Solvency ii News April 2013

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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 withGabriel
Bernardino, Chairman of EIOPA.
Just beforethat, I want you tosee a job
description:
BaselII/ III and SolvencyII risk specialist, Mandarin Speaking!!!
Basel III Risk Specialist - Mandarin Speaking Leading Global
Investment Bank, London
ALeading Global Investment Bank isExpanding the Regulatory Risk
Functionwiththe hire of a Basel III Risk Specialist for their London
Group.
- Basel III RegulatoryRisk Specialist
- LeadingGlobal Investment Bank
- MandarinSpeaking
- London, UK
- 50,000+ Excellent Bonus Benefits
As a key member of the riskgroup you will
becommunicatingextensively with senior
management on a global scaleincluding
direct contact withsenior management in
Hong Kong and Shanghai and will therefore
requireMandarinspeakingskillsat business
www.solvency-ii-association.com

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level proficiency.
An expert in regulatoryframeworks,you will have practical
understandingof Basel II/ III and knowledgeof SolvencyII ICAAP is
alsohighly preferred.
This is a mid-level position withinthe group and will require a minimum
of 3 years industry experiencewithin theLondon and/ or International
Financial Markets.
It is never toolate tolearnMandarin. Is lookseasy!
Amazingjobdescription…
Just one slight problem withthisjob description:You cannot have
knowledgeof SolvencyII ICAAP … simplybecausethere isnothing like
a Solvency II ICAAP… perhapstheymean SolvencyII ORSA(OwnRisk
andSolvencyAssessment, thePillar 2 document).
It remindsme another job description, wheretheyrequired 5+ years of
Basel III experience. Provided that BaselIII wasendorsed at theend of
2010,theycould hire someoneafter 2015…

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Interview with Gabriel
Bernardino, Chairman of
EIOPA, conducted by Christoph
Baltzer, VersicherungsWirtschaft
(Germany)
Insurersseem tobethevictimsof ascenario of
financial repression, especiallywithlowinterest
rates. What wouldbethe consequencesof the
policy of cheap moneyfor insurers?
We see this in some countriesin theEU wherea
lowinterest rate environment startsbeinga big
challengefor some typesof products, especially
whenyou have got long term guarantees.
We at Eiopahave identified it alreadyin 2011.
We have run the first stresstest exerciseparticularlyon low interest
environment, becausewesee it assomethingwhichis approaching.
Theexperienceof Japan showeduswhat can be the consequencesof
such a scenario.
It‘s the responsibilityof thesupervisoryauthoritiesto be proactiveon
this.
This is an area whereweneed to be attentive.
We have identified certain vulnerability: there arecompaniesthat could
faceproblemsif thislow interest rate scenario will be maintained.
There are number of supervisors in the EU that have already taken
steps, but earlier in March EIOPA issued its Opinion, in which we
recommend a coordinated supervisory response to the long lasting low
interest rates.

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Gladly, on the insuranceor pension market westill have sufficient timeto
deal with it, providedthat weidentify risks sufficientlyin advanceand
take necessaryactions.
That‘sa differencecomparing to thecrisis in thebanking sector, where
you need to act immediately.
At the same time some new productsthat wereintroduced beforethe
crisis should be adopted tothe new economic environment: insurance
companies should reflect on thetype of productsand the type of
guaranteesthat theyare issuingtothe market.
DoesSolvencyII help to prepareforthisscenario?
One misunderstandingthat needsclearlyto be spelledout is that it‘s not
SolvencyII that provokeschallengestobusiness.
It‘s the economicenvironment.
SolvencyII makesone difference:You need torecognizeit earlier.
If you have a market consistent valuationof assetsand liabilitiesit will
bemuch more clearthat you have a challengein your portfolio.
If you continueto havea valuation that doesnot reflectthemarket, then
you can pretend that there isnoproblem.
But theproblem exists.
SolvencyII makesthis transparent and that isgood for consumers, for
companies and alsofor supervisors.
We needtohave a preventive supervision.
Supervision should not be there to act whenthe fire is alreadyin your
home.

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Supervision should be there toprevent that the fire occurs.
Versicherungswirtschaft wrotein 2003 that SolvencyII wouldbein force
in 2006. Doyou believethat SolvencyII will bein forcewhenyour term
finishes?
My term finishesin 2016.
That‘sa date that isstill possibleto haveSolvency II in place.
Before that weneed a number of political decisions, but I believethat
SolvencyII will be in place.
It‘s fundamental from a supervisoryperspective becausewenow have a
regimethat doesnot respond tothe risks.
We have toremember whywestarted SolvencyII.
Thepurposewasto increasepolicyholder protection and incentivize
better risk management.
And from all thework that wehavedonein SolvencyII there isalready
somepositiveevolution in the wayinsurersmanage risks.
Wehave seen abankingcrisisin 2008. What weforget about is the
insurancecrisisin theyears 2001until 2003. This wascaused byequity
investments, reserve deficienciesand unprofitable businessin many
lines.Doyou think ascenario of this kind will still bepossibleunder
SolvenyII?
No regulatoryregimecan avoid crisis.
There is no perfect regime.
SolvencyII bringsmuch more awarenessof risks at an earlystage.

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From the side of the companies it‘s a fundamental change of culture
when companies while investing in markets, need to understand the
risksthat theyare running.
Thesupervisorsin their turn will alsohave necessarytoolsand
information in order to look at thecompaniesfrom therisk-based
prospective.
Is thisa zero failure system?
No.
There arenozero failure systems. But there hasbeen progress.
You mentioned thecrisisof 2001until 2003.
Theindustryhas learned from that and weincorporated it in Solvency II.
Thepush for increasedrisk management and for better understanding
bycompanieswhentheyinvest in certain typesof assets– thesearethe
lessonslearnedfrom that past.
This is fundamental right now:one of theconsequencesof the low
interest ratesis that insurancecompaniesare searchingfor yield.
It‘s bound to happen that they go to other types of investment.
But then it‘sfundamental that theyhave a good understanding of those
classes.
And that‘swhat SolvencyII brings.
Insurerscriticize what theyrefer toasartificial volatilityin thebalance
sheetsunderSolvencyII. Someeven talk about irrationalityof capital
markets. Doyou understand this criticism?
SolvencyII will givefiguresthat will be more volatilethan in thecurrent

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situation.
It wasclear from thebeginning.
Everybody wasalertedto that.
What haschanged is themagnitudeof this volatility.
We didn‘t have ashigh volatilitiesin thepast aswehad in therecent
years.
We have todeal withthisvolatility in thesystem.
That‘swhat wearedoingright now withthe long term guarantee
assessment (LTGA), whichpreciselyfocuseson that.
TheLTGAis trying tounderstand what kind of adjustmentsweneedto
make totheregimetodeal withartificial volatility.
But not all volatilityis artificial.
Muchof it is representativeof what is in the market.
I don‘t want to discusswhethermarketsare rational or not.
If you have long term liabilitiesand longterm assetsand you have a very
good match betweenthem, your numbersare lesspronetohave this
volatility.
If you have a huge level of mismatchingthen on the one side you are
takingadvantageof opportunitiesin the markets,but you have a risk.
But for some longterm liabilitiesweneed to havesome adjustmentsto
copewith the fact that the productsand theliabilitiesare long term and
theshort term volatilitiesin the assetshave a meaning, but theydon‘t
havean economicmeaning for thetype of liability that insurershave.
This is theadjustment that weare trying to effect right now.

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Theregimewassincethe beginningbased on theideathat wewant to
seethereality.
And the realityis that marketsare more volatilenowadays.
We needto recognizethe reality.
What wouldbeapositivepolitical solutionforthat?
An agreement on OmnibusII whichis preservingthe fundamental
elementsof SolvencyII, preservingthemarket consistent valuation that
wehave got in SolvencyII and preservingthe principlesof a robust and
prudential regime while consideringalsotheeconomic nature of the
liabilities.
I think that wehavegot some good proposalson the table.
Government bondsare categorized asnorisk investments. Doyou think
that this isagoodwayto tackleproblemsof state debt?
Morethan any other systemSolvencyII takesintoaccount thereality of
financial markets,includingon sovereigns.
In a SolvencyII balancesheet, sovereignswill be assessedat market
value.
It‘s much more advanced than other regimes.
Any kind of influence that markets are putting on any kind of sovereigns
in Europe right now, is taken into the Solvency II numbers immediately,
without anykind of adjustments.
Thenthere is the element of capital requirementson top of that.
But it‘simportant to understand themagnitude.

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If you look at technical provisionsand capital requirements,technical
provisionsrepresent 80 to85 percent of a balancesheet.
Capitalrequirement is just a small item comparedtothat.
By having market consistent evaluation in the technical provisions and
in the balance sheets, you have already a huge reflection of all the risks
theassetshave, includingsovereigns.
Now theperceptionof sovereign risk iscompletelydifferent from what it
wasten years ago, whenwestartedtodevelop thesystem.
Going forward weneed toconsider this.
What is alsoimportant tounderstand is when something should be
done, it should be done for all sectors.
We cannot have a different appreciation of sovereign risk for insurers
and for banks.
It needsto be done for the financial system asa whole.
And it‘s alsoimportant totakedue attention to thetime when weare
doing this.
It‘s not a good policyto changethis whenyou are still in a crisis.
How doyou evaluate the SwissSolvencyTest?It‘sin usesince2006 and
is in force alreadyfor twoyears.
Theprinciplesare very much alignedtoSolvencyII.
I think it‘svery good that theystartedtoimplement thesystem because
Switzerland is an important insurancemarket and EIOPAhasvery good
relationship and closelycooperateswiththe Swissauthority FINMA.

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We can observe challengesbut alsoa good outcome from the
implementationof a risk-basedregime in Switzerland:wehave seen
somechangesin behavior in themarketsand in theproductsthat Swiss
insurerssell.
But let‘sbe frank: it‘smuch easier for onecountry to implement a regime
than to have a decision on a tablewith27different approaches.What are
themost important tasksfor Germaninsurerstotackle on their wayto
SolvencyII?
There aresome companiesthat are more prepared and othersthat are
lessprepared.
That‘swhyweare developingguidelinesfor the preparationphasefor
SolvencyII.
We have definedareaswherewewant supervisorstoensure that
undertakingsare prepared: governance, risk management, pre-
application of internal models, elementsrelatedtotheOwn Risk and
SolvencyAssessment (ORSA), the informationtobe provided to
supervisors.
Theobjectiveof theseguidelinesisto help marketsand supervisorsto
havea clear ideaof how topreparetothenew regime.
For examplethere is a need to makeprogressin the systems and
processesthat are necessarytodeliver high qualitydata tobe provided
bycompaniesand further analysed by supervisors.
This is fundamental for therisk+based environment.
Soby our guidelinesweare not introducingSolvencyII earlyon, but we
expect national supervisorstostart implementingtheseelementsin a
consistent and convergent wayand torequest from companiesto
preparethemselvesin theseareasin order tobe in a good shape when
SolvencyII is enforced.

