EIOPA – ComFrame

Gabriel Bernardino, president of EIOPA, expressed his desire for an international insurance market supervisory and legislative body in a speech early this month.

´The insurance market is spreading globally, creating new opportunities, challenges but also risks,´ said Bernardino. Creating a healthy and stable insurance market requires such international cooperation. The best way to ensure financial stability and proper consumer protection is through the development of a global regulatory and supervisory standard.

ComFrame

Efficiency of supervision could improve under ComFrame: Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs). ComFrame is an integrated, multilateral and multidisciplinary framework for group-wide supervision of international insurance companies, particularly in the area of Solvency II.

To ensure consumer protection at the international level, it is necessary to also improve regulatory capital requirements (Solvency II). This of course takes into account different perspectives and developments worldwide.

Cooperation with regulators at universities would be essential to the IAIG’s approach. Information sharing and cooperation between supervisors would be a defining element of effective supervision.

Mr Bernardino’s plans will require the insurance market to be open to even more structural changes. Besides the changes currently being implemented, the question is whether ComFrame is timely.

In addition, are the possible benefits of an international supervisory and legislative body especially for the DNB and other supervisory bodies (not only in implementing European and International laws and regulations, but also in monitoring them. After all, the capacity problems at the DNB were already present since the advent of Solvency II) or are the benefits also for the insurer and ultimately the policyholder?

Register ISAE 3402

The Corporate Governance Foundation is the driving force behind the ISAE 3402 register. The ISAE 3402 register is a publicly accessible database that lists organisations that have been certified to ISAE 3402. The ISAE 3402 register focuses on reliable partners, provides a platform for companies to showcase their ISAE 3402 certification, and promotes knowledge sharing and development in the field of ISAE 3402.

In December and February, the ECB provided banks with three-year loans totalling €1000 billion. During this operation, the collateral requirements were relaxed, increasing the risk exposure.

Collateral

Until recently, central banks only accepted market-traded collateral, such as government bonds and corporate bonds. ‘It turned out that a significant portion of the banks we wanted to help could not participate in the LTRO (three-year ECB loans, ed.) Their collateral was not good enough,’ Knot explained. He emphasised that he agreed with the support in principle.

This situation primarily affected banks in Southern Europe, which lend substantial amounts to small and medium-sized enterprises (SMEs). To accommodate these banks, central banks would also accept bundled SME loans, Knot explained.

‘Those loans had to meet the same quality standards as other collateral,’ the DNB president noted. Under pressure from seven central banks, the collateral requirement was further lowered, allowing individual SME loans to be accepted as collateral.

Plasterk: ‘Stupid’

PvdA Member of Parliament Ronald Plasterk criticised Knot for exposing the ECB’s internal divisions in this manner, as he expressed on Twitter.

‘What purpose does Knot serve by showcasing that the ECB is internally divided?’ Plasterk questioned. ‘If you are going to inject money, don’t suggest that you might change your mind next month. #stupid’

Risks

The question arises whether the risks borne by these seven central banks might eventually fall on the eurosystem if problems arise in one of these countries. If this happens, will the reduction in the collateral requirement exacerbate the current euro crisis? And perhaps more importantly, should the ECB be open and transparent about this, or should it present a united front to project stability?

Status Update: Solvency II

General

Since the beginning of 2012, negotiations have been underway to finalise the content of the Omnibus II directive and the Level 2 implementing measures. The definitive agreement on the Omnibus II directive is expected shortly. The definitive agreement on the Level 2 implementing measures is expected in the autumn. The focus lies on the risk-free curve, capital requirements, and own funds, as well as transitional measures.

Pillar Developments
Additionally, there are developments per pillar:

Pillar I: Parallel Run and Risk-Free Term Structure

From 2011, Dutch insurers that fall within the scope of Solvency II must calculate their solvency (2011 and 2012) in accordance with the expected Solvency II measures (SCR and MCR) and report on this (Pillar 3) to the DNB. This is known as the parallel run.

A part of this reporting (and the calculation of the SCR) is the countercyclical premium, known as the CCP. A proposal has been developed for this CCP, using the formula from QIS5 as a basis. Two scenarios have been developed, with the countercyclical premium ranging between 75% (Scenario 1) and 100% (Scenario 2). In the definitive directive, more clarity will be created on this.

Pillar II: ORSA

The outcomes of the roundtable sessions held by the DNB regarding ORSA were positive. Bottlenecks include setting up mandatory key functions (Internal Audit, Risk Management, Actuarial Function, and Internal Control) and implementing IT systems. A frequently discussed aspect here is proportionality. Where the risk profile of the insurer must be chosen as the starting point. For example, an insurer with a low risk profile can make different choices in filling these bottlenecks (and other aspects of the directive) compared to an insurer with a high risk profile.

Pillar III: Consultation

Regarding Pillar III, the reporting requirements, the consultation period for several aspects (including reporting templates and National States) has closed, and the comments are currently being processed. More will follow on this later.