Solvency ii News January 2012

Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.solvency-ii-association.com
Solvency II News, January 2012
Dear member,
Basel iii (theCapital RequirementsDirective 4 (CRD IV) in the
European Union) and Solvencyii becomemoresimilar monthafter
month.
With the CRC 4 theEuropean Commissionhasbrought forward
proposalstochangethebehavior of the 8000banksthat operatein
Europe.
The overarching goal is to strengthen the resilience of the EU banking
sector while ensuring that banks continue to finance economic activity
and growth.
Well, the Basel iii / Capital RequirementsDirective 4 in EU, is not a
directiveany more. It is a directiveand a regulation.
Thedirective governsthe accesstodeposit-takingactivities.
Theregulation governshow activitiesof credit institutionsand
investment firmsarecarried out.
While Member Stateswill have to transposethedirectiveintonational
law,the ***regulation is directlyapplicable***, whichmeansthat it
createslaw that takesimmediateeffect in all MemberStatesin the same
wayasa national instrument, without anyfurther action on the part of
thenational authorities.
www.solvency-ii-association.com

This removesthemajor sourcesof national divergences(different
interpretations,gold-plating).
It alsomakestheregulatory processfaster and makesit easier toreact to
changedmarket conditions.
It increasestransparency, asone rule aswrittenin the regulationwill
applyacrossthe singlemarket.
But, th e Solv ency II Direct iv e is a… direct iv e . Whereisthe
regulation?
Isn’t it a regulatoryarbitragechallenge(or opportunity)?
This is goingto change.
Todaywehave a clear opinion:JulianAdams, Director of Insurance,
Association of British Insurers, said that “weexpect the Level 2text to
beimplemented by wayof a Regulation, meaning that it will not be
requiredto be transposed intoour Handbook”
Isn’t it interesting?

Solvency II: what to expect over the coming months
Speechby JulianAdams, Director of Insurance,Association of British
Insurers, SolvencyII Conference, 8 December 2011
Many of you will have been at theFSA’s ownevent on SolvencyII in
earlyNovember, whereweset out some more detail about how we
intendto approach internal model approval in light of our revised
expectationsabout whenthe SolvencyII Directivewill be implemented.
I don’t intend to rehearsethe content of that event here; rather I’d like to
focus on three subjects.
While thesewill mainlybe pertinent to internal model firms, I hopethey
will be of wider interest, not least becausethey provide some insight into
thewayin whichwearetrying to deal withthe ongoing policy
uncertaintysurrounding SolvencyII.
Thefirst isthe approach wewill take withthosefirmsthat wishtouse
their SolvencyII worktomeet the current ICASrequirementstoremove
theneed for parallel running of twodifferent models.
Second, I’d like toclarifythebasis on which applicationsfor internal
modelsshould be submittedaswereceiveda question about whether
thisshould bethe ContentsofApplication or the Commission’sLevel 2
text.
Thethird subject isgroup supervision, particularlyin relationto colleges
of supervisorsand the importanceof thisforum in decision makingfor
regulated firms and groupswith cross-borderoperations.
When wespoketo the industry about internal model approval last month,
weset out how wewouldmake useof theadditional timecreatedby the
bifurcation proposal, whichweexpect to form part of the final packageof
measuresin theOmnibusII Directive.

In order tomaintain momentum, and tobuild on thevaluableworkyou
havedone already, wehave set out submission slotsto firmsfor when we
expect to receiveapplicationsfrom them, both for internal model
approval and alsofor other approvalswhich theywill be seekingto have
in placefrom Day One.
While the general responsetothisinitiativehasbeen positive, wehave
receivedtwospecificchallenges,and I thought it wouldbehelpful to
respond to thesemore fully today.
Thefirst of thesechallengeswason the interactionbetweenSolvencyII
modelsand existingICAS requirements, particularlytheeffective
requirement on firmsto run their ICASmodelsasa regular assessment
of their capital position.
We have previouslyset out an aspirationto allowin effect earlyuse of
SolvencyII modelswherethis is appropriate, and I want to explain how
wewouldseek to achievethis.
As I said last month, wehave to be clearthat our current ruleswill remain
in force for all firms until theSolvencyII regime comesintoforce for
firms on 1January 2014.
Aregimethat allowedselectiveremoval of current rulesin anticipation of
new requirementsthat werenot yet in force wouldnot appear tousto be
justifiedfrom a policy point of view.
What weare in a position to do, however, is to invitefirmsto consider
how theythink their work on their SolvencyII model could be used to
meet thosecurrent rules,therebyremovingthe need for parallel running
of twodifferent models.
When wereceivea firm’s model submission, wewill review it and expect
toreach a point whereweare abletoform a view onthat submission,
whichcould be wellin advance of the implementationdate.

