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Solvency IIPart 1: Background

Vesa RonkainenInsurance Supervisory Authority, Finland

30.11.2006

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Structure of presentation

• Part 1: Background for Solvency II

• Part 2: Pillar 1 (quantitative requirements)

• Part 3: Other pillars

• Part 4: Quantitative Impact Studies

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Contents of Part 1

• 1. Solvency I

• 2. Solvency II process

• 3. Three pillar structure of Solvency II

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1. Solvency I

• Current Solvency I Directives (Non-life:

2002/12/EC, Life: 2002/83/EC) are based on the

1st, 2nd and 3rd life and non-life insurance

directives of the 1970’s, with some improvements

• Capital requirements (solvency margin) are of the

form: factor*volume measure (e.g. premiums,

claims, technical provisions, sum at risk)

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Solvency I Directive 2002/83/EC

Title III: Conditions governing the business• Ch. 1: Principles and methods of financial

supervision• Ch. 2: Rules relating to technical provisions (§23

Categories of authorised assets)• Ch. 3: Rules relating to solvency margin and

guarantee fund (§27 Available solvency margin, §28 Required solv.margin, §29 Guarantee fund)

• Ch. 4: Contract law and conditions of insurance• Ch. 5: Undertakings in difficulty

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Solvency I Directive (cont)

• Title I: Definitions and scope• Title II: The taking up of the business• Title III: (see above)• Title IV: Provisions relating to right of

establishment and freedom to provide services• Title V: Rules applicable to agencies or

branches of third countries• Title VI: Rules applicable to subsidiaries of

parent undertakings from third countries• Titles VII-VIII: Transitional and final provisions

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2. Solvency II process

• 2.1 What is Solvency II?

• 2.2 Why Solvency II?

• 2.3 Who is involved?

• 2.4 Timing? Where are we?

• 2.5. The 3 pillar structure of Solvency II

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2.1 What is Solvency II?

• More harmonised and risk-based solvency regime for life,

non-life and reinsurance companies in the EU

• Comprehensive and advanced supervisory system

including both quantitative and qualitative requirements

• Risk management is in focus

• International compatibility (Basel II, IFRS, IAIS, IAA)

• Good news for policy-holders

• Good for the EU’s internal market (and internationally)

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2.2 Why Solvency II?

The current EU regime Solvency I causes regulatory capital to diverge from an economic capital driven requirement for many reasons:

a. An undefined level of prudence is required in technical provision;

b. The benefits of pooling and diversifying risk are only recognized to a limited extent and the capital requirement only partially reflects reinsurance and other forms of risk mitigation;

c. For life insurance business the interaction of technical provision and the solvency margin can create irrational effects where greater prudence in the solvency provision leads to an increased solvency margin;

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2.2 Why Solvency II (cont.)

d. Asset risks are not adequately recognized in the capital requirements; instead quantitative restrictions are imposed which can distort portfolio choices; and

e. A proper asset/liability management is not adequately rewarded.

f. Given a company’s risk profile, tend to impose capital requirements that for many firms are too low to ensure adequate solvency;

g. Does not provide supervisors with harmonised tools to foster high quality risk management and control which is as important for policyholder protection as the level of solvency itself.

In Solvency II we will supervise the overall financialsoundness and solvency of an insurance firm, including allthe assets and liabilities (the total balance sheet)

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2.3 Solvency II builds on ”Lamfalussy” approach

Level 2 Implementing Measures (EIOPC)

Level 1 Framework Directive

Level 3 Guidelines (CEIOPS)

Level 4 Enforcement of community Law

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2.3 Who is involved?

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2.4 Timing?

Directive development(Commission)

Directive adopted?(Council and Parlament)

Implementation?(Member States)

CEIOPS gives advice to the Commission

CEIOPS gives advice for

Level IIImplemetingmeasures

CEIOPS gives

Level IIISupervisoryGuidance

Testing the impacts via QISs

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2.5 Solvency II: 3 pillars

Quantitative Capital Requirements

• Technical Provisions

• Minimum Capital

• Risk Based Capital

• Eligible Elements of Capital

• Admissible Assets

Supervision

Internal Controls & Risk Management Framework

Transparency of Supervision

Supervisory Review Processes & Powers

Disclosure

Transparency & Disclosure to reinforce market discipline

Pillar 1 Pillar 2 Pillar 3

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CALLS FOR ADVICE(from the EC to CEIOPS)

1. INTERNAL CONTROL AND RISK MANAGEMENT2. SUPERVISORY REVIEW PROCESS (GENERAL)3. SUPERVISORY REVIEW PROCESS (QUANTITATIVE TOOLS)4. TRANSPARENCY OF SUPERVISORY ACTION5. INVESTMENT MANAGEMENT RULES6. ASSET-LIABILITY MANAGEMENT

7. TECHNICAL PROVISIONS IN LIFE ASSURANCE8. TECHNICAL PROVISIONS IN NON-LIFE INSURANCE9. SAFETY MEASURES10. SOLVENCY CAPITAL REQUIREMENT: STANDARD FORMULA (LIFE AND NON-LIFE)11. SOLVENCY CAPITAL REQUIREMENT: INTERNAL MODELS (LIFE AND NON-LIFE)AND THEIR VALIDATION12. REINSURANCE (AND OTHER RISK MITIGATION TECHNIQUES)13. QUANTITATIVE IMPACT STUDY AND DATA RELATED ISSUES14. POWERS OF THE SUPERVISORY AUTHORITIES15. SOLVENCY CONTROL LEVELS16. FIT AND PROPER CRITERIA17. PEER REVIEWS18. GROUP AND CROSS-SECTORAL ISSUES

19. ELIGIBLE ELEMENTS TO COVER THE CAPITAL REQUIREMENTS20. COOPERATION BETWEEN SUPERVISORY AUTHORITIES21. SUPERVISORY REPORTING AND PUBLIC DISCLOSURE22. PROCYCLICALITY23. SMALL UNDERTAKINGS

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