CEIOPS and the Forthcoming Insurance Prudential Regulation

1
CEIOPS and the Forthcoming Insurance Prudential
Regulation

• Alberto Corinti
• CEIOPS Secretary General
• Solvency II
• MIB School of Management
• Trieste, 4 March 2005

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Arguments

• The role of CEIOPS
• Overview of the CEIOPS Work Plan
• CEIOPS and the Solvency II project
• The general design of the new model
• State of play and next steps
• Main issues in CEIOPS answer to the first wave
• Accounting implications

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Role of CEIOPSThe Framework

• The four level model of the new EU regulatory
  framework
• I Framework principles (directive)
• II Implementing measures
• Comitology procedure
• III Actual Implementation
• Supervisory Standards
• IV Enforcement
• The actors at the first three levels

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Economic and Finance Committee
Financial Services Committee
Parliament Committees
Council Working Groups
EIOPC Insurance Pensions
EBC Banking
ESC Securities UCITS
FCC Financial Conglomerates
Regulators level 2 committees
CEIOPS
CESR
CEBS
Supervisors level 3 committees
3L3
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Role of CEIOPS

• CEIOPS was established by the Commissions
  Decision of 5 November 2003 as Level 3 Committee
  in the Insurance and Pensions field
• Level 2 tasks
• It works as an independent advisory committee
  and, as such, shall advise the Commission for the
  preparation of draft implementing measures.
• Level 3 tasks
• It works for a consistent implementation of EU
  Directives,
• can issue its own standards in areas not covered
  by EU Directives and shall promote adoption of
  best practices and
• shall constitute a forum for exchange of
  information and supervisory cooperation.

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Role of CEIOPS

• Accountability
• CEIOPS submits an Annual Report to the Commission
  which also will be sent to the EP and Council
• Takes part in IC/EIOPC and FSC-EFC meetings
• Meeting of Chairs of Level 3 Committees (3L3)
• Transparency and Consultation
• CEIOPS shall fulfills its tasks in a spirit of
  openness and transparency
• CEIOPS publishes an Annual Work Programme
• CEIOPS consults market participants both ex ante
  and ex post (mainly for level 2 work but also for
  level 3 work)
• Public Statement on Consultation Practices
• Market Participants Consultative Panel

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CEIOPS Structure and relations with third parties
Members Meeting (25 3)
EU Commission
EFC - FSC EIOPC 3L3
Consultative Panel
Managing Board (5 2)
Secretariat

• Working Groups
• Insurance Groups Supervision
• Financial Stability
• Occupational Pensions Funds
• Insurance Mediation
• Solvency II
• Pillar I Life
• Pillar I Non-life
• Pillar II
• Pillar III Accounting
• Group/Cross-Sector Issues

EU Commission CEBS CESR ARC EFRAG IAIS Actuaries
..
INDUSTRY CEA EFRP AISAM FEE .
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Arguments

• The role of CEIOPS
• Overview of the CEIOPS Work Plan
• CEIOPS and the Solvency II project
• The general design of the new model
• State of play and next steps
• Main issues in CEIOPS answer to the first wave
• Accounting implications

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CEIOPS work plan the issues

• Level 2
• Solvency II project
• Level 3
• IORP Occupational Pensions Directive
• IAS Regulation
• Insurance groups Supervision Directive
• (and Conglomerate Directive)
• Insurance Mediation Directive
• (Reinsurance Directive)

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CEIOPS Work Plan The Working Groups

• 5 Solvency II Experts Groups
• Analysis of issues to be included in the three
  pillars of the future insurance solvency regime (
  level 1, level 2 and level 3 rules)
• Pillar III WG also follows accounting
  developments affecting insurance
• Cross Sector WG analyses groups and
  conglomerates issues in the forthcoming
  regulation

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CEIOPS Work Plan The Working Groups

• Occupational Pensions Committee
• Enhancing common understanding of the IORP
  Directive
• Facilitating cooperation on cross border
  membership (conclusion of Cooperation Protocol)
• Dealing with issues related to pension funds

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CEIOPS Work Plan The Working Groups

• Insurance Groups Supervision Committee (former
  HPWG)
• Enhancing common understanding of IGD
• Harmonization and streamlining of supplementary
  supervision of groups
• Enhancing cooperation between supervisors in
  dealing with multinational groups

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CEIOPS Work Plan The Working Groups

• Financial Stability Committee
• Establishment of a macro-prudential surveillance
  programme formonitoring the interplay between
  insurance and financial stability
• Study and report on financial stability issues
• Organizing Q.I.S. in the frame of the Solvency II
  project

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CEIOPS Work Plan The Working Groups

• New Initiative on Insurance Mediation
• First meeting in December 2004
• Mandate to be endorsed
• Conclusion of Cooperation Protocol

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Arguments

• The role of CEIOPS
• Overview of the CEIOPS Work Plan
• CEIOPS and the Solvency II project
• The general design of the new model
• State of play and next steps
• Main issues in CEIOPS answer to the first wave
• Accounting implications

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The Solvency II Project

• Main driving factors
• Global solvency approach
• Enhanced risk sensitiveness
• Trade-off effectiveness vs. simplicity
• Encouraged internal risk management
• Flexibility
• Compatibility with IAIS / IAA
• Cross border and sectoral convergence

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The Solvency II Project

• The general design (after phase I)
• I financial requirements
• II risk management and supervisory process
• III disclosure requirements

