Gesamtverband der Deutschen Versicherungswirtschaft e. V. German Insurance Association

Comments of the German Insurance Association (ID: 6437280268-55) on the consultation of the European Commission on supervision of the financial services sector in the EU (Communication 2009/114 and de Larosière Report) Gesamtverband der Deutschen Versicherungswirtschaft e. V. German Insurance Association Wilhelmstraße 43 / 43 G, D - 10117 Berlin PO Box 08 02 64, D - 10002 Berlin Phone: +49 30 2020-5440 Fax: +49 30 2020-6440 60, avenue de Cortenbergh B - 1000 Bruxelles Phone: +32 2 28247-30 Fax: +32 2 28247-39 Contacts: Dr. Axel Wehling Member of the Executive Board E-mail: a.wehling@gdv.de Dr. Bernhard Gause General Counsel Legal Affairs E-mail: b.gause@gdv.de Dirk Schlochtermeyer Head of Investment E-mail: d.schlochtermeyer@gdv.de www.gdv.de

German insurers welcome the key statements on supervision of the financial services sector of the European Commission and of the de Larosière Report as important steps for improving European financial services supervision. Implementation of the measures proposed in the Report should start immediately. More specifically, we take up the following positions: We endorse the creation of a body to deal with issues relating to financial market stability. Reasonably, national supervisory authorities should be responsible for exercising day-to-day supervision of insurers also in the future. The idea of a merger of insurance and banking supervision at European level should not be pursued as there are fundamental sectorspecific differences between banks and insurance companies. We welcome the fact that CEIOPS will in the future be able to make binding decisions on issues of interpretation and matters of dispute between national supervisory authorities (mediation) and that its resources are to be enhanced. We strongly support any coordination of the supervision of groups operating on a cross-border basis by Colleges of Supervisors. National supervisory authorities should not be in a position to issue stricter rules than provided for in harmonised law. Unjustified national derogations should rather be identified and removed consistently. With this agenda, it will be possible to fully achieve the two objectives of financial market stability and functional integrity and dynamics of markets.

Introduction We welcome the European Commission s efforts to make a regulatory review of the effects of the financial market crisis in a timely manner and in selected areas. The Communication of the European Commission on supervision of the financial services sector and the Recommendations of the de Larosière Group are a suitable basis for this. From the German insurers point of view, the new financial market architecture has to restore financial market stability and to ensure effective supervision of market participants on the one hand and allow the functional integrity and dynamics of markets on the other. Therefore, even in times of crisis, sustainable legislation should be adhered to. In the following, we comment on the further development of European financial services supervision (I.) and on the other issues discussed in the de Larosière Report (II.). I. Further development of supervision 1. European Systemic Risk Council The Report proposes that a new supervisory body is established under the auspices of the European Central Bank (ECB) to deal with issues relating to financial market stability and to set up an early warning system to detect crises (European Systemic Risk Council, ESRC). This is based on the finding that supervisory authorities have focused too much on individual companies and have taken too little account of the macro-prudential situation (Recommendation 16). However, macro supervision only makes sense if it is not confined to individual States or banks, but chooses a comprehensive approach for the entire financial sector. To be able to identify risks and to concretely look into any warning information, the ESRC needs powers of intervention to be able to question and alter decisions made by national supervisory authorities (Recommendation 17). Thus, the creation of the ESRC not only raises the issue concerning cross-border cooperation between supervisory authorities, but also concerning the relationship between banking supervision and insurance supervision. German insurers welcome this proposal provided it does not involve additional reporting requirements or administrative costs for insurance companies and that ongoing legal and technical supervision continues to be exercised by national authorities. page 3 / 14

