Solvency ii News September 2012

Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.solvency-ii-association.com
Dear member,
Todaywewill start from an interesting
speech
Gabriel Bernardino, Chairman of EIOPA
Creating a global insurance supervisory Language
Conferenceon Global InsuranceSupervision
Good evening, ladiesand gentlemen,
On behalf of EIOPA I wouldlike to thank the InternationalCenter for
InsuranceRegulation for thecooperation and effortsin organising
together withusthis Conferenceon Global
InsuranceSupervision.
I am very happy toseetoday somany colleagues
from thesupervisoryauthorities aswellas
prominent expertsand executiveofficers of the
insuranceindustry.
Our purposewith this Conferenceis tocreate a
platform of discussionand exchangeof views
about the international context of insurance
supervision.
Your presenceand contribution tothis event is keyto itssuccessand
will certainlycontributetoa better understandingof the different
www.solvency-ii-association.com

regimesand will foster further convergenceof practicesof insurance
supervision worldwide.
Insurancemarketsare increasinglyglobal.
Many insurancegroupshave nowadaysa huge part of their revenues
comingfrom businessoutsidetheir home countries.
This createsnew opportunitiesbut alsonew challengesfor insurers,but
alsofor supervisors.
Thepromotion of sound and stableinsurancemarketscallsfor more
internationalcooperation.
We firmly believe that the best wayto
reinforcefinancial stabilityand consumer
protection isto develop strong global
regulatoryand supervisorystandards.
This will createa level playing field for
international players, foster a common
languagebetweensupervisorsand improve
international cooperation and information
exchange.
I wouldlike toshare withyou some viewson
theways of improving the efficiencyof
supervision from a global perspective.
ComFrame ( Common Framework for the
Supervision of InternationallyActive
InsuranceGroups(IAIGs) - ComFrameis an integrated, multilateral
andmultidisciplinaryframeworkfor the group(widesupervision of
internationallyactiveinsurancegroups.
ComFrame wasinitiatedin responseto the recognition that, despite the
growingrelevanceof IAIGs in the global insurance marketplace,no

internationallycoherent frameworkexistsfor the supervision of such
large, global groups.
I wouldlike tostressthat EIOPAis highlycommitted to contribute to
the establishment of such standardsand, in this regard, weconsider our
participationin the IAIS very important. EIOPAis actively contributing
tothe workof ComFrame.
We consider it necessaryto enhanceregulatorycapital requirementsin
order to achieveadequateconsumer protectionon a global level.
Of course,whilecallingfor thismeasure, wetake intoaccount different
perspectivesand developmentsworldwide.
Seen historically, the EU had experienced comparable discussionsa
decadeago.
We fully support themove toenhanced group-wide supervision.
Cooperation betweensupervisorsin collegesis essential for the proper
supervisoryapproach to InternationallyActive InsuranceGroups.
We believethat information sharingand supervisorycooperation under
conditionsof professional secrecyis a key, determinativeelement of
effectivesupervision.
We needmore shared supervision.
Furthermore, Comframe should comprisea capital element, establishing
strongprinciplesfor group capital calculationsconcerningtherisks
included, the metricsused toassessthem and theoverall level of
confidence.
Without thisconsistency, thereis nolevel playing field internationally.
It is not about one uniquesystem, but about a set of strong principles
that would deliver a rangeof closerand compatiblesystems.

Comframe shouldnot be another regime on top of the alreadyexistent
ones.
Thelocalregimesshould evolveto comply withComframe.
This is my vision. I recognizethat wecannot deliver this
immediately, but at the IAISweneed toset a timetableand concrete
milestonestodevelop thisconcept in a stepby step approach.
We needto be courageousand open-minded.
We needto be open tochangeand evolution becausethe industry reality
is alsoevolving and changing.
An extra effort needsto be done by all of usbecauselike Charles
Kettering(a famousAmerican inventor) said oneday: ―Peoplearevery
openmindedabout newthingsaslongasthey're exactly like theold
ones.‖
Systemic risk in insurance
Thecrisisprompted a new look at systemic risk, includingin the
insurancesector.
Theidentificationand regulation of GloballySystemically Important
Insurersis currentlybeing discussed under theumbrella of the Financial
StabilityBoard and the IAIS.
EIOPA is keen to contribute to a robust identification process of G-SIIs
and to develop appropriate regulatory and supervisory tools to deal with
their characteristics.
Traditionally, systemic risk wasabankingconcept.
However, the recent crisisshowedusthat certain activities developed
undertheinsurancesector can alsoposesystemic risk.

Insurancecompaniesor groupsthat engagein non-traditional, or non-
insurance,activities(for example:CDS, financial guaranteesor
leveragingassetstoenhanceinvestment returnsthrough securities
lendingare more vulnerable tofinancial market developments
and, importantly, more likely toamplify, or contributeto, systemic risk.
Of course,this assessment may changeover time, dependingon the
innovationsand changesin insurancebusinessmodels, especiallyin life
insurance,aswellasin the complex interactionsbetweeninsurance
groupsand financial markets.
We should be especiallyattentivetoany kind of maturity transformation
and leveragingoccurring in the insurancesector.
As a consequence, the identificationof a systemicallyimportant insurer
assuch, should be a direct reflection of itssourceof systemic
importance.
While thesizeof traditional insuranceactivityis still an important
factor, it should not be thedominant factor in the identificationprocess.
Clearly, the non-traditional and non-insuranceactivitiesand thedegreeof
interconnectednesswithother componentsof the financial system are
more relevant from a systemic point of view.
Consequently, the differencesbetweeninsurersand banks in the impact
of failures suggestthat requirementsfor lossabsorbencyand resolution
regimesfor insurersshould accept thesesalient differencesand propose
solutionsthat differentiateaccordingly.
As a conclusion I wouldlike to underlinethat weshould havenoillusions:
thecreation of global insurance supervisorystandardsis a very long
processthat is complicatedby thedifferenceof culturesand uneven
development of supervisorysystems in different countries.
But it is important that the regulatorsall over the world are willingto
reachmutual understandingand todevelop a common supervisory

language,whichwill help usto promote stability of the financial
markets,to enhancetheir transparencyand to foster consumer
protection.
Together wecan achievetheseobjectives.

Interesting comments for the ComFrame
Acompilation of commentson a common frameworkfor the
supervision of internationallyactiveinsurancegroups,
knownasComFrameby theInternationalAssociation of Insurance
Supervisors(IAIS)
Bermuda, Association of Bermuda Insurersand Reinsurers
ABIR doesnot support the current proposal toincludecompaniesthat
dobusinessin 3+ jurisdictionsasthefirst basis on which todeterminea
company may qualify asan IAIG.
(Note: IAIG standsforInternationallyActive Insurance Group)
(Note:ABIR standsforAssociation of BermudaInsurersand
Reinsurers)
ABIR wouldrespectfullysubmit that one of the objectivesof ComFrame
is todevelop harmonization of the applicationof group supervisionand
in this regard, if for example, a group is operatingin 3 jurisdictions
within theEEA, then under the proposed regimeharmonization in
principlewill have been alreadystatutorilymandated, thusthepurposeof
introducinganother group supervisoryregime is not clear.
We wouldproposethat an IAIG is one whichoperateswithlegal entities
in multiplejurisdictionswhichhaveseparate and distinct regulatory
systems across3+ supervisory frameworks;for example, Canada; US;
Bermuda;India, etc.
ComFrame should be appliedonlyto thoseinternationallyactivegroups
that have a global footprint and operatewith legal entitiesin jurisdictions
onmultiplecontinents.
TheEU and theUnitedStateswouldeach count asa singlejurisdiction
sincetheyoperatewitha common cross-stateregulatory system.

