-
7 key specific
benefits of Solvency II
- Guernsey will not seek Solvency II equivalence
- The Omnibus Directive and the Solvency II
Amendments
- The Omnibus II Directive
Welcome to the March 2011 edition of the Solvency ii
Association newsletter
Dear Members,
The Guernsey authorities have
announced that there are no plans for the Island to seek
equivalence under Solvency II. This is a very interesting
development.
The Commerce and Employment Department of
the States of Guernsey (the Guernsey Government) and the
financial regulator, the Guernsey Financial Services Commission
(GFSC) have
released a joint statement
outlining their current position regarding the regulation of the
Island’s insurance sector and in particular in relation to the
EU’s proposed Solvency II framework.
The statement
reads:
Solvency II Position Statement
1. The authorities in Guernsey have
no plans to seek equivalence under
Solvency II.
2. Guernsey
remains committed to meeting internationally accepted regulatory
standards as set by the IAIS and endorsed by the G20.
In 2011 the IAIS standards will
be changing to take account of latest developments on risk based
solvency.
3. The States of Guernsey and the GFSC
will be focused on amending Guernsey’s
regulatory regime to take account of these international
developments.
Obviously any changes to that regime will need to take
account of the nature of, and be appropriate to, Guernsey’s
insurance industry.
4. Work on implementing those
emerging global standards in Guernsey’s regulatory regime will
continue in 2011 and will involve full consultation with
Guernsey’s insurance industry.
5. Parallel to this work
the Commerce and Employment Department and the GFSC will
continue to monitor developments on Solvency II with a view to
determining whether or not full or partial equivalence may be
beneficial to Guernsey.
6. Before any decision is made
as to whether Guernsey should seek equivalence in the future the
Department and the GFSC will consult with
Guernsey’s insurance industry to ensure that the implications of
seeking equivalence are fully understood.
Peter
Niven, Chief Executive of Guernsey Finance – the promotional
agency for the Island’s finance industry, said:
"Guernsey is the largest
captive insurance domicile in the European region but of
course we lie outside the EU and as such, we cannot adopt its
Directives but can seek equivalence.
We have carried out a thorough evaluation of Solvency
II and believe that, as things stand at the moment,
seeking equivalence would not be right
for our insurance market which is a world leader in captive
insurance.
Indeed, the treatment of
captives under Solvency II remains uncertain and so we
will be keeping a close eye on this and Solvency II as a whole
to assess progress and how it might impact our market in the
future.
Guernsey remains committed to
meeting internationally accepted regulatory standards as set by
the IAIS and endorsed by the G20, including the latest
developments on risk based solvency."
Dominic Wheatley
(pictured above), Managing Director of Willis Management in
Guernsey and Chairman of the Guernsey International Insurance
Association (GIIA), said:
“The Guernsey International Insurance Association is
very happy that Guernsey's position on
Solvency II equivalence has been clarified.
This puts an end to speculation on the subject and
gives certainty to those involved in or looking to be involved
in the Guernsey international insurance industry.
“We
believe that the position the Island has adopted will
enhance Guernsey's attractiveness as a
domicile to captive owners and other niche insurers
looking for a regulatory environment that responds to the
smaller scales of business and simpler business models typical
of their businesses.
Guernsey combines good international practice, as
witnessed by the recent IMF report, with responsive, pragmatic
regulation. We believe that the Island's future success lies in
continuing this tradition as a high-quality alternative to the
EU and other mainstream business environments.”
Guernsey
has an international insurance industry with 675 international
insurance entities, comprising 341 international insurers (pure
captives, PCCs, ICCs and ICC cells) and 334 PCC cells with
combined gross assets of £23.4bn, a net worth of £8.1bn and
writing £3.4bn in premiums.
The 7 key
specific
benefits of Solvency II
According to Hector Sants, Chief Executive, FSA UK,
there are 7 key specific benefits
of Solvency II:
1. Improved risk sensitivity
Solvency II emphasises the importance of risk‑based
regulatory requirements.
The adoption of this framework should
encourage firms to better understand the
risks they run, and thus increase the resilience of both
firms and the industry as a whole.
