What's New

COMPLIANCE IRELAND IS NOW OFFERING SOLVENCY II TRAINING

Click here for full details and next dates for this half-day introductory course.

SOLVENCY II IRELAND 14 MAY 2010: FINANCIAL REGULATOR PUBLISHES UPDATED INTERNAL MODEL PRE-APPLICATION DOCUMENT

Back in April 2010, the Financial Regulator issued its third letter to industry unveiling the internal model pre-application process. Following discussions with industry at pre-application workshops in early May, the Financial Regulator has re-issued the process document to include questions and answers for queries raised at the workshops. For inclusion in the pre-application process, firms are requested to return completed questionnaires by 31 May 2010.

Click here for the revised pre-application questionnaire incorporating questions & answers.

SOLVENCY II IRELAND 11 MAY 2010: FINANCIAL REGULATOR HOSTS SOLVENCY II IMPLEMENTATION FORUM

The Financial Regulator hosted a forum for the insurance industry setting out its perspective and expectations regarding the Solvency II implementation process. While recent industry focus has been on QIS5 and aspects of standard model calibration, the Financial Regulator reminded the audience of the significant roles it saw for the ORSA process, Pillar 3 disclosures and the corporate governance aspects of the directive. Given the recent release of Consultation Paper 41 on the area of corporate governance reform for banks and insurers, this is obviously a major area of focus for the regulator.

Click here for opening address by Jonathan McMahon - ADG for Financial Institutions Supervision

Click here for Overview presentation by Andrew Mawdsley

Click here for Disclosure & Reporting presentation by Tim O'Hanrahan

Click here for System of Governance presentation by Eamonn Henry

Click here to read more on Corporate Governance reform and CP41 in Compliance Ireland Newsletter 11/2010.

SOLVENCY II IRELAND 10 MAY 2010: FINANCIAL REGULATOR STRESSES IMPORTANCE OF SOLVENCY II IMPLMENTATION AND CORPORATE GOVERNANCE REFORM

“I’ve been surprised at the thin level of resources available for supervision generally”

Matthew Elderfield set out supervisory priorities for the insurance sector in his speech to the IIF on 10 May 2010 and outlined further his perspective on corporate governance reform in the financial sector. His guiding principle for the insurance sector is a balance of regulation so Ireland can continue to thrive while maintaining high standards.

Mr. Elderfield sees Solvency II becoming a globally-adopted standard, not just an EU standard, with considerable business opportunities for Ireland: “I can see this leading to more non EU companies choosing Ireland as a base of operations and for more EU companies deciding to centralise their operations here.”

Insurance firms were warned Solvency II “is not just a regulatory challenge but a profound commercial one too”. While the regulator pledged to work with industry to find pragmatic solutions, firms were warned to ensure their preparations were “where they should be”. Supervisory teams for their part would take a more systematic assessment of risk and be more challenging and sceptical.

“Unfortunately, it is clear there have been some spectacular failures of corporate governance during the financial crisis…”

“Now is the right time to set some exacting standards for Boards” - Corporate governance reform is set to be a major theme of the regulators. While touted as vital for commercial success and a hugely important source of regulatory comfort, the regulator also felt robust governance standards would “deny the sceptics of the Irish success story an all too easy line of attack”. The draft proposals are still consultative and the regulator emphasised readiness to revise them in consultation with industry to make sure they deliver their intended policy objectives effectively.

Click here for speech in full.

SOLVENCY II EUROPE 4 MAY 2010: EU INTERNAL MARKETS COMMISSIONER PROPOSES DELAY TO SOLVENCY II IMPLEMENTATION

Speaking at a public consultation on Solvency II in Brussels on 4 May 2010, Michel Barnier announced a proposal to defer the entry into force of Solvency II from 31 October 2012 until 31 December 2012. This two month deferral would be to bring the commencement of the Solvency II regime into line with the financial year end of most European insurers.

Click here for speech in full.

SOLVENCY II IRELAND 27 APRIL 2010: FINANCIAL REGULATOR ISSUES CONSULTATION PAPER ON CORPORATE GOVERNANCE REQUIREMENTS FOR INSURERS

The Financial Regulator has issued today, Tuesday 27 April 2010, a Consultation Paper on Corporate Governance Requirements for Credit Institutions and Insurers (CP41).

