1. Head of Unit, Insurance and Pensions, DG Markt, European Commission
Royal Institute of Technology Stockholm, 12 June Solvency II: a new and modern solvency regime for the insurance industry
Prof. Karel VAN HULLE
Head of Unit, Insurance and Pensions, DG Markt, European Commission

2. « Not everything what can be counted counts – and not everything what counts can be counted »
Albert Einstein

3. Framework Directive Proposed on 10 July 2007 Adopted April/May 2009
14 existing Insurance Directives (direct insurance, reinsurance, groups etc.)
+ Solvency II
Codification &
New Articles
Recast
&
Codification
= 1 Directive ‘EU Insurance sourcebook’

4. Solvency II – 4 Principal Objectives
Deepen the Single Market
Enhance policyholder protection
Improve (international) competitiveness of EU insurers
Further Better Regulation

5. Why Solvency II? Modernise regulatory framework
Need to act now before the present Solvency I regime breaks down
Provide the insurance industry with more capacity to take on new risks
Improve supervisory convergence
Reduce regulatory arbitrage between banking and insurance

6. The new regime…
Introduces an economic risk based approach that will reward good risk management and enhance policyholder protection
Places emphasis on the responsibility of the senior management to manage their business responsibly
Fosters and demands greater supervisory convergence across the Community

7. Legislative Process - Lamfalussy
Level 1: Framework Directive
Level 2: Implementing Measures
Level 3: Convergent implementation assisted by close co-operation between national authorities
Level 4: Rigorous enforcement of Community legislation by the Commission

8. 8

9. Intensive consultation process
Framework for Consultation
Three waves of calls for advice to CEIOPS
Interviews with selected number of SMEs by Commission staff
QIS 1 and QIS 2
Impact Assessment with 45 options

10. Consultation continued
Commission proposal prepared following consultation and dialogue with CEA, AMICE, CRO Forum, CFO Forum, Groupe Consulatif, CEIOPS, EIOPC
Close contact with ECON members
QIS 3 and QIS 4
Several public hearings and public meetings with stakeholders

11. Quantitative Impact Studies
Key element of Better Regulation
QIS 4 April – July 2008
Analysis and conclusions from each QIS published by CEIOPS
Results helped to shape the proposal and influenced the negotiations
Some 1500 (re)insurers took part in QIS 4
Results of QIS4 will feed into development of implementing measures

12. Solvency II timetable for 2007-2012
2008
2009
2010
2011
2012
2006
Directive development (Commission)
Directive adoption
(Council & Parliament)
Implementation
(Member states)
CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training & development
Commission preparatory work on possible implementing measures
and impact assessment
Adoption of Implementing measures
July 2007
Solvency II Directive published
2012
Solvency II enters into force
QIS 2
QIS 3
QIS 4

13. New European solvency regime in place and operational in all Member States by October 2012!!

14. Solvency II… 3 ‘Pillars’ of equal importance:
Quantitative requirements
Qualitative requirements
Disclosure and reporting
Economic, risk based approach
Proportionality principle
Group supervision

15. Solvency II: 3 pillars and a roof
Pillar 1: quantitative requirements
1. Harmonised calculation of technical provisions
2. "Prudent person" approach to investments instead of current quantitative restrictions
3. Two capital requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR)
Pillar 2: qualitative requirements and supervision
1. Enhanced governance, internal control, risk management and own risk and solvency assessment (ORSA)
2. Strengthened supervisory review, harmonised supervisory standards and practices
Pillar 3: prudential reporting and public disclosure
1. Common supervisory reporting
2. Public disclosure of the financial condition and solvency report
(market discipline through transparency)
Group supervision
& cross-sectoral convergence
Groups are recognised as an economic entity
=> supervision on a consolidated basis
(diversification benefits, group risks)

16. Pillar I: Quantitative Requirements
Market consistent valuation (fair value) of assets and liabilities, including technical provisions (Best Estimate + Risk Margin calculated on the basis of Cost of Capital)
Two capital requirements: MCR and SCR
SCR: Total balance sheet approach; VaR 99.5% 1-year
European Standard Formula for the SCR
MCR: corridor between 25% and 45% of the SCR
Internal Models to calculate the SCR: full / partial
Less or no need for lists of eligible assets or limits on investments (Prudent Person Rule)
Credit for risk mitigation (securitisation, derivatives, reinsurance)
Credit for diversification

