Overview of the Legislative Process
Purpose of Presentation
Provide brief overview of EU insurance legislative background
Rationale for why Solvency II is being introduced
Overview of Solvency II legislative process
Where we are now and what lies ahead
Ist EU Directives
1st EU non-life and life Directives introduced in the 1970s
Developed and refined through the 80s, and 90s culminating on the Life side with consolidated Life Directive in 2002
Transposed into Irish law e.g. SI 359 of 1994 on non-life side and SI 360 of 1994 on Life side
Problems with old regime (1) Old regime has served its purpose reasonably
well
Muller Report in 1997 indicated however that solvency requirements did not reflect the risks facing the modern insurance industry
This resulted in introduction of Solvency 1 requirements
Always seen as an interim step
Problems with old regime (2)
– the existing system does not enable the accurate and timely identification by supervisors of problems and their root causes which could lead to insolvency.
– risk management is not incentivised under the current regime.
– the lack of consistency across the EU in solvency and regulatory requirements.
– Governance issues
Governance shortcomings a reason for Solvency II
Sharma Report 2002- one of the main triggers for non financial measures in Solvency II
Main Findings of report: Majority of insolvencies preceded by governance type shortcomings
Reduce dependence on capital requirements as the only early warning signal by supplementing it with qualitative measures such as governance and public disclosure
Solvency II Legislative process
Lamfalussy Process
Level 1: The Directive– Joint decision of the Council of Ministers and the
European Parliament Level 2: Delegated acts
– Responsibility of the Commission, based on the advice of EIOPA (but influence of Finance Ministries)
Level 3: Guidelines and implementing acts – Responsibility of EIOPA
Level 4: Enforcement– Responsibility of Commission; ensure all Member States
have implemented fully / correctly
What is purpose of Solvency II Key aspect of Solvency II is to put in place a
regime which has(i) risk based capital requirements
(Pillar 1)
(ii) complemented by relevant non-financial measures (Pillar 2) and which
(iii) enables as much transparency as possible through public reporting requirements (Pillar 3)
It also consolidates Insurance Directives
Pillar 1 elements of Solvency II Technical provisions
Own Funds
Solvency Capital requirement
Minimum Capital Requirement
Prudent Person Principal
Group Supervision
Pillar 2 & Pillar 3 elements of Solvency II
Principles of Supervision
Governance Requirements sets out a series of general framework principles
Public Disclosure
Level 2 Delegated Acts Fleshes out Level 1 Directive CEIOPS advice provided starting point for
this work Ongoing engagement with industry both at
local and European level Commission working group comprised of
Ministries of Finance and technical experts have formulated draft text
Council and Parliament will have a period time to consider these Delegated Acts
Will be implemented as Regulations
Further points to note
Proportionality is a key feature of Solvency II
Efforts been made to reduce complexity
Simplifications
When does Solvency II come into force
1 January 2013
Transitionals
An aspect of Level 2 measures are transitionals This area is still being worked upon General acceptance that transitionals are necessary in
areas such as(1) Own funds – hybrid capital (2) Reporting/Public Disclosure (3) Third country equivalence
Proposals for transitionals in other areas however no agreement on this issues yet and much resistance to some of the proposals.
Simplest message for the moment is work towards implementation on the basis that transitionals will be kept to a minimum: otherwise you may find yourself not sufficiently ready on 1 Jan 2013
Purpose of Omnibus II
Change the date of entry into force of Solvency II
To facilitate the making of implementing technical standards
To facilitate the settlement of disagreements
Specific tasks for EIOPA Lisbonisation of Solvency II Directive Transitionals
Transposition of Solvency II
Currently working on the transposition project
Maximum harmonisation regime so little scope for discretion
Will consult with industry Large exercise: would hope to have it
completed by Oct/Nov next year
Questions?