Solvency ii News May 2012

Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.solvency-ii-association.com
Dear member,
Todaywewill start from a very interestinginterview with
Gabriel Bernardino, Chairman of EIOPA
Interview with Gabriel Bernardino, Chairman of EIOPA
conducted byAnke Dembowski, Institutional Money(Germany)
Insurance companiesvs.
Occupational Retirement Provision
(IORPs)
EIOPA hassubmitteditsadvice forthe
Occupational Retirement Provision
(IORP)'directive on15th of February2012.
What is EIOPA's standpoint in this advice?
Theintentionisnot tohave a copy - paste
exercisebetweenSolvencyII and the
pensionsdirective.
The intention is to find out the elements
that in terms of risk are similar between
thosetwo.
If risks are similar, you should treat them in
a consistent way.
www.solvency-ii-association.com

And if risks aredifferent, you should treat them in a different way. That’s
what weadvocatein thisadvice.
Whicharethemaindifferencesbetweenpensionsandtheinsurance
system?
One of thedifferencesis the type of involvement the sponsorcompany,
i.e. theemployer hasin thepension fund.
If there is a need for more capital within an insurancecompany, the
shareholdersare often subject to a limitedliabilityregime.
This is different in thepension fund area.
Here, you don't have a transfer of the risk tothe pension fund.
Thefund isonlya vehicle tofinancethe responsibilitiesof the employer.
Consequently, if there is a need for capital, the employer may be required
bysocial and labour law to put themoney in.
Youwant to introduceaholistic balancesheet. Howdoesthat looklike?
At the regulationlevel, weneed to take these differencesintoaccount.
That'swhywearetrying to develop theconcept of a holistic balance
sheet, whereweintegrate not only the market value of the assets, but
alsotheeconomicvalue of the liabilities.
In addition, weare integratingother elementsthat takeaccount of the
specificitiesof the pensionarea.
And there aredifferent elementsin eachcountry.
For example, theDutchsystem, whereyou have thepossibilityto cut
back thepension benefitsretroactively.

Or take thesystems whereyou can reducethe indexationsof the
pensionsfor the future, et cetera.
Thesespecificationshave an effect on the value of theliabilities, and you
need to take it intoaccount for theholisticbalance sheet.
And whichsimilaritiesdoyou seebetweenpensionsand insurance
companies?
For example, all theelementsabout governance, risk management and
transparency.
We firmly believe that the sound principlesof SolvencyII can alsobe
appliedin a context of pension funds- provided of course, that you take
intoaccount thenecessaryproportionality.
We are awarethat there are many pension schemesthat arequitesmall
andthat wecannot fullyapplyin a mechanistic wayall the good
principlesof governance,risk management and control to them.
What is thetimeframe for theSolvencyII andthepension directive?
SolvencyII hasalreadybeen discussed for manyyears and weare now in
the last phasesof implementingmeasures.
We intendtohavethe Solvency II frameworkimplementedin 2014.
On the IORP side, theprocessis still at an earlystage.
As you have mentionedin thebeginning, theEuropean Commission has
asked usa long list of questionsin a call for advice and wehaveanswered
them, on 15th of February.
We believethat several testsneed tobe made, especiallyon the
calculationof thetechnical provisionsand of the solvency requirements.

Sowewant to run thefirst quantitativeimpact study (QIS) on the
pension sidesoon.
Will thoseQIS'studiesbesimilar to theonesthat you havedoneonthe
insuranceside?
Again, there aresome elementsthat are common, but some different
elementswill be coming from theholistic balancesheet approach.
And alsothe processin itselfis goingtobe different.
In the insuranceQISwetriedtocapture most of the insurancemarket in
Europe.
But it is not thecasefor pensions,becausethe pensionsmarket is so
diverseacrossthe 27EU member countries.
Therefore, weare goingto conduct the first QISstudy onlyin thoseseven
countrieswheredefinedbenefit plansare more relevant: Germany, UK,
Ireland, the Netherlands,Portugal, Sweden, and Belgium.
We are workingon the common technical specificationsto be appliedin
thetest and will discussthe timelinewiththe European Commission.
TheCommission intendsto have a firstschedulefor proposal on the
revisedIORP Directiveby theend of thisyear.
And what qualitativemeasures arenecessary forpension funds?
Also pension fundsneed to have a liquidityassessment and a
management of their liquidityneeds.
This is part of thequalitativepillar II requirements.
But making an analysisof onesliquidityneedsis part of common good
management rulesanyway.

Of course,a pension fund needstoknow thepensionsit hastopay in
theyears to come and what itsrevenuesfrom theassetswill be.
Onlythen the fund can try tomatch thosetwoand try to avoid surprises.
2. Investment issuesfor insurance companies
Insurancecompanieshave been refinancing banks in thepast, andwe
cannot seebanksisolated from insurancecompanies. Basel III
regulationisnowforcing banks toholdhigher equityratios. Will
insurancecompaniesunder SolvencyII beabletorefinancebanksas
theyusedtoin thepast?
Well, it is not the purposeof insurancecompaniestofinancebanks.
Thepurposeof insurance companies istohave good productsfor their
customersand to providelong term security for their customers.
SolvencyII will not force insurancecompaniestoonly buy one type of
assets.
But it is clear: Themore stability you havein the banking sector, the
better it will be from the riskperspectivetoinvest intobanks.
It is normal that whenbanks are in a stresssituation, or when there are
doubtsabout their capital capacity, investors- not only insurance
companies - refrain from investinglong term intobanks.
With the elements that have been introduced about recapitalizing the
banking sector, I believe that in the future, insurers will come back to
financebanks.
SoEIOPA'sintention is not todisconnect theinsuranceand thebanking
sector in ordertoreduce cyclical ties?
No, with SolvencyII or any kind of regulatoryregime weare not trying
to intervenein that sense.

But what wewant todo is tointroducea risk basedsystem.
We saythat themore risk an insurancecompanyhas, thebetter
capitalized it must be.
We donot say'don't invest intorisky assets' or 'only invest into
sovereignbonds' - that isnot up to thesupervisors.
We onlysaythat thecapital hasto commensuratewiththe risk.
An insurancecompany can have a bigger risk appetite, but then on the
other side, it needstoprovidemore capital.
That is a fundamental element in the wholefinancial system.
Will SolvencyII have an effect ontheproductsthat insurance companies
will offer?
I believethat withSolvencyII consumerswill continuetohave choice
betweendifferent products,with different types of guaranteesand
liquiditycharacteristics.
If an insurancecompany createsliabilitieswhichattract more risk - for
exampleif it wantstooffer productswitha guaranteedinterestratefor
20, 30or 40years, it can dothat, becauseconsumersvalue those
products.
But the riskinvolved needstobe priced correctly.
We must not bringrisk intothe system without pricing it well. I think
that this isthe lesson weclearlylearnedfrom the financial crisis.
What exactlywasthelesson theinsurance sector learned from the
financial crisis?

