Committee reports

European Commission – publication of a framework directive

A proposal for a framework directive for the future new supervisory system – known as the Solvency II project – was presented by the European Commission in the summer of 2007. The Commission intends to introduce the new supervisory rules in the EU member states by 2012.

The proposal for a "Directive of the European Parliament and of the Council on the taking-up and pursuit of the business of insurance and reinsurance" was adopted by the European Commission on 10 July 2007.³ The 13 existing European insurance directives have thus been combined into a single new directive. The proposal includes an Impact Assessment Report, as required since 2005.

In introducing new regulatory requirements, the Commission has the following objectives:⁴

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  To intensify the integration of the EU insurance market
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  To protect policyholders and beneficiaries
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  To strengthen the international competitiveness of EU insurance and reinsurance companies
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  To bring about an improved legislative process

One of the impacts of the reform is that insurance companies will have to record all risks appropriately in future. The amount of capital required will be calculated on the basis of the actual risks incurred. Besides having to comply with these purely quantitative requirements, companies will also have to meet qualitative risk management requirements.

The proposed framework directive also includes rules for the supervision of groups, though they are the subject of some political controversy. They provide for the supervision of insurance groups essentially by a group supervisory authority. To this end, a "group supervisor" – also referred to as Home Supervisor – from the home country authority responsible for supervising the insurance group’s parent company is to be granted extensive responsibilities and cooperate closely with the local supervisory authorities of the European member states in which the group’s subsidiaries are located. Many national supervisory authorities, in particular those in the smaller EU states, remain opposed to this proposal. They fear loss of influence over companies they have been able to control under the present regulations.

The European Commission is under considerable time pressure to adopt the new supervisory regulations before the European Parliamentary elections are held in 2009. Since it is likely that Members of the European Parliament will start making intensive preparations for the election campaign from the beginning of 2009, the Commission is adhering to its ambitious goal of adopting the directive if possible by the end of 2008.

If it succeeds in doing this, the Commission hopes to introduce the new regulations in the European member states from 2012. Preparations necessary for the implementation of the directive in EU member states should have been completed at national level at least 18 months before the directive comes into force. The supervisory authorities of the EU member states need to be provided with guidelines well before the directive takes effect. The insurance industry is to be given sufficient time to take any preparations for the new supervisory rules well in advance.

Provisional future timetable

With these objectives in mind, the European Commission submitted a provisional timetable for further action on the Solvency II project to CEIOPS in its letter of 19 July 2007.⁵ In this letter, CEIOPS was asked to continue to actively support the Commission.

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³ The main new regulations are described in the 9th Solvency II Newsletter. The Directive can be viewed online at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0361:FIN:DE:HTML.
⁴ Cf. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=SEC:2007:0870:FIN:DE:HTML.
⁵ See letter by Director General Jörgen Holmquist to AEAVBA (CEIOPS). Online at: http://ec.europa.eu/internal_market/insurance/solvency_de.htm.

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CEIOPS⁶

New structure at CEIOPS

There have been several changes in the membership of CEIOPS’ Managing Board and a new Secretary General has been appointed. An internal auditor function has also been created. The changes are shown in the chart below:

CEIOPS supports the European Commission

CEIOPS has been requested to support the European Commission by carrying out the following activities in the next few months:

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  Submitting draft technical specifications for the fourth impact study (QIS4)
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  Providing advice on the principle of proportionality and the supervision of insurance groups relevant for the adoption of the framework directive at European level
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  Offering assistance with issues related to the quantitative requirements based on the results of QIS3 and QIS4.

CEIOPS publishes work plan for 2007–2012

In September 2007, CEIOPS submitted a work plan for the years 2007 to 2012,⁷ provisionally outlining the next steps in the process until final implementation of the new EU legislation. In 2008, CEIOPS will be involved in both the QIS4 quantitative impact study and a number of consultation phases. In addition, it will be engaged in numerous activities revolving around the implementing measures for the new supervisory regulations (level 2 of the Lamfalussy procedure). Some of these activities will not be completed until 2009. They will be focusing on:

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  valuation of assets and liabilities, including technical provisions;
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  the method of calculating eligible elements of capital;
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  structure and calibration of the standard formula for calculating solvency capital and minimum capital requirements;
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  full and partial internal models;
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  requirements regarding corporate management;
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  disclosure obligations and reporting to the supervisory authorities;
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  additional capital requirements ("capital add-ons");
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  supervision of insurance groups and local supervision of group subsidiaries.

In this context, the discussions at the IASB⁸ on accounting regulations, which are also undergoing changes, should be followed closely. The aim of all participants is to find similar, or at least consistent, solutions to the same issues, e.g. the valuation of technical provisions.

