1. CEIOPS’ work on Solvency II
ASSAL-EU dialogue
Mexico, 27 April 2009
22-Jun-19

2. Introduction Institutional framework The foundation of Solvency II
Some more detail…
The reality check: QIS
Medium term deliverables
22-Jun-19

3. CEIOPS’ role in the development of SII
Financial
Services
Committee
Economic
and Finance
Committee
European
Commission
Council of Ministers
(ECOFIN)
Parliament
Parliament
Committees
Council
Working
Groups
Regulators
“level 2”
committees
ESC
Securities
EIOPC
Insurance
Pensions
EBC
Banking
FCC
Financial
Conglomerates
Supervisors
“level 3”
committees
CESR
CEIOPS
CEBS
IWCFC
“3L3”
22-Jun-19

4. Financial Requirements Expert Group (FinReq)
Solvency II working groups at CEIOPS
Members´ Meeting
Consultative Panel
Managing Board
Chair: Thomas Steffen, Germany
Solvency II:
Financial Requirements Expert Group (FinReq)
Pauline de Chatillon, France
Financial Stability Committee (FSC)
Kajal Vandenput, Belgium
Occupational Pensions Committee (OPC)
Tony Hobman, United Kingdom
Committee on
Consumer Protection (CCP)
Victor Rod, Luxembourg
Convergence Committee (ConCo)
Raffaele Capuano, Italy
Internal Governance, Supervisory Review and Reporting Expert Group (IGSRR)
Gabriel Bernardino, Portugal
W o r k i n g G r o u p s
Internal Models Expert Group (IntMod)
Paul Sharma, United Kingdom
Insurance Groups Supervision Committee (IGSC)
Petra Faber-Graw, Germany
Review Panel
Michel Flamée, Belgium
S e c r e t a r i a t Secretary General:Carlos Montalvo Rebuelta
22-Jun-19

5. Solvency II – state of play
Level 1 Directive adopted by Parliament on 22 April
Development of advice on Level 2 implementing measures by CEIOPS
Informal consultation with key stakeholders
Three rounds of formal consultation following CEIOPS MM starting beginning April, beginning July and October 2009 (incl. lessons learnt from crisis and new issues in L1 text)
First two sets: final advice October 2009
Work programmes of SII expert groups on website
Heavy work programme
22-Jun-19

6. Careful planning needed
Impact assessment
Contribution by CEIOPS to EC Impact Assessment on L2 measures
QIS 5: 2010
Careful planning needed
22-Jun-19

7. The foundation of Solvency II
Insurance supervision: solo and groups
Quantitative
requirements
Technical provisions (BE and risk margin)
2 capital requirements (MCR and SCR –SF/IM)
Prudent person investment rule
Own funds (3 tiers)
Qualitative
Internal control and risk management (incl. ORSA)
Supervisory review process (qualit. & quant - Add-ons)
Reporting
Supervisory reporting
Public disclosure
Market discipline
Pillar 1
Pillar 2
Pillar 3
Focus on firm’s responsibility
Convergence of supervisory practices
Convergence of supervisory reporting
More pressure from rating agencies, capital markets
Total balance sheet approach
Market-consistent valuation
Validation of internal models
22-Jun-19

8. Total balance sheet approach under SII
Free assets
SCR
MCR
Assets covering technical provisions,
MCR and SCR
Risk margin
for non-hedgeable
risk components -
assets
Best estimate
Technical provisions
Market consistent valuation for
hedgeable risk components
22-Jun-19

9. I. Technical provisions
Core business of the (re)insurer
Cash-flow projections
Market consistency
22-Jun-19

10. II. Capital requirements
SCR: standard formula / internal model
MCR
Structure of the SCR standard formula: modular approach
Correlation between the risks
Diversification
22-Jun-19

11. Risk structure: modular (latest stand: QIS4)
22-Jun-19

12. III. Own funds Determination according to loss absorbing quality
Classification into tiers
Eligibility to cover the capital requirements
22-Jun-19

13. Internal models
What is an internal model?
“A risk management system developed by an insurer to analyse the overall risk position, to quantify risks and to determine the economic capital required to meet those risks” – Solvency II Glossary (CEA/GC)
What is the purpose of an internal model?
To fully integrate processes of risk and capital management within the insurer
22-Jun-19

14. Internal Models Framework
internal model (in the wider risk management sense)
SCR (regulatory capital)
use test
internal risk control functions
actions / steering
Pillar-2
adjustment
reporting / monitoring
actuarial model (in the narrow sense)
SCR
estimate
adjusted
SCR
forecasts
for P&L distributions
risk
exposure
data
risk driver data
statistical quality test
calibration test
22-Jun-19

15. What are the expected benefits of internal models?
Improved risk sensitivity of SCR related to the insurer’s specific profile leading to a more adequate modelling of non-standard contracts
Better alignment of regulatory capital requirements with economic capital
Encouragement of innovation in risk management methodology leading to higher competitiveness through better risk management and hence lower costs of capital
22-Jun-19

