1.P a g e | 1Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Todaywewill start withGabrielBernardino, Chairman of EIOPA.Just beforethat, I want you tosee a jobdescription:BaselII/ III and SolvencyII risk specialist, Mandarin Speaking!!!Basel III Risk Specialist - Mandarin Speaking Leading GlobalInvestment Bank, LondonALeading Global Investment Bank isExpanding the Regulatory RiskFunctionwiththe hire of a Basel III Risk Specialist for their LondonGroup.- Basel III RegulatoryRisk Specialist- LeadingGlobal Investment Bank- MandarinSpeaking- London, UK- 50,000+ Excellent Bonus BenefitsAs a key member of the riskgroup you willbecommunicatingextensively with seniormanagement on a global scaleincludingdirect contact withsenior management inHong Kong and Shanghai and will thereforerequireMandarinspeakingskillsat businessSolvency ii Associationwww.solvency-ii-association.com

2. P a g e | 2level proficiency.An expert in regulatoryframeworks,you will have practicalunderstandingof Basel II/ III and knowledgeof SolvencyII ICAAP isalsohighly preferred.This is a mid-level position withinthe group and will require a minimumof 3 years industry experiencewithin theLondon and/ or InternationalFinancial Markets.It is never toolate tolearnMandarin. Is lookseasy!AmazingjobdescriptionJust one slight problem withthisjob description:You cannot haveknowledgeof SolvencyII ICAAP simplybecausethere isnothing likea Solvency II ICAAP perhapstheymean SolvencyII ORSA(OwnRiskandSolvencyAssessment, thePillar 2 document).It remindsme another job description, wheretheyrequired 5+ years ofBasel III experience. Provided that BaselIII wasendorsed at theend of2010,theycould hire someoneafter 2015Solvency ii Associationwww.solvency-ii-association.com 3. P a g e | 3Interview with GabrielBernardino, Chairman ofEIOPA, conducted by ChristophBaltzer, VersicherungsWirtschaft(Germany)Insurersseem tobethevictimsof ascenario offinancial repression, especiallywithlowinterestrates. What wouldbethe consequencesof thepolicy of cheap moneyfor insurers?We see this in some countriesin theEU wherealowinterest rate environment startsbeinga bigchallengefor some typesof products, especiallywhenyou have got long term guarantees.We at Eiopahave identified it alreadyin 2011.We have run the first stresstest exerciseparticularlyon low interestenvironment, becausewesee it assomethingwhichis approaching.Theexperienceof Japan showeduswhat can be the consequencesofsuch a scenario.Its the responsibilityof thesupervisoryauthoritiesto be proactiveonthis.This is an area whereweneed to be attentive.We have identified certain vulnerability: there arecompaniesthat couldfaceproblemsif thislow interest rate scenario will be maintained.There are number of supervisors in the EU that have already takensteps, but earlier in March EIOPA issued its Opinion, in which werecommend a coordinated supervisory response to the long lasting lowinterest rates.Solvency ii Associationwww.solvency-ii-association.com 4. P a g e | 4Gladly, on the insuranceor pension market westill have sufficient timetodeal with it, providedthat weidentify risks sufficientlyin advanceandtake necessaryactions.Thatsa differencecomparing to thecrisis in thebanking sector, whereyou need to act immediately.At the same time some new productsthat wereintroduced beforethecrisis should be adopted tothe new economic environment: insurancecompanies should reflect on thetype of productsand the type ofguaranteesthat theyare issuingtothe market.DoesSolvencyII help to prepareforthisscenario?One misunderstandingthat needsclearlyto be spelledout is that its notSolvencyII that provokeschallengestobusiness.Its the economicenvironment.SolvencyII makesone difference:You need torecognizeit earlier.If you have a market consistent valuationof assetsand liabilitiesit willbemuch more clearthat you have a challengein your portfolio.If you continueto havea valuation that doesnot reflectthemarket, thenyou can pretend that there isnoproblem.But theproblem exists.SolvencyII makesthis transparent and that isgood for consumers, forcompanies and alsofor supervisors.We needtohave a preventive supervision.Supervision should not be there to act whenthe fire is alreadyin yourhome.Solvency ii Associationwww.solvency-ii-association.com 5. P a g e | 5Supervision should be there toprevent that the fire occurs.Versicherungswirtschaft wrotein 2003 that SolvencyII wouldbein forcein 2006. Doyou believethat SolvencyII will bein forcewhenyour termfinishes?My term finishesin 2016.Thatsa date that isstill possibleto haveSolvency II in place.Before that weneed a number of political decisions, but I believethatSolvencyII will be in place.Its fundamental from a supervisoryperspective becausewenow have aregimethat doesnot respond tothe risks.We have toremember whywestarted SolvencyII.Thepurposewasto increasepolicyholder protection and incentivizebetter risk management.And from all thework that wehavedonein SolvencyII there isalreadysomepositiveevolution in the wayinsurersmanage risks.Wehave seen abankingcrisisin 2008. What weforget about is theinsurancecrisisin theyears 2001until 2003. This wascaused byequityinvestments, reserve deficienciesand unprofitable businessin manylines.Doyou think ascenario of this kind will still bepossibleunderSolvenyII?No regulatoryregimecan avoid crisis.There is no perfect regime.SolvencyII bringsmuch more awarenessof risks at an earlystage.Solvency ii Associationwww.solvency-ii-association.com 6. P a g e | 6From the side of the companies its a fundamental change of culturewhen companies while investing in markets, need to understand therisksthat theyare running.Thesupervisorsin their turn will alsohave necessarytoolsandinformation in order to look at thecompaniesfrom therisk-basedprospective.Is thisa zero failure system?No.There arenozero failure systems. But there hasbeen progress.You mentioned thecrisisof 2001until 2003.Theindustryhas learned from that and weincorporated it in Solvency II.Thepush for increasedrisk management and for better understandingbycompanieswhentheyinvest in certain typesof assets thesearethelessonslearnedfrom that past.This is fundamental right now:one of theconsequencesof the lowinterest ratesis that insurancecompaniesare searchingfor yield.Its bound to happen that they go to other types of investment.But then itsfundamental that theyhave a good understanding of thoseclasses.And thatswhat SolvencyII brings.Insurerscriticize what theyrefer toasartificial volatilityin thebalancesheetsunderSolvencyII. Someeven talk about irrationalityof capitalmarkets. Doyou understand this criticism?SolvencyII will givefiguresthat will be more volatilethan in thecurrentSolvency ii Associationwww.solvency-ii-association.com 7. P a g e | 7situation.It wasclear from thebeginning.Everybody wasalertedto that.What haschanged is themagnitudeof this volatility.We didnt have ashigh volatilitiesin thepast aswehad in therecentyears.We have todeal withthisvolatility in thesystem.Thatswhat wearedoingright now withthe long term guaranteeassessment (LTGA), whichpreciselyfocuseson that.TheLTGAis trying tounderstand what kind of adjustmentsweneedtomake totheregimetodeal withartificial volatility.But not all volatilityis artificial.Muchof it is representativeof what is in the market.I dont want to discusswhethermarketsare rational or not.If you have long term liabilitiesand longterm assetsand you have a verygood match betweenthem, your numbersare lesspronetohave thisvolatility.If you have a huge level of mismatchingthen on the one side you aretakingadvantageof opportunitiesin the markets,but you have a risk.But for some longterm liabilitiesweneed to havesome adjustmentstocopewith the fact that the productsand theliabilitiesare long term andtheshort term volatilitiesin the assetshave a meaning, but theydonthavean economicmeaning for thetype of liability that insurershave.This is theadjustment that weare trying to effect right now.Solvency ii Associationwww.solvency-ii-association.com 8. P a g e | 8Theregimewassincethe beginningbased on theideathat wewant toseethereality.And the realityis that marketsare more volatilenowadays.We needto recognizethe reality.What wouldbeapositivepolitical solutionforthat?An agreement on OmnibusII whichis preservingthe fundamentalelementsof SolvencyII, preservingthemarket consistent valuation thatwehave got in SolvencyII and preservingthe principlesof a robust andprudential regime while consideringalsotheeconomic nature of theliabilities.I think that wehavegot some good proposalson the table.Government bondsare categorized asnorisk investments. Doyou thinkthat this isagoodwayto tackleproblemsof state debt?Morethan any other systemSolvencyII takesintoaccount thereality offinancial markets,includingon sovereigns.In a SolvencyII balancesheet, sovereignswill be assessedat marketvalue.Its much more advanced than other regimes.Any kind of influence that markets are putting on any kind of sovereignsin Europe right now, is taken into the Solvency II numbers immediately,without anykind of adjustments.Thenthere is the element of capital requirementson top of that.But itsimportant to understand themagnitude.Solvency ii Associationwww.solvency-ii-association.com 9. P a g e | 9If you look at technical provisionsand capital requirements,technicalprovisionsrepresent 80 to85 percent of a balancesheet.Capitalrequirement is just a small item comparedtothat.By having market consistent evaluation in the technical provisions andin the balance sheets, you have already a huge reflection of all the riskstheassetshave, includingsovereigns.Now theperceptionof sovereign risk iscompletelydifferent from what itwasten years ago, whenwestartedtodevelop thesystem.Going forward weneed toconsider this.What is alsoimportant tounderstand is when something should bedone, it should be done for all sectors.We cannot have a different appreciation of sovereign risk for insurersand for banks.It needsto be done for the financial system asa whole.And its alsoimportant totakedue attention to thetime when wearedoing this.Its not a good policyto changethis whenyou are still in a crisis.How doyou evaluate the SwissSolvencyTest?Itsin usesince2006 andis in force alreadyfor twoyears.Theprinciplesare very much alignedtoSolvencyII.I think itsvery good that theystartedtoimplement thesystem becauseSwitzerland is an important insurancemarket and EIOPAhasvery goodrelationship and closelycooperateswiththe Swissauthority FINMA.Solvency ii Associationwww.solvency-ii-association.com 10. P a g e | 10We can observe challengesbut alsoa good outcome from theimplementationof a risk-basedregime in Switzerland:wehave seensomechangesin behavior in themarketsand in theproductsthat Swissinsurerssell.But letsbe frank: itsmuch easier for onecountry to implement a regimethan to have a decision on a tablewith27different approaches.What arethemost important tasksfor Germaninsurerstotackle on their waytoSolvencyII?There aresome companiesthat are more prepared and othersthat arelessprepared.Thatswhyweare developingguidelinesfor the preparationphaseforSolvencyII.We have definedareaswherewewant supervisorstoensure thatundertakingsare prepared: governance, risk