Transcript Title

IX CONGRESSO NAZIONALE DEGLI ATTUARI
Gestione e controllo dei rischi:
Solvency II ed Enterprise Risk Management (ERM)
Alberto Corinti
Torino, 27 June 2010
Outline
An introduction to Solvency II under the EU industry perspective
The timeline
Main driving principles of the project
Hot topics in the current debate
2
Solvency II Timeline
2006
2005
2007
CEIOPS work on Pillar I
CEIOPS
advice on
Proportionality
& Groups
CEIOPS work on
Pillars II and III
QIS 2
QIS 3
2010
2009
Directive
Adoption
(Council &
Parliament)
Directive Development
(Commission)
QIS 1
2008
2011 - 2012
Level 2 & 3
(EC & CEIOPS)
CEIOPS advice on
Implementing Measures
CEIOPS work
on L3
QIS 5
QIS 4
Industry gets prepared
“Lamfalussy” process of decision making
Level 1: Framework Directive
European Commission, European
Parliament, European Council
Level 2: Implementing measures
EIOPC, European Commission,
CEIOPS
Level 3: Convergent implementation
CEIOPS
Level 4: Enforcement of legislation
European Commission
Reform of EU supervisory architecture underway: EIOPA
EU Industry view on the new micro prudential
supervision: EIOPA
Key concerns of the industry
Binding standards should only be on genuinely technical areas: what
application in practice?
New powers should be accompanied by appropriate checks and balances,
transparency and accountability
EIOPA power to adopt decisions addressed to individual financial
institutions could create conflicts of loyalty and confusion in the allocation
of supervisory responsibilities
Allocation of tasks as set in Solvency II should not be affected, in
particular the new architecture should not undermine the role of group
supervisor
Reporting requirements should not be duplicated or disregard national
supervisors
5
Industry priorities in developing implementing measures
It is crucial that Level 2 does not depart from the principles which are
crystallized in the framework directive and which are based on a truly riskbased economic approach
The Framework Directive incorporates a range of features which the industry
has advocated for a long time :
Market-consistent approach to value all assets and liabilities with no additional
implicit prudential margins. Specific provisions to address pro-cyclicality with no
impact on measurement
Capital charge for all quantifiable risks based on the agreed risk measurement, with
recognition of genuine diversification, risk mitigation and loss absorbing items
A new supervisory approach with a system of ladder of supervisory interventions
Fostered ERM , including encouragement to develop internal models, and increased
market transparency
Group supervision which allows the assessment of consolidated risk profile in line
with groups’ economic reality
Application of the risk-proportionality principle
Creation of an harmonized EU supervisory regime
6
Industry view on Regulatory lessons from the
financial crisis
A risk based prudential framework is necessary
Solvency II architecture, as designed in the draft framework directive, is solid and
represents the right regulatory answer to the crisis
Economic foundations of SII should be retained and strengthened
Enhanced Enterprise Risk Management
Market consistent valuation as the basis for prudential oversight. Anti-cyclical
tools are necessary, but should not affect A/L measurement
Group supervision in line with groups’ economic reality and based on
enhanced supervisory coordination
Need to avoid overreaction to the crisis
European Insurers highlight the ever increased need for Solvency II, based
on the principles crystallized in the Framework Directive
Solvency II principles - Pillar I conceptual
framework
1 Market Consistent Value of technical provisions
Market value for hedgeable risks and BE plus risk
margin for non headgeable risks
4
2
MCR
Risk Margin
Market 1 consistent
Value of
Liabilities
Ladder of
Intervention
RM
Best estimate for non
hedgeable risk
SCR
MV of hedgeable risks
3
2 Minimum Capital Requirement (MCR)
Reflects a level of capital below which ultimate
supervisory action should be triggered
Calculated on a factor basis, but within the corridor
of 25% - 45% of the SCR
3 Solvency Capital Requirement (SCR)
Target Capital which should enable to absorb
significant unforeseen losses over a specified time
horizon
The standard calculation can be replaced by the use
of internal model under supervisory validation
4 Ladder of Intervention
Solvency II should guarantee a ladder of intervention
if the available capital falls below SCR
Concept of transferability of TP in extreme situations
Solvency II principles – Balancing feasibility and
sensitivity in SCR
Simplified
methods
Simplicity
Standard
methods
Use of entity
specific data
Partial internal
model
Internal model
Sensitiveness
The current debate: QIS5 specifications
Industry raised a number of serious concerns when commenting on the three
waves of CEIOPS advice on implementing measures
Draft QIS5 specification and preliminary draft of implementing measures take
into account many of these concerns, such as:
Risk free rates based on swap curve
Application of liquidity premium in discounting liabilities
Allowance of diversification between lines of business in risk margin
Increased sensitiveness of SCR (NP reinsurance, geographical diversification)
Refined calibration of SCR ( e.g. equity risk and symmetric adjustment)
Increased credibility factors for the use of entity specific parameters
Treatment of “future profits” and “winding-up gap” in tier 1

The debate is still open on a number of issues (e.g. risk free rate, future profits)
The current debate: QIS5 specifications
Still many industry concerns to be addressed, for example with regard to:
Wider application of liquidity premium to liabilities depending on their liquidity
Calibration of spread risk for corporate bonds and for “covered bonds”
Criteria for Tier 1 subordinated debts
Refinement of future premium in the contract boundary definition
Measurement of participation and treatment of participation in financial institutions
Concept of transferability of capital at group level
Definition and treatment of ring-fenced funds
Allowance of the use of entity specific parameters
It is crucial to work in a constructive and cooperative spirit to finalize Solvency II
as expected
With Solvency II Europe has the potential to became a leader in insurance
prudential regulation, with benefits for both policyholder and industry
How can we make it happen?
www.cea.eu
Annex – list of implementing measures under
discussion to date
IM 1 System of Governance
IM 2 Public Disclosure by Insurance & Reinsurance Undertaking
IM 3 Valuation Assets & Liabilities, Other than Technical Provisions
IM 4 Procedure for the approval of Internal Models
IM 5 Tests and standards for Internal Models
IM 6 Supervisory approval of Ancillary Own Funds
IM 7 Classification and eligibility of own funds
IM 8 Transparency and accountability of supervisory authorities
IM 9 Supervisory Reporting by Insurance and Reinsurance undertakings
IM 10 SPV authorisation
IM 11 Group Solvency
IM 12 Capital add-ons
IM 13 Technical Provisions
IM 14 Extension of recovery period
Annex – list of implementing measures under
discussion to date
IM 15 Equity risk - symmetric adjustment mechanism
IM 16 Equity risk - dampener approach
IM 17 Participations - SCR and OF
IM 18 Repackaged loans
IM 19 Simplifications for Technical Provisions
IM 20 Risk Free Rate
IM 21 Group supervision
IM 22 Operational risk
IM 23 Intangible assets
IM 24 Life Underwriting risks
IM 25 Risk Mitigation
IM 26 Undertaking Specific Parameters
IM 27 Market risk sub-module of the standard formula
IM 28 Non-life underwriting risk
Annex – list of implementing measures under
discussion to date
IM 29 Adjustment for the loss-absorbing capacity
IM 30 Approval of group internal models
IM 31 Draft on supervision of group solvency for groups with centralised risk
management
IM 32 Partial Internal Models
IM 33 Ring fenced funds