Transcript Slide 1

THE INSURANCE IN EU ON THE THRESHOLD OF THE THIRD MILLENNIUM
NEW REGULATIONS
AFFECTING THE
INSURANCE MARKET
Elemér Terták
Principal Advisor
European Commission
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Role of insurance in the EU
Between 2002 and 2007 the
European share of the global
market rose from 32% to 43% as
premiums in Europe grew faster
than total worldwide premium
income. However, with the decline
of European premiums in 2008
and 2009, Europe’s market share
decreased to 40%.
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History of insurance and
insurance regulation
 The concept of insurance date as far back as 3000 B.C.
 However, it was during the 15th to 17th century, when modern
types of policies began to develop for life, marine and fire
insurance. Initially, small local and regional carriers primarily
writing fire and life insurance dominated the industry which led
to a state-based regulatory framework.
 In the 19th century the incorporated insurers come to the front
and took over from the mutuals and cooperatives the business.
Major disadvantage of the mutual insurance companies is the
difficulty of raising capital thus take more or large value risks.
The mutual market share at the end of 2008 was 24% .
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History of insurance and
insurance regulation (cont‘d)
 At the end of the 19th century, there was a shift in public sentiment
towards increased regulatory oversight of large and concentrated
industries that resulted from concern from potential monopoly harms.
The regulatory oversight was justified as being in the public interest,
and imposed on several industries, including railroads,
telecommunications, trucking, airlines and insurance.
 Another driver was that in the mid-19th century the prospect of quick
gains led to proliferation of less reputable insurers. The call for a
competent oversight was not long in coming. The first insurance
supervision laws were adopted at the end of the 19th and beginning of
the 20th century. The insurance supervisions were mandated to protect
the insured against failure of insurance companies against fraud, to
protect high premium burden and lack of general policy conditions.
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Theories of Regulation
 Public interest theory, The purpose is to protect consumers by
monitoring the solvency of insurers and their business practices. The
idea is that consumers are not in an equal bargaining position with
insurers, so it is necessary for the government to regulate the terms of
insurance contracts.
 Public choice theory. It rests on one major premise – that regulators
concern themselves only about the needs of the citizens. requirement
for full disclosure and setting reasonable standards are aimed at to
overcome imperfect information
 Insurance is also regulated for economic, social, and political purposes.
 Further rationale is to regulate international insurers for financial
soundness and transparency. Another macroeconomic purpose is to
avoid regulatory arbitrage among financial sectors and to maximize
efficiency of capital allocation.
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Regulation of insurance in the EU
European
Prudential
regulation
Competition
regulation
Contract law
Taxation
National
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Solvency in Europe: Solvency „0”
 1973 / 1979: publication of the first non-life and life directives
of the EEC (European Economic Community)
- mainly based on the work by Cornelis Campagne / OECD 1961
 Required solvency margin for life companies (EEC, 1979):
4% of the mathematical reserves (≡ investment risk)
+
3‰ capital at risk (≡ technical risk)
 Early warning signal, based on fixed ratios (wind-up barrier:
guarantee fund)
 2nd, 3rd directive: solvency margins left unchanged
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Solvency in Europe: Solvency I
1994
Insurance Committee (IC) asked the European supervisory
authorities (from 2004: CEIOPS) to establish a working
group to investigate solvency issues
 chair of the group: Helmut Müller (BAV,
Bundesaufsichtsamt für das Versicherungswesen)
1997
Presentation of the Müller Report:
 current solvency margin structure satisfactory
 amount of the minimum guarantee fund needs to be increased
(inflation)
 identification of three risk groups (technical, investment, nontechnical)
1999
Solvency I project initiated
Committee of European
Insurance and
Occupational Pension
Supervisors
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Experience with Solvency I
Experience since the adoption of Directive 2002/13/EC for
non-life insurers and Directive 2002/83/EC for life insurers:
 have worked well over the last decade
 have significantly increased the protection of the policyholders
Characteristics:
 simple, robust
 easy to understand and use
 inexpensive to administer
 rule-based, and not explicitly risk-based (e.g. differences between
asset and liability profiles are neglected)
However since the creation of these rules, significant changes
have taken place in the insurance industry need to adapt the rules.
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Why to change the rules?
