Solvency ii News July 2012

Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.solvency-ii-association.com
Dear member,
Todaywewill start from the SolvencyII Equivalence
developments
Solvency II – Equivalence Transitionalsmeasure
Short introduction of the concept and to the technical workcurrently
undertaken by EIOPA
1.Introduction
1.This note aimstoprovidesome additional informationasto the
concept of SolvencyII EquivalenceTransitional measures (proposed
under the current draft OmnibusII Directive) aswell astothework
currentlybeingundertaken by EIOPAin respect to the Commission
request for technical input of February 20121.
2.TheCommission hasdeveloped a transitional regime for Solvency II
equivalencefor third countrieswhicheither have a risk based regime
similar toSolvencyII or are willingand committedtomovetowardssuch
a risk based regime over a predefinedperiod (5years in initial
Commissionproposal).
3.Thetransitional measuresrecogniseboth that it will not be possibleto
undertake full equivalenceassessmentsin respect of all pertinent third
countriesprior totheimplementationof SolvencyII, and that there are a
number of third countrieswheretheir solvencyand/ or prudential
regimesare not currentlyableto satisfythe equivalencecriteria in full,
www.solvency-ii-association.com

but will be in a position todo soonce planned changesto theregime
havebeen made.
Thetransitional measureswouldallowundertakingsin or connectedto
thesethird countriesto obtain the benefitsof a positive equivalence
findingon a temporary basisduring thetransitional period.
4.Inclusion in thetransitional regime wouldbe subject toa
Commission Decision.
This will most likely be taken in mid2013under the workingassumption
that the SolvencyII regime will be appliedby EU undertakingsfrom 1
January2014.
Thecriteria envisagedfor eligibilityfor thetransitional regime are still
subjecttoongoingpolitical discussion (negotiationson the OmnibusII
Directivein the Council of Ministersand theEuropean Parliament).
Commission‟srequest for EIOPA‟sinput
5.In respect of thethird countriesthat haveindicated to theCommission
that theyare interestedin beingcoveredby thetransitionalprovisions,
theCommission hasrequestedthat EIOPAcarryout an analysisof the
followingduring 2012:
- Whether personsworkingfor, or on behalf of, the supervisory
authoritiesare bound by obligationsof professional secrecy.
Professional secrecyequivalenceisa prerequisitetoinclusion in a
transitional regime.
- Themain areaswheretheequivalencecriteria wouldcurrentlynot be
met.
6.In its letter toEIOPA, theCommission hasnoted that the same level of
detail aswouldbe required for a full equivalenceassessment isnot

requiredfor thepurposeof identifying the main areaswherethe
equivalencecriteria may not currentlybemet.
With the exception of the professional secrecyprovisions,what the
Commissionhasrequested is a gap analysis.
However, thisanalysis clearlyneedstobe basedon informationcovering
thesame ground aswouldbe covered in a full equivalenceassessment.
Participatingthird countrieshave thereforebeen invited to provide
information by wayof completing the questionnaire annexed to this
note, which closely reflectsthat used in the earlier equivalence
assessmentsundertaken by CEIOPS/EIOPA.
Participating third countriesand next steps:
7.To date, the following third countriesthat have expressed an interest in
being covered by the transitional provisions have received the EIOPA
requestsfor information for theSolvencyII gap analysis:
_Australia
_ Chile
_ China
_ Hong Kong
_ Israel
_ Mexico
_ Singapore
_ SouthAfrica
8.EIOPA will baseits adviceto the Commissionlargely on the
responsestothe questionnaire provided by theseparticipatingthird
countries.
9.However, followingadoption of the OmnibusII Directive(political
agreement among colegislators)EIOPAexpectstolauncha “Call for
evidence”procedure invitingany interestedpartiesto providetheir input

regardingpractical experience/ directknowledgeof thesethird countries
supervisorysystems.
2.Basic principlesunderlying EIOPAtechnical contribution to
the Commission decisions on equivalence transitionals
Positive Equivalence of third country professional secrecy is a
determinative element for a third country to be included in the
equivalence transitional regime.
1.Professional secrecyis the basisfor all supervisory cooperation
amongEU and third country supervisors.
EIOPA will aim to ensure that appropriateprofessional secrecyand
confidentialityrequirementsare in place.
2.Afull equivalenceassessment of the third country professional secrecy
regimewill be undertakenusingtheprinciple,objectiveaswell asthe
indicatorsCEIOPS (EIOPApredecessor) proposed in itsfinal 2010
Level 2Advice tothe Commission.
3.When pursuingthe assessment of theoverarching principleof
professional secrecy, theprincipleof proportionalitywill not applyin
relationtoprofessional secrecy.
Technical input to the Commission regarding identification of
regulatory & supervisory gapsby reference to Solvency II
framework isNOT an equivalence assessment.
4.EIOPAwill NOT seekto establishwhetherthe country supervisory
system providesfor a similar level of policyholder/beneficiaryprotection
asunder SolvencyII to be consideredequivalent.
EIOPA will conduct a gap analysisthrough whichit will seekto identify
theareaswherethethird country doesnot meet the current criteria for

equivalencewhichwill be embeddedin the criteriatobe set out in the
Level 2 implementingmeasures.
2.5. The gap analysiswill be conducted using the indicatorsof
equivalencepreviouslyidentified by CEIOPSand taken over by EIOPA
i.e. thosefactorswhichEIOPAconsidersprovideguidancein
determiningwhether the relevant principlesand objectivesare achieved.
Proportionality principle.
6.Proper consideration shouldbe given to the adequacyof third country
practice in applying the proportionalityprinciple,wherethis isrelevant.
As such, a proportionalityprinciplein theapplicationof regulatory
provisionsin third country jurisdictions(contingent upon thenature,
scaleand complexityof therisksinherent in the business) should not in
itselfbe seen asan indicatorof regulatory/supervisory gaps.
Thegap analysiswill be made in respect of the regime in existenceand
appliedby a third country supervisoryauthority at the timeof the
assessment. Nevertheless,relevant plannedregulatory developmentswill
alsobe taken intoaccount in EIOPAAdvice tothe Commission.
7.Plansand ongoing initiativesfor changingthenational insurance
supervisoryregime in the third country should be taken intoaccount at
thetime of the gap analysisalthough theywill not automaticallylead to
assessorsconcluding asto the absenceof a gap in the third country
supervisory/ regulatoryframework.
Such initiatives should be taken into account to the extent they are
relevant and clearly identified as ongoing work when providing the
technicalgapanalysisto the Commission.
8.As EIOPAexpectsthat a full equivalence assessment will be
performedduring thetransitional period.

Thecurrentlyplannedor ongoing developmentstaken intoaccount for
thepurpose of performing thegap analysis will be revisitedat the time of
thefull equivalenceassessment.
3.Main operational aspects of gap analysis process
1.EIOPAworkis of technical nature only.
TheEuropean Commission retainsfull decision making powersastothe
third countriesto be included in the list of beneficiariesof an equivalence
transitional regime.
The Commission also retains full responsibility as to the contents of any
future convergence plans that may be agreed with a third country as part
of the processtobe accepted in the transitionalregime.
2.EIOPAconsidersthat the activecooperation of the third country
supervisoris essential for a proper analysis tobe undertaken.
EIOPA will not engage in any SII gap analysisin the absence of
confirmation of willingness to participate from the third country
supervisoryauthority.
Theconfirmation of thethird country willingnessto engageisprovided
bytheCommission.
3.EIOPA will post a call for evidence on its website following OMD II
approval (i.e. agreement of the criteria for a third country to be included
in thelist of beneficiariesfrom an equivalencetransitional regime).
4.Thecall for evidencewill allowany interestedparties an
opportunity, earlyin the process, to bring to EIOPA‟s attentionany factors
that theythink may be relevant tothe gap analysisor the professional
secrecyequivalenceassessment.

5.Informationprovidedunder a call for evidencewill be considered by
EIOPA but will not be published.
Neither will EIOPArespond to thepointsmade.
6.EIOPAassessment teamswill expertise, knowledgeand supervisory
experiencein the followingareas:
_ Legal expertise
_ Financial requirementsexpertise (pillar I issues) includingactuarial
expertise
_ Expertisein supervisoryreview, governanceand reporting(pillar II &
III issues)
_ Group supervision expertisefor assessmentsin relationtoArticles227
and 260.
7.The minimum number of assessors per team should be no less than 3,
including a EIOPA Staff representative who can also cover one of the
aboveareas.
8.EIOPAhasinvitedthird country supervisoryauthoritiestocomplete
the annexedquestionnairerelevant totheArticlesof the SolvencyII
Directiveunder whichan assessment isto be undertaken.
Thesequestionnairesare be based on thecriteriaset out in the Level 2
implementingmeasuresand encapsulatethe indicatorsthat EIOPA
considersprovide guidancein determiningwhetherthecriteria are met.
9.Where necessary, EIOPAwill request additional evidencefrom the
respectivethird country supervisoryauthority.
10.While the responsesof the third country supervisory authorityto the
questionnairesissued by EIOPAwill form the basisof the analysis,
EIOPA will not be restrictedtoconsideringonly thismaterial.

3.11.EIOPAmay alsoconsider other relevant information available, where
appropriate, such asany assessment carriedout by theIMF or World
Bank, or whetherthe third country is partyto the IAIS Multilateral
Memorandum of Understanding.
Such informationwill only be used assupportinginformationfor the
gapanalysis.
QUESTIONNAIRE FOR EQUIVALENCE GAP ANALYSIS
IN RELATION TO ART. 172, 227 AND 260 OF SOLVENCY
II DIRECTIVE (2009/ 138/ EC)
Principle 1. Powersand responsibilities of third country
supervisory authorities
Objective
Thesupervisoryauthoritiesof thethird country have thenecessary
means,and therelevant expertise, capacity, and mandatetoachievethe
main objectiveof supervision, namelytheprotectionof policyholders
andbeneficiariesregardless of their nationalityor placeof residence.
In particular, thesupervisoryauthoritiesin that third country shall have
thenecessarycapacities, includingfinancial and human resources.
Thesupervisoryauthoritiesof thethird country duly consider the
potential impact of their decisionson thestabilityof financial systems
globally, particularlyduring emergencysituationsand take intoaccount
thepotential procyclical effectsof their actionswhereexceptional
movementsin the financial marketsoccur.
Reinsurance specificities:
Thesupervisoryauthoritiesof thethird country are empoweredby law or
regulation to effectivelysupervise domestic insuranceor reinsurance
undertakingscarrying out reinsuranceactivitiesand toundertake a

