Solvency ii News April 2012

Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.solvency-ii-association.com
Solvency II News, April 2012
Dear member,
“We‟reno longer a committeeof supervisors,we‟rean authority”
Interview with Gabriel Bernardino, Chairman of EIOPA,
conducted byAndré de Vos, Omni magazine
SupervisoryauthorityEIOPAsubmittedrecommendationsfor new
European pension regime tothe European Commission on 15 February.
EIOPA Chairman Gabriel Bernardino
understandsthat theproposed changesmake
thesector nervous. „But let‟snot start
panicking;this is onlythefirst step.‟
Ice flowsin the Mainfifty metresbelow us.
Theview from Gabriel Bernardino‟sofficeis breathtaking, even on a
grey Februaryafternoon.
TheEIOPA‟s officesare located on the14th, 25th and 26th floorsof the
greenglassWesthafen Toweralongthe banksof the Main in Frankfurt.
As the wind whistlesoutsidethe glasspanels, EIOPAChairman
Bernardinodetails the European Insuranceand Occupational Pensions
Authority recommendationsreleased that sameday regardingchanges
toIORP European pension regime.
www.solvency-ii-association.com

Bernardino& Co.‟sfinal recommendationsweresubmittedthesame day
tothe European Commission. The Commission in turn issuedits„white
paper‟on thepension fundsa day later.
The„whitepaper‟contained elementsfrom theEIOPA
recommendationswhich, after all, had been released last October for
consultation.
Theversion most recently submittedto theEC incorporatesthe 170
responsestothe recommendationsreceived.

Are you surprised bythenumber of responsesto your recommendations?
„Thepension sector takestheserecommendationsseriouslyand we‟ve
receivedresponsesfrom every possibletype of organisation, not justthe
pension funds, facilitatorsand insurers,but alsogovernment authorities,
labour unions,employers and even participants.

I‟m pleased withthewidediversity of responses.
It‟s niceto have generated somany opinions,although a percentageof
thefeedback did not pertain directlyto our recommendations, but tothe
content of the tasksassignedtousbythe European Commission.‟
Recommendationsrunningtomorethan 500pagesis not exactlyeasy
reading.
„That wasa deliberatedecision.
We‟rebreakingnewground and this isa sensitive discussion.
That‟swhyweaim tobe completely transparent, toshow how wearrived
at our decisions,whoour sourcesare, the prosand consof our position
andthestepswe‟d like to take. That resultsin a thick document.
But the onethat I‟m satisfiedwith.And thosewhoonlyread the blue
boxeswith the adviceitself can still get a clear picture of our intention.‟
Did all of thoseresponsesleadtochangestoyour original
recommendations?
Some of them do. We now clearly explain in the introduction what our
goal is and, of all the options set out in the original recommendations,
quitea few have been shelved.
Therecommendationshavebeen streamlined, but are mostlyin linewith
theconsultationadvice given in October.‟
This will comeasadisappointment to many.
„Manypeopleare actingasif everything is already set in stone.
But let‟snot start panicking;thisis onlythe first step.

There‟s still plentyof worktobe done before a new European regime is
in place.‟
Many of theresponsestoyour recommendations, includingfrom the
Netherlands,point tothefact that theEIOPAshould not bemeddlingin
thisarea – handsoff our pension schemes!
„That‟sunderstandable.
It‟sa misconceptionto think that our goal is to replace theexisting
schemes.We want toseewhereimprovementscan be made.
There arealwayssimilaritiesacrossnational pension systems. What they
all have in common is that pension promisesare beingmadeacross
Europe.
Regardless of the national structure used to fulfil those promises, we
believe that clarity is needed at European level regarding the value of
thosepromises.
But todo thiswemust be ableto compare, whichin turn requires
European regulations.
This is ultimatelyin everyone‟sbest interest, from employeesto the
fundsmakingthepension promisesin the variouscountriestothe
pension industryitself, whichwill be in a better position to operate
acrossborders.‟
„European organisationslike EIOPAneed to communicatebetter about
theaddedvalue of these typesof European agreements,certainlyat a
timewhentheEU itselfis under debate.
It is preciselybecauseof the EU current unpopularity weneedto move
forwardin thisway.

Thesekindsof recommendationsare in keepingwiththat ambition.
They‟re good for Europe.‟
What is your personal opinionof themost important proposalsin the
recommendations?
„We‟re putting forward a „holistic balance sheet‟, a harmonisation on top
of the existing balances, which will make it possible to compare pension
funds.
ClearEuropean rulesare needed for thegovernanceof pension funds.
And participantsin pension fundswitha definedcontributionplan must
beprovided withclear and accessibleinformationin a standardised
fashion.
This is calleda „KeyInformation Document‟.‟
Theproposalsfortheholistic balancesheet require further development.
„Over thenext few months, we‟regoing to carryout a quantitative
impact studyon how our proposalswouldlook like in practice.
We‟re starting in April and will conduct this study in the countrieswhere
Defined Benefit Plans are most relevant. (Until now we have 7 countries
includingthe Netherlands).
Our primary goal is todevelop a uniform and consistent manner to
communicateabout pensions.‟
The pension sector isafraid that the new European pension regime will
impose much stricter capital requirementson pension funds, like those
in SolvencyII.

„I have nointentionof imposinganother Solvency II on the pension
sector. That isa persistent misconception.
But it‟snot mentionedin our recommendations.
After all, there are essentialdifferencesbetweenpension fundsand
insurers, soyou cannot imposecapital requirementsin thesame way.
That doesn ‟t alter the fact th at Solv en cy II con t ain s a n
umber of important provisionsin areaslike governanceand risk
management that can alsobe used for pension funds.‟
What kind of changesare needed in thearea of governance?
„Pension promisesin Europe need to be guaranteed in thesame way
acrossEurope.
This meansthat governancealsoneedstobe organised in a comparable
manner.
Regardlessof national pension system structures, the administrators
responsiblefor investmentsneed tounderstand what theyare investing
in.
Theknowledgelevel of pension administratorsis a pan-European
theme; agreementsin this area alsoneed to be made at European level.
But it should still be possibletodistinguishbetweenlargeand small
funds,DB and DC schemes.‟
Pensionfundsareafraid that largerbuffers will lead to lowerpensions.
„We need a pension regimewitha good balancebetweencertaintyand
affordability.

That‟swherebufferscome in.
If you want 100% long-term security, there will be no fundsleft for
pensions.
And if you onlyconsider theaffordabilityof the system, toomuch risk is
taken.
We want to supplyinstrumentsthat make it possibletoview risksacross
Europe in the same way.
We want a consistent approach to riskacrossEurope.
This can alsoentail certain minimum requirementsfor buffers.
But that is ultimatelya politicaldecisionand doesnot concern us.
We simplyaim toprovidea clear framework that facilitatesriskand
return determination.‟
All pension fundsareto bebasedon market valuefrom nowon.
„Our standpoint is that, if you want to effectivelycompare pension funds,
themarket valueof assetsand obligationsshould form thebasis.
That is theholisticbalancesheet approach.
If everyone usesthesame reporting format, pension agreementscan be
easilycompared. But this still meanspension fundscan continueto
consider their national specificities.
Not onlythat, but it providesthe possibilityof incorporatingassurances
asbufferson thenational level.

