CIA Annual Meeting LOOKING BACK…focused on the future

Groupe Consultatif Solvency II: Current Status Rolf Stölting St. John's, June 29 th 2005 Session 5709

Overview over initiatives / working groups (Europe) June 2005 Pillar I Life Pillar I Non-life Pillar II Pillar III Account. Groups etc. EU Commission Internal Market DG Financial Institutions: Insurance CEIOPS Committee of European Insurance and Occupational Pensions Supervisors 28 countries: EU, Norway, Iceland, Liechtenstein Pillar I Life Pillar I Non-life Pillar II Pillar III Account. Groups etc. Groupe Consultatif founded 1978 as technical advisory institution for the EU Association of European actuarial associations CEA (Comité Européen des Assurances) Steering Group for Solvency II Consultative Panel appr. 17 named persons: CEA, Mutuals, Groupe Consultatif etc. GDVFFSAABI Institute of Actuaries Advisory Board Project team Board DAV Institut des Actuaires

Progress Report 1 st Wave Call for Advice Draft Answers Technical Advice 3 rd Wave Call for Advice 2 nd Wave Call for Advice Progress Report Draft Answers Progress Report Technical Advice Time-Frame EU-Commission / CEIOPS Draft Answers

Pillar I Quantitative assessment of solvency Pillar II Supervisory control procedure Solvency II Pillar III Market discipline (transparency and disclosure) Three-pillar approach similar to Basel II

First Wave of Calls for Advice Calls for Advice 1- 6 (Pillar II): Internal control and risk management General aspects of the supervisory process Quantitative tools Transparency of supervisory action Investment management rules Asset-liability management

Second Wave of Calls for Advice Calls for Advice (Pillar I): Technical Provisions in Life Assurance Technical Provisions in Non-life Assurance Safety Measures Solvency Capital Requirement: Standard Formula (Life and Non-life) Solvency Capital Requirement: Internal Models (Life and Non-life) and their validation Reinsurance (and other risk mitigation techniques)

Second Wave of Calls for Advice Calls for Advice (Pillar I, Pillar II): Quantitative impact Study and Data related Issues Powers of the Supervisory Authorities Solvency Control Levels Fit and proper Criteria Peer Reviews Group and Cross-sectoral Issues

Third Wave of Calls for Advice Calls for Advice 19 – 23: Eligible elements to cover the capital requirements (Pillar I) Cooperation between supervisory authorities (Pillar II) Supervisory reporting and public disclosure (Pillar III) Procyclicality (Pillar II) Small and medium sized enterprises (Pillar I)

Pillar 1 – Quantitative requirements (1) Increased level of harmonisation for technical provisions Best estimate topped up with a risk margin Solvency Capital Requirement (SCR) : Reflects level of capital to absorb significant volatility of results and to give reasonable assurance to policyholders If undertaking does not fulfil SCR, amount of capital covering the SCR has to be re-established in due time, based on concrete and realisable plan submitted to supervisor for approval. Parameters calibrated in such a way that quantifiable risks to which insurer is exposed are taken into account Based on amount of economic capital corresponding to a ruin probability of 0,5 % (VaR of 99,5 %) and a one year time horizon (working hypothesis) Method for Standard formula not yet fixed

Pillar 1 – Quantitative requirements (2) Minimum Capital Requirement (MCR) : Reflects level of capital below which ultimate supervisory action would be triggered. Level of MCR will be set once quantitative impact studies have been performed Possibility to be calculated in a simple and robust manner MCR will have an absolute floor

Solvency Capital Requirement as the main instrument of a two-tier system under normal conditions Safety margin on technical reserves Solvency Capital Requirement assets Technical reserves Pillar 1 – Quantitative requirements (3)

Equity capital available Minimum Capital Requirement (MCR) Solvency Capital Requirement (SCR) Additional levels of intervention? Intervention of supervisory body Pillar 1 – Quantitative requirements (4)

Pillar 1 – Quantitative requirements (5) Risk classification : Based on IAA risk classification Underwriting risk Credit risk Market risk Operational risk Liquidity risk Not quantifiable risks will be taken into account in pillar 2 Internal models : May replace standard formula of SCR if validated Validation criteria and process to be developed and harmonised Partial use of models may be authorised

Pillar 2 – Supervisory activities Aim to identify insurers with financial, organisational and other features producing a higher risk profile Increase level of harmonisation of supervisory methods, tools and powers Broader scope than Basel II Need for increased cooperation between supervisors combined with peer reviews

Pillar 3 – Supervisory reporting and public disclosure Supervisory reporting : Harmonised reporting to supervisors Goes beyond the notion of financial reporting rules, including different types of information a supervisor needs to perform his functions Information normally not in public domain Public disclosure : Transparency and disclosure of information to public will serve to reinforce market mechanisms and discipline Should be in line with IASB to reduce admin burden Should be compatible with disclosure requirements of banking sector.

Road to Solvency II Draft proposal for Framework Directive: mid 2006 (Commission) Implementing measures: in 2009 (?) CEIOPS is primary advisor of Commission CEIOPS advises through specific "calls for advice" (early, extensive, open consultation with market participants expected from CEIOPS) Framework for Consultation made up by Commission Commitment of Groupe Consultatif / IAA explicitly appreciated Source: MARKT/2506/04

Thank you for your attention!