rangeof actions,includingthe abilitytoimposesanctionsor take
enforcement action in relation to the domestic insuranceor reinsurance
undertakingscarrying out reinsurance activitiesthat it supervises.
Group supervision specificities:
The supervisory authorities of the third country shall be empowered by
law or regulation to supervise insurance and reinsurance undertakings
whicharepart of a group.
Thesupervision of insurance and reinsuranceundertakingswhichare
part of a group shall be carriedout effectivelyand thesupervisory
authoritiesof thethird country shall be empoweredby law or regulation
toundertake a rangeof actions,includingthe ability toimposesanctions
or totake enforcement action in relationtothegroup that it supervises.
Thesupervisoryauthoritiesof insuranceand reinsuranceundertakings
whicharepart of a group shall be ableto assesstherisk profileand
solvencyand financial position of that group aswell asitsbusiness
strategy.
Third country provisionsand arrangementsshould allowefficient and
effectivesupervisionthrough cooperation and exchangeof information
amongsupervisorsof the group.
1.Pleaseprovidea comprehensivepresentation of your supervisory
authority, includingdetails asto:
- Alegal basisspecifying supervisoryresponsibilitiesand enforcement
powers;
- Freedomfrom undue political, governmental and industry
interferencein the performanceof supervisoryresponsibilities;
- Transparencyof supervisoryprocesses/ procedures;
- Adequate financial and nonfinancial (e.g. sufficient numbersof

appropriatelyskilledstaff) resources;
- Appropriateprotectionfrom beingliablefor actionstaken in good
faith.
2.Pleaseprovide detailsasto supervisorypowersavailableto the
authorityin respect of undertakingsin difficulties(solo) / ultimate
parent undertakingsin difficulties(groups), whichmay include:
- Prohibition of disposal of assets;
- Arecovery plan, financescheme;
- Reestablishment of the level of own funds, reduction of risk profile;
- Downwardrevaluations;
- Preventingthe conclusion of new contracts;
- Withdrawalof authorisation;
- Measuresrelatingtodirectors, managers, controllersand other
relevant persons.
3.Pleaseoffer a detailed overview of theenforcement actionsavailableto
the authorityincludingasto the supervisoryauthority‟s abilityto
cooperatewith other authorities/ bodiesin respect of enforcement action.
4.Pleaseprovide information on your authority‟s powerstotake
preventativeand correctivemeasurestoensure that insuranceand
reinsuranceundertakingscomplywith the applicablelaws,regulations
and administrativeprovisionsincludingdetails astothe authority‟s:
- Ability to ensure complianceon a continuousbasiswithlaws,
regulationsand administrativeprovisions(includingthrough onsite

inspections)includingmeasuresto prevent/ penalisefurther
infringements;
-Ability to communicate concerns, includingthoserelatingtothe
undertaking‟s/ group‟sfinancial position;
-Ability to oblige the(re)insurerto respond to concernsraised by the
supervisor;
- Ability to obtain all information necessaryto conduct the supervision
of the undertaking/ group.
5.Pleaseindicate whetherin the exerciseof your general duties, you are
dulyconsideringthepotential impact of your decisionson the stabilityof
financial systems globally, particularlyduring emergencysituations,on
thebasis of the informationavailableat the time.
- Pleaseprovideany examplesof actionsrecentlyundertakenin this
respect;
-Pleaseprovidedetails asto regulatoryrequirementsastoinformation
sharingin crisis/ normal situation with foreign supervisors.
- In the context of group supervision, pleaseprovidedetails asto
regulatory requirementsasto informationsharing in crisis/normal
situationswhichmay include:
Ability/ Willingnessto submit information on intragroup
transactions;
Exchangeof prior information on decisionsthat couldaffect the
solvencyof the entitiesbelongingtoan EEA MemberState;
Ability/ Willingnessto allowthe transferof cash;
Ability/ Willingnessto support restrictionson free assetsfor
supervised entities.

6.Please indicate whether the you are taking into account the potential
procyclical effects of your actions where exceptional movements in the
financial marketsoccur
- Pleaseprovideany examplesof actionsrecentlyundertakenin this
respect.
7.In thecontext of group supervision, pleaseexplain your supervisory
powers/arrangements/ requirementsfor cooperationwithother
countries.
Pleaseindicatewhether:
- Under your national provisions,you may act asgroup supervisorfor
theentiretyof groupsdomiciledin your jurisdiction.
- Whereyou are thegroup supervisor,do you act asthe point of
contact for keyquestionsat group level and take responsibilityfor:
Thecoordinationand dissemination of information;
Review of the groups‟financial position;
Planningand coordination of supervisory actionsin respect of
thegroup asa whole;
Establishment of a framework for crisismanagement;
Theassessment of theapplicationfor a group internal model if
relevant and takeitsdecision in consultation withother supervisory
authoritiesconcerned.
- As group supervisor doyou have theprerogative to consult and
involvein advancethe relevant supervisoryauthoritiesconcerned in
caseyou intend to carry out an inspectionin an (re)insurance
undertakingsituated in theEEA.

- Doyou haveprovisionsin placefor the establishment of cooperation
arrangements,whichallowthat:
Acollege of supervisorsor similar cooperationarrangementscan
be establishedcomposingaminimum of all relevant authoritiesfor the
group supervision under the followingcircumstances:Relevanceof
thegroup tooverall financial stability; Relevanceof the group in
specific insurancemarket; Similarity of supervisorypractices;The
nature and complexityof the businessundertakenby thegroup;
In casea Collegeof supervisorsor similarcooperation
arrangementsare established, the functioningand organisationof these
mechanismsis based on writtenarrangements,includingprovisions
on obligationto cooperate/exchangeof information and decision
makingprocesses(aimed at consensus);
Pleaseindicatewhetherand, should it be the case,providedetails
astothe existenceof a mechanismfor disputesolving mechanism in case
of disagreement withother relevant supervisoryauthorities
Principle 2 Professional secrecy, exchange of information and
promotion of supervisory convergence
Objective
Thesupervisoryauthoritiesof thethird country and supervisory
authoritiesof Member Statesinvolved in thesupervision of domestic
insuranceand reinsuranceundertakingsshall cooperate and, where
relevant, ensurethe effectiveexchangeof information.
Thesupervisoryauthoritiesof thethird country shall providethat all
personswhoareworkingor whohave workedfor thesupervisory
authorities,aswellasauditorsand expertsactingon behalf of those
authorities,are bound by obligationsof professional secrecy.
Theabovementioned obligationsof professional secrecyshall extend to

information received from thesupervisoryauthoritiesof MemberStates.
8.Pleasedescribethe applicableregime with regard tothe professional
secrecyobligationstheauthoritymust observe(incl. theexistenceand
extent of these obligations) including:
- Confidential information – identification;
- Legal dutytoprotect confidential information;
- Applicable toall relevant individuals(i.e. all thosewhowork, have
worked or act(ed) on behalf of the supervisoryauthority);
- Ongoingobligation(applicablewhilst working/actingon behalf of
supervisoryauthorityand on continuousbasisthereafter);
- Disclosureof confidential information in restricted and clearlydefined
circumstancesaswell assubject toconditionsof professional secrecy
Useof confidential information only in thecourseof supervisory
duties:
compliancemonitoring (includingmonitoring of technical
provisions, solvencymargins, administrative/accountingprocedures and
internalcontrols),
impositionof penalties,
court proceedings/ appeals;
-Consent of Competent Authority wherethe confidential information
originatesfrom another competent authority
prior agreement tothedisclosure,
disclosureis made in accordancewith any specifiedconditions,
includingthoserelatingto the purpose of thedisclosureand useof the
information.

- Ability to enter intocooperationagreements(subject to guaranteesof
professional secrecy.
9.Pleasedescribenational applicablelegal provisionsin caseof breach
of the obligationof professional secrecylike for exampletheprovisions
in national law in respect of thebreach of professional secrecy(for
exampleoffences,penalties,enforcement).
10.Please describe the exceptions allowed by the applicable regime with
regard to the professional secrecy obligations the authority must observe
including:
- Expressagreement todisclose/ use;
- Summary/ aggregate disclosure (individual undertakingnot
identifiable);
- Civil/ criminal proceedings(wherethe undertaking hasbeen
declared
bankrupt or is being compulsorily wound up information must not
concern third partiesinvolved in rescueattempts).
11.Pleasedescribetheapplicableprovisionsregardingthe existenceand
extent of provisionswithregard toyour abilityto exchangeinformation
with:
- Supervisoryauthorities includingin relation toauthorisation and
suitability assessmentscoveringindividualsaswell as
communicationof concernsregarding financial soundnessof
supervised undertakings/ groups;
- Other authorities/ bodies/persons/institutionsresponsiblefor, or
having oversight of:
supervision of financial organisations/markets,
liquidation/ bankruptcyproceedings,

carrying out statutoryauditsof accounts,
detection/ investigation of breachesof company law,
- Central banks;
- Government administrationsresponsiblefor financial legislation (for
reasonsof prudential control);
- Other authorities/ bodies/persons/institutions(pleaseindicate).
Principle 3 Taking up of business
Objective
Thetakingup of thebusinessof reinsurancein the third country shall be
subjecttoprior authorisation.
Authorisation for thetakingup of businessshall be conditional on the
undertakingmeetinga clear, objectiveand publicly availableset of
writtenstandardson a continuousbasis.
12.Pleaseprovidedetails asto existenceand content of standardsin
respect of the Legal Entity:
- Legal form;
- Head office of theundertaking to be situatedin thesame country as
itsregisteredoffice;
- ArticlesofAssociation.
respect totheundertaking‟soperations:
-Limitation toreinsurance and relatedoperationsfor pure reinsurance
undertakingswhichmay include, for example, a holdingcompany
function;

- Limitationtothe businessof insuranceand operationsarising
directlytherefrom for insuranceundertakings;
- Schemeof operations(including, for thefirst three years, a forecast
balancesheet, estimatesregarding but not limited to: future Solvency
Capital Requirements,Minimum Capital Requirements,thefinancial
resourcesintended tocover technical provisionsand capital
requirements);
- Financial resourcescoveringset up costs;
- Basicown fund itemsthat constitutetheabsolutefloor of the
minimum capital requirements;
- Compliance withthe system of governancereferred tounder Principle
4.
respect totheundertaking‟sobligationto provideinformation on
Shareholders/Members:
- Identityof shareholders/ memberswithqualifying holdings;
- Amount of holdings;and
- Assessment of reputation and financial soundnessof theownerand
acquirer.
respect tocloselinks:
- Identification of closelinks(i.e. a situation in whichtwoor more
natural or legal personsare linked by control or participation, or are
permanentlylinkedtoone and thesame person by a control
relationship);

