The Solvency II Experts News

CEA sends joint letter to EC on Solvency II illiquidity premium

CEA presses for further work on Solvency II implementing measures

CEA responds to second wave of Solvency II consultation papers from Ceiops

CEA welcomes European Parliament vote for Solvency II

CEA welcomes informal agreement on Solvency II Framework Directive

Draft European Union solvency rules that could force UK insurers to raise up to £50bn worth of capital are likely to be watered down.

According to Reuters UK, the Solvency II proposals, which have been heavily critisised by Britain’s leading annuity providers in particular, are now attracting criticism in continental Europe, increasing the probability they will be changed.
Next month, regulators from all 27 EU countries will meet in Berlin to agree on recommendations for final Solvency II legislation, which will be submitted to the European Commission early next year.

Further alterations are possible before final legislation is agreed in June 2011, but Reuters says British insurers are hopeful their concerns will be reflected in the regulators’ advice. Click here to read full article.

Some in the UK fear the FSA will apply the directive more strictly than its continental counterparts. Will “harmonization” succeed? Jessica Baylis investigates.

The approval of the Solvency II directive by the European Parliament and Council earlier this year has been the signal for some UK insurers and their advisers to start finding fault with it. The recent heavy coverage in the press of the costs to the UK pensions industry of Solvency II has been the most prominent example of this. But critics have also attacked the way they perceive the directive as being applied. Click here to read full article.

Validation is a fundamental requirement for institutions willing to qualify for an internal model approach to determine regulatory capital requirements. It requires institutions to demonstrate that they have in place a rigorous process by which they can establish whether their internal model framework is sound or whether improvements are needed. Different and distinct, this should not be confused with the process that supervisors undertake when approving a model for use. This paper written by Paolo Cardoni, Technical Specialist in the Solvency II project at the FSA (united Kingdom) is intended to provide insight into how regulators might view the validation standards for internal models and clarify expectations as to how the Solvency II framework for insurance and reinsurance undertakings might approach this. It will show that a correct application of the validation process contributes to reducing the misalignment of the interests of the market and of the regulator.

Click here to read full article

Solvency II is intended to radically change supervision of insurance within the EU. It will move Europe’s insurance supervision onto a modern, risk-sensitive platform far superior to that of the existing Solvency I regime. Meeting all the requirements of the Directive will however not happen overnight; hence many regulators have highlighted the need to start planning for implementation now.

To be Solvency II compliant by 2013, it is essential to identify precisely what activities will be required and how they should be prioritised. Drawing the overall road map and estimating global cost will also need careful consideration early in the Solvency II project. Companies should not treat Solvency II as a pure compliance exercise and should concentrate on identifying synergies between business needs and compliance requirements to drive business efficiency opportunities.

Solvency II will require insurance companies to integrate risk and risk management in all aspects of corporate day-to-day decision making, in particular in terms of setting the strategy. Insurers will need to strengthen the links between all the competencies that contribute to risk management.

In this article, Raphael Borrel and Michel de La Belliere highlight some of the challenges that insurance companies face in their attempt to implement the Solvency II Directive.

Click here to read the article.

The CEA is delighted that the European Parliament has today approved the proposed
Solvency II Framework Directive.

“We welcome the vote and thank the Parliament for its hard work in ensuring that an
enhanced regulatory regime for Europe’s insurers will become reality,” said Michaela
Koller, CEA director general.

The Parliament’s vote follows the endorsement of the text of the Directive by the
Committee of Permanent Representatives (Coreper) on 1 April. Formal adoption of the
Framework Directive is expected at the 5 May Economic and Financial Affairs (ECOFIN)
Council.

A delegation from the EU yesterday presented recent regulatory developments in the EU, and in particular the agreed Solvency II regulatory reforms, to US (re)insurers and policymakers at a meeting in Washington, DC.

