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The birth of Solvency II
Assal – EU Dialogue
Ixtapa, 27 April 2009
Karel VAN HULLE
Head of Unit, Insurance and Pensions, DG Markt,
European Commission
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• « Not everything what can be counted
counts – and not everything what counts
can be counted »
Albert Einstein
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Why Solvency II?
Why the approach chosen?
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Why Solvency II?
• Current regime 30 years old
• Lack of risk sensitivity
– No incentives for insurers to manage risks
adequately; or to improve & invest in risk
management
– Does not facilitate accurate & timely supervisory
intervention
– Does not facilitate optimal allocation of capital
• Weaknesses identified in Müller Report (1997),
in KPMG Report (2002) and in Sharma Report
(2002)
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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
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Why the approach?
• Commission has conducted extensive
Impact Assessment; cost-benefit analysis
• Number of contributions:
– Macroeconomy (DG ECFIN)
– Financial Stability (ECB)
– Impact on insurers (CEA/AISAM/ACME)
– Impact on supervisors (CEIOPS)
– Impact on products and markets (CEA/AISAM)
– Impact on consumers (FIN-USE)
• Number of policy options analysed (45)
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 QR impede efficient asset allocation  sub-optimal return & risk
 PPR vs. QR: improved investment returns 90 – 300 basis points
 At least €1500 billion subject to QR at the moment; even a
conservative 10 basis points improvement would mean €1,5 billion
annually
 Option 13.3 chosen: reduces admin burden due to better alignment of
regulatory regime & industry burden; provides for harmonisation;
more optimum risk-return profile; better diversification of portfolios.
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Proposal for a Framework Directive
14 existing Insurance Directives (direct
insurance, reinsurance, groups etc.)
Recast
&
Codification
+ Solvency II
Codification &
New Articles
= 1 Directive ‘EU Insurance sourcebook’
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Solvency II – 4 Principal Objectives
• Deepen the Single Market
• Enhance policyholder protection
• Improve (international) competitiveness of
EU insurers
• Further Better Regulation
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The new regime…
• Establishes risk-sensitive capital requirements to
encourage and reward good risk management
• Places emphasis on the responsibility of the
senior management to manage their business
responsibly
• Fosters and demands greater supervisory
convergence  Single Market
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Legislative Process - Lamfalussy
Level 1: Framework Directive
Level 2: Implementing Measures (Commission)
Level 3: Convergent implementation assisted by close
co-operation between national authorities
Level 4: Rigorous enforcement of Community
legislation by the Commission
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Many players & stakeholders in the process…
• Preparation by CEIOPS (3 waves of Calls for Advice)
• Commission Proposal for a Directive (10 July 2007)
following consultation & dialogue with
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–
Industry (CEA, AMICE, CRO & CFO Forum)
Professionals (e.g. Groupe Consultatif)
Insurance Supervisors (CEIOPS)
Member State MoF Experts (EIOPC)
• Commission issued an amended proposal for a
Directive (26 Feb 2008)
• EP and Council have final say
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Quantitative Impact Studies
• Key element of Better Regulation
• QIS 4 ran from April to July 2008
• Analysis and conclusions presented in
November 2008  mainly relevant for
implementing measures
• Key issues of QIS 4: MCR,
simplifications, equity risk, internal
models, diversification effects in groups
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Solvency II Timetable for 2007-2012
2006
2007
Directive
development
(Commission)
2008
2009
Directive adoption
(Council &
Parliament)
2010
2011
2012
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
July 2007
Solvency II Directive published
QIS 2
QIS 3
Adoption of
implementing measures
October 2012
Solvency II enters into force
QIS 4
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New European solvency
regime in place and
operational in all Member
States by October 2012!!
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Solvency II
Key aspects of original
Commission Proposal
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Solvency II…
• 3 ‘Pillars’ of equal importance:
– Quantitative requirements
– Qualitative requirements
– Disclosure and reporting
• Economic, risk based approach
• Proportionality principle
• Group supervision and group support
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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: composition and relation to SCR left open
• 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
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Pillar II: Qualitative Requirements
• 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
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Pillar III: Disclosure & Reporting
• New approach in Pillars 1 & 2 means new
approach needed for P3!
• 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
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Supervision of Groups
Proposal will improve the supervision of
groups
Recognition of economic reality of groups
(recognition of diversification benefits;
ability to use internal models to calculate
group SCR; recognition of group support)
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Improved group supervision
• Group supervision will no longer be
supplementary
• Organised co-ordination and co-operation
between all supervisors
• Clear role and responsibilities for group
supervisor
• Group internal model
• Group ORSA and Group Solvency and
Financial Conditions Report
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Introduction of group support
• More efficient allocation of capital within
groups
• Parent may use under certain conditions
declarations of group support to meet part
of the SCR of its subsidiaries
• Derogations to some articles on solo
supervision to avoid « unnecessary »
interventions of solo supervisors
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Council Working Party
negotiations
• Hectic pace of negotiations under P, SI
and F Presidencies (over 1000 p. of
comments)
• Progress reports to ECOFIN under P and
SI Presidencies
• General approach ECOFIN: 2/12/2008
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Main issues raised in the Council
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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)
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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
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Negotiations in European
Parliament
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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
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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
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Results obtained
• Some 150 amendments were finally
adopted in ECON
• EP were keen to keep group support
regime and proposed further
strengthening of cooperation between
supervisors
• EP opposed introduction of duration
approach for equity risk
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Trilogues
• Extremely difficult negotiations between
Council and European Parliament
• 8 Trilogue meetings were held
• Agreement was finally reached with EP
accepting deletion of group support with
review clause
• Duration approach was accepted under
conditions (mainly pension business)
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Next steps
• EP adopted agreed text on 22 April 2009
(593 votes in favour against 80 opposed)
• Final vote in Council on 5 May 2009
• 3 consultation rounds by CEIOPS during
the course of 2009 for level 2 measures
• QIS 5 to be launched in 2010
• Further action through implementation of
the de Larosière Report
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The de Larosière Report
• Expert group set up by EC in 2008
following financial crisis
• Report issued end February 2009
• Proposal to keep functional supervision
but with strengthening of EU level
• Policy proposals by EC end May 2009
• Legislative proposals by EC Autumn 2009
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Solvency II
… modern, innovative and liberal
regime for the prudential
supervision of insurers, based on
sound economic principles…
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Conclusion
Solvency II is…
good for you!
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How to contact us?
• [email protected]
• All official documents, including the text of
Solvency II and preparatory papers are
available on our website, which is
regularly updated. Official texts are also
available in Spanish and Portuguese.
• http://ec.europa.eu/internal_market/insura
nce/solvency/index_en.htm
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