Solvency II - PowerPoint Presentation

Slide1

Solvency II

The first year of implementation

José Almaça

CIRSF Annual International Conference

Lisboa

, 23

rd

june

2016Slide2

2

Agenda

Solvency II: key features

Solvency II implementationFuture developmentsSlide3

3

1.

Solvency II: key features

The Solvency II

regime represents a deep and comprehensive review of the European

prudential

framework

for

the insurance

and reinsurance

sector

It

became

fully

applicable on

January 1

st

2016

Main objectives:

Enhance the level of protection of policyholders

Deepen the integration of the EU insurance markets

Embed a risk-based management culture in undertakings

Promote the convergence of supervisory practices

Increase the level of transparency of the sector

Improve the competitiveness of EU undertakingsSlide4

4

1.

Solvency II: key features

In order to achieve these goals, Solvency II is based on:Total balance sheet approach, i.e. valuation of all assets and liabilities based on sound economic principles

Risk sensitive

capital

requirements

Strong system of governance, including fit and proper, risk management and Own Risk

and

Solvency Assessments

Risk-based and preventive Supervisory Review Process

Adequate levels of reporting to supervisors and disclosure of informationSlide5

5

1.

Solvency II: key features

3

Pillar

structureSlide6

6

1.

Solvency II: key features

Solvency II Directive

(incl. amendments by the

OMNIBUS II Directive)

Delegated Regulation

Implementing Technical Standards +

Regulatory Technical

Standards

Guidelines

Monitoring

Adopted/decided by:

European

T

rilogue

European Commission

EIOPA

Legislative

structureSlide7

7

2.

Solvency II

implementationSolvency II is

a structural

change from the previous solvency regime

From an overall perspective, the quantitative requirements are expected to increase, in particular

Technical provisions in Life business, due to the use of lower discount rates and explicit inclusion of the cost of guarantees

Solvency Capital Requirement, for both life and non-life business, due to the measurement of a broad range of risks

In order to ensure a smooth transition to the new regime,

transitional measures on technical provisions

will be used by several players during a maximum of 16 years

Transitional measuresSlide8

8

2.

Solvency II

implementationClear benefits from the increase of risk sensitiveness and sophistication of the measures

Higher flexibility through a more principles-based regime

More accurate and granular profile of the risks incurred by undertakings

Induces automatically the mitigation of certain risks, i.e. concentration risk

Scope of tools and powers at disposal of national supervisors

Use of common tools and templates enhance the level of cooperation and mutual understanding at

E

uropean level

Experience

so

far

…Slide9

9

2.

Solvency II

implementationHowever,

i

t also entails important challenges for both national supervisors and undertakings, especially in the first years:

High

complexity and

emergence of interpretation issues

Need for improvement of the quality of data and of the analytics to derive them

Challenges stemming from the detachment of the accounting basis from the solvency calculation

Need for a comprehensive review the business strategies, including investment and reinsurance policies, product design, own funds management, etc.

Experience

so

far

…Slide10

10

2.

Solvency II

implementationOn top of these challenges,

there is a need to ensure the sustainability of the insurance business models

vis-à-vis

the macroeconomic environment

The

persistently low level of interest

rates

The vulnerabilities of the banking sector and the resulting contagion effects

The potential for abrupt yield reversals, due to the unwinding of the artificial compression of spreads in some asset prices

The fragile GDP growth perspectives

The potential for external shocks, e.g. Brexit, refugees, political instability…

Experience

so

far

…Slide11

11

2.

Solvency II

implementationSome preliminary figures of the Portuguese market, as at the 1

st

of January 2016

Market coverage ratios of 131% and 392%, respectively for the SCR and MCR

The impact of transitional measures is relevant, especially for life and composite insurers

Experience

so

far

…Slide12

12

3

.

Future developmentsThe adaptation to Solvency II will not be finished in 2016

Insurers should be prepared to increased supervisory scrutiny, potentially including the need to amend methodologies used in previous years

Step wise approach, also taking into account the convergence of interpretations at European level

However, within the legal scope, national authorities may decide to follow different paths on certain issues than their European counterpartsSlide13

13

3

.

Future developmentsExpected

r

egulatory developments at

E

uropean level in the forthcoming years:

Review of the SCR standard formula

Review of the LTG package

Review of the methodology to calculate the risk-free rate term structures (published by EIOPA), including the Ultimate Forward Rate (UFR)

Discussions on the need to add Macroprudential instruments on top of Solvency II

Adaptation of Solvency II to the outcome of Global Capital Standards (ICS) development at international level (IAIS)Slide14

Thank

you