g. apolicyholder, insured person, beneficiary and in some jurisdictions,injured third party.8. Furthermore, where an insurance undertaking receives a complaintabout:(i) Activities other than those regulated by the “competent authorities”pursuant to Article 4(2), EIOPA Regulation; or(ii) The activities of another financial institution for which that insuranceundertaking has no legal or regulatory responsibility (and where thoseactivities form the substance of the complaint), these Guidelines do notapply.However, that insurance undertaking should respond, where possible,explaining the insurance undertakings position on the complaintand/or, where appropriate, giving details of the insurance undertakingor other financial institution responsible for handling the complaint.9. Please note that more detailed provisions on insurance undertakings’internal controls when handling complaints are contained in the “BestPractices Report on Complaints-Handling by Insurance Undertakings”(EIOPA-BoS-12/070). _________________________________________ Solvency ii Association
  26. 26. Guideline 1 - Complaints management policy10. Competent authorities should ensure that:a) A “complaints management policy” is put in place by insuranceundertakings.This policy should be defined and endorsed by the insuranceundertaking’s senior management, who should also be responsible for itsimplementation and for monitoring compliance with it.b) This “complaints management policy” is set out in a (written)document e.g. as part of a “general (fair) treatment policy” (applicable toactual or potential policyholders, insured persons, injured third partiesand beneficiaries etc.).c) The “complaints management policy” is made available to all relevantstaff of the insurance undertaking through an adequate internal channel.Guideline 2 - Complaints management function11. Competent authorities should ensure that insurance undertakings havea complaints management function which enables complaints to beinvestigated fairly and possible conflicts of interest to be identified andmitigated.Guideline 3 – Registration12. Competent authorities should ensure that insurance undertakingsregister, internally, complaints in accordance with national timingrequirements in an appropriate manner (for example, through a secureelectronic register).Guideline 4 - Reporting13. Competent authorities should ensure that insurance undertakings _________________________________________ Solvency ii Association
  27. 27. provide information on complaints and complaints-handling to thecompetent national authorities or ombudsman.This data should cover the number of complaints received, differentiatedaccording to their national criteria or own criteria, where relevant.2. Compliance and Reporting Rules17. This document contains Guidelines issued under Article 16, EIOPARegulation.In accordance with Article 16(3) of the EIOPA Regulation, CompetentAuthorities and financial institutions must make every effort to complywith guidelines and recommendations.18. Competent authorities that comply or intend to comply with theseGuidelines should incorporate them into their regulatory or supervisoryframework in an appropriate manner.19. Competent authorities shall confirm to EIOPA whether they comply orintend to comply with these Guidelines, with reasons for non-compliance,by 15.01.2013.20. In the absence of a response by this deadline, competent authoritieswill be considered as non-compliant with the reporting and reported assuch.3. Final Provision on Review21. These Guidelines shall be subject to a review by EIOPA.Guideline 5 - Internal follow-up of complaints-handling14. Competent authorities should ensure that insurance undertakingsanalyse, on an on-going basis, complaints-handling data, to ensure thatthey identify and address any recurring or systemic problems, and _________________________________________ Solvency ii Association
  28. 28. potential legal and operational risks, for example, by:(i) Analysing the causes of individual complaints so as to identify rootcauses common to types of complaint;(ii) Considering whether such root causes may also affect other processesor products, including those not directly complained of; and(iii) Correcting, where reasonable to do so, such root causes.Guideline 6 – Provision of information15. Competent authorities should ensure that insurance undertakings:a) On request or when acknowledging receipt of a complaint, providewritten information regarding their complaints-handling process.b) Publish details of their complaints-handling process in an easilyaccessible manner, for example, in brochures, pamphlets, contractualdocuments or via the insurance undertaking’s website.c) Provide clear, accurate and up-to-date information about thecomplaints-handling process, which includes:(i) Details of how to complain (e.g. the type of information to be providedby the complainant, the identity and contact details of the person ordepartment to whom the complaint should be directed);(ii) The process that will be followed when handling a complaint (e.g.when the complaint will be acknowledged, indicative handling timelines,the availability of a competent authority, an ombudsman or alternativedispute resolution (ADR) mechanism, etc.).d) Keep the complainant informed about further handling of thecomplaint. _________________________________________ Solvency ii Association
  29. 29. Guideline 7 - Procedures for responding to complaints16. Competent authorities should ensure that insurance undertakings:a) Seek to gather and investigate all relevant evidence and informationregarding the complaint.b) Communicate in plain language, which is clearly understood.c) Provide a response without any unnecessary delay or at least within thetime limits set at national level.When an answer cannot be provided within the expected time limits, theinsurance undertaking should inform the complainant about the causes ofthe delay and indicate when the insurance undertaking’s investigation islikely to be completed.d) When providing a final decision that does not fully satisfy thecomplainant’s demand (or any final decision, where national rules requireit), include a thorough explanation of the insurance undertaking’s positionon the complaint and set out the complainant’s option to maintain thecomplaint e.g. the availability of an ombudsman, ADR mechanism,national competent authorities, etc.Such decision should be provided in writing where national rules requireit. _________________________________________ Solvency ii Association
