Essential adjustments for the success of Solvency II for groups

Transcription

1 Position Paper Essential adjustments for the success of Solvency II for groups (based on the findings from QIS5 for groups and the current discussion on implementing measures) CEA reference: ECO-SLV Date: 28 October Referring to: Related CEA documents: Contact person: Ecofin Department, Pages: 13 The aim of this CEA paper is to raise awareness for the importance of the treatment of groups under Solvency II, and the negative impact for the European insurance markets of the current draft of the consolidated level II text. As soon as the new draft of the consolidated text has been presented, the present high-level paper will be complemented by an annotation of the level 2 text and precise wording proposals, which are to be jointly developed by the insurance industry, thereby also taking into account new developments in solo supervision which have an impact on group supervision. Executive Summary The treatment of groups under Solvency II raises far-reaching questions on future group structures and their supervision and on the refinancing of groups and consequently of the financial sector as a whole. Regardless of that, the attention has been focused on the treatment of solo undertakings. However, the European insurance market is for the main part dominated by insurance groups, partly also by financial conglomerates. Today s group structures can be explained mainly by historical reasons; particularly the group structures emerged through acquisitions and mergers in the past. Partly, groups are necessarily created due to supervisory requirements. For instance, the separation between life and nonlife insurance business, required for supervisory purposes automatically leads to groups to offer the different products to the customers. Notwithstanding their legal structures, groups have to be considered as a single economic entity. They are often managed in this way and should also be supervised in this way. Group supervision and particularly group solvency calculations constitute a factor which may exert great influence on future legal and economic structures. European supervisors face challenges in developing clear objectives for group supervision in line with macroeconomic considerations with a view to financial stability. CEA aisbl Square de Meeûs 29, B-1000, Brussels Tel: Fax: Reproduction in whole or in part of the content of this document and the communication thereof are made with the consent of the CEA, must be clearly attributed to the CEA and must include the date of the CEA document.

2 Unfortunately limited number of participants makes it difficult to draw any conclusions from the result of the fifth Quantitative Impact Study (QIS5) for groups. Furthermore, in many areas, the quantitative requirements are greatly in need of adjustments, either because there is still great need for more guidelines or because simplifications are absolutely necessary. Similarly to the considerations on solo undertakings, there is considerable need for improvement also for groups concerning all three pillars. This is partly due to the fact that groups are not considered as a single economic entity, although this would be appropriate. Groups are affected in two respects by the points already discussed with regard to solo undertakings, which directly depict the solvency situation. On the one hand, because group entities are subject to solo requirements at the same time, and, on the other hand, because the solvency situation of group entities (inter alia, more or less according to size) has an effect on group solvency. For groups, the following points established for solo undertakings are of particular relevance: risk-free interest rate term structure, calibration of the standard formula and eligibility of economic own funds. Requirements for solo undertakings which also have an effect on group calculations: From a group perspective as well, an adequate method to determine the risk-free interest rate term structure is essential. The strong influence of the results of life insurance undertakings, which could be observed under QIS5, together with the volatility of solo results caused by the risk-free interest rate term structure, led to a distortion of group solvency. Furthermore, too conservative calibration of the standard formula affects group results in particular because overestimation of risks is cumulated in a group context. The requirement that existing economic own funds are fully eligible because they are available as a risk buffer applies at group level in the same way as it applies at solo level. Furthermore, the following points are of vital importance especially for groups: Transferability of own funds As regards the availability of own funds (transferability and fungibility) required by the Directive, too restrictive interpretations can contradict the basic idea of Solvency II. As a consequence, groups may have to hold more capital than would be necessary from the risk point of view. The rules are partly based on national accounting rules. Although European accounting directives are in place, there is significant national discretion in the implementation in national GAAP (e. g. discounting of reserves). In our view, group eligible own funds should not be impacted by amounts held due to national accounting requirements. The group Solvency II balance sheet should be based on economic valuation without influence of the national rules. In addition, the legal structure of a group (branches vs. subsidiaries, holding structures) should be irrelevant as well and should not influence the groups capital requirements. Otherwise, this would be to the detriment of undertakings and consumers. Group diversification effects Diversification effects in groups have to be fully recognised in groups capital requirements as well as on the valuation side, especially in determining the risk margin. The fact that insurance groups have especially pronounced possibilities of diversification at their disposal is a typical characteristic of 2 of 13

