Solvency ii News December 2012

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– Reflectingon the
achievementsand preparingfor the newchallenges
Distinguished Guests, Ladiesand
Gentlemen,
On behalf of EIOPA, I am delighted to
welcome you to our secondAnnual
Conferencehere in the Frankfurt Congress
Center.
In particular it is my pleasureto welcome all our panellistsand
moderators.
I want to thank you all for coming and contributing to make thisone of
the reference conferencesin the insurance and pension‟slandscape.
I would alsolike to thank the City of Frankfurt and the State of H essen,
for their welcome and support.
www.solvency-ii-association.com

EIOPA greatly enjoysbeing herein a city which iscontinuously 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 happyto keep this tradition of annual conferences.
For usthisis a very important way to maintain a constructive dialogue
with the insurance and occupational pensionsstakeholders– to find out
more about your concerns, challengesand of courseto 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 pleasedto see that many membersof theEIOPA Board of
Supervisorsand Stakeholder Groupsare alsoattending the conference
and I am sure that they are going to contribute to all the formal and
informal discussionsthat will take placetoday.
I hope that all together we will make thisday interesting and fruitful. In
my opening speech today I will sharewith you some thoughts about
the issuesat stake in each of the panel discussionsand I will provide a
short reflection on the achievements of EIOPA and some of the
challengesahead.
Let me start by the Conference programme, which as usual reflectssome
of the most relevantissuesthat EIOPA has been focused on.

Pensions
We will start with pensionsbecausereshaping the European pensions
system isone of the most challengingprojectsin the EU agenda, which
isvery important for all the EU citizens without exception.
The EU Commission has launched thisyear a white paper called“An
agenda for adequate, safe and sustainablepensions”, identifying a
number of initiatives to be taken in the coming years.
In thisdocument there isa clear recognition that complementary private
retirement savings have to playa greater role in securing the future
adequacy of pensions.
This poseson all of usa great challengeand an enormousresponsibility.
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 shouldbe done by developing a risk)based approach to the
regulation of retirement savings, encompassing a number of
fundamental elements:
1. Arealisticvaluation of pensionpromises
All occupational schemesthroughout Europe shouldhave sufficient
resourcesto meet their promisesunder a reasonable, but realistic and
transparent, framework.
We have abundant lessonsfrom the consequencesof ignoring the
economic based value of assets, liabilitiesand the inherent risks.
That is why we recommended for theIORP Directive review the
application of such principlesas the market consistent valuationsand

the inclusion of the actuarial value of all enforceableobligations of the
IORP in the valuation.
Taking due account of the diversity of IORPs, we proposed the concept
of a “holistic balancesheet” that will enablethe consideration of the
variousadjustment and security mechanismsin 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
bearsit.
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. Arobust solvencyregulation
The occupational pension‟ssolvencyregime shouldbe based on the
“holistic balance sheet” and shouldincorporate appropriate periodsfor
the achievement of the funding targets, taking into account the nature of
the promise, the duration of the liabilities and other elementslikethe
sponsorsupport.
It should alsobesufficiently flexibleto deal with short term volatility and
avoid pro-cyclical behaviour, for exampleby using a corridor approach
and allowing appropriate recovering periods.
3. An enhancementof the governancerequirements
Good governance is crucial for the membersand beneficiaries of the
occupational pension schemes.
It is essential that those who run IORPs are individualsof competence
and integrity, with respective education and work experience.

IORPs shouldalsobe subject to robust internal and external controlsin
areas such as risk management, internal control and audit, appointments
of a custodian and a depository.
The SolvencyII principles shouldbe applied, taken into account due
proportionality.
The regulatory framework should alsogive concrete incentivesto good
risk management.
The useof modern risk management toolslike diversification strategies
in asset allocationaccording to the duration of the liabilities, lifecycle
approaches, hedging techniquesand protection against shortfall riskscan
effectivelyprovide sponsorsand membersof pension schemesbetter
outcomes under a risk control environment.
4. An increasein transparency
It is crucial to maintain members and beneficiaries of pension funds
dulyinformed about their pension rights and prospectives.
Furthermore, the move towards defined contribution (DC)
schemes, where the risk isborn by the members, posesnew 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 elementslike
risks, costs, chargesetc.
This will surelyimprove transparency.
EIOPA iscontinuing its work on the occupational pension‟sarea by
running a Quantitative Impact Study(QIS) exercise.