  30. 30. Kiyohiko G Nishimura: Ageing, finance andregulationsKeynote address by Mr Kiyohiko G Nishimura,Deputy Governor of the Bank of Japan, at theJoint Forum Meeting, Tokyo, 14 November 2012.Introduction:Population ageing, economy and financeIt is my great pleasure to have the opportunity to speak at the JointForum Meeting in Tokyo.The Joint Forum has for many years been at the forefront of dealing withvarious cross-industry issues related to banking, securities andinsurance.The Forum has thereby contributed greatly to the evolution of successfulregulatory and supervisory frameworks.However, many challenges remain.For example, as economic globalization and information technologyadvance, “cross-border” and “cross-industry” risks have becomeincreasingly important in financial services, and failure to regulate andsupervise them effectively may result in profound economicconsequences.“Structured” securitized products and monoline insurances areexamples of such risks, as we have learned to our cost in the recentcrisis.Today, I would like to consider another significant challenge, which Ithink is increasingly important worldwide, though not yet widelyrecognized as crucially important. _________________________________________ Solvency ii Association
  31. 31. This is the issue of population ageing and how to regulate and supervisefinancial products and services to cope with problems arising from it.Indeed, these issues are deeply related to the fundamental nature offinancial services, including all financial sectors such as banking,securities and insurance.In fact, I have warned of the unpleasant and in some cases graveconsequences of ignoring demographic factors in our economic thinkingin a series of recent speeches and papers, especially with respect to assetprice bubbles, money demand and inflation.In particular, I have pointed out that asset price bubbles are most likelyto occur at the final stage of the “demographic bonus” in which acountry enjoys the benefits of an increase in the size of the workingpopulation.In contrast, a decline in growth potential due to “demographic onus” islikely to result in prolonged economic stagnation once the bubble bursts.These phenomena have been observed not only in Japan, but also inother countries such as the United States and peripheral euro areacountries.What underlies the recent distress in the euro area is in fact deeplyrooted in the structural changes resulting from demographic transitionor population ageing.Figure 1 shows the relation between changes in the working agepopulation curve and the timing of bubble bursts.These coincided in Japan around March 1991, in the United States inDecember 2005, in Ireland in September 2006, and in Spain in September2007.And this is not simply a problem affecting advanced economies: theproblem is just around the corner for some emerging economies likeKorea, China, and Brazil. _________________________________________ Solvency ii Association
  32. 32. Population ageing is likely to have a significant impact on financialservices, and requires a new policy response.Here I would like to raise two issues: one is the necessity of cross-industry and even cross-border coordination, and the other is thequestion of how to deal with the fundamental uncertainty surroundingpopulation ageing.Necessity of cross-industry and cross-border coordinationLet me first consider the necessity of cross-industry and cross-bordercoordination. _________________________________________ Solvency ii Association
  33. 33. As a society begins to age, its older citizens become the dominantholders of financial assets.However, with the coming of age, many people are likely to become risk-averse in managing their financial assets, for natural reasons.Thus, a mature economy, with its lower growth potential due to ageing,faces the serious problem of how to provide risk money to promisingsectors of the economy so as to encourage entrepreneurs’ sound risk-taking and enhance value production.To be more specific, financial products and services should enable oldercitizens to maintain their quality of life and help foster an environmentwhere longevity is seen as a gift, rather than a risk.These products, in addition to retirement savings, are expected to playdiverse roles.Given the improved average health of senior citizens in many countries,it is increasingly important that these financial products and serviceshelp the older population stay active and contributing to the communityto the best of their abilities, while mitigating age-related risks such asillness.To provide such products, financial institutions must cooperate withother industries to take full advantage of their advanced technologiesand expertise.At the same time, financial institutions should utilize their own expertiseto measure, distribute, and manage the various risks as intermediatesbetween asset-rich older citizens and prospective entrepreneurs.These attempts inevitably involve “cross-industry” elements.Furthermore, with the transition from a growing economy to a matureeconomy, it is natural for people in an ageing economy to pursue higherreturns by investing their savings in growing overseas economies. _________________________________________ Solvency ii Association
  34. 34. Thus, it is also important for a mature economy to make full use of thebenefits of cross-border transactions while managing the accompanyingrisks.This upcoming trend of cross-industry and cross-border expansion offinancial products and services will pose a serious challenge to thecurrent regulatory and supervisory frameworks.It will certainly call for a comprehensive approach.Regulation and supervision focusing only on a specific sector will likelyresult in a “waterbed effect”: problems will be simply shifted to othersectors rather than being dealt with effectively.Fundamental uncertainty regarding life expectancy and fertilityThe second issue is the fundamental uncertainty surrounding the pace ofpopulation ageing.I first note the two kinds of risk involved: the first relates to lifeexpectancy or longevity, and the second to birth rates or fertility.I then discuss the fundamental uncertainty in measuring these risks inthe economy as a whole, and the possible consequences of this forregulation and supervision.Among the various risks we face in the real world, the longevity risk isthe most fundamental one.No one can tell exactly how long he or she will actually live.While economic textbooks impersonally state that efficient allocation ofresources can be achieved more easily if there is no uncertainty, very fewpeople would prefer to know the exact date on which they are going topass away. _________________________________________ Solvency ii Association
