CIA Annual Meeting
LOOKING BACK…focused on the future
Groupe Consultatif
Solvency II: Current Status
Rolf Stölting
St. John's, June 29th 2005
Session 5709
Overview over initiatives / working groups (Europe)
Internal Market DG
Financial Institutions:
Insurance
CEIOPS Committee
28 countries: EU, Norway,
Iceland, Liechtenstein
Board
of European Insurance
and Occupational
Pensions Supervisors
Pillar I Life
Pillar I Life
Groupe Consultatif
Pillar I Non-life
Pillar I Non-life
Pillar II
Pillar II
founded 1978 as technical
advisory institution for the EU
Association of European
actuarial associations
Pillar III Account.
Pillar III Account.
Groups etc.
Groups etc.
Project team
Advisory Board
EU Commission
Institut des
Actuaires
Institute of
Actuaries
Consultative Panel
appr. 17 named persons:
CEA, Mutuals,
Groupe Consultatif
etc.
Steering
Group for
Solvency II
CEA
(Comité Européen
des Assurances)
GDV
June 2005
DAV
FFSA
ABI
Time-Frame EU-Commission / CEIOPS
1st Wave
Call for
Advice
Progress
Report
2nd Wave
Call for
Advice
Draft
Answers
Progress
Report
3rd Wave
Call for
Advice
31.10.04
28.02.05
Technical
Advice
Draft
Answers
Technical
Advice
Progress
Report
Draft
Answers
30.06.05
31.10.05
Technical
Advice
28.02.06
Three-pillar approach similar to Basel II
Solvency II
Pillar I
Pillar II
Pillar III
Quantitative
assessment
of solvency
Supervisory
control
procedure
Market
discipline
(transparency
and
disclosure)
First Wave of Calls for Advice
• Calls for Advice 1- 6 (Pillar II):
•
•
•
•
•
•
Internal control and risk management
General aspects of the supervisory process
Quantitative tools
Transparency of supervisory action
Investment management rules
Asset-liability management
Second Wave of Calls for Advice
• Calls for Advice 7- 12 (Pillar I):
•
•
•
•
Technical Provisions in Life Assurance
Technical Provisions in Non-life Assurance
Safety Measures
Solvency Capital Requirement: Standard Formula
(Life and Non-life)
• Solvency Capital Requirement:
Internal Models (Life and Non-life) and their validation
• Reinsurance (and other risk mitigation techniques)
Second Wave of Calls for Advice
• Calls for Advice 13 - 18 (Pillar I, Pillar II):
• Quantitative impact Study and Data related Issues
• Powers of the Supervisory Authorities
• Solvency Control Levels
• Fit and proper Criteria
• Peer Reviews
• Group and Cross-sectoral Issues
Third Wave of Calls for Advice
• Calls for Advice 19 – 23:
•
•
•
•
•
Eligible elements to cover the capital requirements (Pillar I)
Cooperation between supervisory authorities (Pillar II)
Supervisory reporting and public disclosure (Pillar III)
Procyclicality (Pillar II)
Small and medium sized enterprises (Pillar I)
Pillar 1 – Quantitative requirements (1)
• Increased level of harmonisation for technical provisions
• Best estimate topped up with a risk margin
• Solvency Capital Requirement (SCR) :
• Reflects level of capital to absorb significant volatility of
results and to give reasonable assurance to policyholders
• If undertaking does not fulfil SCR, amount of capital covering
the SCR has to be re-established in due time, based on concrete
and realisable plan submitted to supervisor for approval.
• Parameters calibrated in such a way that quantifiable risks to
which insurer is exposed are taken into account
• Based on amount of economic capital corresponding to a ruin
probability of 0,5 % (VaR of 99,5 %) and a one year time
horizon (working hypothesis)
• Method for Standard formula not yet fixed
Pillar 1 – Quantitative requirements (2)
• Minimum Capital Requirement (MCR) :
• Reflects level of capital below which ultimate supervisory
action would be triggered.
• Level of MCR will be set once quantitative impact studies
have been performed
• Possibility to be calculated in a simple and robust manner
• MCR will have an absolute floor
Pillar 1 – Quantitative requirements (3)
• Solvency Capital Requirement as the main instrument of a
two-tier system under normal conditions
Solvency Capital
Requirement
Safety margin on
technical reserves
Technical
reserves
assets
Pillar 1 – Quantitative requirements (4)
Solvency Capital
Requirement (SCR)
Minimum Capital
Requirement (MCR)
Intervention of supervisory body
Additional levels
of intervention?
Pillar 1 – Quantitative requirements (5)
• Risk classification :
• Based on IAA risk classification
Underwriting risk
Credit risk
Market risk
Operational risk
Liquidity risk
• Not quantifiable risks will be taken into account in pillar 2
• Internal models :
• May replace standard formula of SCR if validated
• Validation criteria and process to be developed and
harmonised
• Partial use of models may be authorised
Pillar 2 – Supervisory activities
• Aim to identify insurers with financial, organisational and
other features producing a higher risk profile
• Increase level of harmonisation of supervisory methods, tools
and powers
• Broader scope than Basel II
• Need for increased cooperation between supervisors
combined with peer reviews
Pillar 3 – Supervisory reporting and
public disclosure
• Supervisory reporting :
• Harmonised reporting to supervisors
• Goes beyond the notion of financial reporting rules, including
different types of information a supervisor needs to perform
his functions
• Information normally not in public domain
• Public disclosure :
• Transparency and disclosure of information to public will
serve to reinforce market mechanisms and discipline
• Should be in line with IASB to reduce admin burden
• Should be compatible with disclosure requirements of banking
sector.
Road to Solvency II
•
•
•
•
Draft proposal for Framework Directive: mid 2006 (Commission)
Implementing measures: in 2009 (?)
CEIOPS is primary advisor of Commission
CEIOPS advises through specific "calls for advice"
(early, extensive, open consultation with market participants
expected from CEIOPS)
• Framework for Consultation made up by Commission
• Commitment of Groupe Consultatif / IAA explicitly appreciated
Source: MARKT/2506/04
Thank you for your attention!