1 Royal Institute of Technology Stockholm, 12 June 2009 Solvency II: a new and modern solvency regime for the insurance industry Prof. 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 Framework Directive Proposed on 10 July 2007 Adopted April/May 2009 Recast & Codification Codification & New Articles + Solvency II 14 existing Insurance Directives (direct insurance, reinsurance, groups etc.) = 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 Why Solvency II?  Modernise regulatory framework  Need to act now before the present Solvency I regime breaks down  Provide the insurance industry with more capacity to take on new risks  Improve supervisory convergence  Reduce regulatory arbitrage between banking and insurance

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

7 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

8 8

9 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

10 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

11 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 Studies

12 Solvency II timetable for Directive development (Commission) CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training & development 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 Solvency II enters into force

13 New European solvency regime in place and operational in all Member States by October 2012!!

14 Solvency II… 3 ‘Pillars’ of equal importance: –Quantitative requirements –Qualitative requirements –Disclosure and reporting Economic, risk based approach Proportionality principle Group supervision

15 Solvency 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)

16 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

17 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

18 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

19 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

20 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

21 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)

22 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

23 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

24 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

25 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

26 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)

27 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

28 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

29 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

30 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

31 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

32 Solvency II modern, innovative and liberal regime for the prudential supervision of insurers, based on sound economic principles… … modern, innovative and liberal regime for the prudential supervision of insurers, based on sound economic principles…

33 Conclusion Solvency II is… good for you!

34 How to contact us? All official documents, including the text of Solvency II and preparatory papers are available on our website, which is regularly updated. nce/solvency/index_en.htm