  35. 35. As human beings we need to accept such unavoidable uncertainties, andfinancial services have a critical role to play in helping us manage therisks associated with such inherent uncertainties while enabling us toenjoy a life full of surprises.As the population ages, the social need increases for financial productsand services to respond to the longevity risk.To provide the tools necessary to respond to the longevity risk, providersneed to be able to manage the accompanying risks in the economy as awhole.To this end, financial service providers such as insurers havetraditionally utilized “the law of large numbers,” a rule assuming that asthe number of samples increases, the average figure of these samples,such as average life expectancy, becomes more predictable.The same is considered to be true for fertility.Although the exact number of children for a given couple is not knownfor sure, the average rate of birth per couple becomes largely predictable.The popular perception that demographic change is in generalpredictable is based on this law of large numbers.Unfortunately, this perception is not always true, or to put it bluntly, nottrue in many instances.Take Japan for example.Between the 1970s and early 2000s, the total fertility rate forecastsregularly turned out to be wrong and were consistently revised down.The government repeatedly published its forecast in which the decline inthe fertility rate was declared to be only temporary and the birth rateexpected to rise again soon (Figure 2.) _________________________________________ Solvency ii Association
  36. 36. Similarly, life expectancy forecasts have shown that the actual figuresconsistently exceeded the forecasts (Figure 3). _________________________________________ Solvency ii Association
  37. 37. These forecast errors show the fundamental uncertainty surrounding thepace of population ageing.And if the actual outcome deviates from the estimated life expectancyand longevity of the entire population in an economy, all serviceproviders will be affected.For example, in the case of longevity risk products, even a slightdeviation could significantly increase the exposures of service providers. _________________________________________ Solvency ii Association
  38. 38. Avoiding patchwork and “spaghetti code” problemsRegulatory and supervisory reform is often called for once such deviationcauses an unexpected accumulation of losses.However, this kind of loss-induced regulatory and supervisory reformoften leads to patchwork plumbing, which in turn results in a viciouscircle of further losses and more patchwork.The repetition of such ad-hoc adjustments to the framework can causewhat computer programmers refer to as “spaghetti code” problems, inwhich the framework becomes too complex and entangled, likespaghetti, so that no one knows how to fix the problem.Thus, we must be careful not to make over-optimistic forecasts,especially when these forecasts underlie the overall framework and anyforecast error might bring about irrevocable losses.It is also important to have in advance a clear strategy on appropriatepolicy responses when a forecast error is observed, especially in dealingwith “spaghetti code” risks.The performance of the framework should be subject to continuousreview, and necessary measures should be readily available at all times.With these measures in place, it should be possible to prevent a mereforecast error from turning into an “irreversible” disorder of the wholesystem.In this sense, it is better to address the challenges of population ageingby incorporating a second best “fail-safe” mechanism into our overallinstitutional framework, rather than by chasing the first best solutionwhile pretending our forecasts are always rational and unbiased. _________________________________________ Solvency ii Association
  39. 39. Concluding remarksThe recent financial crisis has completely changed the landscape offinancial services, both for financial institutions and for supervisors.Before the Lehman crisis, people tended to see only the “bright side” ofnew financial products, such as securitized products, derivatives, andcross-border transactions, believing them to be backed by advanced andinnovative risk-management and investment tools.However, since the crisis revealed the risks and problems associatedwith them, people have come to see mostly the “dark side” of theseservices.Nonetheless, there is still an essential need for financial products andservices that can help individuals and firms manage their risks, sincesustainable economic development can only be achieved through soundrisk taking by private entities.Moreover, financial institutions will be expected to play an even moreactive role as more countries face the problems arising from populationageing.This is especially relevant to satisfying the need for longevity riskmanagement and in coping with the problems of declining fertility, sincefinancial institutions’ full use of their technologies and resources is thekey to solving these problems.Thus, financial service providers should be able to contribute to theeconomic society by providing people with the tools to address the risksand harsh uncertainties of life, while enabling them to enjoy its thrillsand happy surprises.In this respect, I believe that regulators and supervisors should bear thefollowing two things in mind: _________________________________________ Solvency ii Association
  40. 40. First, regulators and supervisors should always have a cross-industry andin some cases cross-border perspective, and they should also have agrand design as to how the economy can spread the risks necessary forsustainable growth, especially under population ageing.Second, regulators and supervisors should be aware that a desirableregulatory framework will continuously evolve, partly due to populationageing and the consequent structural changes in the economy andfinancial services.The current structure and regulatory framework will not last forever, andneither will sectoral classifications such as “banking,” “insurance,” and“securities”.For example, increased demand for longevity risk management couldperhaps foster new cross-industry innovation between medical andfinancial services.From its unique vantage point, the Joint Forum is able to observe thesigns of structural changes in financial services and to identify the needfor regulatory and supervisory evolution.I sincerely hope that the Forum will continue to be attentive to newdevelopments in financial services and lead the global debate onregulation and supervision.Now I come to the final words of my speech about ageing.Just as we mortal individuals mature and come of age, so too doinstitutions.Here is the Bank of Japan (Figure 4) more than a hundred years ago, inits youthful, burgeoning days. _________________________________________ Solvency ii Association
