European Regulatory Developments Driving Further Change

1. European Regulatory Developments Driving Further Change Jim Murphy Gerard Davis Life Convention 2004, EICC Edinburgh Monday, 8th November 2004

2. Fog in the Channel …

3. Fog in the Channel … … continent cut-off!

4. Agenda • Regulatory Framework/Context • The Regulatory Shortlist • Look into the Future • Over to You!

5. Increasing influence …

6. Increasing influence … … from Europe

7. Increasing influence … … from Europe … and Internationally

8. EU Institutions Parliament Commission Insurance Committee (EIOPC) CEIOPS Actuarial Bodies Groupe Consultatif IAA Accounting Bodies IFAC IASB Others IAIS IMF / World Bank CEA CFO Forum etc. Cast of Characters

9. IAIS • International Association of Insurance Supervisors (IAIS) - Established in 1994- Sets Principles, Standards & Guidance for Supervisors- Insurance Core Principles (ICPs) a cornerstone- www.iaisweb.org

10. European Regulatory Process • “Lamfalussy” Principles

11. Influencing EU Decision Making • Be prepared for the long haul – slow decision making process • EU decisions are political in nature and subject to change • EU officials expect to be lobbied and are open to approaches • Get in early in the process • Parliamentary committees are key • Lobby at national level

12. Agenda • Regulatory Framework/Context • The Regulatory Shortlist • Look into the Future • Over to You!

13. The Regulatory Shortlist! Reinsurance Reinsurers Gender Discrimination Solvency II Solvency I Consolidated Life Guarantee Schemes FSAP Progress Report Direct Writers Winding Up Financial Conglomerates Money Laundering (#3) Distance Selling Savings Insurance Mediation Distributors 2001 2002 2003 2004 2005 2006 2007

14. Financial Services Action Plan (“FSAP”) • Adopted in 1999 - wide ranging proposals for the integration of EU’s financial markets • 42 separate initiatives were identified • Latest review indicated good progress • 39 have already been implemented at EU level (93%) • A substantial number still needs to be implemented in various countries • Review was carried out to assess effectiveness of measures to date • A number of expert groups were established to give views to the Commission on different areas including Insurance and Pensions • Expert group reported in May 2004 and made a number of recommendations including….

15. Expert Group Recommendations • Complete FSAP (Solvency II, reinsurance, IAS) but cost implications should be considered • Regulatory pause to consolidate legislation • Focus on convergent implementation and effective enforcement • Streamline current supervision and remove barriers to EU ‘shared services’ model • Make legislation more coherent and as simple as possible • Simplify and clarify tax issues

16. Expert Group Recommendations cont’d • Foster the organic development of single market • Development of 26th regime • Encourage development of pan-European products • Adopting the statutes to facilitate pan-European mutual societies • Address markets that have greatest potential • Consult widely and in a timely fashion on changes • Adopt a flexible and targeted approach to EU initiatives and legislation • Prioritise future EU initiatives by justification and cost benefit analysis • Reduce or eliminate unnecessary host country rules and options that act as barriers to cross border business.

17. Financial Services Action Plan cont’d • Consultation period finished in mid September • Now awaiting Commission’s response to Expert Groups and consultation responses • This will set the agenda for next phase

18. Insurance Mediation Directive • Implementation Deadline of 15 January 2005 • Applies to intermediaries providing (re)insurance mediation services for (re)insurance contracts • Some exemptions - simplified insurance (e.g. travel), incidental provision of information, employees of insurers … but what about third party administration? ‘(re)insurance mediation' means the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of (re)insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim

19. Consumer Protection Registration Professional requirements- Competency- Good repute- Minimum PI cover Protection of Client Monies Minimum information at PoS Portability of Services Choice of- Freedom of services or- Freedom of establishment Insurance Mediation Directive cont’d

20. Insurance Mediation Directive cont’d • UK intermediaries well placed to meet new requirements • Opportunities for UK intermediaries to target new marketswithout significant entry costs with consequent opportunities for UK providers • Possibilities of arbitrage with intermediaries across Europe reviewing the optimal manufacturing locations (“roundtripping”) • Opportunities for multi-territory intermediaries to consolidate their operations under one roof

21. Distance Selling Directive • EU directive was implemented in September 2002. • Key piece of legislation to facilitate cross border and remote selling of financial services products • Aims to offer high level of protection to consumers but member states are entitled to apply more stringent conditions • Applies to product providers and intermediaries • Information provided is similar to that under 3rd Life Directive • Aims to provide a minimum standard of information • Slightly revised cooling off requirements • Information should be provided via a durable medium • Applies to selling process or initial agreement

22. Distance Selling Directive cont’d • Cooling off period for face-to-face business increased to 30 days • Cooling off period also 30 days for distance selling but rules and exemptions are different to face-to-face business • All member states were obliged to have the directive implemented by 9th October 2004 • Operation of the directive will be reviewed by April 2006

23. Savings Directive • Aim is to crack down on tax avoidance of savings income within the EU • Member States required to exchange information on interest payments to non-residents • Target implementation date was 1 January 2005 …… but delays in finalising third country (e.g. Switzerland) arrangements … 1 July 2005 new target date • Transitional withholding tax regime for Austria, Belgium and Luxembourg

24. Savings Directive cont’d • Scope includes debt instruments but excludes life insurance benefits • Possibility of funds moving from territories within the scope of the Directive to territories not covered by the Directive … anecdotally small expected impact • Possibility of funds moving from investments within scope to investments outside scope … anecdotally more likely than funds moving to other territories

25. Gender Discrimination Directive • Original draft published in November 2004- Article 4 prohibited using sex as a rating factor for new insurance contracts • Various incarnations since then leading to current draft- Sex as a rating factor prohibited in (re)insurance but…Member States can “permit proportionate differences … where the use of sex is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data” • Maternity/pregnancy differences not allowed

26. Gender Discrimination Directive cont’d • Member States must compile, publish and regularly update supporting data and review their decision after 5 years • Commission will review practices and submit a report to the European Parliament and Council within 3 years, possibly followed by a proposal to modify the Directive • Views vary from “business as usual” to “industry will be at the mercy of the government in the short term and commission review in the longer term” • Proof of the pudding will be in the implementation … • … different member states likely to take different approaches

27. Gender Discrimination Directive cont’d • If use of sex as a rating factor is no longer allowed by a Member State, could be significant implications for annuity and motor insurance markets – gravitation towards highest price? • If a Member State permits use of sex as a rating factor, some interesting questions will arise- Will insurers be allowed to use data other than national published data in setting premiums/benefits?- The published data will be historic but will, for example, mortality improvements in annuity pricing be allowed?- If other data is allowed, how much reliance can be placed on internal data, data from reinsurers etc.? • Implementation anomalies may also create opportunities

28. Reinsurance Directive • Directive has proved to be very controversial to date • Initial draft directive published in April 2004 • One of the main objectives was to provide a common structure for regulation of reinsurance activities in EU • Aims to implement similar regulatory structures for reinsurance companies as applies for direct writing companies including: • Licensing of head office in one EU country • Right to operate in other EU countries on services or establishment basis without additional supervision • Fit and proper persons requirement • Reserving as for direct writer but solvency margin is a composite of life and non life solvency margin rules (with some exemptions for captives etc.) • Limits on assets that can be used to cover liabilities • All existing reinsurers will be required to provide some information but are exempted from preparing a scheme of operations.

29. Reinsurance Directive cont’d • It will impact on…. • Solvency of EU reinsurers • Pricing of protection business • Availability of capital intensive reinsurances • Effect of changes are not likely to be material for better capitalised reinsurers and those with diverse books of business • Some concern about competition from non EU reinsurers but Commission keen to ensure level paying field • No specific date set for implementation yet as discussions are still ongoing

30. Solvency II • A Brief history …- Various Commission MARKT papers - 2502/04, 2539/03, 2543/03, 2506/04, 2515/04 • Recent MARKT 2506/04 sets out Road Map:- Draft Proposal for a Directive by end 2005- Target completion date of 2008- Framework for consultation with CEIOPS and other stakeholders- Three waves of consultation (“Calls for Advice”)

31. Solvency II cont’d • Advice from CEIOPS and others should be framed within the following specified principles:- Solvency II system should be a risk-oriented system which encourages risk management- A 3 Pillar structure will apply- Maximum harmonisation with a uniform level of prudence- Within Pillar 1 there will be 2 capital requirements (SCR & MCR)- The system should address Groups/Conglomerates - It should be compatible with requirements for banks and with the work of the IAIS, IAA and Groupe Consultatif - Compatibility also with IAS Phase 2- Quantitative Impact Studies should be carried out

32. Solvency II cont’d • Pillar I – Quantitative- Solvency Capital Requirement (SCR) should allow companies to absorb significant unforeseen losses - Minimum Capital Requirement (MCR) will be the trigger level for supervisory action and should be a simpler calculation - Risks addressed should include underwriting, credit, market, operational & liquidity - Increased harmonisation of technical provisions a cornerstone of new system- Internal Models allowed if validated (validation criteria to be developed) • Pillar II – Supervisory Review Process- Aim is for greater harmonisation • Pillar III – Disclosure- Requirements should be in line with IAIS and IASB requirements

33. Solvency II cont’d • Calls for Advice – Three Waves: • 1st Wave Mid 2004 … mainly Pillar II issues • 2nd Wave now underway … mainly Pillar I issues • 3rd Wave Early 2005 … will be mainly Pillar III issues

34. Solvency II cont’d

35. Insurance Guarantee Schemes • Commission has set up a working group to investigate the possibility of harmonising the protection for policyholders in case of wind up of an insurance company (life and non life) • Seems to be strong support for the introduction of a harmonised scheme across Europe but the devil is in the detail • Latest working paper was circulated in October (Markt/2513/04) • It is proposed that this draft will be discussed at the next meeting of the IC

36. Insurance Guarantee Schemes cont’d • Main points are: • Obligation for each country to establish a scheme and make authorisation conditional on participation in the scheme • Home Member State Principle • Branches may choose to join host country scheme to supplement home country scheme • Cover will be provided to meet claims or to run off liabilities • Minimum level of benefits will be provided (at least 90%, 100% for compulsory and liability covers) • Should future bonuses / profit shares be excluded? • Claimants / beneficiaries should be considered even if the particular business is excluded

37. Agenda • Regulatory Framework/Context • The Regulatory Shortlist • Look into the Future • Over to You!

38. Context for Future Developments • Life assurance specific developments- Can be traced back to IAIS core principles and FSAP- Aimed at developing high standards of supervision and promoting a single market in Europe- More to come? • Other developments can come from left field - e.g. Gender Discrimination Directive, Savings Directive- Future developments less “visible” than life specific developments …but will they succeed in delivering on a cohesive EU single market for life assurance? Are you pro-Europe or Euro-sceptic?

39. UK Providers • Euro-sceptic providers could take the following view… • Some good is coming out of EU regulation (raising standards, consumer protection, financial strength etc.) • However, it is all a bit of a pain =>more cost for no benefit • UK market is reasonably well insulated from new entrants • Not that directly relevant to me • But …

40. UK Providers cont’d • Watch out! • Risk that unharmonised prudential supervision regimes will put you at a competitive disadvantage in your own market! • Increased costs, less efficiencies, more capital and resources • “Common good” requirements and taxation differences are likely to be eroded over time resulting in greater competition in UK market • Availability and pricing of reinsurance support is likely to change • Industry consolidation indicates importance of scale but suggests that there may be room for more niche / specialist players

41. UK Providers cont’d • Pro-European considerations • Harmonisation of prudential supervisory requirements towards risk based systemwill suit stronger players across Europe • Sensible harmonisation of market conduct rules creates opportunities but will open up UK market • Need to make progress on breaking down barriers to competition • Opportunities include • Sourcing business in other countries • Shared services approach should generate efficiencies (costs and capital) • Able to manufacture products in most favourable location • Pan European products (pensions, savings, life cover etc.) • But… • Need to be efficient and competitive in EU context • How long will it take for market conduct harmonisation to be achieved? • How successful will providers be in sourcing reliable distribution?

42. UK Market – Consumers / Distributors • “Euro-sceptic” View • Smaller number of players to choose from due to consolidation • Increased bureaucracy / greater inefficiencies • Higher prices • No effective cross border competition to counteract dominance of large domestic players • “Pro-European” View • Greater range of products and providers available • Narrowing of distinctionbetween UK and non UK products • Competition should keep prices in check • Strong consistent market conduct rules to protect consumers

43. Agenda • Regulatory Framework/Context • The Regulatory Shortlist • Impact of Developments • Over to You!

44. European Regulatory Developments Driving Further Change jim.murphy@lifestrat.ie gerard.davis@lifestrat.ie Life Convention 2004, EICC Edinburgh Monday, 8th November 2004