CEA Annual Report 20092010

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Annual Report 20092010


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Annual Report 20092010

CEA

The CEA is the European insurance and reinsurance

federation. Through its 33 member bodies the national

insurance associations the CEA represents all types of

insurance and reinsurance undertakings, eg pan-Europeancompanies, monoliners, mutuals and SMEs. The CEA represents

undertakings that account for around 95% of total European

premium income. Insurance makes a major contribution to

Europes economic growth and development. European insurers

generate premium income of over 1 050bn, employ one

million people and invest more than 6 800bn in the economy.

www.cea.eu


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CEA Annual Report 20092010

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Contents Foreword 6

European insurance in gures 8

Insurance: a unique sector 10

The CEAs key dossiers

Solvency II 12

Pensions 15

EU nancial supervision 16

International issues 18

International tax issues 20

EU taxation 22

Accounting issues 23

Consumer information and distribution 25

Block Exemption Regulation 28

Damages actions 29

Liability issues 30

Motor insurance 32

Climate change 34

Anti-discrimination 36

Social dialogue 37

The CEA

CEA member associations 40

CEA events 20092010 43

CEA publications 20092010 46

CEA Executive Committee 48

CEA Strategic Board 51

CEA committees and steering groups 53

CEA staff 56

The CEA publications and position papers mentioned in the Annual Report

can be downloaded rom the CEA website, www.cea.eu.

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Indeed, Solvency II has continued to be a key ocus and the major workstream or the CEA throughout

200910 (see p12). Following the adoption o the Solvency II Framework Directive in spring 2009, work

has intensied on the preparation o the implementing measures that fesh out the Directive. Here, the

CEA has been concerned to ensure that the implementing measures refect the economic risk-based

principles underlying the Framework Directive, which require that the capital requirements placed on

insurers are complemented by qualitative supervision in such areas as governance and organisationalstructure. To that end, we published in March 2010 a detailed study on the likely eects o the imposition

on insurers o excessive capital requirements, not just on the insurance industry but also on consumers

and the wider economy. Work on the implementing measures and the orthcoming nal industry-wide

quantitative impact study (QIS 5) will remain a key priority or the CEA in the coming year.

It is not only regulatory and supervisory initiatives that have sprung rom the global economic crisis.

Crisis-related initiatives have had an impact on virtually all the many and varied workstreams o the CEA,

rom accounting rules (see p24) to liability issues (see p30). We are seeing an increasing ocus on ways

to strengthen consumer protection, both rom the new European Parliament that was elected in June

2009 and rom the new European Commission that started work in early 2010. In view o this, the CEA

organised its rst consumer protection conerence in Brussels in December 2009, covering areas suchas inormation disclosure, the case or insurance guarantee schemes and alternative dispute resolution

(see p44).

Through its advocacy work, conerences and publications over the last 12 months, the CEA has

successully strengthened its position as the denitive voice o the European insurance industry. The

ederation is now well placed to represent the industry in the many and varied challenges that it will ace

in the year ahead.

Tommy Persson

CEA President

Michaela Koller

CEA Director General

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European insurance in guresLie drives slight recovery in total insurance premiums

The nancial crisis seriously aected the EU

economy rom the autumn o 2007 onwards.

According to Eurostat gures, ater growth

o 0.7% in 2008, real GDP in the EU shrank by

around 4% in 2009; the sharpest contraction in

EU history. The exceptional measures put in placeunder the European Economic Recovery Plan

helped to restore condence in the banking sector

and to support demand, with capital markets

rebounding ater mid-March 2009.

Since European insurers are among the largest

institutional investors, their overall assets under

management improved in 2009. On the premium

side, conversely to 2008, it seems that the economic

downturn aected non-lie business more than lie

in 2009, although its impact has been small.

Provisional gures or 2009 indicate that the

European insurance industry weathered the

economic crisis airly well, and total premiums

grew 3%, at constant exchange rates, to

1 054bn. This growth is mainly driven by the

lie sector, which accounts or more than 60%

o all premiums in Europe. By comparison, a year

earlier total premiums dropped by 6% at constant

exchange rates.

Lie leads recovery

European lie premiums are expected to reach

647bn in 2009, which corresponds, at constant

exchange rates, to a 5% increase over the previous

year. The largest markets are the UK, France,

Germany and Italy, which together account or

nearly 75% o all lie premiums in Europe.

Although overall growth in Europe is positive, this

was not true in all countries. For example, the

UK saw an 8% decrease in lie premiums. This

decline is the result o the continued all in new

business that was observed during the rst three

quarters o 2009 due to the recession. Conversely,

France, Germany and Italy showed signicant

improvements in lie business, mainly driven by a

rise in single premiums in new business. The strong

tendency or households to increase their savings

in 2009 beneted the guaranteed-return products

oered by lie insurers in some countries.

Non-lie weakens slightly

Provisional gures show that ater the almost

3% increase seen in 2008, at constant exchange

rates, total European non-lie premiums decreased

moderately in 2009 to 406bn rom 417bn a

year earlier. This provisional slight decrease in

non-lie insurance premiums is to a large extent

recession-related, with households and companies

prepared to orego insurance or to reduce their

cover to keep costs down.

With more than 30% o total non-lie premium

income, motor insurance is the largest European

non-lie business line and the one in which

competition is the strongest. This market is largely

driven by Italy, Germany, France and the UK, which

together account or around 60% o all Europes

motor premiums. In 2009, motor insurance

premiums are estimated to have totalled 124bn,

against 127bn in 2008. The decline seen in Italy,

Germany and France, notably due to the decline

in new business that persisted in 2009, more

than oset an increase in the UK. This decreaserefects the decline in car sales. According to the

European Automobile Manuacturers Association,

The weakness o the pound sterling

vis--vis the euro persisted in 2009. As in

the CEAs last annual report, growth rates

have been calculated on the basis o constant

exchange rates. This strips out the eects o

exchange rate changes and better reects

economic reality at the aggregate level.

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European insurance premiums and growth 20072009

Gross written premiums

(bn)Nominal growth

(at current exchange rates)Nominal growth

(at constant exchange rates)

2007 2008 2009 2007/08 2008/09 2007/08 2008/09

Lie 765 642 647 -16% 1% -11% 5%

Non-lie 416 417 406 0% -2% 3% 0%

Motor 130 127 124 -2% -2% 0% 0%

Health 93 99 100 6% 2% 7% 2%

Property 80 81 79 1% -3% 4% 0%

Other non-lie 113 110 103 -2% -6% 1% -4%

Total 1 182 1 058 1 054 -10% 0% -6% 3%

Note: 2009 fgures are provisional

Total gross written premiums in Europe 20012009 (bn)

0

300

600

900

1 200

2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: 2009 fgures are provisional

G

rosswrittenpremiums(bn)

new motor vehicle registrations decreased by 6%

in 2009 against a decrease o 8% in 2008 and

growth o 2% in 2007.

The health insurance sector is the second largest

non-lie business line, accounting or 25% o total

European premiums. This sector is led by the Dutch

and German markets, which together account or

more than two thirds o all premiums. Preliminary

gures or 2009 health premiums indicate thatalthough growth has slowed, overall premiums

are still rising, reaching 100bn in 2009, against

99bn in 2008 and 93bn in 2007. It is worth

pointing out that this business line is the only one

in the non-lie sector that is growing.

Property insurance represents nearly 20% o all

non-lie business. The three leading markets are

the UK, Germany and France, which together

account or 55% o business. In 2009, property

insurance premiums remained largely stable at

around 80bn.

Investments recover

Following the rebound o capital markets that

began in late March 2009, European insurers totalinvestment portolio is estimated to have recovered

rom 6 500bn in 2008 to over 6 800bn in 2009.

This corresponds to an increase o more than 5%,

compared to a all o 8% in 2008 at constant

exchange rates.

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Insurance: a unique sectorWhy insurers dier rom banks

As a reaction to the recent economic crisis and

the ongoing turbulence in the worlds nancial

markets, policymakers have been pushing or

undamental reorms to the way nancial services

sectors are regulated and supervised.

It is, o course, vital to learn lessons ater any

economic crisis, and especially rom one that

sent such shockwaves through the entire

interconnected global economy. The CEA

ully supports any appropriate and rigorous

improvements to regulatory and supervisory

standards or insurers that will maintain a sound

and competitive insurance industry and oster

consumer condence.

A worrying trend has emerged, however, or

policymakers not to appropriately distinguish

between the dierence business models o the

nancial sectors and to assume that what is valid

or banking must also be so or insurance, due to

worries about regulatory arbitrage.

The CEA believes that this would trigger a kind o

herd behaviour that could have a detrimental

eect on global nancial stability. The existence

o dierent business models in dierent nancial

sectors creates the market diversity that lies at the

heart o the nancial system. In general, insurers

invest more conservatively and in a more long-

term manner than banks. It is this dierence in

behaviour between parts o the nancial sector

that creates a stabilising eect.

Explaining the insurance model

In some cases it would seem that this one-size-

ts-all approach to regulation is due to a lack

o understanding and recognition o the specic

characteristics o the insurance business model.

The CEA has thereore prepared a report entitled

Banking and insurance unding mix comparison 2008 (% o total liabilities andequity)

Capital and reserves

Debt securities

Deposits rom monetary

nancial institutions3

Deposits rom customersand government3

Other4

1 Eurozone

2 Percentages based on a sample o European countries (Austria, France, Germany, Italy, UK)3 Amounts held by euro area residents4 For example, money market und shares, liabilities held by non-euro residents5 For example, deerred tax liabilities, obligations to repurchase securities, etc.Source: European Central Bank

Capital and reserves

Subordinated liabilities

Technical provisions

Other5

7

7

115

6

22

31

Banks1 Insurance2

85

27

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Insurance: a unique sector Why insurers

dier rom banks. The report, available on

the CEAs website, describes the insurance and

banking business models, highlights the proound

dierences in the risk prole o the two sectors

both at micro-economic and macro-economic level

and draws conclusions about the implications

this has or the eective regulation o insurance

companies.

The core activity o insurers is risk pooling and risk

transormation, while that o banks is the collection

o deposits and the issuing o loans, together with

the provision o a variety o ee-based services. The

unding (see chart), investments and risk exposures

o the two sectors thereore dier undamentally.

The balance sheet structure o insurers tends to be

relatively economically stable, with airly long-term

policyholder and shareholder obligations and with

assets and liabilities that are linked to a substantial

degree. Insurers have generally de-risked their

assets and kept a low-risk investment policy

over the last decade. On the liability side, too,

insurers are exposed to limited liquidity risk, since

policyholder unds either cannot be withdrawn or

only with a penalty.

Existing regulation is being improved

At micro-prudential level, the EU insurance industry

has well-proven, tailored regulation that is being

improved. The CEA believes that the EUs incoming

Solvency II regime (see p12) is the right regulatory

ramework or the insurance industry and that

excessive or inappropriate read-across o regulation

rom other sectors is unnecessary. Indeed, many

insurers already voluntarily incorporated the more

robust risk and capital management systems

envisaged under Solvency II ater the 2001/02

crisis, which helped them to withstand the more

recent turmoil. The CEA urther believes that

the arrangements or the supervision o groups

incorporated in the Solvency II regime, which are

strongly supported by the CEA, should be given

time to prove their eectiveness beore any new

solutions are considered.

Equally, as demonstrated in the CEAs new report,

(re)insurance does not generate the kind o

systemic risk that arises in banking. Only a limited

number o non-core insurance activities, rather

than insurance entities, may carry systemic risk to

the economy. There is no systemic relevance in core

insurance business. However, insurance companies

may transmit or, as demonstrated during the

crisis, absorb shocks or risks o a systemic nature

generated by other parts o the nancial system.

This, again, dierentiates insurance rom banking

and suggests the need or a targeted approach to

regulatory and supervisory oversight. The insurance

sector nevertheless must have a place on any board

that oversees systemic risk (see p16) because o its

unique perspective and expertise as a risk-taker and

risk-absorber and as an institutional investor.

Insurance did not cause distress

In addition to strengthening regulation and

supervision, various policymakers are considering

ways to und past or uture crises. The CEA

supports measures to strengthen the overall

soundness and saety o the nancial system,

but believes that the inclusion o the insurance

sector in any proposed nancial stability levy or tax

would be unjustied, since insurers were neither

at the root o the last economic crisis nor the main

recipients o subsequent government support (see

p20).

The danger o a read-across o regulation rom

other sectors to insurance is very real. Experience

in some national markets with an integrated

supervisor has shown that a single supervisory

authority increases the risk o a one-size-ts-all

approach, strongly oriented towards the banking

business model and thus neglecting the specic

characteristics o insurance.

The raison-dtre o insurance to provide long-

term stablility to citizens and the economy

could be jeopardised by imposing rules on the

sector that have little to do with the nature o its

business model.

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Solvency IIImplementing measures must refect the Framework Directive

The Solvency II project to create a new regulatory

regime or the EUs (re)insurers has continued to

be a priority or the CEA over the last year. Ater

the adoption o the Framework Directive in the

spring o 2009, the work on the preparation

o the implementing measures has intensied.Both policymakers and stakeholders have aced

a considerable increase in workload, due to the

need to translate, within a short timerame, all the

principles o the Directive into concrete provisions

and to nd technical solutions to a number o

complex topics.

The Solvency II regime should come into orce in

Europe by 31 October 2012, although this date is

likely to be put back to 31 December to coincide with

the end o the nancial year or many companies. To

meet this deadline, the European Commission plans

to present its proposal or implementing measures

in the autumn o 2010 and to nalise them in the

course o 2011, in order to give EU member states

enough time or transposition and companies

enough time to prepare their application.

Heavy workload

In the second hal o 2009 the CEA provided

input to the Committee o European Insurance

and Occupational Pensions Supervisors (Ceiops)

and commented on all the 52 drat advice papers

it put out or consultation. Overall, the drat

advice papers were characterised by a systematic

injection o quantitative and qualitative elements

o conservatism which appeared to be not only

inconsistent with the principles laid down in the

Framework Directive but also not in line with the

agreed economic undaments o the new regime.

It soon became quite clear that the cumulative

eects o the proposed solutions relating to the

valuation o assets and liabilities, the calibration

o the solvency capital requirement (SCR) and the

treatment o own unds would result in a regime

with an overall level o prudence that would go ar

beyond the level that had been agreed politically.

It would also ail to encourage sound internal

risk management by insurers and would entail an

unreasonable cost o compliance.

The CEA, while reiterating its support or Solvency II

and continuing to cooperate with Ceiops at a

technical level, voiced strong criticism o this

approach and proposed a number o alternative

Downsides to excessive capital

The CEA published a report in March 2010

warning o the negative eects on consumers,

insurers and the EU economy i excessive capital

requirements were imposed on insurers during

the nal round o calibrations or Solvency II.

In the report, the CEA demonstrates that the

subsequent reduction in insurers investment

and underwriting capacity would have

worrying macro-economic downsides.

Policyholders would be hurt the most, as the

prices o many lie and non-lie insurance

products would increase. With investment

returns lower i insurers were required to

issue more ordinary equity, consumers would

also have to reduce their current spending

to maintain their retirement savings. Such

potential underunding o pensions would

have serious social costs. Other macro-

economic eects would include a likely

reduction in the insurance industrys role both

as a risk-absorber and as a nancer o long-

term economic growth.

Over-capitalisation would aect the overall

competitiveness o the EU insurance sector andits ability to attract new unding, putting it at

a disadvantage in the global market.

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solutions. Besides providing specic technical

explanations and input, the CEA made clear through

a number o initiatives including the publication

o a report on excessive capital requirements (see

box opposite) that the extreme prudence in the

proposed regime could create serious obstacles

to the sound unctioning o insurance business,

interere with market dynamics and, as a result,

become counterproductive to the interests o

European policyholders and the economy.