The QISexercise aims to assessthe financial impact on IORPs of
valuing assetsand liabilitiesin the holistic balancesheet and
introducing a solvency capital requirement (SCR) under various policy
optionsof the EIOPA‟s Advice.
We expect to finalize the report on the QIS findings in spring 2013.
Finally, we should not forget that there isalsoa need to look at the
individual retirement savings in the EU.
The current framework applicableto 3rd Pillar productsis very much
fragmented with a number of different vehiclesbeing subject to different
typesof EU regulations.
I believe that there are merits in developingan 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 necessaryto enhance
citizens‟ confidence in financial productsfor retirement savings.
In thiscontext, I believe that we shouldexplorethe development of an
“EU retirement savings product”.
This product could be developedto finance individual or collective
DC plansand should clearlydifferentiate from other typesof investment
productsby being focused on the long)term nature of their objective
(retirement savings), avoiding thetrapsof the short term horizon.
It should be based on a simpleframework, allowing for reduced cost
structuresand be managed using robust and modern risk management
tools.
It should rely on clear and transparent governance structuresand
provide full transparency to itsmembers and beneficiaries.
It should have accessto 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 productscould alsoplayan important role in the EU
economy by assuring a focuson long)term investmentsand, thus,
fostering the sustainable growth.
InsuranceRegulation
Our second panel session isdedicated to the insurance regulation.
We calledit “The Way Ahead” and I am sure that we will have a
thoughtful discussion not only on SolvencyII but alsoon international
developments.
The European Union isfaced today with an outdated and fragmented
regulatory and supervisory regime on insurance.
The SolvencyI regime isnot risk sensitive, containsvery few qualitative
requirements regarding risk management and governance and doesnot
provide supervisorswith adequate information on the undertaking‟s
risks.
Consequently,national authorities have been introducing different
elementson 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 isfair to saythat SolvencyII isbased on
fundamentallysound principles:
•A total balancesheet approach and a market consistent valuation of
assetsand liabilitiesin order to have a realistic basisfor assessing risks;

•Two capital requirements, MCR and SCR, assuring a risk based
calculationbut alsoa more robust and simpler floor designed for
ultimate supervisoryaction;
• An overall level of prudence for the calibration of capital requirements;
• The explicit recognition of risk diversification;
•The possibility to use internal modelsafter a processof validation by
supervisorsthat isfocused not only on the quality of risk modelling but
alsoon the actual use of the model in the day to day businessdecisions;
•An updated group supervision approach with the definition of a group
solvencyrequirement and clear powersassigned to the group supervisor;
•A robust system of governance, including the definition of a number of
key functions;
•An Own Risk and SolvencyAssessment (ORSA) that isnow considered
as the best practice at an international level;
• EU harmonized templatesfor supervisoryreporting;
• Enhanced public disclosure.
In the meantime the financial crisishad a number of consequenceson
the discussionson SolvencyII.
Some of them were dealt earlyin the project, some are still creating
uncertainties on the final design and calibration of the regime.
The huge market volatility proved to be a challengein a market
consistent regime, especiallyfor longterm guarantees.
The sovereign crisis led to questionson the concept of the risk free rate.

The changesin banking regulation make more important the role of
insurersasproviders of long-term bank funding.
The lowinterest rate scenario isthreatening some insurance business
models.
Without diminishing all thesechallenges, I believe it istime to move on.
This reform is important and isneeded.
In order to keep the momentum and to be consequent with all the
financial and human resourcesalreadydedicated to thisproject both by
supervisorsand the industry we need to move forward.
So, what stepsdo we need to take?
In first placewe need a strong commitment from the EU political
institutions towardsthe implementation of SolvencyII.
This shouldprompt the definition of a clear and credible timetable based
on a realistic assessment of theexpected time needed to deliver the
different milestonesof the regime.
Secondly, we need to agree on a sound and prudent regime for the
valuation of longterm guarantees.
A regime that preservesthe risk based economic approach on the
valuation and assessment of risk and that adequatelycapturesthe
characteristics of certain long term liabilitieswith sufficiently predictable
matchable cash flows.
This shouldbe viewed as an opportunity to continue to offer long term
guaranteesto consumers, but under a robust framework that would price
correctlyany options embedded in the contracts.

The new regime should not work as an incentive to maintain
unsustainablepracticesand productsthat are alreadychallengedby 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
referencein order to start the assessment assoon as possible.
Thirdly, even if a credible timetable will probablypoint out to an
implementation date not earlier than 2016, it should bepossible in an
interim phase to start to incorporate in the supervisory processsome of
the key featuresof SolvencyII.
EIOPA isexploringthis possibility, based on its powersunder the
EIOPA Regulation.
This interim phase should be coordinated by EIOPA in order to ensure a
consistent application throughout the EU.
SolvencyII hasbeen viewed internationally asa reference in risk based
regulation of insurance.
In that sensemany countrieshave considered elementsfrom Solvency II
while developingtheir own regimes.
The lack of certainty about SolvencyII implementation ischallenging
the EU credibility in the international discussions.
FinancialStability
Our third panel session will focuson financial stability and on the role of
insurers.
The crisisprompted a new look at systemic risk, including in the
insurance sector.

