EIOPA: recent developments in insurance and pensions EVCA Investors' Forum Geneva, 14 March 2012
Content What is EIOPA? Recent developments on Solvency II EIOPA s advice on pensions 2
EIOPA: Background & Timeline Financial crisis in 2007 and 2008 prompted a review of supervisory model 19 June 2009: European Council confirmed that a European System of Financial Supervision (ESFS) should be established. 22 September 2010: European Parliament approved legislation allowing establishment of European Supervisory Authorities (ESAs) 16 December 2010: EIOPA Regulation enters into force 1 January 2011: EIOPA established 10 January 2011: first meeting of the Board of Supervisors formalises EIOPA s establishment. Election of the Management Board and acting Chair validates the establishment of EIOPA 3
Staff demographics As of 1st December 2011 54 staff from 19 different countries: Male: 43 % Female: 57 % SNEs: 5 Staff (TAs+CAs): 48 Trainees: 1 *Yellow: Represented by EIOPA staff Blue: Not yet represented 4
EIOPA s Mission Protect the public interest by contributing to the short, medium and long term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses 5
EIOPA shall contribute to Prevent regulatory arbitrage and promote equal conditions of competition Ensure appropriate regulation and supervision of risk taking by the (re)insurance and occupational pension industry Ensure integrity, transparency, efficiency and orderly functioning of financial markets Enhance consumer protection Strengthen international supervisory coordination Improve functioning of financial markets, incl. a sound effective and consistent level of regulation and supervision 6
EIOPA s Powers Art 8 (2) Develop draft regulatory technical & implementing standards Issue guidelines/recommendations regarding consistent, efficient and effective supervisory practices Take individual decisions addressed to CAs or financial institutions Issue opinions to the European Parliament/Council/Commission Collect necessary information concerning financial institutions Develop common methodologies for assessing the effect of product characteristics/distribution processes on the financial position of institutions and on consumer protection Provide a centrally accessible data base of registered financial institutions 7
EIOPA and national supervisors as part of the European System of Financial Supervision European Systemic Risk Board (ESRB) macro view ECB Council (with insurance and securities alternates where necessary) + + + Chairs of EBA, EIOPA & ESMA European Commission Non-voting: Representative of the national supervisor(s) per Member State + EFC President European Supervisory Authorities and National Supervision micro view European Banking Authority (EBA) European Insurance and Occupational Pensions Authority (EIOPA) European Securities and Markets Authority (ESMA) National Banking Supervisors National Insurance and Pension Supervisors National Securities Supervisors 8
Recent developments in Solvency II
Objectives and opportunities of Solvency II Objectives: o Deepen the integration of the internal market (Single Market) o Enhance protection of policyholders o Improve international competitiveness of EU insurers o Achieve better regulation Opportunities: o Better match between supervisory framework and internal risk management o Harmonised supervision and reporting requirements within the EEA o Improved group supervision o Convergence of supervision in the EEA 10
The foundation of Solvency II Supervision of solo undertakings and groups Pillar 1 Pillar 2 Pillar 3 Quantitative requirements Technical provisions (BE and risk margin) 2 capital requirements (MCR and SCR SF/IM) Prudent person investment rule Own funds (3 tiers) Total balance sheet approach Market-consistent valuation Approval of internal models Qualitative requirements Internal control and risk management (incl. ORSA) Supervisory review process (qualit. & quant - Add-ons) Focus on firm s responsibility Convergence of supervisory practices Reporting Supervisory reporting Public disclosure Market discipline Convergence of supervisory reporting More pressure from rating agencies, capital markets 11
Development process of Solvency II: the single rule book 1. Directive : Entry into force 1 January 2013 2. Implementing measures QIS5 tested the feasibility of the proposed measures Delegated acts (known as Level 2 measures ): Ongoing discussion in Commission Solvency Expert Group, to be followed by approval in Council and Parliament Implementing acts: development of implementing technical standards by EIOPA, endorsement by Commission 3. EIOPA Guidelines and Recommendations EIOPA to ensure convergent practices of industry and supervisors 4. EIOPA tasks under Solvency II Omnibus II Directive to define scope and timing For example: derive and publish risk free rate, be consulted and settle disagreements on group internal models, appointment of group supervisor, determine exceptional fall in financial markets (PII dampener) 12