Wherethisis the case, wewill communicate this tothefirm, and may
alsogive individual capital guidancefor the interim period based on the
model.
As the current requirementswill remain in force, it will be incumbent on
firmsto satisfythemselvesthat theSolvencyII model, alongsidetheir
widersystem of risk management and governance, meetstheexisting
requirementsin our Handbook.
By approachingtheissuein this way, weintendto avoid theneed for
firmsto applyfor a complicatedseries of waiversor toseek specific
permission from ustomake thetransitionearly.
We believethis is both proportionate and appropriate, given the amount
of review work wewill have done withfirms followingsubmission of
their SolvencyII model application tous.
As an aside, I should mention alsothe position for firmsintendingto use
thestandard formula.
Here, wehave said that wewill review theappropriatenessof the
proposed useof thestandard formula in 2013, by which time weexpect
that the standard formula calibrationswill have been finalised, and firms
will have had the opportunitytoapplythem.
Given the proximityof this worktotheimplementation dateof 1January
2014,weexpect standard formula firms tocarry on using their existing
ICAS models for solvencypurposesup totheSolvencyII implementation
date.
Thesecond area I’d like to cover is the basison whichapplicationsfor
internalmodels should be submitted.

We wereasked whethertheyshould be basedon thepreviously-
publishedContentsofApplication or on theLevel 2 text that the
Commission circulatedin November, acceptingthat this isnot yet
published or finalisedand is subject tochange.
This point is becoming pressing, given that we will be issuing guidance
materials to firms in February of next year on our application processes
andthesupportingmaterialsyou will be required tosubmit tous.
It is clearthat the Level 2 text – and, in due course,theLevel 3 text
whichwill supplement it – ismore appropriateto useasa matter of
principle,sincethis setsout much more clearlythebasis on whichwe
are expected to assessfirms’applications,and it is thestandard against
whichyou and wewill ultimatelybe judged.
Usingthe recent version of the Level 2 text in the context of our
implementationactivitieswould, however, posetwoparticular
challenges.
Thefirst isquitesimplythat thetext asit standshasnot been published,
and isnot technicallyin thepublic domain.
We are awarethat anumber of firms have it, but weare not in a position
tomake it availabletoeveryone asit is not oursto publish.
Thesecond is that the text is not yet final, and will not even be released
for consultationuntil after OmnibusII is finalisedin the first quarter of
next year. So, wedo not expect to have final Level 2 text until themiddle
of 2012at the earliest.
On theother hand, theContentsofApplication are out of date, having
been publishedinApril 2010and not reviewedin light of more recent
legislativedevelopments, but theydo represent an internally-agreed and
public standard for the workthat hasbeen done todate, whichwehave
consistentlyappliedto firms in our pre-applicationprocess.

Theythereforerepresentthebasisof most workdone by firmsto date.
On balance, wefeel that basingour applicationapproach on the Level 2
text is themost sensiblewaytoproceed, and wepropose to dothisis by
cross-referencingthe Level 2 text in the guidancematerialswewill be
makingavailabletofirmsin Februaryof next year.
Thereason for this isthat weexpect theLevel 2 text to be implemented
bywayof a Regulation, meaning that it will not be required tobe
transposed intoour Handbook.
It will thereforebe incumbent on firms tocomply with those
requirementsdirectly, and wethink that thisis themost appropriate
approachin the run up toimplementationasit will mirror the post-
implementationregime.
We accept that thisapproach meansthat the criteria may change over
time, but the text which is available now representsthe best and most
up-to-dateview of what the final positionis likely tobe.
Any attemptsbyustointerpret or transposethis text now or in the future
wouldgive riseto legal risk for usand firms.
I am awarethat this will meanthat some firmsmay feel that their efforts
in followingtheContentsofApplicationapproachwill have been wasted,
and I wouldlike toreassure you that this is not the case.
We will expect you tosubmit ***documentary evidence*** that you meet
therequirementsset out in theDirective, and completion of theContents
ofApplication is likelyto goa long waytowardsdemonstrating
compliancewiththe Level 2 requirements, but it isthose Level 2
requirementswhichwill be definitive.

As I have alreadymentioned, weintendtomake availableto you as
much supportingmaterial aswecan tohelp you make the necessary
applications,and intend todothis in February 2012.
What I have attempted to do today is give some additional clarity around
issues that we know are of particular interest to firms and that have been
raisedwith us.
If there are other, similar issues,or if our timescalesare likely tocause
you issuesof any kind, pleasefeel free tospeak toyour usual supervisory
contact.
I’d like toturn finallyto group supervision.
Theconcept and scope of group supervisionunder SolvencyII is much
widerthan under thecurrent Directives,and will require a cultural as
well asa procedural shift, both on the part of regulatorsand firms.
Theroleof a college is significantlyenhanced under theSolvencyII
Directive.
Theremit of thecollege encompassesall three pillarsof SolvencyII, and
thecollege will be expectedtoform a collectiveview on issuessuch as
strategyand governance, and totake a more prospectiveview.
We are alreadyworkingaspart of collegesfor firmsintendingto applyto
usean internal model, both for UK groupswhereweare thegroup
supervisor,and alsowherewesupervisesubsidiariesof groupsthat are
based elsewhere.
Collegesare, however, just asimportant in the context of standard
formula groups, asdecisionswill still need to be takenat thegroup level
on issuesrequiring supervisory approval, such asthe choiceof
calculationmethod.

