solvency ii news december 2012

_________________________________________ Solvency ii Association

www.solvency-ii-association.com

Solvency ii Association 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA

Tel: 202-449-9750 www.solvency-ii-association.com

Dear member,

We will start from a very interesting speech:

Gabriel Bernardino Chairman of EIOPA

EIOPA – Reflecting on the achievements and preparing for the new challenges

Distinguished Guests, Ladies and Gentlemen, On behalf of EIOPA, I am delighted to

welcome you to our second Annual Conference here in the Frankfurt Congress Center.

In particular it is my pleasure to welcome all our panellists and moderators. I want to thank you all for coming and contributing to make this one of

the reference conferences in the insurance and pension’s landscape. I would also like to thank the City of Frankfurt and the State of Hessen, for their welcome and support.

http://www.solvency-ii-association.com/



EIOPA greatly enjoys being here in a city which is continuously gaining global importance as a focal point for regulation and supervision of the

financial system. I look forward to continuing in a spirit of enhanced co)operation in the future.

We are happy to keep this tradition of annual conferences. For us this is a very important way to maintain a constructive dialogue

with the insurance and occupational pensions stakeholders – to find out more about your concerns, challenges and of course to answer your questions.

The annual conference also represents a perfect opportunity for EIOPA to update you on our activities, on the achievements and the upcoming challenges.

I am pleased to see that many members of the EIOPA Board of Supervisors and Stakeholder Groups are also attending the conference and I am sure that they are going to contribute to all the formal and informal discussions that will take place today.

I hope that all together we will make this day interesting and fruitful. In my opening speech today I will share with you some thoughts about

the issues at stake in each of the panel discussions and I will provide a short reflection on the achievements of EIOPA and some of the challenges ahead.

Let me start by the Conference programme, which as usual reflects some of the most relevant issues that EIOPA has been focused on.



Pensions We will start with pensions because reshaping the European pensions system is one of the most challenging projects in the EU agenda, which

is very important for all the EU citizens without exception. The EU Commission has launched this year a white paper called “An agenda for adequate, safe and sustainable pensions”, identifying a

number of initiatives to be taken in the coming years. In this document there is a clear recognition that complementary private retirement savings have to play a greater role in securing the future

adequacy of pensions. This poses on all of us a great challenge and an enormous responsibility.

We need to review the European pension’s regulatory framework to improve the safety and affordability of private pensions and provide confidence to consumers.

This should be done by developing a risk)based approach to the regulation of retirement savings, encompassing a number of fundamental elements:

1. A realistic valuation of pension promises All occupational schemes throughout Europe should have sufficient resources to meet their promises under a reasonable, but realistic and transparent, framework.

We have abundant lessons from the consequences of ignoring the economic based value of assets, liabilities and the inherent risks. That is why we recommended for the IORP Directive review the

application of such principles as the market consistent valuations and



the inclusion of the actuarial value of all enforceable obligations of the IORP in the valuation.

Taking due account of the diversity of IORPs, we proposed the concept of a “holistic balance sheet” that will enable the consideration of the various adjustment and security mechanisms in an explicit way.

This will allow a better understanding of the economic value of assets and liabilities and will give an indication of where the risk is and who bears it.

The “holistic balance sheet” should be seen as a prudential supervisory assessment tool rather than a “usual” balance sheet based on generally agreed accounting standards.

2. A robust solvency regulation The occupational pension’s solvency regime should be based on the “holistic balance sheet” and should incorporate appropriate periods for the achievement of the funding targets, taking into account the nature of

the promise, the duration of the liabilities and other elements like the sponsor support. It should also be sufficiently flexible to deal with short term volatility and

avoid pro-cyclical behaviour, for example by using a corridor approach and allowing appropriate recovering periods.

3. An enhancement of the governance requirements Good governance is crucial for the members and beneficiaries of the

occupational pension schemes. It is essential that those who run IORPs are individuals of competence and integrity, with respective education and work experience.



IORPs should also be subject to robust internal and external controls in areas such as risk management, internal control and audit, appointments

of a custodian and a depository. The Solvency II principles should be applied, taken into account due proportionality.

The regulatory framework should also give concrete incentives to good risk management.

The use of modern risk management tools like diversification strategies in asset allocation according to the duration of the liabilities, lifecycle approaches, hedging techniques and protection against shortfall risks can effectively provide sponsors and members of pension schemes better

outcomes under a risk control environment.

4. An increase in transparency It is crucial to maintain members and beneficiaries of pension funds duly informed about their pension rights and prospectives.

Furthermore, the move towards defined contribution (DC) schemes, where the risk is born by the members, poses new challenges in terms of transparency.

That’s why EIOPA’s advice recommends the introduction in the IORP Directive of a Key Information Document (KID) to be distributed to potential members containing a set of basic elements like risks, costs,

charges etc. This will surely improve transparency.

EIOPA is continuing its work on the occupational pension’s area by running a Quantitative Impact Study (QIS) exercise.



The QIS exercise aims to assess the financial impact on IORPs of valuing assets and liabilities in the holistic balance sheet and

introducing a solvency capital requirement (SCR) under various policy options of the EIOPA’s Advice. We expect to finalize the report on the QIS findings in spring 2013.

