Analysis of Solvency II Impact on Národná banka Slovenska

Transcription

1 Analysis of Solvency II Impact on Národná banka Slovenska April 2011 Contents Introduction Legal framework Regulation not covered by Solvency II Generally binding legal regulations within the competence of NBS Reporting Supervisory review process 7 3. Approach to countries outside the EEA Approvals and proceedings Approval of internal models Re-issuing of insurance undertakings authorisations Approvals and consents Preventive measures and sanctions Enforcement of principle-based regulation Emergency plans Supervision of groups (colleges of supervisors) Tasks in relation to EIOPA Information technologies Information exchange and public disclosure NBS s activities and tasks in the process of the preparations of insurance market for Solvency II.16 Annex 1: Internal models approval process 17 Annex 2: Internal models documentation...18 Annex 3: List of abbreviations. 20 1

2 Introduction The new system of insurance sector regulation in the EU, Solvency II, which will enter into force in the European Union and the Slovak Republic from 1 January 2013, will have a significant impact on the operations of Národná banka Slovenska (NBS) when performing supervision of the insurance sector. Introduction of new prudential rules for undertakings will imply not only a new regulatory environment and a need of insurance undertakings to comply with it, but it will also affect the activities of NBS, mainly the day-to-day exercise of supervision, scope of international cooperation, competences and principles of supervision. Therefore the new tasks to be fulfilled by NBS in the future have to be duly mapped, as well as the scope of the one-off work related to the implementation of Solvency II itself have to be identified. For this purpose and with a view to proper dealing with these new tasks, NBS worked out an impact analysis of Solvency II on NBS. The analysis was prepared within the NBS s project for Solvency II 1, part Analysis of NBS s preparedness for Solvency II. The analysis is closely interconnected with the Analysis of Insurance Undertakings Preparedness for Solvency II 2, the document of which the NBS Bank Board took note on 16 November 2010 and which was subsequently published on the NBS website. It will be followed by an analysis of changes in legislation in connection with the implementation of the Solvency II Directive and by an analysis of Solvency II quantitative requirements testing (QIS 5). The aim of the analysis is to identify the most important impacts of the new regulation in the insurance sector on the NBS activities. 1. Legal framework Following to the new regulation of the insurance sector in the European Union subject to the Solvency II Directive, one of the priorities of NBS in the area of insurance is its cooperation with the Ministry of Finance of the SR in transposing the Directive. The deadline specified in the Solvency II Directive for its transposition by the Member States was 31 October 2012; however with regard to the adoption of the Omnibus II Directive, the deadline was postponed by 2 months, i.e. to 31 December The task will include: Transposition of the new provisions of the Solvency II Directive; Better transposition of re-codified provisions of the Solvency II Directive; Preparations for regulation of the areas not covered by the Solvency II Directive. As part of the Lamfalussy process of creating legislation in the financial sector, that is also the insurance sector, NBS participates in the drafting of implementing measures (delegated acts and binding technical standards) in connection with the Solvency II Directive. NBS actively participates in the preparations of the regulations and recommendations through its representatives in the EIOPA working groups. 1 In charge: Mgr. Júlia Čillíková, Project team leader: Ing. Peter Paluš, Members of the project team participating in the analysis: Mgr. Ján Barlák, Ing. Andrea Gondová, Mgr. Zuzana Kardošová, JUDr. Katarína Krajčovičová, Mgr. Ľudovít Kútnik, Mgr. Stacho Mudrák and Mgr. Lucia Štefunková, other NBS employees participating in the analysis: Ing. Hana Masaryková. 2 tnost_ii.pdf 2