Supervisorycollegesarethemain mechanism wewill use to put some of
theDirective’sintentionsintoaction.
We are workinghard to coordinate our workwith colleaguesin other
member statestomake surethat collectivelyweare ableto make
decisionsat the right point in time.
We are committed toour role in deliveringthe potentiallysignificant
benefitsassociated witha meaningful and forward-lookinggroup
supervision regime, which goeswell beyond a narrow comparisonof
solvencypositionsand lookscloselyat the group’s overall strategic and
economicposition.
This takesustotheprincipal aim of SolvencyII to deliver policyholder
protection in a consistent wayacrossEurope, withthe addedbenefitsof
facilitating financial stability and levellingtheplaying field in the single
market.
In deliveringthisapproach wewill of coursebe assisted by our
colleaguesin EIOPA, whoserole will develop aswemove to
implementationand beyond.
EIOPA alreadyattend supervisorycollegemeetings,and their role will
take account of issuessuch asconsistencyof approach, astheywill have
a better view than most of thepotential for successto be achieved in the
group supervision space.
Collegesare primarilya supervisoryprocess, howeverthere are ways in
whichfirmsand groupscan assistin making this processasefficient as
possible– both for regulatorsand for them – and wewouldencourage
you toengagewith supervisory collegeactivitywherethis ispossible.
I wouldalsourge you to recognisethe increasingfocuson group-level
issuesastime progresses, and to respond to group discussionsin the

samethoughtful and constructivewayasyou alreadydo withdiscussions
on individual entities.
Before closing, I wouldlike to highlight toyou again the consultations
that are currentlyopen for your comment from theFSA, theTreasury
and EIOPA.
Theseconsultationsgive you an opportunityto influencethe
development of policyand the approachto implementation, and I urge
you torespond tothem.
I hopethat today I havebeen able toprovideyou with some greater
clarityabout how wein the UK are going to manage implementation and
transitionfor internal model firms, aswell asgiving you some insight into
thepracticalitiesof the group supervisionregime.
Someof my colleaguesare participatingin a number of thepanel
sessionstakingplacethroughout theday, and theywill be in a position
toprovideany further detail you may require.
In the meantime, thank you onceagain totheABI for givingme the
opportunitytospeak to you today and thank you for your attention.

Investigating the EIOPA presentations …
Note:
This is another opportunityto seethat it will take some time until weput
our handson the final Level 2 measures.

Note:
Will wehave a countercyclical buffer similar to the Basel iii one?
In Baseliii wehavethecountercyclical capital buffer, toachievethe
broader macroprudential goal of protectingthe bankingsector from
periodsof excessaggregate credit growth that haveoften been
associatedwiththebuild up of system-widerisk.
Protectingthe banking sector in this context is not simplyensuringthat
individual banksremain solvent through a period of stress, asthe
minimum capital requirement and capital conservation buffer are
together designedto fulfil this objective.
Rather, the aim is toensure that the bankingsector in aggregate hasthe
capital on hand to help maintain the flow of credit in theeconomy

without itssolvencybeingquestioned, whenthe broader financial
system experiencesstressafter a period of excesscredit growth.
This should help to reducethe riskof the supplyof credit being
constrained by regulatory capital requirementsthat could underminethe
performanceof the real economy and result in additional credit lossesin
thebanking system.
In addressingthe aim of protectingthebankingsector from the credit
cycle, thecountercyclical capital buffer regime may alsohelp to lean
against the build-upphaseof thecycle in thefirst place.
This would occur through the capital buffer acting toraisethecost of
credit, and thereforedampen its demand, whenthere is evidencethat the
stockof credit hasgrowntoexcessivelevelsrelativetothebenchmarks of
past experience.
This potential moderatingeffect on thebuild-up phaseof the credit cycle
should be viewedasa positivesidebenefit, rather than the primary aim of
thecountercyclical capital buffer regime.
Did wehavesomethinglike that in theSolvencyII Directive?Not in the
Directive. Yesin thediscussionsafter the final Basel iii rules.
There are manyunknown unknownsto the moment…

Theabbreviation CCCP wasa nightmareduring
thecold war (CCCP wastheRussian
abbreviationfor the Soviet Union).
Now it becomesa Solvencyii nightmare … as
theEuropean Commission hasintroduceda
Counter-Cyclical Capital matching Premium
(CCCP) asan alternativeto the liquidity
premium. We do not know thedetails yet.
We know that “EIOPAshall publishtechnical information”
Timetohave a look at Article 77aof theOmnibusII Directive:

"Technical information produced by theEuropean Insuranceand
Occupational PensionsAuthority
EIOPA shall publish technical information includingthe relevant risk-
freeinterest rateterm structure.
WhereEIOPAobservesan illiquiditypremium in thefinancial markets
in periodsof stressed liquidity, informationrelatingto the illiquidity
premium, includingits size shall alsobepublished.
EIOPA shall carry out the observation of the illiquiditypremium and the
derivationof theinformation on a transparent, objectiveand reliable
basis.
Information for all these purposesshall be derived accordingto methods
and assumptionswhich may includeformulae, or determinationsmade
byEIOPA.”