3 groups and adds to the security of their commitments. Therefore, in line with the Directive, these diversification effects at group level should be fully taken into account. In calculating the floor of the group SCR in accordance with the consolidated method based on the solo MCRs of the entities of the group (Art. 230 (2)) double-counting of risks associated with the holding of participations has to be avoided. It is not apparent how a limitation for group solvency calculations to sub-groups (e.g. at national subgroup level) could be justified if this does not correspond to the risk and management structures of the respective group. There is a risk that sub-group-based considerations could suggest a wrong picture of the overall risk situation of the group and suggest measures to be taken by supervisors in respect to (sub-) groups which cannot be justified from the economic point of view. For so-called horizontal groups (where undertakings are linked to each other by a relationship as set out in Article 12(1) of Directive 83/349/EEC), there is a need for more flexibility including certain exemption rules with regard to Solvency II group supervision. Simplifications and clarifications QIS5 was a challenge for groups, not only from the point of view of time. The steps of consolidation or deconsolidation and reconciliations, which had to be made in addition to the complex group calculations, raised many questions. For this, further assistance is necessary. The principle of proportionality applies also for groups. For instance, for the inclusion of group entities which are not material in a group context or which involve low risk, simplified approaches (e.g. through factors) should be possible. For reasons of simplicity certain groups should be allowed after agreement with their supervisory authority to use the scope of consolidated accounts in local GAAP for the purpose of the supervisory group solvency calculations. Additional burden and the risk of errors due to adjustments of the scope of consolidation would be eliminated. Then, the basis for the group calculation would be the consolidated accounts in accordance with local GAAP or IFRS respectively. From the point of view of simplification, groups should decide whether the consolidation method or the deduction and aggregation method, which tends to be more conservative, is appropriate. For horizontal groups more flexibility including some relaxations in respect of Solvency II group supervision will be needed. Methods of consolidation Solvency II introduces a different approach in comparison to accounting rules when referring to calculation of group own funds. For example, banking entities, investment firms, financial institutions and institutions for occupational retirement provision as well as non-regulated undertakings carrying out financial activities are included using sectoral rules. Not only will this generate a completely different balance sheet and a huge administrative burden, it will not be reflective of the way risk management of the group is undertaken. Transitional rules As a matter of principle, all simplifications applying to solo undertakings should apply at group level as well. Moreover, there is a need for group-specific transitional rules, which are not (cannot be) based on the solo transitionals. This applies, for instance, to the choice of the method, the 3 of 13

4 consolidation scope as well as to group reporting (pillar III). In particular, transitional provisions are needed in respect of the templates for groups so that compared to solo undertakings only (higher) aggregated data have to be reported. Further group aspects It is important that also further group aspects are addressed in the discussions on Solvency II group issues: criteria for group own funds, treatment of horizontal groups, sub-group supervision, third-country equivalence the calculation of the foreign currency risk and the role of the new European Insurance and Occupational Pensions Authority (EIOPA). The concrete design of group supervision and in particular of the group solvency calculations will be further discussed intensely at European level, besides Solvency inter alia in the context of the next review of the Financial Conglomerates Directive (FICOD). The discussions at global level are still in their early stages 1 ; they will be crucial for insurance groups and, hence, for insurance markets in total. 1 See the IAIS proposals for a Common Framework for the Supervision of internationally active insurers (ComFrame): 4 of 13