Click here to read more in Compliance Ireland Newsletter 11/2010.

SOLVENCY II IRELAND 13 APRIL 2010: FINANCIAL REGULATOR ISSUES THIRD LETTER TO INDUSTRY REGARDING USE OF INTERNAL MODELS

Following on from the feedback released in January 2010 regarding the intended use of internal models (click here for details), the Financial Regulator has issued a third letter to industry. Following on from CEIOPS advice, the Financial Regulator is to instigate a “pre-application” process to be carried out in advance of a formal application to operate an internal model for capital. While not mandatory, firms are encouraged to particpate in the process not least because it will enable the Financial Regulator to allocate resources effectively (and presumably speed the passage of participating firms through the process).

Click here for the third letter to industry.

Click here for the pre-application document.

SOLVENCY II EUROPE 1 APRIL 2010: CEIOPS PUBLISHES LEVEL 2 ADVICE ON ASSESSING THIRD COUNTRY EQUIVALENCE

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published its final advice to the European Commission (Commission) on Level 2 implementing measures on the general criteria to be used to assess third country (i.e. non-EU member state) equivalence under the Solvency II Directive in the areas of reinsurance (Article 172), group solvency (Article 227) and group supervision (article 260).

A covering letter provided by CEIOPS sets out the high level principles it used in arriving at its guidance.

CEIOPS has stated that it is now ready to help the Commission to identify the third countries that should be included in the first wave of equivalence assessments. CEIOPS will also develop Level 3 guidance in this area.

Click here for the CEIOPS covering letter.

Click here for the CEIOPS Level 2 advice on third country equivalence.

SOLVENCY II IRELAND 29 MARCH 2010: SPEECH BY MATTHEW ELDERFIELD ON IMPLEMENTING SOLVENCY II IN A PROPORTIONATE MANNER

Matthew Elderfield gave a speech on the challenges of implementing Solvency II in Ireland. Given that the Financial Regulator was on the cusp of having provisional administrators appointed to Quinn Insurance at the time, his thoughts on insurance risk and solvency take on an added importance.

Mr. Elderfield speaks of being a strong advocate of the concept of proportionality, in particular when applying the requirements of Solvency II to captive insurers. The regulator noted that captive insurers were finding the Pillar II (Own Risk and Solvency Assessment - ORSA) provisions of Solvency II particularly daunting. This is presumably a reflection of the survey findings published in January 2010 by the Financial Regulator that only 57 of 310 respondent insurance firms intend to use an internal model for Solvency II (and 41 of those intend adopting models developed elsewhere in their groups rather than developing them internally in Ireland).

The regulator encouraged the industry to develop basic ORSAs that were fit for purpose – “captives that take the time to put together a sensible assessment of the various Pillar II risks will receive a fair hearing from my staff. And frankly, if the first effort isn’t great, we are prepared to be pragmatic and work with firms in an iterative process to see the ORSA is improved over time.” As a further helping hand to the sector, the regulator volunteered to work closely with pilot firms which could usefully provide feedback to the broader industry.

Despite knowledge of events then currently unfolding at Quinn Insurance, the regulator noted caution about “over-learning the lessons of the banking crisis for the insurance industry.” However the flip side of proportionality would apply to high-impact firms who would experience the Financial Regulator’s more intrusive approach. There was a warning to firms not to rely on untested assumptions that diversified risks will not auto-correlate in times of stress. The regulator warned that high-impact insurance firms will be actively challenged in the approval process for their use of internal models, particularly where this shift resulted in a significant reduction in required capital. The importance of Pillar 2 and Pillar 3 requirements in avoiding convergence of methods and calibrations was also stressed.

Ongoing supervision will also be enhanced. Part of this enhancement is to encourage the re-domiciliation of firms into Ireland from elsewhere in the EU or 3rd countries. This is a clear signal that the Financial Regulator still actively supports financial innovation in Irish financial services despite proposed changes to its statutory objectives in the Central Bank Reform Bill 2010.