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It is a win-winsituation for both companies and supervisors.
Is thereasituation wheresystemic riskbecomesaproblemfor insurers
and reinsurers?
We understand what is systemic riskin banking.
Looking at the insurancesector it‘salsochallenging.
But thetype of businessis different.
Thematuritiesof businessaredifferent.
If you talk about traditional insurancebusiness,wedon‘t see much
evidenceof all thesefactorsthat can bringsystemic risk.
But insurerscan involve themselvesin some typesof businesswhichis
much more pronetosystemic events, for exampleexposurestocredit
default swaps.
Systemic risk in theinsurancemarket ismore a questionsof the
activitiesrather than insurersby themselvesbeingsystemic.
If you have a type of business that is much more leveraged, where you
have maturity transformations like you have on the banking side, if you
walk and run like a bank, then you need to be treatedlike a bank.
Are thecollegesof supervisors abletocopewiththeir task, especiallyif
you look at thevastnessof some insuranceenterprises.
It‘s important that supervision isperformed in a waythat it can deal with
reality.
It‘s important that welook at the risksfrom a group perspective.
In Europe wehave recognizedthis much earlier thanmany jurisdictions
around the globe.

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In the late 1990swehad an insurancegroup directive whichsaidthat it‘s
not sufficient to supervisesinglecompanies, but to do supplementary
supervision at a group level.
With SolvencyII weare recognizingthe reality: The groupsmanage
their businessin amuch more centralisedwayand thisneedsto be
reflectedin supervisionin order toavoid duplicationsand double
burdensbut at thesame timein order tohave a better perception of the
real risks that are run at the group level.
That‘swhycollegesof supervisorsare suchan important tool.
Theprogressthat theyhave made ishuge.
Therole of EIOPAin these collegesis tomake sure that thereis a
consistent and convergent supervision.
This is a process. We have still some room for improvement.
Doyou think amorecentralized approach wouldbebetter for thebig
financial institutions?
There arestepsthat need to be taken in this area.
I think the best waytodo that is tobuild up on the roleand
responsibilitiesgiven to usby the Regulation establishingEIOPA.
We can build a step by step approach towardsa more centralized
supervision.
I don‘t believein ruptures.
That needstobe an evolution and not a revolution.
We gain from havingmore centralizationin some areas.
For exampleinternal models are fundamental for the new regime.

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It‘s important that there is good understandingof how the modelswork
on individual and groups‘level Here wecould have an approach
centralized by EIOPAbecauseit‘snot possiblethat all the authorities in
all the countries whereyou have companieswithina group, will have the
sameexperienceimmediatelytodeal withit.
But it needsto be a step by step approach.
In UK it is nowprohibitedforbrokers totake commissions.Doyou
think that this will improveconsumer protection?
Intermediariesare the visiblefaceof theindustry towardsconsumers.
Thequalityof the informationand advicethat is provided is crucial.
There area number of thingsto improve.
But isit all about disclosure?
Is disclosurethe key issue?
Thereality provesthat this isnot the case.
Disclosure is important but it‘snot the panacea.
I think this is not fair tosay―We gave all the information to the
consumer, but he doesn‘t understand it, soit‘shis problem‖
That is not a policyI wouldrecommend from a perspectiveof consumer
protection.
First of all there aredifferent typesof intermediariesand businesseswe
are talking about.
In life insurance it‘simportant that the consumershave good knowledge
of the commission the intermediariesare taking.

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This is a contract for manyyears, soin life insurance themandatory
disclosureshould bethe rule.
If you look at the non-life sideyou should have the right toget the
information.
But the conditionsfor non-life contractscan be changed on an annual
basis,theyare not fundamental for your decision.
Theconflict of interest ismuch lessrelevant for non-life products.
What is important in consumer protection then?
You need to understand what consumersare worried about. Evidences
tell usthat in manycasesthecommission theintermediary
gets,is not fundamental forconsumers.
Theywant tohave a good advice.
But if theyneeded topay for that advicedirectly, then theywouldnot
buytheproduct.
But asa societydoyou want peopleto be lessinsured?
Sobanning thecommissionsthis measure needstobe well analyzed.
Shouldpension fundsbeobliged tofulfill therequirementsof Solvency
II?
It‘s not our intentionthat pension fundsshould followSolvencyII.
When weadvised theEuropean Commission, wesaid that there are
some areas,whereweseean advantage of applying the same basic
structure Pension fundsare dealingwiththe similar kind of risk, soit‘s
important for the protection of membersand beneficiariestohave good
risk management, good governance, better transparencyetc.

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But wesaid alsothat a straight forwardapproachlike in SolvencyII is
not the best solution for pension funds.
There aredifferent typesof security mechanismsaround Europe.
It‘s important in anykind of solvency regime that thecalculation of
liabilitiesand thevalue of the assetsare taken more realistically.
We made a QIS exerciseand wewill have preliminaryresultsfrom this
test at the end of Marchor in the beginningofApril.
Someof the QIS optionswereconsistent withSolvencyII, otherswere
lessconsistent.
But wenever said that weshould follow SolvencyII.

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EU-US INSURANCE DIALOGUE
AGREES HIGH LEVEL
PROJECT PLAN
TheSteeringCommitteeof the EU-U.S.
InsuranceDialogueProject toincrease
mutual understandingand enhance
cooperationmet in Basel, Switzerland
and agreed on a high level workplan
from 2013to2017.
Theparties achieved agreement on a
prioritizationof objectivesand a schedulefor the implementation of the
initiativespreviouslyagreed upon by the SteeringCommitteeand
describedin the―Way ForwardDocument‖ (December 2012).
As part of the five-year plan, an agreement wasreached to move forward
in 2013with particular focus on thoseinitiativesrelating to professional
secrecy/ confidentialityand reinsuranceand collateral requirements, as
well asto begin work on some other initiativespertainingto solvencyand
capital requirements,group supervision and on-siteexamination
practices.
TheSteeringCommitteeanticipatesa public forum in late 2013toreport
on the year's achievements,tolaunchcollaborative workon supervisory
collegesand to givestakeholdersan opportunityto sharetheir thoughts
on best practicesand experiencesregardingsupervisorycooperationand
coordination.

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Meeting of the G20
Finance Ministers and
Central Bank Governors
Update by the IASB and
FASB
Convergence projects
This report isa high-levelupdate on thestatusand timelineof the
remainingconvergenceprojects.
This includesan update on the impairment phaseof our joint project
on financial instruments(included in theappendicesto thisreport).
Background
In the past ten years, sincethe US FinancialAccounting Standards Board
(FASB) and the InternationalAccounting StandardsBoard (IASB) (the
boards) signedtheNorwalkAgreement in 2002, wehave made
remarkableprogressin improving and converging major global
accountingstandards.
In 2006, theboardsagreeda Memorandum of Understanding (MoU)
that identifiedseveral short-term and longer-term convergenceprojects
that would bring themost significant improvementsto IFRSand US
GAAP.
TheMoU wasupdated in 2008and thenagain in 2010.
Achievements and challenges
Most of theshort-term projectsand several of thelonger-term projects
havebeen completed or are nearingcompletion.

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In 2012theboardsmade significant progresson theremainingjoint
projectsand theycontinueto appreciatethe importanceof developing
converged accountingstandards.
The boards have achieved converged solutions for Revenue Recognition
accounting and will be exposing converged proposals for accounting for
Leases.
There have, however, been some challengestodeveloping completely
convergedsolutions,especiallyfor the Impairment and Insurance
Contractsprojects.
For theImpairment project, it hasbeen a challengetobring together the
different perspectivesof the boards‘respectivestakeholdersand the
different marketsin which such stakeholders conduct their primary
businessactivities.
While the goal continuesto bethe development of a converged Standard
for impairment, theextent of future convergencein thisproject will
depend, in part, on the feedback that isreceivedduring theboards‘
respectivecomment periods.
However, it is alsoimportant tonote that under both setsof proposals
the provisionsfor loanlossescontinuetobe based on the same
information set, updated for changesin lossexpectations.
Developing a converged solution for theInsuranceContractsproject
may be more difficult.
IFRS doesnot currently includeaccountingrequirementsfor insurance
contracts,sothe IASB needsa final Standard urgentlyand will be
undertakinga targetedre-exposure of itsproposals.
TheFASB hasexistingmodels for insurancecontractsbut will initially
be exposing proposed amendmentsfor public comment in mid-2013.

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Thedifferencein thescope of thequestionsin these exposuredocuments
and theneed for theIASB toissuetimelyguidancewill make achieving a
fullyconverged solution for the InsuranceContractsproject challenging.
Financial instruments
Classification and Measurement
During 2012,theboards workedtogether toeliminatedifferencesin their
respectiveclassification and measurement models and haveconverged
decisionsin thefollowingareas:
•Contractual CashFlow CharacteristicsAssessment: a financial asset
wouldbe eligiblefor a measurement categoryother than fair value
through profit or lossif the contractual terms of thefinancial asset give
rise to cash flowsthat are solely paymentsof principal and interest on the
principal amount outstanding, whereinterest is considerationfor the
timevalueof moneyand for credit risk.
•BusinessModelAssessment: theassessment of the businessmodel
wouldapplytothosefinancial assetsthat ‗pass‘ theassessment of the
contractual cash flow characteristics.
Financial assetswouldqualify for amortisedcost accountingif the assets
are held within a businessmodel whoseobjectiveis tohold the assetsin
order tocollect contractual cashflows.
Thefrequencyand nature of saleswouldprohibit some financial assets
from qualifying for amortised cost.
•Fair value through other comprehensive income: financial assetswould
bemeasured at fair value through other comprehensive income if they
‗pass‘the assessment of the contractual cash flowcharacteristicsand are
held within abusinessmodel whoseobjectiveinvolvesboth holdingthe
financial assetstocollectcontractual cash flowsand sellingfinancial
assets.

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•Fair value through profit or loss would be the residual measurement
category that would include all assets that ‗fail‘ the assessment of the
contractual cash flow characteristics.
Given the different stagesof development of the classification and
measurement phasesof their respectiveprojects,(the IASB ismaking
limitedamendmentsto IFRS9 Financial Instrumentswhereasthe FASB
is proposingcompletely new guidance), theboards‘exposure documents
will not be identical.
TheIASB published its Exposure Draft in November 2012.
Theseproposed amendmentswereintended tofurther align theboards‘
classificationmodels, addresssome of the insurancecommunity‘s
concernsabout theinteractionwithaccountingfor insurancecontracts,
and clarifythe existingclassificationand measurement requirementsfor
financial assets.
Thecomment period ended on 28March 2013.
TheFASB expectstoissuea second Exposure Draft on classification
andmeasurement in February 2013and will conduct outreach with
stakeholdersduring theexposure period.
Thecomment period will end on 30April 2013.
Theboardsare planningtobegin joint redeliberationsabout the
feedbackreceivedon theproposalslater thisyear.
Thetiming of theissuanceof final requirementswill depend on the
nature and extent of thefeedback received.
Impairment (Loan LossProvisioning)
This is probablythemost important phaseof our project tooverhaul the
accountingfor financial instruments.

