EIOPA & Solvency IIWhat to expect in non-member states such as Switzerland

Gabriel BernardinoChairman of EIOPA

Swiss Insurance AssociationZurich, 1 December 2011

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Outline

1. What is EIOPA?

Key objectives

Powers

Activity

Challenges

2. Solvency II – The final countdown

3. Equivalence – The road to convergence

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What is EIOPA?

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EIOPA’s key objectives

• Stable/effective financial system

• Sound regulation/supervision

• Transparent, efficient and orderly markets

• International supervisory co-ordination

• No regulatory arbitrage

• Equal conditions of competition

• Appropriate regulation/supervision of risks

• Enhanced customer protection

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EIOPA’s powers

• Develop draft technical standards

• Issue guidelines and recommendations

• In certain cases, remedy emergency situations

• Settle disagreements in cross-border situations

• Monitor correct application of EU law

• Methodologies for products and distribution

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EIOPA’s activity

• Regulation

Solvency II

Input to the EU Commission on the Level 2 implementing measures

On-going work on the Regulatory Technical Standards and Guidelines and Recommendations

Review of the IORP Directive

Draft answer to the call for advice from the EU Commission (in public consultation until 2 January 2012)

Introduce a risk-based framework in the EU occupational pensions supervision

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EIOPA’s activity

• Supervision

Participation in the colleges of supervisors

Providing an added value on consistency and making recommendations in order to assure a convergent and coherent functioning

EIOPA colleges action plan (definition and monitoring)

EU wide stress test

Common framework applied by all undertakings

Evaluate the overall stability of the EU insurance market and assess the major prospective vulnerabilities

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EIOPA’s activity

• Financial Stability

Monitor and assess market developments

Using efficiently the public information available

Collecting more granular information directly from the national supervisory authorities

specific quantitative and qualitative queries

visits by EIOPA staff

Cross-sectoral risk assessment

Done at the level of the Joint Committee of the ESA’s

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EIOPA’s activity

• Consumer protection

Committee on Consumer Protection and Financial Innovation

Guidelines on complaints-handling by insurance undertakings

Best practices on disclosure and selling practices of variable annuities

Report on Financial Literacy and Education Initiatives

First report on consumer trends

Complex unit-linked life insurance

Payment Protection Insurance

Use by consumers of comparison websites

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EIOPA’s activity

• International Relations

Solvency II equivalence analysis

Switzerland, Bermuda and Japan in the first wave

Off-site and on-site analysis to prepare the advice to be given to the EU Commission

International Association of Insurance Supervisors

EIOPA full member of the IAIS - the international standard setter in the insurance area

EIOPA chair elected to the Executive Committee

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EIOPA’s challenges

• Building phase but already need to deliver

• Recruit and maintain highly skilled, competent and experienced staff

• Implementation of Solvency II

• Deliver more standardized and comparable information to consumers

• Create a centralized hub of information for stability purposes

• Deal with the specificities of system risk in insurance

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EIOPA’s challenges

• Creation of a truly European supervisory culture that:

Promotes stability

Enhances transparency

Fosters consumer protection

• A culture based on intelligent and effective regulation

• A culture that adds credibility and promotes good practices

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Solvency IIThe final countdown

• What is still missing?

Level 2 implementing measures

Omnibus 2

Technical standards and guidelines

• EIOPA plans to start public consultation of technical standards on May 2012

Solvency II – The final countdown

• KEY challenge: How to deal with the impact on long-term guaranteed products?

Mitigate the effect of short-term volatility

Preserve transparency of economic approach

Reward long-term ALM and hedging strategies

Build counter-cyclical measures

Reinforce level playing field

Solvency II – The final countdown

• Countercyclical tools Pillar I equity dampener

MCR and SCR - Supervisory ladder of intervention

Pillar II extension of the recovery period

Counter Cyclical Premium A tool to be used in crisis situations Complete formulaic approach is not desirable or even possible Clear criteria and indicators monitored by EIOPA Decision on the application of the CCP, by EIOPA on a European

basis, when certain defined thresholds would be exceeded Avoid incentives to insurers to invest in higher risky assets Should not be used to maintain unsustainable business models

in an on-going situation

Solvency II – The final countdown

Solvency II – The final countdown

Key challenge:

Capital is not the answer for poor risk management

Capital is not the solution for all the risks

Effective risk management processes and practices, applied in a consistent way can be a relevant tool to foster policyholder protection and promote stability in the markets

Solvency II – The final countdown

Key challenge:

Appropriate reporting to supervisors

Quarterly reporting of some core elements

Increase of risk-based information

Preventive supervision is based on the access to timely and quality information

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SII EquivalenceThe road to convergence

SII Equivalence

• SII Directive gives EU Commission authority to

decide about the equivalence of a third country’s

solvency and prudential regime

• EIOPA is responsible for the technical assessment

Benefits of equivalence

• Ensure an adequate level of policyholder

protection on a global basis

• Facilitate cross-border activities of insurance

and reinsurance undertakings

• Reduce regulatory complexity – diminish the

burden on internationally active insurance groups

• Reinforce the global trend towards introducing

economic risk-based approaches

Consequences of equivalence

1. A (re)insurer located in a third country enters into

a reinsurance arrangement with a (re)insurer

in the EU

Reinsurance contracts treated in the same manner as

contracts concluded with EU (re)insurers

EU member states not allowed to require collateral

Consequences of equivalence

2. A (re)insurer headquartered in the EU has

participations or subsidiaries located in a

third country

EU Group to use third country rules on own funds and

capital requirements rather than SII rules for the

calculation of the Group Solvency Capital Requirement

EU Group undertakings in third countries do not need to

recalculate their data according to SII

Consequences of equivalence

3. A (re)insurer headquartered in a third country has

participations or subsidiaries located in the

EU

EU supervisory authorities required to rely on group

supervision exercised by third country supervisors

Avoid burden to third country international groups

Demystifying equivalence

• Not in search for a copy of SII !!!

• But go beyond the simple definition of the

objectives of the regimes…

• Equivalence assessments are principles based:

Is the third country regime risk-based?

Are the basic principles of Solvency II reflected in the

third country regime? (e.g. fully risk-based capital

requirements, enhanced group supervision, etc…)

Criteria for equivalence

• Areas to be assessed:

Powers and responsibilities of third country supervisors

Taking-up of business

System of governance

Public disclosure

Changes in business, management or qualifying holdings

Solvency assessment

Professional secrecy, exchange of information

Group supervision

Transitional regime for equivalence

• To be applied to third countries willing and

committed to converge towards a risk-based

regime over a pre-defined period

• Subject to a EU Commission decision

• Subject to conditions to be defined in Omnibus 2

• EIOPA to perform gap-analysis

EIOPA experience with equivalence

• Excellent cooperation with third country

authorities

• Information provided and dialogue with third

country supervisors was essential to assure the

quality and accuracy of the assessments

• EIOPA has identified which aspects of the third

country regime could be deemed equivalent and

what additional steps would need to be taken in

order for the remaining criteria to be met

EIOPA experience with equivalence

• EIOPA’s advice is that Switzerland meets the

criteria set out in EIOPA’s methodology for

equivalence assessments under Solvency II, but

with certain caveats• This findings reflect the efforts to maintain a

fruitful cooperation between the Swiss and EU

supervisory regimes • In-depth dialogue and cooperation between

EIOPA and FINMA will continue beyond

equivalence

“Very important step in the right direction

with regards to international cooperation and

acceptance of supervisory regimes”

Comment to EIOPA’s assessment

SII equivalence assessment