solvency ii news january 2012

Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.solvency-ii-associa

tion.com

Solvency I I News, January 2012

Dear member,

Basel iii (the Capital Requirements Directive 4 (CRD IV) in the European Union) and Solvency ii become more similar month after month.

With the CRC 4 the European Commission has brought forward proposals to change the behavior of the 8000 banks that operate in Europe.

The overarching goal is to strengthen the resilience of the EU banking sector while ensuring that banks continue to finance economic activity and growth.

Well, the Basel iii / Capital Requirements Directive 4 in EU, is not a directive any more. I t is a directive and a regulation.

The directive governs the access to deposit-taking

activities. The regulation governs how activities of credit

institutions andinvestment firms are carried out.

While Member States will have to transpose the directive into national law, the ***regulation is directly applicable***, which means that it creates law that takes immediate effect in all Member States in the same way as a national instrument, without any further action on the part of the national authorities.

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This removes the major sources of national divergences (different interpretations, gold-plating).

It also makes the regulatory process faster and makes it easier to react to changed market conditions.

It increases transparency, as one rule as written in the regulation will apply across the single market.

But, th e Solv ency I I Direct iv e is a… direct iv e . Where is the regulation?Isn’t it a regulatory arbitrage challenge (or opportunity)?

This is going to change.

Today we have a clear opinion: Julian Adams, Director of Insurance, Association of British Insurers, said that “we expect the Level 2 text to be implemented by way of a Regulation, meaning that it will not be required to be transposed into our Handbook”

Isn’t it interesting?


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Solvency I I : what to expect over the coming monthsSpeech by Julian Adams, Director of Insurance, Association of

British Insurers, Solvency I I Conference, 8 December 2011

Many of you will have been at the FSA’s own event on Solvency I I in early November, where we set out some more detail about how we intend to approach internal model approval in light of our revised expectations about when the Solvency I I Directive will be implemented.

I don’t intend to rehearse the content of that event here; rather I ’d like to focus on three subjects.

While these will mainly be pertinent to internal model firms, I hope they will be of wider interest, not least because they provide some insight into the way in which we are trying to deal with the ongoing policy uncertainty surrounding Solvency I I .

The first is the approach we will take with those firms that wish to use their Solvency I I work to meet the current ICAS requirements to remove the need for parallel running of two different models.

Second, I’d like to clarify the basis on which applications for internal models should be submitted as we received a question about whether this should be the Contents of Application or the Commission’s Level 2 text.

The third subject is group supervision, particularly in relation to colleges of supervisors and the importance of this forum in decision making for regulated firms and groups with cross-border operations.

When we spoke to the industry about internal model approval last month, we set out how we would make use of the additional time created by the bifurcation proposal, which we expect to form part of the final package of measures in the Omnibus I I Directive.


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In order to maintain momentum, and to build on the valuable work you have done already, we have set out submission slots to firms for when we expect to receive applications from them, both for internal model approval and also for other approvals which they will be seeking to have in place from Day One.

While the general response to this initiative has been positive, we have received two specific challenges, and I thought it would be helpful to respond to these more fully today.

The first of these challenges was on the interaction between Solvency I I models and existing ICAS requirements, particularly the effective requirement on firms to run their ICAS models as a regular assessment of their capital position.

We have previously set out an aspiration to allow in effect early use of Solvency I I models where this is appropriate, and I want to explain how we would seek to achieve this.

As I said last month, we have to be clear that our current rules will remain in force for all firms until the Solvency I I regime comes into force for firms on 1 January 2014.

A regime that allowed selective removal of current rules in anticipation of new requirements that were not yet in force would not appear to us to be justified from a policy point of view.

What we are in a position to do, however, is to invite firms to consider how they think their work on their Solvency I I model could be used to meet those current rules, thereby removing the need for parallel running of two different models.

When we receive a firm’s model submission, we will review it and expect to reach a point where we are able to form a view on that submission, which could be well in advance of the implementation date.


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Where this is the case, we will communicate this to the firm, and may also give individual capital guidance for the interim period based on the model.

As the current requirements will remain in force, it will be incumbent on firms to satisfy themselves that the Solvency I I model, alongside their wider system of risk management and governance, meets the existing requirements in our Handbook.

By approaching the issue in this way, we intend to avoid the need for firms to apply for a complicated series of waivers or to seek specific permission from us to make the transition early.

