Overview of the Legislative Process

Purpose of Presentation

Provide brief overview of EU insurance legislative background

Rationale for why Solvency II is being introduced

Overview of Solvency II legislative process

Where we are now and what lies ahead

Ist EU Directives

1st EU non-life and life Directives introduced in the 1970s

Developed and refined through the 80s, and 90s culminating on the Life side with consolidated Life Directive in 2002

Transposed into Irish law e.g. SI 359 of 1994 on non-life side and SI 360 of 1994 on Life side

Problems with old regime (1) Old regime has served its purpose reasonably

well

Muller Report in 1997 indicated however that solvency requirements did not reflect the risks facing the modern insurance industry

This resulted in introduction of Solvency 1 requirements

Always seen as an interim step

Problems with old regime (2)

– the existing system does not enable the accurate and timely identification by supervisors of problems and their root causes which could lead to insolvency.

– risk management is not incentivised under the current regime.

– the lack of consistency across the EU in solvency and regulatory requirements.

– Governance issues

Governance shortcomings a reason for Solvency II

Sharma Report 2002- one of the main triggers for non financial measures in Solvency II

Main Findings of report: Majority of insolvencies preceded by governance type shortcomings

Reduce dependence on capital requirements as the only early warning signal by supplementing it with qualitative measures such as governance and public disclosure

Solvency II Legislative process

Lamfalussy Process

Level 1: The Directive– Joint decision of the Council of Ministers and the

European Parliament Level 2: Delegated acts

– Responsibility of the Commission, based on the advice of EIOPA (but influence of Finance Ministries)

Level 3: Guidelines and implementing acts – Responsibility of EIOPA

Level 4: Enforcement– Responsibility of Commission; ensure all Member States

have implemented fully / correctly

What is purpose of Solvency II Key aspect of Solvency II is to put in place a

regime which has(i) risk based capital requirements

(Pillar 1)

(ii) complemented by relevant non-financial measures (Pillar 2) and which

(iii) enables as much transparency as possible through public reporting requirements (Pillar 3)

It also consolidates Insurance Directives

Pillar 1 elements of Solvency II Technical provisions

Own Funds

Solvency Capital requirement

Minimum Capital Requirement

Prudent Person Principal

Group Supervision

Pillar 2 & Pillar 3 elements of Solvency II

Principles of Supervision

Governance Requirements sets out a series of general framework principles

Public Disclosure

Level 2 Delegated Acts Fleshes out Level 1 Directive CEIOPS advice provided starting point for

this work Ongoing engagement with industry both at

local and European level Commission working group comprised of

Ministries of Finance and technical experts have formulated draft text

Council and Parliament will have a period time to consider these Delegated Acts

Will be implemented as Regulations

Further points to note

Proportionality is a key feature of Solvency II

Efforts been made to reduce complexity

Simplifications

When does Solvency II come into force

1 January 2013

Transitionals

An aspect of Level 2 measures are transitionals This area is still being worked upon General acceptance that transitionals are necessary in

areas such as(1) Own funds – hybrid capital (2) Reporting/Public Disclosure (3) Third country equivalence

Proposals for transitionals in other areas however no agreement on this issues yet and much resistance to some of the proposals.

Simplest message for the moment is work towards implementation on the basis that transitionals will be kept to a minimum: otherwise you may find yourself not sufficiently ready on 1 Jan 2013

Purpose of Omnibus II

Change the date of entry into force of Solvency II

To facilitate the making of implementing technical standards

To facilitate the settlement of disagreements

Specific tasks for EIOPA Lisbonisation of Solvency II Directive Transitionals

Transposition of Solvency II

Currently working on the transposition project

Maximum harmonisation regime so little scope for discretion

Will consult with industry Large exercise: would hope to have it

completed by Oct/Nov next year

Questions?