Concept for cooperative group supervision. Key statements on group supervision under Solvency II

Transcription

1 Gesamtverband der Deutschen Versicherungswirtschaft e. V. Concept for cooperative group supervision Key statements on group supervision under Solvency II Gesamtverband der Deutschen Versicherungswirtschaft e. V. GDV

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3 Concept for cooperative group supervision Key statements on group supervision under Solvency II

4 Imprint Published by: Gesamtverband der Deutschen Versicherungswirtschaft e. V. (GDV) (German Insurance Association) Risk Management Department / Accounting Department Wilhelmstraße 43 / 43 G, Berlin, Germany phone +49 / 30 / fax +49 / 30 / Contacts: Dr. Thomas Schubert Hans-Jürgen Säglitz Mirko Kraft Götz Treber October

5 Contents 3 Contents Introduction Full recognition of diversification effects within groups Making optimum capital allocation possible Defining clearly supervisory powers of a responsible group supervisor and solo supervisors Avoiding supervision of sub-groups Recognition of internal models and partial models at group level Solving the problem of non-eu countries Effective harmonization of group supervision (Pillar II) Harmonizing reporting requirements at group and solo level (Pillar III)...29 List of references...31 List of abbreviations and glossary...33

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7 Introduction 5 Introduction Group structures have great importance in European insurance markets and this importance is expected to increase further in the future. Groups represent a mainspring of integration of insurance markets in Europe. Apart from large groups of insurance companies in various European countries there are also smaller regional groups. Germany is today the head office country both of groups acting greatly at international level and of (mainly) national groups. Irrespective of their size, international group structures pose a particular challenge in terms of supervision. The control of groups usually takes place on a centralized basis. It is less based on legal structure than on economic principles. Although the two perspectives may coincide, they do not necessarily have to. For instance, risks are considered according to lines of business, so that, for example, life and non-life insurance activities or reinsurance operations (while adhering to legally prescribed separation of lines) are treated together and combined in one overall control. Today, the supervision of groups is still greatly characterized by a point of view focusing on individual entities. This is due to historical reasons because supervisory legislation reacted to developments in the economy with delay: It was only some decades after EU solo supervision had been implemented that the Insurance Group Directive (IGD) provided for group supervision which, rather than superseding existing solo supervision, only complemented it. Equally, after groups had been formed which consisted of both insurance companies and banks, insurance group supervision was complemented though not superseded by supervision of financial conglomerates. Solvency II, as a risk-based supervisory system, should avail itself of the opportunity of a fresh start and establish a new quality of group supervision. In the future, group supervision should to a greater extent be based on an economic point of view. Therefore, the basic concept of group supervision should develop away from mere supplementary supervision as there has been so far towards more consolidated supervision (cf. Figure 1). Supplementary supervision considers group supervision as being complementary to solo supervision, which also be- The importance of groups in Europe Centralized control Solo plus supervision today An economic point of view should be taken in the future

8 6 Introduction comes apparent from the term solo plus supervision used for it. In contrast, in consolidated supervision the group is considered as a whole, thus, the group is treated as a whole, thus, the group is considered an entity rather than an aggregate of its components. IGD CEIOPS Concept for cooperative group supervision only group supplementary supervision purely consolidated supervision Figure 1: Classification of concepts for group supervision Rearrangement group supervision The new Solvency II Framework Directive provides an opportunity to rearrange group supervision beyond the Insurance Group Directive 98/78/EC (abbr. IGD) and with the Helsinki Protocol based on it. The proposals made by CEIOPS lead in this direction. We welcome that this is also taken into account by the European Commission in its draft framework directive. The proposal for a framework directive includes considerable progress compared to the current system, e.g. by the establishment of a group supervisor and by the possibility for a more flexible capital allocation within a group by declarations of group support. From the view of the German insurance industry there is no scope left for stepping back from the advanced stage of the proposal though there is still some need for improvement in detail. 1 However, the German insurance industry strongly supports the European commission in aiming at a substantially modernised and simplified group supervision. 1 At the end of each chapter after the summarized key position we refer to the articles of the framework directive concerned.