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While the boards worked jointly to develop an ‗expected loss‘ approach
to impairment, US stakeholders raised numerous concerns about early
draftsof theso-called ‗three-bucket‘approach.
Themost significant concernsrelated to the use of twodifferent
measurement approaches—aportion of the expected lossesfor all new or
purchasedfinancial assetsand a full lossrecognitionapproach for
financial assetsthat haveexhibited‗morethan insignificant deterioration‘.
TheFASB believed it wasnecessaryto addresstheseconcernsbefore
moving to an Exposure Draft.
Toaddresstheseconcerns, theFASB developed a different expectedloss
model wherebyat eachreportingdate, an entitywouldrecognise an
allowancefor credit lossesfor itscurrent estimateof all expectedcredit
losseson financial assetsheld at the reportingdate.
Thesame objectiveappliesto all financial assetsheld in anyperiod;
however, themeasureof the allowancewouldbe commensurate withthe
current assessment of risk for the financial assetsheld.
In late December 2012the FASB publisheditsExposureDraft.
TheFASB‘s comment period endson 30April 2013.
TheIASB decided tomaintain the concept of the ‗three-bucket‘
approachbut will revise it toaddressconcernsthat had been raised
about thepoint at whichfull lifetimeexpected lossesshould be
recognised.
Therevised model will result in an initial recognition of a portion of the
lifetimeexpected losses, withfull lifetimeexpectedlossesbeing
recognised only once a financial asset significantlydeteriorates(ie tothe
point that an economic lossis suffered beyond the level that was
originallyanticipated and priced intothefinancial asset).

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TheIASB isawareof the importanceof publishing itsproposalsassoon
aspossible, and will publish an Exposure Draft in thefirst quarter of
2013.
There will be a 120-daycomment period.
Theboardsappreciatethe importanceof converged requirementsin this
area and continueto have open linesof communication.
However, asnoted above, challengesto achievinga converged solution
includebringing together thedifferent needsof the respectiveboards‘
stakeholdersand thedifferent marketsin whichsuch stakeholders
conduct their primary businessactivities.
It is alsoimportant tonote, however, that under both setsof proposals
the provisionsfor loan lossescontinuetobe based on thesame
information set, updated for changesin lossexpectations.
Theboardswill continue todiscussdevelopmentsastheymove
forward, and participatein eachother‘soutreach during both boards‘
exposure periods.
Thecomment periodswill have some overlap and the boards will
consider public commentson both approachesduring redeliberations.
The timing of the issuance of final requirements will depend on the
nature and the extent of feedback received, but the boards expect to
completedeliberationsin 2013.
HedgeAccounting
Theobjectiveof theIASB‘s project isto improve hedge accountingby
more closely aligningthe accountingwitha company‘s risk management
activities, therebyimproving financial reporting.

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As previouslydiscussed, theHedgeAccounting phaseof theFinancial
Instrumentsproject is not a joint project.
However, the FASB sought commentsfrom itsstakeholderson the
IASB‘s HedgeAccounting Exposure Draft, and will consider theseand
thedecisionsreached during redeliberationsin conjunctionwith
feedbackon its ownproposals,whenit recommencesitshedge
accountingdeliberations.
Other projects
Leases
Lease obligationsarewidelyconsidered to be asignificant source of off
balancesheet financing.
Theobjectiveof theLeasesproject is toimprove financial reportingby
lessorsand lessees,in particular by recognisingleaseson thebalance
sheet.
Theboardshave completeddiscussionson theLeasesproject and have
agreedtore-exposethe revisedproposalsfor identicalstandards on lease
accounting.
Theboardsplan topublish exposure draftsin thesecond quarter of 2013
with a 120-daycomment period.
During the comment period, the boardswill conduct additional outreach
with users of financial statementsand withentitiesthat undertake lease
activities.
Theboardsplan tojointlyredeliberatetheproposalslater this year. The
timingof theissuanceof the final requirementswill depend on the
nature and extent of thefeedback received.

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Revenue Recognition
Theobjectiveof this project isto improve financial reportingby creating
identicalstandards on revenue recognitionthat clarify the principlesthat
can beapplied consistentlyacrossvarioustransactions,industries and
capital markets.
Theproject appliestoall contractswithcustomers(except
leases, financial instrumentsand insurancecontracts).
In December 2012theboardscompleted thesubstantive redeliberations
of the recognition and measurement principlesin the 2011Exposure
Draft.
Theboardsplan toredeliberatethe remainingtopics, includingthe
scope, disclosure, transitionand effectivedate, in the first quarter of 2013
and issuefinal standards in mid-2013.
Insurance Contracts
Theobjectiveof this project isto eliminateinconsistenciesand
weaknessesin existingpractice and to provide a singleprinciples-based
Standard to account for all insurance contracts.
While theboardsareworkingtogether on theInsuranceContracts
projecttheyhavereached different decisionson several basic matters.
For example, while both boards have agreedtomeasuretheinsurance
liability using a current measure of theestimatedcost to fulfil the
obligation, theboardshave reacheddifferent decisionson several aspects
of the model, includingtherecognitionof changesin estimate, the
inclusion of a risk margin in the measurement of the liabilityand the
treatment of acquisition costs.
Theboardsfinalisedtheir joint discussionsin January 2013.

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Theobstaclestofindinga convergedsolutionfor the Insurance
Contractsproject may be difficult toovercome.
In particular, thedifferent decisionsreachedbytheboardsare a result of
different starting points(IFRS currentlydoesnot includeaccounting
requirementsfor insurancecontractssothe IASB needsa final Standard
urgently, whereastheFASB isproposingamendmentsto itslong-
standinginsurancemodel).
Due to the importanceof the project and in view of the extensivedebate
theIASB hasundertaken over theyears, the IASB will only seek
feedbackon five keymatterswhich have significantlychanged sincethe
2010ExposureDraft.
TheIASB hopesthat this approachwill avoid further unduedelays in
finalisingthis much-needed Standard for insurancecontracts.
TheIASB planstopublish this Exposure Draft in thefirst half of 2013.
TheFASB plansto publish itsfirst Exposure Draft in mid-2013.
Investment Entities
TheInvestment Entityproject was,in themost part, jointlydeliberated.
However, the FASB is addressingthe accountingfor investment entities
more broadlythan theIASB did, asthe latter‘sfocuswassolely on an
exemption from consolidation.
Consequently, theboards‘ final requirementswill be similar but not
identical.
TheIASB issueditsfinal requirementsin October 2012.
TheFASB plansto finaliseitsredeliberationsand issuea final Standard
in thefirst half of 2013.

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The new Risk Dashboard

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EIOPA Risk Dashboard – Background note
Executive Summary
EIOPA publishesa Risk Dashboard on a quarterly basis, in accordance
with itsobligationsunder the EIOPARegulation1and followinga
frameworkdeterminedin cooperation withtheother ESAs, the ESRB
andtheECB.
TheRisk Dashboard is based on mechanical aggregation of indicators
and additional expert judgment if deemed necessary.
Besides publicly available market data, extensiveuse is madeof
company data whichis reported by 30 largeand important insurance
groupsfrom theEEAand Switzerlandunder EIOPA‘s quarterlyfast-
track reporting.
Withinthe common structure agreed upon by theESAs, theESRB and
theECB, theRisk Dashboard isdesignedto be flexible, soEIOPA can
react quicklyto upcoming risks whichare deemed necessaryto be
covered.
EIOPA expectsthe Dashboardto graduallyevolve further, taking
feedback by the addresseesof this product intoaccount.
Context
As part of the new European legislation, EIOPAaswell asthe other
ESAsand theESRB arecalledupon to ―develop a common set of
quantitativeand qualitativeindicators(risk dashboard) toidentify and
measure systemic risk‖.
Thelegislationfurther stipulatesthat thesedashboardsshould be
constructed in cooperationbetweentheESAsand ESRB.

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In response to this requirement, the ESAs, together with the ESRB and
the ECB have determined a set of general features for all dashboards to
follow:
- Each riskdashboardwill be constructedbased on the same set of
risk categories:macrorisk, credit risk, market risk, funding and
liquidityrisk, profitability and solvencyrisk and risksresultingfrom
interlinkagesand imbalances.
Furthermore, each institution hastheoption to add categoriesto
allowfor sector specific risks (e.g. insurancerisk).
- It wasnoted that all Risk Dashboardsshould be constructed on a
flexiblebasisin order toalloweach authority toreflect themost
imminent risksidentified.
- Further development and implementationof the Risk Dashboards
should be taken forward individuallyby each of theauthorities
concerned.
However, the ESAs and ESRB should continueto work together
closelyin this regard to ensure interplay regardingtheunderlying
information presentede.g. consistencywhen thesame indicator is
used in different Risk Dashboards.
Approach
Work on theEIOPARisk Dashboardhassincebeen brought forwardby
the Financial StabilityCommitteeof EIOPA.
In definingthemethodology for the Risk Dashboard,the Committeehas
consideredtheapproach taken by other institutionsin the field of risk
assessment, for instanceby the IMF2.
TheRisk Dashboard hasbeen created togive a structuredview of risks
tothe insurancesector and theenvironment in whichit operates,in

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order to facilitatea regular assessment of theserisksand possible
mitigatingpolicyactions.
In creating it, carehasbeen taken tokeep the dashboard as
concise,forward-lookingand flexibleaspossible.
Furthermore, it isworthnotingthat thedashboard is designed asa high-
level tool showingthemost relevant trendsand riskson a macro level.
As significant differencesbetweenindividual institutionsexist, the
findingspresented are not alwaysapplicableto all EU insurers.
Methodology
Indicators
Aset of currently 40 quantitativeindicatorsforms thebasisof the risk
assessment presented.
These indicators, which signal potential risks and vulnerabilities for the
European insurance sector as well as its resilience, are generated using
both supervisoryand publicly availabledata.
This data isused – and in some casescombined – asthebasisof the risk
assessment for each indicator.
Given that thedistribution of risksand vulnerabilitiesisat least as
important asitscentral tendency, the risk indicatorsare, where
possible,assessed by takingboth themedian and outliers(e.g. 10th or
90thpercentiles) of theunderlying sampleintoaccount.
Basedon thisinformationan initial risk score for each indicatoris
derived.
Thesescoresbasicallyserve asproxieswhencombining variousrisk
indicatorstoan assessment for the overarchingrisk category.