5 1. Overview of QIS5 for groups 1.1 Participation rate For evaluation of QIS5, 167 insurance groups have made available their data to EIOPA at group level. Limited conclusion can be drawn in a European context due to the limited participation rate. Nonetheless, as compared with the fourth quantitative impact study (QIS4), participation has increased considerably. In particular, the quality of the folders submitted has been considerably better than at the time of QIS4. Under QIS5, the entities within the consolidation scope required for supervisory purposes have frequently not been fully included because the data were difficult to obtain, the effort involved was too great or there were unclarities with regard to the calculations. 1.2 Issues related to the process The QIS5 results for groups should be considered with caution as QIS5 for groups were particularly affected by the short time available. More specifically: The final update of the solo result folders which had to be used for the group calculations as well was not available until early in October Realistically, the group calculations could not be made until the solo folders had been finalized, i.e. in mid-november The remaining time for group calculations was too short for most groups. Almost all undertakings have used both the consolidation method and the deduction and aggregation method. By comparing the SCRs of the consolidation method and of the deduction and aggregation method, findings on group diversification effects may be derived. In addition to the actual test of the requirements, another objective was to prepare smaller and national groups for the group calculations. The time-related aspect and the high complexity of the calculations as well as unclarities about the calculation method make it uncertain if this objective was achieved. Because of the very different group structures and the varying number of groups in each Member state, average statements may only be considered with caution. Many enquiries towards the end of the test phase revealed great uncertainties of the groups in carrying out the required calculation (inter alia restrictions of transferability, treatment of participations and of horizontal groups). Further tests of the quantitative requirements would be appropriate in general and especially for groups, given the participation of groups in QIS5. It should be considered whether accordingly transitional provisions might be provided for, which allow a phase-in from the current Solvency I system to the new Solvency II supervisory regime also for groups. 5 of 13

6 2. Findings from QIS5 and the current discussion on implementing measures Findings from the solo calculations and their effects on group solvency Like for solo undertakings, an adequate method to determine the risk-free interest rate term structure is of vital importance for group solvency. Any volatility in the risk-free interest rate term structure mainly affects the long-term guarantees of life insurers. The fluctuations in the evaluation of their commitments induced by the risk-free interest rate term structure can often not be absorbed within a group by the rest of the group because the amount of liabilities of an average life insurer is about 10 times higher than the amount of liabilities of a non-life insurer. This could result in a distorted picture of the risk-bearing capacity of groups. Consequently, changing the method for determining the risk-free interest rate term structure is indispensable also from the point of view of groups (refer to the CEA package deal 3 for the part dealing with Long-term guarantees - counter-cyclical premium, Matching premium, extrapolation). The calibration of parameters tested under QIS5 has turned out to be too conservative. The effect of such overestimation of risks was all the greater at group level. The discussion on this point has not yet been completed at solo level, for groups even many more questions are still open. The requirement established for solo undertakings, according to which existing economic own funds are fully eligible, except in the cases stated in the Solvency II Directive, because they are fully available to the group, should be fully supported at group level. 2.2 Transferability of own funds In our view, groups own funds should reflect the own funds of a group as a whole irrespective of where the own funds are held. Thus, as regards the transferability of own funds, restrictions which contradict the basic idea of Solvency II should be avoided. For instance, the Directive does not formulate any obligation according to which a subsidiary has to make own funds directly available to another subsidiary. Rather, it is only required that own funds of subsidiaries may be made available for covering the Solvency Capital Requirement (SCR) of the parent undertaking (bottom-up). 4 Moreover, the Directive provides for eligibility up to the solo SCR without any restrictions. Any limitation in this regard could mean that groups have to hold more capital than would be necessary from the risk point of view. Although European accounting directives are in place, there is significant national discretion in the implementation in national GAAP (e. g. discounting of reserves). However, from the level playing field point of view, national accounting rules should be irrelevant in this respect. In addition, the legal structure of a group (branches vs. subsidiaries, holding structures) should be irrelevant as well and should not 2 The legal form of the implementing measures (Level 2) will depend on the outcome of the negotiations on the Omnibus II Directive, which foresees a lisbonisation: delegated acts, regulatory technical standards, implementing acts or implementing technical standards. In addition, EIOPA may adopt guidelines. 3 Refer to Package deal for redrafting Implementing Measures submitted to EIOPA and the European commission on 18 May Thus, for the purposes of the Directive, own funds of the ultimate parent undertaking for which group solvency is calculated are by definition always transferable. 6 of 13

7 influence the groups capital requirements. Otherwise, this would be to the detriment of undertakings and consumers. Flexible capital allocation in groups is appropriate and necessary from an economic and a risk point of view. 2.3 Full recognition of group diversification effects According to the principle of an economic view, the fact that insurers have considerable possibilities of diversification at their disposal, both in a solo undertaking and within a group, has to be recognized. For this purpose, an insurance group has to be considered as a single economic entity, hence like a single undertaking. 5 The current discussions and the implementation in QIS5 are in contradiction with the full recognition of diversification effects at group level on the valuation side as well as in the capital requirements at group level: On the one hand, by just summing up the risk margins at solo level in determining the risk margin at group level, diversification is not taken into account. On the other hand, the capital requirements under QIS5 were calculated as the sum of the capital requirements of the core group (the sub-group which only comprises insurance subsidiaries), the subgroup of (insurance) undertakings under significant influence and the sub-group of participating undertakings from other financial sectors (OFS), including institutions for occupational retirement provision (e.g. pension funds). Thus, diversification effects were taken into account solely within the core group. Within the two other sub-groups as well as between all sub-groups no diversification effects were taken into account. This corresponds with the assumption that the three areas are fully correlated with each other. This contradicts the fact that through participations insurance groups have possibilities of diversification at their disposal 6 and adds to the security of their commitments. In line with the Directive, these diversification effects should therefore be fully taken into account, especially with regard to the risk margin for the group. Adequate diversification effects could, for instance, be achieved by taking into account correlations (less than 1) between those entities. Sub-group- based considerations are to be considered as not leading to the desired results also against the background of limited diversification effects. 5 This approach corresponds with the traditional consolidation method in accounting (consolidated accounts); here, for instance, cross connections (intra-group transactions) are consolidated to disclose the economic situation of the entire group. 6 Also, the still open question concerning the treatment of participations within groups in the solo calculations is of great relevance to capital allocation within groups. 7 of 13

8 In the case of groups, consistency with the rules on ring-fenced funds has to be ensured to avoid arbitrage effects. Economically unjustified restrictions for ring-fenced funds at solo level should not lead to identical restrictions at group level. Rather, an economic point of view is necessary both at solo and at group level. In calculating the floor of the group SCR in accordance with the consolidated method based on the solo MCRs of the entities of the group (Art. 230 (2)) double counting of risks associated with the holding of participations has to be avoided. At least the group SCR floor should be calculated by using the solo SCRs without participations. Otherwise, since the solo MCR is dependent on the solo SCR (because of the MCR range of % of the SCR) the floor of the group SCR could be unjustifiably high. 2.4 Simplifications and clarifications Groups are different in terms of size, structure, corporate form and organization. This manifests itself in likewise different problems in the group calculations. For instance, for participating groups, it was often difficult to define the consolidation scope within the scope of QIS5 for the group calculations. This scope usually did not correspond with the groups according to national or international accounting. In addition, adjustments were needed in the consolidation of group entities for which solo QIS5 calculations were available. Thus, in almost every case, intricate steps of consolidation or deconsolidation had to be carried out in addition to the complex group calculations. In this respect, some simplifications in the manner of inclusion of additional entities or entities to be included differently than in accounting should be explicitly allowed where those entities to be included do not have major influence on the group SCR or group own funds. Also for the reconciliations, revaluations had to be made for this; further assistance would be much appreciated. The principle of proportionality should be taken into account for groups as well. For instance, it should be possible to include group entities which are not material in a group context or involve low risk by means of simplified approaches (e.g. through factors). For example, a simple participation stress could be applied to ancillary services undertakings where those undertakings provide services only to group entities. Because of the latter they do not pose an additional operational risk which is not covered by the calculations of the operational risk of the solo entities. The consolidation method is the default method for groups under Solvency II. With the consolidation approach undertakings will be able to recognise group diversification. However, in some cases, undertakings may face difficulties in producing full consolidated accounts due to the absence of data, issues with the timeliness of information or other practical reasons.the deduction and aggregation method tested in QIS5 often provides considerably more conservative results, but is easier to apply for many groups. Thus, groups should be allowed to decide which calculation method is appropriate. This should also apply to partial calculations, especially for entities in third countries. Accordingly, in some cases due to the relatively small size of the related undertaking and the resources needed to produce consolidated accounts, in line with the proportionality principle, groups should be able to opt for the deduction and aggregation approach. 8 of 13