We believe this is both proportionate and appropriate, given the amount of review work we will have done with firms following submission of their Solvency I I model application to us.

As an aside, I should mention also the position for firms intending to use the standard formula.

Here, we have said that we will review the appropriateness of the proposed use of the standard formula in 2013, by which time we expect that the standard formula calibrations will have been finalised, and firms will have had the opportunity to apply them.

Given the proximity of this work to the implementation date of 1 January 2014, we expect standard formula firms to carry on using their existing ICAS models for solvency purposes up to the Solvency I I implementation date.

The second area I’d like to cover is the basis on which applications for internal models should be submitted.


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We were asked whether they should be based on the previously- published Contents of Application or on the Level 2 text that the Commission circulated in November, accepting that this is not yet published or finalised and is subject to change.

This point is becoming pressing, given that we will be issuing guidance materials to firms in February of next year on our application processes and the supporting materials you will be required to submit to us.

It is clear that the Level 2 text – and, in due course, the Level 3 text which will supplement it – is more appropriate to use as a matter of principle, since this sets out much more clearly the basis on which we are expected to assess firms’ applications, and it is the standard against which you and we will ultimately be judged.

Using the recent version of the Level 2 text in the context of our implementation activities would, however, pose two particular challenges.

The first is quite simply that the text as it stands has not been published, and is not technically in the public domain.We are aware that a number of firms have it, but we are not in a positionto make it available to everyone as it is not ours to publish.

The second is that the text is not yet final, and will not even be released for consultation until after Omnibus I I is finalised in the first quarter of next year. So, we do not expect to have final Level 2 text until the middle of 2012 at the earliest.

On the other hand, the Contents of Application are out of date, having been published in April 2010 and not reviewed in light of more recent legislative developments, but they do represent an internally-agreed and public standard for the work that has been done to date, which we have consistently applied to firms in our pre-application process.


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They therefore represent the basis of most work done by firms to

date. On balance, we feel that basing our application approach

on the Level 2text is the most sensible way to proceed, and we propose to do this is bycross-referencing the Level 2 text in the guidance materials we will be making available to firms in February of next year.

The reason for this is that we expect the Level 2 text to be implemented by way of a Regulation, meaning that it will not be required to be transposed into our Handbook.

It will therefore be incumbent on firms to comply with those requirements directly, and we think that this is the most appropriate approach in the run up to implementation as it will mirror the post- implementation regime.

We accept that this approach means that the criteria may change over time, but the text which is available now represents the best and most up-to-date view of what the final position is likely to be.

Any attempts by us to interpret or transpose this text now or in the future would give rise to legal risk for us and firms.

I am aware that this will mean that some firms may feel that their efforts in following the Contents of Application approach will have been wasted, and I would like to reassure you that this is not the case.

We will expect you to submit ***documentary evidence*** that you meet the requirements set out in the Directive, and completion of the Contents of Application is likely to go a long way towards demonstrating compliance with the Level 2 requirements, but it is those Level 2 requirements which will be definitive. Solvency ii Association

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As I have already mentioned, we intend to make available to you as much supporting material as we can to help you make the necessary applications, and intend to do this in February 2012.

What I have attempted to do today is give some additional clarity around issues that we know are of particular interest to firms and that have been raised with us.

If there are other, similar issues, or if our timescales are likely to cause you issues of any kind, please feel free to speak to your usual supervisory contact.

I’d like to turn finally to group supervision.

The concept and scope of group supervision under Solvency I I is much wider than under the current Directives, and will require a cultural as well as a procedural shift, both on the part of regulators and firms.

The role of a college is significantly enhanced under the Solvency I I Directive.

The remit of the college encompasses all three pillars of Solvency I I , and the college will be expected to form a collective view on issues such as strategy and governance, and to take a more prospective view.

We are already working as part of colleges for firms intending to apply to use an internal model, both for UK groups where we are the group supervisor, and also where we supervise subsidiaries of groups that are based elsewhere.

Colleges are, however, just as important in the context of standard formula groups, as decisions will still need to be taken at the group level on issues requiring supervisory approval, such as the choice of calculation method.


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Supervisory colleges are the main mechanism we will use to put some of the Directive’s intentions into action.

We are working hard to coordinate our work with colleagues in other member states to make sure that collectively we are able to make decisions at the right point in time.

