Royal Institute of Technology Stockholm, 12 June 2009 Solvency II: a new and modern solvency regime for the insurance i

1. Royal Institute of TechnologyStockholm, 12 June 2009Solvency II: a new and modern solvency regime for the insurance industry Prof. Karel VAN HULLE Head of Unit, Insurance and Pensions, DG Markt, European Commission

2. « Not everything what can be counted counts – and not everything what counts can be counted » Albert Einstein

3. Framework DirectiveProposed on 10 July 2007Adopted April/May 2009 14 existing Insurance Directives (direct insurance, reinsurance, groups etc.) + Solvency II Codification & New Articles Recast & Codification = 1 Directive ‘EU Insurance sourcebook’

4. Solvency II – 4 Principal Objectives • Deepen the Single Market • Enhance policyholder protection • Improve (international) competitiveness of EU insurers • Further Better Regulation

5. 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

6. The new regime… • Introduces an economic risk based approach that will reward good risk management and enhance policyholder protection • Places emphasis on the responsibility of the senior management to manage their business responsibly • Fosters and demands greater supervisory convergence across the Community

7. Legislative Process - Lamfalussy Level 1: Framework Directive Level 2: Implementing Measures Level 3: Convergent implementation assisted by close co-operation between national authorities Level 4: Rigorous enforcement of Community legislation by the Commission

8. 8

9. Intensive consultation process • Framework for Consultation • Three waves of calls for advice to CEIOPS • Interviews with selected number of SMEs by Commission staff • QIS 1 and QIS 2 • Impact Assessment with 45 options

10. Consultation continued • Commission proposal prepared following consultation and dialogue with CEA, AMICE, CRO Forum, CFO Forum, Groupe Consulatif, CEIOPS, EIOPC • Close contact with ECON members • QIS 3 and QIS 4 • Several public hearings and public meetings with stakeholders

11. Quantitative Impact Studies • Key element of Better Regulation • QIS 4 April – July 2008 • Analysis and conclusions from each QIS published by CEIOPS • Results helped to shape the proposal and influenced the negotiations • Some 1500 (re)insurers took part in QIS 4 • Results of QIS4 will feed into development of implementing measures

12. Solvency II timetable for 2007-2012 2012 2011 2007 2008 2009 2010 2006 Directive development (Commission) Directive adoption (Council & Parliament) 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 and impact assessment Adoption of Implementing measures July 2007 Solvency II Directive published 2012 Solvency II enters into force QIS 2 QIS 3 QIS 4

13. New European solvency regime in place and operational in all Member States by October 2012!!

14. Solvency II… • 3 ‘Pillars’ of equal importance: • Quantitative requirements • Qualitative requirements • Disclosure and reporting • Economic, risk based approach • Proportionality principle • Group supervision

15. Group supervision & cross-sectoral convergence Groups are recognised as an economic entity => supervision on a consolidated basis (diversification benefits, group risks) Pillar 1: quantitative requirements 1. Harmonised calculation of technical provisions 2. "Prudent person" approach to investments instead of current quantitative restrictions 3. Two capital requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) Pillar 2: qualitative requirements and supervision 1. Enhanced governance, internal control, risk management and own risk and solvency assessment (ORSA) 2. Strengthened supervisory review, harmonised supervisory standards and practices Pillar 3: prudential reporting and public disclosure 1. Common supervisory reporting 2. Public disclosure of the financial condition and solvency report (market discipline through transparency) Solvency II: 3 pillars and a roof

16. 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: corridor between 25% and 45% of the SCR • 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

17. 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

18. Pillar III: Disclosure & Reporting • New approach in Pillars 1 & 2 means new approach needed for Pillar 3! • 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

19. Improved group supervision • Group supervision no longer supplementary • Organised co-ordination and co-operation between all supervisors • Clear role and responsibilities for group supervisor chairing a college of supervisors • Group internal model • Group ORSA and Group Solvency and Financial Conditions Report

20. Council Working Party negotiations • Hectic pace of negotiations under P, SI and FR Presidencies (over 1000 p. of comments) • Progress reports to ECOFIN under P and SI Presidencies • General approach ECOFIN: 2/12/2008 under FR Presidency

21. Main issues raised in the Council • 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)

22. 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

23. Negotiations in European Parliament • 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

24. 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

25. Result obtained • Some 150 amendments were finally adopted in ECON • EP keen to keep group support and proposed further strengthening of cooperation between supervisors • EP opposed introduction of duration approach for equity risk and Pillar 1 dampener

26. Trilogues • Extremely difficult negotiations between Council and European Parliament • 8 Trilogue meetings were held • EP accepts deletion of group support with review clause • EP accepts duration approach under conditions (mainly pension business)

27. Political agreement • Agreement by Coreper on 1 April 2009 of compromise package agreed during the Trilogue meetings • EP adopts compromise package in plenary on 22 April 2009 with 593 votes in favour and 80 opposed • ECOFIN Council notes agreement of EP on 5 May 2009

28. Next steps • Final adoption of the Framework Directive after finalisation in 22 official languages • Preparation of implementing measures by EC with help of CEIOPS and EIOPC • Delivery of level 3 guidance by CEIOPS

29. Preparation of implementing measures • 3 consultation rounds by CEIOPS during the course of 2009 • Final CEIOPS advice by January 2010 • Discussion of draft texts with MS in subcommittee of EIOPC • Preparation of Impact Assessment with the help of an external consultant

30. Finalisation of the process • Last QIS exercise (QIS 5) to be launched in August 2010 based upon draft technical specifications to be published in March 2010 • Several hearings with stakeholders and EP • Publication of level 3 guidance by CEIOPS by the end of 2011 • Agreement on implementing measures by end October 2011

31. The de Larosière Report • Report issued end February 2009 • Commission Communication of 27 May 2009: keep functional supervision but with strengthening of EU level (ESRC, ESFS with EBA, ESA and EIOPA) • Legislative proposals by EC Autumn 2009 • Amendment of recast text in order to reflect de Larosière changes

32. Solvency II … modern, innovative and liberal regime for the prudential supervision of insurers, based on sound economic principles…

33. Conclusion Solvency II is… good for you!

34. How to contact us? • Karel.van-hulle@ec.europa.eu • All official documents, including the text of Solvency II and preparatory papers are available on our website, which is regularly updated. http://ec.europa.eu/internal_market/insurance/solvency/index_en.htm