EIOPA s work on standards and guidelines EIOPA is currently working on around 50 sets of guidelines and standards o Support convergent application of the SII framework, including crucial elements such as the risk free rate. Internal models, Solvency capital requirements, Own funds, Technical provisions, Valuation of assets and liabilities Group supervision Supervisory transparency and accountability, reporting and disclosure Governance, ORSA consultation concluded Supervisory review process, capital add-ons 13
Other EIOPA initiatives Pre-application initiative for internal models Promote early dialogue between supervisors and undertakings to prepare approval processes for various elements as early as from 2013 onwards Support supervisors with questions and answers procedure on operational supervisory issues Training, conferences 14
Timetable Implementation efforts in 2013 Entry into force on 1 January 2014 Development of standards and guidelines in 2011-2012 Implementing measures discussed in 2010-2011 Directive adopted end 2009 15
Timeline: Omnibus II What is the Omnibus II Directive about? o About EIOPA and Solvency II o Powers and scope of regulatory and implementing technical standards and much more o Transitional measures o Implementation deadline 16
Solvency II and private equity Risk basis of Solvency II requires insurers to hold capital against the risks associated with different classes of asset Private equity classed as other equity (under the standard approach). As with other assets, classification and level of capital requirements based on evidence and after consultation 17
EIOPA s advice on pensions
Background April 2011: Commission asked EIOPA s advice on review of IORP (occupational pensions) directive February 2012: EIOPA s advice delivered 19
What are the key elements of the advice? Entire EU regulatory framework for occupational pensions Acknowledgement of the social and labour law context Scope unchanged, but Commission to consider Valuation of assets and liabilities market-consistent Holistic balance sheet - later Common principles for the governance of IORPs Information to members of defined contribution schemes to include a key information document and an annual statement 20
What will be the impact on different sorts of scheme? Defined contribution schemes Defined benefit schemes Cross-border schemes 21
Defined contribution schemes Aim: members should have confidence in their DC IORP regardless of where in the EU it is located Information o Correct, understandable and not misleading o Key information document o Annual statement Default funds etc. o Identification and diffusion of best practice o Possibility that some elements mandatory/regulated at EU level Governance/disclosure 22
Defined benefit schemes Principles o Transparency o Comparability o Comprehensiveness Recommendations o Valuations market consistent o Valuations include enforceable elements of pensions promise o Holistic balance sheet o Prudent person rule for investments 23
Defined benefit schemes: holistic balance sheet Diversity of security mechanisms for IORPs Holistic balance sheets includes all economic exposures Prudential supervisory assessment tool Recommended in principle In practice: o Methodology for quantification o Cost effectiveness of methodology 24
Illustration of holistic balance sheet 25
Defined benefit schemes: how does this relate to the Solvency II framework for insurance? Similarities o Market-consistent approach o Explicit recognition of risks and of sources of finance and other support o Common governance principles Differences o Recognition that some sources of IORP support are absent or uncommon for insurance o Recognition of specific features of IORPs o Particular emphasis on proportionality 26
Cross-border schemes 84 out of 140,000 Simplified definition of cross-border: o When IORP and sponsoring activity in two different member states Definition of prudential regulation 27
Other issues: governance Common level of principles In general, Solvency II the starting point Governance requirements o Fit and proper o Risk management o Own risk and solvency assessment o Internal controls o Internal audit o Actuarial function o Outsourcing o Custodian/depository 28
Other issues: supervision Supervisors should have the power to carry out stress tests Potential pro-cyclical impact considered If greater harmonisation, then should be increased harmonisation of information to supervisors 29
What happens next? A process not an abrupt outcome QIS o Comprises a quantitative study of the impact on IORPs in different member states of the capital requirements section of the advice o Provides quantification of the costs of the different options and bases o Does not however include a cost-benefit analysis of the results o EIOPA will consider whether to offer further views on those aspects of valuation and capital requirements which are affected by the QIS. The current intention is to complete the QIS by end-q3 2012 30
Summary History, objectives and powers of EIOPA Latest position on implementation of Solvency II What advice EIOPA has provided on occupational pensions 31
Thank you Justin Wray Head of Policy Unit EIOPA email: Justin.Wray@eiopa.europa.eu phone: +49-69-951119332