17. Pillar II: Qualitative Requirements
New regime places much emphasis on good governance (functions)
Risk-management: key change from old regime  Own Risk & Solvency Assessment gives focus and structure
Supervisory Review Process
More developed than in Basel II/CRD
Response to weaknesses identified

18. Pillar III: Disclosure & Reporting
New approach in Pillars 1 & 2 means new approach needed for Pillar 3!
More freedom for firms to run themselves; but with new responsibilities new requirements for disclosure to harness market discipline in support of achieving the regulatory objectives
Power & discretion to supervisors; need to earn trust of stakeholders; need to foster supervisory convergence & achieve competitive equality  new requirements for transparency

19. Improved group supervision
Group supervision no longer supplementary
Organised co-ordination and co-operation between all supervisors
Clear role and responsibilities for group supervisor chairing a college of supervisors
Group internal model
Group ORSA and Group Solvency and Financial Conditions Report

20. Council Working Party negotiations
Hectic pace of negotiations under P, SI and FR Presidencies (over 1000 p. of comments)
Progress reports to ECOFIN under P and SI Presidencies
General approach ECOFIN: 2/12/2008 under FR Presidency

21. Main issues raised in the Council
Application of the proportionality principle
Surplus funds, equity risk, mutual groups
Exclusion of small insurers
Relationship between MCR and SCR
Group supervision and group support: colleges, role of CEIOPS, role of group and solo supervisors (opposition by group of 12: power with responsibilities)

22. Result obtained Section on group support deleted from the final text
Introduction of a duration approach as a Member State option for equity risk
Introduction of a Pillar 1 and a Pillar 2 dampener to deal with procyclicality

23. Negotiations in European Parliament
Several exchanges of views within ECON
Draft Report by Peter Skinner (ECON)
Draft Opinion by Sharon Bowles (JURI)
More than 800 amendments tabled
Discussion Results QIS 4: 22/09/2008
Adoption of Skinner Report in ECON on 7 October 2008

24. Main issues raised in EP
Exclusions: small insurers, pension funds
Relationship between MCR and SCR
Group supervision and group support: role of group and solo supervisors, legal commitment of parent, role of CEIOPS
Mutual groups and captives
Treatment of equity risk
Surplus funds

25. Result obtained Some 150 amendments were finally adopted in ECON
EP keen to keep group support and proposed further strengthening of cooperation between supervisors
EP opposed introduction of duration approach for equity risk and Pillar 1 dampener

26. Trilogues
Extremely difficult negotiations between Council and European Parliament
8 Trilogue meetings were held
EP accepts deletion of group support with review clause
EP accepts duration approach under conditions (mainly pension business)

27. Political agreement
Agreement by Coreper on 1 April 2009 of compromise package agreed during the Trilogue meetings
EP adopts compromise package in plenary on 22 April 2009 with 593 votes in favour and 80 opposed
ECOFIN Council notes agreement of EP on 5 May 2009

28. Next steps
Final adoption of the Framework Directive after finalisation in 22 official languages
Preparation of implementing measures by EC with help of CEIOPS and EIOPC
Delivery of level 3 guidance by CEIOPS

29. Preparation of implementing measures
3 consultation rounds by CEIOPS during the course of 2009
Final CEIOPS advice by January 2010
Discussion of draft texts with MS in subcommittee of EIOPC
Preparation of Impact Assessment with the help of an external consultant

30. Finalisation of the process
Last QIS exercise (QIS 5) to be launched in August 2010 based upon draft technical specifications to be published in March 2010
Several hearings with stakeholders and EP
Publication of level 3 guidance by CEIOPS by the end of 2011
Agreement on implementing measures by end October 2011

31. The de Larosière Report
Report issued end February 2009
Commission Communication of 27 May 2009: keep functional supervision but with strengthening of EU level (ESRC, ESFS with EBA, ESA and EIOPA)
Legislative proposals by EC Autumn 2009
Amendment of recast text in order to reflect de Larosière changes

32. Solvency II
… modern, innovative and liberal regime for the prudential supervision of insurers, based on sound economic principles…

33. Conclusion
Solvency II is…
good for you!

34. How to contact us? Karel.van-hulle@ec.europa.eu
All official documents, including the text of Solvency II and preparatory papers are available on our website, which is regularly updated.