In the bankingsector wehave seen that there waspoor underwritingon
the subprime business, whereriskswerebrought intothesystem without
beingpriced correctly.
We have alsoseen that if you bring risk intothe system, it will never
disappear, no matter how much packagingand re-sellingyou do withit.
Therisk remains there and you need to manageit.
If it is not well priced, someone will pay in theend, either the
companies, the consumersor the taxpayer.
Doestheregulation intend to reducetherisk to aminimum?
No!
When thefinancial system isrisk averse, theeconomywill not work.
Look what the insurersare doing for usasindividuals:We transferour
risksto them.
Insurersbydefinitioncannot be riskaverse,becausedealingwithrisk
andmanagingis their core business.
As regulators, our duty for thesocietyistohave a good balancebetween
securityand growth.
If you want to havea system with 100Percent security, it will be
unaffordable.
SoI am not advocatingthat wehave capital requirementsthat are
bulletproof.
In Solvency II, weare buildinga system based on a with a 99.5percent
confidencelevel.

But in an extreme situation, an insurancecompany can become
insolvent.
What wewant to assure is that insurerswill have excellent risk
management systemsthat will help them tomanage prudentlytheir
risks.
Looking at thelowinterest environment: Doyou think that life
insurancecompanieswill need to changetheir businessmodels, for
exampletoavoid thelongguaranteesthat stretch over thelifetime of a
man?
Yes,wewill probablyseesome changesin the products.
But it is not becauseweare applying SolvencyII, that long lasting
guaranteesare problematic - theproductsexist already.
What SolvencyII brings, is more market consistent pricingof risk, so
that wecan seeclearerwherethe difficultiescould lie whengoing
forward.
Someof the risksof long lastingguaranteesneed to be better assessed,
andprobablysome of theseproductswill costa bit more in the future.
What happensif an insurancecompanyfallsbelowthesolvencycapital
requirement?
Thenthe supervisor and theinsurancecompanywill need tomaintaina
closedialogue, and together theyanalyze the reasonsbehind it.
Thecompany will havetopresenta plan how it intendstorecover its
capital or reduceitsrisk.
Sothis approachisanti-cyclical.
Thecompanydoesnot immediatelyneed to reinforcecapital, asthis
wouldhave a procyclical effect on themarket.

However, if thingscontinuetogo wrongand the capital fallsbelow the
minimum capital requirement, thesupervisorhastheduty toclosethe
businessand in drastic situationseven toclosethe company, because
then thepolicy holders' rightsare at stake.
Thesystem is designedin a waythat it isnot a safeheaven, it’snot a
zero failure system, but it hasdifferent levelsof protection.
How doestransparencyhelp investors?
From the investor's perspective, SolvencyII is a system that givesfar
better information todecide on an investment.
That is thebiggestadded valuea regulatoryregime canhave.
Theworst thing wouldbe togive an incentivetohidethe risk.
In the current system, the solvencyfiguresin the insurancesector are
completelystable, astheyare not based on the market value of the
assets.
But weall know that marketsare volatile, soinvestorsfeel that
somethingiswrong. Under SolvencyII, the solvencycapital
requirementswill be more volatile.
You can have a situationwherein onequarter you have 160percent of
your capital requirements,and in the next quarter only 120percent.
Is moretransparency alwaysbetter?
Under the SolvencyII regime, insurancecompanieswill be disclosing
more information, and the information given will be much more linked
tothe realityof therisks and themarkets.
At first sight, it will seem that figuresare more volatile, but this is dueto
thehigher transparencywewill have, not becausethe insurance
company hasintrinsicallya more volatile business.

We assupervisorsknow this,and wehope that analystsand investors
will understand this aswell and will not penalize insurancecompanies
byhigher cost of capital.
Underthecurrent SolvencyII ' regime, government bondsfrom OECD
countriesdonot have anycapital requirementsat all.
This seemsabit odd, consideringtheproblemsthat someEuropean
countriesare currentlyfacing.
What is thereason whycapital requirementsforgovernment bondsare
not pegged to their rating, like it isthecasefor corporate bonds?And are
thereplansthat thispolicy will bechanged in thefuture oris that avery
political issue?
Before the euro areadebt crisisgovernment bondswerewidely
consideredasrisk free instrumentsthat iswhythere wasnoneed topeg
capital requirementsfor government bondstotheir rating.
Naturallyin this area asin othersthe perception of risk is constantly
evolvingand soI believethat in thefuture weneedtoexploreways to
deal more properlywiththe risksof sovereign exposuresand find a
suitablewayto integrate them in the overall risk-based framework.
Shouldtheinsurance supervision bedirectiveorpre-emptive?
We want to havea supervisory system wherewecapture thingsin
advance.
We donot want to be like firemen that arrive whenthere is alreadya fire.
We want to see thingsin advanceand toavoid the fires. This is
preventivesupervision.
What givesyou sleeplessnightsat themoment?

I think that the overall market situationcertainlyworriesall of us
becauseit definitelyhasan impact on thewholefinancial system.
Insurersbasicallyneedtwothings:Stabilityof the marketsand a well
functioningeconomy.
This alsoincludesa certain level of interest rates,sothat insurance
companies can fulfil their role of providinglongterm guarantees.
Havingthelow interest ratesweare seeing now, is of coursea difficult
situation for insurancecompanies.
But … I am still sleepingwell.

EIOPA - Report on
Good Practices for Disclosure and Selling of VariableAnnuities
1.This Report summarisesthe findingsof an Expert Group, set up in
May 2011under the auspicesof EIOPA’sCommitteeon Consumer
Protection and Financial Innovation (CCPFI) withthe aim of
establishinggood disclosureand sellingpracticesfor variableannuities
(VA).
2.It seekstoinform the debateon
variable annuitiesfrom a consumer
protectionperspectivewiththeaim of
promotingcommon supervisory
approachesand practices.
However, it doesnot set forth any
guidelinesor recommendations.
3.TheExpert Group has been ableto
draw on the conclusionsof a previous
TaskForce, establishedby EIOPA’s
predecessor, theCommitteeof Insurance
andOccupational PensionsSupervisors
(CEIOPS), whichhad assessedvariable
annuitiesfrom a prudential perspective.
In addition theExpert Group hasbeen
assistedin its workby the analysison
market structure and basic product
features,undertaken by EIOPA’s Financial Stability Committee.
Theoutcome of this analysishasbeen published in EIOPA’sFinancial
StabilityReport for Spring20112.
TheExpert Group alsobenefitted from commentsreceivedduring
public consultationand from a Feedback Statement by EIOPA’s
Insuranceand ReinsuranceStakeholder Group (IRSG).