Note:
The moral of the story is that if our risk management structure is not
good enough, theywill not even consider thePillar 1numbers…
At least EIOPA isnot brainwashing the Solvency ii professional into
believing that they must understand what Warren Buffett has said in
order to understand Solvencyiii…
… ornot?(next slide)

First EIOPA Conference, Frankfurt, 16November, 2011
TheEuropean Insuranceand Occupational PensionsAuthority hosted
itsfirst Annual Conferencein Frankfurt.
Around 350participantsfollowedexpertsdiscussinginsuranceand
occupational pensionssupervision and regulation.
Themajor topicsaddressedat the conferencewere SolvencyII, the
Future of Occupational Pensions, Challengesand Opportunities for EU
InsuranceRegulation aswell asConsumer Protection.
Additionally, EIOPAprovided an updateon itson-goingwork for
preparingthefuture implementationof theSolvencyII directive, which
addressestheneed of the national supervisory authoritiesand the
insuranceindustry for clarity on the content of the standardsand
guidelinesfor SolvencyII aswell ason the timelineof activities
necessaryto preparefor SolvencyII.
*** Th e nex t st ep on EIOP A’s work p lan is the lau nch
of a pu b lic consultationondraft standardsand guidelinesfor
SolvencyII ***.
Theconsultation isscheduledto start in May2012.After the consultation
EIOPA aimsto ***finalise itsproposalsin September 2012***.
Thetiming of theseactivitiesisbasedon some assumptionson the
development of thepoliticalprocess:
First of all, the approval of theOmnibusII directiveby the European
Parliament and theCouncil of theEuropean Union and the publication
of the proposalfor a DelegatedAct by the Commission in the first half of
2012;
Secondly, a phasing-in period of thenew regimeduring 2013;

Finally, theapplicationof SolvencyII asof 1January2014for the
consultation may be adjusted depending on the realisation of these
assumptions.
Amended rulesfor financial conglomerates supervision
Amended European rules on thesupervision of financial conglomerates
givingnational financial supervisorsnew powerstobetter overseethe
conglomerates' parent entities,suchasholdingcompanies,come into
force( Directive2011/89/ EU).
Thenew rules will allowsupervisorstoapplybankingsupervision,
insurancesupervision and supplementarysupervisionat the sametime,
asappropriateand necessary, therebyremedying theunintended
loopholesidentifiedduring thefinancialcrisis.
In thisway, supervisorsshouldbe ableto obtain better information at an
earlier stageshoulda financial conglomerate run intotroubleand be
better equipped to intervene.
In addition, banking groups, insurancegroupsand conglomerateswill be
obligedtopublish basic elementsof a resolution plan for the group or
conglomerate, their legal structure ascompared totheir business
structure.
Finally, managersof alternativeinvestment funds(for examplehedge
fund managers) will be includedin the scope of supplementary
supervision whentheyare part of a conglomerate.
Financial conglomeratesare financial groupsthat are often activein
more than one country and operatein both the insuranceand banking
businesses.

FrequentlyAsked Questions
1) What are financial conglomerates?
Financial conglomeratesare financial groupsthat are activein one or
more country and operatein both the insuranceand bankingbusiness.
Theyare oftenlargeand complex.
Due to their size, financial conglomeratesare often of systemic
importancetoour economy: either for one or more Member Statesor
even for theEU asa whole.
Thefact that financial conglomeratescan impact our economy was
highlighted during thefinancial crisisin 2008.
Anumber of financial conglomerateshad difficultiesand governments
acrossEurope had toresort tolargefinancial injectionsin order tokeep
thesefinancial conglomeratesafloat.
2) How are financial conglomeratescurrentlysupervised?
Currently, supervisionin Europe is mainlydone at the national level.
Each singlelegal entitythat wantstooperate in the banking sector in an
EU Member State needsauthorisation from the national financial
supervisorand needsto complywith therelevant banking regulation.
Thesame applies for legal entitiesthat want to operatein theinsurance
sector:such entitiesneed to be authorized asinsurancecompaniesand
must complywiththerelevant insuranceregulation.
Supervision rulesalsoallowfor a group of authorisedbanking entitiesto
besubject toconsolidatedbankingsupervision.
Similarly, in the insurance sector, a group of authorised insurance
entitiescan be subject to insurancegroup supervision.

Financial conglomeratesare often activein both bankingand insurance
businessand operatein several EU MemberStates.
The Financial Conglomerate Directive (2002/ 87/ EC) gives national
financial supervisors additional powers and tools to watch over these
firms.
Morespecifically, theDirectiverequires supervisorstoapply
supplementarysupervisionon these conglomerates,in addition to the
specific bankingand insurancesupervision.
3) What is supplementarysupervision?
Supplementarysupervisionbecomesrelevant whena financial group (ora
"conglomerate") consistsof several legal entitiesthat are authorisedto
dobusinessin banking, insuranceor other sectorsof thefinancial
servicesindustry.
Thenumber of legal entitieswithin a conglomeratecan exceed500or
even 1.000.
All of these entities are controlled by a parent entity, where decisions are
made regarding business strategies, internal governance and group-wide
risk management.
While a parent entitycan be a regulatedentityitself, such asa bank or an
insurancecompany, it can alsotakethe form of a holding company.
Supplementarysupervisionfocuseson problemsthat can arisefrom:
Multipleuse of capital: supervisorsare tomake sure that capital is not
used twiceormorewithin a conglomerate. For example, fundsmay not
beincludedin the calculationof capital on both the level of the single
entityand the parent entity.