9 Introduction 7 The provisions of the framework directive should not aim at a too complex set of rules for group supervision, but rather seek transparency and a reduction in complexity in all three Pillars of Solvency II. The focus should not be on very large groups operating on an almost worldwide scale only, but groups of insurance companies operating mainly at national level should be taken into account as well. Adequate arrangement of the supervisory regulations on group supervision should help avoid restrictions placed on insurance groups which might distort competition. Groups should be free to optimize their structures allowing for economic aspects. Supervisory regulations should not impede this. Above all, it should be avoided that companies feel compelled to make changes in the legal structure of the group solely for supervisory reasons. (Larger) groups change their structure regularly (for instance, due to mergers or takeovers). Any model for group supervision should be flexible enough to accompany such changes in group structure appropriately. Changes in group structure which are due to mergers and takeovers should be handled adequately from the supervisory point of view, especially with regard to capital requirements. On the whole, supervision should be appropriate to risk profile and not only to the size (measured in terms of premiums) of the group (principle of proportionality). Insurance business may frequently be characterized by product-specific particularities. Therefore, it may be appropriate that local supervisory authorities which are familiar with such different business models assume partial functions within a model for group supervision (cf. 4.). Different concepts, which may be characterized by national features, may absolutely be justified, just as different cultures are taken into account within international groups. The currently existing rules on class separation (casualty and property / accident, life and health) should not constitute any disadvantage for companies in terms of group supervision. Transparent rules Economic optimization of group structures Changing group structures due to mergers and takeovers Different products and business models

10 8 Introduction Key positions In the German insurance industry s view, the following principles are of vital importance for adequate group supervision under Solvency II: 1. Full recognition of diversification effects within groups 2. Making optimum capital allocation possible 3. Defining cleary supervisory powers of a responsible group supervisor and solo spervisors 4. Avoiding supervision of sub-groups 5. Recognition of internal models and partial models at group level 6. Solving the problem of non-eu countries 7. Effective harmonization of group supervision (Pillar II) 8. Aligning reporting requirements at group and solo level (Pillar III) On the whole, it is imperative to create a type of group supervision which strengthens insurance markets and competition in the interests of companies, of policyholders, of investors and of supervisors. Over and above insurance group supervision it should also be aimed at adequate supervision of those groups which comprise not only insurers (such as financial conglomerates).

11 Full recognition of diversification effects within groups 9 1 Full recognition of diversification effects within groups Diversification effects within groups exist 2 and constitute an essential element of groups. They have positive effects on companies, policyholders, investors and supervisors. Therefore, they should be fully recognized in terms of structure and amount. Diversification effects within groups exist diversification effects 40 SCR A + SCR B SCR A = 60 SCR B = 80 SCR (A+B) = 100 Company A Company B group composed of companies A and B Figure 2: Diversification effects reduce the group-scr Due to compensatory effects especially in the case of critical extreme events 3 the risk borne by a group will be lower than the sum of the risks of that group s sub-entities (cf. Figure 2). 4 Thus, losses or damage will, for instance, generally not occurat the same time in different risk categories, lines of business, regions or companies in a group. 5 Diversification should not be restricted as to its structure 2 Cf. inter alia CRO Forum [2005], A framework for incorporating diversification in the solvency assessment of insurers, p. 12 et seq. 3 The opposite opinion (cf. Darlap, P./Mayr, B. [2007], Diversification effects in insurance groups A regulatory angle to efficient solvency requirements, p. 40) is not shared. 4 On diversification effects see also CEA [2007], Diversification and Specialisation benefits. 5 On different levels of diversification effects see, for instance, CRO Forum [2005], A framework for incorporating diversification in the solvency assessment of insurers, p. 20 et seq.

12 10 Full recognition of diversification effects within groups Diversification effects result from both economies of scope and economies of scale. Irrespective of the origin of diversification effects, capital requirements for groups will be lower than the sum of solo capital requirements, provided the calculations for the group are made based on risk, for instance, allow for smaller fluctuation margins. Calculating diversification effects by means of: Standard approach Internal models or partial models Test of the standard formula for groups by means of impact studies Diversification effects should not be limited as to their amount Irrespective of the method chosen to calculate the group SCR, diversification effects existing within the group have to be adequately allowed for: In determining the group SCR according to the standard approach it is necessary from the point of view of riskbearing to adequately allow for existing diversification effects. This could be done, for instance, on the basis of correlations between sub-risks in different regions (also within the same country) 6 so as to reflect risk balancing within the group. This would not be ensured by simple addition of solo SCRs. Within the scope of (full) internal models and partial models to determine the group SCR it is justified from the economic point of view that a modelling is made which allows for diversification effects and does not involve any artificial or arbitrary restrictions. A standard formula for groups should be sufficiently tested within the scope of quantitative impact studies (QIS) so as to ensure that even when using the standard approach, diversification effects, such as geographical equalization effects in the case of natural disasters, within a group or between life and non-life casualty are adequately reflected. QIS3 can only be a first step within such a test series 7. Diversification effects should not be artificially limited as to their amount (such as by the sum of solo MCRs as lower limit for the group SCR). 6 National borders are not necessarily appropriate for delimiting risks and allowing for diversification effects. 7 Concerning group aspects in Qis CP: Broszeit; T./Mayr, B. [2007], Gruppenaspekte in der Standardformel von Solvency II - Wie aus den Ergebnissen der Einzelunternehmen das erforderliche Gruppenkapital abgeleitet wird, p. 866 et seq.