Click here to read the full speech.

SOLVENCY II EUROPE 11 MARCH 2010: CEA PUBLISHES KEY MESSAGES CRITICISING CEIOPS ADVICE TO COMMISSION

The Comité Européen des Assurances (CEA) has published a set of "key messages" on Solvency II Level 2 implementing measures. Whilst fully supporting the Solvency II project, the CEA criticises the CEIOPS advice to the European Commission (see news item below for Liquidity Task Force Report).

The CEA considers that CEIOPS advice is in contradiction with the objectives underpinning the Solvency II Framework Directive in a number of respects - particularly in suggesting an increase of financial requirements beyond the level stated in the Directive. CEA feels this will create serious obstacles to the sound functioning of insurance business and have unavoidable negative effects on consumers, without delivering significant incremental benefit in terms of policyholder protection.

The paper includes a set of "key technical messages" describing specific CEIOPS' proposals which it considers should be revised before the final test of the regime in the Fifth Quantitative Impact Study (QIS5) due to take place in 2010. Among these are:

Imposing stringent classification criteria and tier limits for subordinated debt and contingent capital will significantly increased the amount of eligible own funds needed to meet the SCR.
Swap curves should be used to calculate the risk-free rate, rather than gilt curves. Recent re-rating of Irish government debt is cited by the CEA as a rationale why gilt curves are not the best risk-free measure.
The increase in capital requirements for spread risk (3.5 times larger than QIS4) is excessive and cannot be justified.
Diversification should be given due recognition in the SCR and in the risk margin for technical provisions.
Undertaking specific parameters should not be unduly challenging for specialised firms.

Click here for the CEA Key Messages Paper.

SOLVENCY II EUROPE 1 MARCH 2010: CEIOPS TASK FORCE PUBLISHES REPORT ON THE LIQUIDITY PREMIUM

In late 2009, CEIOPS established a Task Force to lead further work on the issue of the inclusion of a liquidity premium in the risk-free rate for discounting technical provisions as an additional input for Level 2 implementing measures.

The Task Force had also to consider the relation of the liquidity premium with the choice of the reference rate (government bond rate and swap rate), developing the adjustments needed for relevant instruments to achieve the criteria that have to be
met in order to be consistent with a risk-free rate. Furthermore, the task force was commissioned to develop principles for determining appropriate extrapolation techniques for the interest rate curve.

The Task Force considered industry submissions and issued its report on 1 March 2010. The report proposes 9 basic principles to address the issue of liquidity premiums. The paper goes on to consider:

Methods of calculation of a liquidity premium for assets.
Methods of calculation of a liquidity premium for liabilities.
Overall impact of a liquidity premium on solvency of insurers.
Recognition of a liquidity premium in the standard formula SCR.
Split between interest rate risk and spread risk in the standard formula.
Changes to the spread risk model to permit a liquidity premium.
Adjustments to spread risk/other market risk correlation assumptions.
Implications on the calculation of risk margins.

Click here for the CEIOPS Task Force Report on the Liquidity Premium.

SOLVENCY II IRELAND 22 FEBRUARY 2010: FINANCIAL REGULATOR QUERIES INSURANCE FIRMS REGARDING CASH FUNDS

The Financial Regulator has written to insurance firms requiring the submission of information relating to investment products which are marketed as being invested in cash or partially invested in cash. The Financial Regulator states that where such funds invest in variable instruments such as floating rate notes there may be issues “in regard to policyholders’ reasonable expectations”.

The Financial Regulator wrote to Irish insurance undertakings on 22 February 2010 in relation to 'cash' funds and is requiring the submission to it by insurance firms of:

The amount of each fund.
Whether the fund has a “no fall in value” assurance.
Any difference between market value and face value.

The enquiries being made by the Financial Regulator are presumably as a consequence of the fine of £2,450,000 imposed on Standard Life by the UK Financial Service Authority on 20 January 2010. The fine relates to Standard Life’s Pension Sterling Fund (the “Fund”) and was imposed for :

Failures of systems and controls relating to marketing materials for the Fund.
Failure to make full and proper investigation into concerns about marketing of the Fund.
Failure to ensure that marketing materials were clear, fair and not misleading.

