EIOPA & Solvency II What to expect in non-member states such as Switzerland Gabriel Bernardino Chairman of EIOPA Swiss Insurance Association Zurich, 1 December 2011

2 Outline 1.What is EIOPA? Key objectives Powers Activity Challenges 2.Solvency II – The final countdown 3.Equivalence – The road to convergence

3 What is EIOPA?

4 EIOPAs key objectives Stable/effective financial system Sound regulation/supervision Transparent, efficient and orderly markets International supervisory co-ordination No regulatory arbitrage Equal conditions of competition Appropriate regulation/supervision of risks Enhanced customer protection

5 EIOPAs powers Develop draft technical standards Issue guidelines and recommendations In certain cases, remedy emergency situations Settle disagreements in cross-border situations Monitor correct application of EU law Methodologies for products and distribution

6 EIOPAs activity Regulation Solvency II Input to the EU Commission on the Level 2 implementing measures On-going work on the Regulatory Technical Standards and Guidelines and Recommendations Review of the IORP Directive Draft answer to the call for advice from the EU Commission (in public consultation until 2 January 2012) Introduce a risk-based framework in the EU occupational pensions supervision

7 EIOPAs activity Supervision Participation in the colleges of supervisors Providing an added value on consistency and making recommendations in order to assure a convergent and coherent functioning EIOPA colleges action plan (definition and monitoring) EU wide stress test Common framework applied by all undertakings Evaluate the overall stability of the EU insurance market and assess the major prospective vulnerabilities

8 EIOPAs activity Financial Stability Monitor and assess market developments Using efficiently the public information available Collecting more granular information directly from the national supervisory authorities specific quantitative and qualitative queries visits by EIOPA staff Cross-sectoral risk assessment Done at the level of the Joint Committee of the ESAs

9 EIOPAs activity Consumer protection Committee on Consumer Protection and Financial Innovation Guidelines on complaints-handling by insurance undertakings Best practices on disclosure and selling practices of variable annuities Report on Financial Literacy and Education Initiatives First report on consumer trends Complex unit-linked life insurance Payment Protection Insurance Use by consumers of comparison websites

10 EIOPAs activity International Relations Solvency II equivalence analysis Switzerland, Bermuda and Japan in the first wave Off-site and on-site analysis to prepare the advice to be given to the EU Commission International Association of Insurance Supervisors EIOPA full member of the IAIS - the international standard setter in the insurance area EIOPA chair elected to the Executive Committee

11 EIOPAs challenges Building phase but already need to deliver Recruit and maintain highly skilled, competent and experienced staff Implementation of Solvency II Deliver more standardized and comparable information to consumers Create a centralized hub of information for stability purposes Deal with the specificities of system risk in insurance

12 EIOPAs challenges Creation of a truly European supervisory culture that: Promotes stability Enhances transparency Fosters consumer protection A culture based on intelligent and effective regulation A culture that adds credibility and promotes good practices

13 Solvency II The final countdown

What is still missing? Level 2 implementing measures Omnibus 2 Technical standards and guidelines EIOPA plans to start public consultation of technical standards on May 2012 Solvency II – The final countdown

KEY challenge: How to deal with the impact on long-term guaranteed products? Mitigate the effect of short-term volatility Preserve transparency of economic approach Reward long-term ALM and hedging strategies Build counter-cyclical measures Reinforce level playing field Solvency II – The final countdown

Countercyclical tools Pillar I equity dampener MCR and SCR - Supervisory ladder of intervention Pillar II extension of the recovery period Counter Cyclical Premium A tool to be used in crisis situations Complete formulaic approach is not desirable or even possible Clear criteria and indicators monitored by EIOPA Decision on the application of the CCP, by EIOPA on a European basis, when certain defined thresholds would be exceeded Avoid incentives to insurers to invest in higher risky assets Should not be used to maintain unsustainable business models in an on-going situation Solvency II – The final countdown

Key challenge: Capital is not the answer for poor risk management Capital is not the solution for all the risks Effective risk management processes and practices, applied in a consistent way can be a relevant tool to foster policyholder protection and promote stability in the markets

Solvency II – The final countdown Key challenge: Appropriate reporting to supervisors Quarterly reporting of some core elements Increase of risk-based information Preventive supervision is based on the access to timely and quality information

19 SII Equivalence The road to convergence

SII Equivalence SII Directive gives EU Commission authority to decide about the equivalence of a third countrys solvency and prudential regime EIOPA is responsible for the technical assessment

Benefits of equivalence Ensure an adequate level of policyholder protection on a global basis Facilitate cross-border activities of insurance and reinsurance undertakings Reduce regulatory complexity – diminish the burden on internationally active insurance groups Reinforce the global trend towards introducing economic risk-based approaches

Consequences of equivalence 1.A (re)insurer located in a third country enters into a reinsurance arrangement with a (re)insurer in the EU Reinsurance contracts treated in the same manner as contracts concluded with EU (re)insurers EU member states not allowed to require collateral

Consequences of equivalence 2.A (re)insurer headquartered in the EU has participations or subsidiaries located in a third country EU Group to use third country rules on own funds and capital requirements rather than SII rules for the calculation of the Group Solvency Capital Requirement EU Group undertakings in third countries do not need to recalculate their data according to SII

Consequences of equivalence 3.A (re)insurer headquartered in a third country has participations or subsidiaries located in the EU EU supervisory authorities required to rely on group supervision exercised by third country supervisors Avoid burden to third country international groups

Demystifying equivalence Not in search for a copy of SII !!! But go beyond the simple definition of the objectives of the regimes… Equivalence assessments are principles based: Is the third country regime risk-based? Are the basic principles of Solvency II reflected in the third country regime? (e.g. fully risk-based capital requirements, enhanced group supervision, etc…)

Criteria for equivalence Areas to be assessed: Powers and responsibilities of third country supervisors Taking-up of business System of governance Public disclosure Changes in business, management or qualifying holdings Solvency assessment Professional secrecy, exchange of information Group supervision

Transitional regime for equivalence To be applied to third countries willing and committed to converge towards a risk-based regime over a pre-defined period Subject to a EU Commission decision Subject to conditions to be defined in Omnibus 2 EIOPA to perform gap-analysis

EIOPA experience with equivalence Excellent cooperation with third country authorities Information provided and dialogue with third country supervisors was essential to assure the quality and accuracy of the assessments EIOPA has identified which aspects of the third country regime could be deemed equivalent and what additional steps would need to be taken in order for the remaining criteria to be met

EIOPA experience with equivalence EIOPAs advice is that Switzerland meets the criteria set out in EIOPAs methodology for equivalence assessments under Solvency II, but with certain caveats This findings reflect the efforts to maintain a fruitful cooperation between the Swiss and EU supervisory regimes In-depth dialogue and cooperation between EIOPA and FINMA will continue beyond equivalence

Very important step in the right direction with regards to international cooperation and acceptance of supervisory regimes Comment to EIOPAs assessment SII equivalence assessment