Finally, we should not forget that there is also a need to look at the individual retirement savings in the EU.

The current framework applicable to 3rd Pillar products is very much fragmented with a number of different vehicles being subject to different types of EU regulations.

I believe that there are merits in developing an EU wide framework for the activities and supervision of individual retirement savings, containing both prudential and consumer protection measures.

Improving consumer information and protection is necessary to enhance citizens’ confidence in financial products for retirement savings. In this context, I believe that we should explore the development of an

“EU retirement savings product”. This product could be developed to finance individual or collective DC plans and should clearly differentiate from other types of investment

products by being focused on the long)term nature of their objective (retirement savings), avoiding the traps of the short term horizon. It should be based on a simple framework, allowing for reduced cost structures and be managed using robust and modern risk management

tools. It should rely on clear and transparent governance structures and provide full transparency to its members and beneficiaries.

It should have access to a European passport allowing for cross)border selling.



An EU certification scheme could give to EU citizens a certainty in the quality of all marketed “EU retirement savings products”.

In my view these products could also play an important role in the EU economy by assuring a focus on long)term investments and, thus, fostering the sustainable growth.

Insurance Regulation Our second panel session is dedicated to the insurance regulation. We called it “The Way Ahead” and I am sure that we will have a

thoughtful discussion not only on Solvency II but also on international developments. The European Union is faced today with an outdated and fragmented

regulatory and supervisory regime on insurance. The Solvency I regime is not risk sensitive, contains very few qualitative requirements regarding risk management and governance and does not

provide supervisors with adequate information on the undertaking’s risks. Consequently, national authorities have been introducing different

elements on their regimes in order to cope with market developments. Solvency II was built with the objective of an increased policyholder protection, using the latest international developments in risk based

supervision, actuarial science and risk management. Coming back to the basics, it is fair to say that Solvency II is based on fundamentally sound principles:

• A total balance sheet approach and a market consistent valuation of assets and liabilities in order to have a realistic basis for assessing risks;



• Two capital requirements, MCR and SCR, assuring a risk based calculation but also a more robust and simpler floor designed for

ultimate supervisory action; • An overall level of prudence for the calibration of capital requirements;

• The explicit recognition of risk diversification; • The possibility to use internal models after a process of validation by supervisors that is focused not only on the quality of risk modelling but

also on the actual use of the model in the day to day business decisions; • An updated group supervision approach with the definition of a group solvency requirement and clear powers assigned to the group supervisor;

• A robust system of governance, including the definition of a number of key functions;

• An Own Risk and Solvency Assessment (ORSA) that is now considered as the best practice at an international level; • EU harmonized templates for supervisory reporting;

• Enhanced public disclosure.

In the meantime the financial crisis had a number of consequences on

the discussions on Solvency II. Some of them were dealt early in the project, some are still creating uncertainties on the final design and calibration of the regime.

The huge market volatility proved to be a challenge in a market consistent regime, especially for long term guarantees.

The sovereign crisis led to questions on the concept of the risk free rate.



The changes in banking regulation make more important the role of insurers as providers of long-term bank funding.

The low interest rate scenario is threatening some insurance business models.

Without diminishing all these challenges, I believe it is time to move on. This reform is important and is needed.

In order to keep the momentum and to be consequent with all the financial and human resources already dedicated to this project both by supervisors and the industry we need to move forward.

So, what steps do we need to take? In first place we need a strong commitment from the EU political institutions towards the implementation of Solvency II.

This should prompt the definition of a clear and credible timetable based on a realistic assessment of the expected time needed to deliver the different milestones of the regime.

Secondly, we need to agree on a sound and prudent regime for the valuation of long term guarantees.

A regime that preserves the risk based economic approach on the valuation and assessment of risk and that adequately captures the characteristics of certain long term liabilities with sufficiently predictable matchable cash flows.

This should be viewed as an opportunity to continue to offer long term guarantees to consumers, but under a robust framework that would price correctly any options embedded in the contracts.



The new regime should not work as an incentive to maintain unsustainable practices and products that are already challenged by the

economic reality. We welcome the role that the EU political institutions are willing to attribute to EIOPA on the assessment of the long term guarantee

package and we hope to receive a clear mandate within the terms of reference in order to start the assessment as soon as possible. Thirdly, even if a credible timetable will probably point out to an

implementation date not earlier than 2016, it should be possible in an interim phase to start to incorporate in the supervisory process some of the key features of Solvency II.

EIOPA is exploring this possibility, based on its powers under the EIOPA Regulation. This interim phase should be coordinated by EIOPA in order to ensure a

consistent application throughout the EU. Solvency II has been viewed internationally as a reference in risk based regulation of insurance.

In that sense many countries have considered elements from Solvency II while developing their own regimes.

The lack of certainty about Solvency II implementation is challenging the EU credibility in the international discussions.

Financial Stability Our third panel session will focus on financial stability and on the role of

insurers. The crisis prompted a new look at systemic risk, including in the insurance sector.