13 Full recognition of diversification effects within groups 11 Any existing risks arising from group affiliation should be observed and mainly come within the scope of Pillar II rather than Pillar I of Solvency II because they have to be subsumed under the qualitative aspect of supervision. As far as additional group-specific risks should be quantifiable in a reliable way, such effects could be allowed for as compensatory diversification effects (balancing of economies and disadvantages of scope). However, there is no final definition and delimitation of such risks within groups from other types of risks which may not also arise in individual companies. Any non-recognition of diversification effects would ignore an essential reason for the existence of groups as well as the fundamental principles of insurance business. Groups should not be put in a worse position than is appropriate from the economic point of view. Also from the policyholders point of view, diversification effects should be included with a view to premium levels. Otherwise competitive disadvantages would be the consequence for groups. Group-specific risks Competitive disadvantages for groups The German insurance industry pleads for economic consideration of diversification effects without any arbitrary restrictions with respect to their amount or their structure. This should be allowed for in the calculation of capital requirements for groups (groups SCR) irrespective of the method used, i.e. both in the case of a standard formula for groups and in the case of groupwide internal models as well as partial models. The group SCR after diversification determines the amount of the overall group own funds to be held. Therefore, we welcome the proposal for a Solvency II framework directive. We suggest developing it further concerning the following aspects: Method 2 (Art. 240) should allow explicitly for diversification effects on group level like method 1 (Art. 237). In addition not only full group internal models but also partial internal models should be permitted for groups as well as on solo level (Art. 238). The limitation of group diversifications effects by a (consolidated) minimum group SCR should be dropped (Art. 237 (2)). Capital add-ons (Art. 238 (6), 240 (6), 245) should not be misused to compensate diversification effects.

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15 Making optimum capital allocation possible 13 2 Making optimum capital allocation possible From an economic point of view, it results that due to diversification effects within groups such groups have to hold available less own funds than would be necessary to ensure the same security level for policyholders in the case of isolated consideration of individual companies (cf. Figure 2). A shortage of own funds in an individual company is offset by the fact that in the group as a whole sufficient own funds are available to cover all risks borne and may be transferred, if necessary. From the policyholder s point of view it will then make no difference whether he or she is insured with a group or with an individual company with the same risk profile. In fact: if it was possible to conduct the entire business of a group within one legal entity, capital requirements would be lower as well. If the transferability of own funds is taken into account without counting own funds twice, the following applies due to diversification effects: A desirable economic security level (only one failure within 200 years, measured as 99.5 % VaR from a one year time horizon) is deemed to exist although the group own funds required to cover the group s solvency capital requirements (group SCR) is lower than the sum of own funds necessary in the case of individual consideration. From requiring to hold own funds at group level for covering the group SCR after diversification (cp. fig 1) it follows that not all entities of the group will cover their solo SCR with own funds. Despite this it has to be ensured that every entity complies with a minimum capital requirement (MCR). Above this solo MCR there is no need for additional own funds on solo level. Instead of covering the solo SCR by all entities the group could make sure that: Diversification effects reduce required own funds Group as a whole Own funds of the group MCR cover the group SCR is covered by own funds of the group and that support declarations have been undertaken by other companies in the amount of the difference between the solo MCR and the solo SCR (cf. Figure 3).

16 14 Making optimum capital allocation possible Such support declarations have to ensure any capital transfers which might become necessary within the group (so-called group support). 8 No unjustified limitations The possibility to hold available at solo level only own funds to cover the solo MCR would represent great progress as compared with existing rules. Any limitations in percentage terms to a proportion of the difference between the solo SCR and the solo MCR which is allowed to be covered by capital transfers commitments (e.g. 50 %) would be arbitrary restrictions not justified from the economic point of view. declaration of group support SCR A MCR = 60 A = 20 subsidiary A SCR B = 80 MCR B = 1/3 80 subsidiary B 40 SCR (A+B) = 100 group s own funds group composed of companies A and B Figure 3: Declaration of group support in the amount of the difference between the solo SCR and the solo MCR no limitation to the diversification effect within the group for the case that the group s own funds (prior to limitation) exceed the group SCR Declaration of group support should not be unnecessarily complicated No excessive demands should be made on the transferability of capital within groups. The maximum amount of declaration of group support but it should be possible to base it on total own funds within the group: it should at least be possible up to the amount of the economic diversification effects 9 within the group (cf. Figure 3). Moreover, it is justified that in the case of own funds in excess of the group s solvency capital requirements (group SCR) there is a possibility to choose a declaration of group support instead of a real capital transfer. 8 For different types of support agreements cp. for instance FitchRatings [2007], Fitch s approach to rating insurance groups, p 6. 9 From the supervisory point of view, the effect of diversification effects may be calculated by comparing the sum of the solo SCRs of the group s entities ( aggregated group SCR with full economic consideration of diversification (consolidated group SCR ).