The identification and regulation of GloballySystemically Important
Insurersiscurrently being discussed under the umbrellaof 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 wasabanking concept.
H owever, the recent crisisshowed usthat certain activities developed
under the insurance sector can alsopose systemic risk.
Insurancecompanies or groupsthat engage in non-traditional, or non-
insurance, activities (for example:CDS, financial guaranteesor
leveraging assetsto enhance investment returnsthrough securities
lending) are more vulnerableto financial market developmentsand,
importantly, more likelyto amplify, or contribute to systemic risk.
Of course, thisassessment may change over time, depending on the
innovations and changesin insurance businessmodels, especiallyin life
insurance, as well as in the complex interactions between insurance
groupsand financial markets.
We shouldbe especiallyattentive to any kind of maturity transformation
and leveraging occurring in the insurance sector.
Also extremelyrelevant are the policy measuresunder discussion.
In line with the FSB recommendations, the IAISproposed measureson
enhanced supervision, effective resolution and higher lossabsorbency.
I welcome thisapproach.
We need to be clear and transparent on the objectivesof the framework.

If insurance groupsheavily develop their business into non -traditional or
non-insurance activities than they should expect to be treated in relation
to those businessesas 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 approachesto deal with
systemic risk in insurance iscloser to an end, EIOPA will
proceed, according to its regulation, and in consultation with the
ESRB, with thedevelopment of criteria for theidentification and
measurement of systemic risk that may be posed by
insurance, reinsuranceand occupational pension‟sinstitutions within
the EU context.
EIOPA‟sachievementsand challenges
Let me finalize by sharing with you some of EIOPA s achievementsand
highlight a number of challengesahead.
In spite of the natural constrains on human and financial resourcesand
the huge challengesposed by the crisis, I believethat EIOPA hasbeen
quite successful in delivering an ambitious plan covering all areas
assigned to usby the European Law.
I‟ve alreadycommented on the huge work developedby EIOPA on the
regulatory side both on insurance and on occupational pensions.
Let me now turn to supervision.
EIOPA hasan enhanced role asa member of the collegesof supervisors.
We developedan Action Plan with concrete deliverablesand timings for
the Colleges.

This has clearlyincreased the consistency of the work of the collegesand
improved the exchangeof information between supervisors.
During thiscrisis EIOPA has been monitoring and assessing market
developmentson a permanent basis, by using efficiently the public
information availableand collecting more granular information directly
from the national supervisory authorities, both through specific
quantitative and qualitative queriesand by dedicated visitsby EIOPA
staff.
This allowedusto reinforce the coordination of the EU supervisor‟s
actions, highlight particular risksand 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
developedin the consumer protection area.
The Guidelineson complaintshandling byinsurers fill an important
regulatory gap at the EU level and are an important step towards
promoting more transparency, simplicity and fairnessin the market for
consumer financial productsand services.
Furthermore we issued a Good Practices Report analyzing the disclosure
and saleof variable annuities that identifies how consumer interestscan
be better protected as regardsthe salesof this type of complex products.
We have alsopublished an initial overview of consumer trendsin the
European insurance and occupational pensionssectors, identifying three
key consumer areas that are presentlysubject to further review and
analysis:
(1) Consumer protection issuesaround payment protection insurance;
(2)Increased focuson unit-linked life insuranceproducts 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 helpto identify and measure the evolution
of risk in the EU insurance market.
EIOPA hasalsorun a low-yield stresstest for the insurance sector that
showed that the insurance industry would be negatively affected if a
scenario were to materialize where yieldsremain low for a prolonged
period of time.
In the international relationsarea, EIOPA has been quite active,
performing SolvencyII full equivalence assessmentsof the Swiss,
Bermudan and Japanesesupervisory systemsand 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 hasdedicated a special effort to a project with the
USfederal 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 USis a very important step forward.
As you can see EIOPA hasalreadymade a significant impact in the EU
regulatory and supervisory landscape.
This was only possible becauseof the dedication of our staff and the
excellentcontribution from expertscoming from the National
Supervisory Authorities.
It is their knowledge, experience and dedication that allowusto fulfil
our mandate and respond to an increasingly demanding environment.