The identification and regulation of Globally Systemically Important Insurers is currently being discussed under the umbrella of the Financial

Stability Board and the International Association of Insurance Supervisors (IAIS). EIOPA is keen to contribute to a robust identification process of G-SIIs

and to develop appropriate regulatory and supervisory tools to deal with their characteristics. Traditionally, systemic risk was a banking concept. However, the recent crisis showed us that certain activities developed under the insurance sector can also pose systemic risk.

Insurance companies or groups that engage in non-traditional, or non-insurance, activities (for example: CDS, financial guarantees or leveraging assets to enhance investment returns through securities lending) are more vulnerable to financial market developments and,

importantly, more likely to amplify, or contribute to systemic risk. Of course, this assessment may change over time, depending on the innovations and changes in insurance business models, especially in life

insurance, as well as in the complex interactions between insurance groups and financial markets. We should be especially attentive to any kind of maturity transformation

and leveraging occurring in the insurance sector. Also extremely relevant are the policy measures under discussion.

In line with the FSB recommendations, the IAIS proposed measures on enhanced supervision, effective resolution and higher loss absorbency. I welcome this approach.

We need to be clear and transparent on the objectives of the framework.



If insurance groups heavily develop their business into non-traditional or non-insurance activities than they should expect to be treated in relation

to those businesses as if they were banks. We need to limit any potential incentive for typical banking risks to be transferred to the insurance sector because some stricter regulation of

systemic risk is applied in the banking sector. As the development of the international approaches to deal with systemic risk in insurance is closer to an end, EIOPA will proceed,

according to its regulation, and in consultation with the ESRB, with the development of criteria for the identification and measurement of systemic risk that may be posed by insurance, reinsurance and occupational pension’s institutions within the EU context.

EIOPA’s achievements and challenges Let me finalize by sharing with you some of EIOPA´s achievements and highlight a number of challenges ahead.

In spite of the natural constrains on human and financial resources and the huge challenges posed by the crisis, I believe that EIOPA has been quite successful in delivering an ambitious plan covering all areas assigned to us by the European Law.

I’ve already commented on the huge work developed by EIOPA on the regulatory side both on insurance and on occupational pensions.

Let me now turn to supervision. EIOPA has an enhanced role as a member of the colleges of supervisors.

We developed an Action Plan with concrete deliverables and timings for the Colleges.



This has clearly increased the consistency of the work of the colleges and improved the exchange of information between supervisors.

During this crisis EIOPA has been monitoring and assessing market developments on a permanent basis, by using efficiently the public information available and collecting more granular information directly

from the national supervisory authorities, both through specific quantitative and qualitative queries and by dedicated visits by EIOPA staff.

This allowed us to reinforce the coordination of the EU supervisor’s actions, highlight particular risks and activities that need to be further monitored and overall to be better prepared in the case of adverse developments.

On consumer protection, that was identified as one of EIOPA’s priorities, I am very proud to mention that our first set of Guidelines was developed in the consumer protection area.

The Guidelines on complaints handling by insurers fill an important regulatory gap at the EU level and are an important step towards promoting more transparency, simplicity and fairness in the market for

consumer financial products and services. Furthermore we issued a Good Practices Report analyzing the disclosure and sale of variable annuities that identifies how consumer interests can

be better protected as regards the sales of this type of complex products. We have also published an initial overview of consumer trends in the European insurance and occupational pensions sectors, identifying three

key consumer areas that are presently subject to further review and analysis: (1) Consumer protection issues around payment protection insurance;

(2) Increased focus on unit-linked life insurance products and



(3) Increased use of comparison websites by consumers.

On financial stability, I want to emphasize the development and publication of EIOPA’s risk dashboard containing a set of quantitative and qualitative indicators that help to identify and measure the evolution of risk in the EU insurance market.

EIOPA has also run a low-yield stress test for the insurance sector that showed that the insurance industry would be negatively affected if a scenario were to materialize where yields remain low for a prolonged

period of time. In the international relations area, EIOPA has been quite active, performing Solvency II full equivalence assessments of the Swiss,

Bermudan and Japanese supervisory systems and running gap-analyses of the regulatory regimes of 8 further countries that had expressed an interest in being included in a transitional regime.

Furthermore, EIOPA has dedicated a special effort to a project with the US federal and state insurance authorities aimed to increase mutual understanding and cooperation with a view to promote business opportunities, consumer protection and efficient supervision.

The public report that identifyies in a factual way the main similarities and differences of the insurance regulatory and supervisory regimes in the EU and in the US is a very important step forward.

As you can see EIOPA has already made a significant impact in the EU regulatory and supervisory landscape.

This was only possible because of the dedication of our staff and the excellent contribution from experts coming from the National Supervisory Authorities.

It is their knowledge, experience and dedication that allow us to fulfil our mandate and respond to an increasingly demanding environment.



Furthermore, the continuous commitment and cooperation of the members of the Board of Supervisors and Management Board was of the

utmost importance in fulfilling our mission and vision. Paramount to our activity was also the constant involvement with the Insurance and Reinsurance Stakeholder Group and the Occupational Pensions Stakeholder Group.