  41. 41. And here is the Bank of Japan as it is today (Figure 5), surrounded bynew architectural additions to the city skyline and still the focal point ofthe landscape. _________________________________________ Solvency ii Association
  42. 42. The building itself has indeed matured, and in its maturity has come tofit itself perfectly to the new age.I believe the same can surely be said of the Joint Forum.Thank you for your kind attention. _________________________________________ Solvency ii Association
  43. 43. Feedback oncomments receivedfrom stakeholders tothe EBA, EIOPA and ESMA’s Joint Consultation Paperon its proposed response to the European Commission’s Call for Adviceon the Fundamental Review of the Financial Conglomerates Directive _________________________________________ Solvency ii Association
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  47. 47. Dear Member,Year after year, new laws and regulations require firms to undertake aforward-looking self-assessment of risks, corresponding capitalrequirements, and adequacy of capital resources.Year after year, it becomes critical to look into the future, to understandwhat is next. Which is the new law, regulation or development? Whichare the challenges and the opportunities for firms and organizations?How will these changes affect the competitive position of existing andnew capital warriors in the markets?There is a great window to look into the future: The excellent forward-looking papers of the Group of Thirty.The Group of ThirtyThe Group of Thirty is a private, nonprofit, international body composedof very senior representatives of the private and public sectors andacademia.The Group aims to deepen understanding of international economic andfinancial issues, to explore the international repercussions of decisionstaken in the public and private sectors, and to examine the choicesavailable to market practitioners and policymakers.Members _________________________________________ Solvency ii Association
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  50. 50. Emeritus Members _________________________________________ Solvency ii Association
  51. 51. _________________________________________ Solvency ii Association
  52. 52. Toward EffectiveGovernance of FinancialInstitutionsImportant PartsWeak and ineffective governance of systemically important financialinstitutions (SIFIs) has been widely cited as an important contributoryfactor in the massive failure of financial sector decision making that ledto the global financial crisis.In the wake of the crisis, financial institution (FI) governance was toooften revealed as a set of arrangements that approved risky strategies(which often produced unprecedented short-term profits andremuneration), was blind to the looming dangers on the balance sheetand in the global economy, and therefore failed to safeguard the FI, itscustomers and shareholders, and society at large.Management teams, boards of directors, regulators and supervisors, andshareholders all failed, in their respective roles, to prudently govern andoversee.On the subject of governance as it applies to FIs, much has been writtenand said in the past few years.Notable among these statements are the 2009 Walker report (A Reviewof Corporate Governance in UK Banks and other Financial IndustryEntities) and the Basel Committee’s Principles for Enhancing CorporateGovernance (2010).Many domestic regulators and stock exchanges have also weighed inwith new requirements and guidelines for governance.The Group of Thirty (G30) applauds these prior initiatives and supportsnot only the spirit of their conclusions but also many of the detailedrecommendations they contain. _________________________________________ Solvency ii Association
  53. 53. The combination of these reports, self scrutiny by the firms themselves,and pressure from regulatory overseers has already yielded substantialchanges in governance practice across the financial services industry andaround the globe.Why would the G30 wish to add its own voice to the body of workalready available, in light of progress being made?First, no one should presume that FI governance is now fixed.It is true that boards are working harder; supervisors are asking toughquestions and preparing for more intensive oversight; managementhas become much more attuned to risk management and to supportingthe oversight responsibilities of the board; and shareholders, to somedegree, are taking a deeper look into their role in promoting effectivegovernance.Nevertheless, as this report highlights, highly functional governancesystems take significant time and sustained effort to establish and hone,and the G30’s input can help with that effort.Second, in a modern economy, business leadership represents a largeconcentration of power.The social externalities associated with the business of significantfinancial institutions give that power a major additional dimension andunderscore the critical importance of good corporate governance of suchentities.Third, we note that the prior reports and guidance almost always comefrom a national or regional perspective (the Basel Committee reportbeing a notable exception), which is understandable as a practicalmatter, but curious given the distinctly global nature of the SIFIs, whichare appropriately the focus of attention.Accordingly, in late spring of 2011, the G30 launched a project on thegovernance of major financial institutions. _________________________________________ Solvency ii Association