Furthermore, the continuouscommitment and cooperation of the
members of the Board of Supervisorsand Management Board was of the
utmost importance in fulfillingour mission and vision.
Paramount to our activity was alsothe constant involvement with the
Insuranceand Reinsurance Stakeholder Group and the Occupational
PensionsStakeholder Group.
The exchange of viewsand the opinions from the Stakeholder Groups
were essential in the development of EIOPA‟s work.
Looking forward, I am convinced that in a few yearsthe setting up of the
European Supervisory Authorities will be recognized asone of the most
fundamental reformsin the European financial sector coming from the
financial crisis.
The potential benefits from thecreation 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 threerelevant ones:
1. How to assurethe consistencyof supervisory practices?
I firmly believe that theconsistency of supervisory practicesisas
important asthe single rule book.
Onlyby assuring that day-to-daysupervision of financial institutions is
done within a consistent framework, we can effectively contribute to an
increased level of protection of policyholdersand beneficiaries in the
European Union.
The single market requiresit and EIOPA iscommitted to deliver it.

A first step should be the development of a Supervisory H andbook that
would work as a guidebook for supervision in Solvency II, setting out
good practicesin all the relevant areas of supervision.
This handbook will foster the implementation of a more consistent
framework for the conduct of supervision. EIOPA isstarting to work in
thisarea.
On the institutional side we observe the evolution in the banking area
with the proposalsto create a single supervisory mechanism for the Euro
area banks.
As a truly convicted European I welcome this step.
I alsorecognize that the insurance sector is in a different situation.
Insuranceis not banking.
There are indeed fundamental differenceson the risksand on the
businessmodels.
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 insurancegroups.
In the short term EIOPA should be ready to playits 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 assesspotential threatsto the stability of the
financial system and make appropriate recommendations for action to
the competent authorities concerned.
In order to perform thisindependent assessment in a transparent,
efficient and risk-based way, EIOPA needsto reinforce itshuman
resources, should have accessto the relevantindividual information

availableto the national supervisorsand alsohave direct accessto the
individual institutions.
In the medium term the evolution to a more European focused
supervision for the EU cross-border insurance groupsshouldalsobe
discussed, namely in face of the potencial arbitrage opportunities
coming from the new supervisoryreality in the banking sector.
2.Thepower to ban or restrict financialactivities
On the Consumer protection area I want to highlight the urgent need to
include provisions in the insurance and pension Directivesallowing
EIOPA to ban or restrict financial activities as established in Article 9 of
the EIOPA Regulation.
This will assurean effective way to deal, for example, with situations of
flawed product design or governance that could lead to severe consumer
detriment.
Without theseprovisions EIOPA cannot fulfill itsmandate as described
in the Regulation.
3. Competenceon 3rd Pillar pensions
In the pensionsarea EIOPA‟s mandate onlycoversoccupational
pensions, the so called2nd pillar.
H owever, I believe that the implementation of the EU agenda for
adequate, safe and sustainablepensionscallsfor a sufficient level of
regulation and supervision of personal pensions, the so called3rd pillar.
Consequently, EIOPA‟s mandate should beextended to all 3rd pillar
pensions.

This isalsorecommended by EIOPA‟s Occupational Pensions
Stakeholder Group in their comment to the Commission‟s White paper
on Pensions.
Ladiesand gentleman,
My vision is to build up EIOPA as a modern, competent and
professional organization that actsindependentlyin 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.
AsBob Dylansonicelysinged: The timestheyarea-changin'.
Thank you.

Opinionof the EuropeanInsuranceand
OccupationalPensionsAuthorityof on
interim measuresregardingSolvencyII
LegalBasis
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 theCouncil
of 25 November 2009on the taking-up and pursuit of thebusinessof
Insurance and Reinsurance (hereafter SolvencyII Directive).
2.As established in Article 29(1) (a) of the Regulation, EIOPA shall play
an active role in building a common Union supervisory cultureand
consistent supervisory practices, as well as in ensuring uniform
proceduresand consistent approachesthroughout 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
supervisorystandardsand practices(Art. 1(6)(a)) and to contribute to the
consistent application of legallybinding Union acts ensuring
consistent, efficient and effective application of the actsreferred to in Art.
1(2) of the Regulation (Art. 1(6)(b)).
The fact that the Solvency II Directive has entered into force, meansthat
it isconsidered “Union law”, but it will not have legallybinding effect
until after the date of itsapplication, which iscurrentlyset 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,
Membersexpressed their strong concernswith respect to the current
statusof the OMNIBUS II negotiations which might further delaythe
application of the Solvency II Directive.
7.In itsexplanatorymemorandum to the Proposal for theSolvency II
Directive the European Commission states:
“The present solvencyrulesare outdated.
They are not risk sensitive, they leave too much scopeto Member States
for national variations, they do not properly deal with group supervision
and they have meanwhile been superseded by industry, international and
cross-sectoraldevelopments.
This isthe reason why a new solvencyregime, calledSolvencyII, which
fullyreflectsthe latest developmentsin prudential supervision, actuarial
science and risk management and which allowsfor updatesin the future
isnecessary.”
8.In addition, in the absence of a final agreement on SolvencyII,
European supervisorsmay be forced to developnational solutionsin
order to ensure sound risk sensitive supervision.
Instead of reaching consistent and convergent supervision in the EU,
different national solutionsmay emerge to thedetriment of a good
functioning internal market.