4.In responseto the lossessuffered by some large insurancegroupson
their VA booksduring the recent financial crises,product characteristics
havechanged significantlyto allowfor better risk management.
As a consequenceof an increased focuson risk management, insurance
undertakingshave had to reflect the associatedcostsin the charging
structure for variableannuityproducts,thusreducingthe potential
benefitsto customerscompared to pre-crisesproduct offerings.
5.TheExpert Group referencedthecross-border businessmodel often
encounteredin relationto thewritingand saleof variableannuities.
Many largeinsurancegroupshave set up specialisedsubsidiaries
dedicatedtothisbusiness(“VAproduct companies”), whichunderwrite
variable annuitiesin several Member Statesthrough freedom of
establishment or freedom of services.
TheGroup alsoconsideredtheobjectivesof consumerswhoinvest in
thesepolicies.Consumersmay purchasethem asa meansof saving for
their retirement or for investment purposesmore generallyasan
alternativetotraditional life insurance or other savingsproducts.
Both the businessmodel and the objectivespursued by customershave a
bearingon what constitutesgood disclosureand sellingpractices.
6.Good disclosurepracticesattempt toensure that customerscan make
their choiceson an informed basis.
Customersneed tobe informedhow theproduct worksunder different
market conditions, what they are charged and which optionstheycan
exerciseduring the life of the contract.
In addition theyneed to be providedwith some general informationon
theproduct provider, thelaw governing the contract and details on the
relevant supervisoryauthoritiesto take account of the common cross-
border businessmodel referredto above.

Theuse of “frequentlyasked questions”isconsideredto be a
transparent wayof communicatingthe relevant information.
7.Good sellingpracticesfor variableannuitieshave to ensure that the
demandsand needsof a customer are taken intoaccount.
Becauseof their inherent complexity, variable annuitiesshould always be
sold on an advised basisvia a salesperson, whichmay bean insurance
intermediary or an agent or employee of the insuranceundertaking.
Toavoid therisk of missellinga number of areas, in particular, should
beaddressed by the salesperson.
TheExpert Group hassuggestedan indicativelist of questionsthat
could be used in thiscontext.
8.Finally, chapter 4.2. examinesgood practicesby theproduct provider
whereit doesnot control the salesprocess.
Insuranceundertakingsshould still ensure that salesare adequateby,
interalia, carrying out a duediligenceon the intermediary firms aswell
asreviewingthe clientsthey havetaken on to ensure that theyare as
expectedregardlessof whocontrolsthe salesprocess.
9.Themain findingsof theReport arethat good practices
• in relation to disclosures
o should provide general information on the insurance undertaking and
the legal and supervisory regime it operates under to take account of the
cross-border nature of thisbusiness
oshould alsoincludeproduct specificinformation toaddressproduct
complexity
• in relation to sellingpractices

oshould ensure that variableannuities are alwayssold on an advised
basis,even whentheyare solddirectlyby thecompany
oshould focuson thecustomer’sobjectivestodeterminehisdemands
andneeds.
2. BACKGROUND TO THE REPORT
1. MANDATE AND SCOPE OF WORK
Mandate
10. This Report examines,specificallyin relationto variable
annuities, good practiceson product disclosureand selling
arrangements.
Theseissueshad not been covered by themandate of theprevious
CEIOPSTaskForcethat focused only on prudential matters.
11. Followingtheadoption of therecommendationsput forward by
thepreviousTask Force, theBoard of Supervisorstherefore
requestedtheCommitteeon Consumer Protection and Financial
Innovation (CCPFI) to look intotheseconsumer- related issues.
Tothisend, the CCPFI set up a subgroup (Expert Group) toassist it
in itswork.This exercise wasinformed by the potential of some
variable annuitiesproductsto achieveoutcomesthat are not
easyfor the consumer to understand.
12.TheReport benefitted from thecommentsreceived during public
consultation and from the Feedback Statement preparedby
EIOPA’sInsuranceand ReinsuranceStakeholder Group (IRSG).
Scope
13. Concerningproduct disclosures,theobjectiveis toidentify good
practicesregardingthe product-specific information aimed at
providinga proper understandingof therisks assumed by the
policyholder in a variableannuitycontract.

Thesedisclosurerequirementsapplyin addition to the information
that needsto be providedon the life insuranceundertakingand
on thecommitmentstheundertakingassumesvis-à-visthe
policyholders.
14.In this context, particular attention should be paid to the multi-
layered charging structure oftenencountered in variable
annuities.
15. Concerningsellingpractices, the aim is tolook at good practices
regardingadvicegiven to customers,whichshould be basedon
their demandsand needs.
Wherethe salesprocesstakesplacethrough insuranceintermediaries
asdefined in the IMD, it hasalsobeen assessedhow insurance
undertakingsshouldensure that salesare appropriate.
16.This Report hasbeen prepared in responsetoEIOPA’s
monitoringrole in relationto new financial activities.
Variable annuitiesfall within the broader category of insurance
contractswithan investment element.
Bearingin mind that at a European level there are several legislative
initiativesunder way, whichmay have an impact on the salesof
variable annuities,namely on product disclosureand on selling
practices(such asthe upcominglegislativeproposal on Packaged
Retail Investment Products–PRIPS- and therevision of the
InsuranceMediationDirective-IM D), thepurposeof theReport is
limitedtoanalysing good practices,to promotecommon
supervisoryapproachesand practices, and toinform the debate on
thistopic.
However, its aim is not to pre-empt theabovementioned legislative
proposalsnor doesit set forth any guidelinesor
recommendations.
17.TheReport hasa clearproduct-specific focusin linewithits
mandate, whichhasdriven the rangeof topicsthat have been
analysed by theExpert Group.