The exchange of views and the opinions from the Stakeholder Groups were essential in the development of EIOPA’s work.

Looking forward, I am convinced that in a few years the setting up of the European Supervisory Authorities will be recognized as one of the most fundamental reforms in the European financial sector coming from the financial crisis.

The potential benefits from the creation of a single rule book are huge, both for stability and consumer protection within the internal market.

Nevertheless, EIOPA is confronted with a number of important challenges. Let me mention three relevant ones:

1. How to assure the consistency of supervisory practices? I firmly believe that the consistency of supervisory practices is as important as the single rule book.

Only by assuring that day-to-day supervision of financial institutions is done within a consistent framework, we can effectively contribute to an increased level of protection of policyholders and beneficiaries in the European Union.

The single market requires it and EIOPA is committed to deliver it.



A first step should be the development of a Supervisory Handbook that would work as a guidebook for supervision in Solvency II, setting out

good practices in all the relevant areas of supervision. This handbook will foster the implementation of a more consistent framework for the conduct of supervision. EIOPA is starting to work in

this area. On the institutional side we observe the evolution in the banking area with the proposals to create a single supervisory mechanism for the Euro

area banks. As a truly convicted European I welcome this step.

I also recognize that the insurance sector is in a different situation. Insurance is not banking.

There are indeed fundamental differences on the risks and on the business models. Nevertheless, I believe that it is fundamental to rely on the experience of

what has been already achieved by EIOPA under the current Regulation and to start a reflection on further tasks, powers and resources needed to deliver a truly consistent supervisory process and, in particular, to assure a more consistent oversight of cross-border insurance groups.

In the short term EIOPA should be ready to play its challenging oversight role according to the Regulation, by conducting inquiries into a particular type of financial institution, or type of product, or type of

conduct in order to assess potential threats to the stability of the financial system and make appropriate recommendations for action to the competent authorities concerned.

In order to perform this independent assessment in a transparent, efficient and risk-based way, EIOPA needs to reinforce its human resources, should have access to the relevant individual information



available to the national supervisors and also have direct access to the individual institutions.

In the medium term the evolution to a more European focused supervision for the EU cross-border insurance groups should also be discussed, namely in face of the potencial arbitrage opportunities

coming from the new supervisory reality in the banking sector.

2. The power to ban or restrict financial activities On the Consumer protection area I want to highlight the urgent need to include provisions in the insurance and pension Directives allowing

EIOPA to ban or restrict financial activities as established in Article 9 of the EIOPA Regulation. This will assure an effective way to deal, for example, with situations of

flawed product design or governance that could lead to severe consumer detriment. Without these provisions EIOPA cannot fulfill its mandate as described

in the Regulation.

3. Competence on 3rd Pillar pensions In the pensions area EIOPA’s mandate only covers occupational pensions, the so called 2nd pillar.

However, I believe that the implementation of the EU agenda for adequate, safe and sustainable pensions calls for a sufficient level of regulation and supervision of personal pensions, the so called 3rd pillar.

Consequently, EIOPA’s mandate should be extended to all 3rd pillar pensions.



This is also recommended by EIOPA’s Occupational Pensions Stakeholder Group in their comment to the Commission’s White paper

on Pensions. Ladies and gentleman,

My vision is to build up EIOPA as a modern, competent and professional organization that acts independently in an effective and efficient way towards the creation of a common European supervisory culture.

We are living extraordinary times and we should feel priviledged to be part of this process. As Bob Dylan so nicely singed: The times they are a-changin'. Thank you.



Opinion of the European Insurance and Occupational Pensions Authority of on interim measures regarding Solvency II Legal Basis 1. This opinion is issued under the provisions of Article 29(1) (a) of Regulation (EU) No 1094/2010 of the European Parliament and of the

Council of 24 November 2010 (hereafter the ‘Regulation’) in conjunction with Directive 2009/138/EC of the European Parliament and the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (hereafter Solvency II Directive).

2. As established in Article 29(1) (a) of the Regulation, EIOPA shall play an active role in building a common Union supervisory culture and consistent supervisory practices, as well as in ensuring uniform

procedures and consistent approaches throughout the Union. 3. As established under Article 1 (6) of the Regulation EIOPA shall contribute to improving the functioning of the internal market, including

in particular a sound, effective and consistent level of regulation and supervision, (Art. 1(6)(a)) preventing regulatory arbitrage and promoting equal conditions of competition (Art. 1(6)(d)). EIOPA shall also contribute to enhancing consumer protection (Art. 1(6)(f)).

4. As established under Article 8 (1) of the Regulation EIOPA’s task is to contribute to the establishment of high quality common regulatory and supervisory standards and practices (Art. 1(6)(a)) and to contribute to the

consistent application of legally binding Union acts ensuring consistent, efficient and effective application of the acts referred to in Art. 1 (2) of the Regulation (Art. 1(6)(b)).

The fact that the Solvency II Directive has entered into force, means that it is considered “Union law”, but it will not have legally binding effect until after the date of its application, which is currently set to 1



January 2014 in accordance with the ("Quick Fix") Directive 2012/23/EU of 12 September 2012.