3 A specific task within the implementation of the Solvency II Directive will be integrating the main objectives and tasks of NBS resulting from the Act on NBS, the Act on supervision and specific legal acts with objectives applicable to NBS as a supervisory authority on grounds of the Solvency II Directive. Pursuant to the Act on NBS, the main objective of NBS as a central bank is price stability. The crucial goal of the NBS in the process of carrying out its financial market supervisory tasks is to foster the stability of the financial system as a whole, as well as to promote the safe and sound financial market in order to maintain its credibility, protection of customers and observance of competition rules. The Solvency II Directive, in contrast with the above goals stipulated by the existing legislation, stresses the protection of customers, and therefore it lays down the protection of policy holders and beneficiaries as the main objective of the supervision. In relation to the issue of the customer protection, as part of the implementation of the Solvency II Directive, it will be necessary to seriously consider what changes could be made to the existing legislation in order to fulfil the main objective of supervision that is defined in the Directive, since in comparison with other sectors, prudential supervision of the insurance sector overlaps with the customer protection. Moreover, the Solvency II Directive extends the powers of supervisory authority by enabling the supervisory authorities of the Member States to impose on the supervised entities not only measures aimed at rectifying and correcting the identified deficiencies, but also preventive measures aimed at compliance with legal regulations. Pursuant to the Directive, the supervisory authorities have the power to adopt any measures with regard not only to the supervised entities, but also with regard to administrative, management or supervisory bodies of insurance or reinsurance undertakings 3. In addition to the power to require recalculation of the Solvency Capital Requirement (SCR), the Solvency II Directive authorizes supervisory authorities to use quantitative tools to assess the overall financial standing of insurance undertakings, as well as to request from insurance and reinsurance undertakings to carry out stress testing. 1.1 Regulation not covered by Solvency II The Solvency II Directive represents a harmonised regulation throughout the EU, although in certain areas it allows for legal regulation by individual Member States. In Slovakia, it concerns mainly the provision on responsible actuaries, levy of a part of insurance premiums, deficit of statutory insurance, collection of accounting data (see Chapter 1.3 Reporting), insurance undertakings outside the scope of the Solvency II Directive and external audit of regulatory reporting. Responsible actuary Under the Solvency II Directive, insurance undertakings are required to provide for an actuarial function which is one of the key functions within the insurance undertakings system of governance. In line with the Solvency II Directive, the actuarial function should be performed by fit and proper persons with appropriate knowledge and experience of actuarial and financial mathematics. In relation to the established actuarial function, the position of responsible actuary will loose its justification and, in our opinion, the concept of responsible actuary should not be 3 The term insurance undertaking will mean both insurance and reinsurance undertaking in this document. 3

4 introduced in the new act. Thus the special actuary examination organised by NBS will loose justification as well. Transfer of a part of insurance premiums In accordance with Article 33 of the Insurance Act, an insurance company, insurance company from another Member State, or branch of a foreign insurance company is obliged to transfer 8% of the total premiums from compulsory contractual motor third party liability insurance received during the previous calendar year in the Slovak Republic to a special account maintained by the Ministry of Interior of the Slovak Republic, and to do so before the end of February of the respective year. This system is expected to continue in the future. Deficit of statutory insurance Insurance undertakings providing compulsory contractual motor third-party liability insurance are obliged to transfer funds to Slovenská kancelária poisťovateľov (National Bureau), if funds of the National Bureau are not sufficient to reimburse its liabilities. The insurance undertakings participate in the liabilities of the National Bureau according to the percentage of their respective shares in the insurance market. With regard to the unsettled liabilities arising from mandatory motor third-party liability insurance, the National Bureau has incurred a deficit. The deficit of the National Bureau is currently covered by a claim against the member insurance undertakings. For that purpose, the insurance undertakings create technical provisions defined by the Insurance Act. As the Solvency II Directive represents a maximum harmonisation in the area of technical provisions, in our opinion a specific technical provision cannot be created to cover the liabilities of the National Bureau arising from the mandatory insurance or compulsory contractual motor vehicle third party liability insurance 4. Insurance undertakings outside the scope of the Solvency II Directive The Solvency II Directive does not apply to small insurance undertakings 5 and it is up to the Member State how these entities will be regulated. In our opinion, these entities should be regulated in accordance with the valid Insurance Act, after recasting certain provisions. Audit of statements Positive experience of the Member States, where audit of statements for the supervision is a common practice, and the necessity to ensure accuracy and completeness of the reported data within the risk-oriented supervision suggest the need to audit the key statements of insurance undertakings after the implementation of Solvency II (in particular the statements referring to SCR, MCR, own funds and valuation). 1.2 Generally binding legal regulations within the competence of NBS 4 Pursuant to the Solvency II Directive, the best estimate of technical provisions is calculated on the basis of expected future cash-flows. Transfer to the Office is a transfer included in the best estimate valuation in line with the QIS 5 methodology. 5 Article 4 of the Solvency II Directive. 4

