The insurance industry and the financial crisis

1. The insurance industry and the financial crisis London Insurance InstituteLondon, 17 March 2010 Prof. Karel VAN HULLEHead of Insurance and Pensions

2. 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

3. 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

4. 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

5. Group supervision & cross-sectoral convergence Groups are recognised as an economic entity => supervision on a consolidated basis (diversification benefits, group risks) 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) Solvency II: 3 pillars and a roof

6. Solvency II Timetable for 2007-2012 2012 2011 2007 2008 2009 2010 2006 Directive development (Commission) Directive adoption (Council & Parliament) Implementation (Member states) CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training & development Commission preparatory work implementing measures Adoption of implementing measures July 2007 Solvency II Proposal - Adopted Directive published in December 2009 October 2012 Solvency II enters into force QIS 2 QIS 3 QIS 4 QIS 5

7. We are here!

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. Two pillars of new supervisory structure • European Systemic Risk Board (ESRB); and • European System of Financial Supervisors (ESFS).

15. ESFS structure Steering Committee (replacing JCFC) European Supervisory Authorities: European Banking Authority European Insurance and Occupational Pensions Authority European Securities Markets Authority National Supervisors

16. 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

17. 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

18. Concluding remarks • Need to strike the right balance in Solvency II between prudence and efficient allocation of capital • Solvency II will seriously upgrade the level of supervisory convergence • The creation of EIOPA will lead to further professionalisation of supervision