The Fund was substantial in size (98,000 investors, £2.2 Billion in assets in December 2008) and was marketed as a stable investment and targeted at customers approaching retirement who were looking to protect a tax-free lump sum. Having initially been invested in bank deposits and other very short-dated instruments, the investment profile of the Fund changed substantially and it was invested 70% in FRNs at one stage. Marketing fact-sheets for the Fund stated “The Fund is invested wholly in cash” despite the change in the portfolio and the fact that questions had been raised internally and by consumers about the promotion of the Fund.

The Fund suffered a 4.8% drop in unit price in one day in January 2009. In February 2009, Standard Life paid £102.7 Million into the Fund to compensate investors.

Click here for a copy of the Financial Regulator's Letter.

Click here for a copy of the FSA Final Notice to Standard Life.

SOLVENCY II IRELAND 4 FEBRUARY 2010: FINANCIAL REGULATOR ISSUES FEEDBACK ON FINANCIAL CONDITION REPORTS AND STATEMENTS OF ACTUARIAL OPINION

The Financial Regulator has published a letter addressed to the Society of Actuaries in Ireland, providing feedback from reviews of Financial Condition Reports and Statments of Actuarial Opinion. Some of the Financial Regulator's comments have Solvency II implications for firms.

The Financial Regulator notes that in very many cases reports were not comprehensive enough. Actuaries should be documenting all considerations in their reports. The aim is to enable another actuary (in particular one working for the Financial Regulator) to understand the work undertaken. The Financial Regulator acknowledges that reports may be written for Directors who do not have actuarial experience, but notes that in the future and specifically with Solvency II in mind, greater technical knowledge will be demanded from Directors than has been the case in the past.

This is an explicit signal from the Financial Regulator that it has high corporate governance expectations under Solvency II. While most work on Solvency II to date has concentrated on the valuation models and techniques, Solvency II contains a sizeable body of corporate governance requirements which have not yet been as widely considered by firms.

The Financial Regulator notes that few actuaries gave much attention to Solvency II in their reports. The Financial Regulator notes "We believe that it is very important that Boards receive advice on the expected impact of Solvency II", although it is conceded that the SCR standard formulae are not yet finalised. Comparison here can be drawn with the recent experience of investment firms under which found themselves struggling to come to terms with the Capital Requirements Directive despite a long transition period.

Click here for a full copy of the Financial Regulator's letter.

SOLVENCY II IRELAND 29 JANUARY 2010: FINANCIAL REGULATOR PUBLISHES UPDATE DOCUMENT RELATING TO USE OF INTERNAL MODELS

The Financial Regulator has published a document updating industry on the response to its survey of August 2009 on the intended use of internal models. The Financial Regulator wrote to 310 institutions. 253 indicated that they intended using the Standard Model and 57 indicated that they intended to use an internal model. Of the 57 intending to use an internal model, only 16 will be using an internally-developed model which will require to be approved by the Financial Regulator - the other 41 firms will be importing models developed at group level and authorised by regulators in other EU states.

The Financial Regulator noted that survey responses revealed a degree of uncertainty among some firms which appeared indicative of a lack of preparation for the issue and relating to the Solvency II process generally.

Firms intending to use internal models are reminded of the requirement to complete and return the 2nd Questionnaire to the Financial Regulator by 31 March 2010.

Click here for a copy of the Response Update Document.

SOLVENCY II EUROPE 12 JANUARY 2010: CEA PUBLISHES KEY CONCERNS ON CEIOPS CONSULTATION PAPERS

The Comité Européen des Assurances (CEA) has published a summary of its key concerns on the third wave of Solvency II consultation papers (CPs 63 to 79) published by CEIOPS in late 2009.

Click here for a copy of the key concerns summary document.

Additional materials regarding the Solvency II initiative can be found on the CEA website.

SOLVENCY II EUROPE 17 DECEMBER 2009: SOLVENCY II DIRECTIVE PUBLISHED IN OFFICIAL JOURNAL

The definitive text of the Solvency II Directive was published in the Official Journal of the European Union on 17 December 2009. The Directive has been given the identifying number 2009/138/EC.