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Risk categories
Theindicatorsare mapped to aggregatedcategoriesof
(1) macro risk,
(2) credit risk,
(3) market risk,
(4) funding & liquidityrisk,
(5) profitability & solvency,
(6) interlinkages& imbalancesand
(7) insurancerisk.
Basedon theindividual risk scoresfor each underlying indicatoran
aggregated riskscore for each categoryisgenerated by either
- an unweightedaverage (for categories4, 6 and 7);
- a weightedaverage referring to a long-term averageof actual
portfolio holdings(for categories2 and 3);
- a sub-aggregationwithinsome indicatorsof a risk categoryand an
aggregationof these―sub-riskscores‖ by using the simpleaverageo
for category1witha split in (1a) real-economyrisksand (1b) the
riskinessof the insurancesector asperceivedby financial market
participants,ofor category3 witha split in (3a) asset siderisksand
(3b) ALM matchingrisks, ofor category5 witha split in (5a) life
business,(5b) non-life businessand (5c) total business.
For a quick and comprehensiveinterpretation theoverall risk scoreare
visualizedthrough four color codesin theRisk Dashboard.

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Quarterlychangesare represented through arrows.
Risk assessment
Themechanicallyestimated risk scoresper categoryform thebasisof
theriskassessment in the Risk Dashboard.
Thesescoresare complemented by other information availableon risks,
e.g. from stresstest results,topical risk analysesor other availabledata.
If necessary, this informationisusedtoadjust the scores.
This way, it is ensured that all availableinformation is used for the risk
assessment and themost completepicture is generated.
However, decisionsto changethe mechanicallyaggregated scores(i.e.
expert judgment) are documented to ensure transparencyof thisprocess.
Toensure flexibility, theRiskDashboardcontainsspacetoelaborate
further on themost prominent risksin a ‗user-defined‘non-mechanical
way.
Additional dimensionsof each risk (e.g. the potential impact aswellas
timingaspects) havebeen derived partiallyon expert judgment aswell.
Expert judgment
Expert judgment is consideredcrucial for complementingor
substitutingthemechanicalprocessof the risk assessmentsand for
makingforward-lookingstatementsabout theexpected evolution of
risks.
Theprocessfor adjustingthe initial risk scores(both upwardand
downward adjustment) by expert judgment isintendedtobetransparent
andused consistentlyover time.

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Any uncertaintyin the assessment and/ or element of judgment that will
influencethe final assessment, such asriskmitigatingfactorswill be
madeexplicit and will be documented.
Thetransparencyand documentationrequirementsshould ensure a
sufficient level of confidencein theexpert judgment.
This confidencein expert judgment isimportant in order toproduce
crediblerisk assessments.
This confidenceshould be further maintainedby trackingtheadjusted
assessmentsagainst actual experienceor new information that becomes
available.
Such ―realitychecking‖ is especiallyimportant wherethe expert
judgment leadstosignificant deviationsfrom themechanical
assessment or whereit hasa material impact on the overall assessment
output.
Data sources
Data for the Risk Dashboardisobtained from both public sources
(market data) and thequarterly supervisoryreporting of 30large
European insurancegroupstoEIOPA(fast-track reporting).
Data availabilityfor RiskDashboardpurposesis expected to improve
substantiallywiththeintroduction of SolvencyII reporting.
Indicators used
Macro risk
As macro risks are obviouslythe major domain of the ESRB‘sRisk
Dashboard, EIOPA‘scontribution focusesmainlyon insurance-linked
aspects.

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Besides consensusforecastsof GDP growth, development of consumer
pricesand unemployment rates,thissection thereforeencompassesthe
financial markets‘perception of the healthinessand profitabilityof the
European insurancesector.
For this purpose, relative stock market performances of European
insurance indices against the total market are assessed, as well as
fundamental valuations of insurance stocks (price/earnings
ratio, price/ book-value ratio), CDS spreads and ratings/rating
outlooks.
Market risk
Market risk is,for most asset classes,assessed by analysing both the
investment exposure of the insurancesector and an underlying risk
metric.
Theholdingsgive a picture of thevulnerabilityof the sector toadverse
developments;the riskmetric givesa picture of the current level of
riskiness.
For equity investments, the relevant risk metrics are the implied volatility
as a short-term indicator and the price/ book-value ratio as medium-term
indicator.
Also for property investmentsthevaluation comesin asa risk metric, via
thecurrent yield of commercial real estateinvestments.
In addition, thecurrent level of long-term interestratesand some asset-
liability matchingindicatorsare assessed, e.g. by comparing the
duration of the bond portfolio (includingthe effect of derivative
holdings) withtheduration of technical provisions.
Thedifferencebetweenguaranteedinterest ratesand investment returns
completestheassessment in this risk category.

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Credit risk
For measuringcredit risk theholdingsof credit asset classesare
combinedwithrisk metricsapplicablefor theseasset classes.
For instance, the holdingsof government securitiesare combinedwith
thecredit spreadson European sovereigns.
Such indicatorsare alsoconstructed for theholdingsof bank bonds
(secured and unsecured) and non-financial corporatebonds.
Liquidity and funding risk
Generallyspeaking, insurersare lessprone to liquidityrisk thanbanks.
As indicators,the lapserateof the life insurancesectorhasbeen used
with a high lapseratesignalinga potential risk.
Furthermore, holdingsof cash & depositsare used asa measure of the
liquiditybuffer available,both in absolutetermsand asa share of less
liquidassets.
Thelast indicatorused is theissuanceof catastrophebonds, wherea
very low volume of issuanceand/ or high spreadssignal a reduction in
demand which could form a risk.
Profitability and Solvency
Ninerisk indicatorswereconsidered in the determination of the risk
score for this category.
While the return on equity providesan overall assessment of the
profitabilityin thewholesector, a more detailedbreakdownof
profitabilitytrendsisavailableby analysing thecombined ratio and the

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return to premiumsfor non-life businessand the return on assetsfor life
insurers.
Solvencyratios for both life and non-life insurerscompletethepicturein
thisrisk categoryaswell asthe year-on-year changein capital&reserves.
Interlinkages and Imbalances
Under this section various kindsof interlinkagesare assessed, both
within theinsurancesector,namely betweenprimaryinsurersand
reinsurers,betweenthe insurancesectorand thebanking sector, aswell
asvia derivativeholdings.
In addition, asan indicatoron imbalancesthedebt/ equityratioof the
insurancesector hasbeen included.
Insurance Risks
As indicatorsfor insurancerisksgrosswrittenpremiumsof both life and
non-life businessare an important input.
Both significant expansion and contractionare taken asindicatorsof
risksin the sector; theformer due to concernsover sustainability and the
latterasan indicatorof widespreadcontraction of insurancemarkets.
Premiumsare alsoanalysed in comparison to insurers‘capital&reserves
(insuranceleverage).
Information on insurance lossesdue to natural catastrophesroundsup
thisrisk category.

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Interview with Gabriel Bernardino,
Chairman of EIOPA, conducted
byNataša Gajski Kovačić, Svijet osiguranja
(Croatia)
In thebest scenario, thebeginningof Solvency
II implementation shouldbeeither in 2015or
2016,asMr. Bernardinohasrecentlysaid.
He addedthat thedate dependson thelength of
thelegal and political process.
Previouslyit wasannounced that full
implementation of SolvencyII will happen at the
beginningof 2014?
What is thereason of thedelay of SolvencyII?
First of all let me give you an overview of theEU legal processthat
precedestheimplementationof SolvencyII.
We have a Level 1text – the SolvencyII Directive, whichwasadoptedin
2009,it isa principlesbaseddocument.
TheLevel 2text will contain detailed rulesof theSolvencyII regime.
This document iscalledImplementing Measuresand will be prepared
bythe European Commission.
Finallywehave Level 3 & Technical Standards, whichconcernspurely
technicalmattersand require supervisory expertise rather than strategic
decisionsor policy choices.
TheTechnical Standardsare tobe preparedbyEIOPAand then
adopted by the European Commission.

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TheEU trilogueparties (theEuropean Commission, theEuropean
Parliament and theCouncil of theEU) still need todecidethe scope and
thelegal basisfor theTechnical Standardsthat EIOPAhastodraft.
This decision will be introducedin thesocalledOmnibusII Directive.
Onlyafter the finalizationof the OmnibusII Directive, the Commission
will come up withthe ImplementingMeasuresand EIOPA– with
TechnicalStandards.
Last year the triloguepartiesagreed that a final decision on theOmnibus
II Directivecan be taken onlyafter EIOPAconductsthe Long Term
GuaranteeAssessment (LTGA).
EIOPA supportsthisapproach becausebeforemoving forward with
SolvencyII weindeed need toagree on a sound and prudent regime
for the valuation of long term guarantees.
On 28 January 2013welaunchedthisstudy and hope to present its
findingsand our conclusionsin June 2013.
Afterwardsweexpect that theOmnibusII Directivewill be finalized.
Someinsurance companiescomplainthat theSolvencyII scheme favors
biggerinsurerswhohavetheresourcestoeasilyadjust to thenew
regime.
Theycomplainthat thecost of preparation aretoobigalready.
How doyou comment that?
No, SolvencyII is a neutral framework.
Already the level 1text statesthat the Directiveshould not betoo
burdensome for small and medium sized insurance companies.

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And one of the meanstoachievethis objectiveis the proper application
of the proportionalityprinciple.
In our workrelatedtothedrafting of Technical Standards, wealways
take intoaccount proportionalityaspectsthat are related tothe
size, complexityor risk profileof insurancecompanies.
As regardsthecostsof preparation, let‘saskourselves:dowewant to
keepthe existingSolvencyI regime?
No, becauseSolvencyI is not risk sensitive, it containsvery few
qualitativerequirementsregardingrisk management and governance
anddoesnot providesupervisorswith adequateinformation on the
undertaking‘srisks.
Comparing to thecurrent regime, SolvencyII has a clear benefit – it is a
risk& based regime, it helpscompaniestobetter understand and
managetheir risks.
SolvencyII is a hugestep in termsof transparencyasit will bring
harmonizedreporting framework and reliabledisclosure.
I am convinced that SolvencyII will providean appropriate basisfor
increasedpolicyholder protection and will contributeto reinforcing
financial stabilityin general.
Thecostsof preparation will be higher for the companiesthat want to
use
internalmodels for thecalculationsof their capital requirement.
That will not be thecasefor thevast majority of companiesin the EU.
Doyou think that Europeaninsurersareprepared forthetransition to
SolvencyII?
Wheredoyou expect thebiggestproblemstooccur?
We are confident about the preparation level of insuranceundertakings.