2. Improved market sensitivity
Solvency II aims to embed a market-sensitive approach
to the regulation of insurance across the EU.
For firms that go down the internal model route, this
will involve more timely and more precise market sensitivity
than under the current UK Individual Capital Adequacy Standards
regime.
This should, therefore, enhance the UK financial
system by ensuring that insurers’ regulatory capital
requirements more accurately reflect up-to-date market
conditions.
I should nevertheless remind you that models have
their limitations, as at the end of the day they are dependent
on their data.
This point is a good moment to remind us all that when
it comes to risk management there is no substitute for good
common sense. It is vital to ensure the substance of the models
can be understood by all key members of management including the
board.
3. Improved supervision of groups
In a significant enhancement to the current regime,
Solvency II makes specific allowances for the supervision of
groups, a reflection of the growing interconnectedness of the UK
insurance market and financial system as a whole.
4. Improved transparency
Solvency II requires consistent data disclosures by
firms across Europe. This should facilitate better peer analysis
on a pan‑European basis and generally raise the level of
understanding by investors and users of the European insurance
industry.
5. Common EU intervention tools
Solvency II creates a codified ladder of
intervention across the EU which will help group supervisors
quickly and effectively act in times of firm specific or
systemic stress.
6. Reduced cross-subsidisation
As insurance regulation is currently
not harmonised across the EU,
there is the potential for differing regulatory regimes to place
different financial requirements on very similar products,
favouring some firms, and disadvantaging others.
By
moving to a harmonised risk-based approach, Solvency II should
align regulatory requirements with the underlying economics and
risks of individual products.
This will provide a level
playing field across the EU for firms to compete on across the
EU and consequently encourage competition.
As the UK has
already begun this move towards risk‑based regulation, with the
implementation of the current ICAS regime, UK firms should be
well placed to take advantage of this levelling of the EU
playing field.
7. Rationalisation of the existing regime
Solvency II will sweep away the complexity of
the current UK regime based on Solvency I and supplemented with
super equivalent requirements including the ICAS regime.
Concerns have been raised as to whether these benefits are
‘worth it’ in relation to both the costs of implementation and
whether in some way the risk calibration is correct.
Assessing the overall benefits of
Solvency II is a complex exercise and the answer on a
pan-European basis could well be different than on a national
basis alone, according to Hector Sants, Chief Executive, FSA
UK.
The Omnibus Directive
The
Omnibus Directive is DIRECTIVE 2010/78/EU
of 24 November 2010, and covers the powers of
the European Supervisory Authorities (European Banking Authority, European Insurance and Occupational
Pensions Authority and European
Securities and Markets Authority)
The financial crisis in 2007 and 2008 exposed important
shortcomings in financial supervision, both in particular cases and
in relation to the financial system as a whole.
Nationally based
supervisory models have lagged behind financial globalisation and
the integrated and interconnected reality of European financial
markets, in which many financial institutions operate across
borders.
The crisis exposed shortcomings in the areas of
cooperation, coordination, consistent application of Union law and
trust between national competent authorities.
In several
resolutions before and during the financial crisis, the
European
Parliament has called for a move towards more integrated European
supervision, in order to ensure a true level playing field
for all actors at Union level and reflect the increasing integration
of financial markets in the Union
In November 2008, the Commission mandated a
High-Level Group
chaired by Jacques de Larosière to make recommendations on how to
strengthen European supervisory arrangements with a view to better
protecting the citizen and rebuilding trust in the financial system.
In its final report presented on 25 February 2009 (the ‘de Larosière
Report’), the High-Level Group recommended that the supervisory
framework be strengthened to reduce the risk and severity of future
financial crises.
It recommended far-reaching reforms to the
supervisory structure of the financial sector within the Union.
The
de Larosière Report also recommended that a European System of
Financial Supervisors (ESFS) be created, comprising three European
Supervisory Authorities (ESA) – one for each of the banking, the
securities and the insurance and occupational pensions sectors – and
a European Systemic Risk Council.
In its Communication of 4
March 2009 entitled ‘Driving European Recovery’, the Commission
proposed to put forward draft legislation creating the ESFS and in
its Communication of 27 May 2009 entitled ‘European Financial
Supervision’, it provided more details of the possible architecture
of that new supervisory framework.
In its conclusions
following its meeting on 18 and 19 June 2009, the
European Council
recommended that a European System of Financial Supervisors, comprising three new ESA, be established.
The system should be aimed
at upgrading the quality and consistency of national supervision,
strengthening oversight of cross-border groups, establishing a
European single rule book applicable to all financial institutions
in the internal market.
It emphasised that the ESA
should also have
supervisory powers for credit rating agencies and invited the
Commission to prepare concrete proposals on how the ESFS could play
a strong role in crisis situations.
On 23 September 2009,
the Commission adopted proposals for three regulations establishing
the ESFS including the creation of the three ESA.
In order
for the ESFS to work effectively, changes to legal acts of the Union
in the field of operation of the three ESA are necessary.
Such
changes concern the definition of the scope of certain powers of the ESA, the integration of certain powers established in legal acts of
the Union, and amendments to ensure a smooth and effective
functioning of the ESA in the context of the ESFS.
The
establishment of the three ESA should be accompanied by the
development of a single rule book to ensure consistent harmonisation
and uniform application and thus contribute to a more effective
functioning of the internal market.
The regulations
establishing the ESFS provide that, in the areas specifically set
out in the relevant legislation, the ESA may develop draft technical
standards, to be submitted to the Commission for adoption in
accordance with Articles 290 and 291 of the Treaty on the
Functioning of the European Union (TFEU) by means of delegated or
implementing acts.
This Directive should identify a first set of
such areas and should be without prejudice to adding further areas
in the future.
The relevant legislation should
define
those areas where the ESA are empowered to develop draft technical
standards and how they should be adopted.
The relevant legislation
should lay down the elements, conditions and specifications as
detailed in Article 290 TFEU in the case of delegated acts.
The identification of areas for technical standards should
strike an
appropriate balance between building a single set of harmonised
rules and avoiding unduly complicated regulation and enforcement.
The only areas selected should be those in which consistent
technical rules will contribute significantly and effectively to the
achievement of the objectives of the relevant legislation, while
ensuring that policy decisions are taken by the European Parliament,
the Council and the Commission in accordance with their usual
procedures.
Matters subject to technical standards should
be genuinely technical, where their development requires the
expertise of supervisory experts.
The technical standards adopted as
delegated acts should further develop, specify and determine the
conditions for consistent harmonisation of the rules included in
basic instruments adopted by the European Parliament and the
Council, supplementing or amending certain non-essential elements of
the legislative act.
The technical standards adopted as implementing
acts should set conditions for the uniform application of legally
binding Union acts.
Technical standards should not involve policy
choices.
Binding technical standards contribute to a
single rulebook for
financial services legislation as endorsed by the European Council
in its conclusions of June 2009.
To the extent that certain
requirements in Union legislative acts are not fully harmonised, and
in accordance with the precautionary principle on supervision,
binding technical standards developing, specifying or determining
the conditions of application for those requirements
should not
prevent Member States from requiring additional information or
imposing more stringent requirements.
Technical standards should
therefore allow Member States to do so in specific areas, when those
legislative acts provide for such discretion.
As set out
in the regulations establishing the ESFS, before submitting the
technical standards to the Commission, the ESA should, where
appropriate, conduct open public consultations relating thereto and
analyse the potential related costs and benefits.
It
should be possible for technical standards to provide for
transitional measures subject to adequate deadlines,
if the costs of
immediate implementation would be excessive compared to the benefits
involved.
The regulations establishing the ESA
require that the cases where the mechanism to settle disagreements
between national competent authorities may be applied are to be
specified in the sectoral legislation.
This Directive should
identify a first set of such cases and should be without prejudice
to adding further cases in the future.
This Directive should not
prevent the ESA from acting in accordance with other powers or
fulfilling tasks specified in their establishing regulations,
including non-binding mediation and contributing to the consistent,
efficient and effective application of legal acts of the Union.
Moreover, in those areas where some form of non-binding mediation is
already established in the relevant legal act, or where there are
time limits for joint decisions to be taken by one or more national
competent authorities, amendments are needed to ensure clarity and
minimum disruption of the process for reaching a joint decision, but
also that where necessary, the ESA should be able to
resolve
disagreements.
