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Solvency II and Omnibus II: A Happy Marriage?

Solvency II and Omnibus II: A Happy Marriage?. ICIR, Frankfurt, 5 July 2012 Prof. Karel Van Hulle Head of Insurance and Pensions European Commission. What is Solvency II?. It is not Solvency I Risk based solvency regime Market consistent valuation of assets and liabilities

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Solvency II and Omnibus II: A Happy Marriage?

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  1. Solvency II and Omnibus II: A Happy Marriage? ICIR, Frankfurt, 5 July 2012 Prof. Karel Van HulleHead of Insurance and PensionsEuropean Commission

  2. What is Solvency II? • It is not Solvency I • Risk based solvency regime • Market consistent valuation of assets and liabilities • Two capital requirements and supervisory ladder of intervention • Three pillars of equal importance

  3. What is Omnibus II? • It is not Omnibus I • It is not an old term for bus, i.e. a road vehicle to carry passengers (Wikipedia) • It is a single legislative document containing amendments to several pieces of legislation (Wikipedia) • The main objective is to amend the Solvency II Framework Directive

  4. What is marriage? • “Marriage is the only war in which yousleep with the enemy” (François, Duc de la Rochefoucauld) • “Marriage is a meal where the soup isbetter than the desert” (Austin O’Malley)

  5. Why do we need Omnibus II? The world has changed

  6. New European Supervisory Structure European Systemic Risk Board (ESRB) Governors of NCBs + ECB President and Vice-President Chairs of EBA, EIOPA & ESMA European Commission Non-voting: One representative of the competent national supervisor(s) per Member State + EFC President + + + Information on micro-prudential developments Recommendations and/or early risk warnings European System of Financial Supervisors (ESFS) European Banking Authority (EBA) European Insurance and Occupational Pensions Authority (EIOPA) European Securities and Markets Authority (ESMA) National Banking Supervisiors National Insurance and Pension Supervisors National Securities Supervisors

  7. Omnibus II Directive: content • Sectoral adaptation of insurance legislation to new supervisory architecture (powers of EIOPA) • Alignment with new Lisbon Treaty (new procedure for empowerments to the Commission) • Transitional measures, first time application, transposition by Member States of the Solvency II Framework Directive

  8. Omnibus II Directive - EIOPA Additional tasks to be attributed to EIOPA in the context of Solvency II Binding mediation between supervisory authorities Determination of exceptional fall in financial markets (pillar 2 dampener) Definition of risk free interest rate curves Definition of specific technical aspects of the SCR standard formula

  9. Omnibus II negotiations • Commission Proposal: January 2011 • Council general approach : Sept.2011 • Vote in ECON (EP) : March 2012 • Trilogue negotiations until? • Adoption in EP plenary: October 2012 • Publication: Nov./Dec. 2012

  10. Omnibus II Issues • Empowerment to Commission and/ or to EIOPA • Long term guarantee package (movement from level 2 to level 1) • Transitional measures – Phasing in • Treatment of SME's: proportionality • Equivalence

  11. RTS v. DA Who is in charge?

  12. RTS/DA • EP does no longer accept three level approach of Solvency II • RTS are DA without policy options • 400 pages of implementing measures have already been written • Solution to be found that does not require the procedure to be started all over again

  13. Long term guarantee package “Artificial volatility”

  14. Long-term guarantees Providing long-term guarantees is an important social function of insurance (e.g. pensions, saving, long-term health insurance) QIS5 showed that the treatment of insurance products with long-term guarantees needs to be refined Long-term guarantees should not give rise to artificial volatility of technical provisions, own funds and capital requirements The Commission Services set up a Working Group to analyse the issue (February to May 2011) The Working Group included experts from MS, EIOPA, industry, actuaries The Working Group concluded that illiquidity premium (tested in QIS 5) does not fully address the issues of long-term guarantees