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At the same time wewant tousethedelayin SolvencyII implementation
for tackling possibleproblemsin a consistent and convergent wayand
here I wouldlike to mention EIOPAOpinion on interim measuresrelated
toSolvencyII, whichweissued in December last year.
In thisdocument weindicatedthat weseea great necessityin such
interim measuresbecause there isa risk that due tothedelayof a final
agreement on SolvencyII, a number of European supervisorsmay
decidetodevelop national solutionsin order toensure sound risk
sensitivesupervision.
Soinsteadof reachingconsistent and convergent supervision in the EU,
different national solutionsmay emergetothedetriment of a good
functioninginternalmarket.
EIOPA will develop Guidelinesthat are addressed tothe national
competent authoritiesand that are related to such stableelementsof
SolvencyII that are unlikelytobe influencedby the finalizedOmnibus
II Directive.
TheseGuidelineswill cover thesystem of governance, includingrisk
management, ORSA, pre applicationof internal models, and reporting to
supervisors.
I must saythat our initiativetodevelop the Guidelineswasapproved by
EIOPA Board of Supervisors(BoS), whichconsistsof all thenational
supervisoryauthoritiesof the EuropeanEconomicArea and also
receivedavery positivefeedback from theEuropean Commission.
In April wehope to havethe first draft Guidelinesready.
Afterwardswewill put them out for a public consultation.
After thepublic consultationthe Guidelineswill be finalized and will be
tabledto EIOPABoard of Supervisorsin Autumn 2013.

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As of 2014the Guidelinesare supposed tostart to be implemented,
howeverweare fullyawarethat it will not be possiblefor thesupervisors
tocomplywitheverything asof 1January 2014.
Sohereagain wetakeintoaccount theproportionalityprinciple:while
preparingtheGuidelinesweare considering their gradual
implementation.
TheGuidelinesare focused on thepreparation for SolvencyII.
With this step wewill ensure a smoother transitiontothenew regime,
both by undertakingsand supervisors.
Croatia is about tojoin theEU thusJuly– what big changescan we
expect in insuranceworld?
As all the other EU members, Croatia will have to complywiththeEU
legislationand, thus, for examplewithEIOPA Guidelinesrelated to the
interim measuresfor theSolvencyII implementation or withthe
Guidelineson complaintshandlingby insuranceundertakingsthat we
issuedin 2012.
I am confident that themembership in theEU will opentoCroatian
insurancemarket the possibilitiesfor future growth, while theEuropean
System of Financial Supervision will contributeto preservingthe
financial stabilityand enhancingconsumer protection in the Croatian
insurancemarket.
Are you familiar withtheworkof insurersin Croatia?
How doyou cooperate withour national supervisoryauthorityHanfa?
Yes,the information exchangeamong competent supervisorsand
EIOPA is one of thepurposesfor whichtheEuropean System of
Financial Supervision (ESFS) wascreated.
As regardsthecooperation, EIOPAstartedto prepare the ground

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for welcomingthe Croatian Financial ServicesSupervisoryAgency
(HANFA) toour Board of Supervisorsalready in 2011.
In 2012HANFA became an observer of the BoS and started the
preparatorywork in order to comply withall the necessaryrequirements.
Themembersof theHANFA Board and its staff membersalready
activelyparticipatein EIOPAactivitiessuch asthemeetingsof EIOPA
Board of Supervisors, variouscommitteesand workinggroupsand
EIOPA trainingsand seminars.
Soonthe HANFA will become a votingmember of EIOPABoard of
Supervisors.
Thetasksof our BoSare wideranging.
TheBoS isthe main decision making body of EIOPA, it adoptsall the
opinions,recommendationsand decisionsissued by our Authority;
approvesour budget, annual and multi annual workprogrammesand
annual reports.
SoNational SupervisoryAuthorities closely participatein theworkof
EIOPA and are awareof all our initiativesand achievements.
Is theresome kind of special treatment towardsnewmembersin
EIOPA, dotheyhave someperiod of adjustment?
No, the preparation startedwell in advance and nospecial transition
period for theCFSSAwill be needed.
When Croatia becomespart of theEU, what will your authoritiesin
insurancepoliticsinCroatia be?
EIOPA is responsibleto develop technical standards,that will become
mandatoryand guidelinesthat HANFA will need tocomplyor explain.
Sothe regulatory frameworkwill be influencedby EIOPA.

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Furthermore, EIOPAhasthepower to investigate possiblebreachesof
theEU Legislationin EIOPA‘s scope of activities.
If EIOPAmakesa conclusion that the Breach of the EU indeedtook
place,theAuthority will issue a recommendation addressedtothe
respectivenational supervisor.
In some limitedcasesEIOPAaction can be applied totheindividual
companies.
But thismight happen onlyin casethenational authoritydoesnot
complywith actionsrecommended by EIOPAor theEuropean
Commission.
In thiscasethe Chairman of EIOPAhasa right topropose to theBoard
of Supervisorsan individual decision addressedtoa financial institution
in whichrequiring the necessaryactiontocomplywithitsobligations
under the Union law.
Such a decisionmay require the cessationof any practice.
Many insurersoperate ontheEuropeanand global level sotheyare
sometimesconfronted withdifferent supervisory regimesorpractices;
howcan that beresolved?
Thefirst step is tobuild up a harmonized prudential frameworkin the
EU.
That is thepurposeof the Solvency II.
Secondlyweneed toassurethat day to day supervisionof financial
institutionsis done within a consistent framework.
EIOPA will develop a SupervisoryHandbook that wouldwork asa
guidebookfor supervisionin SolvencyII, settingout good practicesin
all the relevant areasof supervision.

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This handbook will foster the implementationof a more consistent
frameworkfor the conduct of supervision.
Furthermore, there isa strong role for the collegesof supervisors.
In the end of 2012,91insurancegroupswith cross&border activitywere
identifiedin the European EconomicArea (EEA).
Collegesrepresenta very important tool of group supervision because
theyprovidenecessaryplatform for the gatheringand dissemination of
information especiallyin caseof concernsor emergencysituationsthat
occur.
Collegeshelp todevelop a common understandingof the risk profile of
thegroups, toachievecoordinationof supervisory review and risk
assessment at a group level aswell asto establishsupervisoryplansfor
themitigationof risks at a Group level.
TheRegulation establishing EIOPAempoweredour Authority to
participatein the collegeswitha view tostreamliningthe functioning
and theinformationexchangewithincolleges.
Thestrategicgoal of our collegeworkis toset up consistent, coherent
and effectiveEEA-widesupervision of cross-border insurancegroupsfor
thebenefit of both group and solosupervision.
Every year weset ayearly action plan for collegesand alsopublish our
annual reportson thefunctioning of colleges.
In the courseof 2012, EIOPAattendedalmost all collegemeetingsfor 75
insurancegroups.
We contributed to the workof collegesby developing a cataloguefor
regular information exchangeand by providingspecific presentationsin
collegesabout EIOPA‘s regular assessment of risks facedby the EEA
insuranceindustry.

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How will SolvencyII applyto pension funds?What canpension funds
expect out of SolvencyII?
Right now & nothing. The review of theIORP Directiveisa different
processand isin a different stage.
We believethat occupational pension fundsalsoneed to have a much
more risk basedregulation.
As part of the processto advisethe European Commission on thereview
of the IORP Directive,, weconductedthe first QuantitativeImpact Study
for occupational pensions.
But sufficient time needstobe takentoget theright approach.
At themoment wehavethree main conclusions.
First, is that the requirementsand principlesthat wehave in Solvency II
on thegovernancesideshould alsobeapplied tooccupational pension
funds.
Theprinciples,especiallythe requirementsabout riskmanagement, are
very much relevant for occupational pension funds, too.
But of coursetheyshould be applied using a proportionalityprinciple.
Thesecond conclusionis about transparency.
SolvencyII improvesinformation not onlyfor supervisorsbut alsofor all
theexternalsparties.
We recommended the Commission for examplethat in caseof defined
contribution schemesa key information document shouldbe givento
thepotential and already existing membersof the pension plan.
This document should outlinecosts,charges,commissionsand risks.

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Thethird conclusion is that alsoin theoccupationalpension fundsyou
should have an economicvaluation of assetsand liabilities.
We needto prevent the situation whena problem is faced, but it istoo
late to solve it.
At the same time I usedtorepeat that wearevery much against a
copy&paste exercisefrom Solvency II to IORP Directive.
We dorealize thedifferencesbetweeninsurancecompaniesand IORPs
andthesedifferencesshould necessarily be takenintoaccount.
Your opinion on therolethat insurancecompaniesdealing withlife
insurancehave in providingforwellbeingof elderlypeople?
Insurancecompaniescan and do play a particularlyrelevant rolein
prioritizingsecurityand longterm savings.
Lifeinsurersare experts in risk management, theyare used todeal with
demographic, biometric and investment risks.
Theyare very well placed tooffer good solutionsfor retirement savings.
Due to thisimportant role, regulation and supervision aremuch relevant
toensurethat insuranceundertakingshave robust solvencyand that they
providepolicyholders withtransparent information about theproducts
andtheir risks.