  54. 54. The project was led by a Steering Committee chaired by Roger W.Ferguson, Jr., with John G. Heimann, William R. Rhodes, and Sir DavidWalker as its vice-chairmen.They were supported by 11 other G30 members, who participated in aninformal working group.Requests for interviews went out from the G30 to the chairs of 41 of theworld’s largest, most complex financial institutions— banks, insurancecompanies, and securities firms.In an extraordinary response, especially in light of the pressures on eachof these companies, 36 institutions shared their perspectives andexperiences through detailed discussions with board leaders, CEOs, andselected senior management leaders.In addition, the project team held discussions with a global cross sectionof FI regulators and supervisors.The majority of these interviews were conducted in person, all under theChatham House Rule,which encourages candor.The report is the responsibility of the G30 Steering Committee andWorking Group and reflects broad areas of agreement among theparticipating G30 members, who took part in their individual capacities.All G30 members (aside from those with current national officialresponsibilities) have had the opportunity to review and discusspreliminary drafts.The report does not reflect the official views of those in policy-makingpositions or leadership roles in the private sector.The report is wide-ranging in its coverage of the composition andfunctioning of FI boards and the roles of regulators, supervisors, andshareholders. _________________________________________ Solvency ii Association
  55. 55. The focus is on potentially universal core themes but acknowledgesdifferences in customs and practice in different parts of the world.As regards approaches to total compensation, we do not address thissubject in detail in this report; the G30 commends the Financial StabilityBoard’s Principles for Sound Compensation Practices and fully supportstheir implementation.The G30 undertook its initiative on effective FI governance in the hopeand expectation that FI board and senior management leaders couldshare actionable wisdom on the essence of effective governance andwhat it takes to build and nurture governance systems that work.We hope this report provides a measure of insight and sustenance tothose with policymaking and operational responsibilities for effectivegovernance in the world’s great financial institutions. _________________________________________ Solvency ii Association
  56. 56. Executive SummaryWhat is meant by “governance” in the context of a financial institution(FI)?Corporate governance is traditionally defined as the system by whichcompanies are directed and controlled.The OECD Principles of Corporate Governance (2004) defines corporategovernance as involving “a set of relationships between a company’smanagement, its board, its shareholders and other stakeholders.Corporate governance also provides the structure through which theobjectives of the company are set, and the means of attaining thoseobjectives and monitoring performance are determined.”In the case of financial institutions, chief among the other stakeholdersare supervisors and regulators charged with ensuring safety, soundness,and ethical operation of the financial system for the public good.They have a major stake in, and can make an important contribution to,effective governance.Good corporate governance requires checks and balances on the powerand rights accorded to shareholders, stakeholders, and society overall.Without checks, we see the behaviors that lead to disaster.But governance is not a fixed set of guidelines and procedures; rather, itis an ongoing process by which the choices and decisions of FIs arescrutinized, management and oversight are strengthened andstreamlined, appropriate cultures are established and reinforced, and FIleaders are supported and assessed. _________________________________________ Solvency ii Association
  57. 57. Why governance mattersThe global economic crisis, with the financial services sector at itscenter, wreaked economic chaos and imposed enormous costs onsociety.The depth, breadth, speed, and impact of the crisis caught many FImanagement teams and boards of directors by surprise and stunnedcentral banks, FI regulators, supervisors, and shareholders.[Note: We attempt throughout the report to distinguish the regulatoryfunction from the supervisory function.The regulator sets the rules and regulations within which FIs are obligedto operate, while the supervisor oversees the actions of the board andmanagement to ensure compliance with those rules and regulations.Confusion arises because both functions are often performed within thesame institution (for example, the U.S. Federal Reserve and the UKFinancial Services Authority).]Enormous thought and debate has gone into discovering what causedthe global financial crisis and how to avoid another.In his much-quoted 2009 report on the causes of the crisis, Lord AdairTurner, chair of the UK’s Financial Services Authority (FSA), cited sevenproximate causes:(1) Large, global macroeconomic imbalances;(2) An increase in commercial banks’ involvement in risky tradingactivities;(3) Growth in securitized credit;(4) Increased leverage; _________________________________________ Solvency ii Association
  58. 58. (5) Failure of banks to manage financial risks;(6) Inadequate capital buffers; and(7) A misplaced reliance on complex math and credit ratings inassessing risk.A critical subtext to these seven causes is a pervasive failure ofgovernance at all levels.More generally, most observers have agreed that a combination of “lighttouch” supervision, which relied too heavily on self-governance infinancial firms, and weak corporate governance and risk management atmany systemically important financial institutions (SIFIs) contributed tothe 2008 meltdown in the United States.In several key markets, deregulation and market-based supervision werethe political order of the day as countries vied for global capital flows,corporate headquarters, and exchange listings.Regulators also missed the potential systemic impact of entire classes offinancial products, such as subprime mortgages, and in general failed tospot the large systemic risks that had been growing during the previoustwo decades.In this context, boards of directors failed to grasp the risks theirinstitutions had taken on.They did not understand their vulnerability to major shocks, or theyfailed to act with appropriate prudence.Management, whose decisions and actions determine the organization’srisk status, clearly failed to understand and control risks.In many cases, spurred on by shareholders, both management and theboard focused on performance to the detriment of prudence. _________________________________________ Solvency ii Association