5. This opinion is addressed to the national competent authorities represented in EIOPA’s Board of Supervisors.

Context 6. During the Board of Supervisors (BoS) meeting of September 2012, Members expressed their strong concerns with respect to the current status of the OMNIBUS II negotiations which might further delay the application of the Solvency II Directive.

7. In its explanatory memorandum to the Proposal for the Solvency II Directive the European Commission states:

“The present solvency rules are outdated. They are not risk sensitive, they leave too much scope to Member States for national variations, they do not properly deal with group supervision

and they have meanwhile been superseded by industry, international and cross-sectoral developments. This is the reason why a new solvency regime, called Solvency II, which

fully reflects the latest developments in prudential supervision, actuarial science and risk management and which allows for updates in the future is necessary.”

8. In addition, in the absence of a final agreement on Solvency II, European supervisors may be forced to develop national solutions in order to ensure sound risk sensitive supervision.

Instead of reaching consistent and convergent supervision in the EU, different national solutions may emerge to the detriment of a good functioning internal market.



9. The BoS mandated the Chair of EIOPA to write to the OMNIBUS II trialogue parties setting out its concerns.

In his letter, dated 4 October 2012, the Chair not only expressed the need for a stable and reliable time plan but also the need to reflect on an earlier implementation of some Solvency II elements.

{Note: Do you remember the letter?}

Undertakings which are well-governed and which, in particular, measure correctly, mitigate and report the risks which they face will be more likely to be prepared for the new regulatory framework and act in the interests of policyholders.



10. In that regard it is of key importance that there will be a consistent and convergent approach with respect to the preparation of Solvency II.

In the run-up to the new system the following key areas of Solvency II need to be addressed in order to ensure proper management of undertakings and to ensure that supervisors have sufficient information

at hand. These are the system of governance, including risk management system and a forward looking assessment of the undertaking's own risks (based

on the ORSA principles), pre-application of internal models, and reporting to supervisors. 11. EIOPA sets out below its expectations for the national competent

authorities. These actions are consistent with EIOPA’s obligation to foster supervisory convergence.

12. EIOPA will, taking into account its objective under Article 1 Para 6 and its tasks and powers under Article 8 of the Regulation, contribute to the consistent efficient and effective preparation of supervisors and

insurance and reinsurance undertakings for the application of the Solvency II Directive. 13. As a follow-up to the opinion, and by making use of its powers under

Article 16 of the Regulation, EIOPA will publish guidelines addressed to national competent authorities on how to proceed in the interim phase leading up to Solvency II.

14. Within 2 months of the issuance of the guidelines, each national competent authority shall confirm whether it complies or intends to comply with the guidelines.

In the event that a national competent authority does not comply or does not intend to comply, it shall inform EIOPA, stating its reasons.



15. EIOPA will publish the fact that a national competent authority does not comply or does not intend to comply with that guideline.

Proposed actions by national competent authorities

16. As part of the preparation for Solvency II, national competent authorities should put in place, starting on 1 January 2014 certain important aspects of the prospective and risk based supervisory

approach to be introduced in order to address the concerns set out above. 17. National competent authorities are expected to ensure that insurance

and reinsurance undertakings have in place an effective system of governance which provides for sound and prudent management of the undertaking and an effective risk management system including a forward looking assessment of the undertaking's own risks (based on the

ORSA principles). 18. National competent authorities are expected to ensure that insurance and reinsurance undertakings have in place an effective risk-

management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report, on a continuous basis the risks, at an individual and at an aggregated level, to which they are or could be exposed, and their

interdependencies. 19. National competent authorities are expected to review and evaluate with respect to the undertakings concerned the system of governance,

the assessment of the risks which those undertakings face or may face and the assessment of the ability of those undertakings to assess those risks taking into account the environment in which the undertakings are operating.

20. Through internal model pre-application processes, national competent authorities engaged in pre-application of internal models



should continue to work with undertakings to form a view on undertakings’ degree of readiness for internal model applications, and

should also follow subsequent evolutions to the internal model framework. 21. National competent authorities are encouraged to request all the

information necessary for applying a prospective and risk based supervisory approach. 22. National competent authorities are expected to ensure that the requirements mentioned above are applied in a manner which is

proportionate to the nature, scale and complexity inherent in the business of the insurance and reinsurance undertaking.



Aruoba-Diebold-Scotti Business Conditions Index The Aruoba-Diebold-Scotti business conditions index is designed to

track real business conditions at high frequency.

Its underlying (seasonally adjusted) economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production,

personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow data.

The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas



progressively more negative values indicate progressively worse-than-average conditions.

The ADS index may be used to compare business conditions at different times.

A value of -3.0, for example, would indicate business conditions significantly worse than at any time in either the 1990-91 or the 2001 recession, during which the ADS index never dropped below -2.0.

The vertical lines on the figure provide information as to which indicators are available for which dates. For dates to the left of the left line, the ADS index is based on observed

data for all six underlying indicators. For dates between the left and right lines, the ADS index is based on at least two monthly indicators (typically employment and industrial

production) and initial jobless claims. For dates to the right of the right line, the ADS index is based on initial jobless claims and possibly one monthly indicator.