Thescope of previousworkby EIOPA’spredecessorCEIOPSin the
form of technical advice tothe European Commission on PRIPS
and on IMD had been determined by the respectivecall for advice
and, in relation to sellingpractices, covered a number of areas
(such astransparencyof remuneration, conflictsof interestsand
inducements), whichare not dealt with in this Report.
Theseaspectsare broader in nature and should be developedfurther
asthe widerlegal frameworkevolves.
18.In identifying good practices, the Expert Group hastaken existing
EU legislationfor theinsurancesectorasa starting point.
In the future, legal conceptsoriginallydevelopedfor other financial
sectors(such astheKIID for pre-contractual disclosuresor
MiFID for rules on sales) may be increasinglyrelevant asa
benchmark for the insurancesector.
As these issuesare equallyof a wider nature, the Expert Group did
not want to anticipateany developmentsin this respect.
19.Thefocusof thisReport ison good practicesat the point of sale.
Given the long term nature of many VAcontractswithoptions
that can be exercisedover the lifetime of thepolicy, theCCPFI
notedthe importancefor policyholderstoreceivetimelyand clear
information on the performanceof their account value, sothat
theycan exercisetheir optionson an informed basis.
2.2. BASIC PRODUCT FEATURES
20.Variable annuities(VAs) are unit-linkedlife insurancecontracts
with investment guaranteesprovided by the insuranceundertaking
which, in exchangefor singleor regular premiums, allowthe
policyholder tobenefit from theupsideof the unit, but be partiallyor
totallyprotected whentheunit losesvalue.
21.Acommon businessmodel pursued by many larger insurance
groupsconsistsof settingup specific subsidiariesdedicated to
variable annuitiesbusiness,whichunderwrite in several Member
States,through freedom of establishment or freedom of services.

22.In the US (wherevariableannuitieshavebeen sold in a significant
waysincethe1990s) aswellasin some other marketssuch asJapan
theseproductsare very popular.
In Europe, VAshave becomeincreasinglywidespreadtoo, asthe
possibilityto gain from theexposure tospecificunderlying assetsand
beingprotectedagainst a depreciationof theseassetsat the same time
makes them quite appealing.
23.Recently, in somecountriesnew variantsof unit-linkedpolicies
haveemerged that equallyaim toprovidesome downsideprotection,
but whichdonot includea guaranteebythe insurancecompany.
24.As per the previouspaper, thesetypesof contractsfall outsidethe
scopeof this report.
25.In their basic form, the guaranteesembedded in variableannuities
cover the amount of premiumspaid, but quite oftentheyentail
additional features,for instance, that the premiumspaid yield at least
at a pre-defined interest rate (roll-up).
Alternatively, theguarantee may be reset to the highestaccount value
throughout the insuranceperiod, evaluated in accordancetoa set of
pre-definedtimeframes (ratchet).
26.Policyholders’entitlementsare determinedon the basisof the
guaranteedminimum benefits, if the underlying fundsdepreciatein
value(or gain lessthan warrantedby the roll-up rate).
In all other instances,their claims are determined by theperformance
of the underlying funds.
27.Regardingthe size and the characteristicsof the VAmarket
EIOPA haspublished the key findingsof a surveyconcentratingon
larger insurancegroupsin itsFirst Half Year Financial Stability
Report 2011.
From a consumer perspectiveit is important tolook at thetype of
minimum benefit beingoffered.

28. There are several kindsof guaranteesor minimum benefitsthat
can be embedded intoa VA contract. Examplesof common offerings
include:
•GMDB (guaranteed minimum death benefit):Minimum benefit in
caseof death;
•GMAB (guaranteedminimum accumulationbenefit): Minimum
guaranteedcapital after a predefinedperiod;
•GM IB (guaranteedminimum income benefit):Minimum guaranteed
lifetimeor term annuitystartingat a predefinedageon a defined
benefit base;
•GMWB (guaranteed minimum withdrawalbenefits):deferred or
immediate, temporaryor lifelongincome stream.
29.TheFinancial StabilityReport indicatesthat most contracts(72.2
% of grosswrittenpremiums) includea minimum death benefit.
Regardingminimum livingbenefits,GMAB seemsthe most frequent
feature,followedby GMWB and GM IB.
Most policiesare singlepremium contracts.
30.There aretwomajor marketsfor these products.
Somevariableannuitycontractsare intended for specificpurposes
(such asfor private retirement savings) and seek toattract specific
customer groups(such asaffluent individualsapproachingretirement
age), often whentheproductsare offeredin tax preferred wrappers.
In relationto theseproducts,the “insuranceelement” (i.e. the
guaranteedminimum livingbenefits) typicallyplaysa prominent role
in their marketing.
31.Other offeringsare lessfocused in termsof thetarget clientsand
their goals.

Theylook to attract a broad range of customersbypromotingvariable
annuitiesasan investment opportunitywithlimiteddownsiderisk.
For theseofferings,more emphasisis generallyplaced on the
“investment element” (i.e. theunderlying funds).
3. CURRENT TRENDS IN PRODUCT DEVELOPMENT
32.Current trendsin product development can be traced back, to a
largeextent, to thelessonslearned duringthe recent financial crises,
whichresulted in severe lossesfor some important insurancegroups.
To mitigate the effects of losses, these groups had, for example, to
inject significant levels of capital into VA subsidiaries, halt product
offeringsand/ or withdraw from certain markets.
Thecomplexityof the productsoffered, market volatility, inadequate
hedgingand poor product design weresome of the main reasonswhy
theselossesoccurred.
33.One of the key featuresof many variableannuityproductsis the
long-term nature of theguaranteein the form of livingbenefits.
In addition, policyholders areusuallygiven a number of choicesand
options– for instancein relationtofund selection - whichthey can
exerciseat inceptionor during the life of thecontract.
Thesetwofactorscombined tend to make variableannuitiesofferings
particularlycomplex from a risk management perspective.
In particular, theimplementationof a robust hedging programme,
designed to ensure that the movementsin the liabilitiesare offset by
themovement in thefinancial derivativeinstrumentsused for
hedging, presentsa huge challengefor VAproduct companies.
Thelossesexperiencedin the courseof the financial criseshave
evidencedthat the risksassociatedwiththeseproductsare difficult to
understand and toriskmanage.