Our aim is toachievecomparability of thevariousnational systems with
aslittleimpact on thosesystemsaspossible.‟
TheDutch believethat theNetherlandshasthebest pension system.
Shouldwebeconcerned that it could beunderminedbyEuropean
regulations?
„TheNetherlandsmust alsobe integratedintotheEuropean system,
which, after all, is the wholepoint of theEU, i.e. that weall observethe
samerules.
But I don‟t anticipateany dramatic changestothe Dutch pension
system.
Our recommendationscontain numerousmeasuresthat wereintroduced
in theNetherlandslong ago.‟
Like themarket valuationsthat areseriouslydamagingour coverage
ratios and that wewouldprefer toget rid of onceand forall.
„Afew years ago, theNetherlandsmade a brave decision whenit chose
themarket valuation of both assetsand obligations.
That thismight now possiblyresult in cutbacksin pension rightsis
evidenceof the risk run by pension funds.
You can‟t solvethat problem but suddenlyusing a different interest rate.
In the quantitativestudies,wewill be testinghow a holistic balance
sheet withmarket valueswouldworkin practice.‟
What about thekey information document?
„There are needsfor a clear format for information presentationto
participantsregarding DC schemes.

Right now this informationisoften insufficient.
How much have peoplebuilt up and what risksdotheyrun?We
are usingthe current best practicesin Europe todefine this
document.‟
There‟s noguarantee that moreorbetter informationwill help if the
system itself remainscomplicated.
„It‟strue that peopledon‟t alwaysread thesmall print. That remainsa
dilemma.
But if you usethat asan argument for simpler pension systems, you
could run intotrouble.
Take, for instance, thediscussion on default optionsin DC systems.
This makesit easier for peoplewhodo not fully understandthe system
tomake choices.
Fiveyears ago, a risk-freedefault consistedprimarily of government
bonds.
Nowadays, thiscould be seen asa riskyportfolio. It is absolutely
possibleto createsimpler DC systems, but good information remains
essential.‟
EIOPA hasbeen around formorethan ayear now.How doesit differ
fromCEIOPS,whichyou alsoheaded?
„They‟re incomparable. We‟re livingin a different world, a different era.‟
Youmean that much haschanged in just oneyear?
„It seemslike much longer ago.

Our approach has changed dramatically. We‟re no lon ger a committ
ee of
sup ervisors, we‟re an aut h
orit y.
We d on ‟t n eed absolu t e u n
an imit y .
At CEIOPSdecisionsweretaken by consensus,now if we don ‟t
all agree, weput it to a vote. The discussionsrun deeper asa
result.
Whereas,in the past, a supervisor could say, „I don‟t agree‟, and that
wouldbe the end of it.
It wouldsimplybeput on the record.
How seriouslydopeopletake EIOPA?
„Our authorityis acknowledged. I‟m ambitious.
We aim tobe a well-informed, transparent supervisoryauthority.
But weneed tooperate carefullyand inspire confidenceamong all
parties.
We needto avoid simplyimposingmeasuresand to introducechanges
step by step.‟
Important European pension documentsare being released right in the
middle of the euro crisis. Isthe European pension framework in danger
of beingoverlooked?
„Our job isto make sure that doesn‟t happen.
TheEIOPA is alsoon the European Systemic RiskBoard. We‟re jointly
responsiblefor financial stability.
Pension fundsand insurersplayan important role in that.

It is understandablethat all attention isnow beingdirectedtowardsthe
bank sector, but this should not be at theexpenseof everything else.
Alowlong-term interest rateis very good for banks, but not sogood for
thepension sector.
We‟re making sure that thisis alsoon theagenda for discussion.‟„We
view the crisisasan opportunity for change. The messageof the
crisisisthat wecan ignore neither financial nor demographic risks.
We needto accept and analyse thoserisks. It‟s not about capital, but
about risk.‟
What happensnowwithyour recommendations?
„We‟regoingtostart workingon the quantitativeimpact studies, which
shouldbe finishedby September.
Theresultswill be submitted to theEuropean Commission, whoplans
topresent itsproposal by theend of this year.

SPEECH
Gabriel Bernardino, Chairman of EIOPA
How EIOPAis “taking the lead” in
consumer Protection
28th ProgressInternational Seminar
Geneva, 23 March 2012
Ladies and Gentlemen,
It is a great pleasureto speak to you here in Geneva and toshare with
you EIOPA‟spriorities and plansrelatedto consumer protection.
Theprotection of policyholders, pension schememembersand
beneficiariesis oneof our key objectives.
But, consumer protection is not just a legal objectivefor us;it
encompassesour entire philosophy.
We are expectedtotake a “leading role” in promoting transparency,
simplicityand fairnessin the market for consumer financial productsor
services;that is whyweaim tobe ambitiousin this area.
And wehavetaken a number of important stepsin the right direction.
Thefirst step wetook internallylast year wastocreatea specialised
Committeeon Consumer Protectionand Financial Innovation(CCPFI).
This wasnot only tocomplywith a legal requirement under theEIOPA
Regulation, but alsotosend out a messagethat weconsider the issuesof
consumer protection and financial innovation to be important and closely
interlinked.

Product innovationalsohasan important impact on the level of
consumer protection.
Thenext step wasto target keyareaswherewefelt wecould achieve
tangibleoutcomesand toconsider our strategy asa European
SupervisoryAuthority.
In that respect, I will start by outliningour achievementslast year and
then go on totalk about our strategicgoalsfor this year and theyears
ahead.
Achievements in 2011
2011wasa very busyyear for EIOPAasregardsconsumer protection:
•We prepared Guidelinesand a Best PracticesReport on Complaints
Handlingby Insurers.
We want to fill an existingregulatorygap at EU level and promote
convergenceof regulatorypractice.
We aim todothis by, first, clarifying the expectationsrelatingto an
insuranceundertaking‟sinternal control system and, second, giving
guidanceon theprovision of informationto consumersand procedures
for respondingto complaints.
We consulted on theGuidelinesand Best PracticesReport at theend of
last year and they are due tobe finalisedin Q2 this year.
•We publishedat theend of last year a Report on Financial Literacyand
Education Initiativesbynational competent authorities;it wasa stock
take of existing structures/ processesin Member States.
This wasin linewitha requirement under our empoweringlegislationto
review and coordinatesuch initiatives.

•We collecteddataon consumer trendsamongst our Members
authorities.
This helped usto prepare an Initial Overview, analysing and reporting
on thosetrends,whichwaspublished in earlyFebruary thisyear.
We identifiedthree key trends:
(i)Consumer protection issuesaround Payment Protection Insurance
(PPI)
(ii)Development of unit linked life insuranceand
(iii)Increaseduseof comparison websitesby consumers.
This is justthestart of our ongoing monitoring of consumer trends.
•We provided input intothe Commission‟srevisionof the Insurance
MediationDirective(IM D) by carrying out an extensivesurvey of
national lawsprovidingfor sanctions(both criminal and administrative)
for violationsof theprovisionsof the IMD.
TheCommission‟slegislativeproposal is expected at the end ofApril
thisyear. I will talk about thisagain later.
• We focused on disclosureand sellingpracticesof VariableAnnuities.
This exercisewasbrought about by the fact that some variableannuities
productsmay achieveoutcomesthat arenot easyfor consumersto
understand.
We consulted on a draft Report at the end of last year and thisis due to
befinalisedin Q2 thisyear.

Plansfor 2012
We don‟t want to just stop therein 2012,however. We need tomove
forwardgiven theneed for ustobe proactive.As mentioned, wehave
some ambitiousobjectives.
We will finalise existingprojects,but wealsoinitiatenew projectssuch
asdeveloping trainingstandards for theindustry, ensuringtransparency
in national general good rules,enhancing theexistingmethodology we
usefor collectingdata on consumer trendsand analyzing the impact of
SolvencyII on product development.
All theseinitiativeswill be carried out under thebackdrop of the
impendingCommission legislativeproposalson therevised IMD and
Packaged Retail Investment Products(or PRIPs), whichareexpected at
theend ofApril 2012.
There will inevitably be a considerable workload for EIOPA in response
to these proposalsand work under the Joint Committee of the ESAswill
becrucial toensure crosssectoral consistency.
Theproposalswill contain requestsfor follow up workin theform of
adviceon implementingmeasures,binding technical standardsor
common acts.
Ensuring the appropriate level of remunerationdisclosureand robust
mitigation of conflictsof interestwill be crucial toour ultimateobjective
of enhancingcustomer protection.
Strategic approachfor the years ahead
But what about our strategic approachfor the years ahead?
We have developed a strategic orientation on consumer protection and
financial innovation, whichunderpinsall thework wedo.

This statesthat wewill seekto prevent consumer detriment in the
followingways:
•First, wecontributeto makingsure that consumersin Europe are well
informed.
Information toconsumersprior to purchasingan insurancecontract and
throughout the duration of the contract should encompasstherisksand
the costsof theproducts, relevant regulatory requirementsand
complaintshandlingprocedures.
•Second, advice toconsumersshould best suit their profile and their
needs,taking intoaccount the complexityof thecontract and the risks
involved, witha view to purchasingan appropriateproduct.
As mentioned above, a good practicesreport concerningdisclosureand
sellingof variableannuitiesis currentlybeingfinalised.
•Third, wewant tocontributeto the financial literacyand education of
consumersinter alia by making available, through our website,
information on therolesand responsibilities of national supervisorsin
thesematters, and pointingtouseful financial education material.
•Fourth, in order toensure thequalityof both theadvice and the
information a consumer receives, minimum standardsfor ensuringthe
trainingand competenceof relevant staff in contact withtheclients
should be set out both at theoutset and on an ongoing basis.
•Fifth, there should be effectiveredressproceduresfor consumers.
Consumersshould be able to complain, and their complaintsshould be
heard.
In thisrespect, asalreadynoted above weare preparing guidelineson
complaintshandlingin theinsuranceindustry, whichmay beextended
tocover intermediaries at a later point in time.

•Sixth, firmsshould alsohave in placeappropriateclaimshandling
procedurestoensureeffectiveand fair treatment of claims.
When following these strategic goalswe need to reconsider the policy
tools that we traditionally used to deal with information asymmetries,
conflictsof interestand market inefficiencies.
We need a paradigm shift.
On the information sideweneed to reinforcestandardizationand
comparability.
However, informationshould not be used to shift responsibilityfrom the
providersto consumers.We cannot takefor grantedthat consumers
alwaysmake rational decisions.
Furthermore, it isnot all about transparency. Disclosure isa relevant tool
but alonecannot deliver the full resultsfor consumers.
On theprovision of adviceweneed totake a closerlook at conflictsof
interest.
Unfair practicesleadingto consumer detriment in theinsuranceand
pensionsmarket areoften due to situationsof conflict of interest.
Insuranceis an industry whereagencyincentivescan be themain driver
of the kind of product to be sold.
Sometimesthis resultsin the saleof productswhichare not suitablefor
theconsumersconcerned.
This necessarilyentails that sellingpractices,whetherthrough
intermediariesor direct writers,should meet certainhigh standards.
We alsoneed to payfurther attention to product suitability.

Insurersshould implement aspart of their governancesystem a
frameworkfor earlydetection of unfair products,clausesor selling
practices.
I believethat thiscan usefullyincludethe request of an independent
opinionon theproduct design and characteristicsby the internal
governancefunctionsof the insurer.
Looking ahead, oneof themost relevant powersof EIOPAis the
possibilityof issuingwarningswhenconsumer protection is at risk.
Furthermore, in thecasesspecifiedin EU legislativeactsand in
emergencysituationsEIOPAmay temporarilyprohibit or restrict certain
financial activities.
We needto usethesepowerswithin a robust governance framework, but
theyare there tobe used.
This is a “whistlestop” tour of EIOPA‟s workin the area of consumer
protection and financial innovation.
I hope it hasprovided you with some food for thought.
Thank you for your attention.

The Solvency II implementation update
Speechby JulianAdams, Director of Insurance, FSASolvencyII industry
briefing on 27February2012,London
This event marksanimportant stageon theroad tothe implementation
of SolvencyII here in the UK, aswemove tothenext phaseof our
programme of workwith internal model firms.
This takesplace,of course, against a backdrop of ongoing uncertainty
about Solvency II, both in the substanceof thepolicy and thetimescales
for its implementation, but what weaim to do today is giveyou asmuch
clarityaswecan about what theposition is and, just asimportantly, what
weareproposingto doover the comingmonths.
Later todaymy colleague, Martin Etheridge, will be talkingtoyou about
our view of the latestpolicy position, and then we‟ll be takingyou through
thedetail of how our review processwill work, and what you canexpect to
happen followingyour submission date.
There will alsobethe opportunityfor you to ask questionsof our
panel, and I hope you will take the opportunityto doso.
Before all of that, I havea number of topicsI want to cover withyou this
afternoon.
Thefirst of theseistheongoinguncertaintyat a European level asto
what the timelinefor implementation will be, and when weand you will
start toget some certaintyabout what important aspectsof thenew
regimewill look like.
I then want togoon toexplain what our approachhasbeen todealing
with this uncertaintywhendesigning thenext stageof our processand
puttingtogether thesupporting information and materialsweare
launchingtoday, aswellasdescribinghow weare going to applythe
principleof proportionalityto our execution of that process.

And finally, I want totoucha littlebit on how all of thiswill interact with
t he UK‟s d omest ic regulatory reform agen d a , in particular
lookingat how the implementationof Solvency II will sit alongsidethe
creation of thenew Prudential RegulationAuthority, whichwecurrently
expect in spring2013.
Policy uncertainty
Turningfirst tothe issueof policyuncertainty, I‟d like to start by saying
that theindustry‟sfrustration withthe ongoing lack of clarityis fully
understandable.
We appreciatethat the lack of resolutionof important issues– both in
relationtowhat thenew regime isgoingto look like, and in particular
about when it islikelyto commence and what the effect of transitionals
will be – is disruptiveto the implementation plansthat theindustryhas
spent a lot of time and effort puttingintoplace.
Martin will set out later how weexpect therest of the legislativeprocess
tobe concludedover the coming months, and how that fitswith our
ongoingassumption that firms will be required tocomplywiththe new
regimefrom January2014.
You‟ll be aware,of course, that the timetableis a very tight one,
particularlyin the context of a legislativeprocesswhich hasbeen far
from straightforward, and I should share with you our viewson what
might happen if thereis a further delay.
We await a key votein the European Parliament at the end of March,and
it wouldclearlynot take much further slippagein thisto put transposition
in January2013at risk, but thiswouldnot necessarilyaffect the
implementationdatefor firmsin January 2014.
What it might do instead is merelycompresstheperiod between
transposition and implementation.

It therefore remains our assumption that the new regime will apply to
firms from January 2014, and we have developed a plan which reflects
this.
Clearly, it is possiblethat this will changein thefuture, but for the time
beingweremain of the view that wemust plan for a 2014
implementation.
Our need to be able toapplythe new regime toyou from January2014is
thereason wearepressingahead withthedevelopmentsweare outlining
toyou here today.
It is alsothereason whyit is vitallyimportant that you stick tothe
submission slotswehave alreadyagreedwith you, asthere is very little
scopein our timetablefor anyform of slippage.
By stickingtoyour submission slot you will alsobe consideredalongside
a peer group of firms, whichwill ensure a greater degreeof consistencyof
approach.
Clearly, if the position in relation tothe implementation datechanges
again, wewill communicate this toyou asquickly aswecan, along with
an outlineof what weexpect theimplicationsto be for our own
implementationprogramme here in theUK.
In doing so, we will attempt to respond in the same way aswe did to the
bifurcation proposal last autumn, that isseeking a path which optimises
our own resource positionand theworkfirmshavealreadycompleted.
Launch of the next phase of work
I‟d like to turn now tothemain purposeof today‟s event, whichisthe
launchof the next phaseof internal model approval workin the UK.
Last year, when we announced our revised implementation assumptions
based on implementation for firms in 2014, we took the view that it made
sense to maintain the momentum that the UK industry had built up, and
continuewithour programme of model approval work.

We alsoset out a positionwhereit wouldpotentiallybe open to firmsto
start using their SolvencyII model tomeet existingIndividual Capital
Adequacy Standards(ICAS) requirementswheretheywishedtodoso
and wheretheycould be satisfied that themodel met all of the
requirementsof thecurrent regime.
As part of that, wedecidedthat wewould stick with our previously-
announced „open for applications‟date of 30 March2012.
Thepurposeof today is to give you more informationon what this next
phasewill look like, toset out the expectationswewill have of you
during this period, and toprovidemore detail on the support and
guidance,whichwewill be making availableto you beforeand during
theapplicationphase.
Later on, some of my colleagueswill be takingyou through theprocessin
detail, soin the meantimeI would like to set this in the context of how we
are approachingthisissue, given thelack of clarity wehave about a
number of aspectsof the underlying policy.
As I mentioned at anAssociation of British Insurers(ABI) event in
December, wearebasingour approach tothenext phaseon thestable
draft text of the Level 2 material whichwascirculated by the
Commissionin November.
We are awareof the limitationsassociatedwiththisapproach, namely
that first, it is not a final or complete articulationof what the policy will
be, and second, that it is not technicallya public document.
Nonetheless, wefeel that using theLevel 2 material asit standsis the
most sensibleapproach, asit representsthebest availableview of what
thefinal positionwill be.
We will be basingour internal decision-makingmaterialson thisLevel 2
text, and will be publishinglater today an updated version of the self
assessment template based on this also.

It is clearlypossiblethat the Level 2 text will changeasit getscloserto
adoption, and wewill review our materialsand update them asneeded.
Thenew self-assessment template setsout the almost 300requirements
whichthe Directiveidentifiesashavingtobe met beforemodel approval
can be granted, requirementswhicharederived from theDirectivetext
andhave not in anywaybeen overlaid by uswithadditionalUK
criteria.
We appreciatethat this changewill require some additional workfor
firms, in particular in themove from our previouslypublished contents
of applicationmaterials.
We have not made this changelightly, but believe that it is important to
doso, asit is the Level 2 text whichwill ultimatelyset out thestandards
whichhavetobe met, and arethereforethe standardsagainst which
your compliance– and ours– will have tobe judged.
Thechangealsoremovesa number of itemsfrom thepreviousversion
whicharenow super-equivalent followingchangesto the text.
I should alsomention herealsothat the materialsweare launching
todaydo not take any account of the Level three text.
This is insufficientlydeveloped at thisstageand lacksstability, meaning
that it doesnot providea meaningful platform for planningpurposes.
Again, wewill ensure that our materialsare updated in future to reflect
anychangeswhichmay be required asthepolicybecomesclearer.
An areain whichwecan provide some more clarity today isthat of
technicalprovisions.
We are oftenaskedwhethera review of these will form part of our
approval processfor an internal model, given that technicalprovisions
are thelargest and most complex item on an insurer‟sbalancesheet.
Our view isthat wewouldnot be ableto approve a model under
SolvencyII without having reasonableassuranceasto the accuracyof

theunderlying balancesheet, and wewill thereforebe undertakinga
review of the technical provisionsof IM AP firms aspart of our existing
activitywiththe firm before and after itssubmission slot.
In the main, weenvisagethat there will be twoelementsfor our review:
theapproach takenby firms and the actual calculation of technical
provisions.
Whilst wemay beableto start a review of theapproach this year, it is
unlikely that wewill review thecalculationof technical provisionsuntil a
point in 2013,whenfirms will have preparedtheir year-end 2012balance
sheet on a SolvencyII basis.
We are consideringthe approach that wemay taketo our review of
technicalprovisions,whichmay includetheuse of external review -
somethingfirmsare already doing and whichwehavedeployed for other
aspectsof SolvencyII suchasdata management.
Supervisorswill start discussionswithfirms about the review of the
approachtothe calculationof technical provisionsin the next few
months, and wewill providefurther detail on our approach to thereview
of the calculationoncewehavesight of the finalisedLevel 2 text,
probablythis autumn.
TheDirective text – for model approval aswithother matters– setsout
criteria whichhave tobe met in order for an approval to be granted.
In the caseof internal models approval, theseare detailed, and around
300in number.
It will be necessaryfor usto gain assurancethat all of these requirements
havebeenmet beforewecan decide togrant approval for a model‟suse.
We makeno apology for doing so, sincemodel approval is not
somethingwhichshould be granted lightly, and the Directiveallowsfor
nodiscretion in applying or not applying certain requirements.

Model approval will allow firms to set their own pillar one regulatory
capital requirement, something which is a step change both from the
existingDirectivesand our own current ICAS regime.
Once granted, it is difficult to unwind, and soweneed to besure that not
onlyis the resultingcapital requirement correct, but alsothat the
frameworkof the model is sufficientlyrobust and risk-sensitiveto respond
to changesin circumstancesover time.
Proportionality
What the Directivedoesallowfor – and indeedspecificallymandates– is
theprincipleof proportionality.
This meansthat theamount of effort whichweand you collectivelywill
havetogotoin order toshow that a requirement hasbeen met should be
commensuratewiththe riskthat isposed by the item in question, and the
extent towhichit is material tothe performanceof theoverall
model.
My commitment to you, therefore, is that our review workwill focuson
what is genuinely important in thecontext of your business, whilst
bearingin mind our obligationsunder the Directive.
Thepractical stepswehave takentoensure this have includedsenior
management challengeof all of theworkplans for pre-application, and
theapproach of reviewingteamswill be challengedagain at a number of
stagesthrough the processto ensure that weare focusing our effortson
what are themain driversof risk in an individual firm.
We makeno apology, though, for beingchallengingin our approachto
what firms are doing.
I want togiveyou today some examplesof specific issueswhich have
arisenand whytheyare important.
This will hopefullyhelp to put intocontext some of the questionsweare
askingand the approach wehave takensofar, and will continuetotake.

Thefirst exampleisin the areaof model scope, wherewehave
challenged firms on their exclusion from scopeof important factors
whichcould be significant drivers of themodel‟sperformance.
One exampleof thisis in the areaof catastrophemodelling.
Clearlyif a firm hasa significant portfolio of catastrophe-exposed
businessit is not a tenableposition, assome haveclaimed, that
catastrophemodelsare out of scope, asthesewill have a very significant
effect on the wayin whichthemodel functionsand the extent to whichit
is genuinelyreflectiveof risk.
Thesecond issuethat our review workregularlyidentifiesiswhere
variousaspectsof a firm‟s model submission donot fit together in a
coherent way.
Let me giveyou anexample.
We donot view theDirectiverequirementsin silos – Model Scope, Use
Test, Validation, Model Change requirementsare all linked and
interdependent.
In reviewinga firm‟smodel wethereforeneed to ensure the approach
beingtaken to scope, use, validationand changeareall consistent.
And this will includetheextent towhichthesenior management and
Board of the firm have engaged with, understood, and challengedwhat
hasbeen done.
Thethird isin the area of documentation.
Our review workregularlyhighlightsexamplesof firmsbeingable to
providecredibleexplanationsof how certain Directive requirementswill
bemet, but not necessarilybeing ableto followthrough withsound
documentaryevidenceof this compliance.
This doesnot necessarilymean that more documentation isrequired,
simplythat it needstobe of better quality.