management, pre-application of internal models, elementsrelatedtotheOwn Risk andSolvencyAssessment (ORSA), the informationtobe provided tosupervisors.Theobjectiveof theseguidelinesisto help marketsand supervisorstohavea clear ideaof how topreparetothenew regime.For examplethere is a need to makeprogressin the systems andprocessesthat are necessarytodeliver high qualitydata tobe providedbycompaniesand further analysed by supervisors.This is fundamental for therisk+based environment.Soby our guidelinesweare not introducingSolvencyII earlyon, but weexpect national supervisorstostart implementingtheseelementsin aconsistent and convergent wayand torequest from companiestopreparethemselvesin theseareasin order tobe in a good shape whenSolvencyII is enforced.Solvency ii Associationwww.solvency-ii-association.com 11. P a g e | 11It is a win-winsituation for both companies and supervisors.Is thereasituation wheresystemic riskbecomesaproblemfor insurersand reinsurers?We understand what is systemic riskin banking.Looking at the insurancesector itsalsochallenging.But thetype of businessis different.Thematuritiesof businessaredifferent.If you talk about traditional insurancebusiness,wedont see muchevidenceof all thesefactorsthat can bringsystemic risk.But insurerscan involve themselvesin some typesof businesswhichismuch more pronetosystemic events, for exampleexposurestocreditdefault swaps.Systemic risk in theinsurancemarket ismore a questionsof theactivitiesrather than insurersby themselvesbeingsystemic.If you have a type of business that is much more leveraged, where youhave maturity transformations like you have on the banking side, if youwalk and run like a bank, then you need to be treatedlike a bank.Are thecollegesof supervisors abletocopewiththeir task, especiallyifyou look at thevastnessof some insuranceenterprises.Its important that supervision isperformed in a waythat it can deal withreality.Its important that welook at the risksfrom a group perspective.In Europe wehave recognizedthis much earlier thanmany jurisdictionsaround the globe.Solvency ii Associationwww.solvency-ii-association.com 12. P a g e | 12In the late 1990swehad an insurancegroup directive whichsaidthat itsnot sufficient to supervisesinglecompanies, but to do supplementarysupervision at a group level.With SolvencyII weare recognizingthe reality: The groupsmanagetheir businessin amuch more centralisedwayand thisneedsto bereflectedin supervisionin order toavoid duplicationsand doubleburdensbut at thesame timein order tohave a better perception of thereal risks that are run at the group level.Thatswhycollegesof supervisorsare suchan important tool.Theprogressthat theyhave made ishuge.Therole of EIOPAin these collegesis tomake sure that thereis aconsistent and convergent supervision.This is a process. We have still some room for improvement.Doyou think amorecentralized approach wouldbebetter for thebigfinancial institutions?There arestepsthat need to be taken in this area.I think the best waytodo that is tobuild up on the roleandresponsibilitiesgiven to usby the Regulation establishingEIOPA.We can build a step by step approach towardsa more centralizedsupervision.I dont believein ruptures.That needstobe an evolution and not a revolution.We gain from havingmore centralizationin some areas.For exampleinternal models are fundamental for the new regime.Solvency ii Associationwww.solvency-ii-association.com 13. P a g e | 13Its important that there is good understandingof how the modelsworkon individual and groupslevel Here wecould have an approachcentralized by EIOPAbecauseitsnot possiblethat all the authorities inall the countries whereyou have companieswithina group, will have thesameexperienceimmediatelytodeal withit.But it needsto be a step by step approach.In UK it is nowprohibitedforbrokers totake commissions.Doyouthink that this will improveconsumer protection?Intermediariesare the visiblefaceof theindustry towardsconsumers.Thequalityof the informationand advicethat is provided is crucial.There area number of thingsto improve.But isit all about disclosure?Is disclosurethe key issue?Thereality provesthat this isnot the case.Disclosure is important but itsnot the panacea.I think this is not fair tosayWe gave all the information to theconsumer, but he doesnt understand it, soitshis problemThat is not a policyI wouldrecommend from a perspectiveof consumerprotection.First of all there aredifferent typesof intermediariesand businessesweare talking about.In life insurance itsimportant that the consumershave good knowledgeof the commission the intermediariesare taking.Solvency ii Associationwww.solvency-ii-association.com 14. P a g e | 14This is a contract for manyyears, soin life insurance themandatorydisclosureshould bethe rule.If you look at the non-life sideyou should have the right toget theinformation.But the conditionsfor non-life contractscan be changed on an annualbasis,theyare not fundamental for your decision.Theconflict of interest ismuch lessrelevant for non-life products.What is important in consumer protection then?You need to understand what consumersare worried about. Evidencestell usthat in manycasesthecommission theintermediarygets,is not fundamental forconsumers.Theywant tohave a good advice.But if theyneeded topay for that advicedirectly, then theywouldnotbuytheproduct.But asa societydoyou want peopleto be lessinsured?Sobanning thecommissionsthis measure needstobe well analyzed.Shouldpension fundsbeobliged tofulfill therequirementsof SolvencyII?Its not our intentionthat pension fundsshould followSolvencyII.When weadvised theEuropean Commission, wesaid that there aresome areas,whereweseean advantage of applying the same basicstructure Pension fundsare dealingwiththe similar kind of risk, soitsimportant for the protection of membersand beneficiariestohave goodrisk management, good governance, better transparencyetc.Solvency ii Associationwww.solvency-ii-association.com 15. P a g e | 15But wesaid alsothat a straight forwardapproachlike in SolvencyII isnot the best solution for pension funds.There aredifferent typesof security mechanismsaround Europe.Its important in anykind of solvency regime that thecalculation ofliabilitiesand thevalue of the assetsare taken more realistically.We made a QIS exerciseand wewill have preliminaryresultsfrom thistest at the end of Marchor in the beginningofApril.Someof the QIS optionswereconsistent withSolvencyII, otherswerelessconsistent.But wenever said that weshould follow SolvencyII.Solvency ii Associationwww.solvency-ii-association.com 16. P a g e | 16EU-US INSURANCE DIALOGUEAGREES HIGH LEVELPROJECT PLANTheSteeringCommitteeof the EU-U.S.InsuranceDialogueProject toincreasemutual understandingand enhancecooperationmet in Basel, Switzerlandand agreed on a high level workplanfrom 2013to2017.Theparties achieved agreement on aprioritizationof objectivesand a schedulefor the implementation of theinitiativespreviouslyagreed upon by the SteeringCommitteeanddescribedin theWay ForwardDocument (December 2012).As part of the five-year plan, an agreement wasreached to move forwardin 2013with particular focus on thoseinitiativesrelating to professionalsecrecy/ confidentialityand reinsuranceand collateral requirements, aswell asto begin work on some other initiativespertainingto solvencyandcapital requirements,group supervision and on-siteexaminationpractices.TheSteeringCommitteeanticipatesa public forum in late 2013toreporton the years achievements,tolaunchcollaborative workon supervisorycollegesand to givestakeholdersan opportunityto sharetheir thoughtson best practicesand experiencesregardingsupervisorycooperationandcoordination.Solvency ii Associationwww.solvency-ii-association.com 17. P a g e | 17Meeting of the G20Finance Ministers andCentral Bank GovernorsUpdate by the IASB andFASBConvergence projectsThis report isa high-levelupdate on thestatusand timelineof theremainingconvergenceprojects.This includesan update on the impairment phaseof our joint projecton financial instruments(included in theappendicesto thisreport).BackgroundIn the past ten years, sincethe US FinancialAccounting Standards Board(FASB) and the InternationalAccounting StandardsBoard (IASB) (theboards) signedtheNorwalkAgreement in 2002, wehave maderemarkableprogressin improving and converging major globalaccountingstandards.In 2006, theboardsagreeda Memorandum of Understanding (MoU)that identifiedseveral short-term and longer-term convergenceprojectsthat would bring themost significant improvementsto IFRSand USGAAP.TheMoU wasupdated in 2008and thenagain in 2010.Achievements and challengesMost of theshort-term projectsand several of thelonger-term projectshavebeen completed or are nearingcompletion.Solvency ii Associationwww.solvency-ii-association.com 18. P a g e | 18In 2012theboardsmade significant progresson theremainingjointprojectsand theycontinueto appreciatethe importanceof developingconverged accountingstandards.The boards have achieved converged solutions for Revenue Recognitionaccounting and will be exposing converged proposals for accounting forLeases.There have, however, been some challengestodeveloping completelyconvergedsolutions,especiallyfor the Impairment and InsuranceContractsprojects.For theImpairment project, it hasbeen a challengetobring together thedifferent perspectivesof the boardsrespectivestakeholdersand thedifferent marketsin which such stakeholders conduct their primarybusinessactivities.While the goal continuesto bethe development of a converged Standardfor impairment, theextent of future convergencein thisproject willdepend, in part, on the feedback that isreceivedduring theboardsrespectivecomment periods.However, it is alsoimportant tonote that under both setsof proposalsthe provisionsfor loanlossescontinuetobe based on the sameinformation set, updated for changesin lossexpectations.Developing a converged solution for theInsuranceContractsprojectmay be more difficult.IFRS doesnot currently includeaccountingrequirementsfor insurancecontracts,sothe IASB needsa final Standard urgentlyand will beundertakinga targetedre-exposure of itsproposals.TheFASB hasexistingmodels for insurancecontractsbut will initiallybe exposing proposed amendmentsfor public comment in mid-2013.Solvency ii Associationwww.solvency-ii-association.com 19. P a g e | 19Thedifferencein thescope of thequestionsin these exposuredocumentsand theneed for theIASB toissuetimelyguidancewill make achieving afullyconverged solution for the InsuranceContractsproject challenging.Financial instrumentsClassification and MeasurementDuring 2012,theboards workedtogether toeliminatedifferencesin theirrespectiveclassification and measurement models and haveconvergeddecisionsin thefollowingareas:Contractual CashFlow CharacteristicsAssessment: a financial assetwouldbe eligiblefor a measurement categoryother than fair valuethrough profit or lossif the contractual terms of thefinancial asset giverise to cash flowsthat are solely paymentsof principal and interest on theprincipal amount outstanding, whereinterest is considerationfor thetimevalueof moneyand for credit risk.BusinessModelAssessment: theassessment of the businessmodelwouldapplytothosefinancial