5 The following decrees of Národná banka Slovenska issued on the basis of the authorising provisions of the valid Insurance Act will be justified also in the new legislation: Decree No 8/2010 of 11 May 2010 stipulating elements of an application for granting prior approval of Národná banka Slovenska pursuant to Article 45 (1) of Act No. 8/2008 Coll. on Insurance and on amendments to certain laws, as amended (Notification No 221/2010 Coll.) 6 ; Decree No 14/2008 of 24 June 2008 laying down the method for demonstrating compliance with conditions for the granting of authorisation to conduct insurance business or reinsurance business (Notification No 250/2008 Coll.); Decree No 4/2010 of 9 March 2010 stipulating the template for disclosure of insurance policy terms (Notification No 87/2010 Coll.); Decree No 18/2010 of 28 September 2010 on the average level of expenses related to financial intermediation in life insurance (Notification No 390/2010 Coll.); Decree No 3/2010 of 16 February 2010 on the submitting of reports by an insurance undertaking from other Member State for statistical purposes (Notification No 59/2010 Coll.); Decree No 4/2008 of 1 April 2008 on the submission of statements, reports and other disclosures by insurance companies and branches of foreign insurance companies (Notification No 121/2008 Coll.); Decree No 6/2008 of 15 April 2008 on the submitting of statements, reports, summaries and other disclosures by reinsurance companies and branches of foreign reinsurance companies (Notification No 143/2008 Coll.); Decree No 27/2008 of 16 December 2008 on the submitting of reports by insurance companies and branches of foreign insurance companies for statistical purposes and amending Decree No 4/2008 of Národná banka Slovenska on the submission of statements, reports and other disclosures by insurance companies and branches of foreign insurance companies (Notification No 250/2008 Coll.). 1.3 Reporting Structure, content, definitions of reported items, form, method and frequency of reporting will be harmonised within the EU. Reporting will consist of: Report on solvency and financial condition; Regular supervisory report (with a description and an explanation of material changes in the operations of insurance undertakings, in the system of governance, in risk profile, in valuation for the solvency purposes and in capital management, including the impact of these changes); 6 However, changes resulting from Solvency II will have to be taken into account. 5

6 Annual and quarterly quantitative reports. In addition to the above, the insurance undertakings will have further reporting obligations, for example the obligation to inform whether all persons that perform key functions are fit and proper. So far, the following areas have been identified where reports will have to be prepared and submitted at local level: Collection of accounting data (balance sheet in particular) Pursuant to Article 176(1) of the Act on bankruptcy, a petition for bankruptcy order in the case of an insurance undertaking may be filed only by the competent supervisory authority (NBS) or the forced administrator upon prior consent of the respective supervisory authority (NBS), where the forced administrator has been appointed under a specific regulation, whereas the legal title for the bankruptcy is the fact, that the debtor is in economic difficulties. In order to assess whether such situation occurred, it is necessary to ensure that NBS is provided with the data on financial position (the balance sheet) of the insurance or reinsurance undertaking. Branches In order to have a complete view of the insurance market in the Slovak Republic, and in particular to assess the financial stability and for statistical purposes, it is necessary to know the basic financial indicators concerning activities of the branches of insurance undertakings providing insurance services on the basis of a single passport. Collecting of data for statistical purposes 2. Supervisory review process The Solvency II Directive changes the regulatory requirements for insurance undertakings as well as the method of supervision. The basic principle of supervision is the prospective and risk-oriented approach to the operations of insurance undertakings and their financial stability. The change in the regulation from rules to principles will also bring about a change in the supervision from the monitoring of compliance with the rules to the supervision of compliance with the regulation based on principles. The new approach to the supervision of compliance with the regulation based on principles is feasible only under the condition of an efficient communication between the supervisory authority and the supervised entities. The dialogue between NBS and the supervised entities and mutual trust may help the insurance undertakings to properly adjust their procedures and methods of valuation and estimation of their capital requirements, including the assumptions applied, and to avoid potential corrective measures. The objective of the new regulation under the Solvency II includes not only consistent business rules, but also harmonised tools and methods of supervision, all of which will be covered by EIOPA guidelines and recommendations. Assessment of financial position of an insurance undertaking 6

7 The change in the supervision of the financial position of insurance undertakings directly relates to the change in valuation. Up to now, supervision has consisted mainly of reviewing technical provisions compliance with the requirements of the Insurance Act, compliance of valuation of assets covering technical provisions with regulatory requirements, and the required and available solvency margin. Following the implementation of Solvency II, the assessment will be harmonised with the new valuation requirements and extended by processes of governance and valuation of other balance sheet items. The monitoring of financial health of insurance undertakings will be aimed at risks in accordance with the new capital requirements (SCR and MCR), including their sufficient coverage by own funds. In valuation, NBS will verify adequacy of the system of internal valuation processes, including: Documentation (e.g., description and definition of tasks and responsibilities of respective individuals, description of valuation models and sources of information used); Adequacy and reliability of estimates; Frequency and method of valuation reviews with regard to the market developments. Moreover, NBS will be able to request from an insurance undertaking to have an independent external valuation done. If an insurance undertaking applies the mark-to-model valuation, NBS will also review the following: Information which the insurance undertaking is obliged to provide to NBS; Internal control processes covering an independent review and verification of valuation on a regular basis. In the case of technical provisions valuation, NBS will review: Internal processes and procedures for collecting, storing and validation of data (e.g., qualitative and quantitative standards for data, compilation, evaluation and frequency of updating); Internal processes of valuation, documentation and validation of technical provisions; Consistency of the data usage; Assumptions concerning future management actions and their compliance with the internal plan; Methods used, assumptions and appropriateness of contract grouping into homogenous risk groups in the case of their use for calculating technical provisions. The insurance undertaking will be obliged to demonstrate, upon request from NBS, the appropriateness of the level of their technical provisions, as well as the applicability and relevance of the methods applied, and the adequacy of the underlying statistical data used. Assessment of the system of governance The review of the governance system will be extended to include an assessment of newlyestablished key functions (at least the risk management, compliance, internal audit and 7