Consultation Paper

Risk management will gain even more in importance under Solvency II. CEIOPS submitted the Consultation Paper Risk Management and Other Corporate Issues in mid-July 2007. The principles and minimum quality standards set out in this paper could serve as a basis for European insurers’ risk and control structures in future. The main aim of risk management, according to the paper, is to continually identify, analyse, control and monitor all material risks incurred by a company. A risk management system should be supported by suitable internal control systems and a clearly defined organisational structure. The general requirements stipulated in the paper include the following:

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  A robust system of controls that includes as a minimum the organisational structure
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  A system designed to take account of the type, scope and complexity of the company's activities.
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  Regular internal audits of the system
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  Rules for risk management and internal controls laid down in writing and reviewed annually

Actuarial expertise will play an important role in risk management in future. According to the paper (and as mentioned in the European Commission’s proposed framework directive), all insurance companies must in future have access to such expertise, which will presuppose sufficient knowledge of actuarial and financial mathematics. The actuarial function will be responsible for preparing an annual solvency report containing results and recommendations for the company’s board.

The stakeholders had the opportunity to comment on the requirements until mid-October.

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⁶ Committee of European Insurance and Occupational Pensions Supervisors
⁷Cf. "CEIOPS Work Plan for Solvency II Deliverables 2007–2012" at:
http://www.ceiops.org/media/docman/CEIOPS-SEC-%20SolvencyIIDeliverables2007-2012.pdf.
⁸ International Accounting Standards Board

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European actuaries – Groupe Consultatif

The Annual Conference of European Actuaries was hosted by the Groupe Consultatif in Hamburg on 4 and 5 October 2007. The proposal for a framework directive was on the agenda of several committees, with particular emphasis on the following areas:

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  Requirements of actuaries in respect of the actuarial function described in Section 47
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  The methodology for calculating technical provisions
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  Solvency report

The Groupe Consultatif, which represents the European actuarial associations, has supported CEIOPS since its foundation, especially in actuarial issues and risk theory. To do this efficiently, the Groupe Consultatif chose a working group structure for the Solvency II project in 2004 which is similar to CEIOPS’ expert group structure. When CEIOPS restructured its Solvency II expert groups, the Groupe redesigned its Solvency II working groups to reflect this new structure, enabling close and active cooperation to continue.

The actuaries will concentrate on the following activities in the next few months:

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  Comparison of actuarial methods for calculating the best estimate (as part of the technical provisions) in non-life
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  Valuation standards for internal models
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  Structure and actuarial content of the solvency report

Coordination Group on Proxies

At the beginning of 2006, the Groupe Consultatif pointed out that the calculation of the best estimate of technical provisions was an important factor in the introduction of Solvency II (at least in non-life). This concerned not so much the calculation of the SCR as the determination of eligible capital in the Solvency II balance sheet. The calculation of the best estimate plays a significant part in the proposal for a framework directive. The aim is to determine the fair value of future cash flows for liabilities already incurred, which requires sufficient statistical data from every company (run-off triangles for claims) and actuarial expertise. In Europe, there are currently quite a number of small and medium-sized companies that are unable to satisfy at least one of these conditions.

At the Groupe Consultatif’s suggestion and CEIOPS’ initiative, working groups consisting of representatives of the respective supervisory authorities were therefore established in a number of countries at the beginning of last year. Their purpose is to propose solutions for approximating the best estimate in non-life. Such approximations are only to be permitted where actuarial expertise or statistical data are inadequate.

Since then, newly established groups in 12 countries have taken up their work. In the middle of last year, the Coordination Group for Proxies comprising representatives of these national groups was founded. It is jointly headed by CEIOPS (Olaf Ermert) and the Groupe Consultatif (Rolf Stölting). The national proxy solutions are to be compared and aligned as far as possible to ensure that the harmonisation requested by the European Commission is achieved in this area as well. One of the Coordination Group’s first duties is to incorporate the findings of CEIOPS’ Financial Requirements Expert Group in the proposal for QIS4.

IAIS/IAA

Cooperation between IAIS and IAA has been further intensified. In this regard, IAIS has asked IAA to produce publications on a variety of subjects, including the appropriate valuation of technical provisions and internal models. Furthermore, work on another publication dealing with enterprise risk management has begun. A first presentation on this subject has been given by the IAA to the IAIS Solvency and Actuarial lssues subcommittee.

These topics are, of course, also of great significance in the context of Solvency II in Europe. The strong involvement of European actuaries in the IAA’s working groups ensures that the relationship with the Groupe Consultatif will remain close, enabling the Groupe to provide input to the IAA, which has a worldwide role.

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