assetsthat pass theassessment of thecontractual cash flow characteristics.Financial assetswouldqualify for amortisedcost accountingif the assetsare held within a businessmodel whoseobjectiveis tohold the assetsinorder tocollect contractual cashflows.Thefrequencyand nature of saleswouldprohibit some financial assetsfrom qualifying for amortised cost.Fair value through other comprehensive income: financial assetswouldbemeasured at fair value through other comprehensive income if theypassthe assessment of the contractual cash flowcharacteristicsand areheld within abusinessmodel whoseobjectiveinvolvesboth holdingthefinancial assetstocollectcontractual cash flowsand sellingfinancialassets.Solvency ii Associationwww.solvency-ii-association.com 20. P a g e | 20Fair value through profit or loss would be the residual measurementcategory that would include all assets that fail the assessment of thecontractual cash flow characteristics.Given the different stagesof development of the classification andmeasurement phasesof their respectiveprojects,(the IASB ismakinglimitedamendmentsto IFRS9 Financial Instrumentswhereasthe FASBis proposingcompletely new guidance), theboardsexposure documentswill not be identical.TheIASB published its Exposure Draft in November 2012.Theseproposed amendmentswereintended tofurther align theboardsclassificationmodels, addresssome of the insurancecommunitysconcernsabout theinteractionwithaccountingfor insurancecontracts,and clarifythe existingclassificationand measurement requirementsforfinancial assets.Thecomment period ended on 28March 2013.TheFASB expectstoissuea second Exposure Draft on classificationandmeasurement in February 2013and will conduct outreach withstakeholdersduring theexposure period.Thecomment period will end on 30April 2013.Theboardsare planningtobegin joint redeliberationsabout thefeedbackreceivedon theproposalslater thisyear.Thetiming of theissuanceof final requirementswill depend on thenature and extent of thefeedback received.Impairment (Loan LossProvisioning)This is probablythemost important phaseof our project tooverhaul theaccountingfor financial instruments.Solvency ii Associationwww.solvency-ii-association.com 21. P a g e | 21While the boards worked jointly to develop an expected loss approachto impairment, US stakeholders raised numerous concerns about earlydraftsof theso-called three-bucketapproach.Themost significant concernsrelated to the use of twodifferentmeasurement approachesaportion of the expected lossesfor all new orpurchasedfinancial assetsand a full lossrecognitionapproach forfinancial assetsthat haveexhibitedmorethan insignificant deterioration.TheFASB believed it wasnecessaryto addresstheseconcernsbeforemoving to an Exposure Draft.Toaddresstheseconcerns, theFASB developed a different expectedlossmodel wherebyat eachreportingdate, an entitywouldrecognise anallowancefor credit lossesfor itscurrent estimateof all expectedcreditlosseson financial assetsheld at the reportingdate.Thesame objectiveappliesto all financial assetsheld in anyperiod;however, themeasureof the allowancewouldbe commensurate withthecurrent assessment of risk for the financial assetsheld.In late December 2012the FASB publisheditsExposureDraft.TheFASBs comment period endson 30April 2013.TheIASB decided tomaintain the concept of the three-bucketapproachbut will revise it toaddressconcernsthat had been raisedabout thepoint at whichfull lifetimeexpected lossesshould berecognised.Therevised model will result in an initial recognition of a portion of thelifetimeexpected losses, withfull lifetimeexpectedlossesbeingrecognised only once a financial asset significantlydeteriorates(ie tothepoint that an economic lossis suffered beyond the level that wasoriginallyanticipated and priced intothefinancial asset).Solvency ii Associationwww.solvency-ii-association.com 22. P a g e | 22TheIASB isawareof the importanceof publishing itsproposalsassoonaspossible, and will publish an Exposure Draft in thefirst quarter of2013.There will be a 120-daycomment period.Theboardsappreciatethe importanceof converged requirementsin thisarea and continueto have open linesof communication.However, asnoted above, challengesto achievinga converged solutionincludebringing together thedifferent needsof the respectiveboardsstakeholdersand thedifferent marketsin whichsuch stakeholdersconduct their primary businessactivities.It is alsoimportant tonote, however, that under both setsof proposalsthe provisionsfor loan lossescontinuetobe based on thesameinformation set, updated for changesin lossexpectations.Theboardswill continue todiscussdevelopmentsastheymoveforward, and participatein eachothersoutreach during both boardsexposure periods.Thecomment periodswill have some overlap and the boards willconsider public commentson both approachesduring redeliberations.The timing of the issuance of final requirements will depend on thenature and the extent of feedback received, but the boards expect tocompletedeliberationsin 2013.HedgeAccountingTheobjectiveof theIASBs project isto improve hedge accountingbymore closely aligningthe accountingwitha companys risk managementactivities, therebyimproving financial reporting.Solvency ii Associationwww.solvency-ii-association.com 23. P a g e | 23As previouslydiscussed, theHedgeAccounting phaseof theFinancialInstrumentsproject is not a joint project.However, the FASB sought commentsfrom itsstakeholderson theIASBs HedgeAccounting Exposure Draft, and will consider theseandthedecisionsreached during redeliberationsin conjunctionwithfeedbackon its ownproposals,whenit recommencesitshedgeaccountingdeliberations.Other projectsLeasesLease obligationsarewidelyconsidered to be asignificant source of offbalancesheet financing.Theobjectiveof theLeasesproject is toimprove financial reportingbylessorsand lessees,in particular by recognisingleaseson thebalancesheet.Theboardshave completeddiscussionson theLeasesproject and haveagreedtore-exposethe revisedproposalsfor identicalstandards on leaseaccounting.Theboardsplan topublish exposure draftsin thesecond quarter of 2013with a 120-daycomment period.During the comment period, the boardswill conduct additional outreachwith users of financial statementsand withentitiesthat undertake leaseactivities.Theboardsplan tojointlyredeliberatetheproposalslater this year. Thetimingof theissuanceof the final requirementswill depend on thenature and extent of thefeedback received.Solvency ii Associationwww.solvency-ii-association.com 24. P a g e | 24Revenue RecognitionTheobjectiveof this project isto improve financial reportingby creatingidenticalstandards on revenue recognitionthat clarify the principlesthatcan beapplied consistentlyacrossvarioustransactions,industries andcapital markets.Theproject appliestoall contractswithcustomers(exceptleases, financial instrumentsand insurancecontracts).In December 2012theboardscompleted thesubstantive redeliberationsof the recognition and measurement principlesin the 2011ExposureDraft.Theboardsplan toredeliberatethe remainingtopics, includingthescope, disclosure, transitionand effectivedate, in the first quarter of 2013and issuefinal standards in mid-2013.Insurance ContractsTheobjectiveof this project isto eliminateinconsistenciesandweaknessesin existingpractice and to provide a singleprinciples-basedStandard to account for all insurance contracts.While theboardsareworkingtogether on theInsuranceContractsprojecttheyhavereached different decisionson several basic matters.For example, while both boards have agreedtomeasuretheinsuranceliability using a current measure of theestimatedcost to fulfil theobligation, theboardshave reacheddifferent decisionson several aspectsof the model, includingtherecognitionof changesin estimate, theinclusion of a risk margin in the measurement of the liabilityand thetreatment of acquisition costs.Theboardsfinalisedtheir joint discussionsin January 2013.Solvency ii Associationwww.solvency-ii-association.com 25. P a g e | 25Theobstaclestofindinga convergedsolutionfor the InsuranceContractsproject may be difficult toovercome.In particular, thedifferent decisionsreachedbytheboardsare a result ofdifferent starting points(IFRS currentlydoesnot includeaccountingrequirementsfor insurancecontractssothe IASB needsa final Standardurgently, whereastheFASB isproposingamendmentsto itslong-standinginsurancemodel).Due to the importanceof the project and in view of the extensivedebatetheIASB hasundertaken over theyears, the IASB will only seekfeedbackon five keymatterswhich have significantlychanged sincethe2010ExposureDraft.TheIASB hopesthat this approachwill avoid further unduedelays infinalisingthis much-needed Standard for insurancecontracts.TheIASB planstopublish this Exposure Draft in thefirst half of 2013.TheFASB plansto publish itsfirst Exposure Draft in mid-2013.Investment EntitiesTheInvestment Entityproject was,in themost part, jointlydeliberated.However, the FASB is addressingthe accountingfor investment entitiesmore broadlythan theIASB did, asthe lattersfocuswassolely on anexemption from consolidation.Consequently, theboards final requirementswill be similar but notidentical.TheIASB issueditsfinal requirementsin October 2012.TheFASB plansto finaliseitsredeliberationsand issuea final Standardin thefirst half of 2013.Solvency ii Associationwww.solvency-ii-association.com 26. P a g e | 26The new Risk DashboardSolvency ii Associationwww.solvency-ii-association.com 27. P a g e | 27Solvency ii Associationwww.solvency-ii-association.com 28. P a g e | 28Solvency ii Associationwww.solvency-ii-association.com 29. P a g e | 29Solvency ii Associationwww.solvency-ii-association.com 30. P a g e | 30EIOPA Risk Dashboard Background noteExecutive SummaryEIOPA publishesa Risk Dashboard on a quarterly basis, in accordancewith itsobligationsunder the EIOPARegulation1and followingaframeworkdeterminedin cooperation withtheother ESAs, the ESRBandtheECB.TheRisk Dashboard is based on mechanical aggregation of indicatorsand additional expert judgment if deemed necessary.Besides publicly available market data, extensiveuse is madeofcompany data whichis reported by 30 largeand important insurancegroupsfrom theEEAand Switzerlandunder EIOPAs quarterlyfast-track reporting.Withinthe common structure agreed upon by theESAs, theESRB andtheECB, theRisk Dashboard isdesignedto be flexible, soEIOPA canreact quicklyto upcoming risks whichare deemed necessaryto becovered.EIOPA expectsthe Dashboardto graduallyevolve further, takingfeedback by the addresseesof this product intoaccount.ContextAs part of the new European legislation, EIOPAaswell asthe otherESAsand theESRB arecalledupon to develop a common set ofquantitativeand qualitativeindicators(risk dashboard) toidentify andmeasure systemic risk.Thelegislationfurther stipulatesthat thesedashboardsshould beconstructed in cooperationbetweentheESAsand ESRB.Solvency ii Associationwww.solvency-ii-association.com 31. P a g e | 31In response to this requirement, the ESAs, together with the ESRB andthe ECB have determined a set of general features for all dashboards tofollow:- Each riskdashboardwill be constructedbased on the same set ofrisk categories:macrorisk, credit risk, market risk, funding andliquidityrisk, profitability and solvencyrisk and risksresultingfrominterlinkagesand imbalances.Furthermore, each institution hastheoption to add categoriestoallowfor sector specific risks (e.g. insurancerisk).