8 actuarial functions) as well as the assessment of the management remuneration system of an insurance undertaking. In the assessment of whether key persons are fit and proper, NBS will verify their professional qualifications, knowledge and experience, compliance with relevant professional standards in the respective area and sector, their good reputation and integrity. Certain items of the governance system are already partially required by the Insurance Act (for example the requirement to establish internal audit department within the insurance undertaking s organisational structure) and supervised by NBS. However, NBS will extend the supervision of the internal control system by the control of appropriateness of approved written policies and their implementation in practice. Own Risk and Solvency Assessment (ORSA) An insurance undertaking will perform its own risk and solvency assessment (ORSA) as part of its governance system, specifically the risk management system. In the supervision of ORSA, NBS will focus on the assessment of the appropriateness of the methods and procedures used. Separation of life and non-life insurance management NBS shall supervise the separation of life and non-life insurance, and this activity is required also by the Solvency II Directive. The separated management will relate to the separated calculation of the minimum capital requirement with regard to life insurance (MCRlife) and the minimum capital requirement with regard to non-life insurance (MCRnon-life). Moreover, the insurance undertaking s own funds will have to be separated. Stress testing The supervisory authority may require stress testing as part of the supervisory process, in order to assess the capability of the insurance undertaking to face possible adverse events or future changes in economic conditions. Outsourcing The Solvency II Directive requires that insurance undertakings notify, in a timely manner, the supervisory authorities prior to the outsourcing of critical or important functions to other persons/entities, thus reducing the scope of reported information, as the reporting obligation is not limited to these functions only. Where the functions or activities are outsourced, NBS will have access to all relevant data relating to these activities, regardless of whether the provider is a regulated or unregulated entity. NBS will have the right to conduct on-site inspections at the third-party service provider. In addition to the previously reviewed formalities of contracts between an insurance undertaking and a provider, NBS will be inspecting the following: Suitability/fit and proper requirements of the provider selected; 8

9 Approved written policies for outsourcing and their updating; Ability of the insurance undertaking to influence activities or functions performed by third parties (in particular, when the activities or functions are performed within a group); Regular monitoring of outsourcing and assessment of its effects on the activities of the insurance undertaking; Reviewing the suitability of outsourcing of a given activity or function. Assessment and evaluation of public disclosure and reporting As in the past, NBS will verify the appropriateness of procedures applied in submitting information, but the scope of work will increase with the increasing amount of information submitted. The reporting will require higher specification of persons who review reporting procedures according to their specific type, for example actuarial assumptions should be assessed by a specialist in this area. Moreover, the insurance undertakings will be obliged to publicly disclose a lot of information about themselves (e.g., system of governance, shareholder structure, risk profile, financial data) and NBS will have a new duty to verify such information as part of supervisory activities (regular updating and verification of data accuracy). 3. Approach to countries outside the EEA The calculation of the group solvency capital requirement will take account of the participation of insurance undertakings in other insurance undertakings from third countries, while considering the fact whether the third-country solvency regime is equivalent to Solvency II. In accordance with the Solvency II Directive, the verification of whether the third-country regime is at least equivalent 7 is carried out by the group supervisor that consults the other supervisory authorities concerned and EIOPA before taking a decision. NBS will acquire new tasks in this respect, which are not performed at present. The equivalence of solvency regimes will be assessed in a similar way in the case of reinsurance undertakings from third countries, to which the insurance undertakings cede part of insurance risks. In the first round, the European Commission requires from EIOPA (and the Member States) to assess Bermudas, Switzerland and Japan (so far covering only reinsurance). It has been proposed that the USA will be assessed in a special way (EIOPA suggested to sign a Memorandum of Understanding). 4. Approvals and proceedings 4.1 Approval of internal models Internal models or partial internal models are an alternative to the standard approach of the Solvency II capital requirement calculation. This approach includes identification, measurement and management of main risks to which the insurance undertakings are exposed and enables a specific calibration according to the risk profile of insurance undertakings, including the modelling of individual risk factor interdependencies. The use of a partial model 7 Article 227 of the Solvency II Directive. 9