The EU delegation presented recent EU developments in the light of the adoption of Solvency II. It clarified certain misunderstandings about the regulatory reforms, explained the Solvency II approach and also discussed likely future developments in regulation. The US audience showed keen interest in Solvency II and was also particularly interested in the issue of the equivalence of supervisory regimes.

The Transatlantic Insurance Symposium was organised by the US Chamber of Commerce and BusinessEurope, in cooperation with the CEA, which is the European insurance and reinsurance federation, and the American Council of Life Insurers (ACLI). It focused on regulation and regulatory reform on both sides of the Atlantic.

Speakers on the EU panel were Karel Van Hulle, Head of the European Commission’s insurance and pensions unit; Peter Skinner MEP and Solvency II rapporteur; and Thomas Steffen, chair of the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops). The panel was moderated by Michaela Koller, director general of the CEA.

“The Symposium was the perfect opportunity to stress the need for the US and Europe to work together in an open and constructive dialogue. It was an excellent first step towards achieving regulatory convergence between the US and EU,” said Peter Skinner MEP.

Karel Van Hulle added: “The meeting enabled us to discuss international best practice with our US counterparts, and there was an interesting and stimulating exchange of views on the respective views and plans in the US and in the EU.”

“Increasing the mutual understanding of our regulatory systems and of planned reforms can only help us to resist any pressure to introduce unwarranted protectionist measures as a result of the economic crisis,” said Michaela Koller.

Background

US perspectives at the Symposium were provided by William Toppeta, president of MetLife International and chair of the international committee of the American Council of Life Insurers; Congressman Ed Royce; New Jersey Insurance Commissioner Steven Goldman, chair of the international committee of the National Association of Insurance Commissioners (NAIC); and Michael McRaith, Illinois insurance director and a member of the international committee of the NAIC.

Solvency II, the proposed new regulatory regime for EU (re)insurers, was informally approved last week by the European Parliament and Council (see CEA press release of 26 March).

The Transatlantic Economic Council was created by EU and US leaders to foster transatlantic and economic integration at the EU-US Summit in Washington in April 2007.

BusinessEurope is the European employers’ federation.

Despite investments in risk management, many insurers still lack an overall view of the business, says new research.

Most insurers continue to manage “through the rear-view mirror”, attempting to predict the future based on stale reports, according to Strengthening governance, risk and compliance in the insurance industry, a survey and research paper written by the Economist Intelligence Unit and sponsored by SAP.

Few companies can produce accurate, near-real-time information to support decision-making, and fewer still have mastered scenario analysis and regular risk stress-testing, suggests the report. While insurers have become comfortable with the way they manage risk within operational silos, most have not invested in methods of managing all risk exposures throughout the company and to track interdependencies.

Process complexity, data inconsistency and systems incompatibility are all contributing to the problem at a time when market volatility and investor unease require speedy, data-driven decisions. “In the wake of the financial crisis, executives are paying more attention to how to aggregate enterprise-wide data and manage their businesses better,” says Dan Armstrong, senior editor at the Economist Intelligence Unit and the manager of the research. “This is especially true in insurance companies, where there can be an almost paralysing level of complexity and decentralisation.”

The findings were based on the responses of 58 insurance executives who were part of a larger 446-respondent survey on governance, risk and compliance conducted in the fourth quarter of 2008 and January of 2009. The report also includes interviews with executives at the multiline insurer Zurich Financial Services and the life insurer Securian Financial.

Other findings of the research include:

• The biggest benefits insurers hope to gain from standardising and automating financial processes are improving data accuracy, eliminating error-prone manual processes, giving staff more time to focus on more valuable activities, and making speedier decisions. While 24% of executives cited cost reduction as a key advantage, it ranked fifth overall. More than double that proportion highlighted data accuracy and integrity instead.

• Efforts to automate processes involve problems and risks of their own, many respondents believe. Almost half of respondents cited cost as a barrier to standardisation and automation, and 28% cited the difficulty of obtaining approval from independent-minded executives across regions and business lines.