  15. Long-term guarantees Counter-cyclical premium Objective: prevent pro-cyclical investment behaviour of insurers and reinsurers Adapted rate to discount technical provisions in periods of stressed markets EIOPA determines whether there is a stressed financial market Premium is calculated by EIOPA Criteria included in draft implementing measures to be further detailed in technical standards

  16. Long-termguarantees Matching premium Premium included in interest rates to discount technical provisions of specific insurance products e.g. annuities Annuities are backed by bonds which are held to maturity → insurer is not exposed to full spread risk Premium prevents that spread volatility leads to capital volatility Strict requirements on application, calculation and risk-management to be included in draft implementing measures

  17. Long-term guarantees Extrapolation of risk-free interest rates Interest rates to discount technical provisions need to be extrapolated for long maturities Volatility of discount rates and technical provisions depend on starting point of extrapolation and extrapolation method Implementing measures include requirements on extrapolation to stabilise discount rates

  18. Long-term guarantees Other measures for long-term guarantees Symmetric adjustment to the equity risk sub-module Capital requirement for spread risk of long-term bonds Capital requirement for catastrophe risk of liability insurance

  19. Package proposed by Council • CCP to be calculated by EIOPA with formulas to be provided at level 2 • No specific reference to extrapolation or matching adjustment in level 1 text • Political agreement to stick to the LTG package that had been agreed in discussions between EC and MS in LTG Working Party

  20. Package proposed by EP • Limited CCP with reference to ESRB • Extrapolation with date in the text instead of in recital • Introduction of symmetric adjustment mechanism in spread risk sub-module • Limited matching adjustment seen as a transitional measure

  21. Towards a solution • LTG package that takes account of differences in products and markets • Avoid that different measures apply to same liabilities (no cherry-picking) • Prudential safeguards and transparency • Impact assessment necessary • Review of LTG package after number of years

  22. Phasing in and transition to the new solvency regime What is really needed?

  23. Phasing in • Gradual introduction of timing for public reporting and supervisory reporting during period of 4 years • Implementation plan prior to start of SII • Start of approval process for ancillary own funds, internal models, undertaking specific parameters, etc. prior to start of SII

  24. Transitional provisions • Objective: avoid market disruption, limit interference with existing products and ensure availability of insurance products • Limited consequences in the case of a breach of the SCR during first two years • Treatment of certain hybrid capital instruments issued prior to SII • Other specific transitionals

  25. Proportionality principle • EP proposes to exempt a large part of the industry from quarterly reporting and from reporting of a full list of assets on an item-by-item basis • Mere reference to proportionality principle not accepted • Compromise ensures that information remains available on major part of the market in all Member States

  26. Treatment of third country solvency regimes Absence of a globally agreed solvency framework

  27. Equivalence • Equivalence decisions to be taken by EC concerning CH, Bermuda and Japan • Criteria for transitional equivalence for other third countries: EP wants stricter requirements • What to do if third country does not want to be assessed?

  28. Solvency II: when? Timing has become a difficult issue

  29. Quick Fix Directive • Framework Directive provides for transposition by MS on 31 October 2012 and start of SII on 1 November 2012 • Omnibus II proposal moves start date to 1 January 2013 • Quick Fix Directive puts transposition date on 30 June 2013 and start date on 1 January 2014

  30. Timeline for Solvency II • Level 2 measures to be tabled after publication of Omnibus II and thorough impact assessment • Objection period for EP and Council • EIOPA to start consultation on RTS once level 2 measures are on the table • With some luck: full package known by end spring 2013

  31. It takes two to tango There is always hope

  32. Happy Marriage? • “All marriages are happy: it is the living together afterward that causes all thetrouble” (Raymond Hull) • “More marriages might survive if the partners realised that sometimes thebetter comes after the worse” (Doug Larson)

  33. Prof. Karel VAN HULLE Head of Insurance and Pensions Unit Directorate H – Financial Institutions DG Internal Market and Services, European Commission B-1049 Brussels, Belgium Karel.van-hulle@ec.europa.eu Web site http://ec.europa.eu/internal_market/insurance/index_en.htm

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