Many o the conservative and prescriptive solutions

proposed by Ceiops have been directly or indirectly

justied as lessons rom the recent crisis. The CEA

agrees with Ceiops that the experience o the crisis

should be taken into consideration when designing

and calibrating the new regime. However, as it has

repeatedly stated, the CEA is convinced that the crisis

did not originate rom negligence in market practices

or shortcomings o insurance regulation and that any

regulatory initiative should be justied on the basis othe specic characteristics o insurance and objective

regulatory needs. The CEA is rmly convinced that

in the eld o insurance prudential regulation the

best reaction to the recent turmoil is to implement

Solvency II in line with its agreed undaments.

Ceiops advice unacceptable

The nal advice o Ceiops showed some

movement in the direction advocated by the

CEA and other stakeholders, but only to a very

limited extent. On a number o key issues, relating

or example to the treatment o own unds; the

calculation o technical provision; the appropriate

recognition o diversication and risk mitigation;

and the calibration o some risk modules, the nal

advice included solutions that are not acceptable

to insurers. The CEA has thereore continued

to put its arguments and alternative solutions

to the Commission, which at the beginning o

2010 started to work on the drat implementing

measures and on the specications or the last

complete quantitative impact study (QIS 5).

Among a number o crucial aspects o the uture

regime, the eorts o the CEA have ocussed on:

the treatment o so-called uture prots, on which

Ceiops proposed a restriction o the recognition aseligible capital o positive cash fow arising rom

contracts in orce which is inconsistent with the

economic basis o Solvency II and could have hugely

disruptive eects on insurers; the denition o the

risk-ree rate to be used in the calculation o technical

Insurance guarantee schemes

The CEA supports the ECs objective o protecting consumers policyholders and beneciaries in the

unlikely event o an insurer becoming insolvent and being unable to ull its contractual commitments.

While Solvency II is a state-o-the-art supervisory approach, it does not establish a zero-ailure

regime. Insurance guarantee schemes (IGS) might be an appropriate solution in some markets,

but consumers in other markets might be better protected by other, equivalent arrangements. In

addition, introducing IGS might bring unintended consequences, such as the risk o moral hazard.

Should the EU choose to take action on IGS, the CEA would thereore support a fexible solution

allowing member states to adapt the IGS design to local market conditions in order to achieve

suitable consumer protection. An EU requirement to establish IGS at national level with a minimum

harmonisation approach would broadly meet this objective. In contrast, any EU-wide IGS in addition

to the existing national schemes would result in an uneven playing eld to the detriment o both

consumers and insurers, and would hinder cross-border business.

The Commission is expected to release a White Paper on IGS, together with an impact

assessment, and to consult stakeholders on the conclusions in the second hal o 2010.

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provisions and the recognition, in this context, o

the liquidity characteristics o insurance liabilities;

the recognition o diversication eects in the risk

margin and the better refection o risk mitigation

techniques in the calculation o the SCR; and the

calibration o market and underwriting risks.

The CEA has worked with other industry groups,

such as the Pan-European Insurance Forum, the

CFO Forum, the CRO Forum and the Association

o Mutual Insurers and Insurance Cooperatives

in Europe (Amice), to coordinate the insurance

industrys position, in particular on key issues.

Positive modications

Turning to the current work on the drat

implementing measures and the consultation

on the drat QIS 5 specications, the CEA

welcomes the positive modications made by the

Commission to the Ceiops proposals in areas such

as: the treatment o expected uture prots; the

wider application o the liquidity premium; and

the allowance or diversication between lines o

business in the calculation o the risk margin.

However, the debate remains very dicult and

extremely complex. On a number o outstanding

topics, discussions continue both at European

Commission and at national, EU member state

level. The CEA and other stakeholders still believe

that the proposed measures are too conservativein many specic areas.

Those areas include the ones aecting the

calibration o health and non-lie underwriting

risks, investment in corporate bonds and

insurers participation in banks. Further work also

needs to be done on other aspects o the drat

measures, namely on the appropriate allocation

o the liquidity premium and on the concept

o the ungibility o own unds in the group

solvency calculation. Also, the CEA is particularly

committed to nding solutions that do not unduly

penalise small and medium-sized companies and

that are fexible enough to be workable or the

whole market. In addition, even though the EC

has departed rom Ceiops advice on a number

o topics, it continues to ace opposition in the

Level 2 working groups on issues that are crucial

or the industry and, eventually, it could be orced

to present compromise solutions that would have

unintended but grave eects on the EU insurance

industry, the economy and policyholders.

Infuence o the crisis

The discussion o the implementing measures is

increasingly infuenced by the ongoing debate,

triggered by the recent crisis, over the need to

increase the amount and quality o banks capital

and, more generally, about the supposed need

to increase the severity o micro- and macro-

prudential regulation o nancial services as a

whole. Indeed, many proposals made by Ceiops,

and strongly opposed by the industry, have beenjustied mainly on the basis o aligning insurance

regulation to the increased severity that is going to

be introduced in banking regulation.

In the CEAs opinion, this is not acceptable

legally, based on the principles in the Framework

Directive, nor justied economically, in the light

o insurances unique business and risk prole,

and is not supported by market evidence, even

in the light o the crisis. The CEA is working to

provide more arguments to show that, in orderto oster the nancial micro-stability and macro-

stability called or at the top political level, each

sector needs to be regulated based on its specic

characteristics.

The CEA will reinorce its eorts to support

regulators in nalising a robust, ecient prudential

regime or European insurers that could also

be taken as a reerence or regulation in other

jurisdictions. The next year will be crucial in this

respect, including the running o a QIS 5 exercise

that is well designed and supported by broad

industry participation.

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PensionsEurope needs a level regulatory playing eld

When the new regulatory regime or EU insurers,

Solvency II (see p12), comes into orce in 2012,

insurers that provide pensions will be subject

to more sophisticated, economic risk-based

regulatory requirements than some other pension

providers. This will create a damaging unlevelregulatory playing eld in the European pensions

market.

The CEA believes that regulatory equivalence should

be maintained, not least to ensure transparency and

protection or consumers. Solvency II-type principles

thereore need to be applied to some institutions

or occupational retirement provision (IORPs), which

are currently subject to the minimum-harmonised

Solvency I rules.

Private sectors importance will grow

As European states reduce their role in retirement

provision due to the budgetary pressures rom

the crisis and ageing populations, the role o the

private sector in pension provision will become

more signicant. It is vital to ensure the long-

term viability and stability o the sector through

consistent and appropriately rigorous regulation.

This is why the CEA welcomes the orthcoming

European Commission review o the IORP Directive.

In preparation or the review, the CEA participated

in the EC consultation and public hearing and

produced a position paper in December 2009 on

the Regulatory challenges or pension unds.

This includes suggestions o how Solvency II

principles might be applied to IORPs and calls on

the EC to carry out an impact assessment on the

application o such principles to pension unds.

IORPs can be classied into two broad categories:

those oering additional risk coverage (eg lie and

disability cover) and/or guaranteeing minimum

investment benets, and those oering only old-

age retirement benets.

The CEA believes that there are some clear

parallels between lie insurers and IORPs providing

pensions with guarantees. These pension unds

are clearly analogous to and in competition with

lie insurers. All three pillars o Solvency-II-type

principle-based rules (nancial, supervisory and

disclosure) should apply to them. Pension products

should be regulated according to the risks they

represent, rather than the legal vehicles through

which they are sold. The CEA also believes that

mutual unds that provide pension guarantees

should be required to reserve the same levels o

capital or their guarantees as insurers.

The CEA acknowledges that or the second

category o IORPs those only oering retirement

benets without any guarantees or risk coverage

and where the employer ully backs potential

underunding there are challenges to calibrate

the application o the Solvency II principles to

ensure that they are appropriate. Nevertheless,

Solvency IIs principle-based ramework provides

sucient fexibility to take into account any risk-

mitigating provisions, so applying Pillar II and III

principles to these IORPs is achievable.