The binding procedure for the settlement of
disagreements is designed to solve situations where national
competent authorities cannot resolve, among themselves, procedural
or substantive issues relating to compliance with legal acts of the
Union.
This Directive should identify
situations in which a procedural or a substantive issue of
compliance with Union law needs to be resolved and the national
competent authorities are not able to resolve the matter on their
own.
In such a situation, one of the national competent authorities
concerned should be able to raise the issue with the European
Supervisory Authority concerned.
That European Supervisory Authority
should act in accordance with its establishing regulation and with
this Directive.
The European Supervisory Authority concerned should
be able to require the competent authorities concerned to take
specific action or to refrain from action in order to settle the
matter and to ensure compliance with Union law, with binding effects
on the competent authorities concerned.
In cases where the relevant
legal act of the Union confers discretion on Member States,
decisions taken by a European Supervisory Authority should not
replace the exercise of discretion by the competent authorities in
compliance with Union law.
Directive 2006/48/EC of the
European Parliament and of the Council of 14 June 2006 relating to
the taking up and pursuit of the business of credit institutions provides for
mediation or joint decisions
as regards the determination of significant branches for the
purposes of supervisory college membership, model validation and
group risk assessment.
In all of those areas, amendments should
clearly state that in the event of disagreement during a specified
time period, the European Supervisory Authority (European Banking
Authority) may resolve the disagreement using the process outlined
in Regulation (EU) No 1093/2010.
That approach makes it clear that,
while the European Supervisory Authority (European Banking
Authority) should not replace the exercise of discretion by the
competent authorities in compliance with Union law, it should be
possible for disagreements to be resolved and cooperation to be
strengthened before a final decision is taken or issued to an
institution.
In order to ensure a
smooth transition of the current tasks
of the Committee of European Banking Supervisors, the Committee of
European Insurance and Occupational Pensions Supervisors and the
Committee of European Securities Regulators to the new ESA,
references to those Committees should be replaced in the relevant
legislation with references to the European Supervisory Authority
(European Banking Authority), the European Supervisory Authority
(European Insurance and Occupational Pensions Authority) and the
European Supervisory Authority (European Securities and Markets
Authority), respectively.
The regulations establishing the
ESA provide that they may develop contacts
with supervisory authorities from third countries and
assist in preparing equivalence decisions
pertaining to supervisory regimes in third countries.
Directive 2004/39/EC of the European Parliament and of the Council
of 21 April 2004 on markets in financial instruments and Directive
2006/48/EC should be amended to allow the ESA
to establish cooperation agreements with third countries and
exchange information where those third countries can provide
guarantees that professional secrecy will be protected.
Having a single consolidated list or register
for each category of financial institution in the Union,
which is currently the duty of each national competent authority,
will improve transparency and is more appropriate in the context of
the single financial market.
The ESA
should be given the task of establishing, publishing and regularly
updating registers and lists of financial actors within the Union.
This concerns the list of authorisations of credit
institutions granted by national competent authorities, the register
of all investment firms and the list of regulated markets under
Directive 2004/39/EC.
Similarly, the
European Supervisory Authority (European Securities and Markets
Authority) should be given the task of
establishing, publishing and regularly updating the list of approved
prospectuses and the certificates of approval under
Directive 2003/71/EC of the European
Parliament and of the Council of 4 November 2003 on the prospectus
to be published when securities are offered to the public or
admitted to trading
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL
establishing a European Insurance and Occupational
Pensions Authority - Part A
Part B
Part C
Part D
The Omnibus II Directive
The
Omnibus II Directive is amending Directives 2003/71/EC and
2009/138/EC in respect of the powers of the
European Insurance and Occupational Pensions Authority and the
European Securities and Markets Authority
Following the launch of the three new European
Supervisory Authorities on 1 January 2011, the Commission now
proposes to make targeted changes to
legislation in the area of insurance and securities regulation
to ensure that the new Authorities can work effectively.
In particular, the proposal sets out in detail the
scope for the Authorities to exercise their
powers, which include the possibility to develop draft technical
standards and to settle disagreements between national supervisors.
The proposed directive has be sent to the Council and the
European Parliament for consideration.