9. The BoSmandated the Chair of EIOPA to write to theOMNIBUS II
trialogue partiessetting out its concerns.
In hisletter, dated 4 October 2012, theChair not onlyexpressedthe need
for a stableand reliabletime plan but alsothe need to reflect on an
earlier implementation of some SolvencyII elements.
{Note: Do you remember theletter?}
Undertakings which arewell-governed and which, in particular, measure
correctly, mitigate and report the riskswhich they face will be more
likelyto be prepared for the new regulatory framework and act in the
interestsof 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 SolvencyII.
In the run-up to the new system thefollowing key areas of Solvency II
need to be addressed in order to ensure proper management of
undertakings and to ensurethat supervisorshave 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 setsout belowits expectations for the national competent
authorities.
These actions are consistent with EIOPA‟s obligation to foster
supervisoryconvergence.
12.EIOPA will, taking into account its objective under Article 1Para 6
and itstasksand powersunder Article 8 of the Regulation, contribute to
the consistent efficient and effective preparation of supervisorsand
insurance and reinsuranceundertakings for the application of the
SolvencyII Directive.
13.As a follow-upto the opinion, and by making useof its powersunder
Article 16 of the Regulation, EIOPA will publish guidelinesaddressed to
national competent authorities on how to proceed in the interim phase
leading up to SolvencyII.
14.Within 2 months of the issuance of the guidelines, each national
competent authority shall confirm whether it complies or intends to
complywith theguidelines.
In the event that a national competent authority does not comply or does
not intend to comply, it shall inform EIOPA, stating itsreasons.

15.EIOPA will publish thefact that a national competent authority does
not comply or doesnot intend to complywith that guideline.
Proposedactionsby national competentauthorities
16.As part of the preparation for SolvencyII, national competent
authorities should put in place, starting on 1January 2014 certain
important aspectsof the prospective and risk based supervisory
approach to be introduced in order to addressthe concernsset out
above.
17.National competent authorities are expected to ensure that insurance
and reinsurance undertakings have in placean effective system of
governance which providesfor 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 placean effective risk-
management system comprising strategies, processesand reporting
proceduresnecessaryto identify, measure, monitor, manage and report,
on a continuousbasisthe 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 therisks which those undertakings face or may face
and the assessment of the ability of thoseundertakings to assessthose
riskstaking 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

shouldcontinue to work with undertakings to form a view on
undertakings‟ degree of readinessfor internal model applications, and
shouldalsofollowsubsequent evolutionsto the internal model
framework.
21.National competent authorities are encouraged to request all the
information necessaryfor applying a prospective and risk based
supervisoryapproach.
22.National competent authorities are expected to ensurethat the
requirements mentioned aboveare applied in a manner which is
proportionate to the nature, scaleand complexity inherent in the
businessof the insurance and reinsuranceundertaking.

Aruoba-Diebold-Scotti
BusinessConditions
Index
The Aruoba-Diebold-Scotti businessconditions index isdesigned to
track real businessconditions at high frequency.
Itsunderlying (seasonallyadjusted) economic indicators (weekly initial
joblessclaims; monthly payroll employment, industrial
production, personal income lesstransfer payments, manufacturing and
trade sales;and quarterlyreal GDP) blend high- and low-frequency
information and stock and flow data.
The average valueof the ADS index iszero. Progressivelybigger positive
valuesindicate progressivelybetter-than-average conditions, whereas

progressivelymore negative valuesindicate progressivelyworse-than-
average conditions.
The ADS index may be used to compare businessconditions at different
times.
A value of -3.0, for example, would indicate businessconditions
significantly worse than at anytime in either the 1990-91or the 2001
recession, during which the ADS index never dropped below -2.0.
The vertical lineson the figure provide information as to which
indicators are available for which dates.
For datesto the left of the left line, the ADS index isbased on observed
data for all six underlying indicators.
For datesbetween the left and right lines, theADS index is based on at
least two monthly indicators (typicallyemployment and industrial
production) and initial joblessclaims.
For datesto the right of the right line, the ADS index is based on initial
joblessclaimsand possibly one monthlyindicator.

