CEIOPS’ Work on CEIOPS’ Work on Solvency IISolvency II

VI International VI International Conference on Conference on Insurance and Insurance and Pension Funds, Pension Funds, LisboaLisboa, X/25/2007, X/25/2007

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Outline

• Introduction to CEIOPS activity– Main strands of work– Organisation

• The SII project– Drivers– Timeframe– QIS 1, 2 and 3– Potential hurdles

• Role of CEIOPS as level 3 Committee– Toolkit

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Introduction to Introduction to CEIOPS activityCEIOPS activity

Since its establishment, CEIOPS’ activity has operated in a particular legislative context, very different from that of the other L3 committees

• In insurance, a radical change is under preparation. CEIOPS received waves of calls for advice for the Solvency II framework directive

• In pension funds and intermediary sectors, the EU legislative framework is recently transposed and achieves a limited degree of harmonization

CEIOPS had to shape its organization and work plan accordingly: scope for Level 3 activity restricted and challenging

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Insurance Groups Supervision Committee

Patrick Brady, Ireland

Financial StabilityCommittee

Kajal Vandenput, Belgium

Occupational PensionsCommittee

Tony Hobman, United KingdomInternal Governance,Supervisory Review and Reporting Expert Group

Gabriel Bernardino, Portugal

Internal ModelsExpert Group

Paul Sharma, United Kingdom

Financial RequirementsExpert Group

Pauline de Chatillon, France

IntermediariesExpert Group

Victor Rod, Luxembourg

Members´ Meeting

ManagingBoard

Chair: Thomas Steffen, GermanyW

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ConsultativePanel

S e c r e t a r i a t

ConvergenceCommittee

Michel Flamée, Belgium

Siena Protocol Revision Task Force

Peter Braumüller, Austria

Solvency II:

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The Solvency II Project: The Solvency II Project: DriversDrivers

Consistency with economic Consistency with economic reality and risk sensitivenessreality and risk sensitiveness

Compatibility with IASBCompatibility with IASB

Incentives for internal risk Incentives for internal risk managementmanagement

Streamlined group supervisionStreamlined group supervision

Comparability with banking rulesComparability with banking rules

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The Solvency II Project:The Solvency II Project:Main aspects of CEIOPS Main aspects of CEIOPS

adviceadvice

PILLAR I

• Technical provisions• Capital requirements (SCR and MCR)• Safety Measures (eligible assets,

quantitative limits)• Own Funds (basic own funds, ancillary

own funds, tier structure)

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The Solvency II Project:The Solvency II Project:Main aspects of CEIOPS Main aspects of CEIOPS

adviceadvice

PILLAR IISupervisory review process: “dialogue” with the management

(ORSA)

The review may highlight that there are:

1. Risks not captured by the standard f. (or not captured enough)- Partial or full internal model- Capital add-on

2. Deficiencies in governance, risk management or internal control- Restoring measures- Capital add on

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The Solvency II Project:The Solvency II Project:Main aspects of CEIOPS Main aspects of CEIOPS

adviceadvicePILLAR IIIDisclosure of capital requirements

– Overall capital requirement, without specification of any capital add-on

– Public disclosure of any breach to MCR or SCR, if necessary, before the year end ( a transitional period may be needed)

– Adequate consumer informationValuation

– Over-riding principle: methodologies for calculating items in general purpose financial reports should be used for, or be substantially consistent with the methodologies used for supervisory reporting

-> Prudential filters should be limited as much as possible

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Incentive for risk management:Incentive for risk management:Dynamics of capital requirementsDynamics of capital requirements

MCR

SCRSCR

AdjustedSCR

AvailableCapital

Safetynet

Standardmodel

InternalModel

Supervisoryintervention

Pillar IInsurance, market, credit

and operational risk

Pillar IIAdditional risks or deficiencies

Including capital add-onfollowing SRP

Decrease / [increase] if

internal modelreflects risks

more appropriately

Increase ifrisks not

appropriatelyreflected or governance

deficient

Pillar IIIDisclosure of

Solvency requirementsand breaches

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Groups

• For each Group a group supervisor – Specific rights and duties

• Group level diversification benefits– Active debate on when and how to recognise these