1.1 Crisis intervention by the supervisor Moreover, in its Report the de Larosière Group holds the view that all supervisory authorities in the European Union should have adequate instruments at their disposal to be able to intervene efficiently before and during a crisis (Recommendation 13). The European Commission shares this position in its Communication (vol. 1, p. 8; vol. 2, pp. 4, 5). The German insurance industry fully supports this approach. Preventive supervision, investment rules and modern risk management (Solvency II) must be complemented by efficient crisis management. The existence of adequate supervisory instruments for crisis intervention is a prerequisite for this. In this respect, intervention should not fail because of the fact that insurers operate across the borders while supervision is organised on a national basis. Therefore, the basically existing structures for cross-border cooperation between supervisory authorities must be put into practice as best possible. CEIOPS has already started to promote this approach. 1 In this context, we support the proposal of the Report to analyse any possible supervisory failure in Member States. 1.2 Merging of insurance and banking supervision Moreover, the de Larosière Group suggests a discussion on whether in the medium term the planned separate European authorities for insurance and banking supervision (Recommendations 18 and 22) should be merged into a single authority (Recommendation 24). Thus, it would be easier to supervise financial conglomerates and the complex landscape of different authorities would be adjusted (para. 216). Insurance and bank products are not comparable to each other in essence. While the former focus on protection against risks by handling expected losses according to the law of large numbers, the latter mainly deal with saving and credit transactions. Either requires specific supervisory rules and cultures and hence supervisory staff that is familiar with the particularities of these sectors. Also, within the German financial supervisory authority, BaFin, supervision continues to be carried out in separate, technically independent pillars. As far as any cross-sector action by the planned European authorities is required, this is working already now between CEIOPS and CEBS and will be improved further within the scope of the planned European Systemic Risk Council (Recommendation 16). 1 General Protocol relating to the collaboration of the insurance supervisory authorities of the Member States of the European Union, CEIOPS-DOC-07/08. page 4 / 14

2. European System of Financial Supervision (ESFS) 2.1 The future of CEIOPS Material resources The de Larosière Group proposes that the so-called 3L3 committees receive larger material resources in the future in order to improve the possibilities and the quality of their work (Recommendation 21). The German insurance industry supports this proposal. The so-called 3L3 committees are an important interface between national supervisory authorities and require adequate financial resources to be able to fulfil their tasks. The first steps in this direction have already been taken by the European Commission by presenting a legislative proposal 2 which is to put the funding of the 3L3 committees on a new basis. The improved funding of the three committees, as proposed by the Commission (8 million euro during four years), is a first step in the right direction, but needs still to be improved further. Transformation of CEIOPS into an authority As a next step, the Report proposes the transformation of the existing 3L3 committees into European authorities as part of a European System of Financial Supervision (ESFS) (Recommendation 22). This is taken up by the European Commission which suggests that the three existing committees should be transformed into authorities within a European financial supervisory system (vol. 1, p. 6). For the purposes of strengthening the European element and greater coherence of supervision, this is basically to be welcomed. In late January 2009, the EU Commission already adopted concrete rules on the staffing of and the decision-making within CEIOPS 3, which, as far as their detailedness is concerned, partly even go beyond what is proposed by the Report (Recommendation 22). 2 Proposal for a decision of the European Parliament and of the Council establishing a Community programme to support specific activities in the field of financial services, financial reporting and auditing (document COM(2009)0014 C6-0031/2009 2009/0001(COD)). 3 Commission decision of 23 January 2009 establishing the Committee of European Insurance and Occupational Pensions Supervisors (document C(2009) 178 final). page 5 / 14

Powers However, it is not planned that transformation into a European authority actually entails that CEIOPS would then become a European insurance supervisory authority in the narrow sense. In fact, operational supervision is to remain with national supervisory authorities (Recommendations 18, 22 in fine). Considering the future tasks intended for the 3L3 committees (Recommendation 22, penultimate indent, nos. i) to vii)) as well as the statements made by the Commission in its Communication (vol. 1, pp. 5, 6), only the tasks of adoption of binding standards and the adoption of binding technical decisions to individual financial institutions concern the traditional sphere of competence of national supervisors. However, the former is below the legislative level and is hence a task which CEIOPS has performed already in the past. In fact, the standards developed by CEIOPS have binding effect because the affiliated supervisors have committed themselves to comply with them. The performance of this task is to be welcomed because it will contribute to the coherence of supervisory cultures in the Union. Concerning the second task (binding technical decisions to individual financial institutions), some further clarification is required: so far, it is not apparent what is ultimately meant by this in concrete terms, and it cannot be expected that full discretionary power is conferred to the EU in this respect. Here, it cannot be completely denied that there is actually a risk of single-case decisions of CEIOPS conflicting with operational supervision at national level (Recommendation 22 in fine). page 6 / 14