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Interview with CarlosMontalvo, Executive Director of EIOPA
Conducted by Victoria Tozer Pennington, theRisk Universe (theUnited
Kingdom)
Therecentlyannounced further delay toOmnibusII havebeen greeted
with dismayby firmseager toseethefinal rulestoSolvencyII.
How doyou account forthedelaysandwhat is your advice tofirms?
CarlosMontalvoRebuelta:Acredibletimelinefor the implementationof
SolvencyII is a must have.
Regardlessof theseuncertainties, thereisa strongneed for risk-based
supervision.
This need hasbeen onlyreinforced by thelessonstaken from the current
crisis.
In order words,the ideaand theprinciplesof SolvencyII are more actual
and valid than ever.
Our advicetothe firms is not to wait until the politicaldiscussionsare
over, but touse the timein order tobetter prepare for SolvencyII
internally: tomakesure that the Boardsof firmskeep considering
SolvencyII a priority; and totake advantageof theinformation that they
are already collecting, aspart of suchexercise, in termsof better
understandingthe riskstheyface, and howto addressthem.
In the absenceof a final agreement on Solvency II in the scheduled
timeline, EIOPAhasexpressed an opinion in order toensureand
enhancesound risk based supervision and preparethe industry for the
final SolvencyII Directive.
Instead of reachingconsistent and convergent supervisionin theEU,

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In order toavoid thisscenario EIOPAdecidedtodevelop guidelinesand
totakea lead in thepreparatoryprocessaimed at a consistent and
convergent approach withrespect tothepreparation of SolvencyII.
EIOPA Guidelineswill allowsupervisorsand undertakingstobe better
preparedfor the applicationof the new regulatory framework.
Tocut a long storyshort, theguidelinesare an excellent wayfor all
partiestouse the extra timeof thedelayasa waytobe better prepared
for implementation.
How have theindividual Member Statesof theEuropean Union
progressedwith their adoption of SolvencyII and areyou confident all
will beabletoimplement thefinal rulesontime?
Montalvo:The Member Statescan and must successfullyimplement
SolvencyII and theyhave alreadystartedto make necessarypreparations
for it.
Somestepsin the right direction have alreadybeen taken, there is a good
workalready in progress,but there arestill challengeswithregards to the
wholeimplementationprocessboth for companiesand supervisors.
Ignoring them wouldbe irresponsible.
In your opinion howwill Solvency II serve to reducecost, complexity
and riskforinsurancefirms?
Montalvo:First of all, it is not possibleto eliminateor even reduce risks.
Theinsurancebusinessisa risk-relatedbusinessthat by itsnature is
based on taking, managingrisksand making profit out of thoserisks.
Theobjectiveof SolvencyII is not toreducerisks, but to allowcompanies
toproperlyunderstand, price and managethe risksthey face.
SolvencyII will enhancebetter understanding of the risks, and such

P a g e | 56
understandingwill help companiesto better managetherisksand
therefore, to make better decisions.
This will createan immediatebenefit tothe undertakings.
As regardscomplexity, complexityis particularlychallengingfor small
andmedium-sizedenterprises.
SolvencyII is more complex than it wasoriginallyforeseen.
Beyond theprincipleof proportionalityand itsapplication, wehave
currentlyon our tablesuch initiativesaslookingfor thecalculationof the
Solvencycapital requirements(SCR) and developing an IT tool to
facilitate it, or a toolkit to convert data required intoXBRL.
We acknowledgetheproblem and together with industrywewant to find
waystotacklethe excessof complexityof the framework, because
complexityshould never bean obstacletotheclear benefitsof Solvency
II.
Whyareinsurershaving such difficultycommunicating theimpact of
SolvencyII to thebusiness?
Montalvo:Solvency II provides firmswitha lot of relevant information
for them to run their business, and todo soin a more sound manner.
But thisalsoimplieschangesand it is always challengingto explain the
benefitsof change, tosend themessagethat wemay havetochangeour
approachto certain risks, products… that are embedded in the normal
functioningof the company, simplybecausetheycan threatenthefirm
itself.
Compliancewith therulebook is certainlynot thedriver towards
SolvencyII, asit only bringsthe downsideof it, costsand complexity,
but not theupside, namely qualityinformation, understandingof risks
andthesubsequent opportunities.

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Therefore, a changeof approach, in termsof both action and
communication, should takeplace todeal withthedescribedsituation.
Therearesignificant data management issuesconnected withSolvency
II;doyou recognise thechallengesfirmsface and what advice doyou
havein thisarea?
Montalvo:We are awareof the challengesoriginatedby reporting
requirementsand weareworking in order tominimize this burden for
companies.
Thedata challengescome from twosources:thevaluation of the activity
usinga harmonised market consistent approach and the detailed
requirementsfor public disclosureand supervisory reporting.
Themarket consistent valuation isa high_levelprinciple, which wasset
earlyon in the process(Article 75of theSolvencyII Directive).
EIOPA recognised from thestart thedata challengethat undertaking
will face and hasexpended maximum effort to allowundertakingsto
start preparing themselves,by consultingon thedetailed expectations
regardingpublic disclosureand supervisoryreporting.
Theimplied advice remainsthesame: continue(or urgentlystart for the
late comers) to prepare your internal systemstobe readyon time.
EIOPA hasalsorecentlylaunched an IT development project (Tool for
Undertaking) to make sure that all undertakingswill have accesstoat
least one costlesspossibility tocreatetheSolvency II reporting
submissionsexpected by supervisors.
TheORSA[OwnRiskandSolvencyAssessment] remainsachallenge
for manyinsurers, whichhasnot beenhelped byalack of detailed
guidancefrom theregulators.
Given howmuchfirmsarestrugglingwiththis,doyou expect to offer
moreguidanceoncethefinal rulesarepublished?If

P a g e | 58
so,whenand on whichareas?
Montalvo:The ORSAprocessmust be ownedby the company.
We indicatethe aim of ORSAbut cannot providevery detailed guidance
becausewe don ‘t wan t to int erv ene in themanagement processes
of companies and totell them how exactlytheyshould conduct the
ORSA.
At the same time weunderstand theconcernsof industry and precisely
becauseof this, wealready conducted public consultation on our
preliminaryviewson the ORSA.
And this isnot theend of our workon ORSA, but a link tothe workwe
are doing in termsof supervisoryreview processand other areas.
We planto continueinvolvingthe industryon how to enhance
understandingand how tomake the ORSAan operativetoolkit for the
companies, a toolkit that wouldallow them to understand their solvency
position, their risk challengesand the continuityof their business,
beyond a oneyear time horizon.
In termsof supervision, the ORSAshould be brought to a qualitative
level and that is what EIOPAis alsoworkingon.
Afinal point I think appropriatetoraiseon ORSAis itsuseasa wayto
imposeadd-onsbysupervisors.
If wewoulddoso, it wouldbe a one and done exercise,wewouldnever
realisticallybe able topretend that undertakingswould perform, for their
owninternal purposes,a seriousORSA exercise,but a compliancebox
tickingone.
Arecent survey showedthat althoughfirms (in theUK specifically) are
wellontheir wellto implementingtheir internal models, sourcessay
that thebigger issueof passing theusetest couldbeaproblem.
Doyou haveanyadvice on preparing fortheusetest?

P a g e | 59
Montalvo:Internalmodelsgobeyond a simpletoolkit to calculate capital
requirementsbecausetheyare a fundamental management toolkit.
On thebasis of this, sinceday one, theusetestbecame a cornerstoneof
thewholeprocess.
As part of the usetest, undertakingsneed to demonstratethat the
internalmodel is widelyusedin termsof decision making and plays an
important role in their system of governance, and that the model at all
timesreflectsthe risk profile of theundertaking.
EIOPA is developingguidelinesthat will clarifytherequirementsrelated
tothe usetest.
Theseguidelineshave alreadybeen pre-consultedwithselected
stakeholders.
One of the most crucial points is that national supervisory authorities
(NSAs) should asses individually the compliance with the use test for
each undertakingindividuallyaccordingto the requirements.
Although there areminimum requirementsfor the use test, there isno
detailedand completelist of usesthat theundertakingshavetoabide
with.
EIOPA recognisesthat theusesof the internal model will vary from
undertakingtoundertaking.
NSAswill assesscompliancewith requirementsbasedon
proportionality.
Someusesmay not be materiallyimportant tothe undertakinggiven the
nature of their business.
DoesEIOPAhave anyinformation onthepreferred blend ofscenarios
and lossdata from amodellingperspective?

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Montalvo:Internalmodelsbydefinitionare tailored tothespecificneeds
of individual companies.
On that basisEIOPAcannot have any concretepreferred approach when
it comesto blend of scenarios and lossdata and in general to internal
modelsastheyare specificto companies.
It is up to the undertaking to justify its own approach and methodology
to the supervisory authority as part of the approval process of the use of
an internal model for the calculationof the solvencycapital requirement.
This justification includesdemonstratingboth that the approach is
adequatetakingintoaccount the specificrisk profile of the undertaking,
andthat the internalmodelsrequirementsrelated to test and standards
are fulfilled.
Froman operational risk lossdata point of view, firms arecopingwitha
dearth of data and scaling issuesusingexternal lossdata.
Has EIOPAdone anywork on this area or can you offer some advice to
firmson theissueof the preferred useof internal and external lossdata,
sourcesof lossdata, and scalingproblems?
Montalvo:EIOPAor more precisely, itspredecessorCEIOPShas
performed several studiesin order tocalibratethe Operational Risk
Capital Charge.
Thestudies werebasedon different sample sizes(number and size of
undertakings)in different Member States.
Thefinal calibrationwasbasedon the analysisof larger sampleof data.
It is important to note that the resultsare not far different from those
produced by other analyses.

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EIOPA
Public consultation on Guidelinesrelated to the
preparation for Solvency II
The European Insurance and Occupational Pensions
Authority (EIOPA) launched a public consultation on
Guidelinesrelated tothepreparationfor Solvency II.
Thepurposeof theGuidelinesis tosupport both
National Competent Authorities(NCA‘s) and
undertakingsin their preparation for theSolvency II
requirements.
TheGuidelinescover the areasthat EIOPAconsiders fundamental to
ensure effectivepreparationfor SolvencyII: system of governance,
includingrisk management; forwardlookingassessment of the
undertaking‘sownrisk(based on the OwnRisk and Solvency
Assessment (ORSA) principles);submission of informationtoNational
Competent Authorities(NCA‘s); pre-applicationof internal models.
It is up to NCAs to determine how to comply with EIOPA‘s Guidelines
by incorporating them into their regulatory or supervisory framework in
an appropriatemanner.
NCAs are expected toensure that insurancecompanies and groupstake
activestepstowardsimplementingthe relevant aspectsof theregulatory
frameworkaddressed in theseGuidelines,sothat when SolvencyII is
applicable, itsrequirementscan be fullycomplied with.
However, EIOPA makes it clear that the Guidelines should be applied in
a proportionate way and in particular with regard to the burden on small
andmedium size undertakings.
Thepublic consultation will end on 19 June 2013.
EIOPA intendsto subsequentlypublish thefinal Guidelinesin the
autumnof this year.