The Council of the European Union (Council) adopted the Directive on 10 November 2009 It was then signed by both the Council and the European Parliament on 25 November 2009.

The Directive will come into force 20 days after its publication in the Official Journal, but a number of the provisions (including the repeal of existing insurance directives set out in Article 310) only applies from 1 November 2012. Member States will have to implement the Directive by 31 October 2012.

Click here for the published Directive.

SOLVENCY II IRELAND 1 DECEMBER 2009: FINANCIAL REGULATOR WRITES AGAIN TO INSURANCE FIRMS REGARDING SOLVENCY II IMPACT

The Financial Regulator has written again to insurance firms regarding aspects of the implementation of Solvency II in Ireland.

Firms intending to adopt internal models rather than adopting the standard formula for the measurement of risk are required to inform the Financial Regulator by 31 March 2010. The primary purpose of this appears to be assisting in planning the approval process as CEIOPS Level III guidance on the process is not expected until January 2010. The Financial Regulator has produced a short questionnaire to be completed for this purpose. The Financial Regulator has also published an analysis of the previous questionnaire circulated seeking to find out firms' interntions with regard to the use of internal models.

The fifth Quantitative Impact Study (QIS5) will launch in August 2010. The Financial Regulator encourages firms to participate.

The attention of firms is again drawn to the requirements of the Own Risk and Solvency Assessment (ORSA) process.

Click here for a copy of the letter.

Click here for a copy of the internal model process approval request questionnaire.

Click here for a copy of the analysis of responses to the August 2009 internal models questionnaire.

SOLVENCY II EUROPE 10 NOVEMBER 2009: EU COUNCIL ADOPTS REVISED VERSION OF SOLVENCY II DIRECTIVE

On 10 November the Council of the European Union formally adopted the Solvency II Directive. The version adopted includes a renumbering of the articles and recitals and minor edits from previously published versions. This is not yet the official final version, as the text needs to go through some further formal approval stages before it appears in the Official Journal. No material further changes are expected. Click here for a copy of the Press Release issued by the EU Council. Click here for a copy of the Directive as adopted by the Council.

SOLVENCY II EUROPE 10 NOVEMBER 2009: CEIOPS ISSUES LEVEL 2 IMPLEMENTING MEASURES ADVICE TO EU COMMISSION

CEIOPS released 38 separate Advice Papers for Level 2 Implementing Measures on Solvency II. These Advice Papers and accompanying annexes are available for download from our Downloads page.

SOLVENCY II IRELAND 5 AUGUST 2009: FINANCIAL REGULATOR WRITES TO INSURANCE FIRMS REMINDING THEM OF SOLVENCY II IMPACT

The Financial Regulator has written to insurance firms reminding them of the impact Solvency II will have on their businesses:

Introduction of more sophisticated economic risk-based solvency requirements.
New rules to compel insurers to focus on identification, measurement and active management of risks.
Requirement to conduct an Own Risk and Solvency Assessment on an annual basis.
Additional information to be publically disclosed.

National supervisors will conduct a formal Supervisory Review Process to evaluate insurer's compliance with laws, regulations and administrative provisions relating to the Solvency II directive.

Although the framework directive is not expected to be formally published in the EU Official Journal until October 2009, and the directive will not take effect until October 2012, the Financial Regulator is keen that firms should commence planning for the implementation process now. The Financial Regulator has set out four key elements to successful implementation:

An appropriate governance framework be in place.
An accountable individual appointed at executive level with responsibility for overseeing implementation of Solvency II (The Financial Regulator advises that a specific board member should assume responsibility for Solvency II issues).
Performance of a gap analysis to identify any shortfalls relative to the Solvency II requirements.
Implementation plans should focus on all three pillars (capital requirements, supervisory activities and public disclosures) rather than focusing on potential capital releases under Pillar 1.

Finally, the Financial Regulator required firms to inform it by end-August 2009 of the person responsible for Solvency II at the insurer and whether the insurer intends to utilise internal models.

Click here to download the letter.