34.VA product companieshaveput in place variousinitiativeswith the
aim toreducethe risk embeddedin VA contracts. Thesetrendsin
product development include, amongothers,the useof volatility limits
andthe reduction of fund options(for example, through only allocating
investmentstoindex basedfunds).
This Report hasasitssoleobjectivetoevaluate the impact of such
initiativeson consumers, but doesnot assesstheir effectivenessfrom a
risk management perspective.
35.It should be noted, however,that the costof hedging and related
risk-mitigation must be fully reflectedin the chargingstructurefor
theseproducts, thusreducing thepotential benefits toconsumers
compared to pre-crisesofferings.
It is, therefore,important that theproduct informationprovidedis
sufficientlycleartoenableconsumerstofully understand theVA
contract theyhavebeen presentedwith.
3.DISCLOSURES
1.GENERAL AND PRODUCT SPECIFIC
DISCLOSURES
36. Thepurposeof this section is tooutlinea possibleapproach
to good disclosurepracticesfor variableannuities.
Under current EU law, insurancecompanies are obliged to provide a
certain set of pre-contractual informationon the life insurance
policiestheyoffer, but the format, in whichit ispresented, is up
totheir discretion.
Toconveythe essential product characteristicsin a short document
insurersoftenuse a key featuresdocument, whichis prescribed
bynational law in some jurisdictions.
37. Thekey featuresdocument and any promotionalmaterial that
maybe used for pre-contractual informationmust be consistent
with

thegeneral termsand conditionsapplicableto a variable
annuitiesoffering.
It is thereforeseen asgood practicefor the promotional material to
refer, whereappropriate, tothe relevant sectionsof thegeneral
termsand conditions.
In doing so, the insurance companies can ensureconsistencybetween
their disclosure documentsand the actual provisionsin the
contract, but it alsoallowscustomerstoseehow thepre-
contractual information theyreceiveisreflectedin the general
termsand conditions.
38.It is essential for the product provider to explain a number of areas
of relevance to a customer in terms that are easily understandable,
clear, fair and not misleading.
In relationto variableannuitiessome of the features,whichneed to
beconveyed, are veryproduct specificsuchasthosethat result
from theinterplayof minimum benefits and theperformanceof
theunderlying funds.
Others concern general informationon the product provider, the law
governingtheproduct offeringand thesupervisory regime. Their
relevanceis due to the cross-borderbusinessmodel generally
found withvariableannuities.
39.EIOPA recognises that consumers in different European countries
may have different preferences for the types of product disclosures
received.
One wayof addressingconsumer information needsis through the
useof frequently-asked-questions(FAQs).
Thequestionsbelow, whichcould be presented to the potential
customer both in thepromotional material and in the pre-
contractual information documents, are aimed at ensuring that
anyreader will havea good understanding of the product, the
charges,termsin relation to redemption/ maturityand any
specific risksthat theyshouldbe awareof.

Thesehave thereforebeen grouped under 5 headings,although these
are by nomeansexhaustive.
Notwithstandingthequestionsbelow, insurancecompaniesmust
followall legal and regulatory requirementsthey are subject to.
Finally, the questionsaslaid out below are indicativeonly, and
companies may beflexiblein their presentation of theseto
prospectivecustomers,for exampleusing
scenarios,tables,graphicsand “frequentlyasked questions”
toensure that theinformation is portrayed in a consumer-
friendly manner.
1. THE PRODUCT
•What isthe product and how doesit work?(This should
describethe main featuresof the product and the type of
guarantee(s) offered. It should clearlystate at what point any
moniesarepayable and how much thesewill be.)
•What choice does the policy holder have in where premium(s)
are invested and what are those choices?(This should describe
the underlying funds in which monies may be invested and the
abilityof the investor tochoose)
•What are the mainfeaturesof these fundsin termsof investment
objectiveand risk profile?(This should describethe investment
objectiveof the underlying fundsin a clearmanner withan
indication of riskwhich should followthe same approach asthat
used for UCITS)
•How does the guarantee work?(This should describe how the
investment works, how the guarantee works and the interaction
between thetwo)
•Is the insuranceundertakingentitledtounilaterallymodify the
degreeof the guarantee?If so, is the minimum degreeof the
guaranteedetermined?
•Dotheguaranteebenefitsriseor fall under any circumstances?
(If theproduct is subject tomechanismssuch asroll-up or
ratchet, this should clearlydescribehow thesemechanismswork)

•Are thereany circumstanceswheretheguaranteewill not be
applicable?(Thisshould clearlystate any circumstanceswherethe
guaranteewill ceasetoexist or clearlystatethat theguaranteewill
applyin all eventualities)
•If the underlying fundslosemoney, what will be impact on the
policy?(This should describe, perhapsbywayof a simpletableor
graph, what happensto thepayout tothepolicy holder in certain
situations)
•May thepolicy-holder changethe fundsin whichmoney is
invested?(This will describethe processwherebya policy-holder
may or may not have discretion on allocation, and if thereis
discretion, how often and to what extent that canbe exercised)
• Will changingallocation cost thepolicy holder anything?
3.1.2. CHARGES
• What chargesare applicableto thepolicyand how much are
they in percentageterms?
• How much of the initial premium(s) is/ areused to pay the
variouschargespayable under the policy?
• What charges are payable on a regular basis and what is the
impact of these? (This will describe the effect the regular
chargeshaveon the return on thepolicy)
• If the policy-holder redeemsearly, will there be a cost associated
with that?Or how long doesthe policy-holder have tostayin the
policy toavoid any such surrender cost?
• In casethe chargescan bemodified unilaterally, is the
maximum amount of thosechargesdetermined?
3.1.3. SURRENDERS/REDEMPTIONS/ MATURITY
• When doesthe policy mature?
• What doesthe policy-holder receiveon maturity?

• Can thepolicy be surrendered earlier than maturity?
• What happensif surrenderedearlyand isthere a cost associated?
• Doesthe guaranteelapseif surrendered earlier thanmaturity?
• Are thereany bonuspaymentspayable?
• Can thebenefitsof thepolicy be transferredtosomeone else?
• If so, how will this affect the policy?
3.1.4. RISKS
• Isthere any risk that the insurancecompany will not beableto
paythebenefits?
• How exposed is the policy-holder tothe riskinessin the
underlying funds?
• Are thereany circumstanceswherethepolicy-holder may not
obtain the guarantee?
• Isthe policy-holder exposed to therisk that thefundswill
perform badly?
• How doesthe policy-holder know that the premiumsare
beinginvested asrequested?
3.1.5. COMPLAINTS/ LEGAL/TAX/REGULATION
• Which company doesthepolicy-holder have a contract with?
• What isthe name and addressof the regulatory body of the
insurancecompany that thepolicy-holder hasa contract with?
• Which regulatorybody doesthe policy-holder contact in the
event of a complaint?Doeshe have accesstoanAlternative
DisputeResolution (ADR) system?