10 enables to merge the outputs of the standard formula with those of the internal model using correlation coefficients. Thus the insurance undertakings which use the internal model are likely to monitor risks more efficiently and react in a timely manner to the existing situation; this may also help deal successfully with a number of effects that are difficult to quantify using the standard formula. The procedure to be used in applying for the internal model application at individual or group levels is described in detail in Annex 1: Internal models approval procedure. The scope of basic documentation is set out in Annex 2: Internal models documentation. The insurance undertakings internal model validation will require a full participation of experts not only in mathematics, but also in methodology, actuarial methods, operational risk, economy, accounting, law, supervision, or other areas. The number of experts involved will also depend on the complexity of the model (e.g., number of risk models, partial vs. full internal model). According to the NBS findings 8, nine insurance undertakings plan to use the internal model for the Solvency II capital requirement calculation. 4.2 Re-issuing of insurance undertakings authorisations In the area of the authorisation proceedings, it is necessary to transpose certain provisions of the Directive which have been taken from the Directive on life insurance, or from the Directive on non-life insurance. Among these provisions of the Directive on life insurance are those governing the life insurance classes. A detailed transposition of these provisions requires a change in Annex 1 to the Insurance Act, as well as the subsequent re-issuing of insurance undertakings authorisations allowing them to conduct life insurance activities within the scope of classes listed in Part A of Annex 1 Classification of insurance classes according to insurance types to the Insurance Act. It would also be useful to eliminate minor deficiencies, which occurred in transposing the classes of non-life insurance to Annex 1 to the Insurance Act. 4.3 Approvals and consents Národná banka Slovenska will be approving the following: Own funds (ancillary own funds, classification of own-fund items into tiers, where the own-fund items are not included in the list); Parameters specific to the undertaking concerned when calculating the life, non-life and health underwriting risk modules (USP); Full and partial internal models; Any subsequent more significant change in the internal model; Changes in the policy for changing the internal models; Reversion to the standard formula; Extension of the recovery period; 8 The Analysis of Insurance Undertakings Preparedness for Solvency II, Národná banka Slovenska, October 2010, olventnost_ii.pdf 10

11 Duration dampener for equity risk; Failure to publicly disclose certain information in the report on solvency and financial condition; Advantage for the insurance undertakings with authorisation granted in more than one Member State; Short-term realistic finance scheme in the event that the undertaking does not comply with the Minimum Capital Requirement. NBS as group supervisor will give other consents, for example consent for establishment and abolition of financial relations within a group, submission of only one report on group solvency and financial condition by an insurance undertaking from the group, inclusion of own funds of an intermediate insurance holding company, if held by an insurance undertaking, in the calculation of the group solvency. Granting of the following approvals and consents is expected to expire: Entry in the register of actuaries; Prior consent to reduce share capital of insurance or reinsurance undertakings, on grounds other than the loss off-setting; Prior consent to elect a member of the Board of Directors, or to appoint a proctor of an insurance undertaking or reinsurance undertaking, or to appoint the head, or proctor, of a branch of a foreign insurance undertaking or foreign reinsurance undertaking; Prior consent to merger or division of an insurance or reinsurance undertaking; Prior consent to surrender the authorisation to pursue the business of insurance or reinsurance; Prior consent to sell of an insurance or reinsurance undertaking, a branch of a foreign insurance undertaking, or a branch of a foreign reinsurance undertaking, or part thereof; Prior consent to include items under Article 34(10) and Article 94(4) of the Insurance Act in the actual solvency margin of an insurance undertaking or branch of a foreign insurance undertaking, or of a reinsurance undertaking or branch of a foreign reinsurance undertaking; Prior consent to an insurance or reinsurance undertaking, a branch of a foreign insurance undertaking, or a branch of a foreign reinsurance undertaking to perform financial intermediation on behalf of financial institutions in accordance with separate regulations; Prior consent to early loan repayment under Article 34(7) of the Insurance Act; Prior consent to modify a loan under Article 34(7) of the Insurance Act; Prior consent to repay securities under Article 34(9) of the Insurance Act, with no maturity stipulated; Prior consent to allocate additional technical provisions under Article 23(3) of the Insurance Act. It will also be necessary to review the performance of reinsurance activities by insurance undertakings as to whether the mechanism applied up to now under the Insurance Act requiring an authorisation, is in accordance with the Community law. 4.4 Preventive measures and sanctions 11