EC Pensions Green Paper

The CEA submitted its key messages on pensions to the EC in April 2010, ahead o the Green Paper

that is expected in mid-2010 and that will cover a wide range o state, occupational and private

pension issues. The CEA expresses its hope that the EC will develop an ambitious pension policy,drawing on the unique expertise o insurers in providing reliable pensions and introducing scal

incentives to promote retirement saving and initiatives to improve nancial literacy.

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EU nancial supervisionWorking towards a new European architecture

The CEA believes that the EU nancial services

sector requires ecient and targeted supervision.

It thereore supports the reorm to the structure

o EU nancial supervision announced in 2009 by

the European Commission. The EC proposes an

architecture that is based on two pillars: micro-prudential and macro-prudential supervision.

The legislative package includes drat Regulations

or the creation o separate European Supervisory

Authorities (ESA) or the insurance, banking

and securities sectors, a drat Regulation or the

establishment o a European Systemic Risk Board

(ESRB) and a drat Council Decision entrusting

the European Central Bank with specic tasks

concerning the unctioning o the ESRB. The CEA

urges the EU to ensure that each business sectoris ully represented in both the micro- and macro-

prudential supervisory pillars.

Micro-prudential supervision

Following an initial proposal rom the EC, the

European Council has ormed a preliminary,

largely supportive, position, oreseeing three

separate authorities. In line with its prior

recommendations to the EC, the CEA welcomes

a supervisory architecture based on three distinct

authorities, since acknowledging the dierences

between the sectoral business models and the

consequent dierences in their risk proles is

undamental or eective supervision (see p10).

The Council text, however, does not satisactorily

clariy that the supervision o groups remains with

the lead supervisor o a college, as oreseen in

the Solvency II Framework Directive (see p12). In

the CEAs view, any powers given to the European

Insurance and Occupational Pensions Authority

(EIOPA) should not override those o the group

supervisor, which represents the rst step towards

establishing more ecient group supervision.

The European Parliament, as co-legislator, is,

however, proposing a distinctly dierent approach,

which will make an agreement between Council

and Parliament challenging. It is not only proposing

to identiy systemically relevant companies

operating across the EU and beyond, but also

suggests having them supervised by EIOPA. For

standard supervisory activities, EIOPA would act

through the relevant national supervisors, but could

take binding decisions on nancial institutions

under certain conditions (in emergency situations,

in cases where national authorities do not comply

with EU law, or when a national authority does

not comply with an EIOPA decision settling a

disagreement). EIOPA would also have to establish

a resolution unit to deal with crisis management,

and would lead the supervisory colleges o groupsin going-concern and emergency situations.

The CEA believes that such a drastic overhaul

o the current system could disrupt day-to-day

supervisory activity to the detriment o the overall

nancial system. It has made its concerns known

to the Parliament and emphasised the need or

gradual but steady change in the current dicult

environment. Moving too abruptly rom one

extreme (national supervision) to another (ully

centralised supervisory structure) is risky:

Group supervision

The CEA is a rm supporter o the group

supervisory regime under Solvency II. This

establishes that the lead supervisor is generally

the national supervisor o the entitys home

country, who acts jointly with the supervisory

college comprised o all national supervisors

in which the insurance group operates. Giving

group supervision (partly or ully) to EIOPA,

which ultimately consists o all national

supervisors, would involve supervisors not

directly concerned by a particular company

because it does not operate in their jurisdiction.

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Colleges o supervisors

The CEA supports the colleges o supervisors

set up under Solvency II. They would establish,

or the rst time, a truly group-oriented

approach, since the colleges would not just

meet voluntarily to exchange inormation on an

inormal basis, as is currently the case. Instead,

the colleges would perorm their unctions

under ormal prescriptions and be better

placed to conduct a common risk assessmento the insurance group. The home and host

supervisors acting within a college have the

necessary market and sector knowledge to

provide high quality supervision. Colleges must

be given the time to prove their eectiveness.

Risk o two-tier supervision

The CEA is unconvinced o an approach that

is based on identiying systemically relevant

institutions, as it would create a two-tier

supervisory system and increase the possibility

o regulatory arbitrage, instead o producing

the intended unied, or at least convergent,

supervisory approach. Moreover, it is unclear

whether a centralised authority would have

sucient resources to supervise cross-border

nancial institutions appropriately.

The European Parliament urthermore proposes

the establishment o three dierent unds: national

insurance guarantee schemes in all member states

on the basis o a harmonised EU ramework;

a European Insurance Guarantee Scheme or

insurance companies considered a systemic risk to

ensure the co-responsibility o insurance institutions

in the protection o European policyholders interests

and to minimise the cost or the taxpayers and a

European Insurance and Occupational Pensions

Stability Fund, nanced through contributions rom

institutions considered systemically relevant. The

latter would unction as a bail-out scheme.

The CEA believes that debates on nancial services

tax issues at national and international level (see

p20) should recognise the dierences in the type

and level o risk posed by nancial institutions

(see p10). Also, any kind o cross-subsidisation is

inappropriate, as it would reward riskier nancial

sectors at the expense o less risky ones. Due

to the variety o tax measures discussed, any

cumulative eects that could harm the insurance

sector and its overall ability to provide cover have

to be careully considered.

Macro-prudential supervision

The crisis has highlighted how important it is to ocus

on nancial stability issues and on the supervision o

nancial institutions at the macro-economic level.

European insurers support the proposed role o the

ESRB in identiying systemic risks, but have expressed

their concerns that the ESRBs composition, as

currently proposed by the Commission, is heavily

weighted towards central bankers1. It is without

enough o the insurance expertise that can make a

strong contribution to its objectives:

As insurance is a risk-absorber and a risk-taker,

insurance expertise is needed to ensure an

understanding o the way in which this sector

can create, transmit or absorb systemic risks.

The insurance sector can provide a dierentiated

view o the interplay between the various

participants in the market and the impact o

systemic stresses, providing a more complete

basis or developing recommendations.Specialised knowledge exists in the insurance

supervisory community about threats to

stability posed by actors such as terrorism or

natural catastrophes.

Insurers are institutional investors and the

eects on them o ESRB recommendations are

best highlighted by the relevant supervisors.

Should the ESRB be deprived o the required level

o insurance expertise, its ability to prevent risks to

stability would be greatly reduced.

1 The proposed ESRB Board is composed o the president and the vice-president o the European Central Bank; the

governors o the national central banks; a member o the EC; and the chairperson o each o the three ESA

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International issuesSystemic risk, micro-prudential standards and regulatory gaps

One striking anomaly has emerged rom the global

nancial crisis; the mismatch between nationally

regulated markets and globally interconnected

nancial systems. This regulatory faw has been

identied by many as a key contributor to the

crisis and has led to calls or minimum regulatorystandards not just across jurisdictions but, where

appropriate, across nancial sectors.

This has put the work o international standard-

setting bodies in the spotlight. Political guidance

is mainly provided by G-20 commitments to

reshape the prudential supervisory ramework

o the nancial sector. Regulatory policy

options are being developed by international

organisations, such as the Financial Stability

Board (FSB) and the International Monetary Fund(IMF), and by supervisory standard-setters, such

as the International Association o Insurance

Supervisors (IAIS), the Basel Committee on

Banking Supervision (BCBS) and the International

Organisation o Securities Commissions (IOSCO).

The CEA is contributing to these debates to ensure

that the specic characteristics o the insurance

business model are taken into account.

Although the various national or regional initiatives

respond to the same G-20 commitments, theydier considerably in practice. There is also a risk

that the G-20 agenda will become dominated

by a number o discrete measures without due

regard or their cumulative eects. The CEA is

ocussed in particular on developments in three

key areas:

Addressing systemic risk

G-20 leaders have committed to amending

regulatory systems to ensure that supervisory

authorities are able to identiy and take account

o macro-prudential risks across the nancial

system to limit the build up o systemic risks.

