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The insurance industry and the financial crisis

London Insurance InstituteLondon, 17 March 2010Prof. Karel VAN HULLE

Head of Insurance and Pensions

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Financial crisis and insurance

• Insurers went through the crisis relatively unharmed

• Strong cash flows, long-term liability driven investment policies, stable customer base

• Insurers that had problems were involved in extensive banking or credit operations

• Lack of proper risk management has been an issue in a number of cases

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Actions undertaken

• Close co-operation in the context of G20, Financial Stability Board and Joint Forum

• ECOFIN action plan

• Proposal to improve the supervisory architecture in the EU

• Question to all parties concerned whether Solvency II needed to be changed

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Recapitulation: Why Solvency II?

• Present capital requirements are not sufficiently risk sensitive

• Group supervision is not dealt with in its own right

• More efficient capital allocation would allow insurers to take on more risks

• Supervisory convergence must be strengthened

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Solvency II: 3 pillars and a roofSolvency II: 3 pillars and a roof

Pillar 1: quantitative requirements

1. Harmonised calculation of technical provisions

2. "Prudent person" approach to investments

instead of current quantitative restrictions

3. Two capital requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital

Requirement (MCR)

Pillar 2: qualitative requirements and

supervision

1. Enhanced governance, internal control, risk

management and own risk and solvency assessment

(ORSA)

2. Strengthened supervisory review, harmonised

supervisory standards and practices

Pillar 3: prudential reporting and public

disclosure

1. Common supervisory reporting

2. Public disclosure of the financial condition and

solvency report

(market discipline through transparency)

Group supervision & cross-sectoral convergence

Groups are recognised as an economic entity=> supervision on a consolidated basis

(diversification benefits, group risks)

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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 Proposal - Adopted Directive published in December 2009

QIS 3

Commission preparatory work implementing measures

Adoption of implementing

measures

QIS 4

October 2012 Solvency II enters into force

QIS 5

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We are here!

We are here!

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Solvency II and financial crisis

• Stakeholders confirm that Solvency II is needed because of higher level of harmonisation and risk orientation

• CEIOPS publishes paper « lessons learned from the financial crisis » in March 2009

• Text of Framework Directive is amended in order to introduce provisions dealing with financial crisis situations

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Changes in Solvency II Framework Directive

• Supervisory authorities shall give proper consideration to financial stability and potential procyclical effects of their actions

• Symmetric adjustment mechanism in equity risk sub-module

• Extension of recovery period in the event of exceptional fall in financial markets

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Adaptations at Levels 2 and 3

• Pillar 1: Quality of the capital, alternative risk transfer, market risk, correlation between risks

• Pillar 2: Reliance on CRA’s, liquidity risk, internal models

• Pillar 3: possible procyclical effects of market value based disclosures

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What remains to be done on SII?

• Commission drafting of implementing measures based upon CEIOPS’ advice but in close co-operation with MS and stakeholders

• QIS 5 will be the ultimate test of the standard formula

• Implementing measures to be accompanied by impact assessment

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Timing for SII

• Commission Proposal (s): end 2010

• Stakeholder meeting QIS 5: 30 April 2010

• Public Hearing: 4 May 2010

• Final technical specifications: June 2010

• Start of QIS 5: August 2010

• Adoption of implementing measures: end 2011

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Supervisory architecture

• De Larosière expert group delivers report end February 2009

• Proposal to keep supervision at national level but with strengthening of EU level

• Policy proposals by EC end May 2009

• European Council agrees: 19 June 2009

• EC Legislative proposals: September 2009

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Two pillars of new supervisory structure

•European Systemic Risk Board (ESRB); and

•European System of Financial Supervisors (ESFS).

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ESFS structure• Steering Committee (replacing

JCFC)• European Supervisory

Authorities:– European Banking Authority– European Insurance and Occupational

Pensions Authority– European Securities Markets Authority

• National Supervisors

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EIOPA

• Binding technical standards: common rulebook

• Binding mediation: conflicts between supervisors, application of EU rules

• Group supervision: observer in colleges

• Crisis-management

• Full-time Chairman and more resources

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State of progress

• Political agreement in Council in December 2009

• Vote in EP expected in June/July 2010

• To be followed by amendments in sectoral legislation

• Changes in insurance legislation expected some time in Spring 2010

• EIOPA to start: 1 January 2011

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Concluding remarks

• Need to strike the right balance in Solvency II between prudence and efficient allocation of capital

• Solvency II will seriously upgrade the level of supervisory convergence

• The creation of EIOPA will lead to further professionalisation of supervision