• Isthat company a member of an InsuranceGuarantee
Scheme?In what country?
• What arethelegal consequencesfor the policy-holder in the
event that the insurancecompanybecomesinsolvent or winds
up?
• In the event of a legal disputebetweenthepolicy-holder and
theinsurancecompany, under whichjurisdictionwill the
legalproceedingshappen (i.e. the governinglaw of the
contract)?
• Are thereany tax or legal issuesthat thepolicy-holder
should beawareof?
3.2. ILLUSTRATIONS
40. Theuseof illustrationsis governedby EU legislationin a
number of aspects.
For theinsurancesector Directive2009/138/EC (“SolvencyII”), in
particular, setsforth certain requirementson insurance
undertakings,whenthey providefiguresrelatingtopotential
paymentsabove and beyond the contractuallyagreed payments.
Thesealsoapplyin relation to variable annuitycontracts, asthe
guaranteedbenefitsconstituteminimum promises, whichmay
beincreasedin theevent that the underlying fundsappreciatein
value.
Thefollowingexamplesillustrate, specificallyfor variable annuities,
good practicein implementingtheselegal requirements.
41. Illustrationsshould be used to give customers an understanding
of what payoutsthey mayreceive and what it might cost them in
agiven set of circumstances.
It is usuallysensibleto show thison a number of different bases
derived from the specific details of the case.

Other illustrationson top of thesecould be provided but theseshould
not assume investment growth abovethe top rate of thecore
illustration.
42. By contrast, the systematic useof favourable scenarios(when
all scenariospresented lead to a positiveoutcome) wouldbe
misleading.
Unfavourablescenarios should alwaysalsobe presented and
illustrated;otherwisethe customer could wronglyassumethat
his contract hasnodownside.
Thescenariosshould alsomake clear themaximum riskassumed by
thecustomer.
43. In additiongiventhat many of thechargesapplied tothese
productsare based on the underlying investment it is alsogood
practicetoshowthe effect of thesechargeson the growthof the
fund.
This can be done asan effectivereductionon the yield of the
investment or asan effect of chargescalculation(based on a
standard investment growth rateor indeed no growth).
44. Furthermore it is alsoreasonabletousecasestudies toshow
what might happen in certain circumstancesbut theseshould
not bemisleading, should show thenegative casesaswell asthe
positiveonesand should not take awayfrom the standard
illustrationsabove.
45. All of the above should be caveated with the fact that these are
just illustrations and should not be seen to give any promise that
thiswill be what the customer will actuallyget.
4. SELLING PRACTICES
1. DEMANDS AND NEEDS OF THE CUSTOMER

46. This section identifies good sellingpracticesfor variable
annuitiesirrespectiveof the distributionchannel via whichthey
aresold (direct salesor through intermediaries).
For theinsurancesector, current EU legislationonly coverssalesby
insuranceintermediaries, defined asanyperson who, for
remuneration, takesup or pursuesinsurancemediation.
Insuranceintermediariesshall specify prior to the conclusion of any
specific contract, in particular on the basis of information
provided by the customer, thedemandsand needsof that
customer aswell asthe underlying reasonsfor anyadvice given
tothe customer on a given insuranceproduct.
47. In view of the complexityof many VAofferings,their long-term
nature and theimportancethese productsfrequentlyhave in the
context of privatewealthmanagement, it is good practiceto
applytheseprinciplestothe distributionof variableannuities
generallyas, irrespectiveof thedistribution channel, the
demandsand needsof a customer should alwaysdeterminethe
type of contract that is being offered.
Thesalesprocessshould be conductedby suitablyqualified
salespersons.
48. Theobjectivepursued by a customer, based on the material facts
that he hasdisclosed, should be a key consideration in assessing
his demandsand needs.
Determining whether a certain product offering is suitable will namely
depend on whether it is used for private retirement savings or as
investment opportunitymore generally.
49. TheExpert Group identified a number of areaswherethere is
apotential risk of mis-selling(advicebased onpersonal
circumstances, useof clear projections,useof clear language).
Thequestionsbelow are intended to prevent such risk from
materialising.

It should be noted that thislist isindicative.
4.1.1. PERSONAL CIRCUMSTANCES
• Doesthe salesperson askfor customer’sage, financial
situation, personal demand, knowledgeof financial markets
and the time horizon for hisinvestment (short, medium or
long-term) etc.?
• Basedon this demanddoesthesalespersonoutlinealternative
products(direct investments,unit-linkedcontractsetc.) to VA
products?Which featuresshould the customer focuson when
comparing VAtoother products?
• Is the VA product tailoredto thecustomer’sdemand
(privatepension plan, investment)?
• Are thereanypersonal circumstancesunder whichthesales
person should not adviseVA?
4.1.2. USE OF CLEAR PRODUCT DESCRIPTIONSINCL.
ILLUSTRATIONS
Thesalesperson should inform the customer in a clear and
comprehensivewayabout the relevant aspectsof the VA
product to ensure thecustomer understandscorrectlythe
product he wantstobuy.
• Have potential risksof the VAproduct been explainedin detail?
• Has thefund performance been illustratedby adequateand
plausiblescenarios?(An adequatedepiction includespositive
scenariosaswellasnegativedevelopments.It should alsoinclude
a worstcasescenario.)
• What are the benefitsof the contract in caseof surrender and
death and have thesebeen clearlyillustrated?

• Doesthe insuranceundertakingprepare information sheetsfor
thesalesperson/ intermediarythat theyshould usewhen
informingthecustomer?
• Doesthe insuranceundertakingmonitor the intermediary?
• Doesthe customer have toconfirm in writingthat he understood
theinformation received?
4.1.3. USE OF CLEAR LANGUAGE
Thesalesperson should be able to illustrateall relevant aspectsof the
VA product without using too manytechnical termstoavoid any
confusion.
If technical termsare used, for instancein writtenproduct information
(e.g. volatility), theintermediary should be able toexplain them
in a clear manner.
Thecustomer should be ableto take purchasedecisionsand to
exercisehis optionsduring the contract period on an informed
basis.
• Doesthe salesperson usetermswhichare understandable
alsofor non experts?
• Isthe salespersontrainedto explainthecomplex basisof the
VA products?
• Doesthe salesperson explain the writtenproduct information to
thecustomer?
4.1.4. UNDERSTANDING POTENTIAL FUTURE
OUTCOMES
Theperformanceof fundsunderlying VAcontractsdependson
different economicvariables and conditions.