The CEA has pointed out that, due to dierences

in business models (see p10), (re)insurance does

not generate the kind o systemic risk that arises in

banking. This view was supported by the Geneva

Associations March 2010 report, Systemic Risk

in Insurance, which concluded that only a verylimited number o non-core activities by insurers

could have systemic relevance. As measures

taken to address systemic risks in other parts o

the nancial sector might aect the (re)insurance

industry and because (re)insurers may transmit

or absorb systemic risks rom other parts o the

nancial sector, the CEA has emphasised the need

or appropriate insurance representation in new

macro-prudential bodies to ensure that (re)insurers

continue to act as a stabilising actor.

Signicant dierences in national and regional

approaches to addressing systemic risks have,

however, emerged, most notably between the

approaches taken by the EU, which intends to

monitor the nancial system as a whole through

its proposed European Systemic Risk Board (see

p16), and the US, whose approach is to impose

stricter prudential requirements and oversight on

supposedly systemically relevant institutions. The

CEA has urged the G-20 leaders to address these

dierences and to avoid duplicative and potentially

inconsistent supervisory requirements.

The CEA has repeatedly expressed its concerns

about categorising supposedly systemically

relevant institutions. This might give alse comort,

distracting regulators attention rom other

institutions that engage in risk activities or products

that could trigger systemic risks. Furthermore, it

would create moral hazard and cause a distortion

o competition; companies deemed systemically

relevant would have an incentive to take higher

risks and might be able to borrow at lower cost

due to the implicit state guarantee. The CEA

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believes that activities that might generate systemic

risks should be captured by an appropriate micro-

prudential ramework.

Strengthening micro-prudential standards

G-20 leaders agreed to reduce the likelihood and

impact o ailures o nancial institutions, most

notably (but not exclusively) by strengthening

international micro-prudential standards.

The IAIS is currently strengthening its standards

by adapting its insurance solvency requirements

to groups and has accelerated the adoption o

guidance on the operation o supervisory colleges

and the supervision o non-regulated entities.

Through written responses and participation in

hearings, the CEA contributes to the valuable

work o the IAIS to develop economic risk-

based supervisory regimes. The CEA has long

advocated the introduction o group supervision

that takes account o the economic reality o

insurance groups and thereore welcomes the

IAIS decision to develop a common ramework or

the supervision o internationally active insurance

groups (ComFrame) within the next three years.

The G-20 is also considering measures to improve

the cross-border resolution mechanisms or ailing

nancial groups and to ensure the nancial

sector makes a contribution towards the costs o

government interventions in the banking sector,

which the CEA would oppose (see p20).

Addressing regulatory gaps

The G-20 committed to addressing unjustiable

dierences between banking, securities and

insurance regulation. The IAIS ComFrame will

contribute to this. The IAIS will also consider thesuitability or insurance o BCBS proposals to

strengthen banks capital ramework. The CEA

supports appropriate regulatory consistency in

the nancial sector to avoid arbitrage. However,

it has stressed the danger o extending solutions

relevant or banking to insurance without

assessing their appropriateness to the insurance

model and their consistency with economic risk-

based regulatory rameworks such as Solvency II

or the Swiss Solvency Test. The CEA is seriously

concerned about proposals such as the suggestion

that a leverage ratio may be a useul indicator or

insurance.

US regulatory and tax initiatives

The ability o the US to speak with one voice on insurance regulatory and supervisory issues is more

crucial than ever. The CEA thereore welcomes Congressional proposals or an Oce o National

Insurance/Federal Insurance Oce to negotiate international prudential agreements and to develop

ederal policy on international matters in a market in which regulation is primarily at state level.

However, it is vital that the Oces pre-emptive powers over state measures are robust.

A ederal body oers some hope o a resolution to the long-running debate over the discriminatory

requirement or non-US reinsurers to maintain collateral in US trust unds that is equivalent to 100%o their US liabilities, regardless o their nancial strength.

The US is also pursuing tax initiatives that would eectively introduce double taxation obligations or

oreign insurers, thereby creating new barriers to EU (re)insurers underwriting US risks and decreasing the

competitiveness o the US insurance market. Such a bill proposing the limitation o the deductibility o

reinsurance ees paid to aliates was reintroduced in the House o Representatives in 2009. Noting the

positive impact o oreign reinsurance on the US economy, the CEA opposes this initiative on the grounds

that it violates international tax principles and that the US has adequate tools to deal with income shiting.

The US Administrations 2011 budget proposals contain a similar, albeit simplied initiative.

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International tax issuesInsurers should not pay or ailures in other sectors

In addition to measures to strengthen their

regulatory rameworks, many governments are

considering ways to ensure that the nancial

services industry, rather than the taxpayer, pays or

past and uture economic crises. Some o these

initiatives make clear that they are targeted onlyat banks, others reer to nancial institutions and

specically include insurers, and still others simply

reer to nancial institutions without speciying

which ones.

The European insurance industry was neither the

source o the recent economic crisis nor the main

recipient o any subsequent government support.

Due to the dierences in the business models o

(re)insurers and banks (see p10), (re)insurance does

not generate the kind o systemic risk that arises inbanking. The CEA maintains that instead o taxing

all nancial institutions to und past and uture

economic crises, regulation and supervision should

target those activities that may be systemically

relevant.

In April 2010 the International Monetary Fund

(IMF) gave advice on the range o options

countries have adopted or are considering as to

how the nancial sector could make a air and

substantial contribution toward paying or any

burden associated with government interventions

to repair the banking system. The nal report is to

be submitted to the G-20 Summit in June 2010.

Unilateral actions are already being taken and

strong political commitments made in avour o or

against certain proposed actions. The CEA believes

it is important that international agreements

are reached, not only to aid the resolution o

cross-border institutions in the uture, but also

because there is a danger that global divergence

might result in market distortions that aect the

competitiveness o national industries.

Issues that need to be resolved include: the range

o institutions rom which ees would be levied;

the basis or contributions; the level and timing

o contributions; whether revenue is allocated

to general revenue or a und; the required size

o any und; the conditions or the commitmento monies; and the relationship o unds with

guarantee schemes that already exist under

national law.

Timing questions

Traditionally, most nancial guarantee schemes

have been post-unded, with ees collected rom

the industry ater an event when costs are known.

However, the objectives o the current proposals

are much broader, with unds to be used to pay

or expected nancing needs and to reduce thenancial incentives behind excessive risk-taking,

not just to meet the costs o resolution, thus

expanding the remit o such unds beyond simple

policyholder protection. The general consensus

seems to be in avour o pre-unded schemes,

with additional collections made as necessary to

recover any supplementary contributions rom

public money.

Obtaining unds

Proposals or measures to reduce and address the

costs o past and uture nancial ailures can be

divided into:

Levies

These would be imposed on nancial

institutions to cover the net cost o direct

public support to nancial institutions and to

help reduce excessive risk-taking. In its drat

report, the IMF supports the establishment o

such a levy, which it terms a Financial Stability

Contribution. The IMF eels the levy should

be guided by an internationally accepted set

o principles and should either accumulate

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in a und to acilitate the resolution o weak

institutions or be paid into general revenue.

The European Commission and other

countries are also known to be considering

a levy on nancial institutions. Some o the

proposals envisage that the proceeds o the

levy would be ring-enced in unds, others

that they would go into general government

revenues.

US President Obama is known to be in avour

o introducing a levy on nancial institutions.

At the beginning o 2010 he caught media

attention when he announced the introduction

o a Financial Crisis Responsibility Fee,

saying he wanted to recover every dime the

American people is owed or bailing out the

economy.

Similar proposals, but instead aimed at

addressing the cost o uture not past

nancial crises, are included in the much

broader nancial reorm Bills being debated

in Congress. The Bill passed by the House o

Representatives in December 2009 included

a und levied on nancial institutions. The

companion bill in the Senate was approved

in May and nal reconciliation o both Bills is

ongoing.

