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NEW REGULATIONS NEW REGULATIONS AFFECTING THE AFFECTING THE
INSURANCE MARKETINSURANCE MARKETElemér TertákPrincipal Advisor
European Commission
THE INSURANCE IN EU ON THE THRESHOLD OF THE THIRD MILLENNIUMTHE INSURANCE IN EU ON THE THRESHOLD OF THE THIRD MILLENNIUM
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Role of insurance in the EU Role of insurance in the EU
Between 2002 and 2007 the European share of the global market rose from 32% to 43% as premiums in Europe grew faster than total worldwide premium income. However, with the decline of European premiums in 2008 and 2009, Europe’s market share decreased to 40%.
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History of insurance and History of insurance and insurance regulationinsurance regulation
The concept of insurance date as far back as 3000 B.C.
However, it was during the 15th to 17th century, when modern types of policies began to develop for life, marine and fire insurance. Initially, small local and regional carriers primarily writing fire and life insurance dominated the industry which led to a state-based regulatory framework.
In the 19th century the incorporated insurers come to the front and took over from the mutuals and cooperatives the business. Major disadvantage of the mutual insurance companies is the difficulty of raising capital thus take more or large value risks. The mutual market share at the end of 2008 was 24% .
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History of insurance and History of insurance and insurance regulation insurance regulation (cont‘d) (cont‘d)
At the end of the 19th century, there was a shift in public sentiment towards increased regulatory oversight of large and concentrated industries that resulted from concern from potential monopoly harms. The regulatory oversight was justified as being in the public interest, and imposed on several industries, including railroads, telecommunications, trucking, airlines and insurance.
Another driver was that in the mid-19th century the prospect of quick gains led to proliferation of less reputable insurers. The call for a competent oversight was not long in coming. The first insurance supervision laws were adopted at the end of the 19th and beginning of the 20th century. The insurance supervisions were mandated to protect the insured against failure of insurance companies against fraud, to protect high premium burden and lack of general policy conditions.
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Theories of Regulation Theories of Regulation Public interest theory, The purpose is to protect consumers by
monitoring the solvency of insurers and their business practices. The idea is that consumers are not in an equal bargaining position with insurers, so it is necessary for the government to regulate the terms of insurance contracts.
Public choice theory. It rests on one major premise – that regulators concern themselves only about the needs of the citizens. requirement for full disclosure and setting reasonable standards are aimed at to overcome imperfect information
Insurance is also regulated for economic, social, and political purposes.
Further rationale is to regulate international insurers for financial soundness and transparency. Another macroeconomic purpose is to avoid regulatory arbitrage among financial sectors and to maximize efficiency of capital allocation.
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Regulation of insurance in the EURegulation of insurance in the EU
Competition Competition regulationregulation
Competition Competition regulationregulation
Prudential Prudential regulationregulation
Contract lawContract law TaxationTaxation
EuropeanEuropean
NationalNational
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1973 / 1979: publication of the first non-life and life directives of the EEC (European Economic Community)
- mainly based on the work by Cornelis Campagne / OECD 1961
Required solvency margin for life companies (EEC, 1979):
4% of the mathematical reserves (≡ investment risk) +
3‰ capital at risk (≡ technical risk)
Early warning signal, based on fixed ratios (wind-up barrier: guarantee fund)
2nd, 3rd directive: solvency margins left unchanged
Solvency in Europe: Solvency Solvency in Europe: Solvency „„0”0”
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Insurance Committee (IC) asked the European supervisory
authorities (from 2004: CEIOPS) to establish a working group
to investigate solvency issues chair of the group: Helmut Müller (BAV, Bundesaufsichtsamt
für das Versicherungswesen)
Presentation of the Müller Report: current solvency margin structure satisfactory amount of the minimum guarantee fund needs to be increased
(inflation) identification of three risk groups (technical, investment, non-
technical)
Solvency I project initiated
Committee of European Insurance and
Occupational Pension Supervisors
SolvencySolvency in Europe: Solvencyin Europe: Solvency II
1994
1997
1999
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Experience since the adoption of Directive 2002/13/EC for non-life insurers and Directive 2002/83/EC for life insurers: have worked well over the last decade have significantly increased the protection of the policyholders
Characteristics:
simple, robust easy to understand and use inexpensive to administer rule-based, and not explicitly risk-based (e.g. differences between asset and liability profiles are neglected)
However since the creation of these rules, significant changes have taken place in the insurance industry need to adapt the rules.