We are committed to our role in delivering the potentially significant benefits associated with a meaningful and forward-looking group supervision regime, which goes well beyond a narrow comparison of solvency positions and looks closely at the group’s overall strategic and economic position.

This takes us to the principal aim of Solvency I I to deliver policyholder protection in a consistent way across Europe, with the added benefits of facilitating financial stability and levelling the playing field in the single market.

In delivering this approach we will of course be assisted by our colleagues in EIOPA, whose role will develop as we move to implementation and beyond.

EIOPA already attend supervisory college meetings, and their role will take account of issues such as consistency of approach, as they will have a better view than most of the potential for success to be achieved in the group supervision space.

Colleges are primarily a supervisory process, however there are ways in which firms and groups can assist in making this process as efficient as possible – both for regulators and for them – and we would encourage you to engage with supervisory college activity where this is possible.

I would also urge you to recognise the increasing focus on group-level issues as time progresses, and to respond to group discussions in the


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same thoughtful and constructive way as you already do with discussions on individual entities.

Before closing, I would like to highlight to you again the consultations that are currently open for your comment from the FSA, the Treasury and EIOPA.

These consultations give you an opportunity to influence the development of policy and the approach to implementation, and I urge you to respond to them.

I hope that today I have been able to provide you with some greater clarity about how we in the UK are going to manage implementation and transition for internal model firms, as well as giving you some insight into the practicalities of the group supervision regime.

Some of my colleagues are participating in a number of the panel sessions taking place throughout the day, and they will be in a position to provide any further detail you may require.

In the meantime, thank you once again to the ABI for giving me the opportunity to speak to you today and thank you for your attention.


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Investigating the EIOPA presentations …

Note:This is another opportunity to see that it will take some time until we put our hands on the final Level 2 measures.


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Note:Will we have a countercyclical buffer similar to the Basel iii one?

In Basel iii we have the countercyclical capital buffer, to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the build up of system-wide risk.

Protecting the banking sector in this context is not simply ensuring that individual banks remain solvent through a period of stress, as the minimum capital requirement and capital conservation buffer are together designed to fulfil this objective.

Rather, the aim is to ensure that the banking sector in aggregate has the capital on hand to help maintain the flow of credit in the economy Solvency ii Association

























without its solvency being questioned, when the broader financial system experiences stress after a period of excess credit growth.

This should help to reduce the risk of the supply of credit being constrained by regulatory capital requirements that could undermine the performance of the real economy and result in additional credit losses in the banking system.

In addressing the aim of protecting the banking sector from the credit cycle, the countercyclical capital buffer regime may also help to lean against the build-up phase of the cycle in the first place.

This would occur through the capital buffer acting to raise the cost of credit, and therefore dampen its demand, when there is evidence that the stock of credit has grown to excessive levels relative to the benchmarks of past experience.

This potential moderating effect on the build-up phase of the credit cycle should be viewed as a positive side benefit, rather than the primary aim of the countercyclical capital buffer regime.

Did we have something like that in the Solvency I I Directive? Not in the Directive. Yes in the discussions after the final Basel iii rules.

There are many unknown unknowns to the moment…


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The abbreviation CCCP was a nightmare during the cold war (CCCP was the Russian abbreviation for the Soviet Union).

Now it becomes a Solvency ii nightmare … as the European Commission has introduced a Counter-Cyclical Capital matching Premium (CCCP) as an alternative to the liquidity premium. We do not know the details yet.

We know that “EIOPA shall publish technical

information” Time to have a look at Article 77a of the

Omnibus I I Directive: Solvency ii Associationwww.solvency-ii-association.co

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"Technical information produced by the European Insurance and Occupational Pensions Authority

EIOPA shall publish technical information including the relevant risk- free interest rate term structure.

Where EIOPA observes an illiquidity premium in the financial markets in periods of stressed liquidity, information relating to the illiquidity premium, including its size shall also be published.

EIOPA shall carry out the observation of the illiquidity premium and the derivation of the information on a transparent, objective and reliable basis.

Information for all these purposes shall be derived according to methods and assumptions which may include formulae, or determinations made by EIOPA.”


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Note:The moral of the story is that if our risk management structure is not good enough, they will not even consider the Pillar 1 numbers…

At least EIOPA is not brainwashing the Solvency ii professional into believing that they must understand what Warren Buffett has said in order to understand Solvency iii…… or not? (next slide)


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First EIOPA Conference, Frankfurt, 16 November, 2011

The European Insurance and Occupational Pensions Authority hosted its first Annual Conference in Frankfurt.