17 Making optimum capital allocation possible 15 For entities favoured by declarations of group support the basic possibility of taking own funds into account should not be counteracted by considering such declarations, as a rule, to represent own funds of lower quality (thus not tier 1 capital) and therefore to be subject to further limitations at solo level. Any limitations of own funds, such as percentages for tier 2 and tier 3 with respect to tier 1, would be contrary to an economic point of view. Limitations at solo level should if any also allow for the group case, i. e., they should not restrict optimum capital allocation at group level any further than justified from the point of view of risk-bearing. Declarations of group support undertaken by group entities in favour of other group entities should relate to necessary use only. Therefore, as a rule, no commitment should be necessary according to which the entity concerned would be liable for any obligations undertaken by the company to an unlimited extent. This results from the fact that Solvency II is only aimed at covering a 200 years event rather than providing cover for an unlimited amount. Therefore, any support commitment should not exceed the solo SCR for the entity concerned because it represents the security level provided for. For the promising as well as the favoured company any formal declaration of group support must be of great legal certainty. Moreover, the support provided by the parent company to its subsidiaries should not be undermined by capital add-ons which may be imposed by local supervisory authorities at any time within the scope of Pillar II. 10 Guarantees by third parties should not have to be provided because they would be contrary to the basic idea of giving support within the group without any real capital transfer and would lead to unnecessary cost burdens. Moreover, consideration should be given to the fact that guarantees are available in the market only to a limited extent and may involve systemic risks. Inadequate supervisory restrictions imposed on own funds allocation, such as furnishing guarantee, would unnecessarily add to the companies capital (raising) costs. Any such requirement might also create difficulties in other fields (such as company law, accounting). No limitation by tier structure No support unlimited in amount required Legally binding effect No guarantees by third parties 10 In the view of the German insurance industry, as a rule, capital add-ons should under no circumstances be imposed on an ordinary or regular basis, but only exceptionally.

18 16 Making optimum capital allocation possible Group support in the case of takeovers and mergers Excessive capital charges are ultimately borne by policyholders It should be dealt with the question how recognized group support declared by the parent company in the case of takeovers and mergers may be handled. No unforeseeable financial risks should arise for buyers or sellers in this respect. Therefore, it is necessary that declarations have limited duration which does not exceed the lyd concerning non paid-up capital. The group support of the former group should cease if a company gets a part of another supervised group. Impediments of the kind mentioned above would complicate any adequate allocation of capital within the group and lead to unnecessary capital costs. This would not be in the interest of policyholders who would ultimately have to bear excessive capital sosts via premiums. Optimum capital cost allocation should be made possible via group support so that capital costs may be reduced in the interest of policyholders. Therefore guarantees furby third parties should not be required. We support the proposed group support regime (Art ). Unchanged should be kept that the full difference of solo SCR and solo MCR can be covered by group support (Art. 246 (1)) and that the maximum amount of group support is not limited by the amount of group diversification effects. There is no necessity for underlying the group support with third party guarantees which was demanded sometimes during the elaboration of the framework directive. We are opposed to solo limits which would restrict also the recognition of group support (Art. 246 (1) in conjunction with Art. 97 (5)). Concerning the concrete legal form of declarations of group support further work is necessary.

19 Defining clearly supervisory powers 17 3 Defining clearly supervisory powers of a responsible group supervisor and solo supervisors While different national supervisory authorities may be responsible of individual group companies, for instance in the field of legal supervision, it should be made compulsory in group supervision to provide for a single responsible group supervisor. A supplementary holistic group supervision by solo supervisors is not necessary (cf. Figure 4). In particular, decisions taken by the group supervisor may not be (de facto) annulled by solo supervisory authorities. In particular, only the group supervisor should ensure within the scope of supervision that the group meets the group s solvency capital requirement (group SCR). A responsible group supervisor group no supplementary group supervision by solo supervisors group parent supervisor group supervision by group supervisor no double solo supervision X cooperation between supervisory authorities X ins. comp. A ins. comp. B ins. comp. C ins. comp. D Solo A Solo B Solo C Solo D minimum solo supervision (e.g. MCR) Figure 4: Definition of supervisory powers in the case of cooperative group supervision The exchange of information between supervisory authorities should be lastingly ensured so that, for instance, companies do not have to reply to requests for information on the same facts from different supervisory authorities. It is necessary that confidence is built up between supervisory authorities of different countries so that decisions may be taken homogeneously and based on a consensus. In this context, information and consultation rights as well as the obligation of supervisory authorities to render account to each other may be confidence-building measures as guidelines of cooperation. Objective: trustful cooperation between supervisory authorities

