1. Head of Unit, Insurance and Pensions, DG Markt, European Commission
Faculty of Actuaries Edinburgh, 1 October The Challenge of Solvency II
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. Proposal for a Framework Directive July 10th 2007
14 existing Insurance Directives (direct insurance, reinsurance, groups etc.)
+ Solvency II
Codification &
New Articles
Recast
&
Codification
= 1 Directive ‘EU Insurance sourcebook’

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

5. The new regime…
Introduces an economic risk based approach that will reward good risk management and enhance policyholder protection
Places emphasis on the responsibility of the senior management to manage their business responsibly
Fosters and demands greater supervisory convergence across the Community

6. 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

7. Many players & stakeholders in the process…
Commission Proposal for a Directive following consultation & dialogue with
Industry
Professionals (e.g. Groupe Consultatif)
CEIOPS
Member State Experts
European Parliament and Council of Ministers negotiate and have final say over law
Implementation by national authorities and 1000s of insurers in Europe

8. Quantitative Impact Studies
Key element of Better Regulation
QIS 3 April – June 2007
Analysis and conclusions from QIS3 will be published in November 2007
Results will feed into negotiations, changes to high-level framework if necessary
QIS 4 will take place between April and July 2008 following public consultation with all stakeholders
Results of QIS4 will feed into development of implementing measures

9. Solvency II timetable for 2007-2012
2008
2009
2010
2011
2012
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
and impact assessment
Adoption of Implementing measures
July 2007
Solvency II Directive published
2012
Solvency II enters into force
QIS 2
QIS 3
QIS 4

10. Solvency II – Content & Targets
Solvency II uses the “three-pillar approach” found in Basel II
Underwriting Risk
Market-/ALM Risk
Credit Risk
Operational Risk
Risk category
Solvency requirements
Pillar I
Quantitative Supervisory
Calculation of a risk adequate capital need on the basis of company individual risk profiles
Incentives to develop internal systems to measure and manage risks
Cover- und Capital investment directives
Integrated Solo-Plus supervision and Supervision of reinsurance companies
Supervisory process
Pillar II
Qualitative Supervisory
Assessment of the Risk management and control systems and processes Supervisory of:
Risk categories
RI Program
Internal Risk Model
Stress tests and sensitivities
Asset-Liability Mismatch
Mgmt. assessment „Fit and Proper“
Peer Reviews of other Supervisory Bodies
Market transparency
Pillar III
Strengthening of Market mechanism
Disclosure requirements
Risks
Sensitivity and scenario analysis of assets and technical provisions
Results of the quantitative and qualitative supervisory Assessment
…..
Still widely undefined, ongoing dialog with the IASB
Trend: Fair Value Reporting

11. From Solvency I to a Solvency II Balance Sheet
Economic View “The overall objective of prudential regulation must be to ensure that an insurer maintains, at all times, financial resources which are adequate, both as to amount and quality, to ensure there is no significant risk that its liabilities cannot be met as they fall due.” (CP20, 2.2)
„OLD“
„NEW“
Statuary Value of Assets
Statuary Value of Liabilities.
Required Capital
Ratio of required to
available capital
Market Value of Assets
Best Estimate of Liabilities.
Risk- Margin
Technical Provisions
Solvency Capital Requirement
Ratio of required to available capital
Available Capital
Minimum Capital Requirement

12. Solvency II – Challenges

13. Pillar I
The introduction of market consistent valuation of assets and liabilities and economically based capital requirements will require insurers:
to accurately assess their current financial position using modern financial mathematical and actuarial techniques and to better manage their asset-liability mis-match risk
to fully understand the economic effects of the risk mitigation techniques they use such as reinsurance, securitisation and derivatives

14. Pillar II
The introduction of qualitative risk management standards covering all risks, not just those captured by the Pillar 1 requirements will require insurers:
to ensure that risk assessment and risk management play a central role in their system of governance
to explain to their supervisors how they manage and control the risks they run and how they determine their own capital needs

15. Actuarial Function
The acturial function shall be carried out by persons sufficient knowledge of actuarial and financial mathematics and able where appropriate, to demonstrate their relevant experience and expertise with applicable professional and other standards

16. Coordinate the calculation of technical provisions;
Ensure the appropriateness of the methodologies and underlying models used as well as the assumptions made in the calculation of technical provisions;
Assess the sufficiency and quality of the data used in the calculation of technical provisions;
Compare best estimates against experience;
Inform the administrative or management body of the reliability and adequacy of the calculation of technical provisions;
Oversee the calculation of technical provisions;
Express an opinion on the overall underwriting policy;
Express an opinion on the adequacy of reinsurance arrangements;
Contribute to the effective implementation of the risk management system.

17. Pillar III
The introduction of new disclosure requirements bringing market discipline to bear on insurers will require insurers:
to explain to shareholders, rating agencies and analysts clearly and accurately how their risk profile and risk appetite fits in with their overall business strategy
to explain to external stakeholders how they assess and manage risk, particularly those insurers using an internal model to calculate capital requirements

18. Group supervision
Insurers wishing to use the new approach to group supervision will be required:
to monitor, manage and control risk at group level, and in particular diversification effects across both legal entities and lines of business in their risk management processes and practices
to manage their capital needs and investments holistically rather than in a piece-meal fashion on a legal entity basis

19. Conclusion
Solvency II is all about improving risk management and rewarding already existing good practice
Updating risk management processes and practices in any company takes time
Insurers need to start preparing now, if they do not want to be caught out when Solvency II comes into force
The future belongs to those who prepare for it today