Financialservicessupervision:Commission
requests
Belgium,France, Greece, Luxembourg,Pol
andandPortugal to implementEU rules
The Commission has requested
Belgium, France, Greece, Luxembourg, Poland and Portugal to notify
within two monthsmeasuresto implement EU rulesin the financial
sector (Directive 2010/ 78/ EU) concerning the powersof the three new
European supervisory authorities for banks(European Banking
Authority), insurance and occupational pensions(European Insurance
and Occupational PensionsAuthority) and securities(European
Securitiesand MarketsAuthority).
The Directive aims at adapting the provisions of key financial services
Directives to the new supervisoryframework.
This will make sure that European Supervisory authorities will be fully
allowed to carry out all the tasksconferred upon them.
Member Stateswere due to implement theDirective, nolater than 31
December 2011.
The Commission's requeststake the form of reasoned opinionsunder
EU infringement procedures.
If the Member Statesfail to notify measuresto 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
fineBelgium for not implementingEU 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
penaltypaymentson Belgium, until it fullyimplementsthe 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 fullyimplemented the rulesinto national law.

Basel 3 –
TheTimingDilemma
Last month the United States(US) regulatory authorities announced that
they did not expect their rulesimplementing Basel 3 would become
effective on 1January 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 appearsto be the
intention), it isrecognised in the EU that therewill not besufficient time
for CRD IV to be codified as legislation and put into effect on 1January
2013.
So, doesit necessarilyfollowthat we should delayBasel 3
implementation in H ong Kong becausethe US and the EU cannot meet
the internationally agreed timeline?
Or should we followthe timeline set by the Basel Committee on Banking
Supervision and begin the first phaseof Basel 3 implementation from 1
January 2013?
Our Basel 3rules(the Banking (Capital) (Amendment) Rules2012) are
currentlytabled at LegCo and notwithstanding the expected delaysin the
USand the EU, the Basel Committee‟s timeline remains unchanged.
Itsgradual phase-in of the new capital standardsover six years begins
from January2013 and extendsuntil 2019.
In resolvingthe timing dilemma, it might first be instructive to remind
ourselvesthat Basel 3 isbeing introduced to rectify weaknessesmade all
too starkly apparent in the recent global financial crisis.

Or, put another way, Basel 3 isconsidered good for financial stability.
The Basel 3 capital standardsare designed to strengthen banks‟
resilienceby requiring more and better quality capital and by addressing
and capturing risksnot adequatelyrecognised previously.
The aim is to ensurethat bankscan weather future financial storms
without disruption to their lending.
This shouldin turn make them lesslikely to create or amplify problems
in other areas of the economy and facilitate their contribution to long-
term sustainableeconomic growth.
The roller-coasterof excessiveleveragepre-crisisand excessive
deleveraging post-crisisis not conducive to sustainablegrowth.
Regulation isall about balance.
If regulation is too lax, excessiverisk-taking may resultwith devastating
effects.
If regulation is too tight, it may suppressbeneficial financial activity and
reducegrowth.
In our view, Basel 3 representsan appropriate balancein bolstering
resiliencewhilst at the same time (with its extended phase-in) not
undulyhampering lendingto businessand householdstoday and
ensuring bankscan continue to lendin 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 andAustralia
have all publishedtheir final rulesfor Basel 3 implementation next year.

As hasSwitzerland, another important financial centre.
But notwithstanding the intrinsic benefitsof Basel 3, shouldwe
neverthelessbe swayed by the argument put to usthat Asia is taking the
“medicine” designed for the countriesworst affected by the crisis, whilst
the intended “patients” defer and thereby give their bankssignificant
“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 banksthat could
realisticallycompete with our own) are currently holding much lower
levelsof capital than required by Basel 3 (and hence will have a genuine
cost advantage);
and second that our bankswill, come 1January 2013, have to hold more
capital than they currentlyhold(and hence will incur additional cost).
Are these assumptionscorrect?
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-crisiscapital levels.
There hasbeen significant re-capitalisation.
The Dodd Frank Wall Street Reform and Consumer Protection Act in the
USalreadyrequiresthe regulatory agencies to conduct stress-testing
programmes to ensurebanksand other systemicallyimportant financial
institutions have enough capital to weather severefinancial conditions
and, even before the passage of the Dodd Frank Act, the USFederal
ReserveBoard put some of the largest USbank holding companies
through stress-tests, theresultsof which have led to significant increases
in capital.
By 2012, the 19 bank holding companies subject to the Fed‟s
Comprehensive Capital Analysisand Review had increased their

