1. University of Antwerp 26/04/2018
Solvency II reviews
University of Antwerp
26/04/2018

2. Two years only Solvency II started on 1st January 2016
EUR 11 trillion of assets
EUR 9 trillion of technical provisions
Smooth transition despite low yield environment
Transitional measures
Impact of which is transparent
Stronger insurance industry with Solvency II
Capital aligned to the risks
Realistic basis to mitigate risks
Upgraded governance model
Enhanced transparency to public and supervisors
Group solvency requirements
Proportionality in all 3 Pillars

3. Reviews planned from the beginning
Two reviews at two different levels
Review of the Solvency Capital Requirements
Focused on Delegated Acts
By end 2018
Review of the long-term guarantee measures
Focused on the Directive
By end 2021

4. Reviews planned from the beginning
Two reviews at two different levels
Review of the Solvency Capital Requirements
Focused on Delegated Acts
By end 2018
Review of the long-term guarantee measures
Focused on the Directive
By end 2021
Reporting templates

5. Reviews planned from the beginning
Two reviews at two different levels
Review of the Solvency Capital Requirements
Focused on Delegated Acts
By end 2018
Review of the long-term guarantee measures
Focused on the Directive
By end 2021
Reporting templates
Guidelines

6. Reviews planned from the beginning
Two reviews at two different levels
Review of the Solvency Capital Requirements
Focused on Delegated Acts
By end 2018
Review of the long-term guarantee measures
Focused on the Directive
By end 2021
Reporting templates
Guidelines
International Capital Standards

7. Solvency capital requirements review
Solvency capital requirement standard formula
Specifies how much capital do insurers need to set aside to mitigate risk of adverse developments.
Four principal risks: underwriting, market, credit, operational
Reflects the risk-profile of most (re)insurance undertakings
Follows a modular approach
Takes account of risk-mitigating effects
Diversification, loss-absorbing capacities, reinsurance, derivatives
Allows for undertaking specific parameters (USP) for some risks
Provides for simplified calculations
Corresponds to the 99.5% Value-at-Risk of basic own funds over a one-year period

8. Solvency capital requirements: how does it work?
Assets
600
Liabilities
Equity
100
Own funds 50
Fixed income
500
Technical provisions
550
Starting balance sheet
(fair value)

9. Solvency capital requirements: how does it work?
Assets
600
Liabilities
Equity
100
Own funds 50
Fixed income
500
Technical provisions
550
Starting balance sheet
(fair value)
Assets
561
Liabilities
Equity 61
Own funds 11
Fixed income
500
Technical provisions
550
New valuation in stressed condition: 39% decrease in equity

10. Solvency capital requirements: how does it work?
Assets
600
Liabilities
Equity
100
Own funds 50
Fixed income
500
Technical provisions
550
Starting balance sheet
(fair value)
Assets
561
Liabilities
Equity 61
Own funds 11
Fixed income
500
Technical provisions
550
New valuation in stressed condition: 39% decrease in equity
Assets
561
Liabilities
Equity 61
Own funds 41
Fixed income
500
Technical provisions
520
Whole balance sheet approach: liabilities also re-valued. Impact of future discretionary benefits

11. Objectives of review Commission sought advice in three areas
Reducing complexity and ensuring proportionality of the requirements
Correct technical inconsistencies
Capital Markets Union and financing the economy

12. Scope of Advice Advice provided on 29 separate topics
Plus impact assessment (both cumulative and per topic)

13. Proportionality
Different application of the same concept in the three Pillars
Pillar 1: more rule based
Pillar 2: more principle based
Pillar 3: principle based and involves supervisors
SCR simplified calculation
Proportionate to nature, scale and complexity of risks
Evaluation of the error introduced in the results
The error should not influence decision-making of the user; or
It can always be more prudent

14. EIOPA’s advice New simplified calculations in most complex areas
Catastrophe risks
Counterparty default risk
Lapse risk
Look-through approach
The market risk of funds needs to be that of underlying assets
Issue: can be difficult and burdensome to collect sufficient granular and up-to-date data
Allowed data groupings, assumptions, last allocation available, simple approach for funds with small risks…
… if the error is sufficiently small