9 As alternative for the deduction and aggregation method for reasons of simplicity, we would appreciate considering that certain groups should be allowed, after agreement with their group supervisor, to use the scope of consolidated accounts in local GAAP for the purpose of the supervisory group solvency calculations. Simplifications are needed for groups in particular in respect of pillar III reporting requirements. For example, reconciliation calculations from consolidated accounts / consolidated own funds in accordance with national / international accounting towards Solvency II own funds would only show that there exist material differences in the valuation methods to be applied to balance sheet items and / or in the scope of consolidation. However, detailed reconciliations will be very burdensome. For example if the most recently published proposals on valuation and recognition of insurance liabilities in accordance with IFRS 4 will be to be applied, many questions concerning e. g. the linking of balance sheet items would arise. 2.5 Transitional rules As a matter of principle, all transitional provisions applying to solo undertakings should apply to groups as well. Moreover, there is a need for group-specific transitional measures. This applies, for instance, to the choice of the method, the consolidation scope as well as to group reporting. A smooth transition from the current Solvency I system to the new Solvency II regime could be achieved, for instance, if groups which apply the deduction and aggregation method today were allowed to do this also during a transitional period under Solvency II. With regard to the use of local capital requirements of entities in third countries in the group solvency calculation, facilitation is (temporarily) needed as well, so that supervisors may allow application of the deduction and aggregation method for these entities in third countries, which results in a combination between the two methods. With regard to the consolidation scope, it is desirable that entities which are exempted from group supervision according to the current Insurance Groups Directive (IGD) continue to be exempted, on a transitional basis. At least, it should be possible to exclude entities without complex calculations to prove it inadequate to include them. Preliminary supervisory decision at the start of Solvency II would be helpful. With regard to group reporting, it should be considered whether specific transitional provisions for groups, beyond the solo transitional provisions on reporting, might be introduced. In particular, groups could be allowed not to complete the solo reporting formats (templates) or not to complete them with the same granularity. The reporting formats for solo undertakings have to be completed also by groups on a large scale. For instance, while for solo undertakings detailing at the level of lines of business may not constitute any challenge worth particular mention, this may be problematic for a multi-level group structure with different subsidiaries operating on a worldwide scale. Therefore, only aggregated reporting should be required. 2.6 Method of consolidation Most groups currently are performing consolidation exercises in order to determine a consolidated Financial Statement as required by their accounting rules (IFRS and/or local GAAP). The groups are consolidating any subsidiaries over which control is assumed on a line-by-line basis (with if appropriate 9 of 13

