Solvency II and Pension Funds. Instituto de seguros de Portugal 25 Oct Lisbon

Transcription

1 Solvency II and Pension Funds Instituto de seguros de Portugal 25 Oct Lisbon

2 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

3 CEA s Member Associations 33 national member associations: 27 EU Member States + 6 Non-EU Markets Switzerland, Iceland, Norway, Turkey, Liechtenstein, Croatia 3 Observers Source CEA Russia AISAM Ukraine

4 About CEA Brussels-based, founded in 1953 Active at European and International level 33 member bodies - national insurance associations CEA represents all types of insurance and reinsurance undertakings pan-european companies, monoliners, mutuals & SMEs CEA represents 94% of total European insurance premiums

5 A successful Solvency II project requires co-ordination of all stakeholders Stakeholders in the drafting process of the Solvency II Directive European Parliament Council of Ministers European Commission (DG internal market) CEA Insurance Industry stakeholders CEA National Insurance Associations Insurance Companies EIOPC AISAM/ACME ICISA CEIOPS CFO Forum CRO Forum Groupe Consultatif Other stakeholders

6 CEA main contribution since the beginning of the Solvency II process MAIN CONTRIBUTION Communication and consensusbuilding Answers and comments to Calls for Advice, various position papers Elaboration of Total Balance Sheet Approach Position papers and working papers Briefing Notes QISs and the European Standard Approach Release of working documents on ESA (spreadsheet and guidance) Solid basis for dialogue and negotiation with all stakeholders Guidance on QISs Group Case Studies Ensures a good understanding of EC proposal on Groups CEA overall welcomes the Solvency II Directive Proposal Ref. today s presentation CEIOPS Quantitative Impact Study II Consideration of a risk based economic/total balance sheet approach Inclusion of Cost of Capital (incl. development of methodology) Very close to European Standard Approach Commission s Impact Assessment CEA approached by Commission to deliver input for impact assessment CEA s answer: launch of European-wide survey in view of delivering a common industry feedback

7 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

8 Why a new Solvency framework? Solvency regimes need to evolve to ensure appropriate consumer protection and efficient capital allocation Solvency I disadvantages: Rules can conflict with good risk management Capital is not adequately directed to risks A lack of harmonisation across the EU Some member states use more sophisticated approaches e.g. UK ICA, Danish traffic light system, etc Europe is ready for a better and more appropriate risk based solvency regime

9 Objectives of Solvency II The Industry shares the objectives set out for Solvency II Deepen integration of the EU insurance market Improve protection of policyholders and beneficiaries A major step forward from Solvency I supported by the new economic perspective Improve international competitiveness of EU insurers Promote better regulation

10 What is an economic risk based approach? The industry believes that these objectives can only be achieved through a risk based economic approach assets and liabilities at market-consistent values full recognition of diversification and risk mitigation of all forms (reinsurance, securitization etc.) aligning capital requirements with the underlying risks of an insurance company developing a proportionate, risk-based approach to supervision with appropriate treatment both for small companies and large, cross border groups maintaining strong, effective policyholder protection while achieving optimal capital allocation

11 From Solvency I to Solvency II: Towards a coherent economic approach Increasingly accurate True risk profile SCR* - Internal Models SCR* - Standard Approach Rating agency models Current Solvency I rules Range of solvency measures Future Consistent view on solvency measures across all parties Discussions with supervisors and rating agencies focus on accuracy of internal model and quality of risk management Current situation Multiple ways of assessing solvency which are not always consistent and can even contradict each other Not aligned with best practice internal risk management *Solvency Capital Requirements (SCR) 11

12 Solvency II 3 Pillar Approach Measurement of Assets, Liabilities and Capital Eligible capital Technical provisions Capital requirements Asset Liability valuation etc Supervisory Review Process Internal control Risk management Corporate governance Stress testing Continuity testing Market Discipline Current disclosure requirement National GAAP National regulatory reporting Future disclosure requirements IFRS Phase 2 Private disclosure to the regulator Align risk, capital and value 12

13 Solvency II Framework Key Components Internal Model Standard Approach Level of SCR Ladder of intervention Level of MCR Solvency Capital Requirement (SCR) Target Capital that an entity should aim to meet under normal operating conditions Dropping below SCR does not necessarily require immediate supervisory intervention Ladder of Intervention Solvency II should be designed to guarantee an appropriate ladder of intervention if the available capital falls below SCR Market - consistent Value of Liabilities (i.e. including MVM*) Minimum Capital Requirement (MCR) Reflects a level of capital below which ultimate supervisory action should be triggered Is set in excess of technical provisions Market Consistent Value of Liabilities Is sufficient to cover policyholder obligations *Market-value margin for unhedgeable risks

14 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

15 CEA welcomes the Solvency II Directive Proposal The underlying economic approach is strongly supported Replacing Solvency I regulation which is too simplistic and does not adequately allocate the capital to where the risks are. Eliminating regulatory arbitrage. Strong support for the use of internal models Encourage companies to develop more sophisticated models to determine their capital requirements; These so-called internal and partial models are being approved by supervisors. A solvency system that will evolve and continue to be appropriate in the future The principles based approach, together with the underlying risk based economic methodology, means that the Solvency II regime will be able to adapt and evolve in the future as economic conditions change and new risks and products emerge. The CEA strongly supports the flexibility and adaptability inherent in the Framework Directive.

16 CEA welcomes the Solvency II Directive Proposal Much increased harmonisation across the EU Proportionality The CEA supports the implementing measures to be proportionate for: the technical provisions; SCR; and supervisory powers. CEA would welcome the opportunity to help develop such approaches, which are needed to help smaller companies avoid excessive Solvency II implementation costs. A major step forward in the supervision of groups Recognizing the economic reality of groups; CEA strongly supports the concept of a group supervisor who has primary responsibility for all key aspects of supervision.

17 SII Directive Proposal - Areas requiring further improvement MCR and SCR calculation methods need to be aligned CEA: The MCR should be expressed as a percentage of the SCR The treatment of own funds should be consistent with a policyholder view Detailed calculation specifications should not be in the Directive Reduces the flexibility of Solvency II to reflect emerging experiences and new methodologies.

18 SII Directive Proposal - Areas requiring further improvement It is essential that supervisory powers are proportionate and harmonised Detailed guidance needed to define the extent and circumstances under which new or harmonized powers would be expected to be exercised. CEA is therefore concerned by: The wide ranging and open ended nature of the powers available to supervisors; The potential lack of harmonisation. Disclosure requirements must remain proportionate The SCR should not be a hard target

19 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

20 Why Solvency II matters to consumers (1) Solvency II will enhance policyholder protection by: Earlier identification of risks Introduction of two capital requirements Allowing management and/or supervisors more time to take mitigating actions More appropriate and effective supervisory powers Supervisory review of the adequacy of companies risk management processes and controls Ladder of supervisory intervention Cost effective protection Solvency II capital requirements sufficient to withstand a very rare adverse annual event estimated to happen with a probability of 1 in 200 years No zero-risk of failure: this would set wrong incentives for risk

21 Why Solvency II matters to consumers (2) Development of more innovative and competitive products: Market forces and consumer needs determine how companies design their products Industry survey confirmed that Solvency II should increase competition and the scope for European-wide products More integrated single market increase competition Benefits for consumers in the form of more attractive products The economic approach under Solvency II fosters better understanding of the underlying risk exposure under certain circumstances, this may lead to pricing adjustments, or the development of new innovative products

22 Why Solvency II matters to consumers (3) Important to meet the following conditions (non-exhaustive list): Risk-based economic approach to ensure same adequate level of protection to all policyholders across Europe Independent of legal status or size Development of an escalating ladder of intervention Alignment of MCR and SCR calculation methods needed: MCR should be expressed as a percentage of the SCR Ensures that insurers and supervisors have the possibility to take the right measures at the right time Solvency should remain a principle based supervisory framework A supervisory regime that has the possibility to adopt and evolve; e.g. to capture new or emerging risks Information sharing, coordination and cooperation between MS

23 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

24 Overview of EU insurance market Split of the market share by company size 13% 2% 85% Large companies Medium-sized companies Small companies Split of the number of undertakings by company size 79% 6% 15% Large companies Medium-sized companies Small companies - Total of 5,000 companies -

25 SME role in the EU insurance market Small and Medium-sized Entities (SMEs) represent around 95% of the number of European insurance companies SMEs play a very important role: Increasing specialised product availability Increasing competition and contributing to better prices for consumers SMEs generally operate through: Specialised product offerings / niche markets Historic links with certain customer segments

26 CEA Impact Assessment 442 insurance undertakings contributed to the CEA survey The survey covered undertakings of all sizes and different lines of business The most representative industry survey on Solvency II The survey participants responded on the assumption that Solvency II will follow a risk-based economic approach 26

27 Most companies are developing risk management frameworks This applies to all companies - large, medium and small 27

28 and not just because of Solvency II Solvency II provides an opportunity to align regulatory requirements with best practice in risk management 28

29 SMEs support a risk-based economic approach The solvency regime requirements for SMEs and groups are very similar: e.g. alignment of capital requirements with underlying risks; recognition of risk mitigation schemes; allowance for diversification effects, etc Same risk, same requirement However, SMEs have some specific needs

30 Exemptions from Solvency II Solvency II aims to provide equal protection for policyholders Capital requirements should be risk based and not unduly influenced by the size or legal form of the company Smaller undertakings have expressed their concerns that exclusion from Solvency II would: Lead them to being seen as second class companies Lead them open to local regulation without the guarantee of harmonisation and a level playing field Require them to opt-in to Solvency II to satisfy policyholders looking for Solvency II security when purchasing their contracts

31 The principle of proportionality One-size-fits all approach not possible Flexibility based on the different nature, scale and complexity of the undertakings is required The standard approach must allow simplified calculations provided certain criteria are met Standard approach needs to retain its risk sensitivity without becoming an unnecessary administrative burden, in particular for smaller companies

32 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

33 Groups have a very large market share Split of the market share by company size 13% 2% 85% Large companies Medium-sized companies Small companies

34 Solvency II and Groups Insurance groups are increasingly managed at the group level Allows better assessment of risks Policyholder protection should also be considered at the group level Issues to be considered Lead supervisor Fungibility of capital Under Solvency I, supervision primarily takes place at the solo level Supervisory requirements vary greatly between countries Also for groups, supervision should reflect their economic reality

35 Diversification is key for Insurers Diversification benefits are at the heart of the concept of insurance Diversification effect Across regulatory jurisdictions/geographies Across companies within a single jurisdiction Across risk types (products / lines of business) Within a single risk type (across individual risks) Effects particularly relevant for groups

36 Full recognition of diversification effects Diversification types vary Diversification exists at group level: Across companies within a single jurisdiction Across regulatory jurisdictions A more stable development of claims leading to lower capital requirements Solvency II should fully recognise all diversification effects and reflect this in the capital requirements at both solo and group levels

37 Lead Supervisor A lead supervisor for group supervision would benefit: Policyholder protection more effective assessment of risks - implies earlier detection of possible issues Supervisory best practice Enhance dialogue amongst lead and solo supervisors Lead supervisor would reduce cost of supervision supporting more efficient and competitive internal market for insurance services

38 Supervisory Harmonisation The significant differences in supervisory practice inhibit the development of the insurance market Groups operating in EU face patchwork of requirements Solvency II is an opportunity to address some of these supervisory issues e.g. making reporting requirements more consistent Adopting a lead supervisor approach is an important part of achieving harmonisation Supervisory harmonisation is essential under Solvency II with a supervisory system that is adapted to how groups are managed today and tomorrow

39 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

40 Pension Funds and Solvency II Pension Funds are not included in Solvency II for sound reasons Level playing field should be also ensured in the future Article 17(2) IORP to Articles 27 and 28 Life Assurance Directive now replaced by Solvency II Proposal provisions EC plans to review the IORP Directive in 2008

41 Outline: CEA and the European industry s input to Solvency II Essential Building Blocks of Solvency II Key Aspects of CEA s High-level Position on the Solvency II Directive Key benefits for consumers Areas of particular relevance for SMEs Solvency II recognising the economic reality of groups Solvency II and pension funds Conclusions Source CEA 4

42 Conclusions The Industry strongly supports Solvency II objectives Current rules are not aligned with economics & risks of the business Objectives can only be reached through a risk based economic approach The Industry recognises work done to date by supervisors and welcomes the constructive dialogue Need to keep the positive momentum we observe today, even if hard work is required from all parties Much has been achieved so far but the pace is increasing with challenges for all stakeholders. Areas where further work is required including calibration, group issues, eligible elements of capital, small companies and the articulation/ functioning of Pillar 2 and Pillar 3 The Industry will continue to actively and constructively contribute to the debate QISs are an opportunity for the industry and supervisors

43 Background documents

44 Further reading... Key strategic publications available on the CEA website ( include: Introductory Guide to Solvency II A 10-pages brochure (including synthetic executive summary) introducing the main concepts of Solvency II Proposals for a European Standard Approach ESA for SCR The ESA aims at capturing the requirements of a consistent economic risk-based approach within a workable solution CEA s view on the Impact of Solvency II on the Average Level of Capital A guide on the comparison of the current Solvency I and future Solvency II frameworks CEA Working Document on MCR and a Proposed Ladder of Intervention CEA aims to contribute to the ongoing development of critical issues such as the Minimum Capital Requirement (MCR) and proposes a methodology to calculate MCR as well as an approach to a ladder of intervention CEA Working Paper on the risk measures VaR and TailVaR This paper discusses the issues related to using VaR and TailVaR as risk measures within the solvency assessment of insurance companies CEA 10 Key messages on Solvency II Solvency II Impact Assessment Solvency II Glossary CEA information paper on Groups and Solvency II CEA information paper on Diversification and Specialisation benefits CEA information paper on Small and Medium-sized Undertakings (SME)s and Solvency II

45 Contacts CEA Director General: Michaela Koller CEA Economics & Finance Committee Secretariat Peter Skjødt - acting ECOFIN Director (PSK@ForsikringensHus.dk ) Yannis Pitaras (Pitaras@brussels.cea.assur.org) Jérôme Berset (Berset@cea.assur.org) Marta Gonzalez (Gonzalez@cea.assur.org) Silvia Herms (Herms@cea.assur.org) Benoît Malpas (Malpas@cea.assur.org) CEA Public Affairs: Gabriela Diezhandino (diezhandino@cea.assur.org) Ido Bruinsma (Bruinsma@cea.assur.org) /

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47 MCR and SCR calculation methods need to be aligned SCR SCR SCR MCR & SCR based on different risk-oriented principles Modular approach MCR Tech. liabilities MCR MCR MCR & SCR can respond differently to changing economic conditions Supervisory cannot act by ladder of intervention Compact approach SCR MCR Tech. liabilities SCR MCR SCR MCR MCR defined as percentage of SCR: MCR & SCR respond consistently to changing economic conditions Supervisory can act by ladder of intervention

48 Detailed calculation specifications should not be in the Directive