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1
The insurance industry and the financial crisis
London Insurance InstituteLondon, 17 March 2010Prof. Karel VAN HULLE
Head of Insurance and Pensions
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Financial crisis and insurance
• Insurers went through the crisis relatively unharmed
• Strong cash flows, long-term liability driven investment policies, stable customer base
• Insurers that had problems were involved in extensive banking or credit operations
• Lack of proper risk management has been an issue in a number of cases
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Actions undertaken
• Close co-operation in the context of G20, Financial Stability Board and Joint Forum
• ECOFIN action plan
• Proposal to improve the supervisory architecture in the EU
• Question to all parties concerned whether Solvency II needed to be changed
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Recapitulation: Why Solvency II?
• Present capital requirements are not sufficiently risk sensitive
• Group supervision is not dealt with in its own right
• More efficient capital allocation would allow insurers to take on more risks
• Supervisory convergence must be strengthened
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Solvency II: 3 pillars and a roofSolvency II: 3 pillars and a roof
Pillar 1: quantitative requirements
1. Harmonised calculation of technical provisions
2. "Prudent person" approach to investments
instead of current quantitative restrictions
3. Two capital requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital
Requirement (MCR)
Pillar 2: qualitative requirements and
supervision
1. Enhanced governance, internal control, risk
management and own risk and solvency assessment
(ORSA)
2. Strengthened supervisory review, harmonised
supervisory standards and practices
Pillar 3: prudential reporting and public
disclosure
1. Common supervisory reporting
2. Public disclosure of the financial condition and
solvency report
(market discipline through transparency)
Group supervision & cross-sectoral convergence
Groups are recognised as an economic entity=> supervision on a consolidated basis
(diversification benefits, group risks)
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Solvency II Timetable for 2007-2012Solvency II Timetable for 2007-2012
Directive development (Commission)
CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training &
development
2006 2007 2008 2009 2010 2011 2012
Directive adoption(Council & Parliament)
Implementation(Member states)
QIS 2
July 2007 Solvency II Proposal - Adopted Directive published in December 2009
QIS 3
Commission preparatory work implementing measures
Adoption of implementing
measures
QIS 4
October 2012 Solvency II enters into force
QIS 5
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Solvency II and financial crisis
• Stakeholders confirm that Solvency II is needed because of higher level of harmonisation and risk orientation
• CEIOPS publishes paper « lessons learned from the financial crisis » in March 2009
• Text of Framework Directive is amended in order to introduce provisions dealing with financial crisis situations
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Changes in Solvency II Framework Directive
• Supervisory authorities shall give proper consideration to financial stability and potential procyclical effects of their actions
• Symmetric adjustment mechanism in equity risk sub-module
• Extension of recovery period in the event of exceptional fall in financial markets
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Adaptations at Levels 2 and 3
• Pillar 1: Quality of the capital, alternative risk transfer, market risk, correlation between risks
• Pillar 2: Reliance on CRA’s, liquidity risk, internal models
• Pillar 3: possible procyclical effects of market value based disclosures
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What remains to be done on SII?
• Commission drafting of implementing measures based upon CEIOPS’ advice but in close co-operation with MS and stakeholders
• QIS 5 will be the ultimate test of the standard formula
• Implementing measures to be accompanied by impact assessment
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Timing for SII
• Commission Proposal (s): end 2010
• Stakeholder meeting QIS 5: 30 April 2010
• Public Hearing: 4 May 2010
• Final technical specifications: June 2010
• Start of QIS 5: August 2010
• Adoption of implementing measures: end 2011
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Supervisory architecture
• De Larosière expert group delivers report end February 2009
• Proposal to keep supervision at national level but with strengthening of EU level
• Policy proposals by EC end May 2009
• European Council agrees: 19 June 2009
• EC Legislative proposals: September 2009
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Two pillars of new supervisory structure
•European Systemic Risk Board (ESRB); and
•European System of Financial Supervisors (ESFS).
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ESFS structure• Steering Committee (replacing
JCFC)• European Supervisory
Authorities:– European Banking Authority– European Insurance and Occupational
Pensions Authority– European Securities Markets Authority
• National Supervisors
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EIOPA
• Binding technical standards: common rulebook
• Binding mediation: conflicts between supervisors, application of EU rules
• Group supervision: observer in colleges
• Crisis-management
• Full-time Chairman and more resources
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State of progress
• Political agreement in Council in December 2009
• Vote in EP expected in June/July 2010
• To be followed by amendments in sectoral legislation
• Changes in insurance legislation expected some time in Spring 2010
• EIOPA to start: 1 January 2011
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