Groupe Consultatif Solvency II Project - Society of Actuaries in Ireland

Groupe Consultatif Solvency II Project - Society of Actuaries in Ireland

Groupe Consultatif

Solvency II Project

Bruce Maxwell FSAI FIA

Society of Actuaries in Ireland

27th March 2003

Groupe Consultatif Actuariel Europeen

• Introduction and Background

• Membership

• Structure and Officers

• Mission

• Who we relate to

• EU Environment

• Current Issues

• Publications and Surveys


• Established in 1978 to represent actuarial

associations in the countries of the European Union


• 8 founding countries, 11 associations

Belgium Italy (2)



France (2)


Germany United Kingdom (2)

Membership Categories

• Full

Member state of EU, meeting professionalism criteria

• Associate

European state other than EU Member, and meeting

professionalism criteria for Full membership

• Observer

Member state of EU, or other European state, but not

meeting criteria for Full or Associate membership

Criteria for membership - 1

• Full/Associate

– Code of conduct reflecting at least the Groupe’s Code of

Professional Conduct

– formal disciplinary process (within 18 months of application)

– accessibility of complaint process to anyone affected by

member’s work and his/her professional peers

– availability of due defence process

independent and objective formal appeal process

– definition of appropriate sanctions

Criteria for membership - 2

• If standards of practice are recommended by applicant

association, an appropriate promulgation process must be in

place meeting the following criteria:

– exposure of proposed standards to members and, where

relevant, to third parties for comment

– consideration of comments on the exposure draft

– promulgation of standards by an authority vested with adequate


– publication of standards and distribution to practitioners

• Must comply with minimum education standards (Core

Syllabus) by 2005

Membership - 1

• Current membership -

15 Full Member countries (18 Associations)

8 Associate Member countries

4 Observer Member countries

Total = 27 countries, 30 Associations

• approximately 12500 actuaries

Membership - 2

• Full Member Associations

Austria Italy (2)







France Spain (2)



Greece United Kingdom (2)


Membership - 3

• Associate Members


Czech Republic



• Observer Members

Channel Islands








Major Associations (by size)

UK (Faculty and Institute) >4500

Germany >1500

Spain (Instituto(

and Col.legi

legi) >1500

France >1300

Italy (Istituto(

and Consiglio) c 700

Netherlands c 650

Switzerland c 380

Belgium c 350


• Chairman - Norbert Heinen (Germany)

• Vice-Chairmen

- Maria da Luz (Portugal)

- Paul Grace (UK)

• Treasurer - Alf Guldberg (Sweden)

• Secretary

- Michael Lucas (UK)

Committee Structure

• Freedoms & General Purposes (Ad Kok)

• Insurance (Bruce Maxwell)

• Pensions (Paul Thornton)

•Investment & Financial Risk (Jean Berthon)

• Education (Chris Daykin)


Originally -

• to provide advice and opinions to various

organisations of EU (Commission, Council

of Ministers, Parliament)

Now more proactively -

• a focal point for communication on

professional and technical matters among all

European actuarial associations, but not

restricted to European issues

Who we relate to

•European Commission DGs -

- Internal Market

- Employment & Social Policy

- Taxation & Customs Union

•EU Insurance and Pensions Supervisors

•European Pensions Forum





EU Environment

•complicated EU legislative process

•proposals for Directives initiated by European


•consultation at all stages with professional

experts to ensure proposals are effective and


•major major contributions to this process by Groupe

- good working relationship with Commission

•membership of various Commission working


In practice ...

• regular submissions and bilateral meetings with

Commission on pensions, insurance and financial risk


• raising awareness of actuarial profession

• coordinating and promoting more pan-European

actuarial profession -

– Mutual Recognition Agreement

– Code of Conduct

– Core Syllabus

• programme of Colloquia and Summer Schools

Previous examples

Groupe recommendations on actuarial principles and

technical reserves for life assurance formed basis for

3rd Life Directive

• report on system of actuarial principles for valuation

of assets/liabilities of institutions for retirement

provision - requested by Commission

Current issues - insurance

• reinsurance supervision

• solvency

– reserving practices

– banking rules: relevance for insurance sector

– risk-based capital systems

– prudential supervision

• fair valuation

• professional responsibilities of insurance actuaries

Current issues - pensions

• proposed Pensions Directive

• portability and transferability

• tax obstacles

• ‘prudent person’ approach to investment of pension

fund assets

• professional responsibilities of pensions actuaries

Current issues - other

• Investment

– use of yield curves

– asset/liability mismatching

• Education

– implementation and updating of Core

Syllabus for actuarial training in Europe

Publications and Surveys - 1

• Actuarial methods & assumptions used in valuation of

retirement benefits

• Professional responsibilities of pensions actuaries

• Professional responsibilities of insurance actuaries

• Actuarial standards for transfers between pension schemes

• 2nd Actuarial study of mortality

• Defined contribution arrangements in Europe

all currently available at www.gcactuaries

Publications and Surveys - 2

• Taxation of occupational pension schemes

• Glossary of actuarial (pensions) terminology

Solvency standards for occupational pension schemes

• Pensions aspects of corporate transactions

• Use of yield curves

to be published via www.gcactuaries during 2003

Solvency II - Origin

Followed Solvency I - to be a fundamental review of the

current regime that would address further issues like:

• Size effect (law of large numbers)

• Diversification

• Volatility of different risks

• Quality of internal controls & risk management

• Use of new risk transfer techniques

• Integration between financial sectors

Objectives of Solvency II

• Protect policyholders by affording supervisors an

adequate buffer/time window to identify and remedy

adverse experience

• Provide comparability, transparency and coherency

thus creating a level playing field

• Establish a solvency margin requirement that is

better matched to the true risks (this remains to be

defined e.g. in relation to volatility.)

• Avoid undue complexity

Objectives of Solvency II

• Reflect market developments (in fields such as ART,

derivatives, Asset-Liability

Liability-Management etc.)

• Establish principles and not be excessively prescriptive

• Where possible, be based on common accounting policies

to produce expenditure savings and avoid the duplication

• Avoid unnecessary capital costs to industry harming the

global competitiveness of European industry

Solvency II and ongoing projects









Solvency SOLVENCY II Australian








Basle II


A Two Step Approach

• First Phase: preparatory discussions leading up to a

decision on the general layout of a future EU

solvency system.

• Second Phase: further work to elaborate detailed

solutions, draft regulatory texts and field-testing

Overview of “phase 1” work

• What insurers can learn from the Basel II


• Study of different Risk Based Capital systems (US,

Canada, Australia)

• Technical provisions in life and non-life insurance

• Internal risk models in insurance undertakings

• Identify “best practice” in Member States that could

be useful input to the project

• Links between statutory and financial reporting

Overview of “phase 1” work

• What input could IAIS and IAA work give to the

Solvency II project

• Use of “Lamfalussy“

Lamfalussy” ” techniques to make a new

prudential regime more flexible and operational

• Insurance group aspects

• Financial conglomerates

Questions that are likely to be

investigated in depth in phase 2

• What risks should be taken into account?

• What rules should apply to technical provisions?

• How to include asset risk more explicitly?

• What about operational risk and other business risks?

Reinsurance risk?

• What risks can and should be quantified? What other

risks are better dealt with in a more qualitative way

(“second pillar”)?

Detailed work likely in phase 2

• Risks to be included

• Second pillar methods

• Calculations and simulations

• Field testing

• Output from other projects as it arises will

need to be considered

• Co-ordination ordination with financial reporting


Solvency II


• Difficult to estimate

• Decision on the form of the system by mid

year 2003

• Commission proposal 2004 (?)

• Implemented 2005 - 2007 (?)

IAA Working Party on Insurance

Solvency Assessment @12/02

• Key principles for preferred insurer solvency

assessment framework defined (Note: still need to

consider definition of confidence interval)

• Preferred framework makes use of a combination of

either internal risk models or a factor-based

approach along with a process for aggregating these

to form a total company capital requirement

• Appropriate risk measures are defined

IAA Working Party - report to be

delivered in May 2003

• Appropriate aggregation processes are defined

• Case studies illustrate how solvency assessment

can be done

• Discussion of how preferred framework would have

lessened the likelihood of prior insolvencies

• Much work to calibrate factor-based approach to

jurisdictions will still need to be done

EU Commission Papers (1)

• November 2002: MARKT 2535/02

• “Considerations on the design of a

future prudential supervisory system”

