Solvency ii News February 2013

P a g e | 1
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,
Good news. In UK, firms can usetheir
SolvencyII worktomeet, asfar aspossible,
thecurrent regulatoryrequirements.
Yes,it meansmoreSolvencyII jobs, more opportunities.
Solvency II – early use of Solvency II work to meet
ICAS requirements
Dear Firm
At the PRA launch event for insurerson 22October 2012, I acknowledged
thedelayto the implementationof Solvency II and set out a new planning
horizon of 31December2015.
I alsoset out the intentionto ***allowfirms touse their SolvencyII
worktomeet, asfar aspossible, thecurrent regulatoryrequirements***
under the Individual CapitalAdequacy Standards(ICAS).
Theextendedplanninghorizon hasledusto re-planICAS reviewsover
thenext 24 months, includingfor many firms in the internal model
approval process(IM AP).
In developing the approach, we have benefited from industry technical
input in expert groupswe have convened; we are grateful to those firms
whoparticipated in the groups.
www.solvency-ii-association.com

P a g e | 2
In the speech, I set out a two-phaseapproachtoallowthe earlyuse of
SolvencyII models.
In the first phase, weenvisaged that firms intendingtousetheir Solvency
II model for ICAS purposeswould additionallyneed to providea
reconciliationbetweenthe calculationsperformed totakeaccount of the
differencesin thetworegimes.
In the second phase we said we would allow firms to use their Solvency
II balance sheet and model for ICAS purposeswithout further on-going
reconciliations.
We believethat wehavenow developed an approach (referredto as
„ICAS+‟ asshorthand) that providesa practical solution – availableto
both life and non-life firms – consistent with our current regulatory
approachand whichallowsfirms tocontinueto make progresstowards
SolvencyII.
We consider ICAS+ to be most appropriate for those IMAP firms subject
to an ICASreview to the end of 2014, and firms should discusswith their
supervisorthetimingand content of their reviews.
Firms are remindedthat theyare not obligedto enter the two-phase
approach, and it is not a condition for IM AP review or approval.
On 20 December 2012, EIOPA publishedits opinion on interim
measuresregardingSolvency II.
We are workingwithEIOPAon thedetailsof the interim measures, and
a consultationis planned for spring2013on guidancefor national
supervisoryauthoritiestoensure a harmonised approachto
implementation.

P a g e | 3
The key elements of the two-phase„ICAS+‟ approach
Current ICAS ruleswill continueto apply, includingthe requirement to
carryout an ICAand the settingof individual capital guidance(ICG).
ICAS+ doesnot require SolvencyII testsand standards tobe met.
Wehave set out theinformation needed from firms for an ICAS+ review
in theappendix. Thisincludesthe reconciliationswewouldneed to
understand the relationship betweenthefirm‟s SolvencyII model and its
previousIndividual CapitalAssessment (ICA) model.
We will seektouseexistingIMAP material providedby thefirm wherever
appropriatein our review of the ICAbut firms will need to confirm the
scope of material that should form part of theICAS+ review.
Thescopeof theICASreview will seek toleverage IMAP work already
conducted. Tothe extent that wereceivean ICAS+ submission of
sufficientlyhigh quality(seeappendix), wewill seektoprovideasmuch
detailedfeedback on IMAP progressaspossible.
Thedetail will depend on timing, qualityof materials,policy certainty,
thescope of the reviewand our resourceavailability.
Our startingassumption is that our current ICASapproach will continue
for groups(see below).
In theinterestsof efficiency, weintend to combineICAS+ and IMAP
processesand governance. There arethree main outcomesof an ICAS+
review:
i)a review of the firm‟s ICAand settingICG;
ii)feedback to thefirm on thedevelopment of the SolvencyII internal
model;and
iii) an updated workplan for the SolvencyII model review.

P a g e | 4
Wewill review thein-development ORSAto facilitatethePRAapproach,
for instanceasa wayof bringingtogether businessmodel analysis,
forward-lookingcapital planning, assessment of stressand scenario
testing, evidenceof useand capital risk management.
Firms should discusswith their supervisor how their in-development
ORSAmay beusedtomeet the current INSPRU requirements.
SolvencyII reporting. I saidin my October speech that wewill require
enhancedinformation to deliver thePRA‟s objectivesand wewill look to
seeif weneed to supplement the existingdata weget from firmsin areas
such asstresstestingor some market-widedata aswerefineour workin
areassuch asassessingthe sustainabilityand vulnerabilityof insurers‟
businessmodels.
As I said in October, it is not our intentionto bring in SolvencyII
reporting anysooner than required by EIOPA.
We are workingwithEIOPAon thedetail of its interim measuresin
settingpolicy for insurers.
Thecurrent supervisory approach will continueforgroups. We will focus
on UK solo firmsand take intoaccount group risksin ICAS+.
Anumber of firmshaverequested a group ICAand wewill considersuch
requestsaspart of our reschedulingof reviews,takingintoaccount the
appropriateconsiderationsincludingour own resource availability.
Next steps
Our discussionswithfirms indicatethat industry interestiscurrently
mainlyfor phase1,in part reflectingthesignificant policyuncertainty.
As noted above, we are updating our implementation plans to reflect the
new planning horizon of 31 December 2015, and we are scheduling ICAS
reviewsover the next 24months.

P a g e | 5
Supervisorsare discussingwithfirms whetherthey want tointegratetheir
ICAS and IMAP reviews(revising slotsasneeded) and leveragethe
investment in SolvencyII work for ICAS purposes.
We are working through the next level of detail to implement the two-
phase approach and will provide more information on what firms will
need to provide in their ICAS+ review in Q2 2013.
Pleaseaddressany comment or feedbackyou may have on theICAS+
approachto your usual supervisorycontact or email usat
Solvency2@fsa.gov.uk.
Yourssincerely

P a g e | 6
Appendix
Inputs to the ICAS+ review
For thepurposeof ICAS+, the firm will need to provide:
- detailsof thoseaspectsof itsSolvencyII internal model that it will be
usingto satisfy(if onlypartly) IN SPRU7;
- anyadditional materials, includingwhererelevant an in-development
ORSA, that it will be using to satisfy INSPRU7;
- appropriate reconciliations between the Solvency II model (or those
components of the Solvency II model that the firms will be utilising)
andthepreviousICAmodel; and
- the firm‟s assessment of its progress in developing its Solvency II
internal model and a summary of any additional work required to
meet theSolvencyII testsand standards.
Firms not in thesubmission phaseof IMAP will alsobe expected to
provideany additional materialswedeem necessarytoinform our review
and assessment of the key riskareasof theSolvencyII model againstthe
testsand standards.
This would include, whereappropriate, information on Solvency II group
models. We expect all materialssubmitted for an ICAS+ review tohave
beenapproved by thefirm‟sBoard.
What doesthe reconciliation involve?
In order tobe abletoperform the ICAS+ review, weneed tobe ableto
understand changesin the firm‟s businessand model sincethe previous
ICAreview, and therelationship betweentheSolvencyII model and the
previousICA model.

P a g e | 7
Firms wishingtotakepart in ICAS+ will have toproducethese
reconciliations.
We understand that some firmshavedeveloped their existingmodelsfor
SolvencyII purposeswhilst othershavecreated new model architecture.
Tothisend, there are a number of possiblemethodsavailableto firmsto
providethe reconciliationbetweenthe previousand new ICA.
Firms wishingtoenter ICAS+ should discusswiththeir usual
supervisorycontact the methodthe firm wishestouseand how the
reconciliationswill need tobe performed asthey will be bespoke to the
individual firm.

P a g e | 8
BERMUDA MONETARY AUTHORITY
SETSOUT REGULATORY PRIORITIES
FOR 2013IN LATEST BUSINESSPLAN
KeyAreasof Focus:
-Bermuda will not Apply SolvencyII-type Regime toCaptives
-BMAtoBalanceInternational Cooperation with Independent
Approach to Regulation
- FaciliatingQualityNew Businessfor Bermuda – while retaining
effectiveoversight
HAMILTON, BERMUDA- The Bermuda MonetaryAuthority
publishedits2013BusinessPlan whichsetsout itsregulatory priorities
and goalsfor the year.
JeremyCox, theAuthority‟s Chief ExecutiveOfficer, presentedthe Plan
tostakeholdersfrom thepublic and privatesector at theAuthority‟s
Annual Meetingheld at BMA House.
Describingwhat will be another extremelybusyyear for theAuthority,
Mr Cox said, “We will workhard to ensure that Bermuda firms will
continuetobenefit from operating withina practical, risk-based
regulatoryand supervisoryenvironment that fitstheuniquenature of
Bermuda‟smarket.”
Several keyareasof focusin the Plan werehighlighted, including:
Bermuda Will Not Apply Solvency II-type Regime to Captives
“We can definitivelystatethat Bermuda will not applyany SolvencyII-
type regimeto thecaptivesector,” Mr Cox said, ashe describedplansto
implement refined reporting requirementsfor captivesthisyear.
“We will introducea risk return aspart of consolidatedannual filing for
captivesthat theywill submit electronically, which will create
efficienciesin theprocessfor both themarket and theAuthority.

P a g e | 9
“That isthe extent of our refinements,”Mr. Cox said.
“What the risk return embodies is something that allows the regulator to
get that key risk information and I think it is something the industry will
be quite happy to see in place given that they were volunteering so much
of this information already.”
“It‟sgood for Bermuda and the market that wecan make this decision
based on the proven appropriatenessof our regime for captives,” he said.
“This step, aswell asthe changesto our frameworkfor the commercial
sector, reflectsour ability totakeindependent decisionson regulatory
changeat a pacethat‟sright for Bermuda and accordingtowhat makes
sensefor our diversemarket, while taking intoaccount achievingglobal
recognition for our supervisoryregimes.”
Balance International Cooperation with an Independent
Approach to Regulation
Mr Cox alsoindicatedthat theAuthority remainscommittedto
appropriateinternational engagement, while implementingfit-for-
purpose regulationsfor Bermuda.
TheAuthority recognisesthe importanceof contributing to, aswell as
preparingfor, global changesthat can affectthe Bermuda market.
“We will continue our advocacyefforts, and tohave a seat at thetable
within global standard setting bodies.
This meanswecan contributeto international developmentsaswell as
determineon goingrelevanceor impactsfor Bermuda of such changes,”
hesaid.
“Maintainingstrong workingrelationshipswithkeydecision-makersisa
very important aspect of reinforcingthecredibilitywehaveearned

P a g e | 10
overseas,and supports acceptanceof Bermuda‟s regulatory approach
globally.
This alsofacilitatesour workon group supervision of the insurance
market, and the supervisorycollegesprogramme wehave introduced
and will continuethrough thisyear.”
“What weneed to bedoing is having our ownindependent viewsof what
needstobe done for our Bermuda market recognising that there are
companies here that have a global footprint,” he said.
“We arestrong enough, wearecredibleenough, weare skilledenough
asa jurisdictionand asa regulator tomake our own independent views
on how weshould be positioningthe regulatoryand supervisory
frameworkhere in Bermuda.”
Faciliating Quality New Business for Bermuda – While
Retaining Effective Oversight
Mr Cox alsoannounced regulatoryprojectsplanned for 2013that will
support initiativesidentified asnew businessdevelopment opportunities
for Bermuda.
Theseincludea new licensingand supervisory regime for Corporate
ServiceProviders(CSP).
TheCorporateService Provider BusinessAct came intoeffect on 1st
January2013.
“Under the CSPregime theAuthority will licenseand supervise
professional serviceprovidersin Bermuda that act asagentsfor forming
corporateentities,aswell asproviding other corporateservices.
This addressesan opportunity that industry identifiedsome time agofor
buildingnew businessin this area, while establishingappropriate
oversight.”