12 In accordance with the new regulation, NBS will have the power to impose the following preventive measures: Remedy of weaknesses or deficiencies identified in the supervisory review process (e.g., in the system of governance); measures by the supervisory authority in order to prevent exercise in its territory of activities of an insurance undertaking from another Member State, which had its authorisation revoked or expired in its home country; New sanctions under the Solvency II Directive shall be as follows: A capital add-on; Imposition of a duty upon insurance undertakings to notify (based on a decision stating the reasons) an estimate of the Solvency Capital Requirement determined in accordance with the standard formula, after having received approval to use an internal model; Imposition of reversion to the standard formula; Imposition to use the USP, the internal model or partial internal model, if the standard formula is not suitable; Imposition to recalculate the Solvency Capital Requirement in the case the risk profile has altered significantly since the date on which the Solvency Capital Requirement was last reported; Imposition to use the amounts derived from the SCR calculated according to the standard formula for determining the upper and lower limits of the MCR (by 31 October 2014); Imposition to publicly disclose non-compliance with the MCR and its amount, with an explanation of its origin and consequences, as well as any remedial measures taken; Increase in technical provisions; Measures in respect of the Board of Directors and the Supervisory Board s members; Measures in respect of the Board of Directors members, senior management staff, natural persons or legal entities who acquired a qualifying holding if they act against the sound and prudent management of an insurance undertaking; Measures in the case of insufficient amount of basic own funds in life insurance or non-life insurance activities for composite insurance undertakings; Measures aimed at re-establishment (replenishment) of eligible own funds in the case of non-compliance with the SCR; Withdrawal of an authorisation granted to an insurance undertaking in the event that it does not comply with the Minimum Capital Requirement and the supervisory authority considers that the finance scheme submitted is manifestly inadequate or the undertaking concerned fails to comply with the approved scheme within three months from the observation of non-compliance with the Minimum Capital Requirement; Measures as part of group supervision. The sanctions which will not cease to exist, but are related to the new conditions, include in particular the recovery plan, prohibition of free disposal of assets and withdrawal of authorisation. The following sanctions will probably cease to exist: 12

13 Imposition upon insurance or reinsurance undertakings, branches of foreign insurance or reinsurance undertakings of a measure to make corrections in accounting or any other records; Imposition upon insurance or reinsurance undertakings of a measure to post losses after the posting of losses against accumulated profits from previous years and funds generated from profits. 4.5 Enforcement of regulation based on principles Following the change in regulation from the regulation based on detailed rules to the regulation which is based on compliance with principles, the regulation enforcement system (sanction system) will also be changed. This means that it will be more difficult for the supervisory authority to assess whether, in a particular case, the supervised entity has acted in line with legal regulations or not, and then accordingly, choose the appropriate type of sanction to eliminate the irregular situation. 5. Emergency plans The aim of an emergency plan is to determine activities that the supervisory authorities must perform if a crisis situation is identified. It comprises in particular the definition of a crisis situation and main risks to which the insurance group is exposed, determination of communication means, or a communication tool, between the involved parties, scope of information exchanged between the involved parties, schedule, specification of the supervisor s measures in order to prevent aggravation of the crisis situation. The role of NBS will consist in regular monitoring of the internal and external factors, which could have effect on the operations of an insurance undertaking and threaten its stability. The emergency plan anticipates a continuous access to information and to the communication tools of the members of the college of supervisors, namely also on public holidays Supervision of groups (colleges of supervisors) In Slovakia, 20 insurance undertakings pursue insurance activities, 18 of which are part of an insurance group and are subject to group supervision. NBS is not the lead supervisor in any of the cases; however, it acts as a member of a college of supervisors in 11 groups 10. In accordance with the prepared implementing measures based on the Solvency II Directive, members of a college of supervisors may become also those supervisors in the territory of which an insurance group exerts activities through a branch, if it is a branch with a significant influence in the insurance market. The tasks resulting for NBS as a member of a college of supervisors are as follows: Identification of risk concentration at an individual level (as well as group level), monitoring of significant risks through regular reporting, and providing immediate information to the lead supervisor in the case an increased risk is identified; 9 NBS should designate individuals who will be available for communication 24 hours a day. 10 Some insurance groups operate in Slovakia through several insurance undertakings. 13