20 18 Defining clearly supervisory powers Cooperative group supervision For the purposes of a concept for cooperative group supervision it is of paramount importance that supervisory authorities jointly collaborate in the design of supervisory legislation, learn from each other with respect to supervisory practice and jointly enhance supervisory legislation and practice. Cooperation in bodies Definition of tasks in going concern and in emergency situations Example: Breaching the SCR For instance, representatives of supervisory authorities should cooperate in working groups within CEIOPS (such as in an Internal Model Validation Task Force ) to support supervisory measures taken by the respective competent supervisory authorities more efficiently and effectively. Thus, national supervisors will become co-supervisors of group supervisors. The definition of supervisory powers should include both normal cases and situations of crisis (supervisory ladder). The prerequisite for any appropriate step-by-step intervention within the scope of a supervisory ladder is calculation of the (solo) MCR, 11 which ensures that the MCR is lower than the SCR (for instance, as a percentage of the SCR). The powers which are necessary in each case should be available to the respective supervisory authorities. One example illustrating the design of a concept for cooperative group supervision, as has been outlined, is the definition of supervisory powers in the case of a subsidiary in a group, which is favoured by a declaration of group support by the parent company in another country, falling below its SCR. The right to require an increase of the declared group support from the parent company or even a capital transfer (on the basis of the declaration) from the parent company to the subsidiary (so-called call) should be reserved to the group supervisor (cf. Figure 5) It is not necessary to calculate an additional group s MCR. Also, the concept according to which a minimum group SCR (being the sum of solo MCRs) has to be covered by MCR own funds (hence not SCR own funds) is questionable as well. 12 The measures of raising the support commitment and of increase of own funds with the subsidiary should be considered as subordinate possibilities for once again meeting the SCR requirement at solo level. Preferably, risk-reducing possibilities open to the subsidiary (such as risk-transfer via reinsurance) might, for instance, be taken into consideration.

21 Defining clearly supervisory powers 19 It would be contrary to the concept of a leading group supervisor if each solo supervisor was allowed to approach the parent company of the group. Moreover, it does not appear to be necessary to grant supervisory authorities powers in other legal systems (namely the supervisor of the subsidiary in the head office country of the parent company) which, naturally, would be more restricted than those of the local supervisory authority. parent call group supervisor group support X subsidiary reports (breach) of SCR solo supervisor Figure 5: Request by the group supervisor instead of by the solo supervisor Irrespective of the fact that local supervisory authorities are granted information rights, any more far-reaching supervisory powers should, as a rule, be reserved to the group supervisor. Thus, in the case of the subsidiary falling below its SCR, the solo supervisor should not, a priori, actively approach the subsidiary. This is without prejudice to whether the measures taken by the group supervisor (for instance, the order to increase the group support) are taken at the group supervisor s own initiative or at the request of the local supervisory authority of the subsidiary (without any further discretionary powers). The way outlined in the case of noncompliance with the SCR should also serve as a model for other supervisory measures.

22 20 Defining clearly supervisory powers Minimum solo supervision Supervision in the case of a risk of insolvency Harmonization of supervision It is comprehensible that certain legal powers will remain with solo supervisors (minimum solo supervision, cf. Figure 2). For instance, the authorization to carry on insurance business and the compliance with the regulatory framework for insurance contract terms will be subject to local control (legal supervision). Also, questions concerning the valuation of technical provisions have to be answered usually by solo supervisory authorities. Within the scope of supervision of solvency, issues relating to insolvency law in particular are closely linked to the respective legal entities and cannot be separated from national regulations. Thus, in the context of Solvency II, it is assumed that the national supervisory authority intervenes solely in the case of a sub-entity falling below its MCR. On the other hand, any non-compliance with the SCR as described above at group level does not require any powers of intervention on the part of national supervisory authorities, but solely on the part of the group supervisor. The definition of supervisory powers should ensure that supervisory instruments are exercised in a harmonized way (see also 6.). The German insurance industry pleads for clearly defined supervisory powers between the group supervisor and solo supervisors, which avoids any multiple supervision in the interest of companies as well as of supervisory authorities (concept of cooperative group supervision). We strongly support the provisions in the framework directive proposal as regards cooperation between the group supervisor and solo supervisors (Art ). However, the framework directive allows the solo supervisors to address themselves directly to the parent undertaking. This contradicts a clear attribution of supervisory powers between group and solo supervisors. As explained in the example of breaching the SCR only the group supervisor should be allowed to do so (Art. 245 (2) - (4), Art. 247 (2) - (4), Art. 249 (1) have to be changed).