P a g e | 62
This should allowNCAs toput in placecertain important aspectsof the
preparation for SolvencyII startingon 1January2014.
Consultation Paper on the Proposal for Guidelines
on the System of Governance
1.Guidelines
Introduction
1.According toArticle 16of Regulation (EU) 1094/2010of 24November
2010(hereafter, EIOPARegulation or theRegulation) EIOPA is issuing
Guidelinesaddressed tonational competent authoritieson how to
proceedin the preparatory phaseleadingup totheapplicationsof
Directive2009/138/EC of the European Parliament and of the Council of
25November 2009on the taking-upand pursuit of thebusinessof
Insuranceand Reinsurance(SolvencyII)3.
2. TheseGuidelinesare based onArticles40to49,Article 93,Article
132andArticle 246of SolvencyII.
3.In the absenceof a political agreement on OmnibusII, European
national competent authoritiesmay be forcedtodevelop national
solutionsin order toensure sound risksensitivesupervision.
Insteadof reachingconsistent and convergent supervisionin the EU,
4.It is of keyimportancethat there will be a consistent and convergent
approachwith respect to the preparation of SolvencyII.
These Guidelines should be seen as preparatory work for Solvency II by
fostering preparation with respect to key areas of Solvency II in order to
ensure proper management of undertakingsand to ensurethat

P a g e | 63
supervisorshave sufficient information at hand.
Theseareasare thesystem of governance, includingrisk management
system and a forwardlookingassessment of the undertaking'sownrisks
(based on the OwnRisk and SolvencyAssessment principles, knownas
ORSA), pre-application for internal models, and submission of
information to national competent authorities.
5.Early preparation is a key in order to ensure that when Solvency II is
fully applicable undertakings and national competent authorities will be
well prepared and ableto applythenew system.
For this, national competent authoritiesare expected to engagewith
undertakingsin a closedialogue.
6.As part of the preparation for the implementationof Solvency
II, national competent authoritiesshould put in place from 1January
2014the Guidelinesasset out in thisdocument sothat insuranceand
reinsuranceundertakingstaketheappropriate steps.
7.National competent authoritiesshould sendto EIOPA, a progress
report on theapplicationof theseGuidelinesby the end of February
followingeach relevant year, the first beingby 28 February 2015basedon
theperiod 1January 2014to 31December 2014.
8.TheseGuidelinesincludeGuidelineson the prudent person
principle.
National competent authoritiesare expectedtoensure that undertakings
during thepreparatory period alreadytakeintoaccount thisprincipleon
top of thesystem of regulatoryquantitativelimitsapplicableunder the
current supervisoryregime.
In additionnational competent authoritiesare expectedtoensure that
progressis made byundertakingsto makethe necessarytransitionover
theduration of the interim period towardshaving all therequisite

P a g e | 64
governancesurroundinginvestmentsin place.
This doesnot implythat undertakings‘investment portfoliosalreadyhave
tobe changed totheextent undertakingswouldconsider necessarywhen
theSolvencyII regimeis fullyapplicable.
9.TheGuidelinesconcerningthe actuarial function contain referencesto
capital requirementsand technical provisions.
Thesereferencesareto be understood asreferencesto SolvencyII
requirements.
Amajorityof the tasksof theactuarial function concernsthe
coordinationof SolvencyII technical provisions.
During the preparatory period these tasks are mainly relevant with
regard to the submission of interim information to the supervisory
authority.
There is no full framework for technicalprovisionsvaluation during this
period.
For thepurposeof thepreparatory reportingand onlyfor that purpose
theframeworkwill be provided later.
10.National competent authoritiesare expected to ensure that these
Guidelinesare appliedin a manner whichis proportionateto thenature,
scaleand complexityof therisksinherent in the businessof the
insuranceand reinsuranceundertaking.
TheGuidelinesalreadyreflect the application of the principlesof
proportionalityby havingthe principleembedded.
11.Thenational competent authoritiesshould applytheGuidelinesto
both individual undertakingsand mutatis mutandis at thelevel of the
group. Additionally, for groupsnational competent authoritiesneed to

P a g e | 65
applythe group specific Guidelines.
12.TheGuidelinesshall apply from 1of January 2014.
Section I: General Provisions for preparatory Guidelines
Guideline 1- General provisions for Guidelines
13.National competent authoritiesshould takethe appropriate stepsin
order to put in place from 1January2014thepresent Guidelineson
System of Governance.
14.National competent authoritiesshould ensurethat insuranceand
reinsuranceundertakingsand groupstake the appropriate stepsto:
a.build an effectivesystem of governanceaccordingtothe SolvencyII
Directivewhichprovidesfor sound and prudent management;
b.build an effectiverisk-management system comprisingstrategies,
processesand reportingproceduresnecessarytoidentify, measure,
monitor, manage and report, on a continuousbasisthe risks,at an
individual and at anaggregated level, to whichtheyare or could be
exposed, and their interdependencies;and
c.build qualitativeinformation supportingthe system of governance that
will allownational competent authoritiesto review and evaluatethe
qualityof theinformation.
Guideline 2 - Progress report to EIOPA
1.15.National competent authoritiesshould send toEIOPA, a progress
report on theapplicationof theseGuidelinesby theend of February
followingeach relevant year, the first beingby 28 February 2015basedon
theperiod 1January 2014to 31December 2014.

P a g e | 66
Section II: System of Governance
Chapter I: General governance requirements
Guideline 3 - The administrative, management or supervisory
body (AMSB)
16.In accordancewithArticle 41of SolvencyII, national competent
authoritiesshould ensure that the administrative, management or
supervisorybody of theundertaking hasappropriateinteractionwithany
committeeit establishesaswell aswithsenior management and with
other key functionsin theundertaking, requestinginformation from them
proactivelyand challengingthat information whennecessary.
authoritiesshould ensure that at group level, the administrative,
management or supervisorybody of theentityresponsiblefor fulfilling
thegovernance requirementshasan appropriateinteractionwith the
administrative,management or supervisorybodies of all entitieswithin
thegroup, requestinginformation proactively in the mattersthat may
affect thegroup and challengingthe decisionmaking both at group and
entitylevel.
Guideline 4 – Organisational and operational structure
authoritiesshould ensure that the undertakinghasorganisational and
operational structuresaimedat supportingthe strategicobjectivesand
operationsof the undertaking.
Such structures should be able to be adapted to changes in the strategic
objectives, operations or in the business environment of the undertaking
within an appropriate period of time.
19. In accordancewithArticle 246of SolvencyII, national competent

P a g e | 67
supervisorybody of theentityresponsiblefor fulfillingthe governance
requirementsat group level assesseshow changestothe group‘s
structure impact on thesoundnessof theundertakingand makesthe
necessaryadjustmentsin a timelymanner.
authoritiesshould ensure that, in order totake appropriatemeasures,the
administrative,management or supervisorybody of theentityresponsible
for fulfilling the governancerequirementsat group level knowsthe
corporateorganisationof the group, the purposeof itsdifferent entities
and the linksand relationshipsbetweenthem aswellaskeepitself
informedabout the risksarising from thegroup‘sstructure.
Guideline 5 - Key functions
21.In accordancewithArticles 44, 46, 47 and 48 of SolvencyII, national
competent authoritiesshould ensurethat the undertakingappropriately
implementsthefollowingkeyfunctions:risk management
function, compliancefunction, internal audit function and actuarial
function.
22.In accordancewithArticles 44, 46, 47and 48of SolvencyII, national
competent authoritiesshould ensurethat the entityresponsiblefor
fulfillingthe governancerequirementsat group level appropriately
implementsthefollowingkeyfunctions:risk management
function, compliancefunction, internal audit function and actuarial
function at thelevel of the group.
Guideline 6 – Decision-making
authoritiesshould ensure that the undertakingensuresthat at leasttwo
personseffectivelyrun theundertaking.
That impliesthat anysignificant decision of the undertakinginvolvesat
least twopersonswhoeffectively run theundertakingbeforethe decision

P a g e | 68
is beingimplemented.
Guideline 7 - Documentation of decisions taken at the level of
the AMSB
authoritiesshould ensure that theundertakingappropriatelydocuments
thedecisionstaken at thelevel of theadministrative,management or
supervisorybody of theundertaking and how information from the risk
management system hasbeen taken intoaccount.
Guideline 8 - Internal review of the system of governance
supervisorybody of theundertaking determinesthescope and
frequencyof the internal reviewsof thesystem of governance, taking
intoaccount thenature, scaleand complexityof thebusinessboth at
individual and at group level, aswell asthestructure of thegroup.
authoritiesshould ensure that it is up tothe undertaking to decidewho
is toperform the reviewswithin the undertaking.
authoritiesshould ensure that the scope, findingsand conclusionsof the
review are properlydocumented and reported tothe administrative,
management or supervisorybody of theundertaking.
Suitablefeedback loopsare necessarytoensure follow-upactionsare
undertaken and recorded.
Guideline 9 – Policies
authoritiesshould ensure that the undertakingalignsall policies

P a g e | 69
requiredaspart of the system of governancewitheach other and withits
businessstrategy.
Thepoliciesshould clearlyset out at least:
a)thegoalspursued by the policy;
b) thetaskstobe performed and thepersonor role responsiblefor them;
c) theprocessesand reporting procedurestobe applied; and
d)theobligation of the relevant organisational unitstoinform the risk
management, internal audit and the complianceand actuarial functions
of anyfactsrelevant for the performanceof their duties.
authoritiesshould ensure that in thepoliciesthat cover thekeyfunctions,
theundertakingalsoaddressesthe position of thesefunctionswithin the
undertaking, their rightsand powers.
Guideline 10- Contingency plans
authoritiesshould ensure that the undertakingidentifiesrisksto be
addressedby contingencyplansbasedon the areaswhereit considers
itselfto be especiallyvulnerableand reviews, updatesand teststhese
contingencyplanson a regular basis.
Chapter II: Fit and Proper Guideline – Fit requirements
31.In accordancewithArticle 42 of SolvencyII, national competent
authoritiesshould ensure that personswhoeffectivelyrun the
undertakingor haveother key functions, includingmembersof the
administrative,supervisoryor management body of the undertaking are
'fit' and takeaccount of the respectivedutiesallocatedtoindividual
membersto ensure appropriatediversity of qualifications,knowledge

P a g e | 70
and relevant experiencetoensurethat theundertakingismanaged and
overseenin a professional manner.
1.32.In accordancewithArticle 42of SolvencyII, national competent
authoritiesshould ensure that the undertakingensuresthat the members
of the administrative, management or supervisorybody collectively
possessat least qualification, experienceand knowledgeabout:
a) insuranceand financial markets;
b) businessstrategyand businessmodel;
c) system of governance;
d) financial and actuarial analysis; and
e) regulatoryframework and requirements.
Guideline 12- Proper requirements
authoritiesshould ensure that the undertaking, whenassessingwhethera
person is 'proper', includesan assessment of that person's honesty and
financial soundnessbased on relevant evidenceregardingtheir character,
personal behaviour and businessconduct includingany criminal,
financial, supervisory aspectsregardlessof location.
Theperiod of limitation of thecommitted offenceis judgedbased on
national law or practice.
34.In accordancewithArticle 41and 42 of SolvencyII, national
competent authoritiesshould ensurethat the undertakinghasa policy
on the fit and proper requirements,whichincludesat least:
a) a description of theprocedure for assessingthe fitnessand propriety
of the personswhoeffectivelyrun the undertakingor have other key
functions,both when beingconsidered for the specific positionand on