ABIR alsorecommendsthat a smallernumber of groups-saythe 20
largest–betargetedwith COMFRAME; experiment first, learn from that
beforeexpandingthenet.
ABIR alsois concernedwith theproposed"constrained supervisory
discretion" whichgrants"involved supervisors" the abilityto consider
an insurancegroup an IAIG even if it doesnot meet some of the
proposed criteria or toexcludeit asan IAIG.
This type of discretioncreatesuncertaintyfor groupssinceit may be
"deemed' tobe an IAIG even if it doesn't meet the criteria.
Whilst theComFrame Paper providesexamplesof when thismay be
employed, theproposal is toofar reaching.
Given the proposedconstrained supervisorydiscretion on thepart of the
supervisors,doesComFrame alsopropose an appealsprocessby which
an identifiedIAIG can seek to havethat designation lifted?
Canada, Office of the Superintendent of Financial Institutions
OSFI believesthat thecurrent criteria and processmay be too
prescriptiveor mechanical.
Further, OSFI discouragesdeveloping a discretelist of IAIGsthat is
determined mainlyusing quantitativerequirements.
Instead, a general definition asto the
nature, size, complexity, international activityand risk profile of
institutionsto whichComFrame should applywouldassist the
supervisorin applying supervisorydiscretiontodetermineIAIGs.
Rather than rankinginsurersquantitativelyand determininga cut-off
point for IAIGs, thegeneral definition should be applied on a
continuum.

China, China Insurance Regulatory Commission
Theindentifying standardsof IAIG includesize, international
activity, and constrained discretion, whichcan reasonablyidentify
insurancegroup companieswithinternational activityand the
identificationprocessesare comprehensiveand reasonable.
In our opinion, the"constraineddiscretion" should be prudentlyused
while takingintoconsideration the development stageof each country's
insurancemarket and the nature, functionand risk conditionof
insurancegroups.
EU, European Insurance and Occupational PensionsAuthority
(EIOPA)
EIOPA stronglysupportstheworkof theIAIS todevelop a set of
internationallyconsistent standardsfor the regulation and supervision of
IAIGs.
EIOPA wouldlike tothank theIAIS for theworkconductedup tonow.
Let usfirst expressthat EIOPAconsidersthe restructuringof the
ComFrame Paper tobe an important improvement from thepoint of
view of readability, focus, addresseeperspective, among others.
In general the ComFrame criteria and processfor identifying IAIGs
seem tobe appropriate.
Howeverthere arenoexplicit rulestodefine the Head of theIAIG in
casewherethere isnolegal entitythat controlsor exertsdominant
influenceover the other elementsof theIAIG.
Another aspect whichis not fullyexplainedrefers tocasesin which
entitiesmay beexcluded from supervision.
TheComFrame only refers tothe principleof proportionalitywhereas
clearerand more detailed guidancewouldbe helpful.

Moreover, EIOPAthinksthat some redundancieswithICP'snotions
could be deleted
UK, Association of British Insurers
Thecriteria aretoowide- insurersthat are activeonlyin countries that
are part of a singleregulatory and supervisoryregime should not be
classed asbeing internationallyactive.
ComFrame should bring clarityto regulation and supervisionof groups
whoseindividual legal entitiesoperate under multipleregulatoryregimes
- wherea group isactivein several countries whichareall coveredby the
sameregime, this need doesnot arise.
It should not take three years beforea designation asan IAIG can be
retracted- this wouldlead toa situationwhere, for example, an insurer
that had previouslybeen designated an IAIG but had madesignificant
changestoitsbusinessand wasno longer internationallyactive in a
meaningful waywouldstill be subjecttoComFrame for twoyears to no
obviousbenefit for policyholders, the company or thesupervisors.
In contrast other non-internationallyactiveinsurersoperatingon an
identicalbasis but whichhad not previouslybeen an IAIG wouldnot be
subjecttoComFrame.
If an insurer ceasestomeet thecriteria for an IAIG then neither the
company nor supervisorswill materiallybenefit from theapplicationof
ComFrame.
An insurer's designation asan IAIG or not should be reviewedand
updatedat least annually.
USA, NAIC
Theprocessfor identifying IAIGsappearsto be collaborativein nature
and indicativeof how ComFrame, asa workingframework, should
operate.

Thecriteria used to identify IAIGsshould be clearand focusedon
identifying thoseentitieswhich havea largepresenceinternationally.
The criteria should be simple and allow the involved supervisors to
adjust using their judgment if circumstances necessitate a different
answer("constrained supervisorydiscretion").
Thecriteria currentlyunder considerationby the IAIS attemptsto strike a
balancebut should be carefullyreviewedwiththeseobjectivesin mind.
As discussionon future steps(Field Testing, Implementation, etc.)
progressesover thenext year, thecriteria and processfor identifying
may need to be reassessedtoensure it isappropriate to meet the
intendedobjectives.
With respect to the current draft, consideration should be given as to
whether the criteria for the number of jurisdictionsin which an IAIG
operatesshould includethreshold percentage of market share.
This could either bepart of the criteria itselfor part of thesupervisory
discretionprocess.
Toread more:
http:/ / iaisweb.org/ db/ content/ 3/16037.pdf
Note:
ComFrame is a major project of the IAIS.
While theultimateroleof ComFrame remains under discussion and
development, theintent isgiven by itsname —a common framework—
onethat lays out how supervisorsaround the globecan work together to
superviseinternationallyactiveinsurancegroups(IAIGs) and close
regulatorygaps.
IAIGsare the largest, most complex insuranceentities.

ComFrame hasthreemain objectiveswhichinclude:
1)Developingmethodsof operatinggroup-widesupervisionof IAIGs;
2)Establishinga comprehensiveframeworkfor supervisorsto address
group-wideactivitiesand risks,and
3)Fosteringglobal convergence. ComFrame is neither intendedtobe a
forum tocreate prescriptivewaystopromote a particular meansfor
solvencystandards,nor tocreateadditional layers of regulation.
ComFrame is expectedto evolve over time.
It will be developedover a three-year period withthe Development
Phasecompletedby theend of 2013.
TheIAIS will issuea comprehensive report detailingtheend of the
Development Phase, followingwhichthere will be one or more impact
assessmentsof both qualitativeand quantitativerequirementsfor IAIGs.