 Current regime nearby 40 years old
 Lack of adequate risk sensitivity
 No incentives for insurers to manage risks adequately or
to improve & invest in risk management
 Does not facilitate accurate & timely supervisory
intervention
 Supervision of groups sub-optimal
 Lack of convergence within the EU
 Lack of consistency with international
developments (IAIS, IASB)
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Insurance environment since the 90ies
„In 1980 the life insurance industry was 150 years old, in 2010 it was 30 years old“
 Equity markets experienced a strong bull run from 1996-2000 and
in 2005-2007
 Equity and corporate bond markets suffered falls in 2001-2002
and in the recent financial crisis
 Interest rates stabilized on a low level
- problems with (high) guaranteed returns
 Increasing life expectancy / costs
 More frequent extremes / catastrophes (e.g. 09/11, Tsunami)
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Five erroneous trends in the 90ies
slanted toward
growth
delayed intervention
of external institutions
(supervisors, ratingagencies, ...)
high (distribution)
costs – only partially
offset against policyholder benefits
insurance
market of
the 90ies
competitive
environment – creating
high expectations of
discretionary
bonuses
increase in
the „equity culture“–
weaknesses in risk
management and
control
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Global Risks 2011
1. Economic Risks
Risks with impact on insurance
•Fiscal crises
•Global imbalances and currency volatility
•Infrastructure fragility
2. Environmental Risks
•Air pollution
•Biodiversity loss
•Climate change
•Earthquakes and volcanic eruptions
•Flooding
•Ocean governance
•Storms and cyclones
3. Societal Risks
•Chronic diseases
•Demographic challenges
•Infectious diseases
•Water security
4. Geopolitical Risks
•Organized crime
Terrorism
•Weapons of mass destruction
5. Technological Risks
•Threats from new technologies
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Solvency in Europe: towards Solvency II
1999
Based on the Müller Report, it was agreed that a more
fundamental review of the overall financial position of an
insurance company should be done, including
- Technical provisions (non-life) - Reinsurance
- Asset / investment risk - Solvency margins (methods)
- ALM - Accounting systems
2001
Launch of the Solvency II project by the European
Commission
- CEIOPS was asked to provide input and recommendations
2002
Publication of the Sharma Report
and of the KPMG Report
Committee of European
Insurance and
Occupational Pension
Supervisors
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Solvency in Europe: towards Solvency II
(cont‘d)
The three phases of progress:
Phase 1:
Phase 2:
Phase 3:
from 2001 to 2003
from 2003-2009
from 2009-2013
implementing phase
gathering knowledge
general design of
the system (e.g. 3pillar framework)
KPMG report,
Sharma report
technical development
of detailed rules
3 waves of Calls for
Advice giving
structure of the
framework, QIS
modeling, standard
models, calibration of
models and
parameters
implementing in
national law
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Solvency II – A great leap forward
Benefits expected from the principles and risk-based
capital standards of Solvency II (Directive
2009/138/EC):
 More transparent / better risk allocation between insurers,
policyholders and capital markets
 Better pricing, product innovation
 New asset management strategies
 Decrease in the cost of capital
 Better capital allocation (commensurate with risk profile)
 improved financial stability
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Objectives
Securing the benefits of the policyholders*
1
Minimum financial
requirements
2
Supervisory review
process
3
Market discipline via
disclosure requirements
* Note: this does not necessarily require the continued existence of a company. Zero-failure
will not be the aim of prudential supervisory systems. In a free market, failures will occur!
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Objectives (cont‘d)
 Improved risk management:
o matched to the true risks of an insurance company
 total balance sheet approach
 sending out early warning signals
 ensuring a smooth run-off of the portfolios in case of financial distress
 Stability of the financial market
 Consistency with other sectors (e.g. Basel III)
 International comparability, compatibility and convergence
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Solvency II Timetable
2006
2007
2008
Directive
Directive adoption
development
(Council &
(Commission)
Parliament)
2009
2011
2010
2012
Implementation
(Member States)
CEIOPS work on technical advice necessary for implementing
measures / supervisory convergence / preparation for
implementation / training & development
Commission preparatory work implementing
measures (IM)
QIS2
July 2007
December 2009
Solvency II Directive proposal
Solvency II Directive published in OJ
QIS3
QIS4
Adoption
of IM
January 2013
Solvency II enters into force
QIS5
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State of Play
 Around 40 implementing measures being
prepared based upon advice from CEIOPS /
EIOPA
 Public hearing held in May 2010
 Discussion of drafts with MS experts and with
stakeholders
 First consolidated version of drafts prepared by
Commission staff in October 2010
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State of Play (cont‘d)
 Implementing measures to be adopted by
Commission as delegated acts in June / July
2011
 Council and Parliament can voice objections
during period of 3 or 4 months
 Entry into force: 1 January 2013
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EU Financial Supervision Architecture
Reform and level 3 rules
 CEIOPS became on 01/01/2011 EIOPA
(European Insurance and Occupational
Pensions Authority)
 Preparation of level 3 rules
 Possibility to write Binding Technical Standards,
or issue guidance
 The Solvency II Directive will be revised to allow
these changes (so called « Omnibus 2 »)
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Thanks for your attention!
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