aggregate tier 1common 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
1common capital ratio (which compareshigh 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 exercisein 2011that covered 71of the
EU‟s major banks, the European Banking Authority (EBA) required
most to attain a “core tier 1ratio” of not lessthan 9% by the end of June
2012.
In October 2012, the EBA indicated that it will focuson capital
conservation to “support a smooth convergence to the CRD IV…..
regulatory requirements” and require the banksto maintain an absolute
amount of core tier 1capital corresponding to the level of the 9% core
tier 1ratio.
So even absent formal adoption of Basel 3, the capital levelsof the
largest banksin the USand the EU have increased significantly post-
crisisto levelscomparablewith, or even in excessof, those required
under Basel 3 and so the prospect of such banks“competing” by being
allowedto maintain much lower capital levelsthan Basel 3 bankswould
seem more apparent than real.
Turning to the second “competitive” assumption, will the first phase of
Basel 3, which startsnext year, require local banksto hold significantly
more capital than theydo at present, to the extent that they may become
constrained in their ability to lend and compelledto passon the costsof
the extra capital to borrowers?
Well,the resultsof the H KMA‟s quantitative impact studiestell usthat
our local banksare alreadyvery well-placedto meet the new Basel 3
capital ratios.
Their capital levelsare alreadyin excessof the standard taking effect on
1January 2013 and the issuance of ordinary shares(common equity)
alreadyaccountsfor a very significant proportion of their capital base,

positioning them well for Basel 3‟snew focuson common equity as the
highest qualitycapital for the purpose of lossabsorption.
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
levelsof capital.
This, together with the benefitsoffered by Basel 3 and the relative ease
with which local bankscan comply, servesto underpin our view that we
shouldproceed to implement the first phase of Basel 3 in line with the
Basel Committee‟s timeline.
Generallyspeaking, jurisdictions in Asia have in the past tended to adopt
regulationsthat are in some respectshigher than the Basel Committee‟s
minimum standards.
This may have helpedAsia weather the global financial crisisrelatively
unscathed when compared with the jurisdictions worst affected.
There would, therefore, seem littleto begained from seeking to engage
in, or indeed prompt, a “race-to-the-bottom” in regulatory terms by
deliberatelydelaying the introduction of Basel 3 at this point in time.
In implementing on 1January2013, we will be fulfillingour commitment
both as an international financial centre which customarily adoptsbest
international standardsand as a member of the Basel Committee on
Banking Supervision.
Karen Kemp
Executive Director (Banking Policy)

Dear member,
The regulatory arbitrage challengesand opportunities between the
banking and the insurance sector are alwaysimportant and profitable for
many, especiallyfor consultantsthat are expertsin both areas.
For example, you can see an interesting job description:
“H ead of Risk & Compliance - Up to £ 200,000package”
The candidate needsto have strong expertisein the core Risk
Management areas like:
- Compliance to Basel II, II.5 and Basel III
- Compliance to SolvencyII
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 collectorof ideas that lead to regulatory
arbitrage opportunities, especiallybetween the banking and the
insurance balancesheet.
Almost every financial product is subject to some formof supervision and
regulation, which is usuallydifferent in banking and insurance. Thisisan
opportunity. The same product can be structured to become a “banking
product” or an “insurance product”.
I know. Basel iii and Solvencyii are supposed to eliminate regulatory
arbitrage opportunities.
Every time I think something likethat, I have to admit that firms (and
countries) will alwaysdo their best to exploit opportunities and have
competitive advantages.
This week I will start from an interesting phrase:

“The changesin banking regulation make more important the roleof
insurers asproviders of long-term ***bank funding***”
Whosaid that?
Gabriel Bernardino, the Chairman of EIOPA (the European Insurance
and Occupational PensionsAuthority, one of three European
Supervisory Authorities).

