Alberto Corinti Torino, 27 June 2010

1. IX CONGRESSO NAZIONALE DEGLI ATTUARIGestione e controllo dei rischi: Solvency II ed Enterprise Risk Management (ERM) Alberto Corinti Torino, 27 June 2010

2. Outline An introduction to Solvency II under the EU industry perspective • The timeline • Main driving principles of the project • Hot topics in the current debate

3. Solvency II Timeline Industry gets prepared 2007 2010 2006 2009 2005 2011 - 2012 2008 Directive Development (Commission) Directive Adoption (Council & Parliament) Level 2 & 3 (EC & CEIOPS) CEIOPS advice on Proportionality & Groups CEIOPS advice on Implementing Measures CEIOPS work on Pillar I CEIOPS work on L3 CEIOPS work on Pillars II and III QIS 3 QIS 1 QIS 5 QIS 2 QIS 4

4. “Lamfalussy” process of decision making Level 1: Framework Directive European Commission, European Parliament, European Council Level 2: Implementing measures EIOPC, European Commission, CEIOPS Level 3: Convergent implementation CEIOPS Level 4: Enforcement of legislation European Commission Reform of EU supervisory architecture underway: EIOPA

5. EU Industry view on the new micro prudential supervision: EIOPA Key concerns of the industry • Binding standards should only be on genuinely technical areas: what application in practice? • New powers should be accompanied by appropriate checks and balances, transparency and accountability • EIOPA power to adopt decisions addressed to individual financial institutions could create conflicts of loyalty and confusion in the allocation of supervisory responsibilities • Allocation of tasks as set in Solvency II should not be affected, in particular the new architecture should not undermine the role of group supervisor • Reporting requirements should not be duplicated or disregard national supervisors

6. Industry priorities in developing implementing measures • It is crucial that Level 2 does not depart from the principles which are crystallized in the framework directive and which are based on a truly risk-based economic approach • The Framework Directive incorporates a range of features which the industry has advocated for a long time : • Market-consistent approach to value all assets and liabilities with no additional implicit prudential margins. Specific provisions to address pro-cyclicality with no impact on measurement • Capital charge for all quantifiable risks based on the agreed risk measurement, with recognition of genuine diversification, risk mitigation and loss absorbing items • A new supervisory approach with a system of ladder of supervisory interventions • Fostered ERM , including encouragement to develop internal models, and increased market transparency • Group supervision which allows the assessment of consolidated risk profile in line with groups’ economic reality • Application of the risk-proportionality principle • Creation of an harmonized EU supervisory regime

7. Industry view on Regulatory lessons from the financial crisis A risk based prudential framework is necessary Solvency II architecture, as designed in the draft framework directive, is solid and represents the right regulatory answer to the crisis Economic foundations of SII should be retained and strengthened Enhanced Enterprise Risk Management Market consistent valuation as the basis for prudential oversight. Anti-cyclical tools are necessary, but should not affect A/L measurement Group supervision in line with groups’ economic reality and based on enhanced supervisory coordination Need to avoid overreaction to the crisis European Insurers highlight the ever increased need for Solvency II, based on the principles crystallized in the Framework Directive

8. Solvency II principles - Pillar I conceptual framework 1 • Market Consistent Value of technical provisions • Market value for hedgeable risks and BE plus risk margin for non headgeable risks • Minimum Capital Requirement (MCR) • Reflects a level of capital below which ultimate supervisory action should be triggered • Calculated on a factor basis, but within the corridor • of 25% - 45% of the SCR • Solvency Capital Requirement (SCR) • Target Capital which should enable to absorb significant unforeseen losses over a specified time horizon • The standard calculation can be replaced by the use of internal model under supervisory validation • Ladder of Intervention • Solvency II should guarantee a ladder of intervention if the available capital falls below SCR • Concept of transferability of TP in extreme situations 4 2 Ladder of Intervention 3 SCR MCR 2 RM MV of hedgeable risks Risk Margin Best estimate for non hedgeable risk 3 Market -consistent Value of Liabilities 1 4

9. Solvency II principles – Balancing feasibility and sensitivity in SCR Simplified methods Standard methods Use of entity specific data Partial internal model Internal model Simplicity Sensitiveness

10. The current debate: QIS5 specifications Industry raised a number of serious concerns when commenting on the three waves of CEIOPS advice on implementing measures Draft QIS5 specification and preliminary draft of implementing measures take into account many of these concerns, such as: Risk free rates based on swap curve Application of liquidity premium in discounting liabilities Allowance of diversification between lines of business in risk margin Increased sensitiveness of SCR (NP reinsurance, geographical diversification) Refined calibration of SCR ( e.g. equity risk and symmetric adjustment) Increased credibility factors for the use of entity specific parameters Treatment of “future profits” and “winding-up gap” in tier 1 The debate is still open on a number of issues (e.g. risk free rate, future profits)

11. The current debate: QIS5 specifications Still many industry concerns to be addressed, for example with regard to: Wider application of liquidity premium to liabilities depending on their liquidity Calibration of spread risk for corporate bonds and for “covered bonds” Criteria for Tier 1 subordinated debts Refinement of future premium in the contract boundary definition Measurement of participation and treatment of participation in financial institutions Concept of transferability of capital at group level Definition and treatment of ring-fenced funds Allowance of the use of entity specific parameters It is crucial to work in a constructive and cooperative spirit to finalize Solvency II as expected With Solvency II Europe has the potential to became a leader in insurance prudential regulation, with benefits for both policyholder and industry How can we make it happen?

12. www.cea.eu

13. Annex – list of implementing measures under discussion to date • IM 1 System of Governance • IM 2 Public Disclosure by Insurance & Reinsurance Undertaking • IM 3 Valuation Assets & Liabilities, Other than Technical Provisions • IM 4 Procedure for the approval of Internal Models • IM 5 Tests and standards for Internal Models • IM 6 Supervisory approval of Ancillary Own Funds • IM 7 Classification and eligibility of own funds • IM 8 Transparency and accountability of supervisory authorities • IM 9 Supervisory Reporting by Insurance and Reinsurance undertakings • IM 10 SPV authorisation • IM 11 Group Solvency • IM 12 Capital add-ons • IM 13 Technical Provisions • IM 14 Extension of recovery period

14. Annex – list of implementing measures under discussion to date • IM 15 Equity risk - symmetric adjustment mechanism • IM 16 Equity risk - dampener approach • IM 17 Participations - SCR and OF • IM 18 Repackaged loans • IM 19 Simplifications for Technical Provisions • IM 20 Risk Free Rate • IM 21 Group supervision • IM 22 Operational risk • IM 23 Intangible assets • IM 24 Life Underwriting risks • IM 25 Risk Mitigation • IM 26 Undertaking Specific Parameters • IM 27 Market risk sub-module of the standard formula • IM 28 Non-life underwriting risk

15. Annex – list of implementing measures under discussion to date • IM 29 Adjustment for the loss-absorbing capacity • IM 30 Approval of group internal models • IM 31 Draft on supervision of group solvency for groups with centralised risk management • IM 32 Partial Internal Models • IM 33 Ring fenced funds