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Royal Institute of TechnologyRoyal Institute of Technology

Stockholm, 12 June 2009Stockholm, 12 June 2009

Solvency II: a Solvency II: a new and new and modern solvency regime for modern solvency regime for

the insurance industrythe insurance industry

Prof. 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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Framework DirectiveFramework DirectiveProposed on 10 July 2007Proposed on 10 July 2007Adopted April/May 2009Adopted April/May 2009

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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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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• Introduces an economic risk based approach that Introduces an economic risk based approach that will reward good risk management and enhance will reward good risk management and enhance policyholder protectionpolicyholder protection

• 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 across the Communityconvergence across the Community

The new regime…The new regime…

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Legislative Process - Lamfalussy

Level 1: Framework Directive

Level 2: Implementing Measures

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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Intensive consultation process

• Framework for Consultation• Three waves of calls for advice to

CEIOPS• Interviews with selected number of SMEs

by Commission staff• QIS 1 and QIS 2• Impact Assessment with 45 options

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Consultation continued

• Commission proposal prepared following consultation and dialogue with CEA, AMICE, CRO Forum, CFO Forum, Groupe Consulatif, CEIOPS, EIOPC

• Close contact with ECON members• QIS 3 and QIS 4 • Several public hearings and public

meetings with stakeholders

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• Key element of Better Regulation• QIS 4 April – July 2008• Analysis and conclusions from each QIS

published by CEIOPS• Results helped to shape the proposal and

influenced the negotiations• Some 1500 (re)insurers took part in QIS 4 • Results of QIS4 will feed into development of

implementing measures

Quantitative Impact StudiesQuantitative Impact Studies

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Solvency 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

and impact assessment

Adoption of Implementing

measures

QIS 4

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 II…Solvency II…

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

• Economic, risk based approach

• Proportionality principle

• Group supervision

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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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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: corridor between 25% and 45% of the SCR• 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 Pillar 3!

• 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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Improved group supervision

• Group supervision no longer supplementary

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

• Clear role and responsibilities for group supervisor chairing a college of supervisors

• Group internal model

• Group ORSA and Group Solvency and Financial Conditions Report

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Council Working Party negotiations

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

• Progress reports to ECOFIN under P and SI Presidencies

• General approach ECOFIN: 2/12/2008 under FR Presidency

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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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Result obtained

• Some 150 amendments were finally adopted in ECON

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

• EP opposed introduction of duration approach for equity risk and Pillar 1 dampener

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Trilogues

• Extremely difficult negotiations between Council and European Parliament

• 8 Trilogue meetings were held• EP accepts deletion of group support with

review clause• EP accepts duration approach under

conditions (mainly pension business)

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Political agreement

• Agreement by Coreper on 1 April 2009 of compromise package agreed during the Trilogue meetings

• EP adopts compromise package in plenary on 22 April 2009 with 593 votes in favour and 80 opposed

• ECOFIN Council notes agreement of EP on 5 May 2009

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Next steps

• Final adoption of the Framework Directive after finalisation in 22 official languages

• Preparation of implementing measures by EC with help of CEIOPS and EIOPC

• Delivery of level 3 guidance by CEIOPS

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Preparation of implementing measures

• 3 consultation rounds by CEIOPS during the course of 2009

• Final CEIOPS advice by January 2010• Discussion of draft texts with MS in

subcommittee of EIOPC• Preparation of Impact Assessment with

the help of an external consultant

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Finalisation of the process

• Last QIS exercise (QIS 5) to be launched in August 2010 based upon draft technical specifications to be published in March 2010

• Several hearings with stakeholders and EP

• Publication of level 3 guidance by CEIOPS by the end of 2011

• Agreement on implementing measures by end October 2011

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The de Larosière Report

• Report issued end February 2009• Commission Communication of 27 May

2009: keep functional supervision but with strengthening of EU level (ESRC, ESFS with EBA, ESA and EIOPA)

• Legislative proposals by EC Autumn 2009• Amendment of recast text in order to

reflect de Larosière changes

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