Solvency II SpeakersBureau
The SolvencyII Association hasestablished the SolvencyII Speakers
Bureau for firmsand organizations that want to accessthe expertise of
Certified Solvencyii Professionals(CSiiPs) and Certified Solvency ii
EquivalenceProfessionals(CSiiEPs).
The SolvencyII Association will be the liaison between our certified
professionalsand theseorganizations, 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

Course Title
Certified Solvency ii Professional (CSiiP):
Preparing for the Solvency ii Directive of the EU (3 days)
Objectives:
This coursehas 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 courseis intended for decision makers, managers, professionals
and consultantsthat:
A.Work in Insuranceor Reinsurance firms of EEA countries.
B.Work in Groups - Financial Conglomerates(FC), Financial H olding
Companies (FH C), Mixed Financial H olding Companies
(MFH C), InsuranceH olding Companies(IH C) - providing insurance
and/ or reinsurance servicesin the EEA, whose parent is located in a
country of the EEA.
C.Want to understand the challengesand the opportunities after the
Solvencyii Directive.
This courseis highly recommended for supervisorsof EEA countries
that want to understand how countriessee SolvencyII 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 ServicesAction Plan (FSAP) of the EU
Extraterritorial Application of European Law
Extraterritorial Application of the SolvencyII Directive
Solvencyii and the LamfalussyProcess
Level 1: Framework Principles
Level 2: Detailed Technical MeasuresLevel 3: Strengthening
Cooperation Among Regulators
Level 4: Enforcement
Weaknessesof SolvencyI
From SolvencyI to SolvencyII
Solvencyii Players
Solvencyii Objectives
TH E SOLVENCY II DIRECTIVE
A Unified Legislative Basisfor Prudential Regulation of Insurers
and Reinsurers
Risk-Based Capital Allocation
Scope of the Application
Important Definitions
Value-at-Risk in SolvencyII
Authorisation
Corporate Governance
GovernanceFunctions
Risk Management
Corporate Governance and Risk Management - Level 2
Fit and proper requirements for personswho effectivelyrun the
undertaking or have other key functions
Internal Controls

Internal Audit
Actuarial Function
Outsourcing
Board of Directors: Roleand Solvencyii Responsibilities
12 Principles – System of Governance(Level 2)
PILLAR 2
Supervisory Review Process(SRP)
Focuson Risk Management and Operational Risk
Own Risk and SolvencyAssessment (ORSA)
ORSA - The Internal Assessment Process
ORSA - The Supervisory Tool
ORSA - Not a Third SolvencyCapital Requirement
Capital add-on
PILLAR 3
DisclosureRequirements
The Solvencyand Financial Condition Report (SFC)
PILLAR I
Valuation Of AssetsAnd Liabilities Technical Provisions
The SolvencyCapital Requirement (SCR)
The Value-at-Risk Measure Calibrated to a 99.5% Confidence
Level over a 1-year Time H orizon
The Standard Approach
The Internal Models
The Collectionof Additional H istorical 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 - Testsand Standardsfor Internal Model
Approval
CEIOPS Level 2 - The procedure to be followedfor theapproval of
an internal model
Internal ModelsGovernance
Group internal models
Statistical quality standards
Calibration and validation standards
Documentation standards
SOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIES
SolvencyI: Solo PlusApproach
Group Supervision under Solvency II
Rights and dutiesof the group supervisor
Group Solvency- Methodsof 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 isin the EEA and the third country regime
isnot equivalent
The head of the group isin the EEA and the third country regime
isequivalent
The head of the group isoutside the EEA and the third country is
not equivalent
The head of the group isoutside the EEA and the third country
regime isequivalent
Small and Medium-Sized Insurers:The Proportionality Principle
Captivesand SolvencyII

EQUIVALENCE WITH SOLVENCY II AROUND TH E WORLD
Solvencyii and Countriesoutside the European Economic Area
The International Association of Insurance Supervisors(I AIS)
The SwissSolvencyTest (SST) and Solvencyii:
Solvencyii and the Offshore Financial Centers(OFCs)
Solvencyii and the USA
Solvencyii and the USNational 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 theORSA in theUSA
FROM TH E REINSURANCE DIRECTIVE TO TH E SOLVENCY II
DIRECTIVE
Directive 2005/ 68/ EC of 16 November 2005 on Reinsurance - The
Reinsurance Directive (RID)
CLOSING
The Impact of Solvencyii Outside theEEA
Providing InsuranceServicesto the European Client
Competing with Banks
Learning from the Basel ii Framework
RegulatoryArbitrage: A Major Risk for Countries that see
Compliance as an Obligation, not an Opportunity
Basel II, Basel III, SolvencyII and Regulatory Arbitrage
Challengesand Opportunities: What isnext
Regulatory Shopping after SolvencyII
To learn more about the course:
www.solvency-ii-association.com/ Certified_Solvency_ii_Training.htm

Solvency ii News December 2012

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Solvency ii News December 2012