- It wasnoted that all Risk Dashboardsshould be constructed on aflexiblebasisin order toalloweach authority toreflect themostimminent risksidentified.- Further development and implementationof the Risk Dashboardsshould be taken forward individuallyby each of theauthoritiesconcerned.However, the ESAs and ESRB should continueto work togethercloselyin this regard to ensure interplay regardingtheunderlyinginformation presentede.g. consistencywhen thesame indicator isused in different Risk Dashboards.ApproachWork on theEIOPARisk Dashboardhassincebeen brought forwardbythe Financial StabilityCommitteeof EIOPA.In definingthemethodology for the Risk Dashboard,the Committeehasconsideredtheapproach taken by other institutionsin the field of riskassessment, for instanceby the IMF2.TheRisk Dashboard hasbeen created togive a structuredview of riskstothe insurancesector and theenvironment in whichit operates,inSolvency ii Associationwww.solvency-ii-association.com 32. P a g e | 32order to facilitatea regular assessment of theserisksand possiblemitigatingpolicyactions.In creating it, carehasbeen taken tokeep the dashboard asconcise,forward-lookingand flexibleaspossible.Furthermore, it isworthnotingthat thedashboard is designed asa high-level tool showingthemost relevant trendsand riskson a macro level.As significant differencesbetweenindividual institutionsexist, thefindingspresented are not alwaysapplicableto all EU insurers.MethodologyIndicatorsAset of currently 40 quantitativeindicatorsforms thebasisof the riskassessment presented.These indicators, which signal potential risks and vulnerabilities for theEuropean insurance sector as well as its resilience, are generated usingboth supervisoryand publicly availabledata.This data isused and in some casescombined asthebasisof the riskassessment for each indicator.Given that thedistribution of risksand vulnerabilitiesisat least asimportant asitscentral tendency, the risk indicatorsare, wherepossible,assessed by takingboth themedian and outliers(e.g. 10th or90thpercentiles) of theunderlying sampleintoaccount.Basedon thisinformationan initial risk score for each indicatorisderived.Thesescoresbasicallyserve asproxieswhencombining variousriskindicatorstoan assessment for the overarchingrisk category.Solvency ii Associationwww.solvency-ii-association.com 33. P a g e | 33Risk categoriesTheindicatorsare mapped to aggregatedcategoriesof(1) macro risk,(2) credit risk,(3) market risk,(4) funding & liquidityrisk,(5) profitability & solvency,(6) interlinkages& imbalancesand(7) insurancerisk.Basedon theindividual risk scoresfor each underlying indicatoranaggregated riskscore for each categoryisgenerated by either- an unweightedaverage (for categories4, 6 and 7);- a weightedaverage referring to a long-term averageof actualportfolio holdings(for categories2 and 3);- a sub-aggregationwithinsome indicatorsof a risk categoryand anaggregationof thesesub-riskscores by using the simpleaverageofor category1witha split in (1a) real-economyrisksand (1b) theriskinessof the insurancesector asperceivedby financial marketparticipants,ofor category3 witha split in (3a) asset siderisksand(3b) ALM matchingrisks, ofor category5 witha split in (5a) lifebusiness,(5b) non-life businessand (5c) total business.For a quick and comprehensiveinterpretation theoverall risk scorearevisualizedthrough four color codesin theRisk Dashboard.Solvency ii Associationwww.solvency-ii-association.com 34. P a g e | 34Quarterlychangesare represented through arrows.Risk assessmentThemechanicallyestimated risk scoresper categoryform thebasisoftheriskassessment in the Risk Dashboard.Thesescoresare complemented by other information availableon risks,e.g. from stresstest results,topical risk analysesor other availabledata.If necessary, this informationisusedtoadjust the scores.This way, it is ensured that all availableinformation is used for the riskassessment and themost completepicture is generated.However, decisionsto changethe mechanicallyaggregated scores(i.e.expert judgment) are documented to ensure transparencyof thisprocess.Toensure flexibility, theRiskDashboardcontainsspacetoelaboratefurther on themost prominent risksin a user-definednon-mechanicalway.Additional dimensionsof each risk (e.g. the potential impact aswellastimingaspects) havebeen derived partiallyon expert judgment aswell.Expert judgmentExpert judgment is consideredcrucial for complementingorsubstitutingthemechanicalprocessof the risk assessmentsand formakingforward-lookingstatementsabout theexpected evolution ofrisks.Theprocessfor adjustingthe initial risk scores(both upwardanddownward adjustment) by expert judgment isintendedtobetransparentandused consistentlyover time.Solvency ii Associationwww.solvency-ii-association.com 35. P a g e | 35Any uncertaintyin the assessment and/ or element of judgment that willinfluencethe final assessment, such asriskmitigatingfactorswill bemadeexplicit and will be documented.Thetransparencyand documentationrequirementsshould ensure asufficient level of confidencein theexpert judgment.This confidencein expert judgment isimportant in order toproducecrediblerisk assessments.This confidenceshould be further maintainedby trackingtheadjustedassessmentsagainst actual experienceor new information that becomesavailable.Such realitychecking is especiallyimportant wherethe expertjudgment leadstosignificant deviationsfrom themechanicalassessment or whereit hasa material impact on the overall assessmentoutput.Data sourcesData for the Risk Dashboardisobtained from both public sources(market data) and thequarterly supervisoryreporting of 30largeEuropean insurancegroupstoEIOPA(fast-track reporting).Data availabilityfor RiskDashboardpurposesis expected to improvesubstantiallywiththeintroduction of SolvencyII reporting.Indicators usedMacro riskAs macro risks are obviouslythe major domain of the ESRBsRiskDashboard, EIOPAscontribution focusesmainlyon insurance-linkedaspects.Solvency ii Associationwww.solvency-ii-association.com 36. P a g e | 36Besides consensusforecastsof GDP growth, development of consumerpricesand unemployment rates,thissection thereforeencompassesthefinancial marketsperception of the healthinessand profitabilityof theEuropean insurancesector.For this purpose, relative stock market performances of Europeaninsurance indices against the total market are assessed, as well asfundamental valuations of insurance stocks (price/earningsratio, price/ book-value ratio), CDS spreads and ratings/ratingoutlooks.Market riskMarket risk is,for most asset classes,assessed by analysing both theinvestment exposure of the insurancesector and an underlying riskmetric.Theholdingsgive a picture of thevulnerabilityof the sector toadversedevelopments;the riskmetric givesa picture of the current level ofriskiness.For equity investments, the relevant risk metrics are the implied volatilityas a short-term indicator and the price/ book-value ratio as medium-termindicator.Also for property investmentsthevaluation comesin asa risk metric, viathecurrent yield of commercial real estateinvestments.In addition, thecurrent level of long-term interestratesand some asset-liability matchingindicatorsare assessed, e.g. by comparing theduration of the bond portfolio (includingthe effect of derivativeholdings) withtheduration of technical provisions.Thedifferencebetweenguaranteedinterest ratesand investment returnscompletestheassessment in this risk category.Solvency ii Associationwww.solvency-ii-association.com 37. P a g e | 37Credit riskFor measuringcredit risk theholdingsof credit asset classesarecombinedwithrisk metricsapplicablefor theseasset classes.For instance, the holdingsof government securitiesare combinedwiththecredit spreadson European sovereigns.Such indicatorsare alsoconstructed for theholdingsof bank bonds(secured and unsecured) and non-financial corporatebonds.Liquidity and funding riskGenerallyspeaking, insurersare lessprone to liquidityrisk thanbanks.As indicators,the lapserateof the life insurancesectorhasbeen usedwith a high lapseratesignalinga potential risk.Furthermore, holdingsof cash & depositsare used asa measure of theliquiditybuffer available,both in absolutetermsand asa share of lessliquidassets.Thelast indicatorused is theissuanceof catastrophebonds, whereavery low volume of issuanceand/ or high spreadssignal a reduction indemand which could form a risk.Profitability and SolvencyNinerisk indicatorswereconsidered in the determination of the riskscore for this category.While the return on equity providesan overall assessment of theprofitabilityin thewholesector, a more detailedbreakdownofprofitabilitytrendsisavailableby analysing thecombined ratio and theSolvency ii Associationwww.solvency-ii-association.com 38. P a g e | 38return to premiumsfor non-life businessand the return on assetsfor lifeinsurers.Solvencyratios for both life and non-life insurerscompletethepictureinthisrisk categoryaswell asthe year-on-year changein capital&reserves.Interlinkages and ImbalancesUnder this section various kindsof interlinkagesare assessed, bothwithin theinsurancesector,namely betweenprimaryinsurersandreinsurers,betweenthe insurancesectorand thebanking sector, aswellasvia derivativeholdings.In addition, asan indicatoron imbalancesthedebt/ equityratioof theinsurancesector hasbeen included.Insurance RisksAs indicatorsfor insurancerisksgrosswrittenpremiumsof both life andnon-life businessare an important input.Both significant expansion and contractionare taken asindicatorsofrisksin the sector; theformer due to concernsover sustainability and thelatterasan indicatorof widespreadcontraction of insurancemarkets.Premiumsare alsoanalysed in comparison to insurerscapital&reserves(insuranceleverage).Information on insurance lossesdue to natural catastrophesroundsupthisrisk category.Solvency ii Associationwww.solvency-ii-association.com 39. P a g e | 39Solvency ii Associationwww.solvency-ii-association.com 40. P a g e | 40Solvency ii Associationwww.solvency-ii-association.com 41. P a g e | 41Solvency ii Associationwww.solvency-ii-association.com 42. P a g e | 42Solvency ii Associationwww.solvency-ii-association.com 43. P a g e | 43Solvency ii Associationwww.solvency-ii-association.com 44. P a g e | 44Interview with Gabriel Bernardino,Chairman of EIOPA, conductedbyNataa Gajski Kovai, Svijet osiguranja(Croatia)In thebest scenario, thebeginningof SolvencyII implementation shouldbeeither in 2015or2016,asMr. Bernardinohasrecentlysaid.He addedthat thedate dependson thelength ofthelegal and political process.Previouslyit wasannounced that fullimplementation of SolvencyII will happen at thebeginningof 2014?What is thereason of thedelay of SolvencyII?First of all let me give you an overview of theEU legal processthatprecedestheimplementationof SolvencyII.We have a Level 1text the SolvencyII Directive, whichwasadoptedin2009,it isa principlesbaseddocument.TheLevel 2text will contain detailed rulesof theSolvencyII regime.This