CEIOPS’ work on Solvency II

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

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

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

4. Financial StabilityCommittee (FSC) Kajal Vandenput, Belgium Occupational PensionsCommittee(OPC) Tony Hobman, United Kingdom Committee on Consumer Protection (CCP) Victor Rod, Luxembourg ConvergenceCommittee (ConCo) Raffaele Capuano, Italy Solvency II working groups at CEIOPS Members´ Meeting ConsultativePanel ManagingBoard Chair: Thomas Steffen, Germany Solvency II: Financial RequirementsExpert Group (FinReq) Pauline de Chatillon, France 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 ModelsExpert 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 tSecretary General:Carlos Montalvo Rebuelta

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

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

7. 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 requirements • 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 Total balance sheet approach Market-consistent valuation Validation of internal models Focus on firm’s responsibility Convergence of supervisory practices Convergence of supervisory reporting More pressure from rating agencies, capital markets The foundation of Solvency II Insurance supervision: solo and groups

8. fornon-hedgeable riskcomponents Total balance sheet approach under SII Free assets SCR MCR Assets covering technical provisions, MCR and SCR Riskmargin - assets Bestestimate Technicalprovisions Market consistent valuationfor hedgeableriskcomponents

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

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

11. Risk structure: modular (latest stand: QIS4)

12. III. Own funds • Determination according to loss absorbing quality • Classification into tiers • Eligibility to cover the capital requirements

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

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 adjusted SCR SCR estimate actuarial model (in the narrow sense) forecasts for P&L distributions risk exposure data risk driver data statistical quality test calibration test

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

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

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

18. 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. Supervisory Review Process The supervisory review of Quantitative Requirements, the System of Governance as reported in the RTS and SFCR System of Governance Compliance with system of governance including risk management (including the ORSA), fit and proper requirements, outsourcing, internal controls, internal audit 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 V. Pillar II – Supervisory review process

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

20. Dynamics of capital requirements AvailableCapital AdjustedSCR SCR SCR MCR Safetynet Standardformula Decrease / [increase] ifinternal modelreflects risksmore appropriately InternalModel Increase ifrisks notappropriatelyreflected or governance deficient Including capital add-on following SRP Supervisory ladder of intervention Pillar IInsurance, market, default and operational risk Pillar IIAdditional risks or deficiencies Pillar III Disclosure of Solvency requirements and breaches

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

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

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)

25. Implementing measures: deliverables

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 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

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

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

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)