The insurance industry and
the financial crisis
London Insurance Institute
London, 17 March 2010
Prof. Karel VAN HULLE
Head of Insurance and Pensions
1
Financial crisis and insurance
• Insurers went through the crisis relatively
unharmed
• Strong cash flows, long-term liability driven
investment policies, stable customer base
• Insurers that had problems were involved
in extensive banking or credit operations
• Lack of proper risk management has been
an issue in a number of cases
2
Actions undertaken
• Close co-operation in the context of G20,
Financial Stability Board and Joint Forum
• ECOFIN action plan
• Proposal to improve the supervisory
architecture in the EU
• Question to all parties concerned whether
Solvency II needed to be changed
3
Recapitulation: Why Solvency II?
• Present capital requirements are not
sufficiently risk sensitive
• Group supervision is not dealt with in its
own right
• More efficient capital allocation would
allow insurers to take on more risks
• Supervisory convergence must be
strengthened
4
Solvency II: 3 pillars and a roof
Group supervision
& cross-sectoral convergence
Groups are recognised as an economic entity
=> supervision on a consolidated basis
(diversification benefits, group risks)
Pillar 1: quantitative
requirements
1. Harmonised calculation of
technical provisions
2. "Prudent person" approach
to investments instead of
current quantitative restrictions
3. Two capital requirements:
the Solvency Capital
Requirement (SCR) and the
Minimum Capital Requirement
(MCR)
Pillar 2: qualitative
requirements and
supervision
Pillar 3: prudential
reporting and public
disclosure
1. Enhanced governance,
internal control, risk
management and own risk and
solvency assessment (ORSA)
1. Common supervisory
reporting
2. Strengthened supervisory
review, harmonised supervisory
standards and practices
2. Public disclosure of the
financial condition and solvency
report
(market discipline through
transparency)
5
Solvency II Timetable for 2007-2012
2006
2007
2008
Directive
Directive adoption
development
(Council &
(Commission)
Parliament)
2009
2010
2011
2012
Implementation
(Member states)
CEIOPS work on technical advice necessary for implementing measures /
supervisory convergence / preparation for implementation / training &
development
Adoption of
implementing
measures
Commission preparatory work implementing
measures
July 2007
Solvency II Proposal - Adopted Directive published in December 2009
QIS 2
QIS 3
QIS 4
October 2012
Solvency II enters into force
QIS 5
6
7
Solvency II and financial crisis
• Stakeholders confirm that Solvency II is
needed because of higher level of
harmonisation and risk orientation
• CEIOPS publishes paper « lessons
learned from the financial crisis » in March
2009
• Text of Framework Directive is amended in
order to introduce provisions dealing with
financial crisis situations
8
Changes in Solvency II Framework
Directive
• Supervisory authorities shall give proper
consideration to financial stability and
potential procyclical effects of their actions
• Symmetric adjustment mechanism in
equity risk sub-module
• Extension of recovery period in the event
of exceptional fall in financial markets
9
Adaptations at Levels 2 and 3
• Pillar 1: Quality of the capital, alternative
risk transfer, market risk, correlation
between risks
• Pillar 2: Reliance on CRA’s, liquidity risk,
internal models
• Pillar 3: possible procyclical effects of
market value based disclosures
10
What remains to be done on SII?
• Commission drafting of implementing
measures based upon CEIOPS’ advice but
in close co-operation with MS and
stakeholders
• QIS 5 will be the ultimate test of the
standard formula
• Implementing measures to be
accompanied by impact assessment
11
Timing for SII
•
•
•
•
•
•
Commission Proposal (s): end 2010
Stakeholder meeting QIS 5: 30 April 2010
Public Hearing: 4 May 2010
Final technical specifications: June 2010
Start of QIS 5: August 2010
Adoption of implementing measures: end
2011
12
Supervisory architecture
• De Larosière expert group delivers report
end February 2009
• Proposal to keep supervision at national
level but with strengthening of EU level
• Policy proposals by EC end May 2009
• European Council agrees: 19 June 2009
• EC Legislative proposals: September 2009
13
Two pillars of new supervisory
structure
•European Systemic Risk Board
(ESRB); and
•European System of Financial
Supervisors (ESFS).
14
ESFS structure
• Steering Committee (replacing
JCFC)
• European Supervisory Authorities:
– European Banking Authority
– European Insurance and Occupational
Pensions Authority
– European Securities Markets Authority
• National Supervisors
15
EIOPA
• Binding technical standards: common
rulebook
• Binding mediation: conflicts between
supervisors, application of EU rules
• Group supervision: observer in colleges
• Crisis-management
• Full-time Chairman and more resources
16
State of progress
• Political agreement in Council in
December 2009
• Vote in EP expected in June/July 2010
• To be followed by amendments in sectoral
legislation
• Changes in insurance legislation expected
some time in Spring 2010
• EIOPA to start: 1 January 2011
17
Concluding remarks
• Need to strike the right balance in
Solvency II between prudence and
efficient allocation of capital
• Solvency II will seriously upgrade the level
of supervisory convergence
• The creation of EIOPA will lead to further
professionalisation of supervision
18