document iscalledImplementing Measuresand will be preparedbythe European Commission.Finallywehave Level 3 & Technical Standards, whichconcernspurelytechnicalmattersand require supervisory expertise rather than strategicdecisionsor policy choices.TheTechnical Standardsare tobe preparedbyEIOPAand thenadopted by the European Commission.Solvency ii Associationwww.solvency-ii-association.com 45. P a g e | 45TheEU trilogueparties (theEuropean Commission, theEuropeanParliament and theCouncil of theEU) still need todecidethe scope andthelegal basisfor theTechnical Standardsthat EIOPAhastodraft.This decision will be introducedin thesocalledOmnibusII Directive.Onlyafter the finalizationof the OmnibusII Directive, the Commissionwill come up withthe ImplementingMeasuresand EIOPA withTechnicalStandards.Last year the triloguepartiesagreed that a final decision on theOmnibusII Directivecan be taken onlyafter EIOPAconductsthe Long TermGuaranteeAssessment (LTGA).EIOPA supportsthisapproach becausebeforemoving forward withSolvencyII weindeed need toagree on a sound and prudent regimefor the valuation of long term guarantees.On 28 January 2013welaunchedthisstudy and hope to present itsfindingsand our conclusionsin June 2013.Afterwardsweexpect that theOmnibusII Directivewill be finalized.Someinsurance companiescomplainthat theSolvencyII scheme favorsbiggerinsurerswhohavetheresourcestoeasilyadjust to thenewregime.Theycomplainthat thecost of preparation aretoobigalready.How doyou comment that?No, SolvencyII is a neutral framework.Already the level 1text statesthat the Directiveshould not betooburdensome for small and medium sized insurance companies.Solvency ii Associationwww.solvency-ii-association.com 46. P a g e | 46And one of the meanstoachievethis objectiveis the proper applicationof the proportionalityprinciple.In our workrelatedtothedrafting of Technical Standards, wealwaystake intoaccount proportionalityaspectsthat are related tothesize, complexityor risk profileof insurancecompanies.As regardsthecostsof preparation, letsaskourselves:dowewant tokeepthe existingSolvencyI regime?No, becauseSolvencyI is not risk sensitive, it containsvery fewqualitativerequirementsregardingrisk management and governanceanddoesnot providesupervisorswith adequateinformation on theundertakingsrisks.Comparing to thecurrent regime, SolvencyII has a clear benefit it is arisk& based regime, it helpscompaniestobetter understand andmanagetheir risks.SolvencyII is a hugestep in termsof transparencyasit will bringharmonizedreporting framework and reliabledisclosure.I am convinced that SolvencyII will providean appropriate basisforincreasedpolicyholder protection and will contributeto reinforcingfinancial stabilityin general.Thecostsof preparation will be higher for the companiesthat want touseinternalmodels for thecalculationsof their capital requirement.That will not be thecasefor thevast majority of companiesin the EU.Doyou think that Europeaninsurersareprepared forthetransition toSolvencyII?Wheredoyou expect thebiggestproblemstooccur?We are confident about the preparation level of insuranceundertakings.Solvency ii Associationwww.solvency-ii-association.com 47. P a g e | 47At the same time wewant tousethedelayin SolvencyII implementationfor tackling possibleproblemsin a consistent and convergent wayandhere I wouldlike to mention EIOPAOpinion on interim measuresrelatedtoSolvencyII, whichweissued in December last year.In thisdocument weindicatedthat weseea great necessityin suchinterim measuresbecause there isa risk that due tothedelayof a finalagreement on SolvencyII, a number of European supervisorsmaydecidetodevelop national solutionsin order toensure sound risksensitivesupervision.Soinsteadof reachingconsistent and convergent supervision in the EU,different national solutionsmay emergetothedetriment of a goodfunctioninginternalmarket.EIOPA will develop Guidelinesthat are addressed tothe nationalcompetent authoritiesand that are related to such stableelementsofSolvencyII that are unlikelytobe influencedby the finalizedOmnibusII Directive.TheseGuidelineswill cover thesystem of governance, includingriskmanagement, ORSA, pre applicationof internal models, and reporting tosupervisors.I must saythat our initiativetodevelop the Guidelineswasapproved byEIOPA Board of Supervisors(BoS), whichconsistsof all thenationalsupervisoryauthoritiesof the EuropeanEconomicArea and alsoreceivedavery positivefeedback from theEuropean Commission.In April wehope to havethe first draft Guidelinesready.Afterwardswewill put them out for a public consultation.After thepublic consultationthe Guidelineswill be finalized and will betabledto EIOPABoard of Supervisorsin Autumn 2013.Solvency ii Associationwww.solvency-ii-association.com 48. P a g e | 48As of 2014the Guidelinesare supposed tostart to be implemented,howeverweare fullyawarethat it will not be possiblefor thesupervisorstocomplywitheverything asof 1January 2014.Sohereagain wetakeintoaccount theproportionalityprinciple:whilepreparingtheGuidelinesweare considering their gradualimplementation.TheGuidelinesare focused on thepreparation for SolvencyII.With this step wewill ensure a smoother transitiontothenew regime,both by undertakingsand supervisors.Croatia is about tojoin theEU thusJuly what big changescan weexpect in insuranceworld?As all the other EU members, Croatia will have to complywiththeEUlegislationand, thus, for examplewithEIOPA Guidelinesrelated to theinterim measuresfor theSolvencyII implementation or withtheGuidelineson complaintshandlingby insuranceundertakingsthat weissuedin 2012.I am confident that themembership in theEU will opentoCroatianinsurancemarket the possibilitiesfor future growth, while theEuropeanSystem of Financial Supervision will contributeto preservingthefinancial stabilityand enhancingconsumer protection in the Croatianinsurancemarket.Are you familiar withtheworkof insurersin Croatia?How doyou cooperate withour national supervisoryauthorityHanfa?Yes,the information exchangeamong competent supervisorsandEIOPA is one of thepurposesfor whichtheEuropean System ofFinancial Supervision (ESFS) wascreated.As regardsthecooperation, EIOPAstartedto prepare the groundSolvency ii Associationwww.solvency-ii-association.com 49. P a g e | 49for welcomingthe Croatian Financial ServicesSupervisoryAgency(HANFA) toour Board of Supervisorsalready in 2011.In 2012HANFA became an observer of the BoS and started thepreparatorywork in order to comply withall the necessaryrequirements.Themembersof theHANFA Board and its staff membersalreadyactivelyparticipatein EIOPAactivitiessuch asthemeetingsof EIOPABoard of Supervisors, variouscommitteesand workinggroupsandEIOPA trainingsand seminars.Soonthe HANFA will become a votingmember of EIOPABoard ofSupervisors.Thetasksof our BoSare wideranging.TheBoS isthe main decision making body of EIOPA, it adoptsall theopinions,recommendationsand decisionsissued by our Authority;approvesour budget, annual and multi annual workprogrammesandannual reports.SoNational SupervisoryAuthorities closely participatein theworkofEIOPA and are awareof all our initiativesand achievements.Is theresome kind of special treatment towardsnewmembersinEIOPA, dotheyhave someperiod of adjustment?No, the preparation startedwell in advance and nospecial transitionperiod for theCFSSAwill be needed.When Croatia becomespart of theEU, what will your authoritiesininsurancepoliticsinCroatia be?EIOPA is responsibleto develop technical standards,that will becomemandatoryand guidelinesthat HANFA will need tocomplyor explain.Sothe regulatory frameworkwill be influencedby EIOPA.Solvency ii Associationwww.solvency-ii-association.com 50. P a g e | 50Furthermore, EIOPAhasthepower to investigate possiblebreachesoftheEU Legislationin EIOPAs scope of activities.If EIOPAmakesa conclusion that the Breach of the EU indeedtookplace,theAuthority will issue a recommendation addressedtotherespectivenational supervisor.In some limitedcasesEIOPAaction can be applied totheindividualcompanies.But thismight happen onlyin casethenational authoritydoesnotcomplywith actionsrecommended by EIOPAor theEuropeanCommission.In thiscasethe Chairman of EIOPAhasa right topropose to theBoardof Supervisorsan individual decision addressedtoa financial institutionin whichrequiring the necessaryactiontocomplywithitsobligationsunder the Union law.Such a decisionmay require the cessationof any practice.Many insurersoperate ontheEuropeanand global level sotheyaresometimesconfronted withdifferent supervisory regimesorpractices;howcan that beresolved?Thefirst step is tobuild up a harmonized prudential frameworkin theEU.That is thepurposeof the Solvency II.Secondlyweneed toassurethat day to day supervisionof financialinstitutionsis done within a consistent framework.EIOPA will develop a SupervisoryHandbook that wouldwork asaguidebookfor supervisionin SolvencyII, settingout good practicesinall the relevant areasof supervision.Solvency ii Associationwww.solvency-ii-association.com 51. P a g e | 51This handbook will foster the implementationof a more consistentframeworkfor the conduct of supervision.Furthermore, there isa strong role for the collegesof supervisors.In the end of 2012,91insurancegroupswith cross&border activitywereidentifiedin the European EconomicArea (EEA).Collegesrepresenta very important tool of group supervision becausetheyprovidenecessaryplatform for the gatheringand dissemination ofinformation especiallyin caseof concernsor emergencysituationsthatoccur.Collegeshelp todevelop a common understandingof the risk profile ofthegroups, toachievecoordinationof supervisory review and riskassessment at a group level aswell asto establishsupervisoryplansforthemitigationof risks at a Group level.TheRegulation establishing EIOPAempoweredour Authority toparticipatein the collegeswitha view tostreamliningthe functioningand theinformationexchangewithincolleges.Thestrategicgoal of our collegeworkis toset up consistent, coherentand effectiveEEA-widesupervision of cross-border insurancegroupsforthebenefit of both group and solosupervision.Every year weset ayearly action plan for collegesand alsopublish ourannual reportson thefunctioning of colleges.In the courseof 2012, EIOPAattendedalmost all collegemeetingsfor 75insurancegroups.We contributed to the workof collegesby developing a catalogueforregular information exchangeand by providingspecific presentationsincollegesabout EIOPAs regular assessment of risks facedby the EEAinsuranceindustry.Solvency ii Associationwww.solvency-ii-association.com 52. P a g e | 52How will SolvencyII applyto pension funds?What canpension fundsexpect out of SolvencyII?Right now & nothing. The review of theIORP Directiveisa differentprocessand isin a different stage.We believethat occupational pension fundsalsoneed to have a muchmore risk basedregulation.As part of the processto advisethe European Commission on thereviewof the IORP Directive,, weconductedthe first QuantitativeImpact Studyfor occupational pensions.But sufficient time needstobe takentoget theright approach.At themoment wehavethree main conclusions.First, is that the requirementsand principlesthat wehave in Solvency IIon thegovernancesideshould