IX CONGRESSO NAZIONALE DEGLI ATTUARIGestione e controllo dei rischi:

Solvency II ed Enterprise Risk Management (ERM)

Alberto CorintiTorino, 27 June 2010

Outline

An introduction to Solvency II under the EU An introduction to Solvency II under the EU industry perspectiveindustry perspective

The timeline

Main driving principles of the project

Hot topics in the current debate

2

Solvency II Timeline

2005 2006 2007 2008 2009 2010 2011 - 2012

Directive Development(Commission)

Directive Adoption(Council &

Parliament)

Level 2 & 3(EC & CEIOPS)

CEIOPS work on Pillar I

CEIOPS work on Pillars II and III

CEIOPS advice on Implementing Measures

QIS 5QIS 1 QIS 2 QIS 3 QIS 4

CEIOPSadvice on

Proportionality& Groups

Industry gets prepared

CEIOPS work on L3

“Lamfalussy” process of decision making

Level 4: Enforcement of legislationEuropean Commission

Level 1: Framework DirectiveEuropean Commission, European Parliament, European CouncilLevel 2: Implementing measuresEIOPC, European Commission, CEIOPSLevel 3: Convergent implementationCEIOPS

Reform of EU supervisory architecture underway: EIOPA

EU Industry view on the new micro prudential supervision: EIOPA

Key concerns of the industry

Binding standards should only be on genuinely technical areas: what application in practice?

New powers should be accompanied by appropriate checks and balances, transparency and accountability

EIOPA power to adopt decisions addressed to individual financial institutions could create conflicts of loyalty and confusion in the allocation of supervisory responsibilities

Allocation of tasks as set in Solvency II should not be affected, in particular the new architecture should not undermine the role of group supervisor

Reporting requirements should not be duplicated or disregard national supervisors

5

Industry priorities in developing implementing measures

It is crucial that Level 2 does not depart from the principles which are crystallized in the framework directive and which are based on a truly risk-based economic approach

The Framework Directive incorporates a range of features which the industry has advocated for a long time :

Market-consistent approach to value all assets and liabilities with no additional implicit prudential margins. Specific provisions to address pro-cyclicality with no impact on measurementCapital charge for all quantifiable risks based on the agreed risk measurement, with recognition of genuine diversification, risk mitigation and loss absorbing itemsA new supervisory approach with a system of ladder of supervisory interventionsFostered ERM , including encouragement to develop internal models, and increased market transparencyGroup supervision which allows the assessment of consolidated risk profile in line with groups’ economic realityApplication of the risk-proportionality principleCreation of an harmonized EU supervisory regime

6

Industry view on Regulatory lessons from the financial crisis

A risk based prudential framework is necessary

Solvency II architecture, as designed in the draft framework directive, is solid and represents the right regulatory answer to the crisis

Economic foundations of SII should be retained and strengthened

Enhanced Enterprise Risk Management Market consistent valuation as the basis for prudential oversight. Anti-cyclical tools are necessary, but should not affect A/L measurementGroup supervision in line with groups’ economic reality and based on enhanced supervisory coordination

Need to avoid overreaction to the crisisEuropean Insurers highlight the ever increased need for Solvency II, based on the principles crystallized in the

Framework Directive

RM

Market Consistent Value of technical provisions

Market value for hedgeable risks and BE plus risk margin for non headgeable risks

Minimum Capital Requirement (MCR)Reflects a level of capital below which ultimate supervisory action should be triggeredCalculated on a factor basis, but within the corridor of 25% - 45% of the SCR

Solvency Capital Requirement (SCR)Target Capital which should enable to absorb significant unforeseen losses over a specified time horizon The standard calculation can be replaced by the use of internal model under supervisory validation

Ladder of InterventionSolvency II should guarantee a ladder of intervention if the available capital falls below SCRConcept of transferability of TP in extreme situations

MCR

3

2

4SCR

1

Market -consistent Value

of Liabilities

3

2

Solvency II principles - Pillar I conceptual framework

Risk Margin

4

1

Ladder of Ladder of InterventIntervent

ionion

Solvency II principles – Balancing feasibility and sensitivity in SCR

Simplicity Sensitiveness

Partial internal model

Internal model

Use of entity specific data

Simplified methods

Standard methods

The current debate: QIS5 specifications

Industry raised a number of serious concerns when commenting on the three waves of CEIOPS advice on implementing measures

Draft QIS5 specification and preliminary draft of implementing measures take into account many of these concerns, such as:

Risk free rates based on swap curveApplication of liquidity premium in discounting liabilitiesAllowance of diversification between lines of business in risk marginIncreased sensitiveness of SCR (NP reinsurance, geographical diversification)Refined calibration of SCR ( e.g. equity risk and symmetric adjustment)Increased credibility factors for the use of entity specific parametersTreatment of “future profits” and “winding-up gap” in tier 1

The debate is still open on a number of issues (e.g. risk free rate, future profits)

The current debate: QIS5 specifications

Still many industry concerns to be addressed, for example with regard to:

Wider application of liquidity premium to liabilities depending on their liquidityCalibration of spread risk for corporate bonds and for “covered bonds”Criteria for Tier 1 subordinated debtsRefinement of future premium in the contract boundary definitionMeasurement of participation and treatment of participation in financial institutionsConcept of transferability of capital at group levelDefinition and treatment of ring-fenced fundsAllowance of the use of entity specific parameters

It is crucial to work in a constructive and cooperative spirit to finalize Solvency II as expected

With Solvency II Europe has the potential to became a leader in insurance prudential regulation, with benefits for both policyholder and industry

How can we make it happen?How can we make it happen?

www.cea.eu

Annex – list of implementing measures under discussion to date

IM 1 System of GovernanceIM 2 Public Disclosure by Insurance & Reinsurance UndertakingIM 3 Valuation Assets & Liabilities, Other than Technical ProvisionsIM 4 Procedure for the approval of Internal ModelsIM 5 Tests and standards for Internal ModelsIM 6 Supervisory approval of Ancillary Own FundsIM 7 Classification and eligibility of own fundsIM 8 Transparency and accountability of supervisory authoritiesIM 9 Supervisory Reporting by Insurance and Reinsurance undertakingsIM 10 SPV authorisationIM 11 Group SolvencyIM 12 Capital add-onsIM 13 Technical ProvisionsIM 14 Extension of recovery period

Annex – list of implementing measures under discussion to date

IM 15 Equity risk - symmetric adjustment mechanismIM 16 Equity risk - dampener approachIM 17 Participations - SCR and OFIM 18 Repackaged loansIM 19 Simplifications for Technical ProvisionsIM 20 Risk Free RateIM 21 Group supervisionIM 22 Operational riskIM 23 Intangible assetsIM 24 Life Underwriting risksIM 25 Risk MitigationIM 26 Undertaking Specific ParametersIM 27 Market risk sub-module of the standard formulaIM 28 Non-life underwriting risk

Annex – list of implementing measures under discussion to date

IM 29 Adjustment for the loss-absorbing capacityIM 30 Approval of group internal modelsIM 31 Draft on supervision of group solvency for groups with centralised risk managementIM 32 Partial Internal ModelsIM 33 Ring fenced funds