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The insurance industry and the financial crisis

The insurance industry and the financial crisis

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The insurance industry and the financial crisis

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  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