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The Solvency II Project

• The first pillar
• Capital requirements
• Minimum level (safety margin)
• Target capital (SCR)
• Standard formula (assumptions on quantifiable
  risks)
• Internal model
• Link with the supervisory review process
• Validation of internal models
• Added capital requirements

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The Solvency II Project

• The first pillar (continued)
• Technical provisions
• Explicit prudential level
• Guidelines for life technical assumptions
• Common statistics and guidelines for claims
  management
• Investments
• Prudent person - plus approach
• Also coverage of capital requirement

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The Solvency II Project

• The second pillar
• Internal management, i.e.
• Governance, internal control and risk management
• Investment and ALM (relations with Pillar II)
• Fitness and propriety

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The Solvency II Project

• The second pillar (continued)
• Supervisory process, i.e.
• Process
• Off site and on site reviews
• Powers of intervention ad solvency control levels
• Transparency
• Tools
• stress tests
• early warnings
• An horizontal issue Group supervision

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The Solvency II Project

• The third pillar
• Disclosure of financial situation and risks
• Market discipline effects
• Consistency with accounting framework

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Arguments

• The role of CEIOPS
• Overview of the CEIOPS Work Plan
• CEIOPS and the Solvency II project
• The general design of the new model
• State of play and next steps
• Main issues in CEIOPS answer to the first wave
• Accounting implications

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The Solvency II Project

• State of play
• CEIOPS is mainly working on Pillar I and Pillar
  II
• Priority on issues included in the 1st and 2nd
  wave, but
• holistic approach (see 1st progress report)
• First wave (mainly pillar II issues) issued in
  July 2004
• Internal control and risk management
• Supervisory review process (general)
• Supervisory review process (quantitative tools)
• Transparency of supervisory actions
• Investment management rules
• Asset-liability management

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The Solvency II Project

• State of play
• Second wave (mainly pillar I) issued in Dec.
  2004
• technical provisions life and non life
• safety measures
• solvency capital requirement (standard/internal
  model)
• Reinsurance
• QIS
• power of supervisors and solvency control levels
• Fit and proper criteria
• Peer review
• Group and cross sectoral issues
• Pillar III will start soon, after first results
  of Pillar I

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Project time schedule
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The Solvency II Project

• Next steps
• Proposal of framework directive 2nd half 2006
• Third wave (pillar III) expected early 2005
• CEIOPS advice on first wave expected in June
  2005 (consultation started 25 Feb. 2005)
• CEIOPS advice on second wave expected in Oct.
  2005 (consultation June 2005)
• CEIOPS started preparation phase for QIS

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Calls time schedule
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Arguments

• The role of CEIOPS
• Overview of the CEIOPS Work Plan
• CEIOPS and the Solvency II project
• The general design of the new model
• State of play and next steps
• Main issues in CEIOPS answer to the first wave
• Accounting implications

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Draft answer to the First wave (general)

• Focus on issues relevant for Directive
• Broad principles on potential level 2 rules
• Framework for answers
• do not address conduct of business
• apply to solo supervision
• apply the principle of proportionality
• Dynamic boundary between level 2 and 3

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Draft answer to the First wave

• Internal control and risk management
• Emphasis on Governance as umbrella of R.M. and
  I.C.
• Principle in the directive and balance of level 2
  and 3 rules
• Governance, I.C and R.M based on IAIS CP

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Draft answer to the First wave

• Investment management and ALM
• Trade-off between
• General principles
• Quantitative limits
• Capital requirements
• Same treatment of assets covering T.P., MCR, SCR
• ALM considered in designing capital requirements
• Principles on Investment/ALM policy and
  procedures

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Draft answer to the First wave

• Supervisory Practices
• Focus on forward looking analysis
• On-site and off-site review principles
• Resilience tests compatible with markets and
  business lines (details in level 3 regulation)
• Early warning indicators (details in level 3)
• Transparency of
• Regulation (ex ante and ex post) and supervisory
  process (toward public)
• Findings of supervisory review (toward firms)

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Arguments

• The role of CEIOPS
• Overview of the CEIOPS Work Plan
• CEIOPS and the Solvency II project
• The general design of the new model
• State of play and next steps
• Main issues in CEIOPS answer to the first wave
• Accounting implications

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Accounting Implications

• The current situation
• Critical endorsement of IASs for 2005 (financial
  instruments)
• Undefined situation for insurance
• Standard on insurance contracts to be completed
  (phase II)
• Standard on financial instruments to be reviewed
• Short term and long term impacts on supervision

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Accounting Implications

• Short term impacts (2005), driven by
• implementation of EU Regulation 1606/02
• adoption of Directive 2003/51
• Differences in national situations
• Possible EU supervisory reactions
• Supervisory filters for applying current
  supervisory tools (see CEIOPS consultation paper
  no. 3)
• Guidelines on formats for reporting

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Accounting Implications

• Long term impacts
• Driven by need of consistency between Solvency II
  and IFRS insurance phase II
• Critical trade-off between capital and technical
  provisions
• Possible supervisory actions
• Supervisory reporting consistent with public
  financial statements
• Creation of IAS compatible rules on prudential
  measurement of technical provisions

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ConclusionsMain Trends

• Enhanced role of capital requirements
• New instruments and processes both at firm and
  supervisory level (e.g. internal models)
• Focus on risk management and good governance
• Wider use of ex ante tools (stress analysis)
• Cross border and sectoral convergence
• www.ceiops.org