10 the recognition of a minority interest). This is done irrespective of the nature of the subsidiary. Any interest in entities in which no control is assumed but where significant influence exists is included in the consolidated Financial Statements by means of the "net equity method"; any other interest are included by means of a valuation of the equity interest. This is a very common manner to determine the consolidated balance Sheet. Currently the Solvency II draft level 2 introduces differences to this approach: Banking entities as well as investment firms, financial institutions and institutions for occupational retirement provision are to be deconsolidated and included in the group balance sheet by referring to the sectoral rules (one asset, one liability and aggregation in own funds). Insurance entities are to be consolidated on a proportionate line-by-line basis when joint control exists. Ancillary service entities which are subsidiaries are to be consolidated by means of a line-by-line basis. Other entities are to be consolidated as a single balance sheet entry (adjusted equity method). The proposed approach will generate various questions. Amongst others: Should intra-group transactions be eliminated between all of these entities and how? Should the banking capital requirement be adjusted for intra-group transactions? How is information gathered from entities not being under control within the required timeframes? How is it possible that for listed equity interests a valuation approach is needed (adjusted equity value) while it is assumed that a quoted price in an active market generates the best evidence of economic value? This will generate a whole different balance sheet and will generate a huge administrative burden; especially since reconciliation is needed between the accounting balance sheet and economic balance sheet. Furthermore the risk management of the group will not be executed in this manner. 10 of 13

11 3. Further group aspects 3.1 Group own funds The refinancing of groups essentially depends on confidence in the entire group being in a sound financial and solvency situation. However the criteria for hybrid capital may impede the raising of capital by groups. There is a risk that such hybrid investors are lost and hence that capital is withdrawn from the insurance sector and even worse is no longer made available in times of crisis. For reasons of refinancing, not all capital can be of top quality (tier 1). Even tier 2 or tier 3 capital adds to financial stability. Groups need to be able to use financing instruments other than (accounting) equity for refinancing. There is a risk that the requirements on hybrid capital could lead to products unnecessarily structured in a too complex manner. For the determination of own funds in accordance with the consolidation method an appropriate method for aggregation, which reflects the group structure has to be chosen. Usually, this will be full consolidation. However, depending on the group structure more flexibility is necessary (for example where internal model follow a legal entity approach in cases of minority interests). 3.2 Group supervision of horizontal groups A certain legal-form-specific particularity is the problem of so-called horizontal groups, which often result from mutuals. By horizontal groups we mean groups where undertakings are included into the scope of the group under Solvency II which are only linked to one another by a relationship as set out in Article 12 (1) of Directive 83/349/EEC. For example they have the same board members, but do not hold participations in each other. Such undertakings without capital ties, for example a life and a health mutual insurer, will also come under the Solvency II definition of groups (see Article 212 c (i) 7 ). This may already be the case under Solvency I. In this case the consolidation scope for the Solvency II group calculations may not coincide with the consolidation scope for the consolidated accounts according to local GAAP or IFRS (because of a member state option in the European accounting directives). If no consolidated accounts have to be drawn up, no group solvency calculation should be required on the basis of a consolidated Solvency II group balance sheet. To avoid any additional burden, there is a need for more flexibility including certain exemption rules with regard to Solvency II group supervision. Therefore, the deduction and aggregation method or its combination with the consolidation method should be applied as an equivalent method as well. Level II on group solvency calculations should reflect the economic nature of existing legal structures. 3.3 Sub-group supervision As a Member State option, the Solvency II Directive provides for the possibility of sub-group supervision at national level (Art. 216 or Art. 217). National sub-groups of a group usually do not correspond with the management point of view and even less with the risk point of view of a group. International groups are often not managed by country, rather, a line-based view prevails, according to which, for example, non- 7 This section does not deal with groups as defined in Article 212 c) ii sometimes also called horizontal groups. 11 of 13

