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The birth of Solvency II Assal – EU Dialogue Ixtapa, 27 April 2009

The birth of Solvency II Assal – EU Dialogue Ixtapa, 27 April 2009. Karel VAN HULLE Head of Unit, Insurance and Pensions, DG Markt, European Commission. « Not everything what can be counted counts – and not everything what counts can be counted »

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The birth of Solvency II Assal – EU Dialogue Ixtapa, 27 April 2009

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  1. The birth of Solvency IIAssal – EU DialogueIxtapa, 27 April 2009 Karel VAN HULLE Head of Unit, Insurance and Pensions, DG Markt, European Commission

  2. « Not everything what can be counted counts – and not everything what counts can be counted » Albert Einstein

  3. Why Solvency II? Why the approach chosen?

  4. 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)

  5. Why Solvency II? • Modernise regulatory framework • Need to act now before the present Solvency I regime breaks down • Provide the insurance industry with more capacity to take on new risks • Improve supervisory convergence • Reduce regulatory arbitrage between banking and insurance

  6. Why the approach? • 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)

  7. 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.

  8. Proposal for a Framework Directive 14 existing Insurance Directives (direct insurance, reinsurance, groups etc.) + Solvency II Codification & New Articles Recast & Codification = 1 Directive ‘EU Insurance sourcebook’

  9. Solvency II – 4 Principal Objectives • Deepen the Single Market • Enhance policyholder protection • Improve (international) competitiveness of EU insurers • Further Better Regulation

  10. The new regime… • Establishes risk-sensitive capital requirements to encourage and reward good risk management • Places emphasis on the responsibility of the senior management to manage their business responsibly • Fosters and demands greater supervisory convergence  Single Market

  11. 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

  12. We are here!

  13. 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

  14. Quantitative Impact Studies • 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

  15. Solvency II Timetable for 2007-2012 2012 2011 2007 2008 2009 2010 2006 Directive development (Commission) Directive adoption (Council & Parliament) Implementation (Member states) CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training & development Commission preparatory work on possible implementing measures Adoption of implementing measures July 2007 Solvency II Directive published October 2012 Solvency II enters into force QIS 2 QIS 3 QIS 4

  16. New European solvency regime in place and operational in all Member States by October 2012!!

  17. Solvency IIKey aspects of original Commission Proposal

  18. 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

  19. 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

  20. Pillar II: Qualitative Requirements • 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

  21. 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

  22. Supervision of Groups • Proposal will improve the supervision of groups • Recognition of economic reality of groups (recognition of diversification benefits; ability to use internal models to calculate group SCR; recognition of group support)

  23. 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

  24. 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

  25. 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

  26. 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)

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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)

  32. 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

  33. 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

  34. Solvency II … modern, innovative and liberal regime for the prudential supervision of insurers, based on sound economic principles…

  35. Conclusion Solvency II is… good for you!

  36. 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

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