14 Identification of intra-group transactions and their monitoring through regular reporting, and providing immediate information to the lead supervisor when a significant intra-group transaction is identified; Exchange of data and information between individual members of the college of supervisors on a quarterly basis (2 reports), on an annual basis (7 reports), or with a different periodicity and scope depending on the requirements of the lead supervisor, within one week of the date of receiving relevant data and information by the supervisory authority; Consultation activity concerning the performance of group supervision, calculation of capital solvency requirement at group level, risk concentration, intra-group transactions, etc.; Joint on-site inspections, or targeted on-site inspections within the whole group; Meetings of members of a college of supervisors at least once a year. 7. Tasks in relation to EIOPA NBS participates in the activities of EIOPA mainly through the cooperation in preparing guidelines, reports and recommendations issued by EIOPA (e.g., standard formula updates, assessment of periods with reduced liquidity in financial markets) and through the cooperation in the regular verification of compliance of supervisors activities with the European regulation (Peer review), performed as part of level 4 of the Lamfalussy process. Moreover, NBS will have broad notification obligations in respect of EIOPA, which are described in more detail in Chapter 9 Exchange and public disclosure of information. 8. Information technologies At European level (EIOPA), the IT system of reporting is at present still under preparation and many of its technical details have not been specified yet. NBS regularly attends meetings of the working group dealing with the proposal. In line with the model under preparation, NBS will be obliged to collect harmonised statements at the EU level in a predefined format (XML 11 or XBRL 12 ), review them and store the correct ones in the central database at EIOPA 13. Since NBS uses its own format for the collection of data from the supervised entities, it will be necessary to modify NBS s information systems in order to collect the data in the harmonised format, or to develop a specific information system for that purpose. Both approaches are being analysed but it will be possible to draw specific requirements for the information system only after EIOPA makes the technical specification available to the supervisory authorities (scheduled for the end of 2011). 9. Exchange and public disclosure of information 11 XML universal language used for the exchange of data between systems (simplified version of HTML). When exchanging data in this language, it is necessary to predefine the exact structure of its elements; this process is very time-consuming in the case of complicated structures. The language itself is very simple, and therefore very extensively used and supported. 12 XBRL an extension of XML adapted for the exchange of financial information. It has many predefined structures which are used in financial reporting and can work with many currencies in several languages, but it is not as broadly supported as XML. Most organisations using it bought its implementation from external commercial companies. 13 It will be necessary to identify in more detail implications of the model being prepared for the reviews of statements in NBS, which is carried out by the statistics department and the supervision unit. 14

15 NBS will have new duties, pertaining to the exchange of information mainly in the following situations: Group supervision, or colleges of supervisors (report on solvency and financial condition, regular supervisory report, quarterly and annual quantitative statements, conclusions of the supervision based on the performed review process); With supervisors in the third countries, if an insurance undertaking holds an participation in another insurance undertaking in a country outside the EEA; With supervisors in the third countries in assessing the equivalency of reinsurance undertakings solvency regime; Requirements from EIOPA, for example capital add-on, quantitative and qualitative data with view to update the correlation parameters, parameters, calibration and assumptions of the standard formula. In addition to the new duties, NBS will continue to share the quantitative data on insurance operations of the supervised entities in other countries of the EEA (when providing services on the basis of a single passport). Public disclosure NBS will have a new duty to publicly disclose: Objectives, functions and main supervisory tasks; General description of supervisory review process and the applied monitoring tools which indicate deteriorating financial position of insurance undertakings; Stress scenarios (in the case of stress testing); Certain data relating to the internal models of insurance undertakings; Aggregated financial statistical data (NBS has already publicly disclosed on its website, of its own initiative, certain insurance market indicators). Moreover, NBS will be obliged to translate the publicly disclosed information into another language used in the EU (the English language). 10. NBS activities and tasks as part of the preparations of insurance market for Solvency II The NBS key tasks in the implementation of the new insurance-sector regulation include the provision of information to all involved parties to allow for their due and proper preparation. NBS communicates very actively with all involved parties, utilising all available communication channels, for example personal meetings, website, conferences, workshops, seminars, etc. Specific examples of NBS activities: NBS management meetings with representatives of the supervised financial market entities (insurance undertakings) twice a year; Quantitative impact studies (QIS 5, QIS 4, QIS 3); 15

16 NBS website 14 ; Analysis of Insurance Undertakings Preparedness for Solvency II 15 ; Working group on the transposition of the Solvency II Directive, established by the Ministry of Finance of the SR, whose members are representatives from the Ministry of Finance of the SR, NBS and the Slovak Association of Insurance Undertakings; Meeting and exchange of experience with Česká národní banka ntnost_ii.pdf 16

