Solvency II The first year of implementation José Almaça CIRSF Annual International Conference Lisboa, 23rd june 2016

Agenda Solvency II: key features Solvency II implementation Future developments

1. Solvency II: key features The Solvency II regime represents a deep and comprehensive review of the European prudential framework for the insurance and reinsurance sector It became fully applicable on January 1st 2016 Main objectives: Enhance the level of protection of policyholders Deepen the integration of the EU insurance markets Embed a risk-based management culture in undertakings Promote the convergence of supervisory practices Increase the level of transparency of the sector Improve the competitiveness of EU undertakings

1. Solvency II: key features In order to achieve these goals, Solvency II is based on: Total balance sheet approach, i.e. valuation of all assets and liabilities based on sound economic principles Risk sensitive capital requirements Strong system of governance, including fit and proper, risk management and Own Risk and Solvency Assessments Risk-based and preventive Supervisory Review Process Adequate levels of reporting to supervisors and disclosure of information

1. Solvency II: key features 3 Pillar structure 1. Quantitative requirements Technical provisions Capital requirements (SCR and MCR) Investments Own funds 2. Qualitative requirements System of governance Risk management and Internal control Own Risk and Solvency Assessment (ORSA) Supervisory Review Process 3. Reporting and market discipline Disclosure of information to the public Transparency Harmonized reporting to supervisors

1. Solvency II: key features Legislative structure Solvency II Directive (incl. amendments by the OMNIBUS II Directive) Delegated Regulation Implementing Technical Standards + Regulatory Technical Standards Guidelines Monitoring Adopted/decided by: European Trilogue European Commission EIOPA

2. Solvency II implementation Transitional measures Solvency II is a structural change from the previous solvency regime From an overall perspective, the quantitative requirements are expected to increase, in particular Technical provisions in Life business, due to the use of lower discount rates and explicit inclusion of the cost of guarantees Solvency Capital Requirement, for both life and non-life business, due to the measurement of a broad range of risks In order to ensure a smooth transition to the new regime, transitional measures on technical provisions will be used by several players during a maximum of 16 years

2. Solvency II implementation Experience so far… Clear benefits from the increase of risk sensitiveness and sophistication of the measures Higher flexibility through a more principles-based regime More accurate and granular profile of the risks incurred by undertakings Induces automatically the mitigation of certain risks, i.e. concentration risk Scope of tools and powers at disposal of national supervisors Use of common tools and templates enhance the level of cooperation and mutual understanding at European level

2. Solvency II implementation Experience so far… However, it also entails important challenges for both national supervisors and undertakings, especially in the first years: High complexity and emergence of interpretation issues Need for improvement of the quality of data and of the analytics to derive them Challenges stemming from the detachment of the accounting basis from the solvency calculation Need for a comprehensive review the business strategies, including investment and reinsurance policies, product design, own funds management, etc.

2. Solvency II implementation Experience so far… On top of these challenges, there is a need to ensure the sustainability of the insurance business models vis-à-vis the macroeconomic environment The persistently low level of interest rates The vulnerabilities of the banking sector and the resulting contagion effects The potential for abrupt yield reversals, due to the unwinding of the artificial compression of spreads in some asset prices The fragile GDP growth perspectives The potential for external shocks, e.g. Brexit, refugees, political instability…

2. Solvency II implementation Experience so far… Some preliminary figures of the Portuguese market, as at the 1st of January 2016 Market coverage ratios of 131% and 392%, respectively for the SCR and MCR The impact of transitional measures is relevant, especially for life and composite insurers

3. Future developments The adaptation to Solvency II will not be finished in 2016 Insurers should be prepared to increased supervisory scrutiny, potentially including the need to amend methodologies used in previous years Step wise approach, also taking into account the convergence of interpretations at European level However, within the legal scope, national authorities may decide to follow different paths on certain issues than their European counterparts

3. Future developments Expected regulatory developments at European level in the forthcoming years: Review of the SCR standard formula Review of the LTG package Review of the methodology to calculate the risk-free rate term structures (published by EIOPA), including the Ultimate Forward Rate (UFR) Discussions on the need to add Macroprudential instruments on top of Solvency II Adaptation of Solvency II to the outcome of Global Capital Standards (ICS) development at international level (IAIS)

Thank you