For thereasonsI outlined earlier thisis an important factor in being
assured asto the performanceof the model in a range of future
circumstances.
In some casesthestateof documentation is a reflection of the fact that
firmsare implementingand embeddingtheir models in parallel withthe
development work.
We recognisewhat‟sdrivingthis issueand are sympathetic withthe
challengesthat firmsfacein thisregard but wewill continueto view the
qualityof a firm‟s documentation asbeing an important indicator of
overall preparednessfor makinga submission.
Whilst it isimportant for ustobe robust, and I hopethe foregoing
examplesgive a senseof whythis is thecase,I wouldask you to raise
with your supervisor any concernsyou may have about theapproach
whichis beingtaken or the scope of our review.
Theywill be ableto explain what it is that the review teamsare doing
and whytheyare takinga certain approach or raisingcertain concerns.
I should mention that wearealsoworkingto ensure that our approach is
consistent withthat taken by supervisorsin other Member States.
We are pursuingthisthrough European Insuranceand Occupational
PensionsAuthority (EIOPA), and alsothroughmore informalcontacts
with the supervisorsin theother major jurisdictions.
Through itspeer review workEIOPAiscurrentlyreviewingMember
States‟approachestopre-application, and alsotheperformanceof a
sampleof colleges.
We know that thisis a matter of acute importance to many groupswith
European operations, and we will not be able to achieve our objectives
without closecooperation withregulatorsin other partsof Europe.

By seekingthis consistencywealsohope to achieveone of the other
aims of the Directive, whichis to achievea high level of harmonisation
acrossEurope.
In mentioning this high level of harmonisationI wouldlike toemphasise
– asI have on a number of occasionsin thepast – that it iscategorically
not our intention to„gold plate‟the Directive‟srequirementson model
approval, or, for that matter, in other areas.
We have designedour processesin accordancewitha set of
requirementswhichare deriveddirectlyfrom the Directivetext.
In the few areas wherewehave felt the need to dosomethingwhichis
different or in some waysuper-equivalent – for examplein thearea of
approved persons– wehave sought to be transparent about this in the
text of our consultationdocuments, and havedrawnour reasoning
specificallyto your attention.
All of this, of course,is theFSA‟s statedapproach, but you may be
wonderingwhetherthis will continueto hold true onceresponsibilityfor
insuranceregulationpassestothe new Prudential RegulationAuthority
(PRA), probablyin spring 2013.
Thesimpleanswertothisis yes, it will, and the reasonsfor this are very
simple. First, thesenior management team responsiblefor Solvency II
in theFSAare– by and large – thepeople whowill continuetobe
responsiblefor it whenwemove tothe PRA.
Our colleaguesfrom theBank of England have been engaged in our
implementationprogramme for over a year now, and are alsofullyaware
of the approachweare taking.
Thesecond is that SolvencyII seeksto bring intoplacea regime which
is basedon the same principlesasthat envisagedfor the PRA.
SolvencyII is a regime whichis forward-looking, based on a market-
consistent valuation basis;it encompassesa proactiveframework for

supervisoryintervention, and providesa direct link betweenrisk and
capital.
All of this is completely consistent withthe judgement-drivenapproach
tosupervision whichthe FSAand theBank of England set out in the
launchdocument for the PRA, whichwepublished last summer.
The third reason is derived from the second, namely that we are ensuring
that the requirements of Solvency II are being taken fully into account in
thedesign of insurancesupervision in thePRA.
This should ensurethat the processyou seebeingdeveloped now will
endure through thecreationof thePRA and beyond, and supervision of
insurersunder the PRA will have at itscore the requirementsof the
SolvencyII Directive.

Gabriel Bernardino, Chairman of EIOPA
Stability and growth – Abalancing act
GalaDinner of the Institutional MoneyCongress, Frankfurt
Ladies and Gentlemen,
I am very pleased to be here with you tonight.
First of all I wouldlike to thank the organizersfor their invitationto
deliverthis short dinner speech.
It is my pleasure asChair of EIOPA, theEuropean Insuranceand
Occupational PensionsAuthority, based in Frankfurt, to welcomeyou to
such an important congress.
TheInstitutional MoneyCongressis knownasa significant
communicationplatform for institutional investors, providingan ideal
forum for professional exchangebetween internationallyrenownedasset
managersand institutional investors.
This year it will alsobe an opportunitytodebatethechallengesposed by
recent regulatory initiatives,such asSolvencyII and Basel III, and
discusstheir possibleeffectson theinvestment policiesof financial
institutions.

As for challengesI think there is nodoubt that the development and
implementationof theseregimesrequiressignificant effort not only from
regulatoryand supervisoryauthorities,but alsofrom the industry.
The more these issues are discussed, the easier we will build up a new
financial culture based on robust standards of solvency, enhanced risk
management and increasedconsumer protection.
And by launchingdiscussionsand different workshopson such topics,
theInstitutional MoneyCongresscreatesa basisfor this culture.
Becauseonly by discussing, by exchangingviewswecan reacha full
understandingof the regimesby all market participants.
Let me start by usingthis opportunitytomake some remarksabout the
possibleconsequencesof SolvencyII on the investment behaviour of
insurersand more generallyon thefinancial markets.
It is clearthat applying capital chargesfor investment risk may
encourageinsurerstoshift tolessvolatile investments,especiallywhen
theexpected financial returnsof risky assetsdo not offset the additional
capital requirement.
However, asinsurersare awareof the changingregulation and have
been rebalancingtheir portfoliosaccordingly, there should not be any
significant suddenportfolio reallocations.
Most importantly, a reduction of investment riskcould alsobe achieved
byan improvement in asset liability management, especiallyon long
term guaranteed products.
That is thepurposeof the strong focusof SolvencyII on enhancingrisk
management policiesand practices.

Controllingand ensuring sound and prudent management isfar more
important than the capital calculations,becausemanagement errorsby
their nature cannot be compensatedbycapital requirements.
As a consequenceof a greater focuson asset liability
management, insurerscould be willingto investmore in relatively
highlyratedcorporatebondssincetheyoffer higher yield and
wouldprovidediversification benefitswithin the fixed income
portfolio.
Therefore, easieraccesstofinancingcould be grantedtofirms withhigh
credit ratings, whichwill translateintoa lowercost of capital and would
thereforecontributetohigher investment and economicgrowth.
Overall, regulatory regimesare alwaysa result of a balancingact
betweendifferent objectives.
I am convinced that SolvencyII will providean appropriate basisfor
increasedpolicyholder protection and will contributeto reinforcing
financial stability, while allowinginsurancecompanies tocontinueto
playtheir role aslong term investors.
In a recent paper oneof your distinguishedguests, Prof. Thomas
Sargent, discussedwheretodraw thelinebetweenstabilityand
efficiency.
In my opinion this isa fundamental question for the policydecisionsto
betaken in the coming years.
We needto decidewhat wewant toprivilege:securityor growth.
If wewant both, and I believeweshould, then weneed to bepreparedto
collectivelyaccept some risks.

One of themajor consequencesof the financial crisiswasthe fall of
confidenceand trust in the financial sectorand increasein suspicion on
all areasof financial innovation.
Unfortunately, thebenefitsof financial innovation have been
overshadowedby thecostsof some activitiesthat went reallybad.
I believeregulatorsand theindustryneed to take a fresh look at this
area.
Financial innovation toolscan be a useful wayfor investorsto protect
themselvesagainst unavoidablerisks.
However, theyshould be used tofacilitaterisk transferand accessto
fundingwithin the real economy and not to help institutionstoarbitrage
regulationsand make balance sheetslook saferthan theyare.
In order to increase long term stability and regain consumer confidence
in the financial system we need to proceed with the reforms not only by
adaptingregulationbut alsoby changingbehaviour.
We should encourage realisticrisk assessment and pricing.
Market participantsshould take concretestepstopromote responsible
businessconduct.
Overall wealsoneed to reinforcepreventiverisk based supervisionand
timely enforcement.
We have all been witnessing during the last years systemic risks caused
by excessive leverage combined with risky financial products as well as
inadequaciesin financial regulation and supervision.
Variousuncertaintiesaround the global financial system are still at
place.