  59. 59. Effective governance is a necessary complement to rules-basedregulation.The system needs both.Carefully crafted rules-based regulations concerning capital, liquidity,permitted business activities, and so forth are essential safeguards forthe financial system, while effective governance shapes, monitors, andcontrols what actually happens in FIs.Ineffective governance at financial institutions was not the solecontributor to the global financial crisis, but it was often an accomplicein the context of massive macroeconomic vulnerability.Effective governance can make a significant positive difference byhelping to prevent future crises or by mitigating their deleterious impact.In other words, the rewards for investment in effective governance aregreat.A call to actionEach of the four participants in the governance system—boards ofdirectors, management, supervisors, and (to an extent) long-termshareholders— needs to reassess their approach to FI governanceand take meaningful steps to make governance stronger.This report offers a comprehensive set of concrete insights andrecommendations for what each participant needs to do to make FIgovernance function more effectively.The G30 is acutely aware that the agendas of FI boards and supervisorsare crowded, yet we urge them to continue to give effective governanceone of their highest priorities. _________________________________________ Solvency ii Association
  60. 60. ‹. The financial sector needs better methods of assessing governance andof cultivating the behaviors and approaches that make governancesystems work well.Board self-evaluation, especially when facilitated or led by an outsideexpert, can yield important insight, but it is sobering to consider that in2007, most boards would likely have given themselves passing grades.‹. Supervisors now aspire to understand governance effectiveness andvulnerabilities, but admit to having much to learn.‹. Governance experts often describe what good governance looks like,but give little thought to how to measure or achieve high-performanceresults.Given the role that inadequate governance played in the massive failureof financial sector decision making that led to the global financial crisis,it isnatural that supervisors and stock exchanges are now paying greatattention to governance arrangements.This attention, as a practical matter, often focuses on explicit rules,structures, and processes—best practices—that governance expertsoften believe are indicative of effective governance.Consequently, compliance with best practice guidelines has become veryimportant to boards and to overseers charged with monitoring andencouraging good governance.The G30 hopes this report will contribute meaningfully to the body ofknowledge on governance and will be a useful tool for those tasked withshaping governance systems.The boardBoards of directors play the pivotal role in FI governance through theircontrol of the three factors that ultimately determine the success of the _________________________________________ Solvency ii Association
  61. 61. FI: the choice of strategy; the assessment of risk taking; and theassurance that the necessary talent is in place, starting with the CEO, toimplement the agreed strategy.The 2008–2009 financial crisis revealed that management at certain FIs,with the knowledge and approval of their boards, took decisions andactions that led to terrible outcomes for employees, customers,shareholders, and the wider economy.What should the boards have done differently?To answer that question, it is helpful to consider the mandate of boards.Boards control the three key factors that ultimately determine thesuccess of an FI:1. The choice of business model (strategy)2. The risk profile, and3. The choice of CEO—and by extension the quality of the top-management team.Boards that permit their time and attention to be diverteddisproportionately into compliance and advisory activities at the expenseof strategy, risk, and talent issues are making a critical mistake.Above all else, boards must take every step possible to protect againstpotentially fatal risks.FI boards in every country must take a long-term view that encourageslong-term value creation in the shareholders’ interests, elevates prudencewithout diminishing the importance of innovation, reduces short-termself-interest as a motivator, brings into the foreground the firm’sdependence on its pool of talent, and demands the firm play a palpablypositive role in society.The importance of mature, open leadership by a skillful board chaircannot be overemphasized. _________________________________________ Solvency ii Association
  62. 62. Effective chairs capitalize on the wisdom and advice of board membersand management leaders and on the board’s interactions withsupervisors and shareholders, individually and collectively.Good chairs respect each of these vital constituents, preside, encouragedebate, and do not manage toward a predetermined outcome.Risk governanceThose accountable for key risk policies in FIs, on the board and withinmanagement, have to be sufficiently empowered to put the brakes on thefirm’s risk taking, but they also play a critical role in enabling the firm toconduct well-measured, profitable risk-taking activities that support thefirm’s long-term sustainable success.In the financial services sector more than in other industries, riskgovernance is of paramount importance to the stability and profitabilityof the enterprise.Without an ability to properly understand, measure, manage, price, andmitigate risk, FIs are destined to underperform or fail.Effective risk governance requires a dedicated set of risk leaders in theboardroom and executive suite, as well as robust and appropriate riskframeworks, systems, and processes.The history of financial crises, including the 2008–2009 crisis, is litteredwith firms that collapsed or were taken to the brink by a failure of riskgovernance.The most recent financial crisis demonstrated the inability of many FIsto accurately gauge, understand, and manage their risks.Firms greatly understated their inherent risks, particularly correlationsacross their businesses, and were woefully unprepared for the exogenousrisks that unfolded during the crisis and afterward. _________________________________________ Solvency ii Association