Despitea varietyof illustrationsthe customer may not be able to
assess, whichscenario is more realistic, if he is unawareof these
variablesand how theymay affect theperformanceof fund
investmentsunderlying hispolicy and ultimatelyhis account
value.
Customersshould be made awarethat the performanceof their
account valuedependson how theseeconomic variablesand
conditionschangeover time in a way, whichis comprehensible
tothem. Onlythen can theydecide whichillustrationthey
consider more realistic.
• Doesthe salesperson explain how external factorse.g. on
capital marketscan affect thefund development?
• In order toexplain how external factorscan affect the fund
development, doesthe salespersonrefer to fund developments
of the past?
Doeshe explain that pastperformanceis not necessarilyan indication
of future performance?
• How doesthe salespersonmeasure that the customer
hasunderstood the informationreceived?
Themechanicshow a VA-product generatesprofitsor lossesmay be
very complex.
Even if the customer can assesswhichscenariois more realistic, he
doesnot know whetherhehaslossesor profitsin such a
scenario.
• Doesthe salesperson explain thebasic featuresand
underlyingsof the VA-product in question?
• Dependingon thetype of the VA-product, doesthe salesperson
show the differencebetweena classical unit-linkedproduct and a
VA-product (Type of guarantee, contractual claimsin caseof a
positiveor negativefund development, structure of charges)?

• Doesthe salesperson explain what kind of different options
the customer can exerciseduring the duration of the contract
andhow thiscan affect the fund development?
• Does the sales person explain in which cases the customer gets
only the guaranteed benefits at the end of the contract duration
(e.g. adverse fund development) or to what extent he benefits
from a positivefund performance?

Learningmore about SupervisoryAgencies
BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht
Bundesrepublik Deutschland (Federal Republic of Germany)
Sinceit wasestablishedin May2002, the Federal Financial Supervisory
Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - known
asBaFin for short) hasbrought the supervisionof banks and financial
servicesproviders,insuranceundertakingsand securities tradingunder
oneroof.
BaFin isan independent public-lawinstitutionand is subject to thelegal
andtechnical oversight of the Federal Ministryof Finance.
It is funded by feesand contributionsfrom theinstitutionsand
undertakingsthat it supervises.It is thereforeindependent of the Federal
Budget.
Organisation
BankingSupervision, InsuranceSupervision and Securities
Supervision/ Asset Management arethreedifferent organisational units
within BaFin – theso-calledDirectorates.
International
Thelargenumber of players operatingon theglobal financial markets
hasbeen increasingsteadily for many years now.
Even though there isnolegal framework that is bindinginternationally,
marketsare still expandingacrossborders.

Financial supervision, however, is still largely inward-looking, since
sovereignpowersusuallyend at thenational border.
Functions
BaFin operatesin thepublic interest. Itsprimaryobjectiveis to ensure
theproper functioning, stabilityand integrity of the German financial
system.
Bank customers, insurance policyholders and investors ought to be able
to trust the financial system. BaFin has over 1,900 employees working in
Bonn and Frankfurt am Main.
Theysupervisearound 1,900banks,717financial servicesinstitutions,
approximately600insuranceundertakingsand 30 pension fundsaswell
asaround 6,000domesticinvestment fundsand 73 asset management
companies (asof March2011).
Under itssolvencysupervision, BaFin ensuresthe abilityof banks,
financial servicesinstitutionsand insuranceundertakingsto meet their
payment obligations.
Through itsmarket supervision, BaFin alsoenforcesstandardsof
professional conduct whichpreserve investors' trust in the financial
markets.
As part of itsinvestor protection, BaFin alsoseeksto prevent
unauthorisedfinancial business.
Legal basis
BaFin’s By-Laws represent a major set of preceptsfor how it acts. They
contain regulationsgoverningitsstructure and organisationand its
rightsand obligations.

Theyalsogovern thefunctionsand powersof BaFin’ssupervisorybody,
itsAdministrative Council (Verwaltungsrat), and detailsof itsbudget.
BaFin alsobasesthewayin whichit carries out itssupervisoryactivities
on theMissionStatement it gave itselfshortly after it wasestablished.
Accordingtothis MissionStatement, BaFin’sfunction is tolimit risksto
theGerman financial system at both thenational and international level
andtoensure that Germanyasa financial centre continuesto function
properlyand that itsintegrityispreserved.
As part of the Federal administration, BaFin issubject to the legal and
technicaloversight of the Federal Ministryof Finance, withthe
frameworkof whichthelegalityand fitnessfor purposeof BaFin's
administrativeactionsare monitored.
BaFin Text - Solvency II
Among other things, SolvencyII – theproject toreform the European
legal frameworkfor insurancesupervision – harmonisesthesolvency
capital requirementsfor insurancefirmsand groups.
Followingtheadoption of theSolvencyII Directivein November 2009,
thefocusin 2010wason developing the implementingmeasuresthat are
tobe adoptedand on performingthe fifth quantitativeimpact study
(QIS5).
It is currentlyplannedto make theinitial amendmentstothe SolvencyII
Directiveat the end of 2011by wayof the OmnibusII Directive, for which
theEuropean Commissionpresenteda proposal on 19January2011.
This containsamendmentstotwo keyareasof legislation.
Firstly, it amendsdirectivesgoverning insuranceand securities
prospectusestoreflect the new EU ruleson financial market supervision

and in particular thenew EU financial supervisory authoritiesthat began
workon 1January 2011.
For example, EIOPAis incorporated intotheSolvencyII Directiveas
thesuccessortoCEIOPS.
Provision isalsomade for the bindingsettlement of disputesby EIOPA.
Secondly, theproposal containsamendmentstotheSolvency II
Directive.
For example, theDirectiveprovidesfor theimplementationof Solvency
II tobe postponed by twomonthsuntil 1January 2013.
TheOmnibusII Directivealsoenablesthe European Commission to
specify transitional requirementsfor individual elementsof the
FrameworkDirective, withdifferent maximum transition periodsbeing
set for each area.
TheOmnibusII Directiveisof considerablesignificancefor the
continuing evolution of Solvency II.
For technical reasons, the European Commission cannot present the
official draft of the Solvency II implementing measures until after the
OmnibusII Directivehasbeen adopted.
TheOmnibusII Directivewill thereforehavea significant influenceon
theongoing workon the implementingmeasures.
Implementing measures
TheSolvencyII Directivegivesthe European Commission the authority
toadopt implementingmeasuresfor particular areas.
Theseare intended toadd detail tothe Directiveand henceimprove the
harmonisationand consistencyof supervisionin Europe.