alsobeapplied tooccupational pensionfunds.Theprinciples,especiallythe requirementsabout riskmanagement, arevery much relevant for occupational pension funds, too.But of coursetheyshould be applied using a proportionalityprinciple.Thesecond conclusionis about transparency.SolvencyII improvesinformation not onlyfor supervisorsbut alsofor alltheexternalsparties.We recommended the Commission for examplethat in caseof definedcontribution schemesa key information document shouldbe giventothepotential and already existing membersof the pension plan.This document should outlinecosts,charges,commissionsand risks.Solvency ii Associationwww.solvency-ii-association.com 53. P a g e | 53Thethird conclusion is that alsoin theoccupationalpension fundsyoushould have an economicvaluation of assetsand liabilities.We needto prevent the situation whena problem is faced, but it istoolate to solve it.At the same time I usedtorepeat that wearevery much against acopy&paste exercisefrom Solvency II to IORP Directive.We dorealize thedifferencesbetweeninsurancecompaniesand IORPsandthesedifferencesshould necessarily be takenintoaccount.Your opinion on therolethat insurancecompaniesdealing withlifeinsurancehave in providingforwellbeingof elderlypeople?Insurancecompaniescan and do play a particularlyrelevant roleinprioritizingsecurityand longterm savings.Lifeinsurersare experts in risk management, theyare used todeal withdemographic, biometric and investment risks.Theyare very well placed tooffer good solutionsfor retirement savings.Due to thisimportant role, regulation and supervision aremuch relevanttoensurethat insuranceundertakingshave robust solvencyand that theyprovidepolicyholders withtransparent information about theproductsandtheir risks.Solvency ii Associationwww.solvency-ii-association.com 54. P a g e | 54Interview with CarlosMontalvo, Executive Director of EIOPAConducted by Victoria Tozer Pennington, theRisk Universe (theUnitedKingdom)Therecentlyannounced further delay toOmnibusII havebeen greetedwith dismayby firmseager toseethefinal rulestoSolvencyII.How doyou account forthedelaysandwhat is your advice tofirms?CarlosMontalvoRebuelta:Acredibletimelinefor the implementationofSolvencyII is a must have.Regardlessof theseuncertainties, thereisa strongneed for risk-basedsupervision.This need hasbeen onlyreinforced by thelessonstaken from the currentcrisis.In order words,the ideaand theprinciplesof SolvencyII are more actualand valid than ever.Our advicetothe firms is not to wait until the politicaldiscussionsareover, but touse the timein order tobetter prepare for SolvencyIIinternally: tomakesure that the Boardsof firmskeep consideringSolvencyII a priority; and totake advantageof theinformation that theyare already collecting, aspart of suchexercise, in termsof betterunderstandingthe riskstheyface, and howto addressthem.In the absenceof a final agreement on Solvency II in the scheduledtimeline, EIOPAhasexpressed an opinion in order toensureandenhancesound risk based supervision and preparethe industry for thefinal SolvencyII Directive.Instead of reachingconsistent and convergent supervisionin theEU,different national solutionsmay emergetothedetriment of a goodfunctioninginternalmarket.Solvency ii Associationwww.solvency-ii-association.com 55. P a g e | 55In order toavoid thisscenario EIOPAdecidedtodevelop guidelinesandtotakea lead in thepreparatoryprocessaimed at a consistent andconvergent approach withrespect tothepreparation of SolvencyII.EIOPA Guidelineswill allowsupervisorsand undertakingstobe betterpreparedfor the applicationof the new regulatory framework.Tocut a long storyshort, theguidelinesare an excellent wayfor allpartiestouse the extra timeof thedelayasa waytobe better preparedfor implementation.How have theindividual Member Statesof theEuropean Unionprogressedwith their adoption of SolvencyII and areyou confident allwill beabletoimplement thefinal rulesontime?Montalvo:The Member Statescan and must successfullyimplementSolvencyII and theyhave alreadystartedto make necessarypreparationsfor it.Somestepsin the right direction have alreadybeen taken, there is a goodworkalready in progress,but there arestill challengeswithregards to thewholeimplementationprocessboth for companiesand supervisors.Ignoring them wouldbe irresponsible.In your opinion howwill Solvency II serve to reducecost, complexityand riskforinsurancefirms?Montalvo:First of all, it is not possibleto eliminateor even reduce risks.Theinsurancebusinessisa risk-relatedbusinessthat by itsnature isbased on taking, managingrisksand making profit out of thoserisks.Theobjectiveof SolvencyII is not toreducerisks, but to allowcompaniestoproperlyunderstand, price and managethe risksthey face.SolvencyII will enhancebetter understanding of the risks, and suchSolvency ii Associationwww.solvency-ii-association.com 56. P a g e | 56understandingwill help companiesto better managetherisksandtherefore, to make better decisions.This will createan immediatebenefit tothe undertakings.As regardscomplexity, complexityis particularlychallengingfor smallandmedium-sizedenterprises.SolvencyII is more complex than it wasoriginallyforeseen.Beyond theprincipleof proportionalityand itsapplication, wehavecurrentlyon our tablesuch initiativesaslookingfor thecalculationof theSolvencycapital requirements(SCR) and developing an IT tool tofacilitate it, or a toolkit to convert data required intoXBRL.We acknowledgetheproblem and together with industrywewant to findwaystotacklethe excessof complexityof the framework, becausecomplexityshould never bean obstacletotheclear benefitsof SolvencyII.Whyareinsurershaving such difficultycommunicating theimpact ofSolvencyII to thebusiness?Montalvo:Solvency II provides firmswitha lot of relevant informationfor them to run their business, and todo soin a more sound manner.But thisalsoimplieschangesand it is always challengingto explain thebenefitsof change, tosend themessagethat wemay havetochangeourapproachto certain risks, products that are embedded in the normalfunctioningof the company, simplybecausetheycan threatenthefirmitself.Compliancewith therulebook is certainlynot thedriver towardsSolvencyII, asit only bringsthe downsideof it, costsand complexity,but not theupside, namely qualityinformation, understandingof risksandthesubsequent opportunities.Solvency ii Associationwww.solvency-ii-association.com 57. P a g e | 57Therefore, a changeof approach, in termsof both action andcommunication, should takeplace todeal withthedescribedsituation.Therearesignificant data management issuesconnected withSolvencyII;doyou recognise thechallengesfirmsface and what advice doyouhavein thisarea?Montalvo:We are awareof the challengesoriginatedby reportingrequirementsand weareworking in order tominimize this burden forcompanies.Thedata challengescome from twosources:thevaluation of the activityusinga harmonised market consistent approach and the detailedrequirementsfor public disclosureand supervisory reporting.Themarket consistent valuation isa high_levelprinciple, which wassetearlyon in the process(Article 75of theSolvencyII Directive).EIOPA recognised from thestart thedata challengethat undertakingwill face and hasexpended maximum effort to allowundertakingstostart preparing themselves,by consultingon thedetailed expectationsregardingpublic disclosureand supervisoryreporting.Theimplied advice remainsthesame: continue(or urgentlystart for thelate comers) to prepare your internal systemstobe readyon time.EIOPA hasalsorecentlylaunched an IT development project (Tool forUndertaking) to make sure that all undertakingswill have accesstoatleast one costlesspossibility tocreatetheSolvency II reportingsubmissionsexpected by supervisors.TheORSA[OwnRiskandSolvencyAssessment] remainsachallengefor manyinsurers, whichhasnot beenhelped byalack of detailedguidancefrom theregulators.Given howmuchfirmsarestrugglingwiththis,doyou expect to offermoreguidanceoncethefinal rulesarepublished?IfSolvency ii Associationwww.solvency-ii-association.com 58. P a g e | 58so,whenand on whichareas?Montalvo:The ORSAprocessmust be ownedby the company.We indicatethe aim of ORSAbut cannot providevery detailed guidancebecausewe don t wan t to int erv ene in themanagement processesof companies and totell them how exactlytheyshould conduct theORSA.At the same time weunderstand theconcernsof industry and preciselybecauseof this, wealready conducted public consultation on ourpreliminaryviewson the ORSA.And this isnot theend of our workon ORSA, but a link tothe workweare doing in termsof supervisoryreview processand other areas.We planto continueinvolvingthe industryon how to enhanceunderstandingand how tomake the ORSAan operativetoolkit for thecompanies, a toolkit that wouldallow them to understand their solvencyposition, their risk challengesand the continuityof their business,beyond a oneyear time horizon.In termsof supervision, the ORSAshould be brought to a qualitativelevel and that is what EIOPAis alsoworkingon.Afinal point I think appropriatetoraiseon ORSAis itsuseasa waytoimposeadd-onsbysupervisors.If wewoulddoso, it wouldbe a one and done exercise,wewouldneverrealisticallybe able topretend that undertakingswould perform, for theirowninternal purposes,a seriousORSA exercise,but a complianceboxtickingone.Arecent survey showedthat althoughfirms (in theUK specifically) arewellontheir wellto implementingtheir internal models, sourcessaythat thebigger issueof passing theusetest couldbeaproblem.Doyou haveanyadvice on preparing fortheusetest?Solvency ii Associationwww.solvency-ii-association.com 59. P a g e | 59Montalvo:Internalmodelsgobeyond a simpletoolkit to calculate capitalrequirementsbecausetheyare a fundamental management toolkit.On thebasis of this, sinceday one, theusetestbecame a cornerstoneofthewholeprocess.As part of the usetest, undertakingsneed to demonstratethat theinternalmodel is widelyusedin termsof decision making and plays animportant role in their system of governance, and that the model at alltimesreflectsthe risk profile of theundertaking.EIOPA is developingguidelinesthat will clarifytherequirementsrelatedtothe usetest.Theseguidelineshave alreadybeen pre-consultedwithselectedstakeholders.One of the most crucial points is that national supervisory authorities(NSAs) should asses individually the compliance with the use test foreach undertakingindividuallyaccordingto the requirements.Although there areminimum requirementsfor the use test, there isnodetailedand completelist of usesthat theundertakingshavetoabidewith.EIOPA recognisesthat theusesof the internal model will vary fromundertakingtoundertaking.NSAswill assesscompliancewith requirementsbasedonproportionality.Someusesmay not be materiallyimportant tothe undertakinggiven thenature of their business.DoesEIOPAhave anyinformation onthepreferred blend ofscenariosand lossdata from amodellingperspective?Solvency ii Associationwww.solvency-ii-association.com 60. P a g e | 60Montalvo:Internalmodelsbydefinitionare tailored tothespecificneedsof individual companies.On that basisEIOPAcannot have any concretepreferred approach whenit comesto blend of scenarios and lossdata and in general to internalmodelsastheyare