Dispute settlement (mediation) However, we welcome that in the future CEIOPS is to be able to settle disputes between supervisors in a binding way (Recommendation 22, 4 th indent, i)). This represents an organic further development of the work performed by CEIOPS in this respect even now. 4 At present, the Commission decision 5 only provides for a mediation procedure the result of which is not binding on the supervisory authorities concerned (Art. 4 (1) (a) in conj. with recital 13). Greater importance has to be attached to a binding mediation process between national supervisors also insofar as the Report considers this to be a prerequisite for the implementation of a group support regime (Recommendation 5). Colleges of Supervisors In the short term (late 2009), the 3L3 committees are also to prepare the bases for creation of the so-called Colleges of Supervisors because they are to be in charge of the coordination of the Colleges for groups engaged in cross-border activities (Recommendation 21). This is supported by the European Commission (vol. 1, pp. 5, 6). The foundation for this has already been laid by its decision of 23 January 2009 6. More efficient cooperation between supervisory authorities in supervising groups engaged in cross-border activities within the EU corresponds with a demand made by the German insurance industry for a long time. So far, it has met with a multitude of difficulties in practice, which are hoped to be eliminated by the new procedure. CEIOPS and CEBS are already preparing actively for assuming this task, which also becomes apparent from the adoption of a document containing the essential rules for the functioning of the Colleges of Supervisors. 7 4 CEIOPS: Protocol On Mediation Mechanism between Insurance and Pensions Supervisors, October 2007. 5 Commission decision of 23 January 2009 establishing the Committee of European Insurance and Occupational Pensions Supervisors (document C(2009) 178 final). 6 Commission decision of 23 January 2009 establishing the Committee of European Insurance and Occupational Pensions Supervisors (document C(2009) 178 final), Art. 4 (1) (e). 7 Colleges of Supervisors 10 Common Principles (document CEIOPS-SEC- 54/08, CEBS 2008 124, IWCFC 08 32 of 27 January 2009) page 7 / 14

2. 2 Supervisory powers and supervisory arbitrage The de Larosière Group demands that supervisory authorities within the EU have adequate supervisory powers and deterring possibilities of sanctions (Recommendation 6). The European Commission shares this position in its Communication 8 (vol. 1, p. 8; vol. 2, p. 5). The German insurance industry welcomes this recommendation. It has always advocated far-reaching and comprehensive supervisory powers according to an international standard 9. Elimination of competitive distortions Additionally, it is recommended that the so-called 3L3 committees are to identify national derogations the elimination of which would improve the functioning of the Single Market. Competitive distortions and supervisory arbitrage are to be reduced (Recommendation 10). The European Commission has taken up this indication in its Communication and wants to follow it (vol. 1, p. 7; vol. 2, p. 3). The German insurance industry welcomes this recommendation. Member State options ultimately lead to different levels of supervision in Member States and contribute to competitive distortions and impediments to the exercise of the freedom to provide services. A coherent supervisory law helps to continue to harmonise the Single Market. Therefore, the German insurance industry takes a critical stance on the indication contained in the recommendation according to which the national legislator should be in a position to issue stricter rules than those in harmonised law. For instance, the criticised situation in the field of insurance mediation, which is fragmented despite the EU directive on which legislation is based, is in no small part due to different national tightening. This runs contrary to the goal of avoiding competitive distortions and supervisory arbitrage. These may only be prevented by full harmonisation which prohibits any stricter rules of the national legislator. 8 Communication for the spring European Council Driving European recovery vol. 1 & 2 (doc. COM(2009) 114). Hereinafter, it is always referred to this communication without any mention of this. 9 2003). ICP 3 (IAIS INSURANCE CORE PRINCIPLES AND METHODOLOGY October page 8 / 14

2. 3 Resources and independence of national supervisory authorities The Report stresses that even in the future national supervisory authorities are to remain fully responsible for the day-to-day supervision of insurance companies (Recommendation 22 in fine). This meets with full approval from the German insurance industry. A supervisory authority which may be contacted in the respective country and which is familiar with local particularities and for which there are no language barriers is indispensable for any efficient supervision. Moreover, anything else would lead to a clear shift in competency between Member States and the EU, which would not be possible without altering the EC Treaty. Currently, it is unlikely that any political consensus will be achieved on this. Moreover, it is proposed that national supervisory authorities are strengthened in order to improve the level of supervision within the EU. In this respect, the Report especially addresses the issue concerning the material resources of national supervisory authorities. It is proposed to make improvements in the field of resources and remuneration of supervisors so as to be able to employ the highly qualified staff required (Recommendation 19). The German insurance industry has always held the view that stringent and high-quality supervision of insurance companies is an important factor for assessing the quality of the respective insurance market. Therefore, even in the past, it has endorsed all efforts aimed at improving the material resources of supervisory authorities, such as the changeover made in Germany a few years ago to full financing of supervision by the sector in order to avoid any restrictions due to the consolidation efforts of public budgets. The increasing interlinking of markets and the growing complexity of corporate structures and products involve rising qualitative standards for supervision. On the one hand, this requires intensive training and exchange between national authorities among each other and with insurance companies (Recommendation 19). On the other hand, it will be vital for supervisory authorities to be competitive as employers also with regard to issues concerning remuneration. The proposal that the European Commission should initiate a study on whether supervisors in Member States are actually able to act independ- page 9 / 14