Group risks:Group risksare risksthat arisefrom the group structure and
whicharenot related to specific banking or specificinsurancebusiness.
Theyrefer torisksof contagion (whenrisksspread from oneend of the
group toanother), management complexity(managing more than 1.000
legal entities isa far more difficult challengethanmanaging20legal
entities),risk concentration (thesame riskmaterialisingin several partsof
thegroup at the same time), and conflictsof interest (e.g. one part of the
group hasan interestin sellingan exposure, while another part of the
group hasan interest in keepingthat exposure).
The2002Financial ConglomeratesDirectiveallowsnational supervisors
tomonitor thoserisks, for exampleby requiringconglomeratesto
provideadditional reporting.
Supervisorscan alsorequire conglomeratestopresent additional risk
management or internal governancemeasures.
TheDirective alsorequiressupervisorstocooperateacrosssectorsand
acrossborders in order tocontrol possiblegroup risks.
4) Why istheCommission now proposing a revision of theFinancial
ConglomeratesDirective?
In the light of thefinancial crisis, the Commissionevaluated the
effectivenessof theFinancial ConglomeratesDirectivein 2008.
It found that supplementarysupervision, asstipulatedin theDirective,
could not be carriedout on certain financial groupsbecauseof their legal
structure.
In some cases,national financial supervisorswereleft without the
appropriatetoolsbecausetheyhad been obligedtochooseeither banking
or insurancesupervisionunder thesector-specific directivesor
supplementarysupervisionunder the Financial ConglomeratesDirective

as the definitions for banking and insurance holding companies in the
sector-specific directives and for mixed holdings in the Conglomerates
Directiveweremutuallyexclusive.
Themain objectiveof the revision of theDirective is tocorrect this
unintended consequenceof the current rules.
5) What is tochangeunder theCommission'sproposal?
Theproposed amendmentstothe 2002Directivecan be summarised as
follows:
Under the current rules, supervisors have to choose which supervision
they apply when a group acquires a significant stake in another sector
and when the parent entityisa holdingcompany.
It is now proposedtochangethis: both sector-specific (bankingand
insurance) supervisionand supplementary supervision could be applied
on theconglomerate's parent entity, alsoif it concernsa holding
company.
Bankingsupervisionwouldthereforeremain applicableeven if the
bankinggroup acquires a significant stake in an insurancebusiness.
By the same token, insurancesupervision wouldalsoremain applicable if
theinsurancegroup acquiresa significant stake in a banking business.
When justified by potential group risksasa whole, financial supervisors
should be allowedtoidentify a group asa financial conglomerate and
applysupplementarysupervision.
Theidentificationprocessof financial conglomeratesshould allowfor
risk-basedassessments,in addition toexistingdefinitionsrelatingto
size("quantitativeindicators").

Under the current rules,thebalancesheet figures are determinative
whenidentifying conglomerates.
This approachsometimesresultsin a list of conglomeratesthat are not
necessarilyexposedtogroup risks, while groupsthat areevidently
exposedtogroup risksarenot alwaysincluded withinthe scope of
supplementarysupervision.
Financial supervisorsshould be allowedto waivea group from
supplementarysupervisionif it issmall (smallerthan 60 billiontotal
assets) and if the supervisorassessesthe group risksto be
negligible, even if the small group meetsthequantitativeindicators.
This should enable supervisors to allocate their resources to the
supplementary supervision of larger and systemically important
conglomerates.
Theproposed revisionof the2002Financial ConglomeratesDirective
alsoamendsthe relevant banking and insurancesupervision
legislation, namely the Capital RequirementsDirective(2006/ 48/ EC
and 2006/ 49/ EC) and theDirectiveon SupplementarySupervision of
InsuranceUndertakingsin InsuranceGroups(98/78/ EC).
TheCommission is alsocurrentlyreflectingon tying in thisinitiative
with SolvencyII, thenext generationof supervisory rulesfor insurance
and reinsurancecompaniesin theEU.
6) How doesthis proposal tie in withthewiderworkon crisisprevention
and management the EU is doing?Will theEuropean Financial
SupervisionAuthorities be involved?
Themain objectiveof this initiativeis torestorethe full spectrum of
supervisorytoolsand powers,regardlessof the legal structuresof
financial conglomerates.

This unintended consequenceof thecurrent rulesneedstobe addressed
assoon aspossible.
Nevertheless, theinitiativewill alsostrengthen the effectivesupervision
of financial conglomerates.
TheCommission believesthat supplementarysupervisionof large,
complex groups, operatingin several countries, can onlybe effectiveif
thesame supervisoryapproach isapplied consistentlyacrossall EU
MemberStates.
As regardsfinancial conglomeratesoperating in several EU countries,
closercoordinationbetweennational financial supervisorswill be
required, particularlythrough the new European Financial Supervision
Authorities.
TheproposalsregardingthoseAuthoritiesare currentlybeing negotiated
betweenthe Council and theEuropean Parliament.
Thenew EuropeanBankingAuthority (EBA) and the new European
Insuranceand Occupational PensionsAuthority (EIOPA) are toform a
Joint Committee to overseecooperationand coordination between
national supervisorsin thecaseof financial conglomerates.
As a followup tothisproposal and in order to assistthe Commissionin
proposingfurther improvementsof theframework of supplementary
supervision, the Joint Committeeis alsoexpected to look intoextending
thescope of supplementarysupervisionto non-regulated entitiessuch as
Special Purpose Entities.
Theseare legal entities whereassetsarestored off the groups' balance
sheets.
During the crisis, it became clear that contagion and risk concentration
originatedalsofrom non-regulatedpartsof financial conglomerates.