Experience with Solvency IExperience with Solvency I
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Why to change the rules?Why to change the rules? Current regime nearby 40 years old Lack of adequate risk sensitivity
No incentives for insurers to manage risks adequately or to improve & invest in risk management
Does not facilitate accurate & timely supervisory intervention
Supervision of groups sub-optimal Lack of convergence within the EU Lack of consistency with international
developments (IAIS, IASB)
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„In 1980 the life insurance industry was 150 years old, in 2010 it was 30 years old“
Equity markets experienced a strong bull run from 1996-2000 and in 2005-2007
Equity and corporate bond markets suffered falls in 2001-2002 and in the recent financial crisis
Interest rates stabilized on a low level - problems with (high) guaranteed returns
Increasing life expectancy / costs
More frequent extremes / catastrophes (e.g. 09/11, Tsunami)
Insurance environment since the 90iesInsurance environment since the 90ies
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delayed intervention of external institutions (supervisors, rating-
agencies, ...)
high (distribution) costs – only partially offset against policy-
holder benefits
slanted toward growth
insurance market of the 90ies
increase in the „equity culture“– weaknesses in risk management and
control
competitive environment – creating
high expectations of discretionary
bonuses
Five erroneous trends in the 90iesFive erroneous trends in the 90ies
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Global Risks 2011Global Risks 20111.1. Economic RisksEconomic Risks
• Fiscal crises• Global imbalances and currency volatility
• Infrastructure fragility
2.2. Environmental RisksEnvironmental Risks• Air pollution
• Biodiversity loss• Climate change
• Earthquakes and volcanic eruptions• Flooding
• Ocean governance• Storms and cyclones
3.3. Societal RisksSocietal Risks• Chronic diseases
• Demographic challenges• Infectious diseases
• Water security
4.4. Geopolitical RisksGeopolitical Risks• Organized crime
Terrorism• Weapons of mass destruction
5.5. Technological RisksTechnological Risks• Threats from new technologies
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Based on the Müller Report, it was agreed that a more fundamental review of the overall financial position of an insurance company should be done, including
- Technical provisions (non-life) - Reinsurance
- Asset / investment risk - Solvency margins (methods)
- ALM - Accounting systems
Launch of the Solvency II project by the European Commission - CEIOPS was asked to provide input and recommendations
Solvency in Europe: towards Solvency IISolvency in Europe: towards Solvency II
19991999
20012001
Committee of European Insurance and
Occupational Pension Supervisors
2002 Publication of the Sharma Report and of the KPMG Report
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The three phases of progress:
Phase 1Phase 1:
from 2001 to 2003
gathering knowledge
general design of the system (e.g. 3-pillar framework)
KPMG report, Sharma report
Phase 2Phase 2:
from 2003-2009
technical development of detailed rules
3 waves of Calls for Advice giving
structure of the framework, QIS
Phase 3Phase 3:
from 2009-2013 implementing phase
modeling, standard models, calibration of
models and parameters
implementing in national law
Solvency in Europe: towards Solvency IISolvency in Europe: towards Solvency II (cont‘d) (cont‘d)
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Benefits expected from the principles and risk-based capital standards of Solvency II (Directive 2009/138/EC):
More transparent / better risk allocation between insurers, policyholders and capital markets
Better pricing, product innovation New asset management strategies Decrease in the cost of capital Better capital allocation (commensurate with risk profile)
improved financial stability
Solvency II – A great leap forward Solvency II – A great leap forward
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Securing the benefits of the policyholders*
* Note: this does not necessarily require the continued existence of a company. Zero-failure will not be the aim of prudential supervisory systems. In a free market, failures will occur!
ObjectivesObjectives
Minimum financialrequirements
Supervisory reviewprocess
Market discipline via disclosure requirements
1 32
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Improved risk management: o matched to the true risks of an insurance company
total balance sheet approach
sending out early warning signals
ensuring a smooth run-off of the portfolios in case of financial distress
Stability of the financial market
Consistency with other sectors (e.g. Basel III)
International comparability, compatibility and convergence
Objectives (cont‘d) Objectives (cont‘d)
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Solvency II TimetableSolvency II Timetable
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)
QIS2
July 2007 Solvency II Directive proposal
QIS3
Commission preparatory work implementing measures (IM)
Adoption of IM
QIS4
January 2013 Solvency II enters into force
QIS5
December 2009 Solvency II Directive published in OJ
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State of PlayState of Play
Around 40 implementing measures being prepared based upon advice from CEIOPS / EIOPA
Public hearing held in May 2010Discussion of drafts with MS experts and with
stakeholdersFirst consolidated version of drafts prepared by
Commission staff in October 2010
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State of Play State of Play (cont‘d) (cont‘d)
Implementing measures to be adopted by Commission as delegated acts in June / July 2011
Council and Parliament can voice objections during period of 3 or 4 months
Entry into force: 1 January 2013
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EU Financial Supervision Architecture EU Financial Supervision Architecture Reform and level 3 rulesReform and level 3 rules
CEIOPS became on 01/01/2011 EIOPA (European Insurance and Occupational Pensions Authority)
Preparation of level 3 rules
Possibility to write Binding Technical Standards, or issue guidance
The Solvency II Directive will be revised to allow these changes (so called « Omnibus 2 »)