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The birth of Solvency IIThe birth of Solvency II

Assal – EU DialogueAssal – EU DialogueIxtapa, 27 April 2009Ixtapa, 27 April 2009

Karel VAN HULLEHead of Unit, Insurance and Pensions, DG Markt,

European Commission

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• « Not everything what can be counted counts – and not everything what counts can be counted »

Albert Einstein

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Why Solvency II? Why Solvency II? Why the approach chosen?Why the approach chosen?

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Why Solvency II?Why Solvency II?• Current regime 30 years old• Lack of risk sensitivity

– No incentives for insurers to manage risks adequately; or to improve & invest in risk management

– Does not facilitate accurate & timely supervisory intervention

– Does not facilitate optimal allocation of capital

• Weaknesses identified in Müller Report (1997), in KPMG Report (2002) and in Sharma Report (2002)

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Why Solvency II?Why Solvency II?

Modernise regulatory frameworkModernise regulatory frameworkNeed to act now before the present Need to act now before the present

Solvency I regime breaks downSolvency I regime breaks downProvide the insurance industry with more Provide the insurance industry with more

capacity to take on new riskscapacity to take on new risksImprove supervisory convergenceImprove supervisory convergenceReduce regulatory arbitrage between Reduce regulatory arbitrage between

banking and insurancebanking and insurance

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• Commission has conducted extensive Impact Assessment; cost-benefit analysis

• Number of contributions:– Macroeconomy (DG ECFIN)– Financial Stability (ECB)– Impact on insurers (CEA/AISAM/ACME)– Impact on supervisors (CEIOPS)– Impact on products and markets (CEA/AISAM)– Impact on consumers (FIN-USE)

• Number of policy options analysed (45)

Why the approach?Why the approach?

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QR impede efficient asset allocation sub-optimal return & risk PPR vs. QR: improved investment returns 90 – 300 basis points At least €1500 billion subject to QR at the moment; even a

conservative 10 basis points improvement would mean €1,5 billion annually

Option 13.3 chosen: reduces admin burden due to better alignment of regulatory regime & industry burden; provides for harmonisation; more optimum risk-return profile; better diversification of portfolios.

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Proposal for a Framework DirectiveProposal for a Framework Directive

Recast

&

Codification

Codification &

New Articles

+ Solvency II14 existing Insurance Directives (direct

insurance, reinsurance, groups etc.)

= 1 Directive ‘EU Insurance sourcebook’

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Solvency II – 4 Principal ObjectivesSolvency II – 4 Principal Objectives

• Deepen the Single Market

• Enhance policyholder protection

• Improve (international) competitiveness of EU insurers

• Further Better Regulation

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• Establishes risk-sensitive capital requirements to Establishes risk-sensitive capital requirements to encourage and reward good risk managementencourage and reward good risk management

• Places emphasis on the responsibility of the Places emphasis on the responsibility of the senior management to manage their business senior management to manage their business responsibly responsibly

• Fosters and demands greater supervisory Fosters and demands greater supervisory convergence convergence Single Market Single Market

The new regime…The new regime…

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Legislative Process - Lamfalussy

Level 1: Framework Directive

Level 2: Implementing Measures (Commission)

Level 3: Convergent implementation assisted by close co-operation between national

authorities

Level 4: Rigorous enforcement of Community legislation by the Commission

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We are here!

We are here!

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Many players & stakeholders in the process…Many players & stakeholders in the process…

• Preparation by CEIOPS (3 waves of Calls for Advice)• Commission Proposal for a Directive (10 July 2007)

following consultation & dialogue with– Industry (CEA, AMICE, CRO & CFO Forum)– Professionals (e.g. Groupe Consultatif)– Insurance Supervisors (CEIOPS)– Member State MoF Experts (EIOPC)

• Commission issued an amended proposal for a Directive (26 Feb 2008)

• EP and Council have final say

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• Key element of Better Regulation• QIS 4 ran from April to July 2008• Analysis and conclusions presented in

November 2008 mainly relevant for implementing measures

• Key issues of QIS 4: MCR, simplifications, equity risk, internal models, diversification effects in groups

Quantitative Impact StudiesQuantitative Impact Studies

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Solvency II Timetable for 2007-2012Solvency II Timetable for 2007-2012

Directive development (Commission)

CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training &

development

2006 2007 2008 2009 2010 2011 2012

Directive adoption(Council & Parliament)

Implementation(Member states)

QIS 2

July 2007 Solvency II Directive published

QIS 3

Commission preparatory work on possible implementing measures

Adoption of implementing measures

QIS 4

October 2012 Solvency II enters into force

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New European solvency New European solvency regime in place and regime in place and

operational in all Member operational in all Member States by October 2012!!States by October 2012!!