Other tax instruments

These would be aimed not only at raising public

revenues but also at discouraging high-risk

activities deemed to have negative eects on

the economy. The two main ideas put orward

here are:

Financial Transaction Tax

In March 2010 the European Parliament

approved a resolution in avour o nancial

transaction taxes, commenting that such

taxes would contribute to covering the costs

generated by the crisis. Subsequently, however,

both the EC and the IMF have expressed

concerns over this method o taxation.

Financial Activities Tax

This tax, proposed by the IMF, would be levied

on the sum o the prots and remuneration o

nancial institutions and would be paid into

general government revenues.

In its drat report, the IMF concludes that a

combination o a Financial Activities Tax and a

levy on nancial institutions would oer the most

coherent package o methods to obtain unds.Following the publication o the drat report, the

G-20 has asked the IMF to undertake urther work

on options to ensure domestic nancial institutions

bear the burden o any extraordinary government

interventions where they occur, address their

excessive risk taking and help promote a level

playing eld, taking into consideration individual

countrys circumstances.

Meanwhile, in Europe, in October 2009 EU member

states agreed at a European Council meeting to

prepare a coordinated strategy to acilitate scal

exit strategies and scal consolidation and invited

the Commission to examine innovative nancing

proposals at a global level.

Subsequently, the Commission released a working

document in April 2010 on the main sources

o innovative nancing under discussion to

address global challenges. The paper contains

an early exploration o possible nancing options

where a signicant double dividend o both

raising revenues and improving market eciency

and stability would be reaped. In its working

document, the EC notes that global coordination

is essential or the successul implementation

o any new taxation measures. However, in the

absence o such a coordinated eort at global

level, an EU initiative could be explored. Further

detail is expected in a Communication rom the

Commission shortly.

The CEA will continue to monitor developments

in this area and seek to ensure insurers are not

required to pay the costs o ailures in other

sectors.

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EU taxationProgress on the Savings Directive and VAT invoicing

A key taxation issue or the CEA over the past year

has been the drat Directive on Savings Taxation,

amending the previous 2003 Directive1, which

governs the taxation o cross-border interest

payments.

The European Commission has proposed extending

the scope o the Directive to include the benets

rom certain lie insurance contracts. The CEA has

opposed this extension, primarily on the grounds

o the dierences between insurance and savings

products, but also because o the disproportionate

administrative costs to insurers given the low level

o cross-border activity in lie insurance. The CEA

has held discussions with Council representatives

to explain its arguments or not extending the

scope o the Directive.

Nevertheless, political will on this issue has been

such that the Council considered extending the

scope o the Directive even beyond the lie insurance

products directly comparable to investment unds

that were the target o the original EC proposal.

Improved compromise

Under the latest compromise, however, the

CEA is pleased that a signicant portion o lie

insurance activities (pensions, xed annuities paid

or at least ve years and payments in respect o

death, disability or illness) are now likely to remain

outside the scope o the Directive. Additionally, the

Council is currently suggesting leaving it up to EU

member states whether to exclude the targeted

lie insurance activities (containing a guarantee

o income return and/or whose perormance

depends at least 40% on interest or other types

o debt claims income) i alternative exchange o

inormation systems are already in place under

a dierent legislative provision. This would bewelcome news or the insurance industry as

1 EU Directive 2003/48/EC on taxation o savings

income in the orm o interest payments

it avoids a potential duplication o reporting

obligations.

This technical compromise on the text o the

Savings Directive, which was reached by the Council

in 2009, still awaits political agreement rom all

member states in accordance with the unanimity

rule that governs EU taxation issues. The Spanish

EU Presidency will attempt to reach such agreement

during its tenure, which ends in June 2010.

Positive progress on VAT invoicing

The CEA has been advocating that proposed

revisions to the EU VAT Directive do not impose

invoicing obligations on VAT-exempt insurance

services. Such obligations would placeadditional administrative burdens on insurers

with no corresponding tax collection benets

or EU member states. The CEA had argued

against the generalised invoicing rule being

mandatorily applied to all exempt supplies that

was suggested in the ECs original proposal in

2009.

The European Parliament endorsed the CEAs

concerns and suggested the possibility o

releasing exempt taxable persons rom theinvoicing obligations. The working group o the

EUs Economic and Financial Aairs Council has

discussed various possible texts o the Directive

over the last year.

The latest text wordings, put orward by the

Spanish EU Presidency, exclude EU cross-border

exempt services rom invoicing obligations.

However, member states would still be able

to opt or the invoicing o domestic and non-

EU services. The Presidency aims to reach apolitical agreement at the June meeting o the

Economic and Financial Aairs Council.

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Accounting issuesClose involvement in a new international standard

Insurers are some the largest institutional investors

in Europe and nancial instruments account or

the vast majority o the asset side o insurers

balance sheets. Work to revise the international

accounting standard or nancial instruments,

IAS 39, is thereore o signicant importance orthe CEA.

In response to political pressure, including that rom

the G-20, the International Accounting Standards

Board (IASB) undertook in 2009 to replace IAS 39,

which is deemed by some not only to have ailed to

signal the impending nancial crisis but also to have

exacerbated it. In addition, IAS 39 is considered too

complex (eg, too many categories or classiying

instruments) and hence makes nancial statements

dicult to read or compare.

In order to improve accounting or nancial

instruments as ast as possible as required by the

G-20 the IASB split the replacement o IAS 39

into three phases: classication and measurement

(the number o available categories and the related

valuation method), impairment (when to recognise

an unrealised loss o value on instruments not

air-valued) and hedge accounting. Subsequently,

the IASB decided to deal with nancial liabilities

in a ourth phase. From the beginning, the

CEA expressed its concerns over this piecemeal

approach, as all the our phases are interrelated

making it impossible to take a denitive view on

one without knowing about the others.

Phase 1: CEA points included

In July 2009, the IASB issued its consultation on the

classication and measurement o nancial assets.

The CEA commented in detail on the proposed

model and also participated in roundtables

organised by the IASB. European insurers strongly

supported the act that simple bond securities may

be valued at amortised cost, which is currently

not possible. In addition, the CEA requested that

reclassication should be authorised when there

is a change in a companys business model. The

CEA also supported maintaining the air-value

option to avoid an accounting mismatch. The nal

international nancial reporting standard (IFRS 9)includes all these points.

When commenting on classication and

measurement to the IASB, the CEA pointed out

that insurers were also acing the overhaul o the

standard or valuing insurance liabilities (IFRS 4)

and asked that the mandatory application date

o IFRS 9 and o the uture insurance standard be

aligned to avoid two successive signicant changes

in a very short period o time.

In addition, the CEA requested that i an insurer

decides to adopt IFRS 9 early it should be allowed

to revisit this classication when implementing

the uture insurance standard. This provision is

critical to avoid a mismatch that does not refect

an economic mismatch but is purely due to

accounting standards. Lastly, the CEA warned that

as IFRS 9 and the uture insurance standard are

not being developed concurrently, there is a risk

that the models that each propose may not be

compatible, orcing the IASB to reconsider IFRS 9.The IASB responded positively to these requests.

At the end o 2009, the mixed response rom

banks, insurers and investors to the strengths and

remaining weaknesses o IFRS 9 led the European

Commission not to endorse IFRS 9 in a ast-track

procedure that would have allowed European

companies to adopt it or 2009 year-end reporting.

Phase 2: too complex

In October 2009 the IASB issued the consultation

on impairment. The current IAS 39 requires

companies to book an impairment (ie a loss) on

an incurred basis. Thereore, i a company expects

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that a part o its investment portolio may suer

losses in the uture (due to a downturn in the

economic climate), it cannot start building up

impairment reserves in advance but is orced to

wait until a deault occurs.

Some stakeholders claim that this model reinorced

the last nancial crisis as it led companies to book

large impairment losses when the crisis peaked,

generating a snowball eect. As a result, the IASB

has proposed a model based on expected losses.