P a g e | 11
The Authority will also be focused on the hedge fund area, participating
in the on going jurisdictional effort to position Bermuda as a domicile of
choicefor asset managers.
“Basedon my owninteractionswithstakeholdersin keymarkets
overseasregardinghedgefunds, Bermuda hasthe opportunityto raise
itsprofile further and competemore aggressivelyin this area,” he said.
“TheAuthority is alsoengaged asa priority withlocalindustry
participantsand theBermuda Government on developing Bermuda‟s
positionregarding Europe‟sAlternative Investment Fund Managers
Directive.
It‟s appropriate for theAuthority tobe part of such jurisdictional effortsto
facilitatequalitynew businessfor Bermuda while ensuringweachieve
regulatoryobjectivesappropriately, in a manner that is workablefor all
parties.”

P a g e | 12
Interview with CarlosMontalvo, Executive
Director of EIOPA, conducted by Garry
Booth, Reactions magazine(the UK)
Can you explain what the interim SolvencyII
measures, sometimes known as Solvency 1.5,
encompass?
PerhapsI should start witha disclaimer: I think
thename Solvency1.5is unfortunate.
We are not buildingfrom Solvency I, weare
preparingfor Risk Based Supervision.
EIOPA will issueGuidelinesaddressed tonational
supervisorson how toproceedin the interim phase
leadingup toSolvencyII.
TheseGuidelineswill cover the system of
governance, includingrisk management system
and a forwardlookingassessment of the
undertaking'sown risks(basedon theORSA
principles), pre+applicationof internal models,
and reportingtosupervisors.
For more information you may wishto consult the
EIOPA Opinionon interim measuresregardingSolvencyII:
https://eiopa.europa.eu/ fileadmin/ tx_dam/files/publications/ opinion
s/EIOPA_Opinion+Interim+Measures+Solvency+II.pdf

P a g e | 13
Doestheproposalhave acceptance amongEU country supervisors?Will
everyone moveforwardtogether?
Theabovementioned Opinion of EIOPAwasfirst welcomed, and then
approved by theEIOPABoard of Supervisors, whichconsists of the
national supervisoryauthoritiesof theEU Member States.
EIOPA expectsthat all our Board of Supervisorsmembers are
committed to set thegroundsto develop a consistent and convergent
supervisoryapproach withrespect tothepreparation of SolvencyII.
EIOPA's Guidelineswill ensure that important aspectsof thenew
regimewill be phased in, takingintoaccount due proportionality.
However, by nature theseInterim Guidelinesare soft regulation(i.e.
used on a socalled"Comply or Explain basis"), sothere will be no
sanctionsif some National SupervisoryAuthorities(NSAs) donot fully
complywiththeGuidelinesat this stage.
Whyhave you decided to issueguidelines(Spring2013)?What'sinthe
guidelines?
In the absenceof a final agreement on Solvency II in the scheduled
timeline, EIOPAhasexpressed an opinion in order toensureand
enhancesound risk based supervision and preparethe industry for the
final SolvencyII Directive.
Instead of reachingconsistent and convergent supervisionin the EU,
different national solutionsmay emerge tothedetriment of a good
functioninginternalmarket.
In order toavoid thisscenario EIOPAdecidedtodevelop guidelinesand
totakea lead in thepreparatoryprocessaimed at a consistent and
convergent approach withrespect tothepreparation of SolvencyII.
EIOPA Guidelineswill allowsupervisorsand undertakingstobe better
preparedfor the applicationof the new regulatory framework.

P a g e | 14
Tocut a long storyshort, the guidelinesare an excellent wayfor all
partiestouse theextra time of thedelayasa waytobe better prepared
for implementation.
TheCRO of global reinsurer recentlytoldme, 'Weareexperiencing ever
increasing requirementsforinternal model approval, witheach country
carrying out itsownassessment, withlimitedrelation toproportionality...
This processconsumesalot of resourceswithout creating valueit has
even started to destroyvalue. And thesituationmight get even worse
until thefull formal implementation of all SolvencyII's threepillarsin
2015/16(oreven 17).
It is mysincerehopethat EIOPAwill have thepowertoconvince local
supervisorstostick totheoriginal intention: a principlebased approach
followingtheprincipleof proportionality.'
What's your response?
Therequirementsfor theuseof internal models are set out in the
SolvencyII Directive, and will indeed befurtherdeveloped in the
upcomingimplementingmeasures,and EIOPAstandardsand
guidelines.
Such requirementswill have tobe fulfilledby all undertakings
(irrespectiveof their size) if theywant to usean internal model for SCR
calculationsunder Solvency II.
EIOPA hasbeen supporting the roleof Internal Modelsin a risk based
framework,even after theexperienceof the Banking sector, where
modelswhichweretooprinciplebasedhad a significant rolein the
crisis.
This support should be acknowledged, and theneed tolearnfrom what
happened aswell.

P a g e | 15
EIOPA recognisesthat theusesof the internal model will vary from
undertakingtoundertaking and will point out toNSAsthat theyhave to
assesscompliancewithrequirementsbasedon proportionality,
accordingtothe nature, scaleand complexityof the risksand businessof
theundertaking.
Havingsaidthat, it isfair tosaythat EIOPArecognisesthat differences
betweensupervisorycultures,Member States' legal regimesand a
number of resourcesavailable, have led, in the short term, tosome
inconsistenciesin thesupervisoryapproacheswithrespect tointernal
model reviewsin pre application.
Preciselybecauseof that, whenyou lookat our Work Program and
objectivesfor 2013onwards,you will seethat EIOPAis building a Center
of Expertisefor Internal Modelsthat will workon enhancingconsistency
and supporting those supervisorsthat may need help achievingit.
There‟s been alot ofuncertainty aroundtheimplementationdate of
SolvencyII. Realistically, whenwill theproject becompleted?
Let‟s start withwhat mattersmost: Solvency II will be implemented, and
thereshould be nodoubtsabout it.
On the applicationdate, weare confident that the framework will be
applicablein 2016though I cannot give you 100% reassurancebecause
thedecisionis not made at the EIOPAlevel.
Thedecision hastobe made by agreement betweenthe European
Council, EuropeanParliament and theEuropean Commission.
I can confirm that EIOPA will do the necessaryworktomake the
implementationof SolvencyII happen on January 2016.
But let‟sbe clear, oncewesettlethe pendingissueof Long Term
Guarantees, partiesmust avoid thetemptationof reopeningmore issues.

P a g e | 16
SolvencyII is a good framework, it will not be perfect on day1, but this
should not be an obstacleto start.
Dr ElkeKoenig, president of theGermansupervisor Bafin recently said
of
SolvencyII, “Youhave created amassivelycomplex system whichis
probablyonlyfullyunderstandable forthosethat havecreated it.” What‟s
your response?
Thebasisof the system is quitesimple:it strivesfor risk based
supervision that incorporatestransparency, callsfor a clear
understandingof risk and good governance.
Sothe ideais simplebut the wayit hastobe translatedintoa regulatory
frameworkis complex.
SoDr Koenig isright in that sense.
Whyisit socomplex?
I wouldsaythat it is everybody‟s responsibility(the regulators,the
European Commission).
But in many casesthe complexityis alsobeing drivenby theindustry.
What canwedoto make thingslesscomplex?
We needto enhancetheprincipleof proportionalitywhile bearing in
mind that the same objectivescan be met in different waysin particular
for thecompaniesthat are not doingcomplicatedbusiness,for SMEs
etc.
EIOPA is alsoaimingat reducing part of thiscomplexity, with initiatives
such asan IT toolkit for undertakingsthat could includea wayto
calculatethe SCR, etc.
We don‟t just acknowledgetheproblem, wetry tocome withsolutions.

P a g e | 17
Another CRO toldmethat regulatorsappear tonolongerfollowthe
original SolvencyII frameworkrouteofprinciplebased regulation.
For example, theLevel Threeproposaltoaddacompliancefunction and
anactuarial function, withtheadded requirement that nopersoncan be
simultaneouslyresponsible formorethan onefunction.
ShouldSolvency II, asaprinciplebased regime, forcecompaniesto
makesuch departmental changes?
I wassurprisedat this question.
Theactionsthe CRO refersto, are explicitlycaptured in thelevel 1
Directive(articles46and 48).
There is a full article on the actuarial function (Article 48) that contains
number of requirements.
Thelevel 1text isprinciplebased and there is a second level which gets
intomore nittygrittydetails todo withbest practicearound the
complianceand actuarial functions.
But theprincipleof proportionalityshould always be kept in mind.
Furthermore, the intention of SolvencyII is not to force companiesto do
their businessin onewayor another.
It should ensure that risks are addressedand that themeanstodo so,
subjecttoproportionality, are implemented.
On that basisweare not going to force companiestorecruit a person to
bea complianceofficer or anything like that.
What weexpect is that theycomplywiththe principlesstatedin levels1
and 2– comply in asound waybut not in thesame wayfor all the
companies.

P a g e | 18
Someindividualsinterpret the principlesasprescriptive but it is not our
intentionto tell companieshow tostructure their business.
We usethe wordactuarial function but function doesnot mean person.
Soin a tiny companyyou could have anactuarial function that doesnot
havetobeperformed by a „pure‟actuarybut instead by someone who
hasstrong mathematical knowledge.
Are country supervisorsstraying fromtheoriginal SolvencyII script?
Our duty is tomakesure that all 27NSAsunderstandthe principleof
risk basedsupervisionin a convergent wayand applyit consistently.
Someof our membershave told usthat theyneed to enhancerisk
management, internal controls,or disclosure.
Sotheyhad some internal projectson hold because theseprojects
wereto be channelled via SolvencyII, whichis thesame for everybody.
Now Solvency II is not coming in January 2014astheyexpected and
theywant tomove in thoseareas.
Soexactlythe necessityto avoid the development of national solutions
wasstated in EIOPAOpinion on Interim MeasuresRegardingSolvency
II, whereweare talkingabout number of areasfor whichtherewill be
interim guidelinestargetedtoenhance preparednesstowardsSolvency2.
TheseGuidelinesindicatethat supervisorsaresupportingtheoriginal
ideaof convergenceand harmonization, they believein theconcept of
risk basedsupervision, and EIOPAis takingthelead to ensure that
implementationwill take placein a consistent way.
EIOPA wantsto“pavethewayforfurther mutual understanding and
futureconvergence between theEU and theU.S.on insurance
regulationand supervision”.

P a g e | 19
But manypeoplein theUSarguestronglyagainst convergence. Whyis
convergence important in your opinion?
Theconvergenceis important for our overridingaim, whichisto develop
strongglobal regulatoryand supervisorystandards.
Thepurposeof theEU+USInsuranceDialogue is toenhancemutual
understandingand cooperation aswell asto promotebusiness
opportunity, consumer protection and effectivesupervision.
We remain respectfullyawareof the commonalitiesand differencesof
both regimes,continueto strivetoaddressimportant issuesin technical
detail, and may, over time, movetowardimproved compatibilitythat will
benefit insuranceconsumers, industryparticipants,and theeconomy.
Thereis agrowingview that SolvencyII will lead to restructuring in the
re/insuranceindustrywithM&A and consolidationtofollow.Doyou
agree this could bean unintended consequence?
I havebeen hearing thisfor thelast 15 years and alsooften asked this
question at conferencesby representativesof smaller companies.
And I used to givesuch an example:
I like to buy booksand I buy my booksin a tinybookshop in Madrid.
Theowner readsa lot and he knowswhat the customer likes and always
givesme great recommendations.
I could buymy booksat Barnes& Nobleor at Amazon.But aslong asI
get sucha level of service[from my littlebookshop] I will never dothat.
If smaller insurance companies understand the needs, bring added value
to their customers and also understand the specifics of the business they
underwrite, theywill succeed.

P a g e | 20
Theywill evenbenefit from SolvencyII becauseit givesthem theright
incentivesto have better risk management.
As for companiesthat aresubjected to restructuringor mergers, they will
facesuch issuesbecausetheir problemsare related to globalisationand
not toSolvencyII.

P a g e | 21
Speech byAndrew Bailey, Managing
Director, Prudential BusinessUnit at
the Chartered Institute‟sNicholas
Barbon Lectures, London
Thank you for invitingme togive this
NicholasBarbon Lecture.
And, thank you for givingme the opportunityto
remind myself of thecareer of NicholasBarbon – I
say“remind myself” becausea longtime agoI was
an economichistorian.
Barbon iscertainlyone of the founders – if not the
founder – of the insurance industry in London in the
late seventeenth century.
He wasfirst a builder, indeed, he wrotea tract called “an apology for the
builder” in whichhe defended new constructionin London on the
groundsthat cities created employment and wealth.
Barbon wasprobablytheleading builder of the time and he offeredan
integratedservicebecause he pioneeredhouseinsurance.
Indeedthereareobservationsthat Barbon‟s businesswasto build,
insure, and re-build your housewhenit fell down.
Thesedaysyou wouldbein FSAenforcement if you tried that one.
But Barbon wasalsoone of the earlyeconomic theoristsin a period at
theend of the seventeenth century wheneconomictheory flourished,
beforeit went intoabeyance until Adam Smith and David Hume came
ontothe scene.

P a g e | 22
Barbon developed theargument that wealthcreatesdemand and he
extolledconspicuousconsumption: he wrote that “a poor man wantsa
Pound; a rich man a Hundred”.
Clearly, Barbon never quite imaginedthat one day investment bankers
wouldtake his ideatoa wholenew level.
And, finallyon Barbon, he wasaround at thetime of the founding of the
Bank of England.
Indeed, the recordssuggest that he very much wantedthe Bank of
England not to be founded, and instead that his own ideaof a national
Land Bank should havereceivedthe favour of the Crown and
Parliament.
That did not happen, and so I guess that Barbon would not be happy on
finding out that the Bank of England will, over three hundred years later,
take on regulatinghis industry of insurance.
But then hiswritingssuggestthat Barbon wasno fan of regulation.
From my perspectivethisis a very excitingtime becauseafter nearly
threeyears of workon a wide range of subjectscovering the legislation,
thenew model of prudential supervision, our staff, property, IT and
other things,wecan seethenew Prudential RegulationAuthority
startingtotake shapefor real.
We are in the processof moving intoour new home at 20 Moorgate.
There wereseveral reasonswhywechosea City location.
One consequenceis that it will bringuscloser tothe insuranceindustry,
whichfor themost part resistedtheappeal of CanaryWharf and stayed
closeto the rootsthat dateback to Barbon.
He wouldhave approved, providinghe could havebuilt, insured, and
rebuilt your building.

P a g e | 23
Timewill tell whetheryou will welcomehaving your prudential regulator
near toyour doorsteps, and asfar asweknow locatedin theCity for the
first time.
I want totacklea number of largeissuestoday, whichare closely
connected.
First, whydowethink it makes sensetoplace prudential supervision of
insurancein the PRAalongsidebanksand major investment firms?
Second, what style of supervision will thePRA adopt and how will it
affect insurers?
And third, how do wethink about theissueof systemic risk, and
systemically important statusfor insurers?
There areover 700insurersin this country whichwill be subjectto
prudential supervisionby the PRAand conduct supervision by the FCA
(in addition, insurancebrokerswill be entirelysupervisedby theFCA).
Whyplaceprudential supervision of insurersin thePRA alongside
banks?
I am tempted to make onepoint here and conclude, namelythat we
asked tohave one industrythat caused uslesstroublethanbanks.
Of course,that wouldbe on thebasisof “please keep it that way”.
It‟s tempting to stop there, but in all honestyit wouldnot bethe full
story.
Banks and insurershaveonecrucial thing in common which
distinguishesthem from other financial servicesproviders,namelythat
theybring thefundscustomersdeposit or investdirectlyontotheir
balancesheetsand thereforeexpose customersdirectlytotherisk
inherent in thosebalancesheets.

P a g e | 24
We did not, however, place insurersunder the PRA becausetheyare like
banks,even though there are important similaritiesin theprudential
approachweapplytoboth sectors.
Whythen?
For me, the logic hasto dowithwhat wehave learned about our role
during thecrisis.
Thetraditional model of supervision hasbeen quiteindustryspecific. The
FSAregime introducedin 1997createda singleauthority, but within
theFSAtheframeworkof rules applied toinsurance supervision is
uniqueto theindustry.
It is truethat in the run-up tothestart of thecrisis,and for some time
thereafter, the FSAmingled insuranceand bank supervisionin termsof
itsoperatingunits, but I think that did not workeffectively and wehave
movedtoa clear distinctionwith an insurancesupervisiondirectorate
headedby JulianAdams.
Insurancesupervision is a skill of its own, and while our supervisorsdo
move rolesbetweeninsuranceand banking in both directions,wewant
toensurethat wehave groupsof trulyexpert insuranceand banking
supervisors.
Thereason for locatinginsuranceand banking in thePRA isin my view
that wehave learned during the crisisthat our job asprudential
supervisorsisto ensure that thepublic and usersof financial services,
includingthe corporate sector, can beassured of continuousaccessto
thecritical serviceson whichtheydepend.
Many financial servicesmay be regarded ascriticalby their users,but
some aredistinctivebecauseit ishard for consumers toreplacetheir
provider witha substitutewithout acceptingunacceptablecost and loss.

P a g e | 25
Insurersprovidecritical servicestothepublic in terms of risk transfer
andvery long-livedsavingscontracts.
This lastpoint drawsout that insuranceis not a singlehomogenous
industry– general and life insurancearevery different activities- and we
recognisethat in our supervision.
It wouldbe unacceptabletothe public tohave accesstorisk transfer
through, sayhome or car insurance, or professional indemnityinsurance,
toname but a few, withdrawnin a disruptive and unannounced way.
In the same way, savingscontractsthat are long-lived and providedby
life insurers,and areoften an individual‟sprimary pension provision, are
critical financial servicesthat are difficult to replace without
unacceptablecost.
For me, there isthereforea common feature of banking and insurancein
termsof continuityof accessto critical financial services.
This is not, however, the end of the storyon theissueof whythePRA
will regulate banks and insurers.
What I have started todescribe isthe first objectivethat the new
legislationgivesto thePRA, namelythesafetyand soundnessof the
firmswewill supervise.
But thereis another important leg tothe definitionof theobjective,
namely that theunderlying objectiveof our pursuit of safetyand
soundnessis thestability of the financial system.
For banks, this had led usto emphasisethat wewill be a proportionate
supervisor,puttingmore emphasison the largefirms that have more
scopeto damage thestabilityof thesystem.
We think wecan do thisfor banksbecausethe depositor is protected by
thedeposit insurancearrangementson the first £85,000of deposits
provided by the FSCSfor all banks except branchesfrom other EU

P a g e | 26
countries(wheretheinsurance comesfrom the home country), and
becauseasa consequenceof thecrisisthe resolutionregimeisnowset
downin statute, though weclearlyhave worktodoto make the larger
banksresolvableusing thoseresolution powers,supplemented weexpect
byfuture EU legislation.
For insurers,the legislationgivesthe PRAa second objective, namely
theprotectionof policyholders.
Wedonot have acomparableobjective fordepositors.
Policyholder protection meansin effect that our approach of
proportionalityin supervision cannot be thesame for insurers.
Why?
This is a good question becausetheFSCSis set up tocover insurance.
For me, the reasonisthat wehave more worktodoto develop the best
toolstoensurecontinuity of accessto critical insuranceservices.
WhydoI think weare short of tools?
Toexplain my view on this requires somebackground on theresolution
of banks.
Statutoryspecial resolution regimesfor bankslike the one adopted in the
UK in 2009have at their heart thepower toalter property rights, the
powertoseparate thebusinessof a company from itsowners,albeit with
safeguardsagainstunfair expropriation.
It is a very powerful tool, and onethat should be usedcarefullyfor that
reason.
For banksa typical useof theresolutionregime is becausedepositors can
loseconfidencein their ability to have accesstotheir funds,and thusa
run can start whichbringsdownthe bank.

P a g e | 27
Aresolution regimecan bring order tothat process.
For insurers,policyholders are lesslikely run in thesense that theycan
withdraw their contract and take it somewhereelse,though it is possible
for some life contractstobe surrenderedwithout penalty.
Unlike money, insurancecontractsare not fungiblebecausethecover is
specific tothecontract.
In the limit, a bank depositorcan exchangetheir claim on the bank
(commercial bank money) for a risk-freeclaim on the central bank (by
requestingbank notes).
An insurancepolicyholder cannot do this.
Work is under waytodetermine whetherinsurance wouldbenefit from a
special resolution regimethat overridesnormal insolvencyrulesin order
toenhancethe abilityto ensure continuityof critical contactsthrough,
say, the transfertobusinessto another firm.
I will return tothis subject later in this lecturebecauseit is one that we
should consider carefully.
My general view is that the policyholder protection objectivefor
insurancepointstothe need for a resolution regime for insurers,but the
important issueis tobe clear on what sort of regime.
There is one further area of insurancethat for me clinchesthecasefor
thepolicyholder protection objectivein the PRA.
I almost mention “With Profits” withtrepidation, but I am afraid I must
dosoat this stage.
With about £350bnof policy valuesoutstanding, and policy maturities
that can run intodecadeshence, With Profitsis clearlya legacythat will
bevery much withusfor a good while yet.

P a g e | 28
Consequently, I dothink that the industryand the authoritiesneed to be
alert toitsinherent risks and complexities.
In thinking about the implicationsof With Profits, let me step back for a
moment. In broad terms, I can seetwodistinct typesof financial contract
involvingdepositsand savings.
Adeposit contract witha bank hasat itscore the promisethat the bank
will return the full value of the deposit at any timewhen it is
contractuallyobligedto doso.
Lossof confidencein a bank setsin whendepositorsfear that this may
not happen.
An asset management contract isquitedifferent becausethepromiseis
at itssimplest toreturn theproceedsof the investment strategy, which
may be more or lessthan the amount invested.
It is cruel to remember the WoodyAllen jibeat thispoint that a
stockbroker issomeone whoinvestsyour moneyuntil it is all gone.
Economistsmight call thedeposit and asset management contract
“corner solutions” in that they have a robust definitionand lie at
oppositeendsof a range.
If so, With Profitsfallsin between, and it is in thisground that issues
can arise.
Theproposition wasessentiallyto offer investorsa blendedexposureto
cash, bond, propertyand equityreturn withsome degreeof smoothing of
overall returns, essentiallyat management‟sdiscretion, toreduce market
timingrisk.
Themarketingtendedto make much of theseproducts‟potential toearn
abovecash returnswithout thevolatilityof pure equityexposure; and this
in turn conditionedpolicy holders‟expectations,a fact first acknowledged
explicitlyin the UK‟sprudential solvencyregime for

P a g e | 29
insurersin 1967(bear in mind that this wasnot the original prudential
regime, whichwasintroduced in 1870).
Theessenceof theWith Profitscontact asI understand it is that the
provider offersa guaranteedminimum return, variouslystructured, plus
theprospect of additional returnsderived from the return earnedon a
pooledfund that combinesmany contractsincludingover different
generationsof policyholders.
There is of coursea logic topooling returns, but for the policyholder the
return can be complicated, and sometimesmade opaque, bythepractice
of pooling different generationsof policyholders whomay havedifferent
expectationson their returns(conditioned, for instance, on changesin the
external environment); and by thepracticesof smoothingreturnsand of
chargingdifferentiallyfor the economicvalue of the guarantees.
Additionally, problemshave arisen becausethe fundsare made up of
manydifferent groupsof policyholders with different guarantees,some
of which, essentiallyon the annuityside, became increasinglyvaluable
asnominal interest ratesfell from the mid 1990‟s.
Theexistenceof theseguaranteeswasoften, at best, unclear or, at worst
not disclosed to new joinerstothe fund.
Bear in mind alsothat thesecontractsare long-livedwithmaturities
typicallyof 25yearsof more; and that theWith Profitsinsurers
themselveshave often built up over many years through the take-over or
mergersof manysmaller providers, each with their own distinct
products,associated policyholder expectations,and administrative
“legacy” systems.
Sufficetosay that in the last twoyearsin whichI have been involved
with insurancesupervision, some of themost difficult issuesthat I have
faced havebeen in the area of With Profits.
For that reason, I think it isappropriatethat the PRAshould have a
policyholder protectionobjectivebecauseI think wehave torecognise

P a g e | 30
explicitlythecontractual complexitythat weinherit and thesolvency
risksthis can generate.
I should alsoadd finallythat it is not a coincidencethat wehave found
thisarea tobe themost challengingin terms of creating the “twin
peaks”model in whichthe FCAwill haveresponsibilityfor reaching
judgements,through a formal determinationprocesson fairnessto
policyholders and thePRA will be responsiblefor ensuring that those
judgementsare compatiblewiththe prudential soundnessof firms.
We have reached a satisfactory conclusion, withspecific languagein the
legislation, and a special With ProfitsMoU betweentheFCAand PRA;
but it hasrequired very careful consideration to ensure that each
regulator‟sroleand responsibilitieshasbeen appropriatelydefined to
avoid any “under-laps”and that thecorrect balancehasbeenstruck
betweenthem.
Let me nowmove on to thesecond subject – what style of supervision
will the PRA adopt and how will it affect insurers?
Let me start by drawingthe distinctionbetweenregulation and
supervisionin our world.
Regulation is about the frameworkof rulesand policiesagainst which
weoperate.
Supervision is about how weapplythat frameworkevery day.
Theyare not thesame thing.
Rulesare for the most part in our worldtheproduct of international
agreement, eventually.
There aregood reasonsfor this in termsof seeking to ensure comparable
standardsof protection whereservicescan be provided acrossborders,
and whereencouraging free tradein servicesisconsistent with open
economies.

P a g e | 31
When it comestosupervision the PRA will be applying judgement
around the framework of rules.
This is important for a number of reasons,but above all against a
background of inexorableincreasesin rule making wemust have the
determination to befocussed on thekeyrisksthat matter toour
objectives.
One of my commitmentsisthat wemust be focussed on the(I hope)
small number of big risksthat threaten our objectivesof safetyand
soundnessand policyholder protection.
I don‟t have any difficultywith intensiveand intrusive supervisionwhere
it is focussedand justifiedby the risks.
We are not, however, substitutecomplianceofficers– that is the job of
firms, and onethat wewill expect to seein placeand functioningalong
with risk and audit functions.
Another key aspect of judgemental supervisionis that it must be
forward-lookingtotherisksthat may arise.
This is crucial, and wasnot properlyincorporated intothe pre-crisis
regimeof supervision.
Let me givea few current examplesof thisfor insurers.
We are focussedon the impact of very lowinterest ratesstaying withus
for a protracted time, and whenI say this I am offeringno view
whatsoever on the likelycourseof monetary policy.
Likewise,wewant toknow that theprudential position of firms also
capturesthe possibleimpact of an unexpected upwardshift in the slope
of the yield curve, and again I am offeringno view on monetary policy.

P a g e | 32
Mythird exampleis different:wearewatchingthe rangeof possible
outcomeson flood insurance in thiscountry for their prudential
implications.
Judgment in supervision isnot, however, without itschallengeswhenit
comesto thepracticeof supervision.
There aretwolargechallengesI see.
First, wehave to balancethe use of sensiblejudgement againstthe risk
of creatingundue uncertainty in our behaviour whichdamagesyour
abilityto do business.
This is not easyI accept.
It requires usalmost constantlyto check and test our judgements
against a frameworkof reasonablepredictability.
Also, it requiresa greater degreeof transparencyfrom ustoyou, and I
think from both of usto thepublic and investors.
This is important toensure that wecan both be held toaccount for
applying judgement in a waythat is consistent withthepursuit of our
objectives.
I am consciousthat achievingaccountability in insurancesupervision in
thecurrent environment is challengingbecauseall thefocusis on the
banks.
No visits to the TreasurySelect Committeemay seem like a blessing, but
wehave toensure that the accountabilitystill holds water.
On that point, frankly, I think there should have already been more
accountabilityfor how the processesof theEuropean Union could have
created such a vast cost for an industry for the implementation of a
directivewhichhasnot even yet been finallyagreed, and for whichI
cannot give you a date.

P a g e | 33
Largelyunseen in thebanking crisishasbeen the shockingcost of
SolvencyII.
Thesecond challengewiththeuseof judgement in supervisionis that
elsewherewehave seen a preferencetohavemany rules, but often ones
whichcan then be gamed.
Paul Volcker put it nicelyin his evidencetothe ParliamentaryBanking
Commission.
He said that peopleaskfor clear and simplerulessothat theycan tell
whentheyare in abeyance, but theytypicallyfail toadd that theywant to
know how toget round the ruletoo, but that ispart of the in deal.
At the PRA wewill apply judgement rigorously; sometimesyou will
agree withus, and sometimesyou won‟t. We will be clear and
transparent in our judgements,and wewill be accountable.
Finallyon theissueof the PRA‟sapproach to supervision, I want to
assureyou that wewill take supervisionof insurersjust asseriouslyas
wedotheother lot.
It is not in our nature todootherwise.
And, weare puttingmore emphasison senior level contact in the new
approach.
We want to deliver keymessagesvery clearlyto senior management and
boards,and wewant to know how your governanceworksin practice.
I will give one exampleof thisapproach in recent months, returningto
SolvencyII.
It wasclear tome bythe end of last summer that wewerefacinga long
delayin the directiveon top of a bill that, asI have said, wasindefensible
and ever rising.

P a g e | 34
We have had extensivecontact withchief executivesand theAssociation
of British Insurersin recent months, withtheoverarchingobjectivethat
thiscannot go on.
I think wehave reacheda sensibleconclusionwhichat least makes the
best of wherewefind ourselves.
Wherepossibleand sensiblewewill use thework done on SolvencyII to
dateto bolster our existingICAS regime, though I should stressthat we
are quitecomfortablewiththe coreof ICAS and believe that wecan useit
asthe frameworktobuild the PRA approachuntil such timeasSolvency
II appears.
I hopethat this changeof approach both alleviatesthecostsand helps to
createa lesspressured environment in whichwecan seek to obtain a
better framework for prudential supervision of insurersin the future than
wouldotherwisebe thecase.
There is too much at stake for theindustry and theeconomy to
compromiseon thisobjective.
Let me turn to the third and final issue, namely how dowethink about
theissueof systemic risk, and systemically important status, for
insurers?
This is obviously topical in thecontext of the IAISproposed policy
measuresfor globallysystemically important insurers.
First of all, in my view thecasefor systemic importancefor insurershas
tobe proved.
It doesnot followthat becausemajor banks are systemically important,
thesame must be true for insurers.
And, second, if a casecan be made, it doesnot automaticallydetermine
what the responseshould be; in other words, it doesnot followthat the

P a g e | 35
same capital treatment of systemic firms and/ ora statutory resolution
regimeareneeded asfor banks.
Thecalibrationof theseresponseswill have tobe proven, and the
responsewill need tobe consistent withmitigatingthe causeof the
systemic risk.
So, let‟sput bankstoone side, but only after making one important
point, that whereassystemicrisk in banking is dangerousin good part
becausethat it is in thenature of bankingthat the confidenceissue
combinedwitha very high level of inter-connectivityof risk within the
system createssystemic risk, thisis not true tothe same extent in
insurance.
Over theyears, re-insurancehascome under thespotlight asa possible
causeof intra-system connectivityand risk, but I have not yet seen a
convincingdemonstration of a major systemic issuefor pure reinsurance
of idiosyncratic, diversifiable, non-financial risks such asfire, weather,
earthquake or liability.
It is of courselikelythat withintheinsuranceindustry there are firms
whichbecauseof some combination of complexityof risk and size pose
more risksto the financial system, and assuchour supervisionshould be
proportional.
Let me develop thistheme drawingon, I should say, valuableinput from
my colleaguesPaul Sharma and JulianAdams.
Theresolution challengefor non-life insuranceinvolvesensuring short-
term continuityof risk cover.
But life insurersmake long-term promisestotheir policyholders which
can onlybe matched imperfectlywithavailablefinancial instruments
(securitiesand derivatives).
This createsa vulnerabilityto shocksfrom financial marketssuch asthe
impact of thelargefall in equitymarketsin 2002to 2003.

P a g e | 36
Life insurers do not close down by going into so-called solvent run-off in
the same way as non-life insurers, and bear in mind that the term solvent
run-off is theexpression of a probabilityof an outcome.
Anon-life insurer whenit entersrun-off typicallyceasestocollect new
premiums.
Therisk in run-off here – and thereis a risk that needsexamination– is
that near-term claimsare paid out tothedetriment of unidentified far-
term claims, therebycreatingan inequalitythrough a form of time
subordination.
In contrast, a life insurer that entersrun-off continuesto collect regular
premiumson itsexistingin-forcelife insurance policies.
Moreover, it needstocontinueto pay itsobligations(e.g. annuities-in-
payment) on theexact day contracted whereasa non-life insurer in run-
off has some greater flexibilityto pay claimstomatch itscash flow.
Finally, a life insurer in run-off needstohonour contractual policy
surrenderrights.
Thesefeaturesof life insurersdraw out thedifferencein economic
interest betweennear-term and far-term policyholders, and one whohas
a right of surrender and one whodoesnot.
Moreoveraslife insurersaremaking long-term promisesto policyholders,
theyoften seek tomatch thosecommitmentsdynamically, using short-
term derivatives,and therefore rely on continuedaccessto those
derivativesand the willingnessof counterpartiestotakesuch exposuresto
a firm in run-off.
Thesederivativepositionswill not be more idiosyncratic like traditional
insurance,but will be determined by theoverall direction of financial
market prices, giving scopefor more system-wide problems.
I described earlier theissuesI seewithmore traditional With-Profit
contracts.

P a g e | 37
TheissuesI highlightedwerenot somuch to dowithdefinitefeaturesof
thecontract betweentheinsurer and thepolicyholder but withthe
uncertaintyaround thecontract itselfarisingfrom thesubstantial
discretionafforded tothe insurers‟management todeterminefinal policy
chargesand returns.
There is an argument that suchuncertaintyishelpful tothe insurer
becausethe promiseto thepolicyholder iscautiousin termsof accrued
income and gains, and the insurer is in control of theinvestment strategy
for the asset pool.
Theissuewith uncertaintyaround contractual termsis therefore
arguablymore of a conduct issuetodowithfairnessin the operation of
thecontract, but to be clear it will have prudential consequencesif the
scaleof the fairnessproblem is largeenough, asEquitable
demonstrated.
Compare this withthe newer life insuranceproductsin some
jurisdictionswhichcontain much more definitivepromises, for example
that at eachvaluation point the policyholder hasa commitment such that
if their asset-pool is valued higher thanthepreviousguaranteed amount,
thisnew amount will feature in the minimum guaranteedreturn.
This reducesuncertaintyin one senserelativetoWith Profitsbut
increasesfinancial riskfor the insurer – whichis further increasedwhere
policyholders can switchinstrumentsat each valuation point and thus
select against theinsurer on thebasis of a more definitivepromisethey
havemade on future returns.
Theinsurer thusrisksadverseselectionagainst them.
Therisks in thistype of contract are thereforemore clearlyprudential.
Globallythescaleof all of thesepromisesis very large – the full extent is
not clear, but it could be well over $1trillion.

P a g e | 38
In the UK these contractsare markedtomarket, whichprovidesuseful
information, but that is not consistentlythe caseglobally.
There is scope for problemsin, for instance,the time-valueof liabilities
andthevaluation of complex derivativepositions.
All of this tendstomy mind to demonstrate that there isat least onepart
of the insuranceindustry that is,globally, largeand complex, and UK
firmsare an important part of this sector.
That doesnot, tobe clear, lead to a conclusion that thereforethe
approachand toolkit taken for globallyimportant banksshould applyto
theseinsurers.
It leadsme to twoinitial conclusions.
First, that in a worldof proportionatesupervision, weshould take a more
enhancedand intensiveapproach for theselargeand complex firms.
This is what the PRAwill do, and it doesnot contradict our policyholder
protection objectivewhich, asI indicated earlier, givesusin my view a
somewhat different objectivein respect of small insurersversussmall
banks.
Second, this degree of complexity inevitably raises important questions
around our resolution tools where we face dealing with large-scale run-
downs.
In thiscontext, I am awarethat thePRAwill need tobe veryclear how it
interpretsand putsintoeffect itspolicyholder protection objectivein the
context of insurersthat enter run-off or require some other meanstodraw
thebusinesstoa close.
In conclusion, I hope thisdescription hasgiven you a senseof the PRA‟s
intendedapproach tosupervisinginsurers,and some of thebig issues
that weseeahead.

P a g e | 39
We have grown all too accustomedtofocusing heavily on banks,
reflectingtheir capacityfor damagingspilloversand externalities.
Whether, or how much, insurersshare some of these characteristicsis
thesubject of extensivedebate.
I am yet to be persuadedthat thesimilaritiesof insurersand banksare
more important that thedifferences.
But I am persuadedthat insuranceis a critical financial serviceprovided
byfirms that haveconsiderablecomplexityin termsof financial risks.
This alone demonstrates whywecare about theprudential supervision of
insurers.
I should stressthat weare lookingforward to thechallenge.
Thank you.

P a g e | 40
Corporate and Risk Governance:
The IAIS‟ Self-Assessment and Peer Review
on ICPs 4, 5, 7 and 8
TheIAIS haslaunchedthe Self-Assessment and
Peer Review (SAPR) on Corporate and Risk
Governance.
This SAPR assessesobservanceand understandingof the InsuranceCore
Principles(ICP) relatedtolicensing, suitabilityof persons,corporate
governance, and risk management and internal controls(ICPs4, 5, 7 and
8).
TheStandardsObservanceSubcommittee, whichoverseestheSAPR
process, strongly encouragesall IAIS Memberstoparticipatein this
exercise.
This is an important initiativefor the IAIS.
If your authorityhasnot received an invitationtoaccessthe online
surveytool for thisSAPR, pleasecontact conor.donaldson@bis.org.
What is the process?
TheSAPR isnot a traditional self-assessment.
Theprocessbeginswith development of an onlinesurvey preparedby an
Expert Team.
TheExpert Team for this SAPR consists of representativesfrom the
StandardsObservance Subcommittee,the Governanceand Compliance
Subcommittee,aswell astheWorld Bank.
Alink tothe onlinesurvey will be circulatedto all IAIS Membersin early
February.

P a g e | 41
Memberswill then have four weekstocompletethe survey.
Once the surveyperiod is closed, theExpert Team will meet toreview
thesurveyresults.
Each IAISMember whoparticipatesin the SAPR will receivea draft
report containingthe Expert Team‟spreliminaryassessment of overall
observanceand each of the standardscontained within ICPs4, 5, 7 and 8.
Once a Member receivestheir draft report, they areinvitedtoprovide
commentsand makecorrectionsasnecessary.
TheExpert Team will thenconsider thecommentsand corrections
beforeissuinga final report to the jurisdiction.
Once individual jurisdictionreportsare finalised, theExpert Team will
preparean aggregatereport of their findings.
TheSAPR on Corporate and Risk Governanceshould be completedby
thefirst quarter of 2014.
Whyshould Membersparticipate?
Theglobal financial crisisdemonstrated the importanceof a strong
corporategovernance and riskmanagement framework.
Therevised 2011ICPs incorporatedlessonslearnt by supervisorsduring
thecrisis,includingin these areas.
TheSAPR will help IAISMembersenhancetheir observanceand
understandingof the standardsin ICPs4, 5, 7 and 8.
Jurisdictionswhoparticipatedin previousSAPR exerciseshave also
found the individual reportshelpful toimprove understandingand
observanceof theICPs.

P a g e | 42
In fact, many jurisdictions have drawn on the SAPR exercise and the
report provided to enhance their supervisory practices and legislative
frameworks.
IAISMember participationalsoprovidesinsight intothe understanding
and observance of theICPs.
This insight formsa keyaspect of the feedback loopbetweenstandard
settingand implementationand is critical for helpingthe IAISprioritise
itsfutureimplementationand standard settingwork.
TheSAPR alsocomplimentsthe World Bank (WB) and International
MonetaryFund‟s(IM F) Financial SectorAssessment Program (FSAP)
and contributestotheFinancial StabilityBoard‟ssupervisory intensity
and effectivenessfocus.
Throughparticipationin the SAPR, jurisdictionsgain further insight into
theFSAP processand limit some of the workin the self-assessment
stageof the FSAP.
Further, the Self-Assessment and Peer Review process directly supports
the IAIS mission to promote effective and globally consistent regulation
and supervisionthrough facilitatinggreater understandingof the ICPs.

P a g e | 43
EMIR Rules- Statement by
Commissioner Michel Barnier on
the technical standardsto
implement the new ruleson
derivatives
I take note of thefact that the European
Parliament hasdecidednot to object to
our proposed technicalstandardsto
implement our new rules on derivatives.
TheCouncil had earlier confirmedthat it doesnot object tothese
proposed standards.
This meansthat thestandardscan now enter intoforce 20days after
their publicationin the Official Journal of the EU, most likely around
mid-March.
This reform isessential tobring more responsibilityand transparencyto
derivativetransactions.
As a result, financial institutionsand non-financial companieswill be
subjecttonew transparencyrulesin termsof reportingand supervision,
andtoclearingobligationsfor derivativecontracts.
By adopting thesestandardstheEU meetsitsG20 commitment in the
context of thereform of financial services.
Thenew rules will reducetherisksrelatedto derivativetransactions.
Next weekI will be travellingtothe USAand will meet amongst others
with GaryGensler, Chairman of theCommodity FuturesTrading
Commission (CFTC).
I will be ableto reassureour American counterpartsthat the EU is
meetingitsG20commitment on derivatives,and that wearenow in a

P a g e | 44
positionto applystringent rulesin Europe that are equivalent to theones
in theUSA.
With my visit I hopeto make progresstowardsa system wherebytheEU
andtheUSArecognisetheapplication of their respectiveruleson both
sidesof theAtlantic asequivalent.
Background
In September 2009, at the G20Pittsburgh Summit, theleadersof the 19
biggest economiesin the worldand theEuropean Union agreedthat "all
standard OTC derivativecontractsshould be traded on exchangesor
electronic tradingplatforms, whereappropriate, and clearedthrough
central counterpartiesbyend-2012at thelatest."
Furthermore, they acknowledged that "OTC derivative contracts should
be reported to trade repositories and that non-centrally cleared contracts
shouldbe subject to higher capital requirements."
TheEU isimplementingthis commitment with itsnew rules.
Thephasing-inperiodreferred to in theCommission'sdeclaration, for
non-financial firms, is a periodof three years.

P a g e | 45
EIOPA
Multi-Annual Work Programme
2012-2014
1. Introduction
EIOPA is an independent European
SupervisoryAuthority actingwithinthe scope of variousDirectives
coveringinsuranceand reinsuranceundertakings, institutionsfor
occupational retirement provision and insuranceintermediariesaswell
asrelated issuesnot directlycovered by these Directives.
EIOPA haslegal personality, administrativeand financial autonomy and
is accountableto theEuropean Parliament and the Council of the
European Union.
EIOPA‟sobjectiveisto protect public interestsby contributingto the
short, medium and long-term stability and effectivenessof thefinancial
system, for the Union economy, its citizensand businesses.
This objectiveispursued by promoting a sound regulatory framework
and consistent supervisorypracticesin order toprotect the rightsof
policyholders, occupational pension scheme members and beneficiaries
and contributeto the public confidencein the European Union‟s
insuranceand occupational pensionssectors.
EIOPA is part of theJoint Committeewhich hasthe goal of
strengtheningcooperation betweenthe ESAs.
EIOPA‟stasks,responsibilitiesand scope of action are wide-ranging.
It is thereforeessential todefinestrategicchoicesin eachof thedifferent
areasof work.

P a g e | 46
2. Regulatory Tasks
EIOPA‟sregulatorypowersin theinsurance,reinsuranceand
occupational pensionssectorsincludedevelopingtechnicalstandards,
issuingguidelinesand recommendationsand providing opinionsin
EIOPA‟sfield of competence.
Thepolicyenvironment will be subject tosignificant changebetween
2012and 2014with the finalisation, implementation and subsequent
monitoring of the SolvencyII frameworkfor insuranceand reinsurance,
anddevelopment of revisedlegislationfor occupational pensions.
EIOPA will take an ambitiousEuropean approachtopolicyin these
sectors:there will be substantial benefitstogreater harmonisation in the
measurement of therisks facing both insuranceundertakingsand
IORPs, in their internal governance, and in theinformation theyprovide
tomembers, policyholders and supervisors.
We will workwith consumersand industry, withthe EU member states,
and withEuropean and international organisations.
We will usethe full rangeof EIOPA‟s toolsto implement our policy:
standards,guidelines,opinions,and advice.
Strategic directions2012-2014
-Completion of the standardsand guidelinesrequired for the
introduction of Solvency II, and the monitoring of their implementation
-Establishment of the operational tasksrequired of EIOPAunder
SolvencyII
- Enhancement of convergence in supervisionby greater useof tools
e.g. supervisory review process, Q&A
- Assessment of impact of SolvencyII frameworkon consumers

P a g e | 47
-Advice tothe European Commissionon review of EU legislationfor
occupational pensions
- Quantitativeimpact of EIOPA‟sproposalswithspecial focuson
definedbenefit pensions
-Bestpracticesand recommendationsfor treatment of defined
contribution pensions, particularlyin theareasof default fundsand
information to members
- Advice the European Commission on a frameworkfor theactivities
and supervisionof personal pension schemes
- IncreaseEIOPA‟s voice in internationalpensionsfora
-Embedselectionand use of EIOPA‟s existingtoolsfor assessingthe
effectsof regulatory changes:regulatoryimpact assessment; quantitative
impact studies;stresstests;public consultation
- Improve useof evidencein policy development and option selection
3. Supervisory Tasks
EIOPA is a supervisory authoritythat contributesto high quality
supervisorystandardsand practices,through consistent and efficient
application of the Union acts.
Collegesof Supervisors(Colleges)are considered effectivetoolsto
enhancemutual understandingamong supervisorsand convergence of
supervisorypractices,withtangiblebenefits to undertakings,supervisors
andpolicyholders.
EIOPA hasa leadingrole in buildingtheposition of theEEA
supervisorycommunitytowardsthe cross-border operatinginsurance
groupsfor the benefit of both group and solosupervision.

P a g e | 48
With SolvencyII coming intoforce group supervisionand the
cooperationamongst supervisorsthrough collegeson pillar 1,pillar2
andpillar 3 related issuesbecomesa legal requirement.
In order toshapetheoverall supervisorypracticesEIOPAwill provide
toolstosupport the convergent implementation of Solvency II, e.g. a
supervisoryhandbook and a centre of expertisein thefield of internal
models.
- Participatein college meetingsand joint on-siteinspections
- Support thepreparation of the collegesfor SolvencyII with theaim
that theyare readyfor thetaskby the entry intoforce of SolvencyII
- Facilitateinformation exchangeand providesupport on the
discussion on risksin thecolleges
- Enhancefunctioningof collegesby collecting, definingand
disseminatingbest practicesregardinge.g. internal model pre-
applicationassessment process, delegationof tasks
- Enhancepractical approachto collegesvia the establishment of a
Q&Aprocedure topractical or supervisory questionson established
guidelines,recommendationsand standards
- Development of a supervisoryhandbook addressingbest practisesin
thesupervisoryprocess
- Promote consistencythrough sharingbest practicesand providing
support to competent national authorities
- Investigateallegedcasesof breach or non-applicationof Union Law
and addressrecommendationstocompetent authoritieswhere
necessary

P a g e | 49
4. Consumer Protection and Financial Innovation
Under Article 9 of the EIOPA Regulation, EIOPA is already taking a
leading role in promoting transparency, simplicity and fairness in the
market for consumer financial products or services across the internal
market.
In thisrespect, EIOPA‟sstrategy in the area of consumer protection and
financial innovationis toproactively createadded valuefor consumers
and enhanceconsumer protection in thearea of insurance and
occupational pensions.
Moreover, EIOPAensuresconvergenceof regulatory practiceson the
basisof fundamental Union principlesasfollows.
- Develop common methodologiestoassesstheeffect of product
characteristicsand distributionprocesseson consumer protection
and on the financial position of institutions
- Promote transparency, simplicityand fairnessfor consumer financial
productsor servicesacrosstheinternal market
- Collect, analyse and report on consumer trendsand identifying areas
whereaction of EIOPAcan make a differencetoconsumers
- Review and coordinate financial literacyand education initiativesby
thecompetent authorities
- Develop training standardsfor the industry
- Contributetothedevelopment of common disclosurerules
- Coordinateregulatoryand supervisorytreatment of new or innovative
financial activities

P a g e | 50
- Adopt guidelinesand recommendationswith a view to promote
safety and soundnessof financial marketsand convergence of
regulatorypractice
- Issuewarningsand, within the casesspecified and under the
conditionslaid down in sectoral legislation, temporarily prohibit or
restrict certain financial activities
- Contributetothe assessment of the need for a European networkof
national insuranceguaranteeschemes
- Lead preliminary work on the operations tasks required of EIOPA
under the proposed revised Insurance Mediation Directive (IMD2)
anddelegatedactsrequired under IM D2
5. Common Supervisory Culture
TheEIOPA Regulation stressesthe importanceof a common
supervisoryculture in the European Union.
EIOPA stronglysupportsthe shift from regulationtocommon
supervisoryculture and plays an activerolein building consistent
supervisorypractices,aswellasensuringuniform proceduresand
consistent approachesthroughout theUnion.
- Establishand conducting sectoral and cross-sectoral training
programmesfor European insuranceand occupational pensions
supervisorstoenhanceconvergence in supervisory practices
- Prepare and train operational supervisorsfor SolvencyII
implementationwiththeview towardsconsistent and efficient
supervision under SolvencyII

P a g e | 51
- Establishand conduct EIOPAConferencesand joint trainingsfor
supervisorsand industry representativesto reach better mutual
understanding
- Facilitatepersonnel exchangesand secondmentsbetweencompetent
national authorities
- Conduct regular thematicpeer reviewsacrossall national competent
authoritiesto strengthen theconsistencyand qualityof supervisory
practices
- Resolvedisagreementsbetweencompetent national authorities in
Cross-border situationsby wayof bindingand non-binding
mediation
- Establishmediation proceduresand an independent EIOPA
MediationPanel that facilitatesthe mediation
6. Financial Stability
EIOPA is granted the task of enhancingEuropean financial stabilityin
theinsuranceand occupational pension fund sectors.
EIOPAshall assesspotential threatsto the stability of the financial
system and make appropriaterecommendationsfor actionstothe
competent authoritiesconcerned.
It shall ensurethat possiblesystemic risk posed by some financial
institutionsis taken intoaccount whendevelopingdraft regulatoryand
implementingstandards.
Theoverall aim of EIOPA‟s Financial Stabilityworkis to monitor and
assessmarket developmentsand their implications.

P a g e | 52
In consultationwiththe European Systemic Risk Board (ESRB), it
developscriteria for the identification and measurement of systemic risk
with particular focus on the insuranceand occupational pensionssector.
- Issuefinancial stabilityreportsand report outcomesof financial
stability and vulnerability analysestotheESRB, the European
Commission, the European Parliament and the Council of the
European Union
- Stresstestsof the Insuranceand Occupational Pensionssectors
- Maintenanceand further development of financial stability risk
dashboard
- Assessmarket impact of potential regulatory changesthat influence
theinsuranceand occupational pension sectorsand developing
policy optionsthat enhancefinancial stability and limit possible
systemic risk
- Support competent national authoritieswith financial stabilityissues,
includingbilateral contactsand visits to thenational authorities to
build a better mutual understandingof riskassessment and more
national specific issues
- Monitor and assessfinancial marketsand followingup identified
risks
- Providethird parties withrelevant statisticalanalysesand further
develop thestatistical framework

P a g e | 53
7. CrisisPrevention, Management and Resolution
EIOPA is empowered to take action to identify an “emergency
situation” and, oncesuch a situation is declaredby the Council of the
European Union, to act todeal withit.
EIOPA alsohasa responsibilityto facilitate and, whereappropriate,
coordinateactionstaken by national supervisoryauthoritiestodeal with
adversedevelopmentsthreateningEU financial stability.
- Promote vigilanceon the part of insuranceand pensionssupervisory
authoritiesin EEA Member Statesto anticipateand prevent financial
crises:
oidentify risk“hotspots” and feed this information back toEEA
supervisoryauthorities
oassessthe riskof an “emergencysituation” and make a proposal
tothe European Council whennecessary
- Raiseawarenessand improvepreparednessof national competent
authoritiesto deal withfinancial crises:
opromoteinformation exchangeand development of actionsto
deal withcrisissituations
oserve asa platform for supervisoryauthoritiestowork together
todeal withcrisissituations
odevelopment of consistencyand best practicein the areaof
crisismanagement
- Facilitateand, wherenecessary, coordinate supervisoryactionsto
deal witha crisis:

P a g e | 54
orefine and develop EIOPA‟sown capability todeal with crisis
prevention and management issues
ocoordinatenational competent authorities in their actions
- Stand readyto takedirect action withinEIOPA‟spowers:
obe readytomake decisionsaddressedtocompetent authoritiesor
financial market participantsunderArticle 18 of theEIOPAregulation
- Playa key rolein the development of resolution policy for insurance
in Europe:
oworkwiththe European Commission through itsconsultation
processtoensurethat any new legislationis well tailoredfor
insurance
oput in placewhateverinternal processesand structuresare
requiredto operatethe new resolution regime
8. External Relations
In compliance withthe powersgranted by the Regulation EIOPAis
playing an active rolein thefield of international insuranceand
occupational pensions.
An important goal of EIOPA is to guaranteea level playing field for all
market participants.
Toachievethis,equivalenceand compatibilityof the different regulatory
and supervisory regimesplaya key role.
EIOPA furthersand contributestothe development of a global
regulatorystandard.

P a g e | 55
In thiscontext, EIOPApromotesa joint European approach toactively
shapetheglobal debate in international fora such asIAISand IOPSand
toget the European voicebetter heard to eventuallymake a real
difference.
Over thenext years, EIOPA will produce sound, prudent and quality
regulatoryframeworksin insuranceand occupational pensions.
EIOPA is highly committed to involve the professional expertise, know-
how and experience of its Stakeholder Groups provided through the well
balancedand diverse background of their members.
We strongly believe in a mutual benefit through a trustful and
transparent cooperation.
- Providea platform for EIOPA, EIOPAMembers,EU Institutionsand
third country competent authoritiesor administrationsaswell as
other international stakeholdersto
oFacilitatemutual understanding, know-how exchangeand
mutual learningfrom experiencein different jurisdictionson an
on_goingbasis
oAddresstopicsof overarchinginternational relevance
- Support, coordinateand facilitatethe work in the areaof Third
country equivalence, in particular theEquivalence Committeeaswell
asother projectsrelevant in thiscontext
- Coordinate, facilitate and support the functioningand the work of
thetwoEIOPAStakeholderGroups
oEnsure successful delivery of the Stakeholder Group opinionsto
EIOPA on publicly consulteddocuments

P a g e | 56
- Liaise and cooperatewith theother ESAsand the EuropeanSystem
of Financial Supervision (ESFS)
oSupport the ESAJoint Committeeactivitiestoensureoverall
cross-sectoralconsistencyand take over chairingthe Joint Committeein
2013
- Liaise withEU Institutionsand other stakeholderson relevant
subjectsfor EIOPAand contributeto thosediscussions
9. EIOPAInternal Organisation
After theinitial set up in 2011, EIOPAwill be further establishedin 2012-
2014asa fully-fledged EU Agency.
TheAuthority will grow intoa modern, efficient and adaptive
organisation, well equipped to meet the various and challenging
demands.
Thesedemandsoriginatefrom EIOPA‟s evolving external environment,
adjustmentstoEIOPA‟s productsand services,the further
implementationof theEIOPARegulationand of the specificrulesand
regulationsrelatedtostaff and financialmatters.
On thebasis of the approved IT Strategyand IT Strategy implementation
plan EIOPAwill develop a centralisedsystem for secure transfer and
management of information within EIOPAand betweenEIOPA and its
Members.
EIOPA alsoimplementsthe recommendationsand benefitsfrom
contributionsof theInternalAudit Services(IAS) of the European
Commission and theEuropean Court ofAuditors.
Ensure EIOPAhastherequired competent and motivated staff

P a g e | 57
- further equip EIOPA with competent staff whose team work skills,
flexibility and continuous learning abilities enable the institution to
beagile and adaptive
- further build on EIOPA‟sidentityand culture, creatinga working
environment wherestaff can thrive
- promotethesecondment of national experts toEIOPAEnhance
EIOPA‟sprocessesand supporting ICT solutions
- further design and deployEIOPA‟skey processes,aimingat a high
level of compliance, transparency, efficiencyand effectiveness
- createfast and secure information storage and exchangesolutions
supportingEIOPA‟s core businessactivities
- extend administrativesupportingsystems
- ensure efficient budgetary, financial and internal control
arrangements
- implement best practicesin the area of budgeting, ensuring budget is
planned and justified from scratcheach year based on actual needs
- build up and enhancethe financial policyframeworkwitha focuson
efficient and compliant processes
- continuouslyimprove the internal frameworkin order toensure
timely, efficient and economicdeliveryof its taskswhilst striving to
deliver the highest qualityof EIOPA‟sproductsand services
Contingencyplanning
- ensure contingencyif EIOPA headquartersbecome unavailable, by
establishingalternativelocationsand modalitiesfor high level
meetings

P a g e | 58
- ensure availabilityof keyproductsand serviceswithinagreed time
framesand accordingto the highest security and confidentiality
standardsEIOPAtakingfull corporate& social responsibility
- reducethe carbon footprint by using environmental friendly
solutions
- set up robust workingprocessesof communication withmedia and
public
- continueeducatingour youth, offeringopportunitiesfor traineesand
students
- build a positiveEIOPAimage in social media and networks

P a g e | 59

P a g e | 60

P a g e | 61
Suitability Requirements With
Respect To the Distribution of Complex
Financial Products
Final Report
Executive Summary
In February 2012,the IOSCO Technical
Committeepublished a ConsultationReport,
entitledSuitabilityRequirementswithrespect tothe Distributionof
Complex Financial Products(theConsultation Report).
Thepurposeof theConsultation Report wasto discusspossible
principlesfocusingon customer protections,includingsuitability and
disclosurerequirements,relating to thedistribution by intermediariesof
complex financial productsto retail and non-retail customersbased on a
review of members‟existingregulatoryframeworks,aswell asthelessons
learnedfrom the financial crisisand relevant actionstaken in response.
This Final Report includesthefollowingkey principlesrelatingto
suitability requirementswithrespect tothe distributionof complex
financial products, takingintoaccount the publiccommentsto the
Consultationreport:
Classification of customers
Principle1:
Intermediariesshould be required toadopt and apply appropriate
policiesand procedurestodistinguishbetweenretail and non-retail
customerswhendistributingcomplex financial products.

P a g e | 62
Theclassification of customers should be basedon a reasonable
assessment of thecustomer concerned, takingintoaccount the
complexityand riskinessof different products.
Theregulatorshould consider providingguidancetointermediariesin
relationtocustomer classification.
General duties irrespective of customer classification
Principle2:
Irrespectiveof theclassification of a customer asretail or non-retail,
intermediariesshould be required toact honestly, fairlyand
professionallyand take reasonablestepstomanage or mitigateconflicts
of interest through implementingappropriate proceduresin the
distribution of complex financial products,and wherethere existsa
potential risk of damageto the customer‟sinterest, theintermediaries
should, whereappropriate, be required toclearlydisclosetherisk.
Disclosure requirements
Principle3:
Customersshould receiveor have accessto material informationto
evaluatethefeatures, costsand risksof the complex financial product.
Any information communicatedby intermediaries totheir customers
regardinga complex financial product should be communicatedin a fair,
comprehensibleand balancedmanner.
Protection of customersfor non-advisory services
Principle4:
When an intermediarysellsa complex financial product on an
unsolicitedbasis (no management, adviceor recommendation), the

P a g e | 63
regulatorysystem should provide for adequate meansto protect
customersfrom associatedrisks.
Suitability protections for advisory services(including portfolio
management)
Principle5:
Whenever an intermediaryrecommendsthepurchaseof a particular
complex financial product, includingwherethe intermediary advisesor
otherwiseexercisesinvestment management discretion, theintermediary
should be required totake reasonablestepstoensure that
recommendations,adviceor decisionsto trade on behalf of such
customer are based upon a reasonableassessment that the structure and
risk-rewardprofile of the financial product is consistent withsuch
customer‟sexperience,knowledge,investment objectives,risk appetite
and capacityfor loss.
Principle6:
An intermediary should have sufficient information in order tohave a
reasonablebasisfor anyrecommendation, advice or exerciseof
investment discretionmade toa customer in connection with the
distribution of a complex financial product.
Compliance function and internal suitability policiesand
procedures
Principle7:
Intermediariesshould establisha compliancefunction and develop
appropriateinternal policiesand proceduresthat support compliance
with suitabilityrequirements,includingwhendevelopingor selecting
new complex financial productsfor customers.

P a g e | 64
Incentives
Principle8:
Intermediariesshould be required todevelop and applyappropriate
incentivepoliciesdesigned to ensurethat onlysuitablecomplex
financial productsare recommendedtocustomers.
Enforcement
Principle9:
Regulatorsshould superviseand examineintermediarieson a regular
and ongoing basis tohelp ensure firm compliancewith suitabilityand
other customer protectionrequirementsrelatingtothe distribution of
complex financial products.
Thecompetent authority should takeenforcement actions,as
appropriate.
Regulatorsshould consider thevalue of makingenforcement actions
public in order toprotect customersand enhancemarket integrity.

P a g e | 65
Review of Requirements on
Investment Activities of
Insurers
Important parts
MAS adoptsa principles-basedapproachon theregulation of the
investment activitiesof insurers.
All insurersare expectedto observe MAS‟ Guidelineson Risk
Management and maintainsound investment practice.
With the growthof assetsand correspondingincreasein theinvestment
activityof direct general insurersand reinsurersover theyears, MAS
proposesto extend thescope of theseadditional requirementstoinclude
direct general insurersand reinsurers.
EXTENSION OF REQUIREMENTSIN MAS NOTICE 317
TO DIRECT GENERAL INSURERS AND REINSURERS
MAS Notice317setsout thebasicprincipleswhichgovern theoversight
of the asset management processof life insurance funds.
There is no equivalent MASNoticefor direct general insurersand
reinsurers.
With the growthof assetsand corresponding increasein theinvestment
activityof theseinsurers,MAS proposestoextend the requirementsin
MAS Notice317totheseinsurers.
Key requirementswouldincludetheneed for an investment policy and
an investment committee.
Investment Policy

P a g e | 66
Insurerswill be required tohave an investment policy.
An insurer may adopt their Head Office‟s/ Parent Company‟s
investment policy whenmeeting the requirementsof thenew Notice, as
longasthe investment policy isrelevant tothe Singaporeoperations.
In particular, there has to be an assessment by the insurer on whether
the Head Office‟s/ Parent Company‟s investment policy is relevant to
thelocal operations,and such assessment should be documented.
TheapplicableHead Office‟s/ Parent Company‟sinvestment policy, if
adopted for the Singapore entity, wouldalsohave to be Board-approved.
Investment Committee
Adirect life insurer is required to establishan Investment Committee
that includesthe Principal Officer (“PO”), Appointed Actuary (“AA”)
and Chief Investment Officer (or an officer in a similar capacity
responsiblefor investment functions).
MAS proposesthat direct general insurersand reinsurersbesimilarly
requiredtoestablishan investment committee, that includesthe PO and
Chief Investment Officer (or an officer in a similarcapacityresponsible
for investment functions).
However, MAS wouldleaveit to the insurersto decidewhetherto
includethe CertifyingActuary (“CA”) asa member of the investment
committee.
This recognisesthat most direct general insurers‟and reinsurers‟CAare
external consultants.
Also, given the long-term nature of life business, there is greater need for
theAA of direct life insurerstobe involved in the development of an
investment strategyfor more effectiveasset-liabilitymanagement.

P a g e | 67
At theminimum, theCAof direct general insurersand reinsurersshould
advisethe PO and Board of Directorson mattersfor whichhisexpertise
and experiencewouldbe useful, such asinvestment policyand risk
management, in linewiththeproposed expandedrolesand
responsibilitiesof theCA.
Proposed New MAS Notice
For thepurposeof this Notice:
(a)“investments”meansthe investmentsof the insurancefundsand, in
thecaseof an insurersestablished or incorporated in Singapore, includes
theinvestmentsof the shareholders‟funds.
(b)“hedging” meansthe reduction of investment risk through engaging
in a transaction for a derivative on an investment wherethere is a high
degreeof negative correlationbetweenthe changesin valueof the
derivativeand changesin value of the hedged investment;
(c)“efficient portfoliomanagement”, in relationto a derivative
transaction, hasthemeaningascribedin paragraph 21below;
(d)“economiccapital” meansthe capital needed by theinsurer to satisfy
itsrisk toleranceand support itsbusinessplansand whichisdetermined
from an economicassessment of the insurer‟srisks, therelationshipof
theserisksand the riskmitigation in place;and
(e)“liquid assets” meansassetswhicharereadily converted intocash at a
value close to itsfair price under normal market conditions.
Board of Directorsand Senior Management Oversight
Theresponsibility for the formulation, approval and establishment of the
investment policyof the insurer must rest ultimately withitsBoard of
Directors.

P a g e | 68
Theinsurer shall ensure that itsBoard of Directors, at all times, exercises
added oversight to ensure that the interestsand rightsof policyowners
are not compromised.
For thepurposeof theinsurer‟sinvestment activities,the insurer shall
establisha committee(the"Investment Committee") that includesthe
chief executiveand chief investment officer (or an officer in a similar
capacityresponsiblefor the investment functions) and seek approval
from itsBoard of Directorsfor the establishment of the Investment
Committee.
For a direct life insurer, the Investment Committeeshall alsoincludethe
Appointed Actuary (“AA”).
Adirect general insurer and reinsurer should consult the Certifying
Actuary (“CA”) or theAA, asthe casemay be, on investment related
mattersfor whichtheCA‟s or theAA‟s expertiseand experiencewould
be useful.
At least annually, theinsurer shall ensure that itsBoard of Directors
reviewsthe adequacyand relevanceof itsinvestment policy- in termsof
overall risk tolerance, long term risk-returnrequirementsand solvency
position- in thelight of the insurer'sactivitiesand risk profile.
Reportsto the Board of Directors
Theinsurer shall ensure that the Investment Committeereports
regularly, but nolessthan once every quarter, to theBoard of Directors
and ensuresthat thereportson investment activitiesareprepared in a
timely manner.
If the Board of Directorsdelegatesauthority tothe Investment
Committeetomake investment decisionson itsbehalf, the insurer shall
ensure that theInvestment Committeereportstoeach meeting of the
Board on any and all decisionsof material consequencemade sincethe
last meeting of the Board of Directors, but suchreport shall be no later
than three monthsof making the decision of material consequence.

P a g e | 69
In additiontothe above reports,the insurer shall ensure that the
Investment Committeealsopreparesreportsfor theBoard of Directors,
asand whenany investment-related activityof material consequence
arises, withdetails of the variousissuesand the impact on thefundsand
theinsurer.

P a g e | 70
Anti-Money Laundering: Stronger
rules to respond to new threats
TheEuropean Commission has adopted
twoproposalstoreinforcethe EU's
existingruleson anti-moneylaundering
and fund transfers.
Thethreatsassociatedwithmoney launderingand terrorist financingare
constantlyevolving, whichrequiresregular updatesof the rules.
Internal Market and ServicesCommissioner Michel Barnier said:"The
Union is at the forefront of international effortsto combat thelaundering
of the proceedsof crime.
Flowsof dirtymoney can damage thestabilityand reputation of the
financial sector, whileterrorism shakesthe very foundationsof our
society.
In addition tothe criminal law approach, a preventiveeffort via the
financial system can help tostop money-laundering.
Our aim is toproposeclear rules that reinforcethevigilanceby banks,
lawyers, accountantsand all other professional concerned."
Home affairs Commissioner Cecilia Malmströmsaid:"Dirtymoney has
noplacein our economy, whetherit comesfrom drug deals, theillegal
gunstrade or traffickingin human beings.
We must make sure that organised crimecannot launder itsfunds
through thebankingsystem or thegamblingsector. To protect thelegal
economy, especiallyin timesof crisis,there must beno legal loopholes
for organised crime or terroriststo slip through.
Our banksshould never function aslaundromatsfor mafia money, or
enablethe fundingof terrorism."

P a g e | 71
Today'spackage, whichcomplementsother actionstaken or plannedby
theCommission in respect of fight againstcrime, corruption and tax
evasion, includes:
A directive on the prevention of the use of the financial
system for the purpose of money laundering and terrorist
financing
A regulation on information accompanying transfers of
fundsto secure "duetraceability" of thesetransfers
Both proposals fully take into account the latest Recommendations1 of
the Financial Action Task Force (FATF) (see MEMO /12/246), the
world anti-money laundering body, and go further in a number of fields
to promote the highest standards for anti-money laundering and counter
terrorism financing.
More specifically, both proposals provide for a more targeted and
focussed risk-basedapproach.
In particular, thenew Directive:
improves clarity and consistency of the rules across the
Member States by providing a clear mechanism for identification
of beneficial owners.
In addition, companies will be required to maintain records as to
theidentityof thosewhostand behind thecompany in reality.
by improving clarity and transparency of the rules on
customer due diligence in order to have in place adequate controls
and procedures, which ensure a better knowledge of customers
and a better understandingof thenature of their business.
In particular, it is important to make sure that simplified
procedures are not wrongly perceived as full exemptions from
customer due diligence.

P a g e | 72
and by expanding the provisions dealing with politically
exposed persons, (i.e. people who may represent higher risk by
virtue of the political positions they hold) to now also include
“domestic” (those residing in EU Member States) (in addition to
'foreign') politically exposed persons and those in international
organisations.
This includes among others head of states, members of
government, membersof parliaments,judgesof supreme courts.
extendsitsscope toaddressnew threats and vulnerabilities
by ensuring for instance a coverage of the gambling sector
(the former directive covered only casinos) and by including an
explicit referencetotax crimes.
promoteshigh standards for anti-moneylaundering
by going beyond the FATF requirementsin bringing within
itsscope all persons dealing in goods or providing services for
cash p aymen t of € 7,500 or more, as there have been
indications from certain stakeholders that th e cu rren t €15,000
t h resh old was not sufficient.
Such persons will now be covered by the provisions of the
Directive including the need to carry out customer due diligence,
maintain records, have internal controls and file suspicious
transactionreports.
That said, the directive provides for minimum harmonisation and
Member Statesmaydecidetogo below this threshold.
strengthens the cooperation between the different national
Financial Intelligence Units (FIUs) whose tasks are to receive,

P a g e | 73
analyse and disseminate to competent authorities reports about
suspicionsof moneylaunderingor terrorist financing.
The two proposals foresee a reinforcement of the sanctioning powers of
the competent authorities by introducing for instance a set of minimum
principle-based rules to strengthen administrative sanctions and a
requirement for them to coordinate actions when dealing with cross-
border cases.
Background:
Further to the publication of a revised set of international standards in
February 2012 (IP/ 12/357), the Commission decided to rapidly update
theEU legislativeframeworktoincorporate thenecessarychanges.
In parallel, the Commission alsoundertook a review of theThird Anti-
Money LaunderingDirectivethat showedtheneed toupdate the
existinglegislativeframework in order toaddressall identified
shortcomings.
Theproposedupdateof the legal ruleswill have to be adopted by the
European Parliament and the Council of Ministersunder the ordinary
legislativeprocedure.
Frequentlyasked questions: Anti-Money Laundering
1. What are money laundering and terrorist financing?
1.1What is money laundering?
Money laundering is the conversion of the proceeds of criminal activity
intoapparentlyclean funds, usuallyvia the financial system.
This is done by disguising the sources of the money, changing its form,
or moving the funds to a place where they are less likely to attract
attention.
"Criminal activity" includes fraud, corruption, drug dealing and other
seriouscrimes.

P a g e | 74
1.2 What is terrorist financing?
Terrorist financing is the provision or collection of funds, by any means,
directly or indirectly, with the intention or in the knowledge that they
wouldbe used in order tocarry out terrorist offences.
2.What is the EU already doing to fight money-laundering and
terrorist financing?
1. What is the current legal framework and to whom it applies?
The current EU legislation, the so-called Third Anti-Money Laundering
Directive(hereinafter, the 3rdAMLD), has been in force since2005.
It provides a European framework built around the international
FinancialAction TaskForce (FATF) standards(see IP/04/832).
The Directive applies to banks and the whole of the financial sector as
well as to lawyers, notaries, accountants, real estate agents, casinos and
company service providers.
Its scope also encompasses all dealers in goods (such as dealers in
precious metals and stones), when payments are made in cash in excess
of €15000.
Thosesubject totheDirectiveneed to:
- identify and verify theidentityof their customersand of the
beneficial ownersof their customers(for example, by
ascertainingtheidentityof thenatural personwho
ultimatelyownsor controlsa company), and tomonitor the
transactionsof and the businessrelationshipwiththe
customers;
- report suspicionsof money launderingor terrorist financing
tothe public authorities - usually, the financial intelligence
unit; and
- take supportingmeasures,such asensuring the proper
trainingof personnel and the establishment of appropriate
internalpreventivepoliciesand procedures.

P a g e | 75
The Directive introduces additional requirements and safeguards (such
as the requirement to conduct enhanced customer due diligence) for
situations of higher risk (e.g. trading with correspondent banks situated
outsidethe EU).
Since the existing Directive is based on the international standards, it
will need to be reviewed in order to reflect the new FATF standards
issuedin February 2012.(seequestion 3.3.).
2.2. What are the other elements of the anti-money laundering
framework?
The 3rd AMLD is part of a broader set of legislative measures aimed at
theprevention of money launderingand terrorist financing, including:
Directive 2006/70 containing a number of implementing
measures with respect to Politically Exposed Persons (e.g. high-
ranking officials from third countries), simplified customer due
diligenceproceduresand limitedexemptions.
Regulation 1781/ 2006, which ensures traceability of
transfers of funds by requiring information on the payer to
accompany transfers of funds for the purposes of the prevention,
investigation and detection of money laundering and terrorist
financing.
Regulation 1889/2005 on controls of cash, which requires
personsentering or leaving the EU to declare cash sums they are
carrying if thevalueamountsto €10000or more.
EU Council Decision 2000/ 642 concerning arrangements
for cooperation between financial intelligence units of the
Member Statesin respect of exchanginginformation,
A number of EU legal instruments imposing sanctions and
restrictive measures on governments of third countries, or non-
stateentitiesand individuals.

Solvency ii News February 2013

Solvency ii News February 2013

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a Solvency ii News February 2013

Semelhante a Solvency ii News February 2013 (20)

Mais de Compliance LLC

Mais de Compliance LLC (20)

Último

Último (20)

Solvency ii News February 2013