17 Annex 1: Internal models approval process Scheme 1: Individual level Poisťovňa Insurance undertaking Regulátor Regulator Žiadosť Application Predaplikačný process Pre-application process 30 dní 30 days 6 mesiacov 6 months Potvrdenie úplnosti žiadosti Confirmation of a complete application Schválenie/zamietnutie Approval/Rejection Note: The pre-application process is completed by submitting to the Regulator the application for approval of the internal model. If the application is complete, the Regulator shall decide on its approval (or rejection) within 6 months of the date of complete application. Scheme 2: Group level Poisťovňa Insurance undertaking Regulátor Regulator EIOPA EIOPA Host Home Žiadosť Application Potvrdenie úplnosti žiadosti Confirmation of a complete application Predaplikačný process Pre-application process 45 dní 45 days 6 mesiacov 6 months 2 mesiace 2 months 3 týždne 3 weeks Postúpenie žiadosti Transfer of application Schválenie/zamietnutie Approval/Rejection Konzultácie Consultations Note: The pre-application process is completed by submitting the application to the group supervisor for approval of the internal model. The group supervisor shall immediately send the application to other supervisory authorities concerned. The Group supervisor shall decide, within 45 days of the day of application filing, whether the application is complete. If so, the group supervisor must decide on its approval (or rejection) within 6 months of the date of complete application. In the cases when EIOPA is being consulted within the 6-months period, the period may be extended by additional two months. If EIOPA has not been consulted and a joint decision of the supervisory authorities concerned has not been taken within six months of the date of receipt of the complete application by the group supervisor, the group supervisor shall request EIOPA to deliver within two months its advice to all the supervisory authorities concerned. The group supervisor shall then take a decision within three weeks of the receipt of that advice, taking full account thereof. 17

18 Annex 2: Internal models documentation 1. Pre-application process The documentation standards of Article 125 of the Solvency II Directive form an important part in the application of the internal model for the calculation of capital requirement. In order to initiate the pre-application process it is not necessary that the documentation be complete and with all formalities. However, it is necessary that progress in the internal model documentation be demonstrated, as set out in Article 125 of the Solvency II Directive. 1.1 Internal model documentation index The insurance undertaking shall provide a complete list of the internal model documentation. 1.2 Internal model scope and architecture The insurance undertaking shall provide a brief overview of the documents (at least the working papers) dealing with the following: (a) Scope of the internal model and related legal entities, risk modules or types of insurance; (b) Details of the model, for example data sources, data flows and their storage method; (c) Approaches and methods applied in the modelling of various risk modules, e.g., stochastic model, stress testing, replication techniques; (d) Explanation of aggregation techniques combining partial outputs of specific risk modules and the suggested methods for inclusion of legal entities in the determination of group solvency (accounting consolidation-based method or deduction and aggregation method); (e) Deficiencies and weaknesses of the model and conditions under which the model does not work efficiently. 1.3 Documentation process The insurance undertaking shall provide a brief overview of the documentation process itself, including: (a) Approach chosen to produce and update the documentation; (b) Frequency of reviewing and updating the documentation; (c) Individual and group responsibilities for updating the documentation; (d) Explanation of the regular documentation monitoring processes (changes in the model, etc.); (e) The steps involved in documenting all significant changes of the internal model (referred to in Article 115 of the Solvency II Directive). 1.4 Compliance with Articles 120 to 124 of the Solvency II Directive The insurance undertaking shall provide a brief description of how the current status of documentation reflects the requirements laid down in the following Articles: 18

19 (a) Article 120 Use test (b) Article 121 Statistical quality standards (c) Article 122 Calibration standards (d) Article 123 Profit and loss attribution (e) Article 124 Validation standards. 1.5 External suppliers The insurance undertaking shall provide a brief overview of the parts of the model supplied by external suppliers: (a) Parts of the model supplied by external suppliers; (b) Parts of the model produced with participation of a third party; (c) Clear and accurate identification and specification of the third party s participation in the development of the model; (d) Any compliance problems of the insurance undertaking with the documentation standards due to the use of external models or data. 2. Final application Before NBS assesses the insurance undertaking s application for the use of internal model, the insurance undertaking must have delivered all the documents referred to in the pre-application process in due and complete form. 3. Language The supervisory authorities of the host Member State may require the information, which they are authorised to request with regard to the activities of insurance undertakings operating in the territory of this Member State, to be supplied to them in the official language or languages of this State. If agreed between the supervisory authorities and the insurance undertaking, a different language may also be used. 19

20 Annex 3: List of Abbreviations EEA EIOPA EU National Bureau MCR NBS QIS SCR Omnibus II Directive Solvency II Directive Life insurance Directive SR USP Act on supervision Act on bankruptcy Act on the NBS Insurance Act European Economic Area European Insurance and Occupational Pensions Authority European Union; Slovenská kancelária poisťovateľov Minimum capital requirement Národná banka Slovenska Quantitative impact study Solvency capital requirement Directive of the European Parliament and of the Council amending Directives 2003/71/EC and 2009/138/EC in respect of the powers of the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority (Omnibus II) Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) Directive 2002/83/EC of the European Parliament and of the Council concerning life assurance Slovak Republic Undertaking specific parameters Act No. 747/2004 Coll. on Supervision of the Financial Market and on amendments to certain acts, as amended Act No. 7/2005 Coll. on bankruptcy and restructuring and on the amendment of certain acts, as amended Act No. 566/1992 Coll. on the National Bank of Slovakia, as amended Act No. 8/2008 Coll. on insurance and on amendments to certain acts, as amended 20