ently (Recommendation 19) is also welcomed. We consider this independence to be important because national governments are in charge of legislation while supervisory authorities are responsible for the operational exercise of supervision. 2.4 Insurance Guarantee Schemes (IGS) Although the Report stresses that the Group did not deal with details of guarantee schemes for the insurance industry more closely, it recommends that basically such schemes also are introduced in the insurance sector and that these are based on the principles proposed by the group for the banking sector (Recommendation 14 and para. 138). This has been taken up by the European Commission which announces legislative proposals in this area 10 which would involve the insurance industry as well (vol. 1, p. 7; vol. 2, p. 4). In the opinion of the German insurance industry, the approach according to which bank and insurance products are to be equated with each other with respect to guarantee schemes is not sufficiently differentiated. It does not allow for the fundamental difference between insurance and bank products, any more than for the fact that within insurance products there is a considerable difference between life and non-life insurance. The detailed comments of GDV on the OXERA study, which was initiated by the Commission in preparation of a possible legislative proposal, can be summarised as follows: The German insurance industry would welcome EU-wide mandatory introduction of guarantee schemes in the field of life (and private health) insurance because these lines play a very particular role in social protection of large sections of the population. These lines of insurance are substituted for state services of general interest or complement these. Therefore, in this area, there is a need for special protection of policyholder claims, which is worth recognising. However, such considerations cannot be applied to property and casualty insurance. Here, the policyholder is normally much less affected by the insolvency of an insurer: usually, he only has to look for another insurer to continue to have the risk covered, which is normally possible without difficulty because unlike in life insurance his risk situation does not dete- 10 make appropriate legislative proposals. page 10 / 14

riorate in the meantime due to ageing. Therefore, the German insurance industry is very sceptical about any obligation to set up guarantee schemes which goes beyond the life sector. Basically, the setting-up of guarantee schemes relieves the policyholder of his obligation to make a decision on his own responsibility in favour of a company that operates sustainably. In the especially practice-relevant area of motor TPL insurance almost all EU Member States have established guarantee funds on a voluntary basis. Should the European legislator engage in the introduction of an obligation to set up guarantee schemes (also) in the field of property, casualty and accident insurance, provision would have to be made for deductibles and limits of compensation. Moreover, the financing arrangements of the scheme (compensation or portfolio continuation, ex-post or ex-ante financing) should be left to the discretion of Member States. Any rule which fulfils the principle of home country control, which has been introduced in the EU, will also have to deal with the issue concerning membership in such protection schemes. After all, the scope of protection of such a scheme should be restricted to policyholders that are consumers because, if at all, only consumers need this protection because they possibly lack the necessary resources to get a sufficient picture of the sustainability of the insurance cover offered in the market. On the other hand, entrepreneurs and traders may be expected to be either capable of making the necessary assessment of the supplier on their own or of seeking professional advice. II. Other points 1. Accounting Already since the beginning of the financial market crisis there has been a fierce debate on whether and to what extent accounting rules have aggravated or even caused this crisis. Therefore, it is pleasing that both in the Report of the de Larosière Group and in the Communication of the Commission position has been taken up and positive recommendations have been made on the further development of accounting and on the governance of standard setting. The recommendations on both areas receive almost full support from the German insurance industry. page 11 / 14

