CEA and Solvency II Barcelona 11 June 2007

1. CEA and Solvency IIBarcelona 11 June 2007 Peter SkjødtActing director, Economics and Finance at CEA

2. Through its member associations, CEA represents about 94% of the European industry by premium 25 EU Member States Around 5000 companies Small to large entities Life and non-life Direct and reinsurance 5 Other Markets Iceland Liechtenstein Norway Switzerland Turkey 3 associate members Bulgaria Croatia Romania 3 observers Aisam Russia Ukraine

3. Objectives of CEA in Solvency II Core Objectives of CEA’s efforts • To help achieve the Commission’s stated aims of Solvency II not least on consumer protection – through a new Solvency regulation that is based on a sound economic approach • To help develop a workable and appropriate risk based supervisory scheme • To explore the benefits of the tools developed by the Industry and others in the area of risk management CEA is a credible and reliable partner • We are developing strong and defendable industry consensus on the full range of Solvency II issues • We (try to) communicate in a clear way this consensus to all stakeholders

4. A successful Solvency II project requires co-ordination of all stakeholders Insurance Industry stakeholders Insurance Companies National Insurance Associations CEA AISAM/ACME ICISA CFO Forum CRO Forum Groupe Consultatif Other stakeholders Stakeholders in the drafting process of the Solvency II Directive European Parliament Council of Ministers European Commission (DG internal market) EIOPC CEIOPS

5. Where are we in the project? 2007 2010 2006 2009 2005 2011 2008 Directive Development (Commission) Directive Adoption? (Council & Parliament) Implementation? (Member States) CEIOPS work on Pillar I CEIOPS work on Implementing Measures CEIOPS work on Pillars II and III QIS 3 QIS 1 QIS 2 Further QIS Model Calibration • Framework Directive • Impact Assessment • QIS 3 • Lobbying and Communication CEA Priorities

6. Objectives of the Solvency II project • The industry has voiced strong support for the objectives indicated by the Commission for the Solvency II project: • Deepen integration of the European Union insurance market • Improve protection of policyholders and beneficiaries • Improve international competitiveness of European Union insurers • Promote better regulation

7. For Solvency II a different approach is required The industry believes that the objectives of Solvency II can only be achieved through a risk based economic approach as: An economic approach is transparent and will avoid arbitrage opportunities Frameworks that include arbitrary prudence are more opaque and likely to lead to double counting It can be calibrated to provide a balance between protection to policyholders and encouraging efficient operations of companies It aligns regulatory capital requirements with best practice internal risk management processes It can cope with evolution in financial environments, increasingly sophisticated product designs and capital markets innovation 8

8. What is an economic approach? An economic approach to Solvency II implies: assets and liabilities at market-consistent values full recognition of diversification and risk mitigation of all forms (reinsurance, securitization etc.) aligning capital requirements with the underlying risks of an insurance company developing a proportionate, risk-based approach to supervision with appropriate treatment both for small companies and large, cross border groups maintaining strong, effective policyholder protection while achieving optimal capital allocation 9

9. What are the components of the Solvency II framework? • Market Consistent Value of Liabilities • Is sufficient to cover policyholder obligations • Solvency Capital Requirement (SCR) • Target Capital that an entity should aim to meet under normal operating conditions • Dropping below SCR always requires a plan of action but does not necessarily require immediate supervisory intervention • Minimum Capital Requirement (MCR) • Reflects a level of capital below which ultimate supervisory action could be triggered • Sets a control level in excess of technical provisions ensuring that intervention can occur while the company still has sufficient assets to meet liabilities • Ladder of Intervention • The framework should be designed to guarantee an appropriate ladder of intervention if the available capital falls below SCR and approaches MCR Internal Model Level of SCR Ladder of Intervention Standard Approach Level of MCR Market -consistent Value of Liabilities

10. Initial thoughts on securitisations • Securitisation represents opportunity to transfer risk directly to the capital markets • It provides an alternative to reinsurance • It increases the risk capacity of the insurance industry and helps spread risk across a wider base • It provides investors access to non traditional investments with different risk characteristics (e.g. mortality bonds, catastrophe bonds) • Under an economic approach all forms of risk mitigation (including securitisations) should be recognised • Solvency II will encourage companies to measure and manage risks • One might expect appetite for risk mitigation to increase as companies actively manage their risk exposures • However evolution in the securitisations market will be required • Currently securitisations have a relatively low level of penetration • Further product development is likely to be needed to initiate cost effective solutions for the range of companies across Europe

11. Conclusions • The Industry strongly supports Solvency II objectives • Solvency II is not triggered by a crisis situation but because the current rules are not aligned with the economics of the business or the risks • Objectives can only be reached through a risk based economic approach • An economic approach to Solvency II will benefit consumers, strengthen competition (and lower entry barriers) and create a level playing field within and across markets • The Industry recognises the work done to date by supervisors and welcomes the constructive dialogue it has had and hopes that this will continue • Let’s keep the positive momentum we observe today, even if hard work is required from all parties