23 Avoiding supervision of sub-groups 21 4 Avoiding supervision of sub-groups To avoid any double supervision the supervision of subgroups, in particular of sub-groups which have been created according to purely national aspects, should be strictly rejected. Any consideration of sub-groups would constitute a consideration of an arbitrarily chosen segment of the risk balancing portfolio. For instance, the supervision of sub-groups could involve the danger that accidentally only more risky subentities are combined and that the overall portfolio is not sufficiently appreciated. No supplementary supervision of national subholding companies Even if, for instance, companies in one country or one region should be combined in a subholding company (cf. Figure 6), any supervision of sub-groups would be contrary to clear definition of supervisory powers (cf. 3.). Gesamtverband der Deutschen Versicherungswirtschaft e.v. parent company subholding company I subholding company II insurer A insurer B insurer C insurer D Figure 6: Example of a group structure with subholding companies

24 22 Avoiding supervision of sub-groups No reasons for supplementary supervision of sub-groups Clear definition of tasks Sometimes exceptions are stated which justify supervision of sub-groups, such as high market shares in individual countries or great relevance to the national financial system. These, however, do not warrant any Member State option for supplementary supervision below the level of the whole group, but above the solo level. In exceptional circumstances (regional crisis situations) more intensive cooperation between the group supervisor and a national supervisory authority may be necessary on a case-by-case basis beyond ongoing cooperation between supervisory authorities (for instance, within the scope of working groups within CEIOPS), which takes place anyway. In addition, for such crisis situations more intensive solo supervision would be appropriate as well. However, no supervision of sub-groups is required for this. Even such cases should already be covered by clear definition of tasks between group and solo supervisors. There is no need for supervision of sub-groups as a mere consideration of segments. This would rather lead to multiple supervision involving duplication for companies and supervisory authorities, conflict with clear delimitation of tasks between supervisory authorities and, moreover, weaken the concept of cooperative group supervision. The German insurance industry welcomes that group supervision shall apply only at ultimate group level. There is no necessity of additional subgroup supervision. Art. 223 and 224 should be deleted.

25 Recognition of internal models and partial models at group level 23 5 Recognition of internal models and partial models at group level The certification of an internal model for a group should, as a rule, be effected by the group supervisor. Within the scope of definition of tasks between supervisory authorities, the group supervisor has to coordinate the process of certification with the solo supervisors in an appropriate way. The final decision taken by the group supervisor, however, should then be binding for solo supervisors (no veto ). Before this, a clear, transparent certification process is necessary. Only internal models allow diversification effects within groups to be fully taken into account. So that it is of great importance that the group SCR can be calculated in a feasible way not only by means of a standard formula, but also by international models. The requirements for internal models should also allow adequate consideration of group undertakings which are not in the scope of the Solvency II directive such as insurers from non-eu countries and non-insurers (see 6.). Also, it is of great practical relevance that the group SCR may be determined by means of partial models. Apart from the group-wide modelling of individual risk categories (such as catastrophe risk or the operational risk), this should also mean that an internal model is used for individual companies in the group while for others the standard approach is chosen. For instance, in the case of acquisition of companies, the possibility that the group SCR with the exception of the new company is calculated by means of an (already existing) internal model while the SCR share for the new company is calculated using the standard approach should (temporarily) be allowed. Also, the certification of an extended internal model for the enlarged group should not be considered as an original certification, but as a modification of the existing model, so as to avoid possible substantial delays. Certification by the group supervisor Reflecting diversification effects in internal models Taking account of non-solvency II entities Allowing partial models Relevance of partial models as a mix of different approaches in solo entities

26 24 Recognise of internal models and partial models at group level The requirements stated for the supervision of internal models should apply analogically for partial models at group level. The hurdles for internal models as well as for partial models (approval by the group supervisor) should not be put so high within the scope of group supervision that they are of a prohibitive nature. Rather, incentives should be provided to encourage companies to better supervise and control their risks by means of internal models and partial models than would be possible using the standard approach. We support the proposed process of certifying an internal model for a group (Art. 238). Groups should also be allowed to use partial internal models as well. The proposal for a framework directive should be amended accordantly.