15. Unrated debt What was EIOPA asked to do? What is EIOPA’s advice?
Provide clear and conclusive criteria to enable unrated debt to receive capital charge associated with credit quality step (CQS) 2 (i.e. single A) and possibly CQS 3 and 1
What is EIOPA’s advice?
Internal assessment which combines financial ratios, market implied rating, and qualitative assessment by insurer for CQS 2 and 3; or
Rely on approved bank/insurance internal model to assess credit quality

16. Unlisted equity What was EIOPA asked to do? What is EIOPA’s advice?
Provide clear and conclusive criteria to enable unlisted equity to have the same capital charge as listed
What is EIOPA’s advice?
Assess whether the unlisted companies have similar fundamental characteristics as those listed companies used to derive type 1 capital charge
Where this is the case; and the investment vehicle does not introduce material additional risk; and requirements on risk management by the insurer are met, assign to listed equity capital charge

17. Interest rate risk (1/2) What was EIOPA asked to do?
From prudential perspective clear that current capital requirements for interest rate risk did not reflect recent evidence
To right of red line is time period after which changes in interest rates were not part of the current calibration

18. Interest rate risk (2/2) What is EIOPA’s advice?
All the supervisors agree the current calibration is insufficient: unintended technical inconsistency should be corrected
Support a methodology – the shifted approach – which:
Is effective at both high and low rates of interest
Is supported by the insurance industry
Indeed is adopted by internal model users
Material impact of the methodology on SCR ratios
Average decrease of 14% in solvency ratios for life insurers (from 216% to 202%)
Was expected given there is currently no SCR for risk of interest rates decreasing
Suggest to implement the methodology gradually over 3 years to mitigate the impact

19. Loss-Absorbing Capacity of Deferred Taxes
Definition: capacity to carry-forward losses and pay fewer taxes on future profits
What was EIOPA asked to do?
From prudential perspective, advice is justified given significant divergence in treatment of deferred taxes
Even after allowing for differences in tax rates and other factors
What is EIOPA’s advice?
Set of principles based on consistency of assumptions before and after shock to own funds:
In particular difficult to justify more favourable assumptions in areas such as new business sales and profits post-shock compared with pre-shock
Intended to strike right balance between convergence and flexibility

20. Risk margin Definition: What was EIOPA asked to do?
Policyholders protection mechanism ensuring that liabilities can be transferred
Calculated as the cost of holding necessary capital to cover future SCR
What was EIOPA asked to do?
Consider methods and assumptions used when calculating risk margin in particular cost of capital
What is EIOPA’s advice?
After exhaustive analysis, not to recommend change in cost of capital
Look to future: “…EIOPA advises that the review of other aspects of the risk margin should be done as part of the review of Solvency II that the Commission is required to undertake after five years of implementation”

21. Other topics Catastrophe risks Strategic equity investments
Recognition of adverse development covers
Comparison of own funds in insurance and banking sectors
Capital instruments only eligible as tier 1 up to 20 % of total tier 1
Recalibration of mortality and longevity risks
Recalibration of premium and reserve risks
Volume measure for premium risk
Simplification of the look-through approach
Look-through approach at group level
Market risk concentration
Currency risk at group level
Simplification of the counterparty default risk module
Simplified calculations
Reducing reliance on external credit ratings in the standard formula
Treatment of guarantees, exposure guaranteed by a third-party and exposures to regional governments and local authorities (RGLA)
Risk-mitigation techniques
Look-through approach: investment related vehicles
Undertaking specific parameters

22. Future activities
LTG measures

23. Macro-prudential review
Future activities
LTG measures
Macro-prudential review

24. Macro-prudential review
Future activities
Treatment of
illiquid
liabilities
LTG measures
Macro-prudential review

25. Macro-prudential review
Future activities
Treatment of
illiquid
liabilities
Long term investments
LTG measures
Macro-prudential review

26. Macro-prudential review
Future activities
Treatment of
illiquid
liabilities
Long term investments
LTG measures
Search for yield
Macro-prudential review

27. Macro-prudential review
Future activities
Treatment of
illiquid
liabilities
Long term investments
LTG measures
Search for yield
Sustainable finance
Macro-prudential review

28. Thank you Camille Graciani Insurance Policy Unit