Local knowledge. Global power. 1

2 Where we are in Solvency II – key milestones CEIOPS – implementing measures: End October: final advice wave 1 & 2  Importance to have a concrete proposal on the illiquidity premium  Nov – Dec rd Wave (4 weeks consultation period) Main topics Own funds (participations, quantitative limits, ring fenced funds) Equity risk sub module Calibration Centralized risk management

Local knowledge. Global power. 3 Solvency II - QIS 5 -August – November 2010: QIS 5 -July 2010:Spread sheet for the test -June 2010:Publish final technical specification -March 2010:QIS 5 technical specification and comprehensive calibration paper Calibration – CEIOPS report -March/June 2010:Consultation EIOPC, EP and industry – EC in the driving seat -December 2010:national Sup  Central data base -April 2011:Final QIS 5 report

Local knowledge. Global power. 4 European Stress testing for the 30 major insurers -Probably still in CEIOPS Stress testing task force is well advanced in the development of the stress test structure not too complex scenarios translated in shocks will cover: equities, commodities, real estate, foreign exchange, default risk, spreads no correlations -Valuation basis still to be determined, depending from the timing

Local knowledge. Global power. 5 Solvency II - Level 2 implementing measures Three key messages from CEIOPS: 1.Implementing measures need to be conform to Level 1 text 2.Need to take into account the lessons learnt from the crisis: e.g. calibration, specific group risks 3.Element of cross sectoral consistency – needs to be well monitored as banking framework is not based on a market consistent valuation rather than a mixed model

Local knowledge. Global power. 6 Solvency II: Implementing measures main concerns wave 2 -Classification and Eligibility of own funds (CP 46) -Requirements for Tier 1 capital are more restrictive than those agreed in the Directive -Useful less of hybrid capital instruments is largely ignored -Maturity of capital instrument should not be directly related to the insurer’s liabilities -Concept of grandfathering is currently missing: should be adequately reflected in the implementing measures -Cross sector consistency for the determination of eligible own funds is desirable -Assessment of group Solvency -Risk of un-harmonized treatment for participants by local supervisors -A quick decision on equivalent territories is vital -Risk of non-recognition of diversification benefits with third countries -Confusion around the concepts of diversification, solvency and fungibility/transferability -Group-specific risks such as reputational risk, contagion risk and the impact of intra-group transactions, represent opportunity losses, hence do not require additional capital

Local knowledge. Global power. 7 Solvency II: Implementing measures main concerns wave 2 -Valuation of technical provisions (CP 40, and 42) -CP 40: swap rates should be the preferred risk-free rate -CP 40: a liquidity premium should be recognized for certain lines of business -CP 42: risk margin should not be artificially high -CP 42: an empty reference entity does not reflect market valuation principles -CP 42: diversification across lines of business should be recognized -Calibration – SCR (CPs 48, 49, 51, 53 and 54) -The proposed calibrated factors should be economically justified -Internal Models (CP 56) -Minimum standards for internal models should also apply to standard model -A common approval process for internal model at group and subsidiary level is required

Local knowledge. Global power. 8 Solvency II - Framework Directive -A review of the Directive should be made to assess scope and impact of compromise e.g. centralysed risk management (sub section 6) -The transposition exercise is a risk element in the process which should be monitored

Local knowledge. Global power. 9 Solvency II – System of Governance (CP 33) -Agreement on main outlines of the advice -Level of details in level 1, 2 & 3 -Important to take into account other existing directives or certain elements such as outsourcing -Responsibility of risk management is to set the overall Enterprise Risk Management Framework and to oversee the operators of the company to ensure alignment with the framework -Risk governance -Risk appetite (overall & specific risk limits) -Risk assessment & valuation methodology -Risk control framework (focus on operational risk) -Governance with respect to insurance groups not addressed

Local knowledge. Global power. 10 Solvency II – System of Governance -Overlap in roles & responsibilities between the actuarial function & the risk management function  need clarification -Discussion on concept a scope of independence of the actuarial function -Importance of the integration in the day to day operations & business decision  Consequence: overlap with risk management & finance functions -Actuaries play various roles including in pricing -The independence should be applied on the valuation role  express an opinion to the board on certain matters such as reliability & adequacy of the technical provisions -No agreement on the fact that the actuarial function shall rely on European technical standards developed a body of representatives of different stakeholders

Local knowledge. Global power. 11 Sub section 6 – Supervision of Groups Solvency for groups with centralized Risk Management Understanding of the Subsection 6 The subsection allows companies to submit an application for permission to be subject to Articles 236 and 238. these articles govern a strengthened cooperation and decision process (obligation to inform the college and procedure for final decision on the issue) in two specific cases: -Determination of the SCR for the subsidiary of a group (including the capital add-on) normally governed by Article 229 (Group internal model) -Non compliance with the SCR treated by Article 136 at solo level.

Local knowledge. Global power. 12 Sub section 6 – Supervision of Groups Solvency for groups with centralized Risk Management To be eligible for this permission the following conditions must fulfilled (article 234): a.The subsidiaries concerned are included in the scope of group supervision b.The following conditions met: The risk management processes and internal control mechanism of the parent cover the subsidiary The supervisory authorities concerned are satisfied as regards the prudent management of the subsidiary by the parent c.The group supervisor has agreed on the preparation of a single document covering the ORSA on Solo and Group levels d.The group supervisor has agreed on the preparation of a single solvency and financial condition report for the whole group A procedure consequence of the permission to subject subsidiaries to Articles 236 & 238 is that it neutralizes the possibility for sub-group supervision in jurisdictions other than that of the parent company jurisdiction (Article 214)