27 Solving the problem of non-eu countries 25 6 Solving the problem of non-eu countries It should be provided for equal treatment of group entities in Solvency II countries and group entities in countries with comparable supervision. This means in particular that both diversification effects resulting from group affiliation of such entities (cf. 1.) and from their capitalization may be invoked (cf. 2.). Mutual recognition is of great importance because any nonrecognition under Solvency II might lead to non-recognition of supervision according to Solvency II in countries outside the European Union. Great importance in this field should also be attached to the efforts made by the International Association of Insurance Supervisors (IAIS) with a view to worldwide standards of (group) supervision. 13 Subsidiaries in non-eu countries being very small as regard their risk profile as well as immaterial group entities in general should be handled in a proportionate way. Equal treatment Mutual recognition Principles of materiality and of commensurability As regards the supervision of companies in non-eu countries, it is in the interest of the German insurance industry to achieve mutual recognition of supervision provided supervisory systems are comparable. In general we welcome the approaches of recognition of other supervisory systems, as set out in the proposal for a framework directive (Art. 169, Art ) but the equivalence should not be interpreted as too demanding. The possibility to treat third country entities like European subsidiaries is very positive because it allows benefiting from diversification effects with these entities. 13 Cf. IAIS [2007], Principles on group wide supervision.

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29 Effective harmonization of group supervision (Pillar II) 27 7 Effective harmonization of group supervision (Pillar II) The harmonization of (qualitative) group supervision presupposes comparable supervisory powers of supervisory authorities. Irrespective of the legal structure of supervisory authorities, these should be vested with the necessary powers in the same way so that they may fulfil the tasks of group supervision effectively. Given the rather soft principle-oriented requirements for risk management systems and processes, difficulties could arise in practice with regard to the convergence of Pillar II requirements. Any harmonization of qualitative supervision should ensure that Comparable supervisory powers Harmonization of supervision national supervisory authorities proceed in an identical way in interpreting supervisory standards which have been phrased in as identical legal terms as possible (maximum harmonization), for instance with regard to fit and proper criteria, there is close cooperation between supervisory authorities in coordination circles, possibly at CEIOPS level (Coordination Committee (Co-Co) or mediation groups ) 14 and that supervisory arbitrage (also with a view to supervision of banks and financial conglomerates) is prevented. As regards risk management (especially under Pillar II), consideration should be given to the fact that there may be different designs of risk management systems within groups. Different constructions in terms of company law involve different possibilities to influence group entities. Different designs of risk management systems 14 Cf. CEIOPS [2007], Consultation Paper on the establishment of a Mediation Mechanism between Insurance and Pensions Supervisors.

30 28 Effective harmonization of group supervision (Pillar II) Cooperative group supervision as a mainspring of convergence Member State options should be avoided The core of harmonization of supervision may consist in regular cooperation between different supervisory authorities within the scope of a concept for cooperative group supervision (cf. 2.). Different points of view and procedures may possibly be standardized by this or at least made transparent as to their differences. For the purposes of ongoing competition for good solutions ( best practice ), supervisory authorities should compare their work regularly with that of other supervisory authorities and jointly seek improvements. Any Member State option in respect of group supervision (for instance, concerning supervision of sub-groups, cf. 4.) could prove to be impediments to maximum harmonization and should therefore be examined as to their justification. Effective harmonization of supervision, especially as regards supervision of risk management according to Pillar II, is of great importance for companies. Starting from the good structure in the proposal for a framework directive further work is necessary in applying solo requirements of pillar II (fit and proper criteria, ORSA) at group level in a harmonized manner taking into account the principle of proportionality (Art ).

31 Harmonizing reporting requirements at group and solo level (Pillar III) 29 8 Harmonizing reporting requirements at group and solo level (Pillar III) Double reporting requirements with respect to supervisory authorities (supervisory reporting) and, redundant disclosure requirements (public disclosure) should be avoided. For instance, there should be no obligation to report again of risks for individual companies in a group report. This means in particular that there should be no reporting by sub-groups (cf. the universal rejection of supervision of sub-groups, see 4.). Reporting by parent undertakings on behalf of the group should have discharging effect for subsidiaries. As regards the extent and contents of group reporting, it would be desirable if these were largely harmonized with group reporting requirements in accounting. Since addressees are identical in both cases, disclosure should be based on the same data. In the case of cross-national groups special attention should be given to developments in reporting requirements due to international accounting standards (US-GAAP, IAS/IFRS). No doublication of reporting of risks Harmonization with accounting rules The German insurance industry pleads for appropriate and aligned reporting requirements at group and solo level (with respect to supervisory authorities as well as the public) to avoid any redundant information. We agree with pillar 3 requirements also for groups to obtain market transparency. However, Art. 269 should seek for an advanced approach in the mix of public disclosure at group and solo level to avoid double reporting requirements. Concerning supervisory reporting for groups further work is necessary on level 2 and 3.