This issuehasbeenhighlightedalsoon international level in thecontext
of the G20 work.
It is theCommission's intention to continueto work on thisissueand
present further amendmentsto the Directive on Financial
Conglomeratesasregards this matter aswellasother issueslinked in
particular tothe new Europeansupervisory structure.
The invisibilitieswithin the most visible
In order to understand better all the above, it istime to remember the important
speechfor Michel Barnier, member of the European Commission responsible for the
Internal Market and Services,delivered by Paulina Dejmek, Financial expert in
Barnier's cabinet. More than 200participantsattended the Commission's
ConglomeratesConferenceon 7 June2010in the Charlemagnebuilding in Brussels.
Ladies and gentlemen, you and I have been readingthousandsof
opinionson how toimprove the regulatoryframeworkfor large, complex
financial institutions.
May I kick off thedebateof todayby agreeingwithyou, that wedon’t
need more regulation.
However, asyou know,Commissioner Barnier is committed to make
regulation intelligent and effective. When it comesto the supervision of
large, complex financial institutionslike conglomerates,the topicof
thisconference,thereis a lot of work on our plateto get to intelligent
and effectiveregulation.
JOINT FORUM PRINCIPLES
Ten yearsago, theG10's Joint Forum of financial sector supervisors
releasedthe principlesof supervisingfinancial conglomerates.

Theleading ideawasthat groupsin thefinancial sector, whichare
operatingin several marketsand withmanyregulated entities,were
exposedtorisks, which had nothing to dowiththe banking businessor
with the insurancebusiness,but whichhad everything to dowith the
challengeof controllinga group of manydifferent legal entities.
Thesegroup risks,the risksof contagion, of risk concentration, of
management complexityand conflictsof interest, justifiedmore intense,
and a different kind of supervision of the larger, more complex groups,
than of the smaller,simpler groups.
An illustrative example that makes clear to me what supplementary
supervision is about is the supervision on the Australian Macquarie
Group.
We look forwardtohearingCharlesLittrell this afternoon, explaining
howAPRA proposesto supervisegroupslike that, but let me try to
explain.
If a company hasboth a bank and an airport under itscontrol, the
bankingcapital ruleswouldrequire thebank tocalculatethe correct risk
weightsof the exposuresrelatedtothe airport, or maybe even to deduct
certainexposuresrelated to theairport from own funds.
This is becausethebankingrulesrequirethe bank tohold adequate, risk
based, capital buffers.
Thesupplementaryrules, however, wouldrequire MacquarieGroup tobe
awareof thepotential contagion coming from the airport tothebank.
For example, a terrorist attack on Zaventem airport (for that'spartly
ownedby Macquariethrough an investment fundsentity!) may induce
depositorsat Macquarie Bank torun and withdrawtheir savings
accounts.

Thesupplementaryrules wouldincludebroader governanceand risk
management rulesthat require theboard of Macquarietohave, for
example, contingencyplansand ring fencingpoliciesavailable, or take
other measuresto control the group risks.
TheCommission supportstheprinciplesof theJoint Forum toapply
supplementarysupervisionwhen appropriate.
REVIEW
In 2002, the European institutionsendorsedthe principlesin a directive
for conglomerates,theFICOD, definingconglomeratesasgroupswith
both insuranceand bankingactivities.
Thereview that theCommission Servicescarried out for the last two
years, with your kind cooperation, showedthat the regulatoryframework
in placeworked well for those whocould apply it.
However, not all supervisorscould applyit asit wasmeant tobe.
Thecombination of applicabledirectivesin thefinancial sector created a
situation wheresomesupervisorshad to chooseeither one or the other
directive, if the legalstructure wasorganizedunder a holding company.
This wasnot our objective.
Even more so, for thosesupervisorswhoneed thesespecificpowers,
supplementarytotheir sectoral powers,this problem is urgent.
This is whythe Commission will proposea quick fix next month, which
must ensure that supplementarysupervisioncan be applied in addition
tosectoral supervisionregardlessof legal structures.
But the review revealedthat more improvementswereneeded.

