Solvency II. Insurance and Pensions Unit, European Commission

Transcription

1 Solvency II Insurance and Pensions Unit, European Commission

2 Introduction Solvency II Deepened integration of the EU insurance market 14 existing Directives on insurance and reinsurance supervision, insurance groups and winding up replaced with one Solvency II Directive As a maximum harmonising regime, Solvency II significantly increases cross-border consistency and international credibility Protection of policyholders and beneficiaries by introducing risksensitive economic capital requirements The current Solvency framework is not risk-based and therefore does not incentivise insurers to manage their risks adequately or to improve and invest in risk management The current framework does not ensure accurate and timely intervention by supervisors The current framework does not facilitate optimal allocation of capital Solvency II addresses all of these shortcomings Improved supervisory convergence Including an enhanced framework for the supervision of groups An overarching objective in light of the on-going economic recovery in Europe is ensuring that there are no obstacles to long-term investment 23/01/2015

3 Overview Group supervision & cross-sectoral convergence Groups are recognised as an economic entity => supervision on a consolidated basis (diversification benefits, group risks) Pillar 1 quantitative requirements Technical provisions SCR and MCR (SF or IM) Prudent person principle replaces fixed investment limits Classification of own funds based on quality Pillar 2 qualitative requirements Enhanced internal control and risk management, including the ORSA Supervisory review process, including the use of capital addons Pillar 3 reporting and disclosure Common supervisory reporting Public disclosure of financial condition and solvency report Market discipline through transparency Total balance-sheet approach Market consistent valuation Internal models subject to approval Focus on firm's responsibility Convergence of supervisory practices Better risk-based information Increased transparency Harmonised valuation standards Convergence of supervisory practices Harmonised supervisory reporting and public disclosure 23/01/2015

4 Legislative Process Framework Directive Implementing Measures/ Delegated Acts Guidelines to ensure convergent implementation Rigorous enforcement by the Commission

5 Scope of Solvency II Covers EU insurers and reinsurers Small undertakings excluded from scope Doesn t apply to pension funds covered by occupational pension funds directive Doesn t apply to credit institutions or financial conglomerates

6 Pillar I 23/01/2015

7 Valuation of Assets and Liabilities (Art. 75) Market consistent valuation of assets and liabilities Assets shall be valued at the amount for which they could be exchanged, and liabilities at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm's length transaction ("market consistent valuation"). But there is usually no market for technical provisions The value of technical provisions shall be set equal to the sum of a best estimate and a risk margin. The best estimate is the expected present value of future cash flows, using the relevant risk-free interest rate term structure. The risk margin ensures that the value of the technical provisions is equivalent to the amount insurance and reinsurance undertakings would be expected to require in order to take over and meet the obligations. It is based on the cost of holding the regulatory capital required to support the best estimate liability.

8 Market consistent valuation of liabilities (Art. 75) SCR Capital requirements Risk margin Technical provisions (= MV of the liabilities) Assets Best estimate Liabilities and capital requirements - claims - expenses + investment income + premiums 23/01/2015

9 Own funds (Art ) Available own funds is the sum of On balance sheet items: excess of assets over liabilities plus subordinateddebt(basic own funds) Off-balance sheet items: commitments which you have received from a third party and can call upon(ancillary own funds) Own Fund items are classified into three tiers Quality Nature Basic own funds Ancillary own funds High Tier 1 Tier 2 Medium Tier 2 Tier 3 Low Tier 3 The amount of eligible own funds is limited

10 Ancillary own funds Assets Assets minus liabilities Subordinated liabilities Other liabilities Risk margin Best estimate Basic own funds Technical Provisions

11 Capital Requirements (Art ) Two levels of capital requirements the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) to ensure a ladder of supervisory intervention Breach of the MCR triggers ultimate supervisory actions Solvency Capital Requirement: Calculated using either a standard formula or an approved full or partial internal model Designed to capture all quantifiable risks Calibrated to the Value-at-Risk(VaR) of basic own funds subject to a confidence level of 99.5% overa1yeartimehorizon Special attention is being paid to ensuring that there are no unnecessary obstacles for insurers to invest in long-term assets good for economic growth in Europe Minimum Capital Requirement: Calculated in an auditable, robust and simple manner CalibratedtoaVaRsubjecttoaconfidencelevelof85%overaone-yeartimehorizon MCRissubjecttoanabsolutefloor MCR shall not fall below 25% nor exceed 45% of the undertaking's Solvency Capital Requirement MCR to be calculated quarterly 23/01/2015

12 99.5%

13 Risk modules of the Standard Formula 23/01/2015

14 Supervisory ladder of intervention SCR MCR TP + other liabilities supervisory action is prop portionate to level and length of non- -compliance principles-based rules-based Breach of SCR recovery plan months (+ extension in exceptional markets) Breach of MCR short-term finance scheme + ultimate supervisory action months

15 Investments(Art ) "Prudent person" principle: Freedom to invest: no investment limits, no prior supervisory approval Use of derivatives for risk reduction or efficient portfolio management only Insurer is able to invest in assets whose risks it can identify, measure, monitor, manage, control and report Insurer invests in the best interest of policyholders

16 Pillar II 23/01/2015

17 Overview Qualitative requirements to cover risks which are not captured in the SCR Enhanced internal control, governance, and risk management, as well as self-assessment of capital needs Strengthened supervisory review, harmonised supervisory standards and practices Principle of proportionality: No one-size fits all approach, reflects the nature, scale and complexity of the business Applies both, to the implementation of the Directive by Member States as well as to the exercise of supervisory powers Appliestoallthreepillarsandgroups

18 Effective risk management (Art. 44) Effective risk management system Well integrated into the organisational structure and decision making processes Covers risks included in the SCR and those not covered Own Risk and Solvency Assessment (ORSA) Regular assessments of overall solvency needs, compliance with SCR, MCR and technical provisions, deviations of the riskprofile of the undertaking from the SCR Integral part of the business strategy Resultsneedtobereported Risk management function

19 Other functions Internal audit function Effective, independent and objective internal audit function Evaluation of the adequacy and effectiveness of the internal control system and other elements of the system of governance Findings and recommendations are reported to the administrative or management board Compliance function advises the compliance with the laws, regulations and administrative provisions assessment of the possible impact of changes in the legal environment Actuarial function Coordinates the calculation of technical provisions Ensures appropriateness of methodologies Assesses data quality

20 Capital add-ons (Art. 37) Exceptional circumstances following Supervisory Review Process Used where: Risk profile of the insurer deviates significantly from the assumptions underlying the SCR (calculated using either the standard formula or an internal model) Deficiencies in the undertaking's system of governance Annual review

21 Pillar III 23/01/2015

22 Overview Supervisory reporting regular submission of information to supervision Public disclosure annual report on the Solvency and Financial Condition of the insurer (SFCR) Supervisory authorities to conduct their tasks in a transparent and accountable manner

23 GROUP SUPERVISION 23/01/2015

24 Overview Identification and nomination of a group supervisor Rights and duties of the group supervisor for all key elements of group supervision Enhancement of the duty to exchange information Recognition of diversification effects Groups with Centralised Risk Management covers cooperation between supervisors of centralised groups Review clause on supervisory cooperation and group supervision

25 Key issues Insurance products with long-term guarantees Third Country Equivalence Sovereign debt Empowerments to the Commission and/ or EIOPA Proportionality of reporting for SMEs Transitional measures/ phasing-in Solvency II will start on 1 January /01/2015