Around 350 participants followed experts discussing insurance and occupational pensions supervision and regulation.

The major topics addressed at the conference were Solvency I I , the Future of Occupational Pensions, Challenges and Opportunities for EU Insurance Regulation as well as Consumer Protection.

Additionally, EIOPA provided an update on its on-going work for preparing the future implementation of the Solvency I I directive, which addresses the need of the national supervisory authorities and the insurance industry for clarity on the content of the standards and guidelines for Solvency I I as well as on the timeline of activities necessary to prepare for Solvency I I .

*** Th e nex t st ep on EIOP A’s work p lan is the lau nch of a pu b lic consultation on draft standards and guidelines for Solvency I I *** .

The consultation is scheduled to start in May 2012. After the consultation EIOPA aims to ***finalise its proposals in September 2012*** .

The timing of these activities is based on some assumptions on the development of the political process:

First of all, the approval of the Omnibus I I directive by the European Parliament and the Council of the European Union and the publication of the proposal for a Delegated Act by the Commission in the first half of 2012;

Secondly, a phasing-in period of the new regime during 2013;Solvency ii Associationwww.solvency-ii-association.co

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Finally, the application of Solvency I I as of 1 January 2014 for the consultation may be adjusted depending on the realisation of these assumptions.

Amended rules for financial conglomerates supervision

Amended European rules on the supervision of financial conglomerates giving national financial supervisors new powers to better oversee the conglomerates' parent entities, such as holding companies, come into force ( Directive 2011/89/ EU).

The new rules will allow supervisors to apply banking supervision, insurance supervision and supplementary supervision at the same time, as appropriate and necessary, thereby remedying the unintended loopholes identified during the financial crisis.

In this way, supervisors should be able to obtain better information at an earlier stage should a financial conglomerate run into trouble and be better equipped to intervene.

In addition, banking groups, insurance groups and conglomerates will be obliged to publish basic elements of a resolution plan for the group or conglomerate, their legal structure as compared to their business structure.

Finally, managers of alternative investment funds (for example hedge fund managers) will be included in the scope of supplementary supervision when they are part of a conglomerate.

Financial conglomerates are financial groups that are often active in more than one country and operate in both the insurance and banking businesses.


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Frequently Asked Questions

1)What are financial conglomerates?

Financial conglomerates are financial groups that are active in one or more country and operate in both the insurance and banking business.

They are often large and complex.

Due to their size, financial conglomerates are often of systemic importance to our economy: either for one or more Member States or even for the EU as a whole.

The fact that financial conglomerates can impact our economy was highlighted during the financial crisis in 2008.

A number of financial conglomerates had difficulties and governments across Europe had to resort to large financial injections in order to keep these financial conglomerates afloat.

2) How are financial conglomerates currently supervised?

Currently, supervision in Europe is mainly done at the national level. Each single legal entity that wants to operate in the banking sector in an EU Member State needs authorisation from the national financial supervisor and needs to comply with the relevant banking regulation. The same applies for legal entities that want to operate in the insurance sector: such entities need to be authorized as insurance companies and must comply with the relevant insurance regulation.

Supervision rules also allow for a group of authorised banking entities to be subject to consolidated banking supervision.

Similarly, in the insurance sector, a group of authorised insurance entities can be subject to insurance group supervision. Solvency ii Association

























Financial conglomerates are often active in both banking and insurance business and operate in several EU Member States.

The Financial Conglomerate Directive (2002/ 87/ EC) gives national financial supervisors additional powers and tools to watch over these firms.

More specifically, the Directive requires supervisors to apply supplementary supervision on these conglomerates, in addition to the specific banking and insurance supervision.

3) What is supplementary supervision?

Supplementary supervision becomes relevant when a financial group (or a "conglomerate") consists of several legal entities that are authorised to do business in banking, insurance or other sectors of the financial services industry.

The number of legal entities within a conglomerate can exceed 500 or even 1.000.

All of these entities are controlled by a parent entity, where decisions are made regarding business strategies, internal governance and group-wide risk management.

While a parent entity can be a regulated entity itself, such as a bank or an insurance company, it can also take the form of a holding company.

Supplementary supervision focuses on problems that can arise from:

Multiple use of capital: supervisors are to make sure that capital is not used twice or more within a conglomerate. For example, funds may not be included in the calculation of capital on both the level of the single entity and the parent entity.


