AISAMACME Congress in Bruges, 18-21 October 2006

							AISAM/ACME Capitalising on Mutuality


              AISAM/ACME Congress in Bruges, 18-21 October 2006


19 October
11.10-12.40 Session: Understanding the regulatory challenges
Speakers: Pervenche Berès, Charlie McCreevy, Paul Sharma (Chair of CEIOPS Solvency II
Pillar I expert group)



Intervention of max 10 min then discussion;



Commissioner, Ladies and Gentlemen,



The European Parliament, especially the Economic and Monetary Affairs

Committee, which I have the honour to chair, has been active for a long time in

the field of EU insurance and reinsurance legislation. It started with non-life

directive, which was followed by the regulation of life insurance, then of

insurance groups, and insurance intermediaries. During the current mandate,

ECON adopted the reinsurance directive in 2005, which regulates the

reinsurance sector at the EU level for the first time.



At the moment, we are preparing for the first Lamfalussy directive in the field

of insurance and reinsurance. This will be the Solvency II directive. In this

context, I wish to say a few words on the Lamfalussy approach.




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Lamfalussy process has proven to be an efficient tool to address financial

services legislation. It enables EU legislators to keep pace with developments in

financial markets. It started with capital markets legislation such as MiFID, and

was then extended to insurance, banking and investment funds. Due to the

growing scope and importance of the procedure, the EP was granted more

powers as to the oversight of the Commission’s and level two committees' work

in adoption of technical implementing measures.



We have succeeded to ensure the right of scrutiny. We have the right to submit

a resolution amending the text of implementing measures proposed by the

Commission to level two committees. If we feel that:

   a) the Commission is exceeding its implementing powers provided for in the

       basic level one legislative act, or

   b) if the proposed measures are not compatible with the aim or the content of

       the basic act, or

   c) do not respect the principles of subsidiarity or proportionality,

we have the right to oppose the measures adopted by the Commission. This I

find an important development, which may also influence the work at level one

for the Solvency II directive.



Due to the complexity of Solvency II project, ECON decided to nominate

rapporteur (and shadows) for this directive a year in advance. We feel that it is


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important to be up to date with the work of CEIOPS, to follow its advice to the

Commission as well as to know of Commission’s deliberations. We need to be

aware of the views of the industry as well as of policy-holders and share-holders

when it comes to this important piece of legislation. We are aware of many

different positions and interests that depend on whether the insurance entity is

small or large, whether it is an insurance group or not, as well as whether it is a

mutual or share-holders' owned.



In comparison with banking or with activities of other investment companies,

the insurance industry should due to the specificities of its business have the

most sophisticated of risk management systems. It is therefore challenging to

find a system of quantitative and qualitative requirements that would match the

liabilities of a company. Such requirements should decrease the likelihood of

insolvency and provide time for reconstruction in the case of external events or

internal failures. Simply the evaluation of liabilities is a highly complex

exercise, with the management of the assets being far from optimal in many

insurance companies.



I am aware of concerns of mutual insurance companies as to the treatment of

subordinated debt, deeply subordinated debt1 and other forms of hybrid capital2 -


1
  Deeply subordinated debt: this is the most junior debt, ranking below any other (subordinated) debt in terms of
its priority of payment or liquidation and it thus almost takes characteristics of equity. It is important for mutual
insurers, since they have no or limited access to capital markets. They have no possibility to issue equity;
therefore issuing deeply subordinated financial instruments is the fastest and easiest way for them to raise

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as to whether they should be up to 100% eligible as solvency capital. I am also

aware of your concerns as to what impact Solvency II will have on the

benefits for your members.



However, with the policy holders being the blood of insurance companies, the

most important impact to think of in terms of Solvency II is the impact for

policy holders:

    • Will it finally lead to a reduction of premiums and to higher returns on

        investment of life insurance products?

    • Will there be any change in the range of products on offer?

    • Will cross-product subsidisation finally come to an end?

    • And most important, will the claims of policy holders become more

        secure as a consequence?



Moreover, it is important to anticipate structural consequences of Solvency II -

that is its impact on the markets:

    • Will Solvency II force smaller (niche) insurance companies to consolidate

        due to higher compliance costs?

    • Will today's exempted mutual insurers remain as such?




capital. These instruments have no voting rights and can thus provide much flexibility for companies in regard to
their control. Deeply subordinated debt is a form of hybrid capital.
2
  Hybrid Capital: incorporates characteristics of debt and equity.

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   • Will Solvency II reduce competition or only reduce the number of players

       but bring about economies of scale?



It is important that consolidation brings higher levels of transparency. That it

brings comparability of insurance products and also comparability of life

insurance products with other investment products.



In this context it is important to get the insurance accounting standards right.

Since they are foreseen to be released by the IASB only in 2009 or 2010, we

need to ensure that they are compatible with the solvency legislation.

Accounting and financial reporting standards need to reflect the insurance

business model and thus be of value to the investors as well as to the interested

policy holders.



Finally, there is a question whether the new regime will bring more systemic

stability or will it only increase the costs. It has been estimated that Solvency II

will increase levels of required capital. This might not be true for all the

insurance sectors, since we know that it is expected to affect the life insurance

industry more than non-life, and smaller companies more than insurance groups.

It is expected that insurance groups will enjoy benefits of diversification,

especially due to the use of an internal model, and that the requirements at the

group level may be smaller than the sum of requirements for its solo entities.


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Although quantitative aspects are easier to evaluate, financial strength and

soundness of an insurance company are much more than that. For an insurance

company to be able to pay all their policies and contracts according to their

terms at any time there are numerous qualitative criteria that Solvency II will

define (such as liquidity of resources, concentration of risk, internal monitoring

of risk, internal organisation, information for the public and transparency…).



I would like to conclude with a few thoughts on the global importance of the

Solvency II project. If the EU succeeds in getting the solvency regime right, we

will be the global leader in insurance and reinsurance regulation. Countries like

China, Canada and Japan as well as US are closely following our work. Since

the US regulatory regime is still scattered and based on a State level, with more

or less prescriptive regulation, Solvency II will provide for an example of

modern principle based system.



Finally, I would like to encourage you to take Solvency II as a real opportunity

to improve your business. I can assure you that the European Parliament will

lead an open door policy and will listen carefully to your concerns and

suggestions in order to deliver the best legislative solution possible.




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I am looking forward to the contributions of Commissioner McCreevy and Mr

Sharma and to the questions and discussion to follow.



Thank you for your attention.




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