Sectoral legislation on financial services needs to be
adapted to the setting up of the European Banking Authority, the
European Insurance and Occupational Pensions Authority, and the
European Securities and Markets Authority.
Omnibus II should include such adaptations mainly for the
insurance and securities sectors (Omnibus I covered other issues
such as banking and asset management).
Without adequate
amendments to sectoral legislation, the new Authorities will not be
able to develop technical standards nor to settle disputes between
national supervisors in an efficient way.
Who is affected?
Financial supervisors who will be empowered by the new
legislation. Indirectly, insurance companies, listed companies and
investors.
Internal Market and
Services Commissioner Michel Barnier
said: "The financial crisis in Europe exposed
weaknesses in the supervision of financial markets, which the
new EU financial supervisory structure intends to correct. Today's
proposal is an important building block to ensure that the
new supervisory bodies will run smoothly.
By giving the new supervisors a clearly defined mandate and
bringing existing legislation in line with that mandate, the
Commission further delivers on the promise of creating more solid
and stable markets and mitigating future crises."
The
proposal complements a package of legislative
acts on financial supervision which were agreed on 22
September 2010 and which entered into force on
1 January 2011, creating a new architecture for supervision at
European level with three new European Supervisory Authorities (ESAs).
The ESAs, which replace the former European Committees for
the banking, securities and insurance and occupational pensions
sectors, are the European Banking Authority (EBA),
the European Insurance and Occupational Pensions Authority (EIOPA),
and the European Securities and Markets Authority (ESMA).
In cooperation and coordination with nationally-based
supervisors, the ESAs are in place to ensure that
rules are applied
in a rigorous and consistent fashion throughout the European Union,
to monitor developments within the financial system as well as to
detect potential risks to financial stability.
The trio of
new ESAs have taken over all of the functions of the previous
committees, and in addition have certain additional competences,
including the following:
1. Developing proposals for technical
standards to better define common standards for the application of
legislative acts, respecting better regulation principles;
2. Resolving cases of disagreement between national supervisors, where
legislation requires them to cooperate or to agree;
3. Contributing to ensuring consistent application of existing and
future technical EU rules (including through peer reviews);
4. A
coordination role in emergency situations.
In order for the
ESAs to work effectively, changes to existing financial services
Directives are necessary, laying down the precise scope for the ESAs
to exercise certain of the new powers.
The
areas in which amendments
are necessary fall broadly into the following categories:
1. Definition of the appropriate areas in which the Authorities will be
able to propose technical standards as an additional tool for
supervisory convergence and with a view to developing a single rule
book to ensure strengthened stability, equal treatment, lower
compliance costs and to prevent regulatory arbitrage;
2. Detail
how the Authorities will settle disagreements between national
supervisors in a balanced way, in those areas where common
decision-making processes or cooperation between national
supervisors already exist in sectoral legislation; and
3. General amendments which are necessary for the existing Directives
in the financial services sector to operate in the context of new
authorities, for example, renaming the level 3 committees as the new
authorities and ensuring the appropriate gateways for the exchange
of information are present.
A first set of technical
amendments to 11 Directives (IP/09/1582) was agreed as part of the
supervision package now in force. However, for technical reasons,
those amendments did not cover the "Solvency II" Directive for the
insurance sector (Directive 2009/138/EC), and parts of the
Prospectus Directive (Directive 2003/71/EC).
This legislative proposal
contains a limited set of amendments to the
"Solvency II" Directive.
These amendments include the provision of
more specific tasks for EIOPA such as ensuring harmonised technical
approaches on the use of ratings in relation to the Solvency Capital
Requirements, and extending the implementation date by two months to
ensure better alignment with the end of the financial year for the
majority of insurance and reinsurance undertakings.
The amendments
will also enable the Commission to specify transitional measures in
certain areas if deemed necessary to avoid market disruption and to
allow a smooth transition to the new regime under "Solvency II".