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Solvency IISolvency IIKey aspects of original Key aspects of original Commission ProposalCommission Proposal

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Solvency II…Solvency II…

• 3 ‘Pillars’ of equal importance:– Quantitative requirements– Qualitative requirements– Disclosure and reporting

• Economic, risk based approach

• Proportionality principle

• Group supervision and group support

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Pillar I: Quantitative Requirements• Market consistent valuation (fair value) of assets and

liabilities, including technical provisions (Best Estimate + Risk Margin calculated on the basis of Cost of Capital)

• Two capital requirements: MCR and SCR• SCR: Total balance sheet approach; VaR 99.5% 1-year• European Standard Formula for the SCR• MCR: composition and relation to SCR left open• Internal Models to calculate the SCR: full / partial• Less or no need for lists of eligible assets or limits on

investments (Prudent Person Rule)• Credit for risk mitigation (securitisation, derivatives,

reinsurance)• Credit for diversification

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• New regime places much emphasis on good governance (functions)

• Risk-management: key change from old regime Own Risk & Solvency Assessment gives focus and structure

• Supervisory Review Process• More developed than in Basel II/CRD• Response to weaknesses identified

Pillar II: Qualitative Requirements

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Pillar III: Disclosure & Reporting

• New approach in Pillars 1 & 2 means new approach needed for P3!

• More freedom for firms to run themselves; but with new responsibilities new requirements for disclosure to harness market discipline in support of achieving the regulatory objectives

• Power & discretion to supervisors; need to earn trust of stakeholders; need to foster supervisory convergence & achieve competitive equality new requirements for transparency

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Proposal will improve the supervision of Proposal will improve the supervision of groups groups

Recognition of economic reality of groups Recognition of economic reality of groups (recognition of diversification benefits; (recognition of diversification benefits; ability to use internal models to calculate ability to use internal models to calculate group SCR; recognition of group support)group SCR; recognition of group support)

Supervision of Groups

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Improved group supervision

• Group supervision will no longer be supplementary

• Organised co-ordination and co-operation between all supervisors

• Clear role and responsibilities for group supervisor

• Group internal model• Group ORSA and Group Solvency and

Financial Conditions Report

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Introduction of group support

• More efficient allocation of capital within groups

• Parent may use under certain conditions declarations of group support to meet part of the SCR of its subsidiaries

• Derogations to some articles on solo supervision to avoid « unnecessary » interventions of solo supervisors

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Council Working Party negotiations

• Hectic pace of negotiations under P, SI and F Presidencies (over 1000 p. of comments)

• Progress reports to ECOFIN under P and SI Presidencies

• General approach ECOFIN: 2/12/2008

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Main issues raised in the Council

• Application of the proportionality principle• Surplus funds, equity risk, mutual groups• Exclusion of small insurers• Relationship between MCR and SCR• Group supervision and group support:

colleges, role of CEIOPS, role of group and solo supervisors (opposition by group of 12: power with responsibilities)

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Result obtained

• Section on group support deleted from the final text

• Introduction of a duration approach as a Member State option for equity risk

• Introduction of a pillar 1 and a pillar 2 dampener to deal with procyclicality

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Negotiations in European Parliament

• Several exchanges of views within ECON• Draft Report by Peter Skinner (ECON)• Draft Opinion by Sharon Bowles (JURI)• More than 800 amendments tabled• Discussion Results QIS 4: 22/09/2008• Adoption of Skinner Report in ECON on 7

October 2008

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Main issues raised in EP

• Exclusions: small insurers, pension funds• Relationship between MCR and SCR• Group supervision and group support:

role of group and solo supervisors, legal commitment of parent, role of CEIOPS

• Mutual groups and captives• Treatment of equity risk• Surplus funds

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Results obtained

• Some 150 amendments were finally adopted in ECON

• EP were keen to keep group support regime and proposed further strengthening of cooperation between supervisors

• EP opposed introduction of duration approach for equity risk

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Trilogues

• Extremely difficult negotiations between Council and European Parliament

• 8 Trilogue meetings were held• Agreement was finally reached with EP

accepting deletion of group support with review clause

• Duration approach was accepted under conditions (mainly pension business)

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Next steps

• EP adopted agreed text on 22 April 2009 (593 votes in favour against 80 opposed)

• Final vote in Council on 5 May 2009• 3 consultation rounds by CEIOPS during

the course of 2009 for level 2 measures• QIS 5 to be launched in 2010• Further action through implementation of

the de Larosière Report

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The de Larosière Report

• Expert group set up by EC in 2008 following financial crisis

• Report issued end February 2009• Proposal to keep functional supervision

but with strengthening of EU level• Policy proposals by EC end May 2009• Legislative proposals by EC Autumn 2009

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Solvency II

… modern, innovative and liberal modern, innovative and liberal regime for the prudential regime for the prudential

supervision of insurers, based on supervision of insurers, based on sound economic principles…sound economic principles…

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Conclusion

Solvency II is…

good for you!

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How to contact us?

• Karel.van-hulle@ec.europa.eu• All official documents, including the text of

Solvency II and preparatory papers are available on our website, which is regularly updated. Official texts are also available in Spanish and Portuguese.

• http://ec.europa.eu/internal_market/insurance/solvency/index_en.htm