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Group risks: Group risks are risks that arise from the group structure and which are not related to specific banking or specific insurance business.

They refer to risks of contagion (when risks spread from one end of the group to another), management complexity (managing more than 1.000 legal entities is a far more difficult challenge than managing 20 legal entities), risk concentration (the same risk materialising in several parts of the group at the same time), and conflicts of interest (e.g. one part of the group has an interest in selling an exposure, while another part of the group has an interest in keeping that exposure).

The 2002 Financial Conglomerates Directive allows national supervisors to monitor those risks, for example by requiring conglomerates to provide additional reporting.

Supervisors can also require conglomerates to present additional risk management or internal governance measures.

The Directive also requires supervisors to cooperate across sectors and across borders in order to control possible group risks.

4) Why is the Commission now proposing a revision of the Financial Conglomerates Directive?

In the light of the financial crisis, the Commission evaluated the effectiveness of the Financial Conglomerates Directive in 2008.

It found that supplementary supervision, as stipulated in the Directive, could not be carried out on certain financial groups because of their legal structure.

In some cases, national financial supervisors were left without the appropriate tools because they had been obliged to choose either banking or insurance supervision under the sector-specific directives or supplementary supervision under the Financial Conglomerates Directive


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as the definitions for banking and insurance holding companies in the sector-specific directives and for mixed holdings in the Conglomerates Directive were mutually exclusive.

The main objective of the revision of the Directive is to correct this unintended consequence of the current rules.

5) What is to change under the Commission's proposal?

The proposed amendments to the 2002 Directive can be summarised as follows:

Under the current rules, supervisors have to choose which supervision they apply when a group acquires a significant stake in another sector and when the parent entity is a holding company.

It is now proposed to change this: both sector-specific (banking and insurance) supervision and supplementary supervision could be applied on the conglomerate's parent entity, also if it concerns a holding company.

Banking supervision would therefore remain applicable even if the banking group acquires a significant stake in an insurance business.

By the same token, insurance supervision would also remain applicable if the insurance group acquires a significant stake in a banking business.

When justified by potential group risks as a whole, financial supervisors should be allowed to identify a group as a financial conglomerate and apply supplementary supervision.

The identification process of financial conglomerates should allow for risk-based assessments, in addition to existing definitions relating to size ("quantitative indicators").


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Under the current rules, the balance sheet figures are determinative when identifying conglomerates.

This approach sometimes results in a list of conglomerates that are not necessarily exposed to group risks, while groups that are evidently exposed to group risks are not always included within the scope of supplementary supervision.

Financial supervisors should be allowed to waive a group from supplementary supervision if it is small (smaller than 60 billion total assets) and if the supervisor assesses the group risks to be negligible, even if the small group meets the quantitative indicators.

This should enable supervisors to allocate their resources to the supplementary supervision of larger and systemically important conglomerates.

The proposed revision of the 2002 Financial Conglomerates Directive also amends the relevant banking and insurance supervision legislation, namely the Capital Requirements Directive (2006/ 48/ EC and 2006/ 49/ EC) and the Directive on Supplementary Supervision of Insurance Undertakings in Insurance Groups (98/78/ EC).

The Commission is also currently reflecting on tying in this initiative with Solvency I I , the next generation of supervisory rules for insurance and reinsurance companies in the EU.

6) How does this proposal tie in with the wider work on crisis prevention and management the EU is doing? Will the European Financial Supervision Authorities be involved?

The main objective of this initiative is to restore the full spectrum of supervisory tools and powers, regardless of the legal structures of financial conglomerates.


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This unintended consequence of the current rules needs to be addressed as soon as possible.

Nevertheless, the initiative will also strengthen the effective supervision of financial conglomerates.

The Commission believes that supplementary supervision of large, complex groups, operating in several countries, can only be effective if the same supervisory approach is applied consistently across all EU Member States.

As regards financial conglomerates operating in several EU countries, closer coordination between national financial supervisors will be required, particularly through the new European Financial Supervision Authorities.

The proposals regarding those Authorities are currently being negotiated between the Council and the European Parliament.

The new European Banking Authority (EBA) and the new European Insurance and Occupational Pensions Authority (EIOPA) are to form a Joint Committee to oversee cooperation and coordination between national supervisors in the case of financial conglomerates.