When asking you what should be improved, you replied that capital
treatmentsshould be much more consistent acrosssectors, and that
supervisoryreview processesfor thelargecomplex groupsshould not be
done in a fragmented, sector basedway, but on a group widebasis.
You alsoasked ustodetermine whoshould be subject to supplementary
supervision in a more risk basedmanner.
Last year, asa lesson learnt during thecrisis, alsothe Financial Stability
Board realizedthat the supervision on large, complex groupscould be
improved.
TheyaskedtheJoint Forum toinvestigatethe differentiated nature and
scopeof regulation:
“Theappropriatebodiesshould review thedifferentiated nature of
regulationin thebanking, securities, and insurancesectorsand provide
areport outliningtheissueand makingrecommendationson needed
improvements.
Areview of thescopeof financial regulation, withaspecial emphasison
institutions,instruments, and marketsthat are currentlyunregulated,
alongwithensuringthat all systemically-important institutionsare
appropriately regulated, should alsobeundertaken.”
TheFSB realized, that the set of available rules for the financial sector
whichweremeant toprotect citizensfrom the abuse of information
asymmetry, from theabuse of not knowingor seeingwhat theymight
need to know or see, might be outdated.
Therulesworkedaslongasthe rules, thebusiness, and thecitizenswere
dealingwiththe same packageof services.
Thefragmented framework worked aslongasthebusinesswas
fragmented. Citizenscould trust that thesupervisorwouldsee what the
citizendid not see.

Today, businessstructuresevolved to combinationsof licensesfor all
kindsof financial services.
Both citizens and corporates are benefiting from packages of financial
services, combinations of banking, insurance and investment products
and services.
Companiesin the financial sector innovated the waytheycontrol
themselves,includingnon-regulated entities.
Fiveof them, all very different from each other and all subject to thesame
set of directives,will tell us how theycontrol themselvesasa group this
afternoon.
Therulesworkedfor one licensebusinesses,one bank, one insurers, one
asset manager.
Maybe it workedfor twolicensefirms, a firm with one bank licenseand
oneinsurancelicense.
Doesit workfor firmsof 100licenses?
Doesit workfor firmsof 2000 legal entities, of which1000 authorized to
dowhatever theywishin thefinancial sector?
Where businessstrategies of the most visible financial servicesproviders
in this society are built upon a patchwork of regulated and nonregulated
entities, do supervisors and regulators still seeall the risks that theyneed
tosee?
Can citizenstrust that norelevant risksremain invisible?
This is what theFinancial Stability Board's question wasabout.
TheJoint Forum delivered, and the FSB endorsedtheir advicelast
January.

Thesupervisorsin the first panel of today will explain you all about it,
andnodoubt theywill explain that wecan no longer ignore the risks
comingfrom non-regulatedpartsof theconglomeratesin the financial
sector.
As theyput it: "Policymakers should ensure that all financial groups
(particularlythose providing cross-border services) are subject to
supervision and regulation that capturesthefull spectrum of their
activitiesand risks."
OUTLOOK
This is some work,ladiesand gentlemen. We know you're worried about
more work, whichmay digup thingsyou rather didn't see.We shouldn't
beafraid. Thisis alsoan opportunityto tidyup and get to more
intelligent and effectiveregulation.
Todaywestart a debate whichmay last for another 18months, and
whichwill not be easy.
We will publish thequick fix FICOD I proposal in order toallow
supervisorstoapplyall the powersthey need giventhe defined scope in
thecurrent FICOD.
But wemay want to talk about the adequacyof that scope.
TheCommission is committed to prepare a FICOD II whichdoes
achievethe objectiveof supplementarysupervision, the control of group
risks, whereever theycome from.
In the end, the overall objectiveremainsthe same: the protection of
citizensfrom financial instability.
May weinviteyou tospeak up and shareyour viewswithusabout the
followingquestions:

Doestheregulatory framework still fit our aim toprotect citizens
fromwhat theycannot see?
How canyou andweenforcesupplementary supervision that makes
visiblewhatever isstill invisibletoday?
We look forwardtoan interestingdebate.

Solvency II SpeakersBureau
TheSolvencyII Association hasestablishedthe SolvencyII Speakers
Bureau for firmsand organizationsthat want to accesstheexpertiseof
Certified Solvencyii Professionals(CSiiPs) and Certified Solvencyii
EquivalenceProfessionals(CSiiEPs).
TheSolvencyII Association will be theliaison betweenour certified
professionalsand theseorganizations,at no cost. We stronglybelieve
that this can be a great opportunity for both, our certified professionals
andtheorganizers.
Tolearnmore:
www.solvency-ii-association.com/ Solvency_II_Speakers_Bureau.html
Course Title
Certified Solvency ii Professional (CSiiP):
Preparing for the Solvency ii Directive of the EU (3 days)
Objectives:
This coursehasbeen designed toprovidewiththe knowledgeand skills
needed to understand and support compliancewiththeSolvencyii
Directiveof theEuropean Union.
TargetAudience:
This courseisintendedfor decision makers, managers, professionals
and consultantsthat:
A.Work in Insuranceor Reinsurancefirmsof EEAcountries.
B.Work in Groups- Financial Conglomerates(FC), Financial Holding
Companies(FHC), MixedFinancial Holding Companies (MFHC),
InsuranceHolding Companies(IH C) - providing insuranceand/ or

reinsuranceservicesin the EEA, whoseparent islocated in acountry of
theEEA.
C.Want tounderstand thechallengesand the opportunitiesafter the
Solvencyii Directive.
This course ishighlyrecommendedfor supervisorsof EEA countries
that want to understand how countriesseeSolvencyII asa Competitive
Advantage.
This course is also recommended for all decision makers, managers,
professionals and consultants of insurance and/ or reinsurance firms
involvedin risk and compliancemanagement.
About the Course
INTRODUCTION
TheEuropean Union’sLegislativeProcess
Directivesand Regulations
TheFinancial ServicesAction Plan (FSAP) of theEU
ExtraterritorialApplication of European Law
ExtraterritorialApplication of the SolvencyII Directive
Solvencyii and theLamfalussyProcess
Level 1: FrameworkPrinciples
Level 2: Detailed Technical MeasuresLevel3: Strengthening
CooperationAmong Regulators
Level 4: Enforcement
Weaknessesof SolvencyI
From SolvencyI toSolvencyII
Solvencyii Players
Solvencyii Objectives
THE SOLVENCY II DIRECTIVE