In spring 2010,CEIOPSsubmitted itsproposalsin thisarea tothe
Commission, whichat the end of 2010presented an initial informal full
draft of the implementingmeasuresbased on theproposals.
In 2011, thisdraft will be discussedfurther withthe member states,with
specific considerationbeing given tothe findingsof QIS5.
Theofficial draft of the SolvencyII implementingmeasureswill not be
presentedbythe Commissionand discussed withthe Council and the
Parliament until after theOmnibusII Directivehasbeen adopted.
Impact studies
TheQIS5studyconducted by the Commission in the year under review
is basedon theSolvencyII Directiveand reflectsthe implementing
measuresdeveloped up until that time.
Theobjectivewasto test the quantitativeimpact of SolvencyII in detail.
European insurancefirms and groupswereasked to take part in the
studybetweenJuly and November 2010.
Theresultsreceivedfrom solofirms wereinitiallyevaluated by the
national supervisoryauthorities,while thedata received from groups
wereanalysed by CEIOPSor EIOPA.
All resultsand findingswereincorporatedintoa European report, which
EIOPA presented to theCommission in March2011.
In addition, BaFin published a national report.
Theresultsof the studywill have a major influenceon the discussion
regardingtheSolvencyII implementingmeasures

Guidelines for supervisors
In future, the provisionsof theDirectiveand theimplementing measures
adopted by the European Council and theEuropean Parliament will be
complementedby guidelinesfor supervisorsadopted by EIPOA, with the
aim being to further harmonise supervisorypracticein Europe.
Thefour existingCEIOPSand EIOPAworkinggroupsbegan workon
theseguidelinesin the year under review.
In addition, EIOPAwill develop bindingstandards(on the design of the
yield curve, for example).
One of theworkinggroups, the Financial RequirementsExpert Group
(FinReq), hasthreeareasof work:capital requirements(SCR/ MCR), the
statement of technical provisionsand own funds.
Among other things,it hasdrawn up initial proposalsfor guidelines
relatedtotheprocedure tobe followedfor the approval of undertaking-
specific parametersfor usein calculatingthesolvencycapital
requirement and therecognitionof ancillaryown funds.
In cooperation with the Groupe Consultatif, a forum of European
actuarial associations, it is also developing actuarial standards for
calculatingtechnical provisions.
TheInternal Governance, SupervisoryReview and Reporting Expert
Group (IGSRR) is responsiblefor the requirementsfor public disclosure
and supervisory reportingby undertakings,capital addonsand the
valuation of assetsand liabilities,and is developing guidancefor
supervisorson what thesupervisoryprocessmay look like under
SolvencyII.

In doing so, it isfocusingspecificallyon the evaluation of theownrisk
and solvency assessment (ORSA) and the templatesfor futurereporting
tosupervisors.
On a closelyrelated topic, consideration is being given tohow and
whichdata may in future beexchanged electronicallybetweennational
supervisoryauthoritiesand with EIOPA.
In 2010,the InternalModels Expert Group (IntMod) developed guidance
on theusetest and on calibration, showingsupervisorsand the insurance
industryhow they can fulfil the future requirements.
TheGroup alsodrew up general guidelineson hithertoless-discussed
topics, such asthe inclusion of profit and lossattribution in the internal
model.
Thefourth CEIOPS/ EIOPAworkinggroup, the InsuranceGroups
Supervision Committee(IGSC), is drawingup guidanceon practical
cooperationin the collegesand in coordinatingmeasures.
Theworkinggroup isalsodevelopingharmonised approachesfor
identifying, reportingand assessingrisk concentrationsand intragroup
transactions.

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

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

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

TheValue-at-RiskMeasureCalibratedtoa 99.5% Confidence
Level over a 1-year Time Horizon
TheStandardApproach
TheInternal Models
TheCollectionofAdditional HistoricalData
External Data
The Minimum Capital Requirement (MCR)
Non-CompliancewiththeMinimum Capital Requirement
Non-CompliancewiththeSolvencyCapital Requirement
Own Funds
Investment Rules
INTERNAL MODEL APPROVAL
CEIOPSLevel 2 - Testsand Standardsfor Internal Model
Approval
CEIOPSLevel 2 - The procedure tobe followedfor theapproval of
an internal model
Internal ModelsGovernance
Group internal models
Statistical qualitystandards
Calibrationand validationstandards
Documentation standards
SOLVENCY II, GROUP SUPERVISION AND TH IRD COUNTRIES
SolvencyI: SoloPlusApproach
Group Supervisionunder SolvencyII
Rightsand dutiesof the group supervisor
Group Solvency - Methodsof calculation
Method1(Default method):Accounting consolidation-based
method
Method2(Alternative method): Deduction and aggregation
method
Parent UndertakingsOutsidethe Community - Verification of
Equivalence

Parent UndertakingsOutsidethe Community - Absence of
Equivalence
Thehead of thegroup isin theEEA and the third country regime
is not equivalent
Thehead of thegroup isin theEEA and the third country regime
is equivalent
Thehead of thegroup isoutsidethe EEAand the third country is
not equivalent
Thehead of thegroup isoutsidethe EEAand the third country
regimeisequivalent
Small and Medium-SizedInsurers:TheProportionalityPrinciple
Captivesand SolvencyII
EQUIVALENCE WITH SOLVENCY II AROUND THE WORLD
Solvencyii and Countriesoutsidethe European EconomicArea
TheInternationalAssociation of InsuranceSupervisors(IAIS)
TheSwissSolvencyTest (SST) and Solvencyii:
Solvencyii and theOffshoreFinancial Centers(OFCs)
Solvencyii and theUSA
Solvencyii and theUS NationalAssociation of Insurance
Commissioners(NAIC) - The Federal InsuranceOffice created
under the Dodd-Frank Wall Street Reform and Consumer
ProtectionAct in theUSA, and the ORSAin theUSA
FROM THE REINSURANCE DIRECTIVE TO THE SOLVENCY II
DIRECTIVE
Directive2005/ 68/ EC of 16November 2005on Reinsurance- The
ReinsuranceDirective(RID)
CLOSING
TheImpact of Solvencyii OutsidetheEEA
ProvidingInsuranceServicestotheEuropean Client
Competing withBanks

Learningfrom theBasel ii Framework
RegulatoryArbitrage:AMajorRiskfor Countriesthat see
Complianceasan Obligation, not anOpportunity
Basel II, Basel III, SolvencyII and RegulatoryArbitrage
Challengesand Opportunities:What is next
RegulatoryShopping after SolvencyII
Tolearnmore about theonlineexam you may visit:www.solvency-
ii-
association.com/ CSiiP_CSiiEP_Frequently_Asked_Questions.pdf
www.solvency-ii-association.com/ CSiiP_CSiiEP_Certification_Steps.pdf
Tolearnmore about thecourse:
www.solvency-ii-association.com/ Certified_Solvency_ii_Training.htm

Solvency ii News May 2012

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