P a g e | 71
an on-goingbasis;
b)a description of the situationsthat give rise toa re-assessment of the
fit and proper requirements;and
c)a description of the procedure for assessingthe fit and proper
requirementsof other relevant personnel not subject tothe requirements
ofArticle 42 of Solvency II accordingto internal standards, both when
beingconsidered for the specific positionand on an on-going basis.
Guideline 14- Outsourcing of key functions
35.In accordancewithArticle 42and 49 of Solvency II, national
competent authoritiesshould ensurethat the undertakingapplies the fit
andproper requirementsto thepersonsemployed by the serviceprovider
or sub service provider toperform an outsourcedkey function.
36.In accordancewithArticle 42and 49 of Solvency II, national
competent authoritiesshould ensurethat the undertakingdesignatesa
person within theundertakingwith overall responsibilityfor the
outsourced keyfunction whoisfit and proper and possessessufficient
knowledgeand experienceregardingtheoutsourced keyfunction to be
ableto challengetheperformanceand resultsof the service provider.
Chapter III: Risk Management Guideline 15- Role of the
administrative, management or supervisory body in the risk
management system
supervisorybody of theundertaking is ultimately responsiblefor
ensuring the effectivenessof the risk management system, settingthe
undertaking‘srisk appetiteand overall risk tolerancelimitsaswell as
approvingthe mainrisk management strategiesand policies.
38. In accordancewithArticle 246of SolvencyII, national competent

P a g e | 72
supervisorybody of theentityresponsiblefor fulfillingthe governance
requirementsat group level is responsiblefor the effectivenessof the risk
management system of thewholegroup.
This risk management system should includeat least:
a)thestrategic decisionsand policieson risk management at group
level;
b)thedefinition of group‘sriskappetiteand overall risk tolerancelimits;
and
c)theidentification, measurement, management and control of risks at
group level.
authoritiesshould ensure that the entityresponsiblefor fulfillingthe
governancerequirementsat group level ensuresthat such strategic
decisionsand policiesare consistent withthe group‘s structure, size and
thespecificitiesof theentitiesin thegroup and that thespecific
operationsand associatedrisksof each entity in the group are covered
and in addition, it ensuresthat an integrated, consistent and efficient risk
management of thegroup isput in place.
Guideline 16- Risk management policy
authoritiesshould ensure that the undertakingestablishesa risk
management policy whichat least:
a)definestherisk categoriesand the methodsto measuretherisks;
b)outlineshow theundertakingmanageseach relevant categoryand
area of risks;

P a g e | 73
c)describesthe connectionwiththe overall solvencyneedsassessment as
identified in the forwardlookingassessment of the undertaking‘sown
risks(basedon theORSAprinciples), the regulatory capital requirements
and the undertaking‘srisk tolerancelimits;
d)specifies risktolerance limitswithinall relevant risk categoriesin line
with the undertaking‘soverall risk appetite;and
e)setsout thefrequencyand content of regular stresstests,and describe
thesituationsthat wouldwarrant special stresstests.
Guideline 17- Risk management function: general tasks
authoritiesshould ensure that the undertakingrequires the risk
management function to report to the administrative, management or
supervisorybody on risksthat have been identifiedaspotentially
material.
Therisk management function should alsoreport on other specific areas
of risks both on itsowninitiativeand followingrequestsfrom the
administrative,management or supervisorybody.
authoritiesshould ensure that the entityresponsiblefor fulfillingthe
governancerequirementsat group level ensuresthat the risk policy is
implementedconsistentlyacrossthe group.
Guideline 18- Underwriting and reserving risk
authoritiesshould ensure that in itsrisk management policy, the
undertakingcoversat least the followingwithregard to underwritingand
reservingrisk:
a) the typesand characteristicsof theinsurancebusiness, for example,
thetype of insurancerisk the undertakingis willingto accept;

P a g e | 74
b)how the adequacyof premium incometo cover expectedclaims and
expensesis tobe ensured;
c)theidentificationof the risksarising from the undertaking‘sinsurance
obligations,includingembedded optionsand guaranteed surrender
valuesin itsproducts;
d)how, in the design of a new insuranceproduct and the premium
calculation, the undertakingtakesaccount of the constraintsrelatedto
investments;and
e)how, in the design of a new insuranceproduct and the premium
calculation, the undertakingtakesaccount of reinsurance or other risk
mitigation techniques.
Guideline 19– Operational risk
authoritiesshould ensure that in therisk management policy, the
undertakingcoversat least the followingwithregard to operational risk:
a)identificationof the operational risksit is or might be exposed toand
thewaytomitigatethem;
b)activitiesand internal processesin placein theundertaking, including
theIT system supportingthem; and
c)risk tolerancelimitswithrespect to the undertaking‗skey operational
risk areas.
authoritiesshould ensure that the undertakinghasprocessesto identify,
analyseand report on operational risk events.
For this purpose, it should set up a system for collectingand monitoring
operational risk events.

P a g e | 75
authoritiesshould ensure that for thepurposesof operational risk
management, theundertakingdevelops and analysesan appropriateset
of operational riskstressscenariosbased on at least thefollowing
approaches:
a) thefailure of a key process, personnel or system; and
b) theoccurrenceof external events.
Guideline 20 – Control and documentation of risk-mitigation
authoritiesshould ensure that for thepurposesof proper useof
reinsuranceand other risk mitigationtechniquesthe undertaking
analyses, assessesand documentsthe effectivenessof all risk mitigation
techniquesemployed.
Guideline 21- Reinsurance and other risk-mitigation
techniques– risk management policy
authoritiesshould ensure that in the risk management policy the
undertakingcoversat least the followingwithregard to reinsuranceand
other risk mitigationtechniques:
a)identificationof the level of risk transfer appropriatetothe
undertaking‘sdefined risk limitsand whichkind of reinsurance
arrangementsare most appropriateconsideringthe undertaking‘srisk
profile;
b)principlesfor the selection of reinsurancecounterpartiesand
proceduresfor assessingand monitoringthe creditworthinessand
diversification of reinsurancecounterparties;
c) proceduresfor assessingtheeffectiverisk transfer and consideration

P a g e | 76
of basisrisk;
d)liquiditymanagement todeal withanytimingmismatch between
claims‘paymentsand reinsurancerecoveries;and
e)whereapplicable,proceduresfor ensuringthat unit-linked
policyholders continueto receivebenefitsin linewithaimsand
objectivesoriginallycommunicated to them.
Guideline 22 - Asset-liability management
authoritiesshould ensure that in itsrisk management policy the
undertakingcoversat least the followinginformationwithregard to
asset-liability management:
a)a description of theprocedure for identificationand assessment of
different naturesof mismatchesbetweenassetsand liabilities,at least
with regard totermsand currency;
b)a description of mitigationtechniquestobe used and theexpected
effect of relevant risk-mitigatingtechniqueson asset-liability
management;
c)a description of deliberatemismatchespermitted and thecontent and
frequencyof stress-teststo be conducted and monitored; and
d)a description of the underlying methodologyand frequencyof stress
testsand scenario teststobe carried out.
Guideline 23 - Investment risk
1.50.In accordancewithArticles 44 and 132of Solvency II, national
competent authoritiesshould ensurethat in itsrisk management
policy, theundertaking coversat least the followingwith regard to
investments:

P a g e | 77
a)thelevel of security, quality, liquidity, profitabilityand availability the
undertakingisaimingfor with regard tothewholeportfolio of assetsand
howit plansto achievethis;
b)theinternal quantitativelimitson assetsand exposures,includingoff-
balancesheet exposures,that are to be establishedtohelp the
undertakingachieveits desired level of security, quality, liquidity,
profitabilityand availability for the portfolio;
c) considerationof the financial market environment;
d) theconditionsunder whichthe undertakingcan pledgeor lend assets;
e)thelink betweenmarket riskand other risksin highly adverse
scenarios;
f)theprocedure for appropriatelyvaluingand verifying the investment
assets;
g)theproceduresto monitor theperformanceand review thepolicy
whennecessary; and
h)how the assetsare to be selected in thebest interest of policyholders
andbeneficiaries.
Guideline 24 - Liquidity risk
authoritiesshould ensure that in itsrisk management policy, the
undertakingcoversat least the followingitemswithregard to liquidity
risk:
a) the procedurefor determining the level of mismatchbetweenthe cash
inflowsand thecash outflowsof both assetsand liabilities,including
expectedcash flowsof direct insuranceand reinsurancesuch asclaims,
lapsesor surrenders;

P a g e | 78
b)considerationof total liquidityneedsin the short and medium term
includingan appropriate liquiditybuffer toguard against a liquidity
shortfall;
c)considerationof the level and monitoring of liquidassets, includinga
quantification of potential costsor financial lossesarisingfrom an
enforced realisation;
d)considerationof the identificationand costof alternativefinancing
tools; and
e)considerationof the effect on the liquiditysituation of expectednew
business.
Chapter IV: The ―prudent person‖ principle and the system of
governance Guideline 25 - Investment risk management
52.In accordancewithArticle 132of Solvency II, national competent
authoritiesshould ensure that for thepurposeof the investment risk
management the undertakingdevelops itsown set of keyrisk indicators
adaptedto itsriskmanagement policyand businessstrategy.
authoritiesshould ensure that the undertakingdoesnot solelydepend on
theinformation provided by financial institutions,asset managersand
ratingagencies.
In making its investment decisions,theundertakingshould take into
account the risksassociatedwith theinvestmentswithout relying only
on the risk beingadequatelycaptured by the capital requirements.
Guideline 26 –Assessment of non-routine investment activities
authoritiesshould ensure that beforeperforming any investment or
investment activityof a non-routinenature the undertaking carries out

P a g e | 79
an assessment of at least:
a)itsabilitytoperform and manage the investment or the investment
activity;
b)therisksspecificallyrelated tothe investment or the investment
activityand the impact of theinvestment or the investment activityon
theundertaking‘srisk profile;
c)theconsistencyof theinvestment or investment activity withthe
beneficiariesand policyholder‘sinterest, liability constraintsset by the
undertakingand efficient portfolio management; and
d)theimpact of thisinvestment or investment activityon thequality,
security, liquidity, profitability and availability of the wholeportfolio.
authoritiesshould ensure that wheretheinvestment or investment
activityentails a significant riskor changein the risk profile, the
undertaking‘srisk management function communicatessucha risk or
changein the risk profile tothe administrative, management or
supervisorybody of theundertaking.
Guideline 27 - Unit-linked and index-linked contracts
56.In accordancewithArticles 44 and 132of Solvency II, national
competent authoritiesshould ensurethat the investmentsof unit-linked
and index-linkedcontractsof theundertakingare selected in thebest
interest of policyholders and beneficiariestaking intoaccount any
disclosedpolicyobjectives.
57.In accordancewithArticles 44 and 132of Solvency II, national
competent authoritiesshould ensurethat, in thecaseof unit-linked
business,theundertakingtakesintoaccount and managethe constraints
relatedtounit-linkedcontracts,in particular liquidityconstraints.

Solvency ii News April 2013

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Solvency ii News April 2013