Financial services supervision: Commission requests Belgium, France, Greece, Luxembourg, Poland and Portugal to implement EU rules

The Commission has requested Belgium, France, Greece, Luxembourg, Poland and Portugal to notify within two months measures to implement

EU rules in the financial sector (Directive 2010/78/EU) concerning the powers of the three new European supervisory authorities for banks (European Banking Authority), insurance and occupational pensions (European Insurance and Occupational Pensions Authority) and

securities (European Securities and Markets Authority). The Directive aims at adapting the provisions of key financial services Directives to the new supervisory framework.

This will make sure that European Supervisory authorities will be fully allowed to carry out all the tasks conferred upon them.

Member States were due to implement the Directive, no later than 31 December 2011. The Commission's requests take the form of reasoned opinions under

EU infringement procedures. If the Member States fail to notify measures to implement the Directive within two months, the Commission may decide to refer them to the EU

Court of Justice.

Electronic money: Commission asks Court of Justice to fine Belgium for not implementing EU rules The European Commission has decided to refer Belgium to the Court of Justice of the EU for failing to implement the Directive on the taking

up, pursuit and prudential supervision of the business of electronic money institutions.



The Commission has also decided to ask the Court to impose daily penalty payments on Belgium, until it fully implements the Directive.

The Commission proposes a daily fine of € 59 212,80 which would be paid as from the date of the Court's ruling until Belgium notified the Commission that it had fully implemented the rules into national law.



Basel 3 – The Timing Dilemma Last month the United States (US) regulatory authorities announced that

they did not expect their rules implementing Basel 3 would become effective on 1 January 2013, although they are working as “expeditiously as possible” to complete their rulemaking process.

Similarly in the European Union (EU), the trilogue between the European Commission, the European Parliament and the Council of Ministers to agree the text of Capital Requirements Directive IV (CRD IV, the EU version of Basel 3 is still ongoing and, even if a political

agreement can be reached by year-end (which still appears to be the intention), it is recognised in the EU that there will not be sufficient time for CRD IV to be codified as legislation and put into effect on 1 January 2013.

So, does it necessarily follow that we should delay Basel 3 implementation in Hong Kong because the US and the EU cannot meet the internationally agreed timeline?

Or should we follow the timeline set by the Basel Committee on Banking Supervision and begin the first phase of Basel 3 implementation from 1 January 2013?

Our Basel 3 rules (the Banking (Capital) (Amendment) Rules 2012) are currently tabled at LegCo and notwithstanding the expected delays in the US and the EU, the Basel Committee’s timeline remains unchanged.

Its gradual phase-in of the new capital standards over six years begins from January 2013 and extends until 2019.

In resolving the timing dilemma, it might first be instructive to remind ourselves that Basel 3 is being introduced to rectify weaknesses made all too starkly apparent in the recent global financial crisis.



Or, put another way, Basel 3 is considered good for financial stability.

The Basel 3 capital standards are designed to strengthen banks’ resilience by requiring more and better quality capital and by addressing and capturing risks not adequately recognised previously.

The aim is to ensure that banks can weather future financial storms without disruption to their lending. This should in turn make them less likely to create or amplify problems

in other areas of the economy and facilitate their contribution to long-term sustainable economic growth. The roller-coaster of excessive leverage pre-crisis and excessive

deleveraging post-crisis is not conducive to sustainable growth. Regulation is all about balance.

If regulation is too lax, excessive risk-taking may result with devastating effects. If regulation is too tight, it may suppress beneficial financial activity and

reduce growth. In our view, Basel 3 represents an appropriate balance in bolstering resilience whilst at the same time (with its extended phase-in) not

unduly hampering lending to business and households today and ensuring banks can continue to lend in any downturn tomorrow. For this reason we propose to begin implementing Basel 3 from 1

January 2013. We are not alone in this.

Our regional peers, Mainland China, Japan, Singapore and Australia have all published their final rules for Basel 3 implementation next year.



As has Switzerland, another important financial centre. But notwithstanding the intrinsic benefits of Basel 3, should we

nevertheless be swayed by the argument put to us that Asia is taking the “medicine” designed for the countries worst affected by the crisis, whilst the intended “patients” defer and thereby give their banks significant “competitive advantages” over our own?

This competitive advantage argument would seem to be based on two assumptions.

First that US and EU global banks (i.e. those banks that could realistically compete with our own) are currently holding much lower levels of capital than required by Basel 3 (and hence will have a genuine cost advantage);

and second that our banks will, come 1 January 2013, have to hold more capital than they currently hold (and hence will incur additional cost).

Are these assumptions correct? Well even though adoption of Basel 3 is delayed in the US and the EU, this certainly does not mean that banks in these regions remain at their

pre-crisis capital levels. There has been significant re-capitalisation.

The Dodd Frank Wall Street Reform and Consumer Protection Act in the US already requires the regulatory agencies to conduct stress-testing programmes to ensure banks and other systemically important financial institutions have enough capital to weather severe financial conditions

and, even before the passage of the Dodd Frank Act, the US Federal Reserve Board put some of the largest US bank holding companies through stress-tests, the results of which have led to significant increases in capital.