In the modern highlyintegrated environment financial stability can be
already thought of asan international public good.
All countriesbenefit from thestabilityof theworldfinancial system asa
whole.
But at the same time all countries experiencecertain costswhenthe
system is unstable.
Soit became clearthat without more effectivesupervision it will not be
possibleto addressfurther systemic risksin thefinancial system.
This callsfor international coordination.
Anumber of different international bodiessuch asG20 and the Financial
StabilityBoard arecurrentlyworkingon theseissuesin their different
spheresof influence.
EIOPA for exampleis contributingto thedevelopment of a common
frameworkfor supervisinginternationallyactiveinsurancegroupsand
developing criteria toidentify systemic risk in insuranceactivities,both
conducted under theumbrellaof theInternationalAssociation of
InsuranceSupervisors(IAIS).
Theresultsof thisheavyregulatory agenda will reshapethe financial
system asweknow it and weshould be prepared to copewith the
challengesahead.
At EIOPAweare quiteawareof the relevanceof our mandate and
responsibilities.
As you may know in January 2012 EIOPA completed the first year in its
status as a European institution, one of the three European Supervisory
Authorities.

EIOPA‟s mission is to protect the public interest by contributing to the
short, medium and long term stability and effectiveness of the financial
system, for theEU citizensand economy.
This mission ispursuedbypromotinga sound regulatory framework
and consistent supervisorypracticesin order toprotect the rightsof
policyholders, pension scheme membersand beneficiariesand
contributeto the public confidencein the European Union‟sinsurance
and occupational pensionssectors.
And I wouldlike toassure you that weare ambitiousin fulfillingour
obligationstowardstheEU citizensand businesses.
EIOPA is currentlyintensively working on thedevelopment of technical
standardsand guidelinesthat areessential for the implementationof
SolvencyII.
But if I start elaboratingfurther on this,it will not be a dinner speech
anymore, but an epicpoem.
EIOPA is alsoworkingintensivelyon thereview of the IORP Directive,
advisingthe EU Commissionon the waystointroducea risk based
frameworkfor the supervision of occupational pension funds.
EIOPA is an institution opentosociety.
We want to listenand debate withthe different stakeholdersand that is
whywevaluevery muchthe opportunitytoexchangeviewswithyou
during this Congress.
Thank you for your attentionand have a good dinner.

Dear Member,
In Basel iii, Solvencyii, and many other lawsand regulations, wehaveto
make economicprojections.
What I reallylove isthe need for “realisticassumptions”.
So, wehave a crystal ball: The MonetaryPolicy Report totheCongress
wherewecan find the“Summaryof Economic Projections”
Monetary Policy Report to the
Congress
Summary of Economic
Projections
In conjunctionwiththe January24–
25, 2012,Federal OpenMarket
Committee(FOMC) meeting, the
membersof the Board of
Governorsand thepresidentsof the
FederalReserve Banks, all of
whom participatein the deliberations
of the FOMC, submittedprojectionsfor growthof real output, the
unemployment rate, and inflation for theyears 2012to 2014and over the
longer run.
Theeconomicprojectionswerebased on informationavailableat the
timeof the meetingand participants‟individual assumptionsabout
factorslikely toaffect economicoutcomes,includingtheir assessments
of appropriate monetary policy.
Startingwiththe Januarymeeting, participantsalsosubmitted their
assessmentsof thepath for thetarget federal fundsrate that theyviewed

asappropriateand compatiblewiththeir individual economic
projections.
Longer-run projectionsrepresent each participants‟assessment of the
rate to whicheachvariable would be expected tocon-vergeover time
under appropriate monetary policy and in theabsence of further shocks.
“Appropriatemonetary policy” isdefinedasthe future path of policy
that participantsdeem most likely tofoster outcomesfor economic
activityand inflation that best satisfytheir individual interpretation of
theFederal Reserve‟sobjectivesof maximum employment and stable
prices.
As depicted in figure1, FOMC participantsprojectedcontinued
economicexpansionover the 2012– 14period, withreal grossdomestic
product (GDP) risingat a modest rate this year and then strengthening
further through 2014.

Participantsgenerallyanticipatedonlya small declinein the
unemployment rate thisyear.
In 2013and 2014, thepace of theexpansion wasprojected to exceed
participants‟estimatesof the longer-runsustainablerateof increasein
real GDP by enough to result in a gradual further declinein the
unemployment rate.
However, at the end of 2014,participantsgenerallyexpected that the
unemployment rate wouldstill be well above their estimatesof the
longer-run normal unemployment ratethat they currentlyview as
consistent withtheFOMC‟sstatutorymandatefor promoting maximum
employment and pricestability.
Participantsviewedthe upwardpressureson inflation in 2011from factors
such assupplychain disruptionsand risingcommoditypricesashaving
waned, and theyanticipatedthat inflation wouldfall back in 2012. Over
theprojection period, most participantsexpected inflation, asmeasured
bythe annual changein theprice index for personal consumption
expenditures(PCE), to be at or b elow t he FOMC‟s objectiveof 2
percent that wasexpressedin the Committee‟sstatement of longer-run
goalsand policy strategy.

Core inflationwasprojectedto run at about the same rate asoverall
inflation.
As indicatedin table1, relativeto their previousprojectionsin November
2011, participantsmadesmall downwardrevisionstotheir expectationsfor
therateof increasein real GDP in 2012and 2013,but theydid not
materiallyalter their projectionsfor a noticeablystronger paceof
expansion by 2014.
With the unemployment rate havingdeclined in recent monthsby more
than participantshad anticipatedin thepreviousSummary of Economic
Projections(SEP), theygenerallyloweredtheir forecastsfor the level of
theunemployment rate over the next twoyears.
Participants‟expectationsfor both the longer-run rateof increasein real
GDP and the longer-run unemployment rate werelittlechangedfrom
November.
Theydid not significantlyalter their forecastsfor the rate of inflation
over thenext threeyears.
However, in light of the 2 percent inflationthat istheobjectiveincluded
in thestatement of longer-run goalsand policy strategy adopted at the
Januarymeeting, the rangeand central tendencyof their projectionsof
longer-run inflationwereall equal to2 percent.
As shown in figure2, mostparticipantsjudged that highly
accommodativemonetary policywaslikelytobe warrantedover coming
years topromote a stronger economicexpansion in thecontext of price
stability.
In particular, withtheunemployment rate projectedto remain elevated
over theprojection period and inflation expectedtobe subdued, six
participantsanticipatedthat, under appropriatemonetary policy, the first

increasein the target federal fundsrate wouldoccur after 2014,and five
expectedpolicyfirming to commenceduring 2014(the upper panel).
Theremainingsix participantsjudged that raisingthefederal fundsrate
soonerwouldbe required to forestall inflationarypressuresor avoid
distortionsin the financial system.
As indicatedin thelowerpanel, all of theindividual assessmentsof the
appropriatetarget federal fundsrate over thenext several years were
below the longer-run level of the federal fundsrate, and 11participants
placedthe target federal fundsrate at 1percent or lowerat the end of
2014.
Most participantsindicated that they expected that thenormalization of
theFederal Reserve‟sbalancesheet should occur in a wayconsistent
with the principlesagreedon at theJune2011meeting of theFOMC,
with the timingof adjustmentsdependent on the expecteddate of the
first policytightening.
Afew participantsjudgedthat, given their current assessmentsof the
economicoutlook, appropriate policywouldincludeadditional asset
purchasesin 2012,and one assumed anearlyendingof thematurity
extension program.
Asizablemajorityof participantscontinuedto judgethe level of
uncertaintyassociatedwiththeir projectionsfor real activityand the
unemployment rate asunusuallyhigh relativeto historical norms.
Many alsoattacheda greater-than-normal level of uncertaintyto their
forecastsfor inflation, but, compared withthe November SEP, two
additional participantsvieweduncertaintyasbroadly similar tolonger-
run norms.
As in November, many participantssawdownsiderisksattendingtheir
forecastsof real GDP growthand upsiderisks to their forecastsof the

