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

2. Agenda Solvency II: key features Solvency II implementation
Future developments

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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.

10. 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…

11. 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

12. 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

13. 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)

14. Thank you