Commission ideas on the

Architecture 11/02

• Adapt Basle 3-pillar 3

structure to Insurance

Solvency system must be geared to the risks in


• Must encourage companies to manage and

measure risk

• Must contain more detailed principles of prudential


• Must allow for subsequent adaptation to

International developments

• Must avoid proliferation of reporting systems and

regulatory arbitrage

Commission ideas on the

Architecture 11/02

• Introduce (new) concept of Target Capital

• Encourage companies to assess their own

capital levels needed to reduce their risk of

ruin to an acceptably low level

• Level of “Safeguard” capital

• Early-warning indicators

• System needs a “common level of prudence

in provisions”

• Devise a reinforced supervisory review


First Pillar

• Contain quantitative requirements

• Provisions

• Investments

• Capital

Second Pillar

• “Supervisory Review Process”

• Internal control and administrative


• Risk Management

Third Pillar

• Market discipline - adapt banking approach as

little interdependence in insurance sector

• Published financial information

• Policyholder information

EU Commission Papers (2)

• March 2003: MARKT 2509/03

• “Design of a future prudential

supervisory system in the EU -

recommendations by the Commission


General Considerations 3/03

• Provide supervisors with tools to assess

“overall solvency”

– quantitative and qualitative

• Three pillars as per Basle II

– adapted to needs of insurance supervision

General Considerations 3/03

• Should encourage and incentivise insurance

companies to measure and manage their


– develop common EU principles on risk

management and supervisory review

– lead to recognition of internal models

General Considerations 3/03

• Distinguish between

– (1) “target” capital requirement, based on

need for economic capital at a certain ruin

probability, and

– (2) “safeguard” capital, a more easily

calculated lower, absolute minimum level

of capital

General Considerations 3/03

• System should lead to increased

harmonisation of quantitative and qualitative

supervisory methods

– contribute to creation of ‘level playing field’

– build on the principle of ‘maximum


General Considerations 3/03

• Have consistency across financial sectors

in particular, be compatible with

approaches and rules used in banking

• Aim at more efficient supervision of insurance

groups and financial conglomerates

• Ensure an efficient and flexible regulatory and

supervisory framework

– use Lamfalussy or comitology techniques

Actuarial Involvement

• “The Commission Services believe that work

within, and involvement by, the actuarial

profession - IAA/Groupe Consultatif - will

prove important for the continuation of the

Solvency II project.”

• “ … IAA Report … involvement of IAA/GC

specialists … could be helpful within the

framework of defining a system for the target

capital level, as well as for developing

validation criteria for internal models.”


• Accounting rules prepared by the IASB will be

crucial to convergence in financial and

regulatory reporting.

• The insurance accounting project of the IASB

will have a clear impact on the Solvency II


Tentative Recommendations

• First Pillar

– Non-life technical provisions

– Life technical provisions

– Investment issues

– Capital rules - 2 levels

• Target level:standardised framework at EU

level (assistance from IAA/GC)

– use of internal models

• Minimum level: “simple and objective”

Tentative Recommendations

• Second Pillar

– Principles for ‘internal control’

– Principles for ‘sound risk management’

– Supervisory review process

• co-ordination


• transparency/accountability

• peer reviews

Tentative Recommendations

• Third Pillar

– Disclosures

– Co-ordinated

ordinated reporting

• IASB, IAIS, Basle II

– Public or private ?

Future Solvency II Work

Project Management Paper

– IC* Solvency Subcommittee

– Insurance Committee* - July 2003?

• *IC falls under the auspices of Member State finance authorities

Future Solvency II Work

• Complex and Work Intensive Tasks

– Technical working groups (Commission led)

– Conference of EU Supervisors (Supervisor


– Outside parties

Future Solvency II Work

• Requires ‘sizeable staffing resources’

• Long-term project

– different ‘modules of rules’ may be

introduced at different times

– co-existence of old and new supervisory

rules for a while

Questions/Next Steps

• GC views on technical aspects

• GC assistance to Commission/supervisors

– proactive/reactive

– direct involvement on working groups

– more input required by Commission

– can we meet the demand

– link with IAA

• Should we copy the approach of the IAA

Subcommittee on Actuarial Standards


• “Accounting rules prepared by the IASB will

be crucial to convergence in financial and

regulatory reporting.”

• “The insurance accounting project of the

IASB will have a clear impact on the Solvency

II project.”


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