Solvency II
In 2011, EIOPAfocused
on preparingthe final set
of regulatory measuresfor
SolvencyII, the draft standardsand guidelines.
One of themain achievementsof EIOPAin 2011wasthe report on the
Fifth QuantitativeImpact Study (QIS5) summarisingthepotential
impact of thedetailed implementingmeasurestobe drafted for the
SolvencyII regulatoryframework.
QIS5 hasbeen themost ambitiousand comprehensive impact study ever
carried out in the financial sector, withthedirect involvement of more
than 2500entitiesand 100supervisorsfrom member statesand
EIOPA, workingtogether for almost a full year.
EIOPA launched official public consultationsin 2011in twoareasin
whichearlydiscussionwith and preparation by the industryare
particularlyimportant.
Theseconsultationswereon the draft standardsand guidelineson
reportingand disclosure, and on guidelineson OwnRiskand Solvency
Assessment (ORSA).
At the end of 2011, EIOPAsubmittedadditional advicetothe European
Commission on thecalibration of thenon-life underwritingrisk module.
In the areaof catastropherisk, EIOPA madeitsfinal recommendation
for the implementingmeasureson a number of outstandingnon-life and
health catastropheriskissues.
Several task forcesconcluded their workin 2011, resultingin the
publication of the followingreports: ―Calibrationof the Premium and
ReserveRiskFactorsin theStandard Formulaof SolvencyII‖ and the
―Report of the TaskForce on ExpectedProfitsarisingfrom Future
Premiums‖.

Finally, sincethe creation of EIOPA‘sInsuranceand Reinsurance
StakeholderGroup, EIOPAhasbenefited from their expertiseand wide
rangeof viewsand interests,and activelyinvolved itsmembersin major
aspectsof SolvencyII.
Occupational pensions
Themain focusof EIOPA‘swork on occupational pensionsin 2011was
developing EIOPA‘sresponsetotheCall forAdvice from theEuropean
Commission on thereview of Directive2003/ 41/ECon the activitiesand
supervision of institutionsfor occupational retirement provision (IORP
Directive).
Theworkon the Call forAdvice wasorganisedin four sub-groups,all
workingin parallel, but all reportingto the Occupational Pensions
Committee(OPC).
In 2011, EIOPAalsocompleted number of survey-based reports on
reportingrequirements, risksrelatedtoDC schemesand pre-enrolment
information.
Thesesurveyswereconducted toprovidea common technical basisfor
respondingtothe Call forAdvice.
During 2011, EIOPAcarried out twopublic consultationson itsdraft
advice.
Thefirst between8 July2011and 15August 2011on selected aspectsof
theCall forAdvice.
Thesecond, between25October 2011and 2 January 2012on the entire
draft advice.
EIOPA alsosubmittedduring the year 2011its input tothe ESRB on data
requirementsfor IORP and published itsrecurrent report on market
developments.

Consumer protection and financial innovation
EIOPA hasconsidered, from day one, consumer protection asa
cornerstoneof itswork and an area wherea differencehastobe
made, and EIOPAhasbeen proactivein thearea of consumer
protectionand financial innovation.
In the courseof 2011, theAuthority prepared ―The Proposal for
Guidelineson Complaints- Handling by InsuranceUndertakings‖, the
Report on Best Practicesby InsuranceUndertakingsin handling
complaintsand finalised a ―Report on Financial Literacyand Education
Initiativesby Competent Authorities‖.
EIOPA alsocollecteddata on consumer trendsamong its membersto
preparean initial overview, analysing and reportingon thosetrends.
TheAuthority alsoprovided relevant input tothe European
Commission‘srevisionof the InsuranceMediationDirective(IM D) by
carrying out an extensivesurvey of sanctions(both criminal and
administrative) provided for in national lawsfor violationsof IMD
provisions.
External commitment, includingbenefitingfrom the expert input of
EIOPA’stwoStakeholder Groupsand holding EIOPA‘sfirst Consumer
StrategyDay, wasalsocrucial to EIOPAachievingitsgoalsin 2011.
Collegesof Supervisors and cross-border crisis management
and resolution
EIOPA‘stasksgobeyond pure regulatory work,and includeconcrete
oversight responsibilities, includingan enhanced role asmembersof the
different collegesof supervisors.
Theoverall strategictarget of EIOPA‘sCollegeworkis toconsolidate
theposition of the European EconomicArea (EEA) supervisory

communityvis-a-visinsurance groupsoperatingacrossbordersfor the
benefit of both group and solosupervision. In 2011, around 89 insurance
groupswith crossborder undertakingswereregisteredin the EEA.
During the year, Collegesof Supervisorshaving at leastone actual
meetingor teleconferencewereorganised for 69groups.
Atotal of 14 national supervisoryauthoritiesacted asgroup supervisors
toorganisetheevents.
During the setup phasein thefirst year after its establishment, EIOPA
attendedCollege meetingsand/ or teleconferencesof 55 groups.
In early2011, a set of interim proceduresfor dealingwith emergency
situationswasdeveloped byEIOPAin conjunction with theother ESAs.
Aseconded national expert in crisismanagement wasappointed in
March2011, and work then commencedon thedevelopment of a
permanent crisismanagement framework by EIOPA.
Key to thiswasthe development of a strategicpolicy on crisis
management.
In the end of 2011a TaskForceon CrisisManagement delivered a
comprehensive, decision-makingframework on crisis pre-emptionand
crisismanagement.
Financial stability
Thecommon theme of EIOPA‘sfinancial stabilityinitiativesin 2011was
toidentify, at an earlystage, trends, potential risksand vulnerabilities
stemmingfrom microand macroeconomic developments, and, where
necessary, toinform the relevant EU institutions.

This wasachievedby specific and regular market
monitoring, information sharing and discussionson mitigating
measuresin theFinancial Stability Committee(FSC).
In linewiththisobjective, EIOPA‘sFSCset up itsfirst (pilot) risk
dashboard in October 2011, containinga common set of quantitative and
qualitativeindicatorsthat help to identify and measure systemic risk.
This dashboard is tobe developed further asa joint effort of theESAs
andtheESRB.
In the courseof 2011EIOPAhasbeen an active member of theESRB
SteeringCommitteethat wasestablishedin order toassist in the
decision-makingprocessof the ESRB.
EIOPA alsowastakingpart in theESRB Advisory Technical Committee
(ATC) and itstechnical subcommitteeswith themain focuson
identifying potential systemicallyimportant issuesin the sectorsof
insuranceand IORPs.
Furthermore, EIOPAparticipatedin thejoint ATC andAdvisory
Scientific Committee (ASC) expert group dealing withthe regulatory
treatment of sovereign exposures.
In 2011, thethreeESAs and the ESRB signeda joint ―Agreement on the
establishment at the ESRB Secretariat of specific confidentiality
proceduresin order tosafeguard information regardingindividual
financial institutionsand information from whichindividual financial
institutionscan be identified‖.
EIOPA alsobegan designinga databaseof current and historical data for
IORPsand insuranceand reinsuranceundertakingsin theEuropean
Union.
During 2011, EIOPAconducted harmonised, pan-European core and
low-yieldstresstestsfor the insurancesector in cooperation with the
ESRB, ECB and EBA.