As a follow up to this proposal and in order to assist the Commission in proposing further improvements of the framework of supplementary supervision, the Joint Committee is also expected to look into extending the scope of supplementary supervision to non-regulated entities such as Special Purpose Entities.

These are legal entities where assets are stored off the groups' balance sheets.

During the crisis, it became clear that contagion and risk concentration originated also from non-regulated parts of financial conglomerates.Solvency ii Association

























This issue has been highlighted also on international level in the context of the G20 work.

It is the Commission's intention to continue to work on this issue and present further amendments to the Directive on Financial Conglomerates as regards this matter as well as other issues linked in particular to the new European supervisory structure.

The invisibilities within the most visible

In order to understand better all the above, it is time to remember the important speech for Michel Barnier, member of the European Commission responsible for the Internal Market and Services, delivered by Paulina Dejmek, Financial expert in Barnier's cabinet. More than 200 participants attended the Commission's Conglomerates Conference on 7 June 2010 in the Charlemagne building in Brussels.

Ladies and gentlemen, you and I have been reading thousands of opinions on how to improve the regulatory framework for large, complex financial institutions.

May I kick off the debate of today by agreeing with you, that we don’t need more regulation.

However, as you know, Commissioner Barnier is committed to make regulation intelligent and effective. When it comes to the supervision of large, complex financial institutions like conglomerates, the topic of this conference, there is a lot of work on our plate to get to intelligent and effective regulation.

JOINT FORUM PRINCIPLES

Ten years ago, the G10's Joint Forum of financial sector supervisors released the principles of supervising financial conglomerates.


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The leading idea was that groups in the financial sector, which are operating in several markets and with many regulated entities, were exposed to risks, which had nothing to do with the banking business or with the insurance business, but which had everything to do with the challenge of controlling a group of many different legal entities.

These group risks, the risks of contagion, of risk concentration, of management complexity and conflicts of interest, justified more intense, and a different kind of supervision of the larger, more complex groups, than of the smaller, simpler groups.

An illustrative example that makes clear to me what supplementary supervision is about is the supervision on the Australian Macquarie Group.

We look forward to hearing Charles Littrell this afternoon, explaining how APRA proposes to supervise groups like that, but let me try to explain.

If a company has both a bank and an airport under its control, the banking capital rules would require the bank to calculate the correct risk weights of the exposures related to the airport, or maybe even to deduct certain exposures related to the airport from own funds.

This is because the banking rules require the bank to hold adequate, risk based, capital buffers.

The supplementary rules, however, would require Macquarie Group to be aware of the potential contagion coming from the airport to the bank.

For example, a terrorist attack on Zaventem airport (for that's partly owned by Macquarie through an investment funds entity!) may induce depositors at Macquarie Bank to run and withdraw their savings accounts.


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The supplementary rules would include broader governance and risk management rules that require the board of Macquarie to have, for example, contingency plans and ring fencing policies available, or take other measures to control the group risks.

The Commission supports the principles of the Joint Forum to apply supplementary supervision when appropriate.

REVIEW

In 2002, the European institutions endorsed the principles in a directive for conglomerates, the FICOD, defining conglomerates as groups with both insurance and banking activities.

The review that the Commission Services carried out for the last two years, with your kind cooperation, showed that the regulatory framework in place worked well for those who could apply it.

However, not all supervisors could apply it as it was meant to be.

The combination of applicable directives in the financial sector created a situation where some supervisors had to choose either one or the other directive, if the legal structure was organized under a holding company.

This was not our objective.

Even more so, for those supervisors who need these specific powers, supplementary to their sectoral powers, this problem is urgent.

This is why the Commission will propose a quick fix next month, which must ensure that supplementary supervision can be applied in addition to sectoral supervision regardless of legal structures.

But the review revealed that more improvements were needed.Solvency ii Association

























When asking you what should be improved, you replied that capital treatments should be much more consistent across sectors, and that supervisory review processes for the large complex groups should not be done in a fragmented, sector based way, but on a group wide basis.

You also asked us to determine who should be subject to supplementary supervision in a more risk based manner.

Last year, as a lesson learnt during the crisis, also the Financial Stability Board realized that the supervision on large, complex groups could be improved.

They asked the Joint Forum to investigate the differentiated nature and scope of regulation:

“The appropriate bodies should review the differentiated nature of regulation in the banking, securities, and insurance sectors and provide a report outlining the issue and making recommendations on needed improvements.