By 2012, the 19 bank holding companies subject to the Fed’s Comprehensive Capital Analysis and Review had increased their



aggregate tier 1 common capital to US$803 billion in the second quarter of the year from US$420 billion in the first quarter of 2009, with their tier

1 common capital ratio (which compares high quality capital to assets weighted according to their riskiness) doubling to a weighted average of 10.9% from 5.4%.

In the EU, under a recapitalisation exercise in 2011 that covered 71 of the EU’s major banks, the European Banking Authority (EBA) required most to attain a “core tier 1 ratio” of not less than 9% by the end of June 2012.

In October 2012, the EBA indicated that it will focus on capital conservation to “support a smooth convergence to the CRD IV….. regulatory requirements” and require the banks to maintain an absolute

amount of core tier 1 capital corresponding to the level of the 9% core tier 1 ratio. So even absent formal adoption of Basel 3, the capital levels of the

largest banks in the US and the EU have increased significantly post-crisis to levels comparable with, or even in excess of, those required under Basel 3 and so the prospect of such banks “competing” by being allowed to maintain much lower capital levels than Basel 3 banks would

seem more apparent than real. Turning to the second “competitive” assumption, will the first phase of Basel 3, which starts next year, require local banks to hold significantly

more capital than they do at present, to the extent that they may become constrained in their ability to lend and compelled to pass on the costs of the extra capital to borrowers?

Well, the results of the HKMA’s quantitative impact studies tell us that our local banks are already very well-placed to meet the new Basel 3 capital ratios.

Their capital levels are already in excess of the standard taking effect on 1 January 2013 and the issuance of ordinary shares (common equity) already accounts for a very significant proportion of their capital base,



positioning them well for Basel 3’s new focus on common equity as the highest quality capital for the purpose of loss absorption.

In summary then, irrespective of any delay in formal implementation of Basel 3, major banks in the US and EU are inexorably moving to higher levels of capital.

This, together with the benefits offered by Basel 3 and the relative ease with which local banks can comply, serves to underpin our view that we should proceed to implement the first phase of Basel 3 in line with the

Basel Committee’s timeline. Generally speaking, jurisdictions in Asia have in the past tended to adopt regulations that are in some respects higher than the Basel Committee’s

minimum standards. This may have helped Asia weather the global financial crisis relatively unscathed when compared with the jurisdictions worst affected.

There would, therefore, seem little to be gained from seeking to engage in, or indeed prompt, a “race-to-the-bottom” in regulatory terms by deliberately delaying the introduction of Basel 3 at this point in time.

In implementing on 1 January 2013, we will be fulfilling our commitment both as an international financial centre which customarily adopts best international standards and as a member of the Basel Committee on

Banking Supervision. Karen Kemp Executive Director (Banking Policy)



Dear member,

The regulatory arbitrage challenges and opportunities between the banking and the insurance sector are always important and profitable for many, especially for consultants that are experts in both areas.

For example, you can see an interesting job description: “Head of Risk & Compliance - Up to £200,000 package”

The candidate needs to have strong expertise in the core Risk Management areas like: - Compliance to Basel II, II.5 and Basel III - Compliance to Solvency II

You can read more at: http://jobview.monster.co.uk/getjob.aspx?jobid=115693460&WT.mc_n=Indeed_UK&from=indeed

I have to confess: I am a collector of ideas that lead to regulatory arbitrage opportunities, especially between the banking and the insurance balance sheet.

Almost every financial product is subject to some form of supervision and regulation, which is usually different in banking and insurance. This is an opportunity. The same product can be structured to become a

“banking product” or an “insurance product”. I know. Basel iii and Solvency ii are supposed to eliminate regulatory arbitrage opportunities.

Every time I think something like that, I have to admit that firms (and countries) will always do their best to exploit opportunities and have competitive advantages.

This week I will start from an interesting phrase:

http://jobview.monster.co.uk/getjob.aspx?jobid=115693460&WT.mc_n=Indeed_UK&from=indeed

http://jobview.monster.co.uk/getjob.aspx?jobid=115693460&WT.mc_n=Indeed_UK&from=indeed



“The changes in banking regulation make more important the role of insurers as providers of long-term ***bank funding***”

Who said that? Gabriel Bernardino, the Chairman of EIOPA (the European Insurance

and Occupational Pensions Authority, one of three European Supervisory Authorities).



Solvency II Speakers Bureau The Solvency II Association has established the Solvency II Speakers

Bureau for firms and organizations that want to access the expertise of Certified Solvency ii Professionals (CSiiPs) and Certified Solvency ii Equivalence Professionals (CSiiEPs).

The Solvency II Association will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers.

To learn more: www.solvency-ii-association.com/Solvency_II_Speakers_Bureau.html

http://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 course has been designed to provide with the knowledge and skills needed to understand and support compliance with the Solvency ii Directive of the European Union.

Target Audience: This course is intended for decision makers, managers, professionals

and consultants that: A. Work in Insurance or Reinsurance firms of EEA countries.