Information for and reports by the European Insurance and
Occupational Pensions Authority
Member States shall require the
supervisory authorities to provide the
following information to EIOPA on an annual basis:
(a)
the average capital add-on per undertaking
and the distribution of capital addons imposed
by the supervisory authority during the previous year,
measured as a percentage of the Solvency
Capital Requirement, shown separately as follows:
(i) for all insurance and reinsurance undertakings;
(ii)
for life insurance undertakings;
(iii) for non-life insurance
undertakings;
(iv) for insurance undertakings pursuing both
life and non-life activities;
(v) for reinsurance
undertakings;
(b) for each of the disclosures set out in
point (a) of this paragraph, the proportion of capital add-ons
imposed under points (a), (b) and (c) of Article 37(1) respectively.
EIOPA shall publicly disclose, on an
annual basis, the following information:
(a) for all
Member States together, the total distribution of capital add-ons,
measured as a percentage of the Solvency Capital Requirement, for
each of the following:
(i) all insurance and reinsurance
undertakings;
(ii) life insurance undertakings;
(iii)
non-life insurance undertakings;
(iv) insurance undertakings
pursuing both life and non-life activities;
(v) reinsurance
undertakings;
(b) for each Member State
separately, the distribution of capital add-ons, measured as
a percentage of the Solvency Capital Requirement, covering all
insurance and reinsurance undertakings in that Member State;
(c) for each of the disclosures
referred to in points (a) and (b) of this paragraph, the proportion
of capital add-ons imposed under points (a), (b) and (c) of Article
37(1) respectively.
EIOPA shall provide the information
referred to in paragraph 2 to the European
Parliament, the Council and the Commission, together with a
report outlining the degree of supervisory convergence in the use of
capital add-ons between supervisory authorities in the different
Member States."
Technical information produced by the European Insurance and
Occupational Pensions Authority
EIOPA shall publish technical information
including the relevant risk-free interest rate term structure.
Where EIOPA observes an
illiquidity premium in the financial markets in periods of stressed
liquidity, information relating to the illiquidity premium,
including its size shall also be published.
EIOPA shall
carry out the observation of the illiquidity premium and the
derivation of the information on a
transparent, objective and
reliable basis.
Information for all these purposes shall be
derived according to methods and assumptions which may include
formulae, or determinations made by EIOPA.
The information
referred to in the first paragraph shall be
published for each relevant currency on at least a quarterly
basis in a manner.
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The Solvency ii Association develops and maintains a
compendium of Solvency ii related risk and compliance topics.
Subject matter experts review and update this body of knowledge.
The Solvency ii Association offers two Solvency ii
certification programs:
A. Certified Solvency ii Professional
(CSiiP) for professionals working in the EEA countries
B.
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professionals working in non-EEA countries
The Solvency ii
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II Training worldwide only in cooperation with the Solvency II
Training Ltd.
As Corporate Affiliates of The Institute
of Continuing Professional Development (CPD) our three-day Solvency
II training courses offer delegates a total of 24 (CPD) hours.
FOR SOLVENCY II TRAINING YOU MAY
CONTACT:
Solvency II Training
Level 33, 25 Canada Square
Canary Wharf, London E14 5LQ
Tel:
+44 (0) 207 060 3312
Fax: +44 (0) 207 681 3317
Contact: Ross Fenwick, Managing Partner
Tailor made,
in-house instructor-led training
Contact
Ross Fenwick, Managing Partner,
Solvency II Training,
Tel:
+44 (0) 207 060 3312,
Fax: +44 (0) 207 681 3317,
Email:
info@solvencyiitraining.eu
,
Web:
www.solvencyiitraining.eu
The Solvency ii Association has signed an exclusive worldwide partner
agreement with Solvency II Training Ltd,
Level 33, 25 Canada Square, Canary Wharf, London E14 5LQ,
Tel:
+44 (0) 207 060 3312,
Fax: +44 (0) 207 681 3317.
All the instructor-led classes
that lead to the CSiiP and the CSiiEP certificates will be organized
by the Solvency II Training Ltd. We do not offer distance learning
programs.
For further information or to
register for one of our Solvency II training courses, please contact:
Ross Fenwick, Managing Partner,
Solvency II Training Ltd,
Tel:
+44 (0) 207 060 3312,
Fax: +44 (0) 207 681 3317,
Email:
info@solvencyiitraining.eu
,
Web:
www.solvencyiitraining.eu
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