Mark-to-market valuation We think that the principle of mark-to-market valuation (more frequently discussed under the keyword of fair value ), which is enshrined in international rules, is still basically suited to make appropriate accounting and accurate representation of the actual net assets, financial position and results of operations possible. However, the current turbulences in international financial markets also make clear that this valuation concept in its present form comes up against limits if markets are influenced by atypical and exceptional developments and no longer provide realistic values. Therefore, the insurance industry pleads for conceptual further development also allowing for the case of inactive or illiquid markets and providing the methodical basis for achieving stable and adequate results in critical market phases. The insurance industry especially supports the recommendation that accounting rules should not contradict the business model, promote procyclical conduct and deter from any long-term commitment. For instance, the business model of insurance companies has the particularity that in an insurance balance sheet assets and debts are not independent of each other, but interact with one another. Due to supervisory regulations, insurance companies are required to hold investments to cover long-term commitments arising out of insurance contracts. Such investments are not left to the free disposal of the insurance company. Any value adjustment concerning investments due to temporary price losses, which considering the long-term investment horizon will in all probability not materialise, leads to an incorrect picture of the actual net assets, financial position and results of operations of the insurance company and may subject it to additional own funds requirements for prudential reasons. This special interaction has also to be allowed for accordingly in terms of valuation of financial instruments. Strengthen the supervisory and governance structure of the IASB Again and again, reservations about the legitimacy of the International Accounting Standards Board (IASB) are expressed in public. On the one hand, the IASB is a purely private-law body, on the other hand, it makes proposals on the design of accounting rules to national and European legislators which these cannot avoid easily. Although the IASB lacks legislative competence which is why its accounting standards must be adopted by the European Parliament beforehand the work of IASB has a factual effect which the legislator may avoid only in exceptional cases. page 12 / 14

Against this background, the demands for strengthening the supervisory and governance structure of the IASB are understandable and logical. However, as the process of improving the supervisory and governance structure of the IASB is already well under way, careful consideration should be given to the question which measures are actually still required from the European point of view and to what extent progress has already been achieved. Also, it should always be ensured that the professional independence of the IASB remains intact. The improvement of the structures of the IASB should be oriented towards compliance with the due process in setting standards and hence strengthen credibility and confidence in the standard setting process. 2. Solvency II The core element of a stable financial system is a harmonised and riskoriented supervisory system which, as a level playing field, provides the necessary regulatory framework. The agreement on a new form of insurance supervision is to be welcomed. Against the background of the financial market crisis, any other decision would have sent a wrong signal. The Report rightly takes up the demand for integrated supervision of insurance groups. The relevance of this proposal has been proven by spectacular difficulties experienced by banks. Unfortunately, Member States have not been able to agree on a group support regime (Recommendation 5). However, it is foreseen that this decision will be reviewed three years after the entry into force of Solvency II. Thus, an opportunity has been missed to play today already a pioneering role in group supervision whose weaknesses in the form as it is became clearly evident, above all, during the financial market crisis. The implementation of group support with appropriate safeguards and binding rules on mediation in the case of conflicts between the group supervisor and solo supervisors would have further improved the regulatory framework on the part of supervision and would have been an up-to-date response to the financial market crisis. 3. Other financial market regulation The Report recommends that the regulatory gaps be closed for all companies operating in the financial market whose business activity is of a systemic nature (Recommendation 7). page 13 / 14

Hedge funds and private equity funds In the interest of general investor protection and stability of the international financial system, the respective national supervisory authorities should be able to directly investigate market-relevant hedge funds. In this respect, we support the objective that as regards content the main emphasis should be placed on transparent disclosure of the financial and ownership structure and of the main risks of the investment strategy. Also, an adequate equity base seems to be absolutely necessary. Derivatives and securitizations (Recommendation 8) We welcome the considerations on the creation of a central clearing counterparty for the settlement of credit default swaps (CDS) in Europe. In this respect, adequate capital resources of the clearing centre and wellfunctioning supervision by CESR are necessary prerequisites for any appreciable market stabilisation in this line of business. Moreover, we support the plans for simplification and standardisation of negotiable OTC derivative structures. Also, we consider that it is basically appropriate that issuers of products with complex structures, such as CDS or various credit ABS, have to hold part of the nominal value (approx. 5 %) in their own books until maturity. However, in the securitizations segment, existing sector-specific differences have imperatively to be taken into account. In this respect, securitization of credit risks requires a risk approach which is different from that for securitization of underwriting or other risks. Compared with credit risks, insurance risks correlate much less with general economic developments. Consequently, possible problematic consequential effects, such as those currently experienced with regard to credit ABS in the segment of insurance securitizations, may practically be excluded. Therefore, the sole adoption of regulatory requirements for credit ABS in the field of insurance securitizations is neither appropriate nor does it lead to the desired results. Berlin, April 2009 page 14 / 14