  63. 63. ManagementManagement needs to play a continuous proactive role in the overallgovernance process, upward to the board and downward through theorganization.The vast majority of governance and control processes are embedded inthe organizational fabric, which is woven and maintained bymanagement.The board is dependent on management for information and fortranslating sometimes highly technical information into issues andchoices requiring business judgment.Governance cannot be effective without major continuing input frommanagement in identifying the big issues and presenting them fordiscussion with the board.Management needs to strengthen the fabric of checks and balances inthe organization.It must deepen its respect for the vital roles of the board and supervisorsand help them to do their jobs well.It must reinforce the values that drive good behavior through theorganization and build a culture that respects risk while encouraginginnovation.SupervisorsSupervisors that more fully comprehend FI strategies, risk appetite andprofile, culture, and governance effectiveness will be better able to makethe key judgments their mandate requires.Supervisors have legally defined responsibilities relating to risk control;fraud control; and conformance to laws, regulations, and standards of _________________________________________ Solvency ii Association
  64. 64. conduct.Supervisors now seek a deeper and more nuanced understanding of howthe board works, how key decisions are reached, and the nature of thedebate around them, all of which reveal much about the firm’sgovernance.Most FI boards applaud this expansion in the supervisors’ focus fromcontrol process details to include a broader grasp of issues and context.To be effective, however, this expansion requires regular interactionamong senior people in supervisory agencies and boards and boardmembers.Supervisors need to broaden their perspectives to include FI strategy,people, and culture.They should focus their discussions with senior management andthe board on the real issues—through both formal and informalcommunications.But they must also maintain their independence and accept that theywill at best have an incomplete picture.Similarly, supervisors must not try to do the board’s job or so overwhelmthe board and management that they cannot guide the FI.Supervisors have a unique perspective on emerging systemic,macroprudential risks and can compare and contrast one FI with others.This is vital information to develop and share.Unfortunately, in the policy-making debate, the qualitative aspect ofsupervision is sometimes overshadowed by quantitative, rules-basedregulatory requirements. _________________________________________ Solvency ii Association
  65. 65. Clearly, new capital, liquidity, and related standards are essential to amore stable global financial architecture, but enhanced oversight of theperformance and decision-making processes of major FIs is alsoessential. _________________________________________ Solvency ii Association
  66. 66. Bermuda’s Insurance SolvencyFrameworkThe Roadmap to RegulatoryEquivalencePlanned 2012/2013 Developments• Full implementation of the groups rules for Class 4 and Class 3Bgroups, including group solvency and financial reporting requirements,effective 1st January 2013• Continued phased implementation of Bermuda Solvency CapitalRequirement (BSCR - standard capital model) for the Long-Term sector,i.e. Class E insurers, and also refined BSCR for small commercialinsurers, i.e. Class 3A, for year-end 2011 filings• Extending the optional use of approved internal capital models toLong-Term insurers; preparation for group ICM reviews for the Long-Term sector• Revised eligible capital rules effective 1st January 2013• Complete (Long-Term Prudential Standard Rules), effective 1st January2013 for Class C and Class D insurers• Review of Commercial Insurers Solvency Self-Assessment submissionsin 2012 for year-end 2011 filings from Class 4, 3B, 3A and Class E firms• Introduction of the Quarterly Financial Return for Class 4 and Class 3Binsurers, which will comprise unaudited financial statements, intra-group transactions and risk concentrations and will be filed in May,August and November 2012 _________________________________________ Solvency ii Association
  67. 67. Completed Framework Developments• Substantially completed the policy and legislative infrastructure forgroup supervision, which included issuing the Insurance (GroupSupervision) Rules 2011 as well as the Insurance (Prudential Standards)(Insurance Groups Solvency Requirement) Rules 2011.Also identified over 20 insurance groups for which the BMA will be theGroup-Wide Supervisor (GWS)• Completed pilots and pre-application procedures with selected insurersfor the internal capital models (ICM) evaluation process• Established the Commercial Insurers’ Solvency Self-Assessment(CISSA) requirement, our Bermuda-specific ORSA (Own Risk andSolvency Assessment)• Advanced work to establish an Economic Balance Sheet policy andframework• Developed a refined Bermuda Solvency Capital Requirement standardcapital adequacy model as a core element of our enhanced supervisoryframework for the Long-Term (life) insurance sector• Implemented evaluations of an enhanced Schedule of RiskManagement and new Catastrophe Return submissions by insurers aspart of solvency assessments• Extended our disclosure and transparency requirements to Class 3Aand Class E Long-Term insurers by requiring submission of GAAPfinancial statements that the Authority will make publicly available. _________________________________________ Solvency ii Association
  68. 68. Progress note on the Global LEIInitiativeThis is the third of a series of notes onthe implementation of the legal entity identifier (LEI) initiative.Following endorsement of the FSB report and recommendations by theG-20, the FSB LEI Implementation Group (IG) has been tasked withtaking forward the planning and development work to launch the globalLEI system by March 2013.The IG is collaborating closely with private sector experts through aPrivate Sector Preparatory Group (PSPG) of some 300 members from 25jurisdictions across the globe.Charter for the Regulatory Oversight Committee (ROC):The IG has prepared a draft Charter for the Regulatory OversightCommittee for review and endorsement by the FSB and G20.The draft was supported by the FSB at its recent meeting in Tokyo forsubmission to the early November G20 Finance Ministers and CentralBank Governors meeting for final endorsement.Approval of the Charter will initiate the process for the ROC to beformed.ROC membership will be open to public authorities from across theglobe that assent to the Charter.Authorities will also be able to apply for Observer status.The objective is to launch the ROC as the permanent governance bodyfor the global LEI system in January 2013. _________________________________________ Solvency ii Association