• Group capital (SCR) monitored by group supervisor; MCR set for individual subsidiaries by solo supervisors– SII Directive allows firms to opt for group

supervision, subject to satisfying conditions/supervisor approval

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The Solvency II ProjectThe Solvency II ProjectProcess Process

Past CEIOPS contributionPast CEIOPS contribution

07/04 12/04 02/05 04/05 06/05 07/05 10/05 12/05 01/06 03/06 04/06 06/06 10/06

Framework for

Consultation

First wave of CfA

Second waveof CfA

Third waveof CfA

Answers to the firstwave

Amended Framework

for Consultation

Additional Request

for Advice

QIS1 QIS 2PFS

09/05

FurtherAdvice

FurtherAdvice

Answers to the second wave

Answers to the third wave

03/07

Amended Framework for Consultation

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Additional Request for QIS

CEIOPSCEIOPSPresent and FuturePresent and Future

01/07 03/07 04/07 06/07 10/07 04/08

Further advice

QIS3

Amended Framework for Consultation

07/07

Directive negotiation (adoption end 2008, early 2009) and preparation of Level 2 measures (1st half 2010, adoption 2nd half; Level 3 guidance). Implementation by 2012

Further Advice on Implementing Measures

12/07

Draft QIS4 specifications

Launch of QIS4

QIS3 Report

QIS5, QIS6 ?

Advice on proportionalityAdvice on groups

05/08

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Level 3 work of CEIOPS Level 3 work of CEIOPS on Solvency IIon Solvency II

Contributing to effective EU regulatory convergenceContributing to effective EU regulatory convergence•• Exchange of information on national interpretation and implemenExchange of information on national interpretation and implementationtation•• Comparisons on national transpositions (also webComparisons on national transpositions (also web--based)based)

Converging supervisory processes and toolsConverging supervisory processes and tools•• Standards on supervisory toolStandards on supervisory tool--kit and best practiceskit and best practices•• Common reporting and sharing of data between supervisorsCommon reporting and sharing of data between supervisors

Creating common supervisory cultureCreating common supervisory culture•• EUEU--wide training programmeswide training programmes•• Platform for exchange of staff of EU Supervisory AuthoritiesPlatform for exchange of staff of EU Supervisory Authorities

Facilitating cooperation in day to day supervisionFacilitating cooperation in day to day supervision•• Conclusion and review of agreements (Conclusion and review of agreements (MOUsMOUs))•• Developing operational networks (groups)Developing operational networks (groups)

–– Streamlined exchange of informationStreamlined exchange of information–– Common assessmentCommon assessment–– Joint activities (on site inspections)Joint activities (on site inspections)

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Testing the impact of SII: Testing the impact of SII: QIS3QIS3

• Aims of this exercise:– High participation rate by the industry– Practicability and suitability of calculation– Impact on balance sheets– Suitability of the tentative calibrations– Impact at group level

• General approach– Minimum of options and double calculations– Reduced complexity and better explanation of

underlying rationale – “Best efforts basis”– Analysis of group data

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Market CoverageMarket Coverage

28 out of 30 EEA 28 out of 30 EEA Member Countries Member Countries participatedparticipated

New in the New in the Sample: Sample:

•• BulgariaBulgaria•• CyprusCyprus•• GreeceGreece•• Latvia Latvia •• SlovakiaSlovakia

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Participation by countryCountry Life Non-Life ein--surancComposite Total