B. Work in Groups - Financial Conglomerates (FC), Financial Holding Companies (FHC), Mixed Financial Holding Companies (MFHC), Insurance Holding Companies (IHC) - providing insurance and/or reinsurance services in the EEA, whose parent is located in a country of

the EEA. C. Want to understand the challenges and the opportunities after the Solvency ii Directive.

This course is highly recommended for supervisors of EEA countries that want to understand how countries see Solvency II as a Competitive Advantage.

This course is also recommended for all decision makers, managers, professionals and consultants of insurance and/or reinsurance firms involved in risk and compliance management.



About the Course

INTRODUCTION

The European Union’s Legislative Process

Directives and Regulations

The Financial Services Action Plan (FSAP) of the EU

Extraterritorial Application of European Law

Extraterritorial Application of the Solvency II Directive

Solvency ii and the Lamfalussy Process

Level 1: Framework Principles

Level 2: Detailed Technical MeasuresLevel 3: Strengthening

Cooperation Among Regulators

Level 4: Enforcement

Weaknesses of Solvency I

From Solvency I to Solvency II

Solvency ii Players

Solvency ii Objectives

THE SOLVENCY II DIRECTIVE

A Unified Legislative Basis for Prudential Regulation of Insurers

and Reinsurers

Risk-Based Capital Allocation

Scope of the Application

Important Definitions

Value-at-Risk in Solvency II

Authorisation

Corporate Governance

Governance Functions

Risk Management

Corporate Governance and Risk Management - Level 2

Fit and proper requirements for persons who effectively run the undertaking or have other key functions

Internal Controls



Internal Audit

Actuarial Function

Outsourcing

Board of Directors: Role and Solvency ii Responsibilities

12 Principles – System of Governance (Level 2)

PILLAR 2

Supervisory Review Process (SRP)

Focus on Risk Management and Operational Risk

Own Risk and Solvency Assessment (ORSA)

ORSA - The Internal Assessment Process

ORSA - The Supervisory Tool

ORSA - Not a Third Solvency Capital Requirement

Capital add-on

PILLAR 3

Disclosure Requirements

The Solvency and Financial Condition Report (SFC)

PILLAR I

Valuation Of Assets And Liabilities Technical Provisions

The Solvency Capital Requirement (SCR)

The Value-at-Risk Measure Calibrated to a 99.5% Confidence

Level over a 1-year Time Horizon

The Standard Approach

The Internal Models

The Collection of Additional Historical Data

External Data

The Minimum Capital Requirement (MCR)

Non-Compliance with the Minimum Capital Requirement

Non-Compliance with the Solvency Capital Requirement

Own Funds

Investment Rules



INTERNAL MODEL APPROVAL

CEIOPS Level 2 - Tests and Standards for Internal Model

Approval

CEIOPS Level 2 - The procedure to be followed for the approval of

an internal model

Internal Models Governance

Group internal models

Statistical quality standards

Calibration and validation standards

Documentation standards

SOLVENCY II, GROUP SUPERVISION AND THIRD COUNTRIES

Solvency I: Solo Plus Approach

Group Supervision under Solvency II

Rights and duties of the group supervisor

Group Solvency - Methods of calculation

Method 1 (Default method): Accounting consolidation-based method

Method 2 (Alternative method): Deduction and aggregation method

Parent Undertakings Outside the Community - Verification of Equivalence

Parent Undertakings Outside the Community - Absence of

Equivalence

The head of the group is in the EEA and the third country regime

is not equivalent

The head of the group is in the EEA and the third country regime

is equivalent

The head of the group is outside the EEA and the third country is

not equivalent

The head of the group is outside the EEA and the third country regime is equivalent

Small and Medium-Sized Insurers: The Proportionality Principle

Captives and Solvency II



EQUIVALENCE WITH SOLVENCY II AROUND THE WORLD

Solvency ii and Countries outside the European Economic Area

The International Association of Insurance Supervisors (IAIS)

The Swiss Solvency Test (SST) and Solvency ii:

Solvency ii and the Offshore Financial Centers (OFCs)

Solvency ii and the USA

Solvency ii and the US National Association of Insurance

Commissioners (NAIC) - The Federal Insurance Office created under the Dodd-Frank Wall Street Reform and Consumer Protection Act in the USA, and the ORSA in the USA

FROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY II DIRECTIVE

Directive 2005/68/EC of 16 November 2005 on Reinsurance - The

Reinsurance Directive (RID) CLOSING

The Impact of Solvency ii Outside the EEA

Providing Insurance Services to the European Client

Competing with Banks

Learning from the Basel ii Framework

Regulatory Arbitrage: A Major Risk for Countries that see

Compliance as an Obligation, not an Opportunity

Basel II, Basel III, Solvency II and Regulatory Arbitrage

Challenges and Opportunities: What is next

Regulatory Shopping after Solvency II

To learn more about the course: www.solvency-ii-association.com/Certified_Solvency_ii_Training.htm

http://www.solvency-ii-association.com/Certified_Solvency_ii_Training.htm



http://www.solvency-ii-association.com/New_Member_Orientation_Newsletters.html

solvency ii news december 2012

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