AUnified LegislativeBasisfor Prudential Regulation of Insurers
andReinsurers
Risk-BasedCapitalAllocation
Scope of theApplication
Important Definitions
Value-at-Riskin SolvencyII
Authorisation
CorporateGovernance
GovernanceFunctions
RiskManagement
CorporateGovernanceand Risk Management - Level 2
Fit and proper requirementsfor personswhoeffectivelyrun the
undertakingor haveother key functions
Internal Controls
InternalAudit
Actuarial Function
Outsourcing
Board of Directors:Role and Solvencyii Responsibilities
12Principles– System of Governance (Level 2)
PILLAR 2
SupervisoryReview Process(SRP)
Focuson Risk Management and Operational Risk
Own Risk and SolvencyAssessment (ORSA)
ORSA- TheInternal Assessment Process
ORSA- TheSupervisoryTool
ORSA- Not a Third Solvency Capital Requirement
Capital add-on
PILLAR 3
DisclosureRequirements
TheSolvencyand Financial Condition Report (SFC)

PILLAR I
ValuationOf AssetsAnd LiabilitiesTechnicalProvisions
TheSolvencyCapital Requirement (SCR)
TheValue-at-RiskMeasureCalibratedtoa 99.5% Confidence
Level over a 1-year Time Horizon
TheStandardApproach
TheInternal Models
TheCollectionofAdditional HistoricalData
External Data
The Minimum Capital Requirement (MCR)
Non-CompliancewiththeMinimum Capital Requirement
Non-CompliancewiththeSolvencyCapital Requirement
Own Funds
Investment Rules
INTERNAL MODEL APPROVAL
CEIOPSLevel 2 - Testsand Standardsfor Internal Model
Approval
CEIOPSLevel 2 - The procedure tobe followedfor theapproval of
an internal model
Internal ModelsGovernance
Group internal models
Statistical qualitystandards
Calibrationand validationstandards
Documentation standards
SOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIES
SolvencyI: SoloPlusApproach
Group Supervisionunder SolvencyII
Rightsand dutiesof the group supervisor
Group Solvency - Methodsof calculation

Method1(Default method):Accounting consolidation-based
method
Method2 (Alternative method): Deduction and aggregation
method
Parent UndertakingsOutsidethe Community - Verification of
Equivalence
Parent UndertakingsOutsidethe Community - Absence of
Equivalence
Thehead of thegroup isin theEEA and the third country regime
is not equivalent
Thehead of thegroup isin theEEA and the third country regime
is equivalent
Thehead of thegroup isoutsidethe EEAand the third country is
not equivalent
Thehead of thegroup isoutsidethe EEAand the third country
regimeisequivalent
Small and Medium-SizedInsurers:TheProportionalityPrinciple
Captivesand SolvencyII
EQUIVALENCE WITH SOLVENCY II AROUND THE WORLD
Solvencyii and Countriesoutsidethe European EconomicArea
TheInternationalAssociation of InsuranceSupervisors(IAIS)
TheSwissSolvencyTest (SST) and Solvencyii:
Solvencyii and theOffshoreFinancial Centers(OFCs)
Solvencyii and theUSA
Solvencyii and theUS NationalAssociation of Insurance
Commissioners(NAIC) - The Federal InsuranceOffice created
under the Dodd-Frank Wall Street Reform and Consumer
ProtectionAct in theUSA, and the ORSAin theUSA
FROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY II
DIRECTIVE

Directive2005/ 68/ EC of 16November 2005on Reinsurance- The
ReinsuranceDirective(RID)
CLOSING
TheImpact of Solvencyii OutsidetheEEA
ProvidingInsuranceServicestotheEuropean Client
Competing withBanks
Learningfrom theBasel ii Framework
RegulatoryArbitrage:AMajorRisk for Countriesthat see
Complianceasan Obligation, not anOpportunity
Basel II, Basel III, SolvencyII and RegulatoryArbitrage
Challengesand Opportunities:What is next
RegulatoryShopping after SolvencyII
Tolearnmore about theonlineexam you may visit:www.solvency-
ii-
association.com/ CSiiP_CSiiEP_Frequently_Asked_Questions.pdf
www.solvency-ii-association.com/ CSiiP_CSiiEP_Certification_Steps.pdf
Tolearnmore about thecourse:
www.solvency-ii-association.com/ Certified_Solvency_ii_Training.htm

Solvency ii News January 2012

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Solvency ii News January 2012