• Insurers operating in the European Union will face pressure to refine and improve financial processes as part of the updated set of regulatory requirements known as Solvency II. The Supervisory Review Process of Solvency II aims to identify institutions with financial, organisational or other features that result in a higher risk profile. Because the authorities will review financial processes as well as governance and capital reserves, it will be necessary to know who participates in each process, what the person does, and the results of the process.

Click here to download the briefing  paper.

The European Commission’s (EC’s) November 2008 target for adopting the Solvency II framework directive was missed. Standard & Poor’s Ratings Services believes that the earliest implementation date is now likely to be Jan. 1, 2013, instead of Oct. 1, 2012. In their opinion, Solvency I is no longer fit for purpose and is implemented by national supervisors in many different ways around Europe.

Solvency II holds out the prospect of a radical Europe-wide modernization of insurance supervision, putting it on a much more risk-sensitive footing than most other supervisory regimes around the world. Some commentators have cited the current turmoil in investment markets as reason to pause before embarking on Solvency II. Standard & Poor’s Ratings Services’ opinion is the contrary; they believe that the turmoil highlights the urgency of implementing Solvency II. The focus is now to adopt the directive by April 2009, before the European Parliament (EP) elections in June. If that target is missed, a 2013 implementation would in their view be challenging. Solvency II remains controversial and Standard & Poor’s Ratings Services commented on the features that gave rise to the controversy in their article published on March 12, 2008, titled “One In Four Of Europe’s Insurers Could Face Major Strategic Decisions Under Solvency II.”

In this article Standard and Poor’s updates their commentary for recent political, supervisory, and economic developments under the following headings:
•Group support
•Equity risk
•Minimum capital requirement (MCR)
•Market impact
•Annuity products in the U.K.
•Bonus reserves in Germany
•Diversification effects
•Standard solvency capital requirement (SCR) calibration
•Internal models
•Implications for ratings
•Convergence with International Financial Reporting Standards (IFRS)

Click here to read full article

The CEA, the European insurance and reinsurance federation, is delighted that informal but unanimous agreement has been reached at political level in Europe on the text of the proposed Solvency II Framework Directive after prolonged negotiations.

“This is a decisive step towards the new, enhanced regulatory regime that we have been seeking for Europe’s insurers,” said Michaela Koller, CEA director general. “We are happy that the timetable for implementing the Directive is on track. Solvency II is an important and timely piece of legislation and any delay would have been most unfortunate in the current economic climate.”

The CEA, however, feels that carving out group support from the text agreed means that Europe has missed the opportunity to introduce a tool that would have met the need for the efficient and effective supervision of multinational groups which was highlighted last month in the De Larosière Group’s report on financial supervision. “The industry looks forward to Europe taking this step as soon as possible,” said Alberto Corinti, deputy director general of the CEA.

The text of the Framework Directive agreed informally today by the Committee of Permanent Representatives is expected to be formally endorsed next week. The European Parliament will put the Directive to a plenary vote on 22 April. Formal adoption of the Framework Directive could then take place during the 5 May Economic and Financial Affairs (ECOFIN) Council.

“The CEA stands ready to continue contributing to the work on the Level Two implementing measures of the Directive, to ensure that the best possible framework for the supervision of Europe’s insurers is achieved,” said Corinti.

As insurers continue to release 2008 results, the difficulties of pinning down financial performances in volatile markets are becoming more evident.

Several relatively new accounting methods used by insurers in Europe are undergoing real-life stress tests in the current economic downturn, and interestingly, these methods that are designed to bring clarity to financial reporting are coming up with divergent pictures of what is going on in terms of company performance.

The insurance industry in Europe is calling for swift action on adoption of the European Union’s Solvency II standard for insurers, but it may be difficult to finalize that system if the underlying accounting cannot be nailed down.

This article discusses how current volatility in global equity and debt markets, along with interest rates, may be driving a divide between what can be expected from MCEV accounting and IFRS, and perhaps creating a problem for Solvency II. Click here to read full article