- Monitoring of closelinkstoensure theydonot prevent the effective
exerciseof supervisory powersover theauthorisedundertaking.
respect of refusal/withdrawal of authorisation:
- legallypossible;
- possibledue to qualificationsof shareholders/ members;and
- wherecloselinksprevent effectivesupervision.
Principle 4 System of Governance; Supervisory Review and
Public Disclosure
Objective
Thesolvency/prudential regime of thethird country shall require
domestic insuranceand reinsuranceundertakingscarrying out
reinsuranceactivitiestohave in placean effectivesystem of governance
whichprovidesfor sound and prudent management of thebusiness, and
requiregroupstohave in placesuch asystem at thelevel of the group.
That system shall at least includean adequatetransparent organisational
structure witha clear allocation and appropriatesegregation of
responsibilities,requirementsfor ensuringthat personsmanagingthe
undertakingare fit and proper and effectiveprocessesto ensure thetimely
transmission of information both within the undertaking or groupand to
therelevant supervisory authorities.
Thesolvency/prudential regime of the third country shall require
reinsuranceactivitiesto have in placean effectiverisk management
system comprisingthe strategies, policies,processesand internal and
supervisoryreportingproceduresnecessarytoidentify, measure,
monitor, manage and report, on a continuousbasisand at an individual
and an aggregated level, the riskstowhichtheundertakingisor could

beexposed, and their interdependencies,aswell asan effectiveinternal
control system.
It shall require groupstohave in placesuch asystem at the level of the
group.
reinsuranceactivitiesto establish and maintain riskmanagement,
compliance, internal audit and actuarial functions.
Groupsshall be required toestablishand maintain thesefunctionsat
group level.
Thesolvency/prudential regime of thethird country shall require groups
anddomestic insuranceand reinsuranceundertakingscarrying out
reinsuranceactivitiesto disclosepublicly, on at least an annual basis, a
report on their solvencyand financial condition.
Group supervision specificities:
Theprudential regime of thethird country shall require thegroup tohave
sound reportingand accountingproceduresto monitor and manage its
intragroup transactionsand risk concentrationsand toreport at least
annuallysignificant riskconcentration at the level of the group and
significant intragroup transactions.
17.Pleaseprovidean overview of the governance includingrisk
management general requirementsand supervisory powersapplicablein
your regime, includinginformationon theexistenceof:
- Effectivesystem of governance(includingbut not limited to
transparent organisational structure witha clear allocation and
appropriatesegregation of responsibilities,effectivesystem for timely
transmissionof information);

- Requirementsrelevant tothe fitness(for exampleappropriate
professional qualification, knowledgeand experience) and propriety
(for examplegood repute and integrity) of management and key
function holders;
- Effectiveand well integratedrisk management system aimedat
identifying, measuring, monitoring, managingand reporting(on a
continuousbasis) the risks towhichtheundertaking isor could be
exposed (on an individual and aggregated
level, interdependencies),and the amount of ownfundsnecessaryto
cover thoserisks(comparabletoan own risk and solvency
assessment;
- Objectiveand independent internal audit function witha direct
reporting linetotheadministrative, management or supervisorybody;
- Effectiveinternal control mechanisms(for art. 172 includingthose
appliedtoensurethat data received from cedantsarereliable and
timely);
- Sound writtenadministrative/ accountingprocedures;
- Contingencyplans.
18.Pleaseindicatewhetherand under which conditionsis an actuarial
functionrequired by your system includingwhetherthere isa clear
condition of knowledgeof actuarial and financial mathematics
appropriatetothe nature, scaleandcomplexityof theriskinherent in the
(re)insurancebusiness.
19.Please indicate whether your supervisory system requires continuous
supervision of outsourced functions or activities (in order to ensure that
meetingof obligationsshall not be affected).
In your replypleasealsoprovide information on theexistence/ extent of
provisionsin relationto outsourcingincludingastothe requirement for
a notification tothesupervisoryauthorityprior to outsourcingof critical
or important functionsor activitiesaswell asany other material
subsequent developments.

20.Pleaseindicatewhetheryour supervisorysystem requiresthat
undertakingshave a ComplianceFunction in placeto providethe
administrative,management or supervisorybody adviceon compliance
with law,regulationsand administrativeprovisionsincludingan
assessment of thepossibleimpact of any changesin the legal
environment and theidentificationand assessment of compliancerisks.
21.Pleaseprovide details asto governancerequirementsapplicablein
order to ensure identificationof deteriorating financial conditionsand
remediation of deteriorating with appropriate monitoring toolsin place.
22.Pleaseprovidedetails asto the existenceand extent of theauditors'
dutytoreport:
- Breach of laws,regulations,administrativeprovisions;
- Issueswhichmay affect the continuousfunctioningof the
undertaking;
- Refusal (or reservations) in respect of certification of accounts;
- NoncompliancewithSolvencyand Minimum Capital Requirements.
23.Please provide a comprehensive overview of requirements for the
public disclosure of report(s) on solvency and financial conditions at
least on an annual basiswithadescription of:
- Thebusinessand performance;
- System of governance;
- Riskexposure, concentration, mitigation and sensitivity;
- Assets;
- Technicalprovisions,other liabilities;

- Capital management;
- Significant intragroup transactionsand significant risk
concentrations,in thecaseof groups.
24.Pleasedescribethe type and frequencyof accounting, prudential,
statisticalinformationobtainableby thesupervisoryauthority:
- Annual Report on thesolvencyand financial condition of the
undertaking;
- Annual accounts(coveringall operations, financial situationand
solvency);
- Returns/statisticaldocuments;
- Information regarding contractsheld withintermediaries,in thecase
of reinsuranceundertakings(art. 172)
Principle no. 5 Changesin business, management or qualifying
holdings
Objective
Thesolvency/prudential regime of thethird country shall require that
proposed changesto thebusinessor management of domesticinsurance
or reinsuranceundertakingscarrying out reinsuranceactivitiesor of
groups,or toqualifying holdingsin suchundertakingsand groupsare
consistent withmaintainingthesound and prudent management of the
domestic insuranceor reinsuranceundertakingor group.
25.Pleaseprovide information on the existence/ extent of provisionsand
supervisorypowersin respect of acquisitions,includingasto:
- Notification of intentionto hold or increasedirectlyor indirectlya
qualifying holding;

- Right of supervisoryauthorityto opposeproposed acquisitionaswell
asabilitytosuspendvoting rightsand/ orability toannul castedvotes;
- Existenceof thresholdsprompting notification;
- Possibilityfor assessment of acquisitionby financial undertakingsto
besubject toprior consultation.
supervisorypowersin relationto disposals,includingasto:
- Notification of intentionto disposedirectly/indirectlyof a qualifying
holding;
- Thresholdsprompting notification.
supervisorypowersregardingthe information obtainablefrom an
undertaking, includingasto:
-Thresholdspromptingnotification of acquisitions/ disposals;
-Regular notification (e.g. annual) of qualifying holdings,including
size.
supervisorypowersin relationto the requirementsfor ongoing
assessment, approval and disclosureof relevant information, including
information in respect of:
- Portfolio transfersor transfer of individual contracts(e.g. in the
context of reinsurancecontracts);
- Changesto management;and
- Schemeof operation.

29. Pleaseprovidedetails asto existenceand content of standardsand
supervisorypowersin respect to theundertaking‟sobligationto provide
information on assessment of reputation and financial soundnessof the
new owner / acquirer.
Principle no. 6 –SolvencyAssessment
Objective
domestic insuranceand reinsuranceundertakingsand groupsto hold
adequatefinancial resources.
Theassessment of thefinancialpositionof domesticinsuranceand
reinsuranceundertakingsand groupsin the third country shall rely on
soundeconomic principlesand solvencyrequirementsshall be based on
an economicvaluation of all assetsand liabilities.
domesticinsuranceand reinsuranceundertakingsand groupsto
establishtechnical provisionswith respect to all of their insurance and
reinsuranceobligationstowardspolicyholders and beneficiariesof
insuranceand reinsurancecontracts.
Thesolvency/prudential regime of the third country shall require that
assetsheld tocover technicalprovisionsare invested in thebest interests
of all policyholdersand beneficiariestakingintoaccount anydisclosed
policy objectiveand that domesticinsuranceand reinsurance
undertakingsand groupsonlyinvest in assetsand instrumentswhose
riskstheundertaking concerned can properlyidentify, measure, monitor,
manage, control and report.
domestic insuranceand reinsuranceundertakingsand groupsto meet
capital requirementsthat are set at a level whichensuresthat in theevent
of significant lossespolicyholders and beneficiariesareadequately

protectedand continueto receivepaymentsastheyfall due toa level of
confidenceat least equivalent tothat achieved byArticle 101of Directive
2009/ 138/ EC.
Thosecapital requirementsshall be risk based withtheobjectiveof
capturingquantifiablerisks.
Wherea significant risk is not quantifiableand cannot be captured in the
capital requirements, thenthat risk shall be addressed through another
supervisorymechanism.
Thesolvency regimeof thethird country calculationof capital
requirementsshall ensure accurateand timely interventionbysupervisory
authoritiesof the third country in the event that thosecapital
requirementsare not complied with.
Thesolvency regimeof thethird country shall require domestic
insuranceand reinsuranceundertakingsand thosewhich arepart of a
group tomaintain a minimum level of capital, noncompliancewith
whichshall triggerimmediate and ultimate supervisoryintervention.
Thesolvency regimeof thethird country shall require domestic
insuranceand reinsuranceundertakingscarrying out reinsurance
activitiesto meet thecapital requirementsreferredtoin paragraphs5and
6above withownfundsthat areof a sufficient qualityand whichareable
to absorb significant losses.
Ownfund itemsconsideredby thesupervisoryauthoritiesto be of the
highestqualityshall absorb lossesboth in a goingconcern and in caseof
a windingup.
For group supervision assessments:
Thecalculationof group solvencyin thethird country'sprudential
regimeshall produce a result that is at least equivalent totheresult

achieved by either one of the calculationmethodsset out inArticles230
and 233 of Directive2009/ 138/ EC.
Thecalculation shall ensure that thereis no doubleuseof own fundsto
meet thegroup capital requirement and that theintragroup creation of
capital through reciprocal financingis eliminated.
30.Pleaseprovide information on the existence,content and extent of
provisionsin respect of financial supervision, including asto:
- Verification of stateof solvencyand financial condition of
undertaking/ of thegroup;
- Verification of establishment and abilitytorequest increaseof
technical provisionsand coveringassets;
- Obligation of undertakingto submit financial reportingto
supervisor.
31.Pleasedescribe provisionsasto rulesfor valuationof assetsand
liabilities,and indicate whetherthe followingare applicable:
- Thevaluation of assetsand liabilitiesisbased on an economic
valuation of thewholebalancesheet;
- Assetsand liabilitiesare valued at the amount for whichtheycould
be exchanged betweenknowledgeablewillingpartiesin an arm‟s
lengthtransaction;
- Valuationstandardsfor supervisorypurposesisconsistent with
international accountingstandards, tothe extent possible.
32.Pleaseprovidedetails asto the legaland supervisory regime
applicablein relationtotechnical provisions(TP) and indicatewhether
and/ orhow:

- TP are establishedin respect of all (re)insuranceobligationsand aim
tocapture all expectedrisksrelated to (re)insuranceobligationsof the
undertaking;
- TP are calculatedin a prudent, reliable and objectivemanner;
- Thelevel of TP is theamount a third country (re)insurance
undertakingwouldhavetopay if it transferred or settledits
contractual rightsand obligationsimmediately toanother
undertaking/ knowledgeablewillingpartyin an arm‟s length
transaction;
- Thevaluation of TP is market consistent and makes use, tothe
extent possible,of and isconsistent withinformation provided by
financial marketsand generallyavailableinformationon
underwritingrisks;
- Asegmentation of the (re)insuranceobligationsintoappropriaterisk
groupsand asa minimum by linesof businessisout in order to
achievean accuratevaluation of reinsuranceobligations;
- Processesand proceduresexist to ensure theappropriateness,
completenessand accuracyof the data used in thecalculationof TP.
- Thesupervisor is ableto require theundertakingto raisetheamount
of technical provisionsif it doesnot complywiththe requirements.
33. Pleaseprovidedetails asto the regimeapplicablein relationto own
fundsincluding, whereapplicable, asto:
- Ownfundsare classified in accordancewiththeir abilitytoabsorb
lossesin the caseof windingupand on a goingconcern basis;
- Thehighest qualitycapital is available toabsorb lossesin a going
concern and in caseof a windingup, withadditional requirementsof
sufficient duration of the own fund item, absenceof incentivesto

redeem, absenceof mandatory servicingcostsand absenceof
encumbrances;
- Adistinction is made betweenown fundson thebalancesheet and
off balancesheet items(for exampleguarantees);
- Accordingtotheir classification, own fundsare eligibleto cover
partiallyor fully(for thebest qualityownfunds) the capital
requirements;
- Quantitativelimitsapplytotheown fundsto ensure thequalityof
ownfundscoveringthecapital requirements.In theabsenceof
quantitativelimitsother supervisory requirementsshould ensure the
high qualityof own funds.
34.Pleasedescribethe applicableregulatory and supervisoryregime in
relationtoinvestmentsproviding detailssupportingthat:
- Undertakingsare onlyallowedto invest in assetsand instruments
wherethe riskscan be properlyidentified, measured, monitored,
managed, controlledand reported and appropriatelytaken into
account in their solvencyneeds;
- Assetsheld tocover TP are investedprudentlyin the best interestof
all policyholdersand beneficiaries;
- All assetsare invested in such a manner as to ensure the security,
quality, liquidity, availability and profitability of the portfolio as a
whole;
- Prudent levelsof investmentsin assetsnot admitted totradingare
required;
- Investment in derivativeinstrumentsare possibleinsofarasthey
contributeto a reduction of risks or facilitatean efficient portfolio
management;

- There is avoidanceof excessiverelianceon any one particular asset,
issuer or accumulationsof risk; noexcessiveriskconcentration.
35. Pleaseprovidedetails asto the legaland supervisoryregime
applicablein relationtocapital requirementsand indicatewhether
and/ orhow:
- Capital requirementsare be riskbasedand aim at measuringall
quantifiable unexpected risks of theundertaking. Pleasecover the
followingpoints:
Where a significant risk is not captured in thecapital
requirements,pleaseprovidedetails astothemechanism applied to
guaranteethat capital requirementsadequately reflect suchrisk;
How thecapital requirementsreflect a level of ownfundsthat
wouldenabletheundertakingtoabsorbsignificant lossesand that gives
reasonableassuranceto policyholdersand beneficiaries that payments
will be made astheyfall due;
What is thecalibration target for the capital requirements?Do
the requirementsenablethe undertakingat a minimum towithstanda 1
in 200ruin scenario over a one year period or ensurethat policyholders
andbeneficiariesreceiveat least the samelevel of protection;
Thecalculationof capital requirementsshall ensure an
accurateand timely intervention by supervisoryauthoritiesof thethird
country;
Obligationon undertakingstocommunicateconcernsrelating
totheir financial position;
Obligationon undertakingtorespond to concernsraised;
Thesupervisoryauthorityhaspowerstotakethe necessary and
appropriateactionsagainst the undertakingto restorecompliancewith
that requirement;

Appropriate standardsare in place wherecapital requirements
take intoaccount theeffect of riskmitigation techniques.
- There is a minimum level under whichcapital requirementsshould
not fall whichequatestoaminimum level of policyholder protection
whichtriggersimmediateand ultimatesupervisory intervention
action.
- Soloand group capital requirementsare calculatedat least annually
andmonitored on an ongoing basis.
36.If your regime providesfor the useof internal models, pleasedescribe
the applicableprovisionsregarding specificitiesof assessment of internal
modelsin the context of assessingcapital requirements, including
information relatingto the followingareas:
- Wherethe (re)insuranceundertakingusesa full or a partial internal
model tocalculate itscapital requirements, the resultingcapital
requirementsprovidea level of policyholder protection that isat least
comparable tothelevel that wouldbe required under local rules if no
internalmodel is used (i.e. it adequatelymodelsthe risksthe
undertakingisor could be exposedtoand providecapital
requirementswiththe same confidencelevel asthestandard
approach);
- Theregimehas a processfor the approval of internal modelswhich
includesa requirement for prior approval of the internal model before
theundertaking is permitted to use themodel to determineits
regulatorycapital requirements;
- Theapplicableregime includesthe followingrequirementsfor an
internalmodel tobeused to calculateregulatorycapital:
Aprerequisitefor an adequate risk management system;
Theinternal model is widelyused in and plays an important role
in the undertakingssystem of governance(usetest);

Statistical qualitystandards;
Validationstandards;
Documentation standards;
Calibration standards;
Profit and lossattribution.
- Wherea (re)insuranceundertaking usesa partial internal model to
calculateitscapital requirements,thescope of the partial internal
model is clearlydefinedand justified toavoid the "cherrypicking" of
risks. Pleaseprovideany supportinginformation todemonstrate that
thereis noambiguityasto whichrisks, assetsand/ or liabilitiesare
includedor excluded from the scope of thepartial internal model.
37.Pleaseprovidedetails asto the legal& supervisoryregimeapplicable
in relationtogroup capital requirementsand indicatewhetherand/ or
how:
- Appropriatestandardsare in place wherecapital requirementstake
intoaccount theeffect of risk mitigationtechniquesand
diversificationeffectsat group level;
- In order to reflect the total risks that the group may face, the group
solvency capital requirement also reflects the risks that arise at the
level of the group and that arespecific tothe group;
- Thecalculation methodsusedfor determiningthegroup capital
requirement.
38.Pleaseprovidedetails asto the regimeapplicablein relationto group
ownfundsincluding, whereapplicable, asto provisionsrequiring that:
- Doublegearing and the intragroup creationof capital through
reciprocalfinancingis eliminated;

- Theresult of theassessment of fungibility/ transferabilityissues
(e.g. restricted assets) is communicatedby the group supervisor;
- Solodeficitsare fully taken intoaccount at group level unlessthe
group can provethat its responsibilityis limitedtoitsproportional
shareof the capital;
- Thecalculationof thegroup solvency shall take account of the
proportional share held by theparticipatingundertaking in itsrelated
undertakings.
However, wherethe relatedundertaking is a subsidiaryundertakingand
doesnot have sufficient eligibleown fundstocover itsSolvencyCapital
Requirement, thetotal solvencydeficit of the subsidiary shall be taken
intoaccount.
Principle 8 Parent undertakingsoutside the Community: group
supervision
Objective
Thesupervisoryauthoritiesof thethird country shall have a legal or
regulatory framework for determiningwhichundertakingsfall under the
scopeofsupervision at group level.
Thescope of supervisionat group level shall at least includeall
undertakingsover whicha participatingundertaking, asdefinedby
Article 212of Directive2009/138/EC, exercisesdominant or significant
influence.
Thescope may excludeundertakingswherethiswouldbe inappropriate
tothe objectivesof group supervision.
39. Pleaseprovide information on whetherthe scope of group
supervision coversall parts of thegroup particularlyfor entitiesfor which

thereis a dominant or significant influenceare included in thescope of
group supervision.
Thescope may excludeundertakingswheretheir inclusionwouldbe
inappropriateto the objectivesof group supervision (i.e. the undertaking
whichshould be included is of negligible interest withrespect to the
objectivesof group supervision or the inclusion of the undertaking would
beinappropriate or misleadingwithrespect to the objectivesof the group
supervision).
40.Pleaseindicateyour approach, asgroup supervisor, to informing
other supervisoryauthoritiesconcerned whereyou have decidedthat an
entitywithinthe group should be excludedfrom group supervision.
In communicatingwith theother supervisoryauthoritiesin such cases
doyou includethe reasonsfor this decision?
41.Pleaseprovideany other relevant information on how your regulatory
frameworkprovidesfor a singleidentifiedgroup supervisor responsible
for coordinationand exercisinggroup supervision.

Financial Stability Report 2012
First half year report
Introduction
EIOPA‟sFinancial StabilityCommittee(FSC) hasupdateditsreport on
financial stabilityin relationtotheinsuranceand occupational pension
fund sectorsin theEU/EEA.
Thecurrent report coversdevelopmentsin financial markets,the
macroeconomicenvironment, and the insurance,reinsuranceand
occupational pension fund sectorsasof 4 May2012unlessotherwise
indicated.
Summary of main issuesand conclusions
INSURANCE SECTOR
Lately, the relativelypositivedevelopment of insurersexperienced in
recent years, hasstartedtoreverse.
This hasshown in solvencyratiosaswell asprofitability and to an extent
alsopremium growth.
Though the solvency situation of insurersis onlyreflectedon a Solvency
I basis1in this report right now, thedevelopment of keyvaluedrivers
(e.g. lowyield environment in anumber of currencyzonesin Europe)
indicatesthat the situationalsoputssignificant pressure on market
values.

Nevertheless, SolvencyI ratios for insurersarestill at a comfortablelevel
with ~200% at theend of 2011.
Followingup on last report‟s risk perception, EIOPAhasanalysed the
sector‟sresiliencetoa possiblelonger lastinglowinterestrate
environment aswell.
Although the sector overall seems to be capable of coping with these
challenges for some time, EIOPA continues to monitor the situation
closely.
However, if accompaniedby other potential threatsmaterialising, the
situation might lookdifferent, e.g. in caseof renewedturmoil duetothe
failure of governmentstostabilisefiscal situations, a strong weighingof
thesedevelopmentson economicgrowth, or a disruptiveunwindingof
currencyrisk (e.g. asa consequenceof developmentsin Greece).
While first order effectsof such an event on the European insurance
sector asa wholeseem limited(accordingto EIOPAanalysis
conducted), localinsurersare likely tosuffer and second order effects
might alsohit other European insurers,though mainlythrough the
potentiallytriggered disruption of financial markets(e.g. sovereigns,
banksand equities).
REINSURANCE SECTOR
In 2011, a largenumber of very severenatural catastrophesoccurred,
making2011the costliest year ever for thereinsurancesector.
Thenatural catastrophelossesexceededby far theheavy lossesof the
previousrecord year 2005(withhurricanesKatrina, Rita, Wilma).
At the same time, the financial crisisworsened,withinterest rate levels
generallyremaininglow.

As a consequencethereinsuranceundertakingswereconfronted with
hugechallengesregardingboth the liabilityside and the asset sideof the
balancesheet.
However, at the beginningof 2011theoverall reinsuranceindustry was
very well capitalised.
As a consequencethereinsurersdealt well withthe challenging
environment; the capital reduction wasonly verymodest.
Several years of relatively benign payoutsaswell asthe recovery of the
financial marketshad ledto reinsurancecapacitiessubstantiallyin
excessof demand.
Altogether, theinternational reinsurancemarket remained relatively
stablein 2011and saw onlymodest price increasesat thebeginning of
2012.
Raisingpriceslargelycould not yet be seen in spiteof themany natural
catastrophesin 2011.
Therenewalsat thebeginningof 2012aswell asat April 1ledto some
marked increasesin reinsurancepricesin the regionsand segments
affected by losses.
But overall therateshave gone up onlymodestly, last but not least due to
theextensiveabsenceof major losseventsin Europe and North America.
Furthermore, there isan increasedcapital flowintothereinsurance
market.
In the background of the financial crisisinvestors are searchingfor
relativelysafe investments,exertinga moderatingeffect on the rates.

OCCUPATIONAL PENSION FUNDS SECTOR
Themembersand beneficiaries of Institutionsfor Occupational
Retirement Provisions(IORPs) are currentlyconcentrated mainlyin a
few Member States,but continueto grow in importanceacrossEurope;
in some Member Statesreforms are in place to foster thisgrowthin the
future.
A trend is observed towards defined contribution schemes, which leave
sponsors less vulnerable to market downturns as risks are borne mainly
bymembers and beneficiaries.
Data for 2011(providedby supervisorson a best effort basis) document a
grave evolution in thefundingpositionsof IORPs, especiallyfor the
larger defined benefit (DB) systems suchasUK and NL, wherelevelsin
2011seem tohave declined below 100%.
Thelow yield environment in both countries is a key driver behind this
development, asit forcesthemarket valueof liabilitiesup.
At the same time both systemsalsoresult in low expected future asset
returnsgiven thedominance of debt investmentsfor most occupational
pensionsin most countries.
Supervisorshave takenactionstoaddressthese lowfundinglevels.
In NL fundsare obligedto participatein a recovery programme astheir
coverageratio (assetsdividedby technical provisions)dropsbelow the
requiredlevel (on average120%).
TheUK pensionsregulator is alsorunning recovery programmesand has
publisheda statement inApril settingout expectationsof trusteesof DB
IORPsstartingvaluationsunder thecurrent conditions.
Other recent trendsincludean increasein sovereigndebt exposuresof
IORPsin 2011withrespect to2010.

At least in high yield countriesthis isfocussingon shorter maturities.
Given current turbulent market conditions,a number of regulatorshave
emphasisedthe increasingimportanceof proper governanceprocesses
and increasingreporting requirements,alsoincludingregular scenario
analysesand stresstests.
Recent developments
FINANCIAL MARKET DEVELOPMENTS
Themacroeconomicenvironment is still challengingin manyEuropean
countriesand thusa main source of concern for financial stability.
Uneaseover government debt levelsremains and political uncertainty
continuesto influencemarketsalsoafter the relativelystrongpolicy
responsesat the European level.
Overall, the political and economic climate continuesto weighon
growthprospectsin Europe, although there are regional differences.
Figure 1showstheevolution of twoleadingEuropean businesscycle
indicatorsfor theeconomiccycles six monthsahead.
TheOECD indexshowsa somewhat decliningtrend in macroeconomic
output, althoughpossiblyat a slowerpacethan in previousmonths.
TheZEW Eurozone indicatorhad improved at thebeginningof 2012
after having reached levelscomparablewiththoseobserved during the
financial crisisin 2008.
Thelatest figure, however, indicatesthat the sentiment is again
deterioratingslightly.

Note: Thefigure showsleadingindicatorsfor the economiccycle six
monthsahead.
Twoindicatorsaredepicted. Onederivesfrom theZEW (Zentrum für
EuropäischeWirtschaftsforschung) Eurozoneexpectation of economic
growth and theother from OECD.
Theformer isplotted in blue on theleft hand axis and the latter is
plottedin green on the right hand axis.
TheOECD updatedits methodology for thecalculation of the indicator
in April 2012touse GDP asa referenceseries.
Several European countries are facingcontinuedeconomic downturn.
Figure 2 showsthedevelopment in GDP in several largeEuropean
countries.

Onlyin a few countries is theGDP back topre crisislevels.
In several countries,GDP seemsto be sloping downwards.Combined
with deleveragingby the banking sectorin Europe and the fiscal
consolidationpath followedby major governments, growthprospectsfor
several countriesseem dim, at least in the short term.
Thefact that fiscal consolidation and bank deleveragingis occurringin
manycountries at thesame time increasesthedisruptivepotential of the
situation.
At the same time, there is littleevidenceof inflationarytendencieswhich
might have been expected given the debatesat the politicallevel on
growth oriented instrumentsand global fiscal expansionarypolicies.
Figure 3 showsthat overall inflationexpectationsare well anchored at
around 2% at a fiveyear horizon.

Note: Thefigure showsthe evolution of therateof the 5 year EUR
inflationswap.
It is noted that the swaprate is not adjusted for any inflation or other risk
premia.
Combined withhigh levelsof Government debt followingthebanking
crisiswhichstartedin 2008, thissituationhas led European government
bond yields todiverge further.
Government bond yields are high compared to the last few years for
many European countries and several currently show an increasing
trend.

LEGISLATIVE AND REGULATORY DEVELOPMENTS
Anumber of legislativeand regulatory developmentshavebeen reported
by 29 Membersand Observerson the basisof an EIOPAsurveyon
national regulatoryreformswhichhavebeen adopted in the secondhalf
of 2011and thefirst part of 2012.
Thevolatility in thecapital market and theturbulenceexperiencedin the
Eurozonesovereign debt market areperceived asthemajor thrust of the
regulatoryand legislative changesreportedby most of the responding
countries.
As a reaction to the impact of sovereign risk on thesolvencyposition of
theinsuranceundertakings,in several countrieschangesweremadein
thevaluation approach tosovereign bonds(DE, DK, GR, IT).
Supervisoryengagement alsoincluded increasingthe requiredfrequency
of reporting of sovereign, banking and other assetclassexposuresby
insuranceundertakingsand groups(IE, LU, SI).
To deeply explore potential risk concentration areas and market
vulnerabilities ad hoc risk analyses, legislative amendments and
reporting requestshavebeen made (BE, FR, IT, PL).
Thecomposition of the asset portfolios held by insuranceundertakings
andthe asset allocation policiesare closely monitored in many territories
(BE, DE, EE, FR, GR, IE, IT, PL, RO) aswell asthe liquidityposition
(BE, CY, PT, PL, RO) asa consequenceof higher lapserates.
Likewisein houseStressTest exerciseswerewidelyperformed, or are
plannedtobeconducted in 2012,to assessthe insurers‟abilityto absorb
additional shocksaswell astheimpactsof relatively largemovementsin
risk factorsusing new stresstest calculations,methodologiesor
additional adverse financial contexts(EE, FR, FI, LU, NO, PL, CZ).

Low yield valuation exercisesare alsoconsidered to be a key instrument
tobe further usedtoinvestigate financial weaknessesof the domestic
market players.
In thiscontext, and in preparation of 2012European stresstesting,
several countrieshave alreadylaunchedor are planning toconduct a
QIS5bisexerciseover thecurrent year.
Followingup on theregular and ad hocmonitoring of the solvencyand
capital positionsof undertakings,more than half of theresponding
countriesreported the need toadopt additional supervisorymeasuresto
prevent or solve solvencystrains.
In few countries a need wasseen toput in placetargeted actionsor to
request ad hocdata (EE, MT, SE) on the basisof concern over the high
risk profile of individual companies.
This hasbroadlyledto a review of theannual, quarterlyor monthly
reporting packages(LU, LI, SE) which in some caseshave alsobeen
amended or newlyimplemented to allow an impact assessment of the
new prudential requirementsto be adoptedunder the SolvencyII
framework.
Action planstograduallyimplement the new prudential requirements
havealreadybeen initiatedin the observed period (second half 2011first
half 2012) and will be carried out over theyear 2012(DE, LI, MT, FR).
Thesemainlyconsist in exercisesfor evaluatingthe preparednessand
affectednessof the industry bySII requirements,supported in some
countriesby dedicatedmeetingsand byon sitevisitscarriedout aspart
of the Internal Model pre applicationprocessand of the SolvencyII
implementationprocess.
Similar programs, startedbeforethe observed period, are ongoingand
broadlyperformed in many other European jurisdictions.

Developments in the European insurance sector
INSURANCE SECTOR DEVELOPMENTS
Overall, the reported data from a sampleof largeEuropean insurers
indicatesa slight worseningin profitabilityand solvencylevelswhilenew
businessisquitesluggish for a significant number of reportinggroups.
Lifeinsurancepremiumshave increased by only3% on averagethough
more than half of the participatinggroupsreported decliningpremiums.
While in traditional life insurance, with a guaranteecomponent,
premiumsdeclinedby around 10% on average, unit linked life insurance
recorded higher premiums(+3%).
In non life business,premiumsdecreased on averageby 2% whilemore
than half of the sampleexperiencedhigher premiums.
Thehighest increasesin premiumshavebeen seen in marine/ aviation
/ transport (+24%), whilein credit / suretyship premiumsshrank by
17%.

Source: EIOPA, based on worldwide consolidated financial information
received from a sample of 24 large European insurance groups from AT,
CH, DE, ES, FR, IT, NL, SE and UK (22 groupsfor 2011data).
Overall profitsof surveyed groupsdecreasedfrom 2010to2011– when
consideringthemedian group, profitsweresome 17% lower.
Return on equityalsodecreased (from 9.6% to7.8% for themedian
group) though the dispersion especiallyon the lowerend of the
distribution wassignificantlylowerin 2011than in 2010.

Though 2011wascharacterised by a largenumber of unusuallycostly
natural catastrophes, profitabilityof thelarge non life insurancegroups
did not deteriorate:Net claims incurred grew lessthan net premiumsso
combinedratioswerequitestable.
Overall, it declinedfrom 99% to 97%. Also thistrend wasobserved for a
majorityof surveyed groups.

CH, DE, ES, FR, IT, NL, SE and UK (18groupsfor 2011data).
LOCAL MARKET DEVELOPMENTS
In addition tothe quantitativeanswersbasedon thefast track reporting
summarised above, membershave providedqualitativeassessmentsof
market conditions, key aspectsof the life and non life insurancesectors,
andthemain risks and challengesastheyareobserved in local markets.
In EIOPA‟s view theinsurancesectoracrossMember Statesappearsto
be generallyresilient.
In spiteof adversemarket conditionsand sluggish economy, life and non
life companiesare sufficientlycapitalisedin termsof solvencyratios
followingthe current regime.
Alargegroup of Membersreported that solvencyratios in their national
marketssufferedend 2011from decreasesin market valuation and

sovereigndebt crisis, however,some insurershavealreadyrecapitalised
and othersannounceto doit during theyear 2012.
Overall, in themajorityof the Member States(DE, DK, ES, FR, IT,
UK) a stabilisation in the upcoming 6 to12monthsis expected.
In a significant number of Member Statesa declinein grosspremiums
in thelife sector hasbeen observed recently, primarilydue to the
sluggisheconomic activityin some countries.
Continuedhigh unemployment alsomakes it difficult financiallyfor
manyindividualsto purchasenew products.
In addition, in some MemberStatesthedemand for classicallife
insuranceproductsdecreased slightlycomparedtolast year whichmay
besomehow relatedtothetrend in manyMemberStatesto marketing
towardsunit linkedor zero guaranteeproducts.
While a few Member Statesreport slight improvementsin financial
resultsof life and non life companies, in most MemberStates, insurers
wereaffectedby adverse market conditions,low interestratesand by the
sovereigndebt crisis.
Hence, lowerreturnson assetsduetovolatilefinancial markets, low
interest rates, the sovereigndebt crisisand the macroeconomic
downturn, are highlighted asthemain causesfor themixed financial
resultsof the European life and non life sectors.
In particular, thecurrentlyavailableinformationpointed out that
financial market developmentsduring thesecond half of 2011
contributedtoa deteriorationof the solvencysituationof theinsurersin
Europe, however, the sectorsare reported to remain well capitalised.
Anumber of key aspectsand developmentsin theEuropean life and non
life insurancesectorshave been reported by Members.

As life insurersexaminehow to reducethecapital strainscaused by
guaranteed products, theprolonged low interest rate environment will
depresstheyieldsfor new cashflow and maturing bonds.
Thereforethere isan increasedtrend in many Member States(DE, FI,
NO, SE, UK) towardsmarketing unit linkedor zero guaranteeproducts.
Aparticular issuepertainsto thelapserateswhichdeterioratein some of
theMember States(AT, BE, FR, IT) whichmay be somehow related to
weakmacroeconomic environment.
In particular in some Member Stateswereobserved higher lapserates
during thelast quarter of 2011but latest information availablepoint out
toa decrease(FR) or a stabilisation in 2012(AT, BE, IT, SE).
In termsof assetsheld by insurancecompanies,in a few Member States,
insurersdetermined concentration limitsfor asset management, reducing
exposurestoor even banning euro peripheral sovereign.
Furthermore, in themajorityof MemberStatesmost insurerswrote
downthe value of Greek government bondsin thesecond quarter.
In a largegroup of MemberStatesthere hasalsobeen an allocationfrom
peripherallowgraded government bondsto higher graded government
bonds, equity and high graded non financial corporatebonds(DE, FR,
UK, FI, NO). Moreover, in a few Member Statesit is expected that
insurersshorten maturities,hold cash and favour liquid assets(FR, IT).
Risk and Challenges
Theoverarchingand somewhat interconnectedrisk themes,whichhave
been onthe economic agenda for some timenow,remain mainly
unchanged:
(i) sovereignrisk;

(ii)thelow yield environment, and the riskof not meetingissuedinterest
rate guarantees; and
(iii) thesearch for yield and the additional risk assumed in this process.
Emergingthemesmay well followon the back of these three well known
risk factors.
Thelist could contain eventssuch asfurther developmentsin the
sovereignbond marketsin Europe, renewedstrainson the banking
sector, further deteriorationof the US economy and fiscal
budget, imbalancesand further uneven growth rateswithintheeuro
areaeconomiesand followingpolitical and macroeconomic risks.
SUPERVISORY RISKASSESSMENT FOR THE
INSURANCE SECTOR
As regardstherisk themeshighlightedby Members,some of therisk
factorswhichare affectedmore for adversefinancial marketsconditions
and a weakereconomicenvironment are seennow tobe more relevant.
Therisksexpected toincrease:sovereign, property and credit to
corporatesand householdsemerge simultaneouslyin a sluggish
economicenvironment suchasEurope experienced in the past months.
Moreover, in an environment wheregovernment yieldsare located at low
levels,interest rateguaranteesbecome hard to fulfil.
Furthermore, asa result of a weakeconomicrecovery, the remaining
economy and industrial enterprisesfacedifficulties, and theaverage
credit rating of governmentsand industrial corporationswouldtherefore
deteriorate.
Hence, investment opportunitiesin lower rated investment
vehicles,such as, for example, sub investment gradebonds, increase
in supply, makingit relativelyeasierfor insurancecompanies to
engagein such investments.

As highlightedby several Members,it is important tobe vigilant and to
contain and monitor theserisksdescribed above.
Otherwise,it can be envisaged that weakercapitalisedinsurance
companies could suffer unsustainablelossesfrom their investment
activities.
Indeed, macroeconomic conditionsindicate that 2012will likelybe
anotheryear in Europe of lowGDP growth, lowinterestratesand
moderate equitymarket performance.
Even if the economicrecovery continues, insurersmay find that the
assetsunderpinningtheir balancesheetshave decreased in value.
EIOPA Membersand Observershave been askedtoassessrisksand
challengesaccordingto the probability of a materialisationand the
impact on thenational insurancemarkets.
While for theAutumn 2011EIOPAFinancial StabilityReport a more
comprehensivelist of 45risksand challengesisused asthe basisfor the
risk assessment, many of them being of a structural nature, thelist used
in thethisSpring Report isprimarily focussedon market and credit
risks.
Based on the responses from 29 Member States4, the following risks and
challenges are classified as the most imminent, ranked by the product of
the scoresfor probability and potential impact.
Sovereign risk, equityrisk, lowinterest ratesaswell ascredit risk of
banksare the riskswith highest overall rankings.
Especiallythefirst of these itemsis consideredto have an increased
probabilityof materialisationand alsothe impact of such a scenariois
expectedto be significant.

Over thelast six monthseight of the10 risks mentioned above have
increasedaccordingto the feedback of national supervisors.
Thehighest increasesare reported withregard to equityrisk, property
risk and liquidityrisk.
On thecontrary, natural catastrophesand currency risk are considered
tobe stabilisedcomparedwith data from six monthsago.
For thenext six monthsthreerisksare expected to increasefurther, due
to turbulencesin thefinancial marketsand asa consequenceof a
sluggisheconomy, e.g. credit risk on sovereigns, propertyrisk and credit
risk to corporatesand households.
Conversely, interestrate risk relatedtoa prolonged period of low interest
ratesisexpectedtodecreaseslightly.

Developments in the European reinsurance sector
MAJOR LOSS EVENTSIN 2011AND AT THE
BEGINNING OF 2012
Theyear 2011has set new records.
At about USD 380bn, global economic lossesfar surpassed2005, the
previousrecord year withlossesof USD 220bn and make 2011a year of
unprecedentedlosses.
Original insured lossestotalled USD 105bn, slightlymore than 2005 s
USD 101bn(in original values).
Themost destructive lossevent of the year 2011wasthe devastating
earthquakeof 11Marchin Tohoku, Japan, whichalone (includingthe
tsunami and without consideringtheconsequencesof thenuclear
accident) accounted for overall lossesof USD 210bn and insuredlosses
of about USD 35bn - 40bn.
It wasthecostliest natural catastropheof all timesand the strongest
earthquake (magnitude of 9.0) ever recorded in Japan.
Theearthquake wasalsothemost severe natural catastrophe in 2011
relatingtofatalities:15,840people werekilled, roughly more thanthe
half of all peoplewhohave been victimsof natural catastrophesin 2011.
However, thefigure doesnot includethecountlesspeoplewhodied asa
result of the faminefollowingthe worstdrought in decadeson the Horn
ofAfrica, whichwasthe greatest humanitariancatastropheof theyear
2011.
Thesecond most expensivenatural catastrophein 2011for the insurance
industrywasagain a very severe earthquake.
On 22 February, New Zealand s second largest town, Christchurch, was
partly destroyed by an earthquakewith a magnitudeof 6.3, whichcaused

insuredlossesof about USD 13bn and overall lossesof roughlyUSD
16bn.
Thesetwolargeearthquakeswereresponsiblefor making geophysical
eventsthe dominant lossdrivers in 2011.
Nearlytwothirdsof economiclossesand about half the insured losses
stemmedfrom geophysical events.
Thelong term averagecontribution of geophysical eventshasbeen just
22% of theeconomiclossesand only 10% of the insuredlosses.
So2011wasexceptional not onlyduetoitsextraordinarilyhigh losses,but
alsobecauseof significant deviationsof thedistributionof the lossesto
thedifferent perils.
Sincethe hurricaneseasonwasrelativelyharmlessthestorm related
insuredlossesreachedonly 37% of all insured lossesin 2011compared
with 76% in thelongterm average.
Again, untypically, more than 50% of all insured storm lossesstemmed
from devastatingthunderstormsand tornadooutbreaksin theUSA
whichaccountedfor an absoluterecordof insured lossesof about USD
26bn.
Afurther record in 2011representsthe floodingin Thailand.

With overall lossesof about USD 40bn and insured lossesof about USD
10bnthe floodingin Thailand wasnot onlyby far the country smost
expensive catastrophe to date, but alsotheworld smost expensive flood
disaster.
Aprominent role played the increasedimportanceof Thailandregarding
the global manufacturing supplychains.
Alargenumber of keycomponent manufacturerswereaffectedby the
flooding, leadingto production delaysand disruptionsat client
businesses.
As a consequenceinsured lossescaused by production disruptions
soared up.
So, despite thedominant geophysical eventsin 2011, the weatherrelated
eventsin total werealsovery severe, leadingtothesecond highest values
recorded since1980in termsof overall and insured losses(in 2011
currencyunits).
Even without the earthquakes,2011wouldhave been an extreme
natural catastropheyear.
Moreover, thedistribution of insured lossesbetweenthe continentsin
2011wasalsoexceptional.
Asia accountedfor 44% of all insured losses, whereasNorthAmerica and
Europe together accounted for fewerthan 40% in 2011contrary tothelong
term averageof more than85% of all insured losses.
Theabsenceof major losseventsin theWestern developed countries
with a high insurancedensity left the insured lossesin relation to the
overall lossesat a low level and is one major reason whyoverall therates
onlyincreasedrelativelymodest in spiteof theheavy lossesin 2011.
By contrast, lossactivityduringthe first three monthsof 2012hasbeen
relativelylight.

Insuredlossesduring the quarter are expectedtobe lessthan USD 5bn,
significantlylowerthan lossesof over USD 50bn in thefirst three months
of 2011.
Thesinking of the cruiseship Costa Concordia, regional tornado
outbreaksin the US and earthquakesin Mexicoand Chile werethe most
significant lossesthat occurred in the first quarter of 2012.
Despitetheheavy lossesof 2011, thereinsurancemarket continuesto
functionnormallyand hassufficient capital.
At the end of 2011, the reinsurancecapacitywasonlythree percent under
thelevel of 2010.
Therenewalsin January andApril reveal that sufficient capacitywas
availablein the market in spiteof theheavylossesand thechallenging
macroeconomicenvironment (particular low investment yieldsand
increasedinvestment volatility).
Several years of relatively benign payoutsaswell asthe recovery of
financial marketshad ledto reinsurancecapacitiessubstantiallyover the
demand, whichdepressed theprices.Consequentlythe ratesdid not rise
largely, whichisvery different from other post lossmarkets.
There are, of course,somemarked increasesin reinsurancepricesin the
regionsand segmentsaffectedby losses, especiallyregardingtheAsia
Pacific region.
But overall therateshave gone up onlymodestly, last but not least due to
theextensiveabsenceof major losseventsin Europe and North America.
Particularlythe demand for reinsurancein theUS, wherereinsurance
demand far exceedsthat of any other region, continuestobe very
sensitiveto price.

The2011hurricaneseason wasrelatively harmless.
Themodel version changes(RMS v.11) wereoften alreadyreflectedin
underwritingprocessestovarying degreesbased on previousloss
experiencewith theresult of a lessincreaseddemand for reinsurance
than expectedearlier.
Annex 1:Country abbreviations
AT Austria
BE Belgium
BG Bulgaria
CY Cyprus
CZ Czech Republic
DE Germany
DK Denmark
EE Estonia
ES Spain
FI Finland
FR France
GR Greece
HU Hungary
IE Ireland
IS Iceland
IT Italy
LI Liechtenstein
LT Lithuania LU
Luxembourg
LV Latvia
MT Malta
NL Netherlands
NO Norway
PL Poland
PT Portugal
RO Romania
SE Sweden

SI Slovenia
SKSlovakia
UK United Kingdom
CH Switzerland

The translation (Japaneseto English) is ready!
Insurance Inspection Manual
(Inspection Manual for Insurance Companies)
Points ofAttention for Inspections with Use of ThisManual
(1)This inspectionmanual shall applytoall insurancecompanies,
includingthe overseasofficesof Japanese insurancecompanies
(overseasbranches,locallyincorporatedentities,representativeoffices,
etc. provided however, that the determination of whether toinclude
theseofficesin the inspectionsubject to thismanual shall be judged in
view of applicablelawsand regulations,includingthe local regulatory
framework), aswell asJapanesebranchesof foreign insurance
companies, etc. and specified corporations.
(2)Whenthe insurancecompany is a company witha committeesystem,
inspectionsshall be conducted from theviewpoint of whether the Board
of Directors, committees(such asthe nomination, compensation, and
audit committees), executiveofficers,and other corporatestructures
exercisetheir empoweredauthority, etc., paying attention tothefollowing
points:
- 1) Theauthorityto executebusinessis bestowedon executive
officers,and in principle, directorsdo not have theauthorityto
executebusiness.
- 2) The Board of Directorsmay delegate, by resolution, the authority
tomake businessdecisionsto executiveofficers.

- 3) The purposeof theBoard of Directorsis to supervisethe
executionof therespectivedutiesperformed by directorsand
executiveofficers.
- 4) Auditing authorityis bestowedon theaudit committee,and not on
individual audit committeemembers. (Audit committeemembers
appointedby theaudit committeemay exercisethe authorityof the
audit committee.)
(3)In thecasewherean executivedirector (non-director) assumesthe
rolesand responsibilitiesthat wouldnormallybe assumed by a director
in chargeof a specificbusinessoperation, it is necessarytoconduct a
comprehensivereview asto whethertheBoard of Directorshasassigned
theofficer authoritysimilar in effect tothat whichwould be granted toa
director in charge, whetherthe focusof the responsibilityis made clear,
and whether the Board of Directorssufficientlymonitorsthe execution of
therelevant businessoperation.
Basedon thefindingsthereof, theinspectorshould determine whether
theexecutive officer is performing the rolesand responsibilitiesrequired
for a director in charge, asspecified in thechecklistsof this manual.
(4)Furthermore, whendue tocertain special reasons,it isnecessaryto
conduct an inspectionof subsidiaries, etc., of insurancecompaniesor
partiesconductingbusinesson their behalf, examinationsasmay be
requiredshall be conductedin accordancewiththeapplicablesections
of this manual.
(5)Unlessspecified otherwise,itemsexpressed in the question form
such as“doesthe company…” or “isthe company…” refer to
requirementsthat must bemet by insurancecompanies.
Meanwhile, itemsprecededby “It isdesirable…” refer tobest practices
recommended for insurancecompanies,unlessspecifiedotherwise.

With regard toitemsaccompanied by “for example,” insurance
companies arenot required tofully complyletter-by-letterwiththe
criteria and requirementsspecified therein.
Theyare merelyexamplesof itemsthat may be useful for checking
whetherinsurancecompaniesare meeting certain criteria and
requirements,in a manner befittingthe scaleand nature of their
business.
(6)Thefollowingare definitionsand usesof someof thekey termsin
thismanual
- 1) Itemsthat are defined asroles of “the Board of Directors” are
items for which the Board of Directors itself needs to determine
substantial mattersrelated thereto.
However, thisshall not precludeanother deliberativebody, division
or department from discussing draft proposalsfor decision.
- 2) The “Board of Directorsor organizationequivalent to theBoard of
Directors”includes, in addition to the Board of Directors,other
entitiesthat decide mattersconcerningcorporatemanagement, with
theparticipationof senior managerssuch asa council of managing
directorsand a corporate management council (hereinafterreferredto
asthe “Council of Managing Directors,etc.”).
It is desirablethat decisionsconcerningitemsspecified asthe
prerogativesof the Board of Directorsor organizationequivalent to
theBoard of Directorsbe madeby the Board of Directorsitself.
In the casewherethedecision- making authorityis delegated to the
Councilof ManagingDirectors, etc., it isnecessaryto make sure that
thedelegation hasbeen madein a clearmanner, that a follow-up
review is provided for through the compilation of theminutesof
meetingsof the Council of ManagingDirectors,etc., and that a
sufficient check-and-balancesystem is ensured, through
arrangementssuch asrequiringreportstobe madetothe Board of

Directors,and allowingcorporate auditorsto attend meetingsof the
Councilof ManagingDirectors, etc.
- 3) The “businesslocations”referstoorganizations,other than the
head office, whichincludesbranches,regional offices, businessline
headquarters,businessoffices,overseasbranches, and overseas
corporations.
Theterm “businesslocations,etc.” refers tobusinesslocations,and
alsoincludesservice centers(includinglossinvestigation
operations), overseasrepresentativeofficesand other locationsthat
are not engaged in salesactivities,and businesslocationsother than
thehead office.
- 4) The “manager” refers topersonsin senior managerial positionsin
management divisions(includingdirectors).
Furthermore, the term alsoreferstothehead of a businesslocation,
or seniormanagers thereof(includingdirectors) with levelsof
responsibilityequivalent toor higher than thehead of a business
location.
- 5) The “employees, etc.” refers toemployees, salesrepresentatives,
and insuranceagentsof insurancecompanies.
- 6) The “insurancesalesrepresentatives”refers tosalesrepresentatives
and insuranceagents,but doesnot includeinsurancebrokers.
- 7) The “policyholders” referstopersonswhoarepartiestoinsurance
contractswithinsurancecompanies.
- 8) The “policyholders,etc.” refers topolicyholders, insuredpersons,
andbeneficiaries.

- 9) “Internal rules”are rules that specifyarrangementson an
insurancecompany‟sbusinessin accordancewithitscorporate
management policy, etc. that are applicablewithinthe company.
It should be noted that internal rules donot necessarilyhaveto
specify detailed procedures.
- 10)The “marketingand salesdivision” referstoa division,
department, or businesslocation engaged in salesbusiness.For
example, a division involveddirectlyor indirectlyin salesor engaged
in salespromotionplanningis a marketing and salesdivision.
- 11) The “legal checks, etc.,” which includesa compliancecheck,
means, for example, a validation of the consistencyand compatibility
of internal rulesand the legalityof transactionsand business
operationsbypersonnel in chargeof legal affairs, a division in charge
thereof, personnel in chargeof compliance,thecompliance control
division, and in-houseor outside lawyersand other experts.
- 12)“Monitoring” refers tonot onlysurveillancebut also
implementationof specificpre-emptivemeasuressuch asissuing
warnings.
- 13)The “risk profile” of a financial institutionrefers tothesum of
featuresof variousriskstowhichthe institutionis exposed.
Checklist for BusinessManagement (Governance) (for Basic
Elements)
Checkpoints
- In order toprotect customersby ensuring the sound and appropriate
management of businessand fairnessof insurancesolicitationof an
insurancecompany, under appropriate governance, thorough
implementationof legal compliance,proper insurancesolicitationand
customer protection, and accuratemanagement of variousrisksacross
all businessesof theinsurancecompanyare needed.

-In order toenablean insurancecompany to conduct business
management (governance) effectively, officers and employees, aswellas
organizationswithin thecompany must perform their respectiveroles
and responsibilities.
Tobe more specific, directorsand other executivesare responsiblefor
nurturing workethicsand cultivatinga company-wide culturethat
attachesimportanceto internal control.
Therepresentative directors,non-representativedirectorsand corporate
auditorsmust understand their own rolesin thevariousprocessesof
internalcontrol and fully involvethemselvesin theprocesses.
Also, it is important that theBoard of Directorsand the Board ofAuditors
function effectivelyand that thefunctionsof a check-and- balancesystem
amongdivisionsand departments, and thefunctionsof internalauditsby
theInternalAudit Division are executed appropriately.
-Theinspectorshould determine whether the insurancecompany‟s
businessmanagement (governance) system is functioningeffectively
throughout the institutionand whetherthe management isperforming
itsrolesand responsibilitiesappropriatelyby wayof reviewing, withthe
useof the check itemslistedin thischecklist, theeffectivenessof the
functionsof five basicelements,namely a system of
(1)Businessmanagement (governance) by therepresentativedirectors,
non-representativedirectorsand the Board of Directors,
(2) Internal audits,
(3) Auditsby corporate auditors,
(4) External audits,and
(5) Checkingby actuaries.
- If the insurancecompany‟s management fails torecognize weaknesses
or problemsrecognized by the inspector,it is alsonecessarytoexplore,

in particular, thepossibilitythat the Internal Control System isnot
functioningeffectively, and review the findingsthereof through dialogue.
-Theinspectorshould review the statusof improvementswith regard to
themajor issuespointed out on the occasion of the last inspectionand
determinewhetheror not effectiveimprovement measureshave been
developed and implemented.
Checklist for Legal Compliance
Checkpoints
-The development and establishment of a legal compliance system is
one of the most important tasks for an insurance company in order to
secure the sound and appropriate management of itsbusiness.
Therefore, the company‟s management ischargedwith and responsible
for taking theinitiativein developing and establishingthe legal
compliancesystem that coversthe company‟s entire businessby
decidinga basic policyon legal complianceand developing an
organizational framework,etc..
-Theinspectorshould determine whether the legalcompliance system is
functioningeffectively and whethertherolesand responsibilitiesof the
insurancecompany‟sBoard of Directorsare being appropriately
performed by wayof reviewing, withtheuseof check itemslistedin
Chapter I., whetherthemanagement isappropriately implementing
(1) Policy development,
(2)Development of internal rulesand organizational frameworksand
(3) Assessment and improvement activities.
- If any problem is recognizedasa result of reviewsconductedwiththe
useof the check itemslistedin Chapter II and later in this checklist, it is
necessaryto exhaustively examinewhichof the elementslistedin
Chapter I are absent or insufficient, thuscausingthesaid problem, and

review findingsthereof through dialoguebetweenthe inspector and the
insurancecompany.
-If the company‟s management fails torecognize weaknessesor
problemsrecognized by theinspector,it is alsonecessarytoexplorein
particular the possibility that the InternalControl
System is not functioningeffectivelyand review findingsthereofthrough
dialogue.
-Theinspector should review the statusof improvementswith regard to
theissuespointed out on the occasionof the last inspectionthat arenot
minor and determinewhetheror not effectiveimprovement measures
havebeen developed and implemented.
Toread more
http:/ / www.fsa.go.jp/ en/ refer/manual/ hoken_e/ h-all.pdf

Interview with Gabriel Bernardino, Chairman of EIOPA,
conducted by Silke Wettach, WirtschaftsWoche (Germany)
Mr Bernardino, howmuch doesEIOPAcurrentlyknowabout
occupational pensionsin theEU?
Bernardino:We currentlyhave very littledata from pension fundsat the
European level.
We d on ‟t h ave a comm on lan guage and national regimes
considerablyvary from eachother, whichmakesit even more difficult
to havecomparable data for different countries.
We cannot easily assessthesustainabilityof thefundsand the
soundnessof their promises.
Acommon and transparent frameworkthat ensurescomparable data
wouldbe extremely useful in this case.
Sohowareyou goingto proceedwith it?
Bernardino:If wehad comparable data wecould conduct stressteststhe
waywealreadydofor insurers.
We have no scheduleddate, but thisis in our plansin thenear future.
What doyou expect from theIORPsstresstest?After thestresstestsin
the bankingsector thepicture wasinsufficient.
Bernardino:European pension fundsmanagein total 3 trillion EUR in
assets.

Theyare represented in assetseverywhere whichmakesthem relevant
for the economy and for the stability of our financial system.
That is whyEIOPAproposesto conduct annual stresstestsfor the big
pension fundsat theEuropean level.
At the same time supervisoryauthoritiesshould perform stresstestsat
thenational level.
SmallerIORPscan be testedon a lessfrequent basis.
What wewant to know while conductingstresstestsis wherethe future
vulnerabilitiesare?But here weare talkingabout a very longterm
perspective.
With thebankingstressteststherewerealot of national reflections.
Nobodywanted to seenational championsfailing. Will thesituation in
occupational pensionsbedifferent?
Bernardino:We have now a very sensitivediscussionon thepensions
sideand it wasexpected.
Thetruth must finallybe put on the table.
And howexactlydoesthetruth looklike?
Bernardino:Occupational pensionsarenow under a great pressure.
Everywhere be it Germany, theNetherlandsor theUK population and
labour forceare contracting.
At the same time stock marketsbecome very volatileand have a
tendencyto go down.
Thelong term interestratesare alsodecreasing.All this threatensthose
pension promisesthat weremade in the past.

But if wedeny the reality, wewill not takeany action.
And I am afraid that on theoccupational pensionsif wedon‟t act, we
might be heading towardsan inter-generational conflict, whenthe
pensionsof future generationsmight be significantlyreduced.
What arepolicyholdersgoingtoface?
Bernardino:It isquitesimple:if I make a promisetopay basedon a
certainassumptionand thisassumptionchanges,theneither I can pay
lessor I request higher contribution.
In the Netherlandswealready witnessthe consequences:occupational
pension fundscut their paymentsbecausemarket interestratesare lower
than it wasoriginallyanticipated.
Are theNetherlandssmarter than theothers?
Bernardino:Some countriesare more transparent. And thisisexactly
what werequire from others when wesuggest a “holistic balancesheet”
or an extendedsolvencybalancesheet.
Each employee will exactlyknow the riskshebearsand whichpayments
hewill get. Sosuch a reality+driven check+up wouldbe beneficial for
everybody.
Perhapssome fundsareabsolutely not interested that their true
condition comestolight?
Bernardino:Some fundsdiscount long term liabilitieswithtoohigh
interest rates.
If you use more prudent and real discount ratesthey will report huge
underfunding. And of coursecompaniesdo not want that it comesout,
but it isnot a secret.
How goodarethefunds‟managers?

Bernardino:Thequalityvariesand in any caseit must be improved. The
current low interest ratesmake IORPssearch for interestinginvestments.
And thismakesit very important for fund managersnot just tooutsource
asset management.
Thosewho, however, instruct a third party to invest in derivativesor
structuredfinancial instruments, should at leasthavea thorough
understandingof the possibleconsequences.
Theindustryexpectsthat theEU is goingto set upthesamecapital
requirement fortheIORPsasfortheinsurers. Is that correct?
Bernardino:We do not want just tocopythe requirementsfor insurers.
However, let‟stakea situation when a companyhasa pension plan and
transfersthe risk tothe IORP like it usedto do withan insurance
company.
In thissituation whycan‟t thesame regulation be appliedtothe IORP?.
But thisshouldnot be the caseif pension fundsact asinvestment
vehiclesand their risk is taken by the company or a protection fund.
SomeGerman criticsfear that theCommission s planscould destroythe
Germansystem. Doyou understand their fears?
Bernardino:It isnot our intention todestroy anykind of systemsand our
goal is not todesigna perfect regulation, whichmakesoccupational
pensionssoexpensive that nobody can afford them.
But the worst scenario wouldbe if thosepension promiseson which
everybody counted, fail. This is whywemust act. Ultimately, it is like the
debt crisis:it emerged not becausepeople know littleabout economics,
but becausetheyweredenying the reality. And this isalwaysexpensive.

Overview of Progress in the Implementation of the G20
Recommendations for Strengthening Financial Stability
Report of the Financial Stability Board to G20 Leaders, 19June2012
Introduction
Sincethe onset of theglobal financial crisis, theG20hasestablished core
elementsof a new global financial regulatoryframework that will make
thefinancial system more resilient and better abletoserve theneedsof
thereal economy.
National authoritiesand international bodies,withthe Financial Stability
Board (FSB) asa central locusof coordination, havefurther advanced this
financial reform programme, basedon clearprinciplesand timetablesfor
implementation.
TheFSB coordinatesand closelymonitorsthe national implementation
of agreed G20and FSBfinancial reformsand is responsiblefor reporting
on it tothe G20.
TheFSB set up in October 2011a Coordination Framework for
Implementation Monitoring (CFIM), in collaborationwithinternational
standard-settingbodies (SSBs), to intensifyitsmonitoring and public
reporting on implementation, focusing in particular on priorityreform
areas.
This report details theprogressmade in global policy development and
in implementation of global policyreformssincethe G20 Cannes
Summit in November 2011.
Acentral pieceof theinternational policyreformsisstronger minimum
standardsfor bank capital and liquiditythrough implementation of Basel
II, II.5and III requirements.

As of end-May 2012:
- 20of 27member jurisdictionsof the Basel Committeeon Banking
Supervision (BCBS) had implementedthe BaselII.5rulesto
strengthen capital chargesfor banks‟tradingbooksand complex
securitisations,whichweredue to come intoforce from end-2011.
Six member countrieshave not issuedfinal regulationsin thisarea.
- 20of 27BCBS member jurisdictionshave issued draft or final Basel
III regulations,implementation deadlinefor which is1January 2013.
Sevenmember jurisdictionshave yet todo so, but themajorityof
thesebelieve theycan issuefinal regulationsby theimplementation
deadline.
Another central reform objective is ending “too big to fail” through
strengthened resolution regimes and resolution planning for global
systemically important banks(G-SIBs):
- Encouraging progresshasbeenmade by major jurisdictions,
includingthe US, UK and EU, toput in placeor proposelegislation
toestablish effectiveresolution regimes;
- However, although cross-border crisis management groups(CMGs)
havebeen establishedfor 24 of the 29G-SIBs, much further workis
needed to develop resolution strategiesand plans,and thecross-
border co-operationagreementsneededtoensure the resolvability of
theseG-SIBs.
With regard toreformstoover-the-counter(OTC) derivativesmarkets,
all jurisdictionsand marketsneed toaggressively push ahead to achieve
full implementationof market changesby end-2012tomeet the G20
commitmentsin asmany reform areasaspossible:
- Good progresshasbeen made by thosejurisdictionswiththelargest
OTC derivativesmarkets, includingtheUnitedStates(US),
European Union (EU) and Japan, in advancingnational legislation

and regulation and practical implementationof reformstomarket
infrastructures;
- SSBshave alsomade significant progressin developing the
international policiesthat are keyto advancingOTC derivatives
reform implementationacrossjurisdictions.
All jurisdictionsnow have sufficient informationabout international
standardsand policiestoput in placethe needed domestic
legislationand regulation.
With regard toreform of compensation structuresat financial
institutions:
- Almost all FSB member jurisdictionshave now implementedthe FSB
Principlesand Standards for sound compensation practicesin
regulation or supervisoryguidance.
SinceCannes, jurisdictionsthat showedsignificant gapshave
progressed.
However, sustainedsupervisoryand regulatoryattention will be
needed to achievelastingimprovementsin financial firms‟
compensation structuresand practices.
Sincethe CannesSummit, the FSB and itsmembershave made good
progressin policy development in areaswhere G20objectiveshave been
agreed, includingdeveloping proposalsfor public consultation on
extendingthe frameworkfor systemically important financial institutions
(SIFIs) to cover global insurersand domesticbanks, measuresto address
theregulation and oversight of shadowbanking, and thedevelopment of
a governanceframework for a global Legal EntityIdentifier (LEI) system.
An important goal of the monitoring processisto highlight, for
correctiveaction, areaswheretherearerisks that policyobjectiveswill
not be met, or whereimplementationis not meeting theagreed
timelines.

Among theseareas:
- Although CMGs have been established, much further work on
resolution plans and on cross-border co-operation is needed to
improveresolvability.
Progressisbeingmadein national legislativereformstoestablish
more effectiveresolutionregimes.
The standards set out in the FSB‟s November 2011 Key Attributes of
Effective Resolution Regimes provide international standards in this
area, and the detailed assessment methodology being developed will
providefurther guidance.
- Many jurisdictionsstill need to addressweaknessesin their
supervisors‟mandates,to ensure sufficient independencetoact,
appropriateresources,and a full suiteof powersto proactively
identify and addressrisks.
The Basel Core Principles are being strengthened in this area, with a
consultativepaper havingbeen issued lastDecember.
The following sections describe in greater detail the progress made by
the FSB and its members to promote financial stability and strengthen
the resilience of the global financial system, including through surveys
conducted by theFSB‟sImplementation Monitoring Network (IM N).
2. Building resilient financial institutions
2.1Implementation of Basel II/ II.5/III
TheG20 Leaders,at the CannesSummit, reaffirmed their commitment
toimprove banks' resiliencetofinancial and economic shocks,and
calledon jurisdictionstomeet their commitment toimplement fullyand
consistentlytheBasel II/ II.5/III requirements.
TheBaselIII frameworkseeksto strengthen theresilienceof the
bankingsystem through prudential measuresthat will enhancethe

Solvency ii News July 2012

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