specificto companies.It is up to the undertaking to justify its own approach and methodologyto the supervisory authority as part of the approval process of the use ofan internal model for the calculationof the solvencycapital requirement.This justification includesdemonstratingboth that the approach isadequatetakingintoaccount the specificrisk profile of the undertaking,andthat the internalmodelsrequirementsrelated to test and standardsare fulfilled.Froman operational risk lossdata point of view, firms arecopingwithadearth of data and scaling issuesusingexternal lossdata.Has EIOPAdone anywork on this area or can you offer some advice tofirmson theissueof the preferred useof internal and external lossdata,sourcesof lossdata, and scalingproblems?Montalvo:EIOPAor more precisely, itspredecessorCEIOPShasperformed several studiesin order tocalibratethe Operational RiskCapital Charge.Thestudies werebasedon different sample sizes(number and size ofundertakings)in different Member States.Thefinal calibrationwasbasedon the analysisof larger sampleof data.It is important to note that the resultsare not far different from thoseproduced by other analyses.Solvency ii Associationwww.solvency-ii-association.com 61. P a g e | 61EIOPAPublic consultation on Guidelinesrelated to thepreparation for Solvency IIThe European Insurance and Occupational PensionsAuthority (EIOPA) launched a public consultation onGuidelinesrelated tothepreparationfor Solvency II.Thepurposeof theGuidelinesis tosupport bothNational Competent Authorities(NCAs) andundertakingsin their preparation for theSolvency IIrequirements.TheGuidelinescover the areasthat EIOPAconsiders fundamental toensure effectivepreparationfor SolvencyII: system of governance,includingrisk management; forwardlookingassessment of theundertakingsownrisk(based on the OwnRisk and SolvencyAssessment (ORSA) principles);submission of informationtoNationalCompetent Authorities(NCAs); pre-applicationof internal models.It is up to NCAs to determine how to comply with EIOPAs Guidelinesby incorporating them into their regulatory or supervisory framework inan appropriatemanner.NCAs are expected toensure that insurancecompanies and groupstakeactivestepstowardsimplementingthe relevant aspectsof theregulatoryframeworkaddressed in theseGuidelines,sothat when SolvencyII isapplicable, itsrequirementscan be fullycomplied with.However, EIOPA makes it clear that the Guidelines should be applied ina proportionate way and in particular with regard to the burden on smallandmedium size undertakings.Thepublic consultation will end on 19 June 2013.EIOPA intendsto subsequentlypublish thefinal Guidelinesin theautumnof this year.Solvency ii Associationwww.solvency-ii-association.com 62. P a g e | 62This should allowNCAs toput in placecertain important aspectsof thepreparation for SolvencyII startingon 1January2014.Consultation Paper on the Proposal for Guidelineson the System of Governance1.GuidelinesIntroduction1.According toArticle 16of Regulation (EU) 1094/2010of 24November2010(hereafter, EIOPARegulation or theRegulation) EIOPA is issuingGuidelinesaddressed tonational competent authoritieson how toproceedin the preparatory phaseleadingup totheapplicationsofDirective2009/138/EC of the European Parliament and of the Council of25November 2009on the taking-upand pursuit of thebusinessofInsuranceand Reinsurance(SolvencyII)3.2. TheseGuidelinesare based onArticles40to49,Article 93,Article132andArticle 246of SolvencyII.3.In the absenceof a political agreement on OmnibusII, Europeannational competent authoritiesmay be forcedtodevelop nationalsolutionsin order toensure sound risksensitivesupervision.Insteadof reachingconsistent and convergent supervisionin the EU,different national solutionsmay emergetothedetriment of a goodfunctioninginternalmarket.4.It is of keyimportancethat there will be a consistent and convergentapproachwith respect to the preparation of SolvencyII.These Guidelines should be seen as preparatory work for Solvency II byfostering preparation with respect to key areas of Solvency II in order toensure proper management of undertakingsand to ensurethatSolvency ii Associationwww.solvency-ii-association.com 63. P a g e | 63supervisorshave sufficient information at hand.Theseareasare thesystem of governance, includingrisk managementsystem and a forwardlookingassessment of the undertakingsownrisks(based on the OwnRisk and SolvencyAssessment principles, knownasORSA), pre-application for internal models, and submission ofinformation to national competent authorities.5.Early preparation is a key in order to ensure that when Solvency II isfully applicable undertakings and national competent authorities will bewell prepared and ableto applythenew system.For this, national competent authoritiesare expected to engagewithundertakingsin a closedialogue.6.As part of the preparation for the implementationof SolvencyII, national competent authoritiesshould put in place from 1January2014the Guidelinesasset out in thisdocument sothat insuranceandreinsuranceundertakingstaketheappropriate steps.7.National competent authoritiesshould sendto EIOPA, a progressreport on theapplicationof theseGuidelinesby the end of Februaryfollowingeach relevant year, the first beingby 28 February 2015basedontheperiod 1January 2014to 31December 2014.8.TheseGuidelinesincludeGuidelineson the prudent personprinciple.National competent authoritiesare expectedtoensure that undertakingsduring thepreparatory period alreadytakeintoaccount thisprincipleontop of thesystem of regulatoryquantitativelimitsapplicableunder thecurrent supervisoryregime.In additionnational competent authoritiesare expectedtoensure thatprogressis made byundertakingsto makethe necessarytransitionovertheduration of the interim period towardshaving all therequisiteSolvency ii Associationwww.solvency-ii-association.com 64. P a g e | 64governancesurroundinginvestmentsin place.This doesnot implythat undertakingsinvestment portfoliosalreadyhavetobe changed totheextent undertakingswouldconsider necessarywhentheSolvencyII regimeis fullyapplicable.9.TheGuidelinesconcerningthe actuarial function contain referencestocapital requirementsand technical provisions.Thesereferencesareto be understood asreferencesto SolvencyIIrequirements.Amajorityof the tasksof theactuarial function concernsthecoordinationof SolvencyII technical provisions.During the preparatory period these tasks are mainly relevant withregard to the submission of interim information to the supervisoryauthority.There is no full framework for technicalprovisionsvaluation during thisperiod.For thepurposeof thepreparatory reportingand onlyfor that purposetheframeworkwill be provided later.10.National competent authoritiesare expected to ensure that theseGuidelinesare appliedin a manner whichis proportionateto thenature,scaleand complexityof therisksinherent in the businessof theinsuranceand reinsuranceundertaking.TheGuidelinesalreadyreflect the application of the principlesofproportionalityby havingthe principleembedded.11.Thenational competent authoritiesshould applytheGuidelinestoboth individual undertakingsand mutatis mutandis at thelevel of thegroup. Additionally, for groupsnational competent authoritiesneed toSolvency ii Associationwww.solvency-ii-association.com 65. P a g e | 65applythe group specific Guidelines.12.TheGuidelinesshall apply from 1of January 2014.Section I: General Provisions for preparatory GuidelinesGuideline 1- General provisions for Guidelines13.National competent authoritiesshould takethe appropriate stepsinorder to put in place from 1January2014thepresent GuidelinesonSystem of Governance.14.National competent authoritiesshould ensurethat insuranceandreinsuranceundertakingsand groupstake the appropriate stepsto:a.build an effectivesystem of governanceaccordingtothe SolvencyIIDirectivewhichprovidesfor sound and prudent management;b.build an effectiverisk-management system comprisingstrategies,processesand reportingproceduresnecessarytoidentify, measure,monitor, manage and report, on a continuousbasisthe risks,at anindividual and at anaggregated level, to whichtheyare or could beexposed, and their interdependencies;andc.build qualitativeinformation supportingthe system of governance thatwill allownational competent authoritiesto review and evaluatethequalityof theinformation.Guideline 2 - Progress report to EIOPA1.15.National competent authoritiesshould send toEIOPA, a progressreport on theapplicationof theseGuidelinesby theend of Februaryfollowingeach relevant year, the first beingby 28 February 2015basedontheperiod 1January 2014to 31December 2014.Solvency ii Associationwww.solvency-ii-association.com 66. P a g e | 66Section II: System of GovernanceChapter I: General governance requirementsGuideline 3 - The administrative, management or supervisorybody (AMSB)16.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that the administrative, management orsupervisorybody of theundertaking hasappropriateinteractionwithanycommitteeit establishesaswell aswithsenior management and withother key functionsin theundertaking, requestinginformation from themproactivelyand challengingthat information whennecessary.17.In accordancewithArticle 246of SolvencyII, national competentauthoritiesshould ensure that at group level, the administrative,management or supervisorybody of theentityresponsiblefor fulfillingthegovernance requirementshasan appropriateinteractionwith theadministrative,management or supervisorybodies of all entitieswithinthegroup, requestinginformation proactively in the mattersthat mayaffect thegroup and challengingthe decisionmaking both at group andentitylevel.Guideline 4 Organisational and operational structure18.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that the undertakinghasorganisational andoperational structuresaimedat supportingthe strategicobjectivesandoperationsof the undertaking.Such structures should be able to be adapted to changes in the strategicobjectives, operations or in the business environment of the undertakingwithin an appropriate period of time.19. In accordancewithArticle 246of SolvencyII, national competentSolvency ii Associationwww.solvency-ii-association.com 67. P a g e | 67authoritiesshould ensure that the administrative, management orsupervisorybody of theentityresponsiblefor fulfillingthe governancerequirementsat group level assesseshow changestothe groupsstructure impact on thesoundnessof theundertakingand makesthenecessaryadjustmentsin a timelymanner.20.In accordancewithArticle 246of SolvencyII, national competentauthoritiesshould ensure that, in order totake appropriatemeasures,theadministrative,management or supervisorybody of theentityresponsiblefor fulfilling the governancerequirementsat group level knowsthecorporateorganisationof the group, the purposeof itsdifferent entitiesand the linksand relationshipsbetweenthem aswellaskeepitselfinformedabout the risksarising from thegroupsstructure.Guideline 5 - Key functions21.In accordancewithArticles 44, 46, 47 and 48 of SolvencyII, nationalcompetent authoritiesshould ensurethat the undertakingappropriatelyimplementsthefollowingkeyfunctions:risk managementfunction, compliancefunction, internal audit function and actuarialfunction.22.In accordancewithArticles 44, 46, 47and 48of SolvencyII, nationalcompetent authoritiesshould ensurethat the entityresponsibleforfulfillingthe governancerequirementsat group level appropriatelyimplementsthefollowingkeyfunctions:risk managementfunction, compliancefunction, internal audit function and actuarialfunction at thelevel of the group.Guideline 6 Decision-making23.