16. IV. Group supervision
Solvency II provides for the enhancement of supervisory arrangements
Powers and duties of a group supervisor
Development of a College of Supervisors
Management of financial crises
22-Jun-19

17. V. Pillar II – Governance system
Fit an proper requirements
Risk management system
Own risk and solvency assessment (ORSA)
Internal control
Internal audit
Actuarial function
Principles on outsourcing
22-Jun-19

18. Supervisory Review Process Quantitative Requirements
V. Pillar II – Supervisory review process
System of Governance
Compliance with system of governance including risk management (including the ORSA), fit and proper requirements, outsourcing, internal controls, internal audit etc.
Supervisory Review Process
The supervisory review of
Quantitative Requirements, the System of Governance as reported in the RTS and SFCR
Quantitative Requirements
Assets and liabilities (including technical provisions), the Minimum Capital Requirement (MCR), the Solvency Capital Requirement (SCR standard formula / internal model), own funds, investments etc.
RTS and SFCR
- Private quantitative and narrative information the undertaking submits to the supervisor
- Public information the undertaking is required to disclose to the market
22-Jun-19

19. VI. Pillar III Supervisory reporting Public Disclosure
Report to supervisors (RTS)
Ongoing information
Public Disclosure
Reinforce market discipline
Solvency and financial condition report (SFCR)
Standardised reporting formats
22-Jun-19

20. Dynamics of capital requirements
Available Capital
Adjusted SCR
SCR
SCR
MCR
Safety net
Standard formula
Decrease / [increase] if internal model reflects risks more appropriately
Internal Model
Increase if risks not appropriately reflected or governance
deficient
Including capital add-on
following SRP
Supervisory ladder of intervention
Pillar I Insurance, market, default and operational risk
Pillar II Additional risks or deficiencies
Pillar III
Disclosure of
Solvency requirements
and breaches
22-Jun-19

21. Adoption of Framework Directive
Reality check: Quantitative impact studies
QIS1
October 05
Focus on technical provisions
Spring 05
Preliminary Field Study
Limited participation
QIS5 in 2010
QIS2
Spring 06
Technical provisions, MCR and SCR
Adoption of Framework Directive
QIS4
April-July 2008
Simplifications
Groups
Internal models
Own funds
EC’s Framework Directive Proposal July 2007
QIS 3 - Spring 07
Group SCR / solo SCR
Available capital
Revised MCR
Calibration
22-Jun-19

22. Overall financial impact: no major impact on total balance sheet composition
20/10/2008
22-Jun-19
Page 22

23. Overall financial impact: stable capital surplus
Insurance industry well capitalised
QIS4 scenarios !
Data end 2007 !
No additional capital needed for the EEA insurance industry as a whole
Almost 11 % of participants would not meet the SCR
Vast majority meets the MCR under QIS4
22-Jun-19

24. General conclusion of QIS4
Successful exercise: strong commitment from supervisors and industry to the Solvency II project
Sound architecture: Support of the underlying principles (e.g. calculation of best estimate, SCR modular structure, proportionality)
22-Jun-19

25. Implementing measures: deliverables
22-Jun-19

26. Next steps for CEIOPS on the SII project
Development of advice to EC
on L2 measures
Adoption of Level 1 Directive
by ECOFIN
foreseen beginning May 2009
QIS5
Development of L3 measures
Set 1
released
26/03/2009
2009
2010
2011
Further advice on technical provisions, incl. simplified methods
Further design and calibration of SCR risk modules, incl. simplifications
Advice on MCR design and calibration
Further advice on definition, classification and tiering of own funds:
Advice on capital add-ons
Advice on reporting to supervisors
Advice on public disclosure
Advice on group solvency assessment
Advice on technical aspects of internal models
3 sets of advice to
Level 2 measures
=>Advice on approx. 30 implementing measures before end 2009
Careful planning process!
+ Lessons learned from the financial crisis
22-Jun-19

27. April: Consultation papers on L2 measures
Consultation Paper on Methods and statistical techniques for calculating the best estimate
Consultation Paper on Segmentation
Consultation Paper on Future premiums
Consultation paper on Assumptions about future management actions
Consultation Paper on Counterparty default risk
Consultation paper on Allowance for Financial mitigation techniques
Consultation Paper on Criteria for supervisory approval of ancillary own funds
Consultation Paper on Governance
Consultation Paper on Transparency and Accountability
Consultation Paper on Valuation of assets and “other liabilities”
Consultation Paper on SPV
Consultation Paper on Approval Process of Internal Models
22-Jun-19

28. To come: July advice on Level 2 implementing measures
Further advice on Pillar I, including calibration of standard formula
Further advice on Pillar II and II, including capital add-ons, reporting and disclosure
Advice on groups, including group solvency assessment and colleges of supervisors
Further advice on the technical aspects of internal models
22-Jun-19

29. To come: October advice on Level 2 implementing measures
Includes:
Lessons learnt from crisis (eg. equity dampener)
New issues in Level 1 text (limits to eligibility of own funds, elements of group supervision)
22-Jun-19