However, it seems clear that the IASB model was

developed or the banks loan book, whereas

insurers hold government and corporate bonds,

not bank loans. Furthermore, the proposed model

would be highly complex to implement.

The CEA wrote to the IASB to express support or

a change rom an expected-losses to an incurred-

losses model but requesting a much simpler and

more workable model. The CEA stressed that

IFRS 9 is applicable to all companies holding

nancial instruments, not just banks, so the nal

impairment standard must t all instruments

admissible to the amortised cost category. Two

insurance specialists, whose candidature was

supported by the CEA and the CFO Forum, now

sit on the expert advisory panel set up by the IASB

to assist it in parallel with its consultation, and the

nal standard on impairment is expected to be

issued by the end o 2010.

Phases 3 and 4: under consultation

The IASB issued the consultation documents on

hedge accounting and nancial liabilities in the

second quarter o 2010. On hedge accounting,

the main challenges are to simpliy signicantly

the current rules that are deemed highly complex

and to obtain adequate recognition o portolio

hedging. On nancial liabilities, the main issue is

what to do with prots generated mechanically on

debt air valued when an issuer gets downgraded.

Under the current rules, i the rating o a company

that issues debt goes down, it reports a prot,

which is counterintuitive.

The ull model (at least as exposure drats) o the

standard should be available in mid-2010, allowing

the CEA to assess its coherence and relevance. The

EC will then reconsider the endorsement o IFRS 9

into European law (expected in 2011). Any delay

in the endorsement creates an unlevel playing

eld between European companies and those in

other jurisdictions using IFRS.

Global standards

As an increasing number o companies compete worldwide to raise capital on stock markets, the need

to have one set o high quality international nancial standards has become ever more apparent. The

CEA supports convergence towards the best possible standards.

Since the EU adopted International Financial Reporting Standards in 2005, more than 100 jurisdictions

have required or permitted the use o IFRS, including most large markets. US regulators have been

hesitant to make the jump, rst announcing a roadmap towards adoption o IFRS and then expressing

reservations about outsourcing standard-setting to a non-US independent body. A decision is notexpected or a ew more years.

In the meantime, the US standard-setter (FASB) and the International Accounting Standards Board

have identied a number o key joint projects, including insurance contracts. Probably one o the most

important projects is nancial instruments (see main text), but in mid-2009 both boards concluded

that they were not currently able to agree on a common standard. Thereore, the IASB published a

standard based on a mixture o air value and amortised cost, while the FASB published one based on

ull air value in May 2010. This divergence is unlikely to be solved in the short term.

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Consumer inormation and distributionA complex debate about horizontal EU legislation

The economic crisis has placed the issue o

consumer protection at the centre o EU political

debate and has highlighted the need to restore

consumer condence in nancial products.

High-level principles address diversity

There is currently a debate at EU level about a

horizontal approach to the regulation o the

distribution o all packaged retail investment

products (PRIPs).

The CEA has always maintained that a regulatory

level playing eld is necessary to achieve consistent

consumer protection. However, this debate

remains complex. This is due not only to striking

dierences between dierent nancial sectors but

also to the existing diversity o products oered in

dierent EU markets and business lines, together

with signicant variations in distribution structures

across the EU. This diversity in nancial sectors,

products and distribution channels is the result

o diering social, political, economic and legal

environments.

The CEA considers that this complexity and

diversity would make it extremely dicult to

adopt EU-wide detailed legislation harmonising

rules or dierent PRIPs. The CEA has long argued

that agreement on high-level principles would be

a more appropriate solution, both to allow or a

more fexible approach across sectors and markets

as well as to address the diversity o products and

existing distribution channels and dierent local

consumer cultures.

Recognising dierent products

The CEA believes that the outcome o ongoing work

to dene the scope o any uture PRIPs legislation

is still unclear and that a horizontal approach to

a denition o PRIPs needs to be complemented

by sectoral implementing measures that refect the

wide variety o PRIPs that are available.

In its Update on the work on PRIPs o December

2009, the European Commission concluded that

there is a need or horizontal rules on inormation

disclosure and selling practices or all PRIPs to

avoid putting retail investors at any disadvantage.

In addition, the EC established the need to includecertain insurance products, such as unit-linked

lie and index-linked insurance products, in uture

PRIPs legislation.

Move to harmonisation

Following these preliminary conclusions, the EC is

currently moving towards harmonising the entire

regulatory landscape or all PRIPs to ensure the

same levels o consumer protection across the

board and a level playing eld across the whole

range o PRIPs and distribution channels.

Specically, the Commission is at present working

on dening the scope o uture horizontal

legislation on PRIPs. Its current approach is an

economic-based denition that also includes

elements o packaging, capital accumulation and

exposure to risk or the investor. The Commission

has also asked the three Level 3 committees

(the Committee o European Insurance and

Occupational Pensions Supervisors and its

banking and securities counterparts) to deliver ajoint proposal on the scope to ensure a balanced

approach and equal treatment or each nancial

sector.

In November 2009 the CEA submitted its

preliminary comments on PRIPs to the Commission.

The CEA agreed that uture PRIPs legislation

might be based on a general PRIPs denition.

However, the CEA is in avour o developing

detailed technical criteria to capture the dierent

eatures o insurance PRIPs and to acilitate theircomparability with other PRIPs.

In parallel, the CEA stressed the variety o lie

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insurance products that are on oer in dierent

national markets. It put orward or consideration

a denition o the scope o insurance PRIPs that

is based on three categories o lie insurance

products.

According to this classication, pure risk insurance

products (death coverage only) and products with

no investment risk or consumers (guaranteed lie

insurance not linked to a und or index) shouldall outside the scope o uture PRIPs legislation.

Conversely, products where investment risk is

partially or ully borne by the consumer (unit- and

index-linked lie insurance products) should all

within the scope o uture PRIPs legislation. This

classication is supported by the majority o CEA

members. It refects the EC objective o addressing

potential consumer detriment in cases where the

consumer runs an investment risk.

Improving investor inormation

The CEA believes that a uture PRIPs regulatory

ramework based on high-level principles canimprove the quality o the inormation provided

to consumers and can ensure consistent levels o

consumer protection. At the same time, the CEA

CEA develops inormation checklist

To explain specic characteristics o unit-linked lie insurance products to retail investors, the CEA

developed a Key Inormation Checklist (KIC), which it presented to the Committee o European

Insurance and Occupational Pensions Supervisors (Ceiops) in June 2009. The checklist summarises

essential insurance-relevant inormation on the products and highlights their main eatures and

objectives compared to other packaged retail investment products (PRIPs).

The CEA is currently adapting the content and ormat o the KIC to the Key Inormation Disclosures

Document (KID) proposal or undertakings or collective investment in transerable securities (UCITS)

(see main text), which will be used by the European Commission as a benchmark or uture disclosure

requirements or PRIPs.

The CEAs objective is to address the ECs plans on PRIPs inormation disclosure by developing on

the basis o KID inormation categories a document that is eectively addressing level playing

eld issues with other retail investment products while still being suited to the specic characteristics

o insurance PRIPs. The work entails the ne-tuning o the specic inormation requirements

or insurance PRIPs and the identication o those inormation categories that are not suited to

these products. The uture KIC or insurance PRIPs should contain, or example, inormation on

risk coverage and specic insurance benets as well as on premiums, contract length and the

consequences o terminating the contract early.

The CEA avours having the KIC in a checklist ormat to avoid prescriptiveness and to make it

possible to adapt the inormation requirements to dierent market conditions and consumer needs.

The checklist ormat will also allow insurance undertakings more fexibility to adapt the inormation

requirements to their products.

The KIC will be tested with some national insurance products to check that it ully meets consumers

needs or understandable and concise inormation. It will also be tested with insurance companies

sales orces to veriy whether it can serve as a useul tool or insurance distributors. The CEA willthen present its revised proposal or a KIC or insurance PRIPs to the EC and Ceiops in the second

hal o 2010.