unemployment rate; most participantsviewedthe riskstotheir inflation
projectionsasbroadlybalanced.
The Outlook for Economic Activity
Thecentral tendencyof participants‟forecastsfor the changein real
GDP in 2012was2.2 to 2.7percent.
This forecast for 2012, while slightly lower than the projection prepared
in November, would represent a pickup in output growth from 2011 to a
rate close to itslonger-run trend.
Participantsstated that theeconomic information receivedsince
November showedcontinued gradual improvement in thepaceof
economicactivityduring thesecond half of 2011, asthe influenceof the
temporaryfactorsthat damped activityin the first half of the year
subsided.
Consumer spendingincreasedat a moderate rate, exportsexpanded
solidly, and businessinvestment rosefurther.
Recently, consumersand businessesappeared to becomesomewhat
more optimistic about the outlook.
Financial conditionsfor domesticnonfinancial businesseswere
generallyfavorable,and conditionsin consumer credit marketsshowed
signsof improvement.
However, a number of factorssuggested that the paceof theexpansion
wouldcontinuetobe restrained.
Although some indicators of activity in the housing sector improved
slightly at the end of 2011, new homebuilding and sales remained at
depressed levels, house priceswere still falling, and mortgage credit
remainedtight.

Households‟real disposableincomeroseonly modestlythrough late 2011.
In addition, federal spendingcontractedtowardyear-end, and the
restrainingeffectsof fiscal consolidationappearedlikely tobegreater
thisyear than anticipatedat thetime of the November projections.
Participantsalsoread the information on economic activityabroad,
particularlyin Europe, aspointing to weakerdemand for U.S.exports
in comingquarters thanhadseemed likelywhenthey prepared their
forecastsin November.
Participantsanticipatedthat thepace of the economicexpansion would
strengthen over the2013–14period, reachingratesof increasein real
GDP above their estimatesof thelonger-run ratesof output growth.
Thecentral tendenciesof participants‟forecastsfor thechangein real
GDP were2.8 to3.2 percent in 2013and 3.3 to4.0percent in 2014.
Among the considerationssupportingtheir forecasts,participantscited
their expectationthat the expansionwouldbe supported by monetary
policy accommodation, ongoing improvementsin credit conditions,
risinghousehold and businessconfidence,and strengtheninghousehold
balancesheets.
Many participantsjudgedthat U.S. fiscal policy wouldstill be a drag on
economicactivityin 2013,but many anticipatedthat progresswouldbe
madein resolving the fiscal situation in Europe and that theforeign
economicoutlook wouldbe more positive.
Over time and in theabsence of shocks,participantsexpectedthat the
rate of increaseof real GDP would converge to their estimatesof its
longer-runrate, witha central tendency of 2.3 to2.6percent, little
changedfrom their estimatesin November.
Theunemployment rate improved more in late 2011than most
participantshad anticipatedwhenthey prepared their November

projections,fallingfrom 9.1to8.7percent betweenthe third and fourth
quarters.
As a result, most participantsadjusteddowntheir projectionsfor the
unemployment rate thisyear.
Nonetheless, withreal GDP expected to increaseat a modest rate in 2012,
theunemployment rate wasprojected to declineonly a littlethis year, with
thecentral tendencyof participants‟forecastsat 8.2 to8.5percent at year-
end.
Thereafter, participantsexpected that the pickup in thepace of the
expansion in 2013and 2014wouldbe accompaniedby a furthergradual
improvement in labor market conditions.
Thecentral tendencyof participants‟forecastsfor theunemployment rate
at the end of 2013was7.4 to8.1percent, and it was6.7 to7.6percent at
theend of 2014.
Thecentral tendencyof participants‟estimatesof the longer-run normal
rate of unemployment that would prevail in theabsence of further shocks
was5.2 to6.0percent.
Most participantsindicated that they anticipatedthat fiveor six years
wouldbe requiredtoclosethe gap betweenthe current unemployment
rate and their estimatesof the longer-runrate, although some noted that
more timewouldlikelybe needed.
Figures 3.A and 3.B providedetails on the diversityof participants‟views
regardingthe likely outcomesfor real GDP growthand the
unemployment rate over thenext threeyears and over thelonger run.
The dispersion in these projections reflected differences in participants‟
assessments of many factors, including appropriate monetary policy and
itseffectson economicactivity, the underlying momentum in economic

activity, the effectsof the European situation, theprospectivepath for
U.S.fiscalpolicy, thelikely evolution of credit and financial market
conditions,and theextent of structural dislocationsin thelabor market.
Compared withtheir November projections, the rangeof participants‟
forecastsfor thechange in real GDP in 2012narrowedsomewhat and
shiftedslightlylower, assome participantsreassessedtheoutlook for
global economic growth and for U.S. fiscal policy.
Many, however, made no material changeto their forecastsfor growthof
real GDP this year.
Thedispersion of participants‟forecastsfor output growthin 2013and
2014remained relatively wide.
Havingincorporatedthe data showinga lowerrate of unemployment at
theend of 2011thanpreviouslyexpected, thedistribution of participants‟
projectionsfor theend of 2012shifted noticeablydownrelative to the
November forecasts.
Therangesfor theunemployment rate in 2013and 2014showedless
pronouncedshifts toward lowerratesand, aswasthe casewiththe
ranges for output growth, remained wide.
Participantsmade onlymodest adjustmentsto their projectionsof the
ratesof output growthand unemployment over the longer run, and, on
net, thedispersionsof their projectionsfor both werelittlechangedfrom
thosereportedin November.
Thedispersion of estimatesfor thelonger-run rate of output growth is
narrow,withonlyone participant‟sestimate outsideof a rangeof 2.2to
2.7 percent.
By comparison, participants‟viewsabout the level towhichthe
unemployment rate wouldconverge in thelong run are more diverse,

reflecting, among other things,different viewson the outlookfor labor
supplyand on theextent of structural impedimentsin the labor market.

TheBermuda MonetaryAuthority (BMA) is the integratedregulator of
thefinancial servicessector in Bermuda.
Established under the Bermuda Monetary Authority Act 1969, the
Authority supervises, regulates and inspects financial institutions
operatingin or from within the jurisdiction.
It alsoissuesBermuda‟snational currency; managesexchangecontrol
transactions;assistsother authoritiesin Bermuda withthe detectionand
prevention of financial crime;and advisesthe Government and public
bodies on banking and other financial and monetary matters.
TheAuthority developsrisk-based financial regulationsthat it appliesto
thesupervisionof Bermuda‟sbanks, trust companies,investment
businesses,investment funds,fund administrators,moneyservice
businessesand insurancecompanies. It alsoregulatesthe Bermuda
Stock Exchange.
LICENCE FEES REDUCED FOR BERMUDA SPECIAL
PURPOSE INSURERS
Amendment toFeeStructure ReinforcesBermuda‟sCompetitivenessfor
itsGrowingSPI Business
TheBermuda MonetaryAuthority („theAuthority‟ or „BMA‟) is pleased
toannounce that theregistration feesfor Special PurposeInsurers
(SPI‟s) hasbeen nearlyhalved.