A review of the scope of financial regulation, with a special emphasis on institutions, instruments, and markets that are currently unregulated, along with ensuring that all systemically-important institutions are appropriately regulated, should also be undertaken.”

The FSB realized, that the set of available rules for the financial sector which were meant to protect citizens from the abuse of information asymmetry, from the abuse of not knowing or seeing what they might need to know or see, might be outdated.

The rules worked as long as the rules, the business, and the citizens were dealing with the same package of services.The fragmented framework worked as long as the business was fragmented. Citizens could trust that the supervisor would see what thecitizen did not see.


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Today, business structures evolved to combinations of licenses for all kinds of financial services.

Both citizens and corporates are benefiting from packages of financial services, combinations of banking, insurance and investment products and services.

Companies in the financial sector innovated the way they control themselves, including non-regulated entities.

Five of them, all very different from each other and all subject to the same set of directives, will tell us how they control themselves as a group this afternoon.

The rules worked for one license businesses, one bank, one insurers, one asset manager.

Maybe it worked for two license firms, a firm with one bank license and one insurance license.

Does it work for firms of 100 licenses?

Does it work for firms of 2000 legal entities, of which 1000 authorized to do whatever they wish in the financial sector?

Where business strategies of the most visible financial services providers in this society are built upon a patchwork of regulated and nonregulated entities, do supervisors and regulators still see all the risks that they need to see?

Can citizens trust that no relevant risks remain invisible?

This is what the Financial Stability Board's question was about. The Joint Forum delivered, and the FSB endorsed their advice last January.


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The supervisors in the first panel of today will explain you all about it, and no doubt they will explain that we can no longer ignore the risks coming from non-regulated parts of the conglomerates in the financial sector.

As they put it: "Policymakers should ensure that all financial groups (particularly those providing cross-border services) are subject to supervision and regulation that captures the full spectrum of their activities and risks."

OUTLOOK

This is some work, ladies and gentlemen. We know you're worried about more work, which may dig up things you rather didn't see. We shouldn't be afraid. This is also an opportunity to tidy up and get to more intelligent and effective regulation.

Today we start a debate which may last for another 18 months, and which will not be easy.

We will publish the quick fix FICOD I proposal in order to allow supervisors to apply all the powers they need given the defined scope in the current FICOD.

But we may want to talk about the adequacy of that scope.

The Commission is committed to prepare a FICOD I I which does achieve the objective of supplementary supervision, the control of group risks, where ever they come from.

In the end, the overall objective remains the same: the protection of citizens from financial instability.

May we invite you to speak up and share your views with us about thefollowing questions:


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Does the regulatory framework still fit our aim to protect citizens from what they cannot see?

How can you and we enforce supplementary supervision that makes visible whatever is still invisible today?

We look forward to an interesting debate.


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Solvency I I Speakers Bureau

The Solvency I I Association has established the Solvency I I Speakers Bureau for firms and organizations that want to access the expertise of Certified Solvency ii Professionals (CSiiPs) and Certified Solvency ii Equivalence Professionals (CSiiEPs).

The Solvency I I Association will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers.

To learn more:www.solvency-ii-association.com/Solvency_II_Speakers_Bureau.html

Course TitleCertified Solvency ii Professional (CSiiP):

Preparing for the Solvency ii Directive of the EU (3 days)

Objectives:This course has been designed to provide with the

knowledge and skills needed to understand and support compliance with the Solvency ii

Directive of the European Union.

Target Audience:This course is intended for decision makers,

managers, professionals and consultants that:

A. Work in Insurance or Reinsurance firms of EEA countries.

B. Work in Groups - Financial Conglomerates (FC), Financial Holding Companies (FHC), Mixed Financial Holding Companies (MFHC), Insurance Holding Companies (IH C) - providing insurance and/ or


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reinsurance services in the EEA, whose parent is located in a country of the EEA.

C.Want to understand the challenges and the opportunities after the Solvency ii Directive.

This course is highly recommended for supervisors of EEA countries that want to understand how countries see Solvency I I as a Competitive Advantage.

This course is also recommended for all decision makers, managers, professionals and consultants of insurance and/ or reinsurance firms involved in risk and compliance management.

About the Course

INTRODUCTION The

European Union’s Legislative Process

Directives and Regulations

The Financial Services Action Plan (FSAP) of the EU

Extraterritorial Application of European Law

Extraterritorial Application of the Solvency I I Directive

Solvency ii and the Lamfalussy Process

Level 1: Framework Principles

Level 2: Detailed Technical MeasuresLevel 3: Strengthening Cooperation Among Regulators

Level 4: Enforcement Weaknesses of Solvency I From Solvency I to Solvency I I Solvency ii Players Solvency ii Objectives

THE SOLVENCY I I DIRECTIVE


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A Unified Legislative Basis for Prudential Regulation of Insurers and Reinsurers

Risk-Based Capital Allocation Scope of the Application Important Definitions Value-at-Risk in Solvency I I Authorisation Corporate Governance Governance Functions Risk Management Corporate Governance and Risk Management - Level 2 Fit and proper requirements for persons who effectively

run the undertaking or have other key functions Internal Controls Internal Audit Actuarial Function Outsourcing Board of Directors: Role and Solvency ii Responsibilities 12 Principles – System of Governance (Level 2)

PILLAR 2 Supervisory Review Process (SRP) Focus on Risk Management and Operational Risk Own Risk and Solvency Assessment (ORSA) ORSA - The Internal Assessment Process ORSA - The Supervisory Tool ORSA - Not a Third Solvency Capital Requirement Capital add-on

PILLAR 3 Disclosure Requirements The Solvency and Financial Condition Report (SFC)


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PILLAR I Valuation Of Assets And Liabilities Technical Provisions The Solvency Capital Requirement (SCR) The Value-at-Risk Measure Calibrated to a 99.5%

Confidence Level over a 1-year Time Horizon The Standard Approach The Internal Models The Collection of Additional H istorical Data External Data The Minimum Capital Requirement (MCR) Non-Compliance with the Minimum Capital

Requirement Non-Compliance with the Solvency Capital

Requirement Own Funds Investment Rules

INTERNAL MODEL APPROVAL CEIOPS Level 2 - Tests and Standards for Internal

Model Approval CEIOPS Level 2 - The procedure to be followed for the

approval of an internal model Internal Models Governance Group internal models Statistical quality standards Calibration and validation standards Documentation standards

SOLVENCY I I , GROUP SUPERVISION AND TH IRD COUNTRIES

Solvency I: Solo Plus Approach Group Supervision under Solvency I I Rights and duties of the group supervisor Group Solvency - Methods of calculation


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Method 1 (Default method): Accounting consolidation-based method

Method 2 (Alternative method): Deduction and aggregation method

Parent Undertakings Outside the Community - Verification of Equivalence

Parent Undertakings Outside the Community - Absence of Equivalence

The head of the group is in the EEA and the third country regime is not equivalent

The head of the group is in the EEA and the third country regime is equivalent

The head of the group is outside the EEA and the third country is not equivalent

The head of the group is outside the EEA and the third country regime is equivalent

Small and Medium-Sized Insurers: The Proportionality Principle

Captives and Solvency I I

EQUIVALENCE WITH SOLVENCY I I AROUND THE WORLD Solvency ii and Countries outside the European

Economic Area The International Association of Insurance Supervisors

(IAIS) The Swiss Solvency Test (SST) and Solvency ii: Solvency ii and the Offshore Financial Centers (OFCs) Solvency ii and the USA Solvency ii and the US National Association of Insurance

Commissioners (NAIC) - The Federal Insurance Office created under the Dodd-Frank Wall Street Reform and Consumer Protection Act in the USA, and the ORSA in the USA

FROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY I I DIRECTIVE Solvency ii Association

























Directive 2005/ 68/ EC of 16 November 2005 on Reinsurance - The Reinsurance Directive (RID)

CLOSING The Impact of Solvency ii Outside the EEA Providing Insurance Services to the European Client Competing with Banks Learning from the Basel ii Framework Regulatory Arbitrage: A Major Risk for Countries

that see Compliance as an Obligation, not an Opportunity

Basel I I , Basel I I I, Solvency I I and Regulatory Arbitrage

Challenges and Opportunities: What is next Regulatory Shopping after Solvency I I

To learn more about the online exam you may visit: www.solvency-ii- association.com/CSiiP_CSiiEP_Frequently_Asked_Questions.pdf

www.solvency-ii-association.com/CSiiP_CSiiEP_Certification_Steps.pdf

To learn more about the course:www.solvency-ii-association.com/Certified_Solvency_ii_Training.htm


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solvency ii news january 2012

Career

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