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holds that specic disclosure requirements are

indispensable when explaining the eatures o

dierent products to consumers.

The EC plans a Lamalussy-type directive (ie

legislation that ollows a process that allows the

Council o Ministers and the European Parliament

to ocus on key political decisions, while technical

implementing details are worked through

aterwards) on product disclosure to be appliedcross-sectorally to all PRIPs. It intends to use the

Key Inormation Disclosures Document (KID)1 that

was developed or undertakings or collective

investment in transerable securities (UCITS)2 as a

benchmark.

In its position paper o November 2009, the CEA

welcomed common principles or inormation

disclosure or all PRIPs to ensure the same level

o understandable and transparent inormation,

independently o the distribution channel.Simultaneously, the CEA recommended adopting

specic inormation requirements to capture

the essential and distinct eatures o insurance

products and to enable consumers to understand

the dierences between these and investment

products.

Such a tailoring o inormation would, in the

CEAs view, be the best way to address the need

to enhance investor protection. For insurance

PRIPs, the CEA proposed three additionalcategories o inormation: premiums (method and

requency o payment, etc.), contract duration

and the consequences o early termination o the

contract.

Selling practices

The CEA believes that there is a need to improve

selling processes to better protect consumers

against the mis-selling o products. In its view, an

approach to uture legislation on selling practices

that ocuses on the intended legislative objectives

would be the most eective way to achieve this

objective while simultaneously recognising and

allowing or the dierent distribution arrangements

that exist in dierent EU markets.

The EC is working on new rules on selling practices or

all PRIPs. This objective should be achieved through

the revision o both the Insurance Mediation Directive

(IMD) and the Markets in Financial InstrumentsDirective (MiFID). Both directives should include,

or example, equivalent rules on the management

o conficts o interest, conduct o business and the

transparency o remuneration. Current MiFID rules

could serve as a benchmark.

In its November 2009 position paper, the CEA

questioned the use o MiFID as a benchmark or

uture rules on selling practices, since the Directive

is currently under revision and its impact on the

market is still unknown. The CEA identied keyways to address potential conficts o interest and

highlighted the need to adapt uture regulation

in this area to the particularities o dierent

distribution structures.

Distribution channels have developed dierently

across the EU, with this variety being a result o

more general economic developments as well

as specic consumer needs. Moreover, these

distribution channels have dierent dynamics

and constantly adapt to socio-cultural andeconomic changes. Future rules should thereore

accommodate fexible and market-oriented

solutions.

To provide the EC with such result-oriented

solutions, the CEA is preparing its preliminary

proposals on the revision o the IMD, which will be

presented to the Commission in mid-2010. A nal

CEA position will be drawn up during the second

hal o the year.

1 The KID is an inormation sheet which includes crucial inormation categories that a retail investor should consider

when buying a product

2 UCITS are investment companies that carry out activities o collective investment with dierent nancial

instruments, eg transerable securities

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Block Exemption RegulationCampaigning or insurer cooperation that benets consumers

In March 2010 the CEA welcomed the renewal by

the European Commission o the two areas o the

insurance Block Exemption Regulation (BER) that

allow insurers to cooperate in pools and on joint

compilations, tables and studies without inringing

EU competition law. However, the Commission hasnot renewed the two other areas o cooperation

standard policy conditions (SPCs) and security

devices.

While the CEA is disappointed that the ull

renewal or which it argued was not achieved, it is

nevertheless pleased with the outcome, given that

two years ago the Commission appeared set on

complete removal o the BER. The nal text was

also a signicant improvement on the drat issued

by the Commission in October 2009.

Need or workable conditions

The CEA welcomes the new conditions included

in the renewed BER, such as the clarication

o the new risk denition or pools, which now

incorporates, or instance, risks arising rom new

technologies, as well as a six-month transitional

period.

While a transition period is undoubtedly necessary

to enable operators to seek legal advice and adaptto any changes in BER conditions, the drat revised

BER published by the Commission in October 2009

did not provide or any such period.

Similarly, the CEA is satised that the nal BER

does not impose access or any third parties to

joint compilation results, as contemplated by the

Commission in its October drat. The proposed

unrestricted access to joint compilations or any

third parties, including insurers competitors, would

have had a major impact on levels o cooperationand consequently on the competitiveness o

smaller and oreign insurers, who would have

been unable to benet rom the experience o

larger, domestic insurers.

However, the nal text o the BER imposes a stricter

market-share calculation on pools, which the CEA

criticised throughout the consultation process. The

CEA is concerned that such a modication will

leave larger insurers outside the BERs scope, thus

lowering market capacity.

Less cooperation

The CEA is disappointed that the Commission did

not renew the SPC and security device exemptions.

In its position paper o June 2009, the CEA warned

that abolishing the two exemptions would result

in reduced cooperation in both areas.

Less cooperation on establishing SPCs would makeit dicult or customers to make comparisons

between insurers and or smaller companies to

enter new markets. Speaking about the exemption

or technical specications or security devices

at a Commission hearing in June 2009, the CEA

stressed that removing this exemption would leave

consumers with lower standards infuenced by

security device manuacturers.

Risk o legal uncertainty

The Commission has decided to address SPCs

and security devices through guidelines to clariy

how to apply EU competition rules to cooperation

agreements in these areas. While committed to

take part in the related consultation, the CEA has

already expressed its concerns that guidelines could

lead to a signicant drop in cooperation, since, in

contrast to the BER, they are not legally binding,

and will thereore not ensure legal certainty or

insurers.

It remains to be seen what eect this partial BER

renewal will ultimately have on the European

insurance market.

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Damages actionsHow EU-wide class action may not be in consumers best interests

While supportive o the rights o victims o

competition law inringements to obtain eective

compensation, the CEA maintains a critical

approach towards the possible introduction o an

EU-wide class action mechanism.

During 2009 the CEA closely ollowed the

European Commissions work on a drat proposal

or a Directive on rules governing damages actions.

This had begun with the EC White Paper o April

2008 on which the CEA commented. Despite its

initial drat acing intensive criticism rom various

stakeholders including the CEA and MEPs

the Commission attempted to put orward a

revised proposal during the second hal o 2009.

However, urther criticism rom stakeholders o

the possible impact o the new rules led to thepostponement o the initiative.

The new European Commission that started work

in February 2010, which maintains the previous

Commissions rm ocus on strengthening the

protection o the consumer, has already made

clear its determination to proceed with a legislative

proposal on damages actions or breaches o

EU competition law, albeit ollowing an intense

stakeholder consultation expected later this year.

The CEA strongly opposes the introduction o any

measures that would not be in the best interests o

consumers, most notable o which is the adoption

o an opt-out system. This system enables

qualied entities to bring a court action without

having individually identied the injured parties on

whose behal they act. The CEA believes that opt-

out systems do not comply with the principle o

consumer choice, as consumers cannot decide or

themselves whether they wish to join a collective

action. The CEA also has concerns regarding

the consistency o an opt-out model with the

European Convention on Human Rights, since it

orces consumers, oten unwittingly, into litigation

o which they may not want to be part.

Furthermore, the purpose o an action or

damages should be to compensate victims or the

actual loss they have incurred. As the number o

aected consumers is unknown under an opt-

out system, the level o compensation cannot

be assessed according to each individuals loss,

thereby risking under- or over-compensation. From

an insurance perspective, it is dicult to assess

potential liabilities where the number o claimants

and amount o damages cannot be accurately

determined.

Eligibility is key

A urther aspect to highlight is the need or clear

eligibility criteria or entities qualied to take

actions or damages. This would prevent bodies

pursuing their own economic interest when

making claims.

The CEA believes that any Commission proposal

that envisages allowing part o the damages

award to be used to cover expenses incurred by

qualied entities is contrary to the principle o

ull compensation or consumers. It is imperative

that the Commission ensures the introduction

o appropriate saeguards and avoids eectively

opening a back door to the possibility o lawyers

and commer

CEA Annual Report 20092010

Documents

Transcript of CEA Annual Report 20092010