32 30

33 List of references 31 List of references Broszeit, T./Mayr, B. [2007], Gruppenaspekte in der Standardformel von Solvency II Wie aus den Ergebnissen der Einzelunternehmen das erforderliche Gruppenkapital abgeleitet wird, in: Versicherungswirtschaft, 11/2007, 2007, p CEA [2007], The insurance Groups and Solvency II, draft working paper, Brussels CEA [2007], Diversification and Specialisation benefits, draft working paper, Brussels CEA/CRO Forum [2006], Feedback on CEIOPS Consultation Paper 14 Joint submission by the CRO Forum and CEA, 2006 (Download: publications/feedbackonceiopspaper14_resource/ File.ecr?fd=true&dn=croforumandcearesponsetocp14). CEA/GC [2006], Solvency II Glossary, Version 1.0, Brussels/Oxford 2006 (Download: CEIOPS [2006], Statement of the Role of the Lead Supervisor (CEIOPS-DOC-07/06), 2006 (Download: StatementontheRoleoftheLeadSupervisor.pdf). CEIOPS [2006], Recommendation on Independence and Accountability (CEIOPS-DOC-04/06), 2006 (Download: CEIOPS-DOC-04%2006RecommendationOnI&A.pdf). CEIOPS [2006], Advice to the European Commission in the framework of the Solvency II project on insurance undertakings Internal Risk and Capital Assessment requirements, supervisors evaluation procedures and harmonised supervisors powers and tools (CEIOPS-DOC-06/06), 2006 (Download: media/files/consultations/consultationpapers/cp13/ CEIOPS-DOC pdf). CEIOPS [2007], Advice to the European Commission in the Framework of the Solvency II project on Supervisory powers further advice (CEIOPS-DOC-06/07), 2007 (Download: CEIOPS-DOC-06-07AdviceonSupervisoryPowers-FurtherAdvice.pdf).

34 32 List of references CEIOPS [2007], Consultation Paper on the establishment of a Mediation Mechanism between Insurance and Pensions Supervisors (CEIOPS-CP-01/07), Frankfurt 2007 (Download: CRO Forum [2005], A framework for incorporating diversification in the solvency assessment of insurers, 2005 (Download: d=true&dn=diversification_white_paper_ ). Darlap, P./Mayr, B. [2007], Diversification effects in insurance groups A regulatory angle to efficient solvency requirements, in: ZVersWiss, 02/2007, 2007, p FitchRatings [2007], Fitch s approach to rating insurance groups, 2007 GDV [2007], Solvency II and reinsurance Recognition of Risk Mitigation, Discussion Paper, Berlin 2007 (Download: GDV [2007], Impact Assessment Results of the Industry Survey on the Impact on Solvency II, Berlin HMT/FSA [2006], Supervising insurance groups under Solvency II (Download: IAIS [2007], Principles on group wide supervision (Draft, ), Solvency II links: CEA: CRO Forum: CEIOPS: European Commission: GDV:

35 List of abbreviations and glossary 33 List of abbreviations and glossary CEA CEIOPS CRO declaration of group support FSA GC group supervisor Comité Européen des Assurances (= federation of European insurance associations) Committee of European Insurance and Occupational Pensions Supervisors Chief Risk Officer (= board member or manager responsible for the field of risk management) Here understood in the sense of a formal declaration recognized by the supervisory authority granting support if necessary which can be limited in amount and duration. It should be possible for such a declaration to replace own funds at solo level. Financial Services Authority (= British supervisory authority for financial services and financial markets) Groupe Consultatif Actuariel Européen (= European actuarial association) The competent supervisory authority in charge of the supervision of the group (in the country of the parent company where the group is headed), as distinguished from local (national) supervisory authorities of group undertakings (in the countries of the subsidiaries). GDV Gesamtverband der Deutschen Versicherungswirtschaft e. V. (= German Insurance Association) HMT IAIS IGD MCR QIS VaR SCR ZVersWiss HM Treasury (= British Ministry of Finance) International Association of Insurance Supervisors Insurance Group Directive (98/78/EC) Minimum Capital Requirement (the capital level representing the final threshold that triggers ultimate supervisory measures in the event that it is breached) Quantitative Impact Study (of CEIOPS) Value at Risk (a risk measure) Solvency Capital Requirement (the amount of capital to be held by an insurer to meet the Pillar I requirements under the Solvency II regime) Zeitschrift für die gesamte Versicherungswissenschaft (journal) For definitions of (English) terms as regards Solvency II see the Solvency II Glossary (CEA/GC [2006], Solvency II Glossary, Version 1.0).

36 Gesamtverband der Deutschen Versicherungswirtschaft e. V. Wilhelmstraße 43 / 43 G, Berlin Postfach , Berlin Tel. 0 30/ , Fax 0 30/ berlin@gdv.org, Gesamtverband der Deutschen Versicherungswirtschaft e. V. GDV