12 life insurers in several countries are managed together. A group should not come under sub-group supervision in an arbitrary way if this does not correspond with the view within the group (for example because of capital markets expectations). Also, it is correct that the Solvency II Directive does not allow the contradiction between centralized risk management and sub-group supervision: sub-group supervision ends and cannot be introduced if the subsidiary is part of the centralized risk management. The group supervisor, in his responsibility for the entire group, is challenged in his role by sub-group supervisors. It is clear that the information on the sub-group has to be shared in the college of supervisors among all supervisors of the group and EIOPA. Otherwise, the idea of the European System of Financial Supervision (ESFS), with EIOPA as a European supervisory authority with a coordinating function in the supervision of international groups, would be called into question. It is important that national supervisory authorities do not waste resource on group supervisors which would be needed in the work of the college of the whole group. If sub-group supervision is not restricted to essential parts of group supervision, there are incentives for groups to change over to branch structures. Thus, conversely, national supervisors would be totally deprived of any deeper insight. Particularly considerations on sub-group solvency and nationally imposed capital add-ons may constitute ring-fencing of capital. Any economically appropriate capital allocation within the group, which corresponds to risks and group strategy, could be prevented. 3.4 Group reporting Future Solvency II reporting requirements represent a challenge, especially for groups. At group level less granular information would be sufficient than at solo level. Too detailed reporting on group level could hinder the view of the group as a whole. This also corresponds with the group stakeholders: reports which go beyond major solo companies are mostly irrelevant for decisions concerning the group. 3.5 Third-country equivalence The strength of European insurance groups becomes apparent from the fact that participations are held globally. The high degree of regulation in Europe strengthens groups. However, it should not put them at a competitive disadvantage. In fact, equivalence assessments will need some time, even in the case of presumably equivalent third countries. Third countries must be granted the possibility of introducing a supervisory regime comparable to Solvency II. Therefore, transitional provisions addressing the problem as long as third- country supervisory regimes are not yet equivalent with Solvency II are indispensable. The length of the transitional period should allow for the time needed for the corresponding legislative procedures for changing supervisory regimes in third countries and should take intermediate steps into account. Before third countries have their equivalence recognized, it is necessary that it is still possible to use local requirements on a transitional basis, which presupposes the deduction and aggregation method with regard to such undertakings in the third country (i.e., for instance, combined with the consolidation method for the EU group). 12 of 13

13 3.6 Calculation of the currency risk The discussion on the draft implementing measures might imply that the currency risk calculations for the standard formula will follow the QIS5 Technical Specifications. The corresponding shock (FX shock) is applied to the Net Asset Value of the foreign currency against the reporting currency. This applies in particular to groups underwriting business outside their own currency area. However, the solvency position of an undertaking is enhanced when it holds a certain part of the Net Asset Value in foreign currency to secure policyholders over and above expected claims where these claims have to be paid in the foreign currency. Where the standard model is used, a more appropriate proposal for calculating the group currency risk capital charge would be to apply the currency risk shock to the sum of the local surpluses net of the SCR. [For solo entities, where no currency-specific SCR is available, a consistent approach could be achieved by weighting the currency risk capital charge by the proportion of assets and liabilities held in foreign currencies.] Obviously for internal models, an approach taking into account the currency policy of the particular group would apply. 3.7 The role of EIOPA The group supervisor is responsible for day-to-day supervision of the group. Therefore, the procedure of binding mediation by EIOPA should remain an exception. In particular, the approval of internal models at group level should remain with the group supervisor. The ordinary approval process for a group-wide internal model should not be unnecessarily delayed by the involvement of EIOPA. In particular, it has to be ensured that the group supervisor settles the question if EIOPA does not take a decision (in a timely manner). The CEA is the European insurance and reinsurance federation. Through its 34 member bodies the national insurance associations the CEA represents all types of insurance and reinsurance undertakings, eg pan-european companies, monoliners, mutuals and SMEs. The CEA, which is based in Brussels, represents undertakings that account for around 95% of total European premium income. Insurance makes a major contribution to Europe s economic growth and development. European insurers generate premium income of over 1 100bn, employ nearly one million people and invest almost 7 500bn in the economy of 13