Session 6 – Pillar 2: Governance and Supervision Models Conferencia Anual ASSAL-IAIS 2016 Rio de Janeiro, 19 April 2016

2 Key messages Recognition in Europe – based on experience - of importance of good governance Emphasis on recognition and control of risk oExamples: ORSA, prudent person principle Governance will be a key aspect of supervisory convergence under Solvency II oSupervisory review process oColleges of supervisors

3 Recognition of importance of good governance From a historical perspective, risk management was not a fundamental element of the insurance regulatory regime in the EU. oThis changed completely with Solvency II Sharma report 2002: primary causes of failures and ‘near- misses’ between 1996 and 2001 were poor management and inappropriate risk decisions rather than inadequate capitalisation per se. Solvency II preparatory guidelines: September 2013: oSystem of governance oORSA Solvency II 1 January 2016: many additional standards and guidelines on governance

4 Emphasis on recognition and control of risk Enhanced responsibility of the companies’ executive boards. Ultimately responsible for the compliance with laws, regulations and administrative provisions of Solvency II.

5 Prudent Person Principle In Solvency I: a rule-based approach Authorised Assets for Coverage of Technical Provisions (article 23 of the Life Directive 2002/83/EC) Rules for Investment Diversification (article 24) : Quantitative limits for certain types of issuers (property, unsecured loans, cash, assets not traded on a regulated market) Quantitative limits by issuer (5% + rule of 10*4) Possibility of additional rules at national level “Rule-based” approach : Easy to implement and supervise Not necessarily adapted to the evolution & variety of asset portfolios In Solvency I: a rule-based approach Authorised Assets for Coverage of Technical Provisions (article 23 of the Life Directive 2002/83/EC) Rules for Investment Diversification (article 24) : Quantitative limits for certain types of issuers (property, unsecured loans, cash, assets not traded on a regulated market) Quantitative limits by issuer (5% + rule of 10*4) Possibility of additional rules at national level “Rule-based” approach : Easy to implement and supervise Not necessarily adapted to the evolution & variety of asset portfolios In Solvency II: a principle-based approach No limitative list Principles for a prudent management: Invest in what you know Have a portfolio fit for purpose The UT has to define its own internal limits Investments have an impact on the SCR “principle-based” approach : More difficult to supervise? Link with risk management and ALM More leeway but more responsibility for the UT Already in place for reinsurance business (article 34 of reinsurance Directive 2005/68/CE) In Solvency II: a principle-based approach No limitative list Principles for a prudent management: Invest in what you know Have a portfolio fit for purpose The UT has to define its own internal limits Investments have an impact on the SCR “principle-based” approach : More difficult to supervise? Link with risk management and ALM More leeway but more responsibility for the UT Already in place for reinsurance business (article 34 of reinsurance Directive 2005/68/CE)

6 An example: ORSA Brings together in a comprehensive way risk and capital management i.e. risks an undertaking is currently exposed to, or may face in the long term, and the internal capital needs oCapital requirement may not cover all material risks a specific undertaking is actually exposed to. A standard formula is of course standardised. oIncludes non-quantifiable risks like reputational risk or strategic risk, amongst others. Supervisors will seek: oEvidence that the ORSA is an integral part of the insurer’s risk, capital and value management system, and will use the ORSA to understand the undertaking’s attitude towards risk management oTo understand the level of involvement of the board in the ORSA process and if, in fact, the ORSA process and outcome is being considered in the decision-making processes. The ORSA process is as important for the undertaking as the final outcome itself.

7 An aside on pensions and risk management Opinion issued by EIOPA on 14 April 2016 on a Common Framework for Risk Assessment and Transparency for IORPs (occupational pension funds) Risk assessment and transparency framework for IORPs oMarket-consistent balance sheet oStandardised risk assessment oPublic disclosure oSupervisory actions

8 Governance will be a key aspect of supervisory convergence: supervisory review process The ultimate objective of the Supervisory Handbook is to foster convergence of supervisory practices amongst the NSAs and, thus, to further build the common European supervisory culture. oFitness and propriety: specific indicators established oBoard effectiveness: how Board works together: set of good and poor characteristics defined

9 Supervisory convergence: Colleges of supervisors

Thank you Justin Wray Head of Policy Unit EIOPA phone: