Specific calls for advice from CEIOPS second wave

Transcription

1 Specific calls for advice from CEIOPS second wave Brussels, 17/5/2005 Preliminary comments of the European mutual insurance sector to CEIOPS with a request to take them into account when advising the European Commission on the different calls for advice (see Annex 2 (sequel) to Framework for Consultation December 2004, European Commission to CEIOPS) Overall remark: AISAM s and ACME s members, which jointly represent about 20% of the European insurance market, believe that we are in a situation of transition; changes introduced by the supervisors or through general accounting laws follow mainly IAS thinking. As it is not yet clear what Phase II will bring, this means that some of the comments below may need correction if and when the IFRS project is implemented. Request n 7 Technical provisions in life insurance Analysis of appendix I: New Article 20 of the Recast Life Directive 2002/83/EC Point 1 A: (i) could be compressed as follows: the amount of the technical life-assurance provisions shall be calculated by a sufficiently prudent prospective actuarial valuation, taking account of all future liabilities as determined by the policy conditions for each existing contract. More detailed guidelines are given in implementing measures ; - agree (ii) rules on retrospective methods, if any, could be given in the implementing measures; - agree (iii) this provision could be extended as follows: a sufficiently prudent valuation is not a "best estimate" valuation, that is expected present value, but shall include an appropriate explicit risk margin for adverse deviation of the relevant factors as defined in implementing measures ; We welcome the protection that Solvency II is intended to give policyholders. Page 1 sur 16

2 We understand that provisions will be composed of a best estimate valuation as well as an explicit prudence margin. 1 We understand therefore that the MCR prudence comes on top of the best estimate liabilities (iv) this provision would be included under point 1 B a); Agree (v) rules regarding the unit of calculation (e.g. individual/books of contracts) could be given in implementing measures. Accounting developments may necessitate changes to the current rules; - Agree (vi) the rules regarding the surrender value floor have to be analysed in the light of accounting and solvency regime developments taking also into account traditional prudential practices and asset-liability mismatch issues. These rules could be given in implementing measures. We are concerned that a SVF would be required to be accounted for in the FV liabilities. Promises to policyholders obviously have to be reserved for, either in provisions, including the prudence margin or in the capital. This principle should be set in the framework directive and not be left to the implementing measures. Point 1 B: - The rate of interest shall be chosen according to the nature of insurance contracts and the valuation method used for liabilities and assets", a system where interest rate guarantees are valued explicitly Agree and a market interest rate yield curve is used for discounting. The principle should be a risk free rate (government bonds or swaps or other) more correctly defined than is currently the case under the directives All these rules should be established in the future at the EU instead of the national level. Agree that the principle should be established on EU level ; what the precise market data is of that rate corresponding to the principle, depends on the investments and their durations and also of the country of issuance, as these are the assets covering the liabilities. The determination of the rate would be the insurers responsibility. The mutual insurance sector would like to underline here that point 8.5 of CEIOPS Progress report Regardless of the calculation mechanism, insurance undertakings should retain ultimate responsibility for ensuring adequacy of their provisions should also be applied on the life side. Point 1 D: Provisions for guarantees and bonuses should be explicit and transparent: in the case of participating contracts, the method of calculation for technical provisions shall explicitly take into account guarantees and future bonuses of all kinds, in a manner consistent 1 See Commission draft amended framework for consultation on Solvency II point 15 Page 2 sur 16

3 with the other assumptions on future experience and with the current published method of distribution of bonuses. Details could be given in implementing measures when the analysis and development work is clearer; - Agree Overall, life provisions should be seen in line with IASB developments and the SCR calculation methodology. Methods for establishing risk/prudence margins, the setting of risk/prudence margins in addition to expected values, relevant factors and the aggregation level should be set to the greatest extent possible in a compatible way to minimise additional workload and costs. ( see p 7) However, non-ifrs and SMEs require specific consideration, and actuarial rules should allow, where feasible, different approaches and approximations ranging from traditional deterministic methods to sophisticated stochastic modelling. The mutual insurance sector agrees that non-ifrs and SMEs require specific considerations: for the time being, a large proportion of European insurers is and will remain non IFRS compliant companies. The mutual insurance sector underlines, as in its wave 1 comments 2, that indeed new solvency regulation should not add undue complexity. It is unclear today to which extent mutual companies can be classified as SMEs under IAS definition if any. Lastly, it should be noted that not all mutual insurers are potentially SMEs. Therefore, an appropriate treatment for mutual insurers is not equivalent to a special treatment for SME status insurers. The mutual insurance sector believes that the focus should be more on the composing elements of the solvency margin: according to IAS, the strength of a company lies within the equity. This is logical given IASB s focus on the investors. This is not the case for a mutual insurer. In the case of a mutual insurer, equity is typically small, as a mutual insurer s strength lies on the liabilities side within the reserves and provisions often not only including important equalization reserves (non-life), but also an implicit prudence margin ( life and non-life): this prudence margin, explicit in the future as agreed earlier, should be part of the solvency capital as requested in previous comments and papers 3. A proposal regarding the possible benchmark level of prudence of the technical provisions with field testing results should be communicated to the Services. The mutual insurance sector would like to volunteer mutual insurance members for the field testing in order for CEIOPS/the Commission to have examples from a balanced range of companies. As call for advice n 1 already stressed, adequacy and proportionality should be tested/applied in the field testing. Request n 8 Technical provisions in non-life insurance The mutual insurance sector welcomes point See AISAM-ACME proactive joint comments on Wave 1 3 See comments to CP nr 3 : the prudence margin within liabilities should be part of the solvency margin Page 3 sur 16

4 The Commission Services would like CEIOPS to advise on rules to value non-life technical provisions, with the aim of establishing technical provisions that are sufficient to cover the liabilities with a quantified level of confidence. Given the diversity of nonlife business lines and the many factors impacting on ultimate claims settlement, the Commission is aware of the methodological difficulties involved with this approach. To take into account the uncertainty of the valuation and to protect policyholders (e.g. when the solvency margin has disappeared and the portfolio must be transferred or put into run-off), risk margins must be set in addition to the expected present value or best estimate provisions. The following aspects should be taken into account in the analysis. 1. Required quantitative prudence level: how should it be fixed, to what amounts exactly should it be applied; 2. Actual quantitative prudence level: how should it be evaluated, at what level of aggregation, etc. 3. Obligation to use several appropriate actuarial methods amongst the generally accepted methods some or all of these methods may have to be defined; 4. If considered appropriate, criteria to decide on final amount of technical provisions when methods give differing results (for example, the criteria could be to choose the amount that is given by several methods). These criteria must not be so strict that it prevents the exercise of actuarial judgement and discretion. 5. Introduction of a detailed annual report on the valuation of technical liabilities making explicit the actuarial and economic assumptions made, their evolution over time and the reasons for the benefits or losses of liquidation. This report should also disclose the risk margins above the expected value included in the technical provisions and the justification of the discount rate used. 6. Appropriateness of introducing guidelines on reserving (levels of aggregation, allowance for risk interdependency, etc.). 7. Harmonization of the data collected (implying a prior definition of the terms used), including run-off triangles of undiscounted technical provisions used to assess provisioning adequacy and claims paid triangles. 8. Adaptation of the estimates of the technical provisions (whenever there is significant information and at least at periodic intervals) and mechanisms to ensure estimates of technical provisions are responsive to major external events (e.g. rapid inflation or catastrophic events). 9. Treatment of non-ifrs companies and SMEs, avoiding undue complexity. 10. To promote solvency on a long term basis, should a compulsory equalization mechanism be maintained regardless of the taxation and accounting regimes (this could, for example, be incorporated in the Solvency Capital Requirement calculation)? CEIOPS is invited to advise on how best to develop common EU actuarial standards to achieve greater consistency in provisioning practices. As stated in the Framework for consultation, CEIOPS is asked to work with actuarial bodies, in particular the Groupe Consultatif. The advice must be compatible with the likely accounting developments, unless duly justified. The advice must take into account insurance-specific standards and recommendations adopted in other international fora (namely, IAIS and OECD). Preliminary remarks: Page 4 sur 16

5 1. Regarding central estimate: there is the difficulty of getting a central estimate as there will be skewed distribution in small entities. That could affect mutual insurers more than joint stock companies implying a large set of developments in order to get a robust distribution. However, here the reinsurance program may give a different result and for these entities the net amounts should be considered. 2. Models with constant liquidation on historical basis have shown that in the run off triangle in the most remote years the speed of payments is increasing, because as of year 10 and further, there is a decreasing trend of the provisions. Ten years ago, these tails had still a relevant percentage in the entire distribution of the claims payment generation. Therefore in the future payments will be quicker which will result in release of capital and potentially a different tariff the longer the liquidation risks. 3. The impact of reinsurance on small companies: the impact of the reinsurance program on the level of reserves is high in case of small insurers and the adequacy of the reserve level should be examined.? 4. If the future solvency model accepted is based on technical provisions calculated on the basis of present value of the best estimates of future cash flows, including a prudence margin, this should be the case for all European insurers, including the mutual sector ( but excluding the exempted mutual insurers under the first non-life directive as adapted under the third non life directive). On the Required Quantitative Prudence Level: It should be restated that this is a confidence level, and not a level of prudence. These terms are not interchangeable. Insurers in their home member state are already required to establish adequate provisions in respect of their entire business, but until now there has been no attempt to define adequate or what precisely technical provisions sufficient to cover the liabilities are. Additionally, the establishment of the provision is driven by the total estimated ultimate cost with no reference being made to the methods of estimation used, nor the inputs to the estimation process. CEIOPS will need at least to clarify and determine these factors more firmly in order to properly address the issue of prudence levels. The mutual insurance sector opinion is that the level of 75% confidence (i.e. that in 75% of the possible outcome, we have enough provisions to cover all the claims) is acceptable and pitched at roughly the right level. The fixing of this level at 75% in no way releases firms from their obligation to raise adequate estimated provisions for all claims, taking into account for example their volatility and the length of the claims, nor from using appropriate methods to do so, but it does recognise that in any process it is not possible to know all factors in advance. There is also the assumption that this 75% level becomes a minimum requirement of insurers. The setting of any level of confidence against provisioning implies that the entire process will be supported by in-depth actuarial analysis (see point 3 later), both at the individual company level and industry levels. It is only by undertaking such review and analysis that insurers can raise provisions they believe to be accurate, and judge the adequacy of those provisions raised in the past. Page 5 sur 16

6 A future SCR in a standard model should take into account the confidence level of existing provisions: therefore, the mutual insurance sector suggest that adequate provisions include a best estimate level at a 75% confidence level, with the additional provisions according to a higher confidence level in the explicit prudence margin. Both should be considered in the solvency capital calculation as a composing element. The paradox of Solvency I which calculated the solvency margin potentially based on the claims provisions should be avoided: this method results in a situation that the higher the provisions (including today s confidence level and the implicit prudence margin) the higher the solvency capital needs to be. Actual Quantitative Prudence Levels It is widely expected that these will not be the same throughout all insurers, since some of them will undoubtedly wish to retain provisions that reflect a level of confidence higher than the 75% benchmark. This is what may be more correctly termed a level of prudence. The evaluation of such confidence levels will have to be undertaken in at least 2 ways, firstly looking at the past performance of claim provisioning (comparing results to the expected, stated confidence levels) and secondly assessing the methods used in raising current provisions for future claims to estimate their success in establishing the correct confidence levels. Aggregation in these assessments should not be company-wide, but should at most be by line of business (e.g. Health, Accident, Motor etc). It may be necessary to aggregate only to a lower level within these criteria, but this will depend largely upon the individual insurer s business profiles. It seems sensible to suggest that aggregation only be performed to the extent that claims aggregated display broadly the same behaviour/performance, and this is likely to be different from insurer to insurer. Obligation to use a number of different actuarial methods The vast majority of insurers already comply with this, whether they use internal or external actuaries. Whilst it is true that there are a number of widely accepted actuarial methods 4, it is unlikely that all of them will be appropriate to all firms, or to all lines of business. Despite this, it is not unreasonable to expect that a variety of different methods are used in insurers (irrespective of size) in the work that they already carry out (or employ others to carry out) although they may have settled for the better of the methods to use. Definition will be required regarding the specific types of assessment required, but the establishment of specific measurements themselves may be too restrictive: too prescriptive rules should also be avoided. 4 The Institute of Actuaries in the UK has already produced a document establishing the differing methods that may be used in raising Technical Provisions (for Claims etc) that will be mirrored across the equivalent bodies in other countries. This documents and others of the same nature such as the IAA actuarial standards could be used as a source of inspiration Page 6 sur 16

7 Decision Criteria Differing methods of assessment will provide differing results for the level of provisions required. No criteria imposed should restrict the actuary from exercising his expertise and discretion in selecting the most appropriate result(s), so it would seem that an arbitrary rule (such as the median of several methods, or the mean of those methods) should be avoided. Nonetheless, it should be possible for rules to set parameters of acceptable practice within which discretion can be exercised. Any management decision relative to provisions required should be based on the input from the actuary. Detailed Annual Report Without such a report, it will not be possible for insurers to prove that their past assessment of required provisions has met the required levels of confidence relating to the payment of claims. All insurers should, under the umbrella of proper management, already be monitoring their claims performance against provisions. Such a report should therefore be mandatory towards the supervisors and could form an additional part of existing regulatory reporting. It is unclear at what level (of detail) the insurer would be required to report. This may be part of the extension of the liability adequacy test. The mutual insurance sector expects insurers to be unlikely to show approval to any level of public disclosure on the level of provisions and the way they make these provisions beyond that required by the individual regulator/supervisor. If publicly availability would be required, an educational process would be necessary (any information which goes out should give guidance on how to read it and for which purpose) while at the same time the level of detail should not be irreconcilable with the principle of competition. The right level of detail vs. technical reporting needs to be worked out. In any case, it should be an EU wide decision to whom the reporting is intended, its level of disclosure and its level of detail. The challenges involved in educating potential users so that misunderstandings and confusion are minimised should not be underestimated. Appropriateness of introducing new reserving guidelines Provisioning guidelines already exist in many EU member states as published methods of best practice or widely accepted methods. Stated guidelines (regarding approach rather than detail) will be required in order to achieve greater harmonisation within the industry, but care must be taken that these do not become too prescriptive, and therefore reduce the proper exercise of discretion of management Page 7 sur 16

8 Harmonisation of data collected We assume that the call for advice focuses on the collection of claims data to assess provisioning adequacy, rather than the performance of individual companies. The collection of such data will be totally necessary in order to be able to assess the potential adequacy of provisions going forward. However, this does raise further queries regarding the level of harmonisation possible across the EU. The question posed seems to indicate that there is an expectation that data collected across the EU will be equally relevant in each individual country or economic area. In reality it is highly unlikely that such harmony of experience actually exists, and some segmentation of information/statistics will be necessary. Additionally, if information is aggregated at too high a level, potential problem areas may be rendered less obvious, and corrective measures may be delayed. Periodic adaptation of estimates There can be no argument that the periodic adaptation of estimates to reflect changes in experience, economy, or simply the passage of time, is necessary. Equally, amendment of the assumptions (rather than methods) used in raising provisions must be subject to periodic review. It is in the decision of what period to use that most argument will be found. Rather than impose any prescriptive interval at which review must be undertaken, this would be better expressed as insurers should periodically review (at least annually) their level of provisions, together with the estimates and assumptions used in setting those provisions. Should the individual insurer/industry become aware of factors that will significantly affect the levels of provision required, such review should be undertaken as soon as practicable. (with guidelines on the maximum time that can elapse before such review is complete) The mutual insurance sector suggest therefore a review at least annually but with a review as regularly as is relevant to the company given its size, risks, complexity etc. Treatment of non-ifrs firms and SMEs Any treatment of any insurer within the industry relating to the setting of provision levels should endeavour to treat them as fairly, and as equally as possible, irrespective of their size, and the accounting standards they are required to adopt. For this reason, it is important that rules remain restricted to best-practices, methods and approaches, rather than impose ultra-specific measurements and actions. Equally, the nature, size, scope, and complexity of individual insurers should always be a driver in the level of activity required in satisfying regulatory requirements. Compulsory equalisation mechanisms This is another contentious area with a large number of differing approaches throughout the EU. There are some countries where equalisation reserves are used extensively, others where Page 8 sur 16

9 only certain classes of cover are subject to equalisation reserves, and over all of this is the potential within forthcoming legislation that their use will be curtailed. If the reason for a compulsory equalisation mechanism is merely to promote long term solvency, then such a goal can be achieved in a number of ways, of which equalisation is only one possibility. For this reason, a compulsory requirement is not recommended. This is not to say that firms cannot use such mechanisms, merely that they should not be forced to use them. Furthermore, if the trend is towards IFRS accounting, insurers should still be allowed to maintain them. In relation to the question of maintaining a compulsory equalization mechanism, regardless of the taxation or the accounting regime, both AISAM and ACME find that equalization reserves are an integral part of the financial strength of an insurance company (whether these provisions are part of the technical provisions or part of equity). As non life insurance is more variable than life insurance, we would like to emphasize more strongly the prudent approach in this area for mutual companies. In both cases, equalization reserves, whether they are part of equity or of provisions, should be taken into account for solvency purposes and the move from Solvency I to Solvency II should not result in limiting the composing elements of the solvency margin. (NB: equalization reserves are not currently part of the solvency margin in most EU countries, for example France and Germany, but they are in Finland). In a (future) IFRS world, we understand that these reserves will be a restricted segmented part of equity; as part of equity they should be part of the solvency margin s composing elements since equity is part of the solvency of a company. (The potential to hold these reserves as a restricted segmented part of equity will also make it easier to establish the tax rules: no taxation upon transfer within the balance sheet, taxation upon transfer to the P&L statement). They should be covered by appropriate assets. IFRS should be a neutral operation relative to equalization reserves on solvency level. Taxation should not be based on IAS accounts; these should remain based on the annual accounts/tax accounts of the legal entities. In line with its importance in the European industry, the mutual insurance sector request an equivalent important number of insurers for the field testing in order for CEIOPS and the Commission to have examples from a balanced range of companies. Request n 9 and request 15 Safety measures/ Solvency control levels The mutual insurance sector agrees with 2 levels of solvency capital; an MCR base level and an SCR level. The paradox of Solvency I should be avoided: the larger the provisions, the higher the required margin. The option that CEIOPS expert groups is considering various options for the development of MCR, including retention of the existing (Solvency I ) requirements ( point 9.4 in CEIOPS Progress report), merits a further qualification and the mutual insurance sector would strongly suggest to CEIOPS not to retain the existing Solvency I requirements on those points. Page 9 sur 16

10 MCR should be the absolute bottom level, calculable from a given formula, easily and regularly. It should be undisputable. It should have the same function as the current guarantee fund but should not be the same as the current guarantee fund. It should not be a percentage of SCR: by doing so, an MCR based on an internal model SCR will be different from standard model SCR and you will end up with 2 types of MCRs. It should be better than today s Solvency I system (disappearance of the solvency I paradox and a better reflection of the risks run by the particular insurer) In the zone in between, a toolbox of different supervisory actions are possible. SCR should be risk based and needs to be risk based. Concerning MCR, the mutual non-life insurers have today a 25% lower guarantee fund. Since the structural reasons for this have not changed and given that mutual insurers still have the potential to call for supplementary contributions (and continue to do so), the mutual insurance sector requests a status quo of these rules. In return, this situation should be clearly disclosed to member policyholders. At the same time, the mutual insurance sector repeats its request for a correct application of the exemption under Solvency I which should be maintained in the context of Solvency II: small mutual insurers with less than 5 million GPW should not need to apply a future MCR and subsequent solvency regime. In that context, the mutual insurance sector refers to the Dutch application of article 3 of the first non life directive (modified by the 3 rd non life directive) where there is a gradual system of supervision including solvency and risk mitigation (reinsurance) requirements for insurers up to 5 million euro GPW; these exempted non-life players do not have a European license. Mutual insurers with more than 5 million euro GPW have a European licence and follow the European solvency and reporting rules (see table hereafter; a more technical note is added in annex) The Netherlands, current exemption regime Exemption category 1 Exemption category 2 Exemption category 3 Max. 200 members Max premiums Max members Max premiums Max premiums No solvency requirements No reinsurance obligation No supervision No solvency requirements Reinsurance obligation No supervision Limited solvency requirements Reinsurance obligation Light supervision Precondition for all categories: Potential for call for supplementary contributions in case of deficits or limited pay-out obligation as defined in mutual s statutes Different solvency levels exist today: in some Member States the Solvency I directive, which introduced increased supervisory powers, has been transposed with the potential to ask for a doubling of the existing minimum solvency level (France) if an insurance company is not in a Page 10 sur 16

11 sound situation. However, as the Solvency I directive is very broadly/vaguely worded, it is left to the discretion of the supervisors to decide what a sound situation is (to be checked). The mutual insurance sector would therefore welcome a clarification and suggests that the national interpretation potential of future directives be in line with CEIOPS guidelines. Furthermore, the European mutual insurance sector does not support a three level system as proposed on p 41, paragraph 3. If SCL is the solvency control level above the Solvency capital requirement or SCR, this would result in SCL becoming MCR-like although MCR is designed to be the minimum (in euros) 5. With a level above SCR, an insurer is in a normal solvency situation and there is no need for an additional ceiling, or additional powers linked to it (especially as it is still unclear how this SCL will be determined). Above SCR, there should be no automatic and additional unconditional requirements: we are therefore concerned that the reference to the early warning indicator, at a level higher than SCR, suggests this third level. Obviously, SCR needs to be reviewed by the company sufficiently regularly to check if its level is still relevant. This should be part of internal control and should be based on a series of early warning indicators defined by the company. In case of a shortfall, the supervisor should be notified inclusive the steps taken to redress the situation (see also CP nr 4 issue internal control and monitoring). One can imagine also a more frequent and more simplified reporting on SCR for example also as a way to reduce excess capital. Moreover, insurers with an internal model, who will be tracking all the time, do not need any further solvency level. In case the solvency is between MCR and SCR, a series of gradual supervisory actions in function of the actual solvency level should be foreseen and are acceptable. AISAM and ACME support the idea of a countercyclical tool: this merits attention and needs further development as the link between solvency requirements and investment diversifications is important. Request n 10 Solvency capital requirement: standard formula (life and non-life) SCR should not have the same legally binding effect as the MCR. It should be a target. A standard formula is considered merely a proxy of the real risks an insurer faces: internal models are clearly the preferred route. Operational risks should be covered under pillar II. 5 In some countries today, we have the following situation: Minimum Capital Requirement (MCR) = 100; Solvency Capital Requirement (SCR) = 200; Solvency Control Level (SCL) = 250. For example, the statutory pension system in Finland has a gradual system: Statutory requirement = 100; Twice the MCR = lower target level (LTL); Upper target level = twice LTL i.e. HTL; In between these levels is considered to be a proper solvency situation. Being under LTL will influence an insurer s ability to give dividends or statutory benefits. In principle, an insurer is between the LTL and the HTL. Page 11 sur 16

12 In the standard formula, which should be factor based, AISAM and ACME s members would prefer a national calibration of parameters as mutual insurers are mainly local companies. The parameters should also allow taking into account the mutual model: for example, the SCR should reflect whatever actions are open to the mutual insurer in resilience conditions such as raising premiums or asking for supplementary contributions. At the same time, the sector calls for maximum harmonization; this implies that the national calibration by national supervisors should not end up in a discretionary application. Furthermore, they believe that simulations and field testing are necessary, for example in order to define a proper confidence level: the preliminary proposal for principles for a draft directive refers to calibration and a choice of confidence level. This confidence level depends on the choice of VaR or TVaR. Although there are theoretical advantages for TVaR, the mutual insurance sector retains VaR as appropriate in a standard model approach. The potential complexity of the implementation of a future Solvency II for small and medium sized insurers indeed needs to be taken into account. The measures should be theoretically sound but practically simple (not simplistic) to allow SME players to calculate the SCR. A simple RBC approach (GDV equivalent) could be used. This would also add flexibility for specific mutual factors. In all regulatory regimes, the level of Solvency Capital required by a firm will be affected by the overall adequacy of its provisions. In theory, the more adequate are an insurer s provisions, the lower will be its capital requirement (as relates to the claims element of its business). This raises a number of important questions regarding the behaviour of firms, and how that behaviour should be reflected in its Solvency Capital requirement. If an insurer provides at greater than the 75% level, the excess should be allowed against the Solvency Capital Requirement, though there is no requirement for insurers to hold greater than the 75% level. The same is true regarding the position of equalisation provisions. Logic and experience dictate that the Solvency Capital Requirement should be derived (in part) from technical provisions. However, if SCR is derived from the Technical Provisions actually made, then the insurer is effectively given a disincentive against raising more prudent provisions. The higher the provision, the greater will be the SCR. This is counter-intuitive. One solution, if SCR will be based (as a standard formula) on Technical Provisions, is to use the 75% confidence level of Provisions to calculate SCR, rather than the amount actually set aside. In that way, all insurers will be assessed on the level they should provide, rather than on their own individual preferences regarding prudence levels. Request n 11 Solvency capital requirement: internal models (life and non-life) and their validation We welcome the potential use of internal models, consistent based on the same explicit general principles as the standard formulae and would like to underline that both the standard formulae and the internal models should be acceptable from the beginning. Internal models will allow the company to better understand and manage its risks; an adapted target capital requirement different from a standard SCR calculation should be the reward for improved Page 12 sur 16

13 understanding of risk and its management, both in the interest of policyholders and the stability of the financial system. The inverse would consequently be that a standard formula could result in a need for a higher SCR than under an internal model. If the internal models are validated, the results should be respected and there should be no request/need for a double calculation (following the standard formula). The validation of these models should be based on a European platform with CEIOPS setting the principles of validation but validation itself being the responsibility of the management of company. Once a model is validated, based on agreed principles (never a licence stamp), a clear procedure needs to be agreed at CEIOPS level as to how and when the assumptions can be changed. There should be a periodical potential for change (e.g. every 2-3 years as in the UK today) with interim changes only if a proper business reason exists for these changes. We also underline that partial internal models should be allowed too: certainly, not all companies will be able to implement internal models for all lines of business at the same time and a partial replacement of the standard formulae with these partial internal models should be possible. This partial implementation philosophy is also a means of developing experience and skills across the sector. Obviously, the appropriate capital needs must be calculated very accurately in field testing. Within the framework of the field testing process, the mutual insurance sector suggests to subject some specific partial internal model to CEIOPS to test the validation process across Europe. Request n 12 Reinsurance (and other risk mitigation techniques) We welcome the comment 6.1 (in the Call for advice) especially the last phrase that the reduction factor for reinsurance needs to be reviewed as this is today under Solvency I unnecessarily adding requirements to the solvency margin. The mutual insurance sector requests that reinsurance (as a true risk mitigation technique), should be given full credit on its own merits (100%), particularly if the credit risk of the reinsurer is already taken into account, but also given reinsurers increased regulatory requirements in the SCR. This could be done via the provision of figures on a net-ofreinsurance basis, with a risk factor for reinsurance default (credit risk). Supervised reinsurers, once the credit risk is properly accounted for, should be adequately treated. Furthermore, the mutual insurance sector asks CEIOPS to avoid differences in implementation measures from one country to another. Lastly, reinsurance should be included in a simple way in the standard formula. Request n 13 Quantitative impact studies and data related issues accepted The mutual insurance sector welcomes the intention of the Commission to engage in a QIS to measure the practical consequences of these requirements and the Commission s request to Page 13 sur 16

14 CEIOPS to contribute to the organisation, coordination and performance of the simulations. The effect on policyholders is particularly essential, certainly from a mutual insurer s point of view as they are in most cases both customers and owners. The analysis of pro-cyclical effects and the measures to reduce them should be taken into account; the result should not be a solvency framework which prevents a reasonable investment policy. Specific issues for SMEs: field testing should cover both mutual insurers and SMEs as not all SMEs are mutual insurers and not all mutual insurers are SMEs. Request n 14 Powers of the supervisory authorities Solvency I already made a start in drawing up a new definition of supervisory powers. In that context, we would like to refer to our comments on Request n 4 in call for advice wave 1: The European mutual insurance sector supports the move towards transparency; indeed, it is also our belief that this will help to harmonize supervisory practices and promote best practice convergence. At the same time, our members ask for a more precise definition of transparency as it is in the interest of the supervised and supervising parties to precisely understand the solvency situation of the supervised insurer. Transparency should also imply that the supervised entity is entitled to receive feedback from the supervisory authorities; where supervisors conclude that a supervised entity falls under the scope of explicit powers and that there is a need to increase the solvency, this should be wellreasoned. At the same time, the right for rebuttal should be guaranteed with the option for insurers to propose an alternative 6. The mutual insurance sector would like to add that, if the powers of the supervisors increase significantly, the mutual insurance sector would like to contribute to the elaboration of a code of conduct between the supervisors and the supervised which would guarantee more transparency. In that code of conduct, the way supervisors exercise their discretionary powers, should be explained in order to achieve also in supervisory practices a level playing field. Supervisors intervention powers today include powers to increase capital requirements (higher required solvency margin or downward revaluation of the available solvency margin). Applied under a new solvency regime, they should be properly defined and with clear limits: - The mutual insurance sector would like to observe that this type of power defies the purpose of having two capital levels. Indeed, this power has to be very specifically defined and should not replace the safety margin between MCR and SCR. It should only be used in a crisis situation. - If the purpose is to intervene when an insurer has a solvency capital between MCR and SCR, the mutual insurance sector would strongly resist this definition. A sliding scale of actions can however be envisaged with a clear preference for dialogue and planning. 6 See the joint AISAM/ACME comments to CEIOPS regarding call for advice nr 1, 17/2/2005 Page 14 sur 16

15 Furthermore, both AISAM and ACME s members deplore the unconditional possibility for the call for supplementary contributions to be excluded from the solvency capital, as is the case in some Member States following Solvency I, since it was not the intention of the European directive to move from an automatic eligibility to automatic ineligibility. Paradoxically enough, this would imply that when the supplementary contributions are needed most, they can be used the least. The mutual insurance sector calls for this situation to be redressed. Request n 16 Fit and proper criteria The current wording of the directive suggests that shareholders and management are considered to be fit and proper. More transparency and clearer definitions ( what is fit and proper; in which field do they need to be fit and proper insurance versus management, ) are welcomed in order to reach a European level playing field. The fit and proper requirements should not be extended to the Supervisory Boards (in a dualistic system). In a monistic system, board members if they exercise material influence on the management of the company such as executive directors could be required to be fit and proper. Non-executive directors fit and proper tests should focus on the skills required to meet their role., Request n 17 Peer reviews Control is very local today with limited coordination. AISAM and ACME therefore welcome this innovation and considers that peer reviews between insurance supervisors will contribute to a level playing field. This could bring particular added value in those countries less familiar with the mutual legal form. The mutual insurance sector therefore suggests that if the peer reviews are done via market visits during which interviews are conducted with some market participants, the necessary attention is given to the mutual insurance sector of which at least one representative should be heard. These peer reviews should take place ideally yearly but every 3 years would be acceptable. An alternative could be a dedicated European team to supervise mutual insurers across Europe as this will assist countries with less experience in supervising mutual insurers Request nr 18 Group and cross-sectoral issues As far as the IGD is concerned, AISAM and ACME s members ask for a consistent calculation: for example, in the case of admissible assets to cover the solvency requirements at a solo level, 100% of the unrealised capital gains can be taken into account, whereas at group level the percentage is limited (e.g. in France in a life company at group level, Page 15 sur 16

16 admissible assets can be taken into account up to a maximum of the MCR level of the life company, and everything above this only counts for 15% whereas on a solo basis this is 100%). In addition, many AISAM and ACME's members use internal reinsurance to get a better diversification of their risk with reinsurance percentages that are more than 85% or 50%. Because these operations are internal operations and don't bring any supplementary risk at group level, AISAM and ACME's members insist on the fact that for both MCR and SCR this kind of internal reinsurance scheme should not lead to a double need of solvency margin A more extensive answer on this issue will be given at a later stage. Contact details: For ACME: Catherine Hock, Permanent delegate Direct ++32/2/ Mobile: ++32/496/ Fax ++32/2/ acme@skynet.be 50, rue d Arlon 1000 Bruxelles For AISAM Lieve Lowet, Secretary General Switchboard ++32/2/ Direct ++32/2/ Mobile ++32/473/ Fax ++32/2/ l.lowet@aisam.org Square de Meeûs 22B/16, 1050 Brussels Page 16 sur 16