  69. 69. Location and legal form of the global LEI foundation:Formation of the ROC is a necessary step for the creation of the globalLEI foundation which is the legal form for the Central Operating Unit.The location and exact legal form of the global LEI foundation will havea bearing on the overall governance framework for the Global LEISystem.The IG and PSPG have analysed potential locations for the foundationand have now initiated a detailed assessment of a narrow set of potentialcandidates.The results of the assessment will facilitate the drafting of the necessarylegal documentation to establish the foundation and will be presented atthe first meeting of the ROC.Board of Directors of the LEI foundation:One of the first tasks for the ROC will be the appointment of the initialBoard of Directors.PSPG members are working closely with the IG to develop criteria forfitness, experience, regional and sectoral balance, term of office etceterathat will support the process for nomination and selection of the firstBoard and deliver a governance framework for the global LEI foundationto help sustain the public good nature of the system.The PSPG presented a number of initial recommendations and optionsrelated to these criteria for the Board of Directors on 16 October; theproposals are currently being reviewed by the IG and the final version ofthe recommendations will be presented at the first meeting of the ROC. _________________________________________ Solvency ii Association
  70. 70. Operational Solutions Demonstration Day:The FSB hosted a Global LEI System Operational SolutionDemonstration Day in Basel on 15 October.Thirteen presentations from across the globe were made that containedproposals and solutions covering all or part of the proposed global LEIsystem as set out in the FSB report.Business Processes and Use Cases:PSPG members presented an initial set of deliverables containingbusiness processes and use cases for the operational elements of theglobal LEI system at the joint PSPG and IG meeting on 16 October.PSPG members have already undertaken detailed work in some areasand will expand on a strong base.The next phase of the operational work is to build on these specificationdocuments, focusing on how the system can best address a number ofkey issues in relation to areas such as data quality, addressing locallanguages, as well as how to draw most effectively on local infrastructureto deliver a truly global federated LEI system.The PSPG are requested to prepare clear proposals andrecommendations by the end of the year, in order to support a successfuland speedy launch of the global LEI system.Number allocation scheme for the global LEI system:On 12 September, the IG requested an ‘engineering study’ from PSPGexperts to determine which scheme for the management of the issue ofidentifiers best serves the purposes of the global LEI system.Following receipt of response and discussion with private sector expertsat the 16 October PSPG meeting, the IG prepared a recommendation for _________________________________________ Solvency ii Association
  71. 71. the technical specification of the LEI code structure which has beenendorsed by the FSB Plenary.Annex sets out the FSB decision to adopt a ‘structured’ approach to thenumber allocation scheme, whereby LOUs are assigned a unique prefix.The FSB decision is provided now to deliver clarity and certainty to theprivate sector on the approach to be taken by potential pre-LEI systemsthat will facilitate the integration of such local precursor solutions intothe global LEI system.Ownership and hierarchy data:Addition of information on ownership and corporate hierarchies isessential to support effective risk aggregation, which is a key objectivefor the global LEI system.The IG is developing proposals for additional reference data on thedirect and ultimate parent(s) of legal entities and on relationship(including ownership) data more generally and will prepare initialrecommendations by the end of 2012.The IG is working closely with the PSPG to develop the proposals.Annex: Number Allocation Scheme for the Global LEI System -implications for local pre-LEI Issuers and other early moversIn response to requests for early clarity and guidance on thedetermination of the number allocation scheme for the management ofidentifiers for the Global LEI System, the FSB Implementation Grouprequested an ‘engineering study’ from the FSB LEI Private SectorPreparatory Group (PSPG) experts to explore the advantages anddisadvantages of different schemes.The FSB is very grateful for all of the responses and for the contributionsof members of the PSPG. _________________________________________ Solvency ii Association
  72. 72. While there are a range of different schemes to manage the issue ofidentifiers that fit the characteristics of the 20 digit code (including twocheck digits) approach outlined in the ISO 17442 standard, for simplicitythose schemes can be categorised into two general groups:- An unstructured numbering system – one where an 18 character unique identifier fills the whole numbering spectrum;- A structured numbering system – one where subsets of the spectrum of possible codes are partitioned for efficient allocation according to a structural guideline; for instance, an N digit prefix could be assigned to each Local Operating Unit (LOU) for its exclusive use.On the basis of the arguments presented, the FSB has concluded that astructured number offers the best approach for the Global LEI System.The following method is to be used:- Characters 1-4: A four character prefix allocated uniquely to each LOU.- Characters 5-6: Two reserved characters set to zero.- Characters 7-18: Entity-specific part of the code generated and assigned by LOUs according to transparent, sound and robust allocation policies.- Characters 19-20: Two check digits as described in the ISO 17442 standard.Public authorities wishing to sponsor local pre-LEI issuance that wouldtransition to the LEI system should ensure that new numbers areallocated according to the above guideline.Pre-LEI solutions wishing to transition into the Global LEI System uponits launch shall be required to adopt the numbering scheme outlinedabove no later than 30 November 2012. _________________________________________ Solvency ii Association