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Faculty of ActuariesFaculty of Actuaries

Edinburgh, 1 October 2007Edinburgh, 1 October 2007

The Challenge of The Challenge of Solvency IISolvency II

Karel VAN HULLEHead of Unit, Insurance and Pensions, DG Markt,

European Commission

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• « Not everything what can be counted counts – and not everything what counts can be counted »

Albert Einstein

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Proposal for a Framework DirectiveProposal for a Framework DirectiveJuly 10th 2007July 10th 2007

Recast

&

Codification

Codification &

New Articles

+ Solvency II14 existing Insurance Directives (direct

insurance, reinsurance, groups etc.)

= 1 Directive ‘EU Insurance sourcebook’

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Solvency II – 4 Principal ObjectivesSolvency II – 4 Principal Objectives

• Deepen the Single Market

• Enhance policyholder protection

• Improve (international) competitiveness of EU insurers

• Further Better Regulation

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• Introduces an economic risk based approach that Introduces an economic risk based approach that will reward good risk management and enhance will reward good risk management and enhance policyholder protectionpolicyholder protection

• Places emphasis on the responsibility of the Places emphasis on the responsibility of the senior management to manage their business senior management to manage their business responsibly responsibly

• Fosters and demands greater supervisory Fosters and demands greater supervisory convergence across the Communityconvergence across the Community

The new regime…The new regime…

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Legislative Process - Lamfalussy

Level 1: Framework Directive

Level 2: Implementing Measures

Level 3: Convergent implementation assisted by close co-operation between national

authorities

Level 4: Rigorous enforcement of Community legislation by the Commission

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Many players & stakeholders in the process…Many players & stakeholders in the process…

• Commission Proposal for a Directive following consultation & dialogue with– Industry– Professionals (e.g. Groupe Consultatif)– CEIOPS– Member State Experts

• European Parliament and Council of Ministers negotiate and have final say over law

• Implementation by national authorities and 1000s of insurers in Europe

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• Key element of Better Regulation• QIS 3 April – June 2007• Analysis and conclusions from QIS3 will be

published in November 2007• Results will feed into negotiations, changes to

high-level framework if necessary• QIS 4 will take place between April and July

2008 following public consultation with all stakeholders

• Results of QIS4 will feed into development of implementing measures

Quantitative Impact StudiesQuantitative Impact Studies

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Solvency II timetable for 2007-2012

Directive development (Commission)

CEIOPS work on technical advice necessary for implementing measures / supervisory convergence / preparation for implementation / training &

development

2006 2007 2008 2009 2010 2011 2012

Directive adoption(Council & Parliament)

Implementation(Member states)

QIS 2

July 2007 Solvency II Directive published

QIS 3

Commission preparatory work on possible implementing measures

and impact assessment

Adoption of Implementing

measures

QIS 4

2012 Solvency II enters into force

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Solvency II – Content & TargetsSolvency II uses the “three-pillar approach” found in Basel II

Underwriting Risk

Market-/ALM Risk

Credit Risk

Operational Risk

Risk category

Solvency requirements

Pillar I

Quantitative Supervisory

Calculation of a risk adequate capital need on the basis of company individual risk profiles

Incentives to develop internal systems to measure and manage risks

Cover- und Capital investment directives

Integrated Solo-Plus supervision and Supervision of reinsurance companies

Supervisory process

Pillar II

Qualitative Supervisory

Assessment of the Risk management and control systems and processes Supervisory of:

Risk categories RI Program Internal Risk Model Stress tests and

sensitivities Asset-Liability

Mismatch Mgmt. assessment

„Fit and Proper“

Peer Reviews of other Supervisory Bodies

Market transparency

Pillar III

Strengthening of Marketmechanism

Disclosure requirements Risks Sensitivity and

scenario analysis of assets and technical provisions

Results of the quantitative and qualitative supervisory Assessment

….. Still widely undefined,

ongoing dialog with the IASB

Trend: Fair Value Reporting

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From Solvency I to a Solvency II Balance Sheet

Economic View“The overall objective of prudential regulation must be to ensure that an insurer maintains, at all times, financial resources which are adequate, both as to amount and quality, to ensure there is no significant risk that its liabilities cannot be met as they fall due.” (CP20, 2.2)

„OLD“ „NEW“

Statu

ary Valu

e of A

ssets

Statuary

Value of

Liabilities.

Required

Capital

Ratio of required to available capitalM

arket Valu

e of A

ssets Best

Estimate of

Liabilities.

Risk-Margin

Technical Provisions

Solvency CapitalRequirement

Ratio of required to available capital

AvailableCapital

AvailableCapital

MinimumCapitalRequirement

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Solvency II – ChallengesSolvency II – Challenges

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Pillar IPillar I

• The introduction of market consistent valuation of assets and liabilities and economically based capital requirements will require insurers:– to accurately assess their current financial position

using modern financial mathematical and actuarial techniques and to better manage their asset-liability mis-match risk

– to fully understand the economic effects of the risk mitigation techniques they use such as reinsurance, securitisation and derivatives

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• The introduction of qualitative risk management standards covering all risks, not just those captured by the Pillar 1 requirements will require insurers:– to ensure that risk assessment and risk management

play a central role in their system of governance– to explain to their supervisors how they manage and

control the risks they run and how they determine their own capital needs

Pillar IIPillar II

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Actuarial Function

The acturial function shall be carried out by persons sufficient knowledge of actuarial and financial mathematics and able where appropriate, to demonstrate their relevant experience and expertise with applicable professional and other standards

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• Coordinate the calculation of technical provisions;• Ensure the appropriateness of the methodologies and underlying

models used as well as the assumptions made in the calculation of technical provisions;

• Assess the sufficiency and quality of the data used in the calculation of technical provisions;

• Compare best estimates against experience;• Inform the administrative or management body of the reliability

and adequacy of the calculation of technical provisions;• Oversee the calculation of technical provisions;• Express an opinion on the overall underwriting policy;• Express an opinion on the adequacy of reinsurance

arrangements;• Contribute to the effective implementation of the risk

management system.

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• The introduction of new disclosure requirements bringing market discipline to bear on insurers will require insurers:– to explain to shareholders, rating agencies and

analysts clearly and accurately how their risk profile and risk appetite fits in with their overall business strategy

– to explain to external stakeholders how they assess and manage risk, particularly those insurers using an internal model to calculate capital requirements

Pillar IIIPillar III

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• Insurers wishing to use the new approach to group supervision will be required:– to monitor, manage and control risk at group level, and

in particular diversification effects across both legal entities and lines of business in their risk management processes and practices

– to manage their capital needs and investments holistically rather than in a piece-meal fashion on a legal entity basis

Group supervisionGroup supervision

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ConclusionConclusion

• Solvency II is all about improving risk management and rewarding already existing good practice– Updating risk management processes and

practices in any company takes time– Insurers need to start preparing now, if they do not

want to be caught out when Solvency II comes into force

– The future belongs to those who prepare for it today