In June and December 2011, EIOPApublished itstwosemiannual
Financial Stability Reportscontainingan assessment of the economic
soundnessof the European insurance,reinsuranceand IORPs.
In December 2011, EIOPA put out for public consultation a set of data
reporting templates necessary for regularly assessing sectoral risk and
monitoring financial developmentsonceSolvency II entersintoforce.
EIOPA Overview
Introduction
TheEuropean Insuranceand Occupational PensionsAuthority
(EIOPA) wasestablishedasa result of thereformsof the structure of
supervision of the financial sector of theEuropean Union (EU) that
followedthe financial crisisof 2007, asthe crisis demonstratedthat the
pre-existing3L3 Committees(CEIOPS,CEBS and CESR) had reached
their limit.
Before and during the financial crisesof 2007and 2008, theEuropean
Parliament called for a movetowardsgreater European supervisory
integration in order toensure a true level playing field for all players at
thelevel of the European Union and toreflect theincreasingintegration
of the financial marketsof the EU.
In responsetothe global financial crisis, theEuropean Commission
tasked a High Level Group (Committeeof Wise Men), chairedby Mr
Jacquesde Larosiere, toconsider how the European supervisory
arrangementscould be strengthened, both to better protect EU citizens
andtorebuild trust in the financial system.
Among itsmany conclusions,the Group stressedthat supervisory
arrangementsshould not only concentrateon the supervision of
individual firms, but alsoplaceemphasison the stabilityof thefinancial
system aswhole.

Followingtherecommendationsof the Committeeof WiseMen, the
European Commission initiateda reform, whichwassupportedby the
European Council and the European Parliament.
As a result, the supervisoryframeworkwasstrengthened to mitigatethe
risk and severityof future financial crises.
EIOPA is part of a European System of Financial Supervision (ESFS), the
purpose of whichis toensuresupervisionof the EU financial system.
TheESFS comprisesthe three European SupervisoryAuthorities(ESAs):
theEuropean BankingAuthority (EBA), based in London, theEuropean
Securitiesand MarketsAuthority (ESMA), based in Paris, and
EIOPA, based in Frankfurt, aswell asthe European Systemic Risk Board
(ESRB), based in Frankfurt, and the competent or supervisoryauthorities
in theEU Member Statesasspecified in the legislationestablishingthe
threeESAs.
EIOPA‘smain goalsare:
•Tobetter protect consumers, thusrebuildingtrust in thefinancial
system;
•Toensure a high, effectiveand consistent level of regulation and
supervision, takingaccount of thevarying interestsof all MemberStates
andthedifferent nature of thefinancial institutions;
•Toachieve a greater harmonisationand coherent applicationof the
rules applicableto the financial institutions& marketsacrossthe
European Union;
• Tostrengthen oversight of cross-border groups;
• Topromote a coordinatedEuropean Union supervisoryresponse.

EIOPA‘score responsibilitiesare tosupport thestabilityof the financial
system, ensure thetransparencyof marketsand financial productsand
protect policyholders, pension scheme membersand beneficiaries.
EIOPA is commissioned to monitor and identify trends, potential risks
andvulnerabilitiesat the micro-prudential level, acrossbordersand
acrosssectors.
EIOPA is an independent advisorybody to theEuropean
Parliament, the Council of the European Union and theEuropean
Commission. Toaccount for thespecificconditionsin thenational
marketsand thenature of the financial institutions,theEuropean
System of Financial Supervision is an integratednetwork of national
and European supervisoryauthoritiesthat providesthenecessarylinks
betweenthe
macro and microprudential levels, leavingday-to-day supervisiontothe
national level.
EIOPA is governed by itsBoard of Supervisors, whosemembers arethe
headsof the relevant national authoritiesin thefield of insuranceand
IORPsin each Member State.
TheEuropean Union’snational supervisoryauthoritiesarea sourceof
expertiseand information in the field of insuranceand IORPs.
Policy Working Groups
Themajorityof PolicyWorking Groupsdealt withinsuranceand
reinsurance-relatedissues,in particular SolvencyII.
Twoother Working Groupsin the policy areadealt with IORPs
(IORP Directive) and equivalence-relatedissues.
Solvency II Working Groups
TheSolvencyII project iscompletely reshapingthe supervisoryand
regulatoryframework for insuranceand reinsurancecompanies,

bringing a modern risk oriented, economicand principlebasedset of
rules.
One of themain tasks for EIOPA in thecoming yearsis toprepare the
new supervisoryregime for insuranceand reinsuranceundertakingsand
particularlyto conduct all the necessaryworkfor implementationof the
EU Directiveon the taking-up and pursuit of the businessof insurance
and reinsurance(SolvencyII).
During 2011, the SolvencyII Working Groupsdeveloped draft standards
and guidelineswhichare likely tobe required by theOmnibusII
Directive, and whichEIOPAconsidersasessential for ensuring the
existenceof convergent supervisorypracticesfrom SolvencyII‘sfirst day
of entry intoforce.
Pre-consultationswithselectedstakeholderswereheld aspart of the
continuousinformal discussion withstakeholderswhileawaiting
confirmation of the formal legal basisfor public consultation on the
standards.
Each WorkingGroup contributed to EIOPA‘strainingprogramme for
supervisorsand, whererelevant, WorkingGroupswereinvolvedin the
discussionsconductedby the European Commission on implementing
measures.
WorkingGroupscontributed to thoseareasof each other‘swork that
requireda cross-workinggroup perspective, suchasgovernanceor
reporting.
Insurance GroupsSupervision Committee (IGSC)
TheInsuranceGroupsSupervision Committee(IGSC) focusedon
developing draft technical standards and guidelinesfor theconvergent
implementationof SolvencyII in the areasof group solvency
calculations,intra-grouptransactionsand risk concentration, the
cooperationand exchangeof information in Colleges,and thetreatment
of third country branches.

Financial Requirements Committee (FinReq)
TheFinancial RequirementsCommittee(FinReq) focused on
developingdraft technical standards and guidelinesfor theconvergent
implementationof Solvency II in theareasof ownfunds, technical
provisions, and thestandard formula for capital requirements, including
theuse of undertaking-specific parameters.
FinReqcontributed to thedevelopment of calibrationfactorsfor non-life
underwritingrisk and catastrophe risk.
Internal Governance Supervisory Review and Reporting
Committee (IGSRR)
TheInternal Governance, SupervisoryReview and Reporting Committee
(IGSRR) focused on developing draft technical standards and guidelines
for the convergent implementation of SolvencyII in the areasof system of
governance, includingOwnRisk and SolvencyAssessment
(ORSA), transparencyand accountabilityof supervisory
authorities,public disclosureand supervisoryreporting, and valuationof
assetsand liabilities(other than technical provisions).
Publicconsultationon theORSAguidelinesand reportingand
disclosurerequirementswaslaunchedat the end of 2011.
IGSRR alsostarted workingon guidelinesfor external audit, the
supervisoryreview process,capital add-ons,and the extension of the
recoveryperiod in theexceptional fall in financial markets.
IGSRR prepared EIOPA’s contribution to the International Financial
Reporting Standard (IFRS) setting process and to the EU endorsement
process.

