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Solvency II and Pension Funds
Instituto de seguros de Portugal25 Oct. 2007 | Lisbon
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
3
Outline:
1
4
2
Source CEA
CEA’s Member Associations
Source CEA
33 national member associations:
27 EU Member States
+ 6 Non-EU Markets
Switzerland, Iceland, Norway, Turkey,Liechtenstein, Croatia
3 Observers
Russia Ukraine
AISAM
Brussels-based, founded in 1953
Active at European and International level
33 member bodies - national insurance associations
CEA represents all types of insurance and reinsurance undertakings
pan-European companies, monoliners, mutuals & SMEs
CEA represents 94% of total European insurance premiums
About CEA
A successful Solvency II project requires co-ordination of all stakeholders
Stakeholders in the drafting process of the Solvency II Directive
European Parliament
Councilof Ministers
EIOPC
CEIOPS
European Commission(DG internal market)
Insurance Industry stakeholders
CFO ForumCRO Forum
CEA
AISAM/ACMEICISA
Other stakeholders
National Insurance
Associations
Insurance Companies
Groupe Consultatif
CEA
CEA main contribution since the beginning of the Solvency II process
Communication and consensus-building
Answers and comments to Calls for Advice, various position papersElaboration of Total Balance Sheet ApproachPosition papers and working papersBriefing Notes
QISs and the European Standard Approach
Release of working documents on ESA (spreadsheet and guidance)Solid basis for dialogue and negotiation with all stakeholdersGuidance on QISs
Group Case StudiesEnsures a good understanding of EC proposal on Groups
CEA overall welcomes the Solvency II Directive Proposal
Ref. today’s presentation
CEIOPS’ Quantitative Impact Study IIConsideration of a risk based economic/total
balance sheet approachInclusion of Cost of Capital (incl. development
of methodology)Very close to European Standard Approach
Commission’s Impact AssessmentCEA approached by Commission to deliver
input for impact assessmentCEA’s answer: launch of European-wide survey
in view of delivering a common industry feedback
MAIN CONTRIBUTION
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
2
3
Outline:
1
4
Why a new Solvency framework ?
Solvency regimes need to evolve to ensure appropriate consumer protection and efficient capital allocation
Solvency I disadvantages:Rules can conflict with good risk managementCapital is not adequately directed to risksA lack of harmonisation across the EU
Some member states use more sophisticated approachese.g. UK ICA, Danish traffic light system, etc
Europe is ready for a better and more appropriate risk based solvency regime
Objectives of Solvency II
The Industry shares the objectives set out for Solvency II
Deepen integration of the EU insurance market
Improve protection of policyholders and beneficiariesA major step forward from Solvency I supported by the new economic perspective
Improve international competitiveness of EU insurers
Promote better regulation
What is an economic risk based approach?
The industry believes that these objectives can only be achievedthrough a risk based economic approach
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
11
From Solvency I to Solvency II:Towards a coherent economic approach
Future
Current situation
• Consistent view on solvency measures across all parties
• Discussions with supervisors and rating agencies focus on accuracy of internal model and quality of risk management
• Multiple ways of assessing solvency which are not always consistent and can even contradict each other
• Not aligned with best practice internal risk management
True risk profile
SCR* - Internal Models
SCR* - Standard Approach
Rating agency models
Current Solvency I rules
Range of solvency measures
Increasinglyaccurate
*Solvency Capital Requirements (SCR)
12
Align risk, capital and value
Eligible capitalTechnical provisionsCapital requirementsAsset Liability valuationetc
Internal controlRisk managementCorporate governanceStress testingContinuity testing
Current disclosure requirement
National GAAPNational regulatory reporting
Future disclosure requirements
IFRS Phase 2Private disclosure to the regulator
Market DisciplineSupervisory ReviewProcess
Measurement of Assets,Liabilities and Capital
Solvency II – 3 Pillar Approach
Solvency Capital Requirement (SCR)Target Capital that an entity should aim to meet under normal operating conditionsDropping below SCR does not necessarily require immediate supervisory intervention
Ladder of InterventionSolvency II should be designed to guarantee an appropriate ladder of intervention if the available capital falls below SCR
Minimum Capital Requirement (MCR)Reflects a level of capital below which ultimate supervisory action should be triggeredIs set in excess of technical provisions
Market Consistent Value of LiabilitiesIs sufficient to cover policyholder obligations
Internal Model
Standard Approach
Market -consistent Value of
Liabilities
(i.e. including MVM*)
Level of MCR
Level of SCR
Solvency II Framework Key Components
Ladder of intervention
*Market-value margin for unhedgeable risks
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
2
3
Outline:
1
4
CEA welcomes the Solvency II Directive Proposal
The underlying economic approach is strongly supportedReplacing Solvency I regulation which is too simplistic and does not adequately allocate the capital to where the risks are.Eliminating regulatory arbitrage.
Strong support for the use of internal modelsEncourage companies to develop more sophisticated models to determine their capital requirements;These so-called internal and partial models are being approved by supervisors.
A solvency system that will evolve and continue to be appropriate in the future
The principles based approach, together with the underlying risk based economic methodology, means that the Solvency II regime will be able to adapt and evolve in the future as economic conditions change and new risks and products emerge. The CEA strongly supports the flexibility and adaptability inherent in the Framework Directive.
CEA welcomes the Solvency II Directive Proposal
Much increased harmonisation across the EU
ProportionalityThe CEA supports the implementing measures to be proportionate for:
the technical provisions; SCR; and supervisory powers.
CEA would welcome the opportunity to help develop such approaches, which are needed to help smaller companies avoid excessive Solvency II implementation costs.
A major step forward in the supervision of groupsRecognizing the economic reality of groups;CEA strongly supports the concept of a group supervisor who has primary responsibility for all key aspects of supervision.
SII Directive Proposal - Areas requiring further improvement
MCR and SCR calculation methods need to be aligned CEA: The MCR should be expressed as a percentage of the SCR
The treatment of own funds should be consistent with a policyholder view
Detailed calculation specifications should not be in the DirectiveReduces the flexibility of Solvency II to reflect emerging experiences and new methodologies.
SII Directive Proposal - Areas requiring further improvement
It is essential that supervisory powers are proportionate and harmonisedDetailed guidance needed to define the extent and circumstances under which new or harmonized powers would be expected to be exercised.
CEA is therefore concerned by:The wide ranging and open ended nature of the powers available to supervisors; The potential lack of harmonisation.
Disclosure requirements must remain proportionate
The SCR should not be a hard target
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
2
3
Outline:
1
4
Why Solvency II matters to consumers (1)
Solvency II will enhance policyholder protection by:
Earlier identification of risksIntroduction of two capital requirementsAllowing management and/or supervisors more time to take mitigating actions
More appropriate and effective supervisory powersSupervisory review of the adequacy of companies’ risk management processes and controlsLadder of supervisory intervention
Cost effective protectionSolvency II capital requirements sufficient to withstand a very rare adverse annual event estimated to happen with a probability of 1 in 200 yearsNo zero-risk of failure: this would set wrong incentives for risk management
Development of more innovative and competitive products:
Market forces and consumer needs determine how companies design their products
Industry survey confirmed that Solvency II should increase competition and the scope for European-wide products
More integrated single market increase competitionBenefits for consumers in the form of more attractive products
The economic approach under Solvency II fosters better understanding of the underlying risk exposure
under certain circumstances, this may lead to pricing adjustments, orthe development of new innovative products
Why Solvency II matters to consumers (2)
Why Solvency II matters to consumers (3)
Important to meet the following conditions (non-exhaustive list):
Risk-based economic approach to ensure same adequate level of protection to all policyholders across Europe
Independent of legal status or size
Development of an escalating ladder of interventionAlignment of MCR and SCR calculation methods needed: MCR should be expressed as a percentage of the SCREnsures that insurers and supervisors have the possibility to take the right measures at the right time
Solvency should remain a principle based supervisory frameworkA supervisory regime that has the possibility to adopt and evolve; e.g. to capture new or emerging risks
Information sharing, coordination and cooperation between MS’supervisory authorities
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
2
3
Outline:
1
4
Overview of EU insurance market
Split of the number of undertakings by company size
- Total of 5,000 companies -
6%15%
79%
Large companies
Medium-sized companies
Small companies
Split of the market share by company size
85%13% 2%
Large companies
Medium-sized companies
Small companies
SME role in the EU insurance market
Small and Medium-sized Entities (SMEs) represent around 95% of the number of European insurance companies
SMEs play a very important role:Increasing specialised product availabilityIncreasing competition and contributing to better prices for consumers
SMEs generally operate through:Specialised product offerings / niche marketsHistoric links with certain customer segments
26
CEA Impact Assessment
442 insurance undertakings contributed to the CEA survey
The survey covered undertakings of all sizes and different lines of business
The most representative industry survey on Solvency II
The survey participants responded on the assumption that Solvency II will follow a risk-based economic approach
27
Most companies are developing risk management frameworks …
This applies to all companies - large, medium and small
28
… and not just because of Solvency II
Solvency II provides an opportunity to align regulatory requirements with best practice in risk management
SMEs support a risk-based economic approach
The solvency regime requirements for SMEs and groups are very similar:
e.g. alignment of capital requirements with underlying risks; recognition of risk mitigation schemes; allowance for diversification effects, etc
Same risk, same requirement
However, SMEs have some specific needs …
Exemptions from Solvency II
Solvency II aims to provide equal protection for policyholders
Capital requirements should be risk based and not unduly influenced by the size or legal form of the company
Smaller undertakings have expressed their concerns that exclusion from Solvency II would:
Lead them to being seen as second class companiesLead them open to local regulation without the guarantee of harmonisation and a level playing fieldRequire them to opt-in to Solvency II to satisfy policyholders looking for Solvency II security when purchasing their contracts
The principle of proportionality
One-size-fits all approach not possible Flexibility based on the different nature, scale and complexity of the undertakings is requiredThe standard approach must allow simplified calculations provided certain criteria are metStandard approach needs to retain its risk sensitivity without becoming an unnecessary administrative burden, in particular for smaller companies
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
2
3
Outline:
1
4
Groups have a very large market share
Split of the market share by company size
85%13% 2%
Large companies
Medium-sized companies
Small companies
Solvency II and Groups
Insurance groups are increasingly managed at the group levelAllows better assessment of risksPolicyholder protection should also be considered at the group level
Issues to be consideredLead supervisorFungibility of capital
Under Solvency I, supervision primarily takes place at the solo level
Supervisory requirements vary greatly between countries
Also for groups, supervision should reflect their economic reality
Diversification is key for Insurers
Diversification benefits are at the heart of the concept of insurance
Across risk types(products / lines of business)
Across companies withina single jurisdiction
Across regulatory jurisdictions/geographies
Within a single risk type(across individual risks)
Div
ersi
ficat
ion
effe
ct Effe
cts
part
icul
arly
re
leva
nt fo
r gro
ups
Full recognition of diversification effects
Diversification types vary
Diversification exists at group level:Across companies within a single jurisdictionAcross regulatory jurisdictions
A more stable development of claims leading to lower capital requirements
Solvency II should fully recognise all diversification effects and reflect this in the capital requirements at both solo and group levels
Lead Supervisor
A lead supervisor for group supervision would benefit:
Policyholder protection more effective assessment of risks - implies earlier detection of possible issues
Supervisory best practiceEnhance dialogue amongst lead and solo supervisors
Lead supervisor would reduce cost of supervisionsupporting more efficient and competitive internal market for insurance services
Supervisory Harmonisation
The significant differences in supervisory practice inhibit the development of the insurance market
Groups operating in EU face patchwork of requirements
Solvency II is an opportunity to address some of these supervisory issues
e.g. making reporting requirements more consistent
Adopting a lead supervisor approach is an important part of achieving harmonisation
Supervisory harmonisation is essential under Solvency II with a supervisory system that is adapted to how groups are managed today
and tomorrow
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
2
3
Outline:
1
4
Pension Funds and Solvency II
Pension Funds are not included in Solvency II for sound reasons
Level playing field should be also ensured in the futureArticle 17(2) IORP to Articles 27 and 28 Life Assurance Directive now replaced by Solvency II Proposal provisions
EC plans to review the IORP Directive in 2008
Source CEA
CEA and the European industry’s input to Solvency II
Essential Building Blocks of Solvency II
Key Aspects of CEA’s High-level Position on the Solvency II Directive
Key benefits for consumers
Areas of particular relevance for SMEs
Solvency II recognising the economic reality of groups
Solvency II and pension funds
Conclusions
2
3
4
Outline:
1
Conclusions
The Industry strongly supports Solvency II objectivesCurrent rules are not aligned with economics & risks of the business Objectives can only be reached through a risk based economic approach
The Industry recognises work done to date by supervisors and welcomes the constructive dialogue
Need to keep the positive momentum we observe today, even if hard work is required from all parties
Much has been achieved so far but the pace is increasing with challenges for all stakeholders.
Areas where further work is required including calibration, group issues, eligible elements of capital, small companies and the articulation/ functioning of Pillar 2 and Pillar 3
The Industry will continue to actively and constructively contribute to the debate
QISs are an opportunity for the industry and supervisors
Background documents
Further reading...
Key strategic publications available on the CEA website (www.cea.assur.org) include:Introductory Guide to Solvency II
A 10-pages brochure (including synthetic executive summary) introducing the main concepts of Solvency IIProposals for a European Standard Approach – ESA for SCR
The ESA aims at capturing the requirements of a consistent economic risk-based approach within a workable solution
CEA’s view on the Impact of Solvency II on the Average Level of CapitalA guide on the comparison of the current Solvency I and future Solvency II frameworks
CEA Working Document on MCR and a Proposed Ladder of InterventionCEA aims to contribute to the ongoing development of critical issues such as the Minimum Capital Requirement (MCR) and proposes a methodology to calculate MCR as well as an approach to a ladder of intervention
CEA Working Paper on the risk measures VaR and TailVaRThis paper discusses the issues related to using VaR and TailVaR as risk measures within the solvency assessment of insurance companies
CEA 10 Key messages on Solvency II
Solvency II Impact Assessment
Solvency II Glossary
CEA information paper on Groups and Solvency II
CEA information paper on Diversification and Specialisation benefits
CEA information paper on Small and Medium-sized Undertakings (SME)s and Solvency II
Contacts
CEA Director General: Michaela Koller ([email protected])
CEA Economics & Finance Committee SecretariatPeter Skjødt - acting ECOFIN Director ([email protected] )Yannis Pitaras ([email protected])Jérôme Berset ([email protected])Marta Gonzalez ([email protected])Silvia Herms ([email protected])Benoît Malpas ([email protected])
CEA Public Affairs: Gabriela Diezhandino ([email protected])Ido Bruinsma ([email protected])
www.cea.assur.org / www.cea.eu+32 2 547 5811
www.cea.assur.org
MCR
SCR
MCR
SCR
MCR
SCR
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MCR
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MCRSCR
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MCR defined as percentage of SCR:
MCR & SCR respond consistently to changing economic conditions
Supervisory can act by “ladder of intervention”
MCR & SCR based on different risk-oriented principles
MCR & SCR can respond differently to changing economic conditions
Supervisory cannot act by “ladder of intervention”
MCR and SCR calculation methods need to be aligned
Tech.liabilities
Tech.liabilities
Detailed calculation specifications should not be in the Directive