Mutuals thereof

Health thereof

Austria 6 10 0 11 27 3 6Belgium 1 6 0 8 15 0 0Bulgaria 2 4 0 0 6 0 1Cyprus 3 2 0 0 5 0 0Czech Republic 1 3 0 8 12 0 0Denmark 31 38 0 0 69 16 0Estonia 4 3 0 0 7 0 0Finland 8 11 0 0 19 7 0France 41 52 2 59 154 77 0Germany 60 110 9 0 179 41 23Greece 1 0 0 0 1 0 0Hungary 4 3 0 6 13 1 0Iceland 2 5 0 0 7 0 0Ireland 16 16 7 0 39 0 0Italy 29 26 0 18 73 2 0Latvia 1 1 0 0 2 0 0Lithuania 3 8 0 0 11 0 0Luxembourg 6 7 3 0 16 2 2Malta 2 2 0 1 5 0 0Netherlands 14 44 0 0 58 14 23Norway 3 16 0 0 19 5 0Poland 9 15 0 0 24 2 0Portugal 14 14 0 5 33 1 0Slovakia 3 0 0 2 5 0 0Slovenia 2 2 2 5 11 1 0Spain 15 57 2 34 108 38 0Sweden 14 13 0 0 27 22 0United Kingdom 35 43 3 1 82 19 0Total 330 511 28 158 1027 251 55

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Market coverageCountry Life Non-Life HealthAustria 88.6 69.9 100.0Belgium 68.0 55.0Bulgaria 44.0 24.0 59.0Cyprus 56.0 13.0Czech Republic 84.7 90.9Denmark 75.0 76.3Estonia 87.0 31.0Finland 95.0 89.0France 80.8 56.4Germany 84.0 77.0 84.0Greece 12.0 0.0Hungary 86.0 86.0Iceland 72.0 100.0Ireland 47.0 37.0Italy 71.3 82.4Latvia 41.0 10.0Lithuania 41.9 74.7Luxembourg 9.0 60.0 89.0Malta 92.0 17.5Netherlands 68.0 57.0 68.0Norway 62.6 88.5Poland 74.0 80.9Portugal 98.7 93.7Slovakia 50.1 47.6Slovenia 97.0 88.0Spain 76.2 77.8Sweden 61.0 65.0United Kingdom 65.8 73.5

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QIS3QIS3Preliminary ResultsPreliminary Results

• Broad impact– TP decreases, capital requirement increases

… philosophy of SII in removing implicit prudence in the TP and including more risks in the capital requirements

– Most undertakings see a decrease in the solvency ratio…– …but remain solvent

• Capital– Little information on impact of Tier structure

• Technical Provisions– Life: problems with valuation of options and guarantees– Non-life: segmentation issues

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QIS3QIS3Preliminary ResultsPreliminary Results

• SCR– Many comments on individual modules…– …especially on non-life parameterisation, credit default risk and

on the correlations

• MCR– Most participants favour compact approach over modular

approach– Some negative MCRs observed due to profit sharing policies in

life business

• Group results– Less data received than was hoped for: 50 group results from 16

member states

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Potential hurdles to Potential hurdles to the success of SIIthe success of SII

Complexity of the new supervisory frameworkSupervisory discretion inherent to a principle based approachInconsistent national implementationsDivergent approach and tools in national supervisionLack of expertise at national levelFragmented supervisory processHigh cost for compliance

The legislative framework should set the basis for avoiding or limiting these issues.

But this needs to be complemented by appropriate actions at level 3.

These issues will be covered by CEIOPS’ role as a Level 3 Committee.

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Solvency IISolvency IIFuture DevelopmentsFuture Developments

• Important dates

– 20 November: publication of the QIS3 report

– Mid December: release of the QIS4 draft specifications for consultation

– QIS4 in 2008

– Implementation: 2012

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The way forward

• Solvency II is not only a set of rules addressed to firms, but a comprehensive system for carrying out day to day supervision

• Its success will also depend on how CEIOPS will cover its role as a Level 3 Committee, supporting national supervisors

• At the moment CEIOPS is contributing to creation of the regulatory framework (level 1 and, soon, level 2)

• But actual implementation of Solvency II should rely on advanced and convergent supervisory arrangements and tools at EU level (level 3).

• CEIOPS intends to develop its activity accordingly, in cooperation with all stakeholders.

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THANK YOU…THANK YOU…And see you in FrankfurtAnd see you in Frankfurt

CEIOPS conference CEIOPS conference XI/20/2007XI/20/2007

www.www.ceiopsceiops.org.org