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that the undertakingensuresthat at leasttwopersonseffectivelyrun theundertaking.That impliesthat anysignificant decision of the undertakinginvolvesatleast twopersonswhoeffectively run theundertakingbeforethe decisionSolvency ii Associationwww.solvency-ii-association.com 68. P a g e | 68is beingimplemented.Guideline 7 - Documentation of decisions taken at the level ofthe AMSB24.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that theundertakingappropriatelydocumentsthedecisionstaken at thelevel of theadministrative,management orsupervisorybody of theundertaking and how information from the riskmanagement system hasbeen taken intoaccount.Guideline 8 - Internal review of the system of governance25.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that the administrative, management orsupervisorybody of theundertaking determinesthescope andfrequencyof the internal reviewsof thesystem of governance, takingintoaccount thenature, scaleand complexityof thebusinessboth atindividual and at group level, aswell asthestructure of thegroup.26.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that it is up tothe undertaking to decidewhois toperform the reviewswithin the undertaking.27.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that the scope, findingsand conclusionsof thereview are properlydocumented and reported tothe administrative,management or supervisorybody of theundertaking.Suitablefeedback loopsare necessarytoensure follow-upactionsareundertaken and recorded.Guideline 9 Policies28.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that the undertakingalignsall policiesSolvency ii Associationwww.solvency-ii-association.com 69. P a g e | 69requiredaspart of the system of governancewitheach other and withitsbusinessstrategy.Thepoliciesshould clearlyset out at least:a)thegoalspursued by the policy;b) thetaskstobe performed and thepersonor role responsiblefor them;c) theprocessesand reporting procedurestobe applied; andd)theobligation of the relevant organisational unitstoinform the riskmanagement, internal audit and the complianceand actuarial functionsof anyfactsrelevant for the performanceof their duties.29.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that in thepoliciesthat cover thekeyfunctions,theundertakingalsoaddressesthe position of thesefunctionswithin theundertaking, their rightsand powers.Guideline 10- Contingency plans30.In accordancewithArticle 41of SolvencyII, national competentauthoritiesshould ensure that the undertakingidentifiesrisksto beaddressedby contingencyplansbasedon the areaswhereit considersitselfto be especiallyvulnerableand reviews, updatesand teststhesecontingencyplanson a regular basis.Chapter II: Fit and Proper Guideline Fit requirements31.In accordancewithArticle 42 of SolvencyII, national competentauthoritiesshould ensure that personswhoeffectivelyrun theundertakingor haveother key functions, includingmembersof theadministrative,supervisoryor management body of the undertaking arefit and takeaccount of the respectivedutiesallocatedtoindividualmembersto ensure appropriatediversity of qualifications,knowledgeSolvency ii Associationwww.solvency-ii-association.com 70. P a g e | 70and relevant experiencetoensurethat theundertakingismanaged andoverseenin a professional manner.1.32.In accordancewithArticle 42of SolvencyII, national competentauthoritiesshould ensure that the undertakingensuresthat the membersof the administrative, management or supervisorybody collectivelypossessat least qualification, experienceand knowledgeabout:a) insuranceand financial markets;b) businessstrategyand businessmodel;c) system of governance;d) financial and actuarial analysis; ande) regulatoryframework and requirements.Guideline 12- Proper requirements33.In accordancewithArticle 42of SolvencyII, national competentauthoritiesshould ensure that the undertaking, whenassessingwhetheraperson is proper, includesan assessment of that persons honesty andfinancial soundnessbased on relevant evidenceregardingtheir character,personal behaviour and businessconduct includingany criminal,financial, supervisory aspectsregardlessof location.Theperiod of limitation of thecommitted offenceis judgedbased onnational law or practice.34.In accordancewithArticle 41and 42 of SolvencyII, nationalcompetent authoritiesshould ensurethat the undertakinghasa policyon the fit and proper requirements,whichincludesat least:a) a description of theprocedure for assessingthe fitnessand proprietyof the personswhoeffectivelyrun the undertakingor have other keyfunctions,both when beingconsidered for the specific positionand onSolvency ii Associationwww.solvency-ii-association.com 71. P a g e | 71an on-goingbasis;b)a description of the situationsthat give rise toa re-assessment of thefit and proper requirements;andc)a description of the procedure for assessingthe fit and properrequirementsof other relevant personnel not subject tothe requirementsofArticle 42 of Solvency II accordingto internal standards, both whenbeingconsidered for the specific positionand on an on-going basis.Guideline 14- Outsourcing of key functions35.In accordancewithArticle 42and 49 of Solvency II, nationalcompetent authoritiesshould ensurethat the undertakingapplies the fitandproper requirementsto thepersonsemployed by the serviceprovideror sub service provider toperform an outsourcedkey function.36.In accordancewithArticle 42and 49 of Solvency II, nationalcompetent authoritiesshould ensurethat the undertakingdesignatesaperson within theundertakingwith overall responsibilityfor theoutsourced keyfunction whoisfit and proper and possessessufficientknowledgeand experienceregardingtheoutsourced keyfunction to beableto challengetheperformanceand resultsof the service provider.Chapter III: Risk Management Guideline 15- Role of theadministrative, management or supervisory body in the riskmanagement system37.In accordancewithArticle 44of SolvencyII, national competentauthoritiesshould ensure that the administrative, management orsupervisorybody of theundertaking is ultimately responsibleforensuring the effectivenessof the risk management system, settingtheundertakingsrisk appetiteand overall risk tolerancelimitsaswell asapprovingthe mainrisk management strategiesand policies.38. In accordancewithArticle 246of SolvencyII, national competentSolvency ii Associationwww.solvency-ii-association.com 72. P a g e | 72authoritiesshould ensure that the administrative, management orsupervisorybody of theentityresponsiblefor fulfillingthe governancerequirementsat group level is responsiblefor the effectivenessof the riskmanagement system of thewholegroup.This risk management system should includeat least:a)thestrategic decisionsand policieson risk management at grouplevel;b)thedefinition of groupsriskappetiteand overall risk tolerancelimits;andc)theidentification, measurement, management and control of risks atgroup level.39.In accordancewithArticle 246of SolvencyII, national competentauthoritiesshould ensure that the entityresponsiblefor fulfillingthegovernancerequirementsat group level ensuresthat such strategicdecisionsand policiesare consistent withthe groups structure, size andthespecificitiesof theentitiesin thegroup and that thespecificoperationsand associatedrisksof each entity in the group are coveredand in addition, it ensuresthat an integrated, consistent and efficient riskmanagement of thegroup isput in place.Guideline 16- Risk management policy40.In accordancewithArticle 44of SolvencyII, national competentauthoritiesshould ensure that the undertakingestablishesa riskmanagement policy whichat least:a)definestherisk categoriesand the methodsto measuretherisks;b)outlineshow theundertakingmanageseach relevant categoryandarea of risks;Solvency ii Associationwww.solvency-ii-association.com 73. P a g e | 73c)describesthe connectionwiththe overall solvencyneedsassessment asidentified in the forwardlookingassessment of the undertakingsownrisks(basedon theORSAprinciples), the regulatory capital requirementsand the undertakingsrisk tolerancelimits;d)specifies risktolerance limitswithinall relevant risk categoriesin linewith the undertakingsoverall risk appetite;ande)setsout thefrequencyand content of regular stresstests,and describethesituationsthat wouldwarrant special stresstests.Guideline 17- Risk management function: general tasks41.In accordancewithArticle 44 of SolvencyII, national competentauthoritiesshould ensure that the undertakingrequires the riskmanagement function to report to the administrative, management orsupervisorybody on risksthat have been identifiedaspotentiallymaterial.Therisk management function should alsoreport on other specific areasof risks both on itsowninitiativeand followingrequestsfrom theadministrative,management or supervisorybody.42.In accordancewithArticle 246of SolvencyII, national competentauthoritiesshould ensure that the entityresponsiblefor fulfillingthegovernancerequirementsat group level ensuresthat the risk policy isimplementedconsistentlyacrossthe group.Guideline 18- Underwriting and reserving risk43.In accordancewithArticle 44of SolvencyII, national competentauthoritiesshould ensure that in itsrisk management policy, theundertakingcoversat least the followingwithregard to underwritingandreservingrisk:a) the typesand characteristicsof theinsurancebusiness, for example,thetype of insurancerisk the undertakingis willingto accept;Solvency ii Associationwww.solvency-ii-association.com 74. P a g e | 74b)how the adequacyof premium incometo cover expectedclaims andexpensesis tobe ensured;c)theidentificationof the risksarising from the undertakingsinsuranceobligations,includingembedded optionsand guaranteed surrendervaluesin itsproducts;d)how, in the design of a new insuranceproduct and the premiumcalculation, the undertakingtakesaccount of the constraintsrelatedtoinvestments;ande)how, in the design of a new insuranceproduct and the premiumcalculation, the undertakingtakesaccount of reinsurance or other riskmitigation techniques.Guideline 19 Operational risk1.44.In accordancewithArticle 44of SolvencyII, national competentauthoritiesshould ensure that in therisk management policy, theundertakingcoversat least the followingwithregard to operational risk:a)identificationof the operational risksit is or might be exposed toandthewaytomitigatethem;b)activitiesand internal processesin placein theundertaking, includingtheIT system supportingthem; andc)risk tolerancelimitswithrespect to the undertakingskey operationalrisk areas.1.45.In accordancewithArticle 44of SolvencyII, national competentauthoritiesshould ensure that the undertakinghasprocessesto identify,analyseand report on operational risk events.For this purpose, it should set up a system