Effective1st April 2012,all new SPI‟s licensed in Bermuda will pay $6,000
for annual registration. This isa significant reductionfrom the current
registration feeof $11,600.
ShelbyWeldon, theAuthority‟s Director, Insurance,Licensing&
Authorisationssaid, “Theabilityto establish SPI‟shere withinour
insuranceclassification system isanother option for the market to use
Bermuda'sextensivealternativerisk transferexpertise.”
An SPI assumesinsuranceor reinsurancerisks and typically fullyfunds
itsexposure tosuchrisksthrough debt issuanceor some other
financing.
Therepayment rightsof the debt or other financingmechanismsare
subordinatedtotheinsuranceor reinsurance obligationsof that vehicle.
Mr. Weldon continued, “SinceSPI‟sarefully funded, theAuthority also
appliesa proportionate level of supervisionto such entities,which
appropriatelyis different from what wewouldapplytosay, a large
Class4commercial insurer.
Therefore, this fee adjustment alsorecognisesthat distinction, sinceour
feesare directlyrelatedto the cost of supervision, further reinforcing
Bermuda‟scompetitivepositionto support SPI‟s.”
Bermuda hasrecorded significant growthin SPI formationsin the last
twoyears.
Atotal of 23new SPI‟swerelicensed in 2011, up from eight in 2010and
onein 2009whentheAuthorityestablishedthe regulatoryframeworkto
accommodateSPI‟s.
During January and February2012,threeSPI‟shad already licencedin
Bermuda.

Themove toreducethe feeshasbeen well receivedby industry,
includingBermuda-based law firm, Appleby.
Brad Adderley, Partner, Corporate & Commercial at Appleby said, “The
fee reduction epitomises the proactive approach of the Authority, which
was reinforced by the very senior Bermuda contingent that attended the
recent Insurance- & Risk-Linked Securities Conference held annually by
theSecurities Industry and Financial MarketsAssociation (SIFMA).
TheBMA'sattendanceat the conferencereaffirms tothe market place
that Bermuda wantsto be the preeminent player in this space.”
GregWojciechowski, President and CEO of the Bermuda Stock
Exchangesaid, “Sincethecoming into force of the new licensingregime
for Special PurposeInsurers,the BSX hasseen a significant increasein
interest from themarket for thecreation of Bermuda based SPI‟swhich
are used for the issuanceof InsuranceLinkedSecurities (ILS). This
development hasledto a record number of listedILS issueson the BSX.”
SPI‟s are often u sed t o issu e cat ast roph e b ond s.
TheBSX hasreportedthat $3.4 billionworth of catastrophebonds,or
ILSwaslisted on theexchangeby theend of 2011.
Todate, 25 ILSstructureshavebeen listedon the BSX.
Mr. Adderleycontinued, “Bermuda hasmade significant inroads intothe
cat bond market – the reduction of feeswill help the island continueto
grow this businesswhichwill have a positiveimpact on the Bermuda
economy.”
Mr. Wojciechowski added, “The announcement by the BMAtoreduce
registration feesfor SPI structuresis a significant development and
underscoresBermuda's firm commitment toprovideregulatoryand

commerciallysensiblesupport to the global reinsuranceindustry.
Bermuda hasbeen a partner totheglobal reinsuranceindustryfor over
threedecades,a healthypartnership whichhasresulted in the
jurisdictionexhibitinga "siliconvalley" effect for specialtyinsurance.
Bermuda is a global leader in the reinsuranceindustry and developments
such asthisreduction of feeshighlight Bermuda stakeholders‟resolvein
providingthe environment for that partnership tocontinuefor decades to
come.”
Arthur Wightman, Partner,Assurance and BusinessAdvisory Services,
Insurance/Reinsuranceat PricewaterhouseCooperssaid, “Bermuda's
established fundsand reinsurancemarketplacesmakeit the optimal
jurisdictionfor structuring InsuranceLinkedSecurities and other
convergencestructures.
This moveby Bermuda'sforward-lookingregulator isjust one example
of how seriouslyBermuda is committed tofurther developingthese
marketsand representsanother proactive move by the BMAto
commerciallypracticableregulation.
It alsoreinforcesa commitment by the regulator tofacilitatespeedto
market.”
BERMUDA INSURANCE SECTOR ACHIEVES STRONG
RESULTSIN CHALLENGING MARKET CONDITIONS
Significant premium volumes, increasedinsurer registrationsachieved
TheBermuda MonetaryAuthority (theAuthority or BMA) today
announced the Bermuda insurancemarket remained resilient in 2011and
continued to absorb the impact of market issues,includinga continued
softeningof prices, lowinterestratesand above-averagelossesfrom
natural catastrophes.

With respect to 2011registrations,theAuthority registered a total of 54
new Bermuda insurers,up from the36recorded in 2010.Growth in the
registration of Special Purpose Insurers(SPIs) has continued: 23 new
SPIs werelicensed in 2011, up from eight the previousyear.
2011alsosawthe formationof twoClass4 reinsurancecompanies.
ShelbyWeldon, Director, Insurance, Licensing & Authorisationssaid,
“2011wascertainlya challengingyear, whichwasreflectedin the year-
end resultsof some firms.
However, Bermuda‟sinsurersare successfullyaddressing global market
conditions.
Also, Bermuda‟scommitment to achievingequivalencewithrelevant
standardsgloballycontinuestoattract qualitybusinessesthat seethe
benefitsof being based in a practical, first leagueregulatory environment
that is well-regardedin keyinternational markets.”
“Thelatest available statistics show theBermuda insurancemarket
achieved significant premium volumesand healthy amountsof assets
and capital and surplus,” Mr. Weldon said.
“The market recorded gross premiums written of $107.7 billion; this
compares to $119.7 billion written the previous year, not surprisingly
reflectingthe challengesof a prolongedsoft market.
In addition, themarket recorded aggregatetotal capital and surplusof
$185.2billion and assetsof $524.7billion, year-on-year increasesof
1.7per cent and 5.8per cent respectively.”
Commentingon themarket‟sbusinessvolumesbysector, Mr. Weldon
said, “The commercial sector wrotea consistent amount of gross
premiums, $86.3 billion compared to$87.1billion thepreviousyear.

Total assetswere$438billion, up 16.5 per cent year-on-year. Capital and
surpluswasalsoup, by 10.5per cent, from $131.8billion to$145.6
billion.”
“Bermuda captivesalsomaintained high businessvolumes, and there
werea total of 862captivesregisteredin Bermuda at the end of 2011, up
from 845in 2010,” Mr. Weldon continued.
“Captiveswrotea total of $21.4billion in gross premiums,compared to
$32.7billion the previousyear.
This changecan be attributedto a combination of theAuthority‟s
continuing reclassificationof a number of companiesto more accurately
reflect their risk-profiles, aswell asa decrease in premiumswrittenby
particular firms within the sector.”
Mr. Weldon concluded, “Bermuda‟sinsurancemarket continuesto
managethe impactsof theglobal economy and market conditions
effectively.
Bermuda is a unique jurisdiction providing leadership across the
spectrum of insurance risk management: captives, insurance and
reinsurance.
This reinforcesBermuda‟spositionasa leading domicile for insurance
businessalongwithother core elementsof our success– such as
disciplinedunderwritingby firms and apragmaticregulatory
environment withworldclassstandardsthat supportsqualitybusiness.”

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
ExtraterritorialApplication 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 personswhoeffectivelyrun 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
OwnRisk 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-Compliancewiththe Minimum 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 the approval 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
isnot 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
regimeis equivalent
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:AMajorRisk for 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 April 2012

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Solvency ii News April 2012