Internal Models Committee (IntMod)
TheInternal ModelsCommittee(IntMod) focused on developingdraft
technicalstandardsand guidelinesfor the convergent implementationof
SolvencyII in the areasof testsand standardsfor full and partial internal
models,requirementsfor the approval process,and thepolicyfor
introducingchangesto the model.
In order toincreasesupervisoryconvergence and to prepareindustry and
supervisorsfor theuseof internal modelsunder SolvencyII, IntMod
implementedinitiativesfor enhancingsupervisoryconsistencyacross
Europe in the pre-applicationprocessfor internal models, and for
ensuring adequatecooperation betweensupervisorswhen assessing
internalmodels.
Theseinitiativesinvolvedpractical meetingsbetweenoperational
supervisorsand training activities.
Task Force on Expected Profits arising from Future Premiums
(EPIFP)
This taskforce wascreated todevelop a common understandingof the
element of expectedprofitsincludedin future premiums(EPIFP) soas
toadvisethe Commission on thedraftingof implementingmeasures
after the fifth quantitativeimpact study (QIS5).
It wascomposedof representativesof industry, the European
Commission and EIOPA membersand discussed possibleways of
harmonisingthecalculationof EPIFP under SolvencyII.
EIOPA submitted a report tothe European Commission which
ultimatelyonly representedtheviewsof itsown members.

Occupational Pensions Committee (OPC)
Themain focusof the Occupational PensionsCommittee(OPC) work
betweenApril 2011and the end of the year wasdevelopingEIOPA‘sadvice
tothe European Commission on thereview of theIORP Directivein
responseto the Call forAdvice.
Beyond this, OPC own initiativeprojectsin 2011included the
publication of a number of survey- based reportsasfollows:
•‘Report on reportingrequirementstosupervisoryauthoritiesfor
IORPs’
• ‘Report on market developments2011’
•Tworeportson risksrelatingtomembersof definedcontribution
pension schemes(risksfaced bymembers and mechanismsmitigating
thoserisks)
•‘Report on pre-enrolment information’ aspart of a wider OPC
mandateon PackagedRetail Investment Products(PRIPs) and pensions
Other inputsincludeda contribution to a report on the European
Systemic Risk Board (ESRB) data requirementsin respect of IORPs.
Equivalence Committee
In January 2011, theEquivalenceCommittee wasset up with itsmain
taskbeing to respond torequestsfrom the European Commission for
final advice, after full consultation, on the equivalenceof third countries‘
supervisorysystems.
On 26 October 2011, upon request of theEuropean Commission, EIOPA
delivereditsfinal advice, after full consultation, on the SolvencyII
equivalenceassessmentsof thesupervisory systems in the following
countries:
- Switzerland,

- Bermuda and
- Japan.
Thesupervisorysystemsof Switzerlandand Bermuda wereassessedwith
referenceto reinsurance, inclusion of thethird country undertakingin
thegroup solvencycalculation and group supervision, whilethe
supervisorysystem of Japan wasassessedonly withreference to
reinsurance.
Theequivalenceassessment wasbased on respectivequestionnaires
filledin bythe relevant supervisoryauthorities(SwissFinancial
SupervisoryAuthority – FINMA; Bermuda MonetaryAuthority – BMA;
andtheJapan Financial ServicesAuthority – JFSA), followedby a desk-
based analysisusingEIOPA‘smethodology, and onsitevisitsby EIOPA
expertsto each of the three countries.
Regulatory Working Groups
Committee on Consumer Protection and Financial Innovation
(CCPFI)
In 2011, the Committeeon Consumer Protection and Financial
Innovation(CCPFI) supported EIOPAin fulfillingthe requirement laid
downin itsRegulationof takinga leadingrole in the area of consumer
protection and financial innovation, asfollows:
•preparing ―Guidelineson Complaints-Handlingby Insurance
Undertakings‖and ―Report on Best Practicesby Insurance
Undertakingsin handling complaints‖.
•preparing the ―Report identifying Good Practicesfor Disclosureand
Sellingof VariableAnnuities‖.
•finalisingthe ―Report on Financial Literacyand Education Initiatives
byCompetent Authorities‖.

•collectingdata on consumer trendsamong itsmemberssoasto
preparean initial overview, analysing and reportingon thosetrends.
•carrying out an extensive survey of sanctions (both criminal and
administrative) provided for in national laws for violations of IMD
provisions.
Task Force on Insurance Guarantee Schemes (TF-IGS)
This taskforcemet in the courseof 2011toprepare the report on the
cross-border cooperation mechanismsbetweenIGSsin theEU.
In accordancewithEIOPA‘smandate tocontributeto assessingthe
need for a European network of IGSsthat is adequately fundedand
sufficientlyharmonised, thereport wasEIOPA‘sinput tothe European
Commission‘spolicy- making on IGSs.
It summarised the findingsfrom amappingexerciseof theexisting
mechanismson cross-border cooperation betweenthe IGSsof Member
States,and provided general recommendationstothe European
Commission in the area of cooperationbetweenIGSsand withtheir
supervisors.
Oversight Working Groups
Review Panel
At thebeginningof 2011, theReview Panel , using the experienceand
lessonslearnedfrom itsfirst peer reviewexercisecompletedin
2010,reviewedthe methodology for peer reviewsin linewiththe
EIOPA Regulation.
In the middle of the year, the Review Panel started work on three peer
review projects on supervisory practices for pre-application of internal
models, supervision of branches of EEA insurance undertakings, and
supervision of IORPs.

Thesepeer reviewsare due to be completed in 2012.
Task Force on CrisisManagement
In 2011a Task Forceon CrisisManagement wasestablishedtodevelop
EIOPA‘sstructuresfor crisisprevention, management and resolution.
In December 2011, this task force delivereda comprehensive, decision-
makingframework that wasendorsed by theBoard of Supervisors.
This frameworksetsout in detail theprocessesthat EIOPAwill followin
dischargingits crisispre-emption and crisismanagement responsibilities
under the EIOPARegulation.
Financial Stability Working Groups
Financial Stability Committee (FSC)
TheFinancial StabilityCommittee(FSC) focused on monitoring and
analysingdevelopmentsin the insuranceand IORPs sectors.
This includedin particular the impact of sovereign debt situation in
someEuropean countriesand alsothat of other eventssuch asnatural
catastrophes,includingthe impact of theJapaneseearthquake in March
2011and the subsequent devastatingtsunami.
Furthermore, the FSC developed a 2011stresstest exercise for the
European insurancesector, includinga subsequent satelliteexercisefor
a low-yield environment.
TheFSC alsodeveloped and implemented the EIOPArisk dashboard
based on quarterlyinformation collectedfrom national supervisors.
TheFSC contributed to theworkof thecross-sector risk subcommittee
of the Joint Committee.

FSC alsocontributed to thetwohalf-year Financial StabilityReports
monitoringboth sectors(IORPsand insuranceundertakings), which
werealsosubmittedtothe EU Economic and Financial Committee
(EFC) and theESRB.
Corporate support Working Groups
Information Technology and Data Committee (ITDC)
In 2011, the IT and Data Committee(ITDC) focusedon developing
EIOPA‘sIT and data strategy and, followingon from this, it workedon
IT specificationsand implementationplans.
TheIT strategy set out the IT-relatedgoalsneeded to fulfil EIOPA‘s
mission.
TheBoard of Supervisorsadopted the IT and data strategy reportsat its
October 2011meetingand mandated EIOPAtoimplement the IT-
relatedgoalsset out therein.
TheBoard of Supervisorsrequired the ITDC toproduce high - level and
outlineIT plansand specifications,with particular focuson an EIOPA
IT implementationplan.
Update on Solvency II
•SolvencyII is a new regulatory frameworkproviding supervisorswith
theappropriatetoolsfor assessing theoverall solvencyof insurance and
reinsuranceundertakingsbyquantitativeand qualitativemeans, thus
improvingunderstandingand management of theseundertakings‘risks.
•It is based on three pillars:quantitativerequirements(pillar I);
governance, risk management and supervisory review (pillar II); and
supervisoryreportingand publicdisclosure(pillar III).
• Theframework directivewaspublishedon 17 December 2009.

•TheOmnibusII Directive isunder discussion in theEuropean
Parliament and Council of the European Union followingthelegislative
proposalfrom theEuropean Commission on 19January2011.
•Implementingmeasureshave been discussedbetween theEuropean
Commission and Member Statessincethe end of 2009.
•Standardsare being draftedby EIOPAtobe endorsedby theEuropean
Commission.
•Guidelinesare beingdrafted byEIOPAtoensure the convergent
application of the regulation.
• Date of entry intoforce of SolvencyII: 1January2014.
OmnibusII Directive and implementing measures
Followingthecreationof EIOPA, theSolvencyII Directiverequired
revisionto reflectthe new supervisorystructure;these revisionswill form
part of theOmnibusII Directive(OMDII).
OMDII will introduceintothe SolvencyII Directivethe necessary
regulatoryand supervisorypowersfor EIOPAtodischargeits
responsibilities.
In addition, OMDII alsoincludestransitional measuresallowinggradual
implementationof SolvencyII.
This extension meansthat the beginningof the regimewouldbe aligned
with the end of the financial year for most insuranceundertakings.
During 2011EIOPAcontinued to providetechnical and analytical
support to theCommission and gave further input toclarifyitsprevious
adviceon the development of the implementingmeasuresfor Solvency
II.

While deliberationsweretakingplacein theEuropean Parliament and
theCouncil of the European Union on OMDII, theCommission,
MemberStatesand stakeholdersalsoexaminedthe draft implementing
measures.
Key areasunder discussion werethe sustainability of long-term
insuranceguarantees,the volatilityof elementsin undertakings’
solvencybalancesheets,and reportingand disclosurerequirements.
Standardsand guidelines
In 2011, EIOPAfocusedon preparingthefinal set of regulatory
measures,thedraft standardsand guidelines.
SolvencyII will be one of the first projectstobenefit directlyfrom
EIOPA‘sregulatorypowersto draft standardsand subsequentlyto
ensure consistent implementationof legislationthrough binding
mediationand oversight of Collegesof Supervisors.
Until there is agreement on the proposalsfor OMDII Directive, EIOPA
will not have completecertaintyon thescope of itspowersfor drafting
thestandards for SolvencyII and the detail of the regulatory provisions
whichthe standardsand guidelinesare intendedtosupport.
Consequently, it wasimportant for EIOPAtomonitor thevarious
OMDII proposalsand thusidentify the standardswhich theAuthority
expectsit will have todraft beforeSolvencyII entersintoforceon 1
January2014.
During 2011, EIOPAalsoidentifiedthoseareasin which it is essential to
haveguidelinesin placebeforethe entry intoforce of SolvencyII.
EIOPA is committed to effectiveconsultationand communication with
itsstakeholderstoimprove thequalityof the regulatory provisionsand
assist theindustry in preparingfor the new regime.

Subjecttothe conclusion of thenegotiationson OMDII and the
implementingmeasures,EIOPAplanspublic consultationon the
packagesof draft standardsand guidelinesduring 2012.
In 2011, EIOPA launched official public consultationsin twoareasin
whichearlydiscussionwithand preparation by the industryare
particularlyimportant.
Theseconsultationswereon the draft standardsand guidelineson
reportingand disclosure, and on guidelineson OwnRisk and Solvency
Assessment (ORSA).
In other areas,EIOPAcontinued itsinformal pre-consultationswith
selectedstakeholders(European Insuranceand ReinsuranceFederation
(CEA), Association of Mutual Insurersand InsuranceCooperativesin
Europe (AMICE), Chief Risk Officers(CRO) Forum and Chief Financial
Officers(CFO) Forum, Groupe Consultatif Actuariel Europeen), thus
havingan ongoingdialoguewiththe industryahead of thepublic
consultation.
Anumber of other initiativeswereset up specificallyto improve EIOPA‘s
cooperation and exchangeof information withitsstakeholders.
Several task forcescompleted their workin 2011, whichresultedin the
publication of the ―Report on the Calibration Factorsin theStandard
Formula of SolvencyII‖ and the ―Report of the TaskForceon Expected
Profitsarisingfrom Future Premiums‖.
Finally, followingthe creationof EIOPA‘sInsuranceand Reinsurance
Stakeholder Group, EIOPAactively involveditsmembersin major
aspectsof SolvencyII.

Areas in which EIOPA prepared draft standardsand guidelines
during 2011:
•Solvency capital requirements for standard formula as well as for
internal model users; own funds; valuation of technical provisions;
valuation of assetsand liabilities.
• Group supervision.
•Supervisorytransparencyand accountability, reporting and
disclosure,external audit.
• Governance, ORSA.
•Supervisoryreview process;capital add-ons;extension of recovery
period (‘Pillar 2 dampener); finitereinsurance;special purpose
vehicles.
Quantitative Impact Study 5
One of thekey achievementsof EIOPAin 2011wascompletion of the
report on theFifth QuantitativeImpact Study (QIS5) in March2011.
Theresultsof theQIS5 exerciseweretaken intoaccount in discussions
on theimplementingmeasuresand arebeingreflectedin thedraftingof
standardsand guidelines.
The QIS5 exercise
In March2011, EIOPAdelivered to the European Commission a report
on the resultsof the fifth pan-Europeanquantitativeimpact study
organisedtoinform policymakerson thepotential effectsof the detailed
implementingmeasureswhicharebeingdrafted for theSolvencyII
regulatoryframework.
Morethan 2 500individual undertakingsand 160groupsfrom the30

membersof theEuropean EconomicArea participatedvoluntarilyin this
simulation exercise,providing detailed quantitativeand qualitativeinputs
onthe variouselementsof the future regulation.
Thestudyconfirmed that overall the industry remained well capitalised
under thedraft provisionsand optionstested.
Thestudygathereduseful input on transitional provisionsfor
discounting, the grandfathering of specific elementsof own funds, and
thetransitional equivalenceof third-country regimes, for example.
Valuableinsight wasgainedabout the characteristicsof internal models
under development by undertakings,thedifficultiesin calculatingthe
loss- absorbingcapacityof technical provisionsand deferred taxes, and
the potential impact of the introductionof an illiquiditypremium in the
valuation of technical provisions.
Thestudyalsocovered the treatment of participations;it gathered
information on therelevanceof expectedprofit in future premiums, and
on thegroup solvencyassessment under the consolidationand
deductionand aggregationmethods.
Thestudyresultshighlightedthe areasin whichfurther work wouldbe
desirable.
This wasthen initiatedby EIOPAasfollows:definition of contract
boundariesin thevaluation of technicalprovisions;the need to reduce
complexityin certain areas;developmentsin the calibrationof
catastropherisk; and the treatment of long-term guaranteesin the
context of SolvencyII.
Aparticular topic– therefinement of factorsused in non-life
underwritingand health non - similar tolife underwritingrisk modules–
wasaddressed by specific data collectionin theQIS5exercise.
Thedata wereanalysed using a methodology drawnup by a task force of
supervisors,actuariesand industry representatives.

For most businesslines,the report publishedin December 2011
facilitated joint recommendationsfor amendmentsof the factorsused in
theQIS5 exercise.
EIOPA‘scurrent and future work on thedevelopment of draft technical
standardsand guidelinesfor SolvencyII will benefit greatly from the
lessonslearnedduring the QIS5exercise, in particular byenhancingthe
practicability and feasibilityof the rulesfor a singlerulebook of
standardsand guidelinestoensureconvergent applicationof thenew
system.
Standard formula capital requirements
EIOPA prepared draft standards and guidelineson the approval process
anddata qualityfor undertaking-specific parametersfor solo
undertakingsand groups;methodsfor thecalculation of undertaking-
specific parametersfor soloundertakings; theloss-absorbingcapacityfor
deferredtaxesand technical provisions;and standard capital
requirementsfor health underwritingrisk.
Informal pre - consultationswill be launchedand further draft standards
and guidelinesdeveloped in 2012.
One key area in whichEIOPAdeliveredfurther advice tothe
Commission wasthecalibration of thenon-life underwritingrisk
module.
Theadvice wasbased on a European-widedata request totheindustry
launched in September 2010,and on discussionswithindustry
representativesand theEuropean Commission toconsider themost
appropriatecalibrationmethodologies.
Theresultsof thiswork werepublishedin December 2011.
In the areaof catastropherisk, followingdiscussionswiththe
industry, EIOPA made itsfinal recommendation on a number of
outstanding non- life and health catastropherisk issuesfor the
implementingmeasures.

In the second half of 2011, EIOPAcontinuedworkingwith industry
representativeson zoning and reinsurancestandards, aswell ason
catastropherisk guidelines.
Technical provisions
Informal pre-consultationswereheld on actuarial guidelinesfor the
valuation of technical provisions.
EIOPA began developing the draft standard on the risk-freeinterest rate
curveand contract boundaries.
For thefirst time, the European Commissiontested in QIS5 a risk-free
interest rate term structure which includeda so-calledilliquidity
premium.
Theterm structure wasbased on an adjustedswap rate, and a new
extrapolationmethod wasapplied for long maturities.
During 2011, discussionscontinued on adjustmentstothe risk-freerate
followingthe QIS5resultsand on the sustainability of long - term
insuranceguarantees.
EIOPA participatedin these discussionsorganisedby the European
Commission withMemberState and industry representatives.
Proposalsemerged from Member Statesand industry on new
adjustments,theso-calledcounter-cyclical premium and thematching
premium.
Theseproposalswereanalysed by EIOPAin the context of developinga
standard for therisk - freerate that EIOPAwill defineand publish.
Discussionsare expectedtocontinuein 2012.

Valuation of assetsand liabilities (excluding technical
provisions)
Informal pre-consultationswereheld on draft standardsand guidelines
concerningthevaluation of assetsand liabilities.
This includedguidelineson theuseof mark-to-model techniquesand
thecompatibilityof International Financial Reporting Standards(IFRS)
with SolvencyII.
During 2011, EIOPAalsocontributedtotheprocessof IFRSstandard-
settingand subsequent EU endorsement of thosestandards.
Reporting and disclosure
In 2011, EIOPAlaunched a public consultationon itsdraft guidelines
and standardsfor reporting and disclosure.
This marked the end of an ongoing and fruitful processof informal
consultation withstakeholderssince2009.
Due to the importanceof harmonised reportingrequirementsfor the
SolvencyII project, and alsofor other areasof EIOPA‘swork, such as
financial stabilityand thelevel of preparation that will be required from
theindustry, one of EIOPA‘skey aimsistoarrive at stablereporting
requirementsassoon aspossible.
Further discussionson specificaspectsof the reportingtemplatesand
thefrequencyof reports are expected to continue in the first half of 2012.
Governance and risk management requirements
Informal pre-consultationswereheld on standardsfor
governance,includingORSA(thelatterissuewasalsosubjecttopublic
consultationlater on). EIOPAbegan developing draft standardsand
guidelineson transparencyand accountabilityof supervisoryauthorities
and the

supervisoryreview process,capital add-onsand extension of the recovery
period in deterioratingmarket conditionsaswellasonexternal audit.
Own funds
for ancillaryown fundsand the classificationof ownfunds.
Further workwascarried out on thetreatment of participationsand ring-
fenced funds.
Internal models
for the following:applicationprocessesfor internalmodels; policiesfor
changingthemodel; partial internal models; use tests;expert judgments;
probabilitydistributionforecasts(PDF); and consistencybetweenthe
methodologyused for the PDF calculationand the methodologyused for
valuation of assetsand liabilities(e.g. the calculation of technical
provisions, approximationsfor calibrations,profit and loss
attributions,validationpolicyand validationtools,documentsand the use
of external models).
Followingthepublication in 2010of guidelinessupportingthe pre-
application processfor internal models, EIOPA monitored theactivities
of supervisorsand industry, usingthisopportunitytocheck the day-1
applicabilityof internal models.
This includedinformal practical meetingsof supervisorsinvolved in the
pre-applicationprocess.
Insurance stresstest
At the end of March2011, EIOPAlaunchedthe second Europe-wide
stresstest for theinsurancesector, whichwasfollowedin mid-August by

a satelliteexerciseassessingthe effectsof a prolonged period of low
interest rates.
This satelliteexerciseis often referred to asthe ―lowyield stress
test‖, and while it wasplanned in conjunctionwith the core stress
test, itslaunch waspostponed to easetheworkloadof participating
undertakings.
In accordancewithitsregulation, EIOPAshall conduct stresstest
exercisesfor theinsuranceand IORPssectorsat least oncea year.
The2011core and low-yieldstresstest exerciseswereto assessthe
strength of individual institutionsand evaluatetheoverall resilienceof
the industriesto several clearlydefined adverseeconomicand financial
market environments.
Thecore stresstest waslaunched in March2011based on data asof 31
December 2010,and theaggregatedresultsof the exercisewere
published in July2011.
Of the 221 insurance and reinsurance groups and undertakings
covered, 58 groups and 71 single entities reported results to
EIOPA, representing approximately 60% of the whole European
insurancemarket.
Theresultsof thestresstest exerciseconfirmed that the insurance
market in Europe asrepresented bythe 129participatingentities is
robust and iswell prepared for potential future shocks.
Data showedthat approximately10% (13) of the groupsand
undertakingswhichrespondeddid not meet the minimum capital
requirement (MCR) in the adversescenario.
Atotal of 8% (10)failed to meet the MCR in the inflation scenario.
Overall, EIOPAidentifiedthemain driversof the resultsasadverse
developmentsin equityprices,interestratesand sovereign debt markets.

On the liabilityside, non - life risksweremore critical, triggeredby
increasedclaimsinflationand natural disasters.
Risksfrom sovereign bond exposureswere coveredseparatelyin a
supplementarytest and the resultsshowedthat approximately5%
(6) of the participatinggroupsand undertakingswouldnot meet the
MCR.
Thesatelliteexercisewaslaunched after the EIOPA2011corestresstest
exercise.
This wasto analyse the risksthat European insurerswouldface in a
scenario whereinterest ratesremained low for a prolonged period of
time, and to understandthedevelopment of insurers‘capital positionsin
adverseeconomicconditions,aswell asto evaluatethe overall stability of
theinsurancemarket.
It wastargeted at thoseinsurersthat areexposed to interest-rate
sensitiveproducts, sincea low-interestscenariowouldsignificantly
jeopardisethe abilityof theseundertakingsto meet theperformance
guaranteesprovidedin certain insurancecontracts.
For this reason, comparedtothescope of the corestresstest, the sample
of reporting undertakingswasslightlyreducedto82in total.
Otherwise,the setup of thelow-yield stresstest wasidenticaltothe core
test, i.e. valuationswerebased on SolvencyII/ QIS5 technical
specifications,and the referencedate was31December 2010.
Based on theseresults,EIOPAconcluded that, on average, theindustry
wouldbe adverselyaffectedby a prolongedperiod of lowyields.
Depending on the particularshapethat such a low-yield curve would
take and wherethe lowyieldswerelocatedalongthe curve, results
suggest that 5%-10% of the insurersincludedin thetest wouldface
severeproblemsin the sense that their solvencyratiowouldfall below
100%.

In addition, an increasednumber of insurerswouldseetheir capital
positiondeterioratewithsolvencyratesonly slightlyabove the100%
mark, meaningtheycould becomevulnerabletoother potential external
shocks.
Risk dashboard
In October 2011, the EIOPA FSC set up itsfirst (pilot) risk dashboard, in
linewiththe framework of the joint group on thecooperation between
theESAsand the ESRB on systemic risk.
As part of the new European supervisorylegislation, EIOPA, theother
ESAsand theESRB are called upon to ―develop a common set of
quantitativeand qualitativeindicators(risk dashboard) toidentify and
measure systemic risk‖.
This dashboard should be constructed asa joint effort of the ESAsand
theESRB to givea structuredview of risksto the financial sector and
thustofacilitate a regular assessment of theserisksand possible
mitigation policies.
It is envisagedthat the risk dashboards of the variousinstitutionsbe
discussed at ESRB meetings(General Board and/ orAdvisory Technical
Committee) toassesssystemic risk.
Thetwomain outputsrequired are riskvulnerabilitiesand solvency
profitability(meaningthe ability towithstandshocks).
Afirst pilot risk dashboard hasbeen approved by EIOPA but isstill in a
development phaseand needstobe further refinedand finalised after
completion of thequalitycontrol phase.
As far asthemethodologyis concerned, theEIOPAriskdashboardis
based both on publicsources(market data) and theconfidential
quarterlyfast-track reportingfrom the30largest European insurance
groupsand it containsboth quantitativeand qualitativeindicators.

Data availabilityfor dashboard purposesis expected tofurther improve
with the introduction of SolvencyII reportingfrom 2014onwards.
Aset of some 50quantitativeindicatorsform thebasis of therisk
assessment, and theseare mapped intoaggregatedcategoriesthat are
alsoused by the other ESAs.
Theseare macro risk, credit risk, market risk, funding and liquidity
risk, profitabilityand solvencyinterlinkagesand imbalances,and a
specific categoryfor insurancerisk.
Therisk dashboard isthen obtainedthrough the mechanical aggregation
of theseindicatorsand additional expert judgment which isimportant for
filteringout noise from thedata and producingcrediblerisk
assessments.
Therisk dashboard will be shownin theform of a graph withcolour
coding.
In addition toworkon the risk dashboard, EIOPAlaunchedseveral
initiativesduring 2011to improvemarket monitoring.
For example, a daily financial market monitor waslaunched, and thisis
nowproduced and circulatedamong EIOPAStaff and EIOPAFSC
Members.
A more comprehensive bi-weekly briefing containing risk assessments
and market analysis was also developed, and regular production of this
briefing isplanned for 2012.
Oversight
During 2011EIOPAundertook significant workin relation to insurance
groupsunder the current regime (SolvencyI), whilstin parallel
preparingitselffor the SolvencyII framework.

This hasincludedinitiativestoharmoniseand streamlinegroup
supervision for cross-bordergroupsand enhanceco-operationbetween
supervisorswithintheCollegesof Supervisors.
EIOPA hasstarted toattend the meetingsof Collegesof Supervisors
sincethe beginningof 2011, and this hasbeen a vital mechanismfor
helpingsupervisorstoprepare for theentry intoforce of Solvency II, in
particular withregard to the pre-applicationsfor internal models.
In MarchEIOPApublished itsreport on the functioningof colleges,and
alsothetargetstobe achieved during 2011, asincluded in EIOPA‘s2011
Action Plan for Collegesof Supervisors.
Theoverall strategictarget of EIOPA‘sCollegeworkis toconsolidatethe
positionof the EEA supervisory communityvis-a-vis thecross- border
operatinginsurance groupsfor thebenefit of both group and solo
supervision.
Thefocusis on combiningand leveragingthe knowledgeand forces of
thenational supervisoryauthoritiesin theEEA toform a strong and
equal supervisorycounterpart tothe mostly centrallyorganised and
managed undertakings.
In thisrespect, EIOPAasa member of theCollegesof Supervisors
(―Colleges‖) promotescommunication, cooperation, consistency, quality
and efficiency in theColleges.
In 2011, 89 insurancegroupswith cross-border undertakingswere
registeredin theEEA.
During the year, Collegesof Supervisorswith at least one physical
meetingor teleconferencewereorganised for 69 groups.
Atotal of 14 national supervisoryauthoritiesacted asgroup supervisors
toorganisethe events.

Some6 Collegeswerechairedby theSwissFinancial Market Supervisory
Authority (FINMA) asgroup supervisor.
Duringthe setup phasein the first year after its establishment, EIOPA
attendedCollege meetingsand/ or teleconferencesof 55 groups.
Themain conclusionsfrom EIOPA’sobservation in the Collegesin
2011are asfollows:
•Substantial effortsweremade by supervisorsin preparing, organising
and contributingtothe College;
•Theexchangeof theQIS5and stresstest resultsin most of theColleges
enhancedthe qualityof thediscussionsand improved thesupervisors‘
common understandingof theundertakings‘risk exposure and solvency
position;
•Similarly, the discussionof financial conglomerateaspects,where
relevant, helpedtoimprove College members‘ awarenessof the financial
strength of the groupsasa whole;
•Concernsor legal constraintsin some Member Statesrelatingto the
exchangeof confidential information hamperedthe scope and qualityof
discussionsin the Colleges;
• Differencesobserved betweentheCollegesregarding:
-Scope, content and thefrequencyof informationexchangein the
Colleges,
-Preparation and focus of presentations and discussions with the firms‘s
representative are areas for improvement in implementing an EEA-wide
consistent, coherent and effective supervisionfor cross-bordergroups;
•Theemergencyinfrastructure test wassuccessfullycompletedby most
of the Colleges;

•TheCollegesare makinggreat effortsto prepare for the
implementationof theSolvencyII Directive, in particular thepre-
application processfor useof an approved internal model.
Participation in Collegesby EIOPAstaff
During 2011, five full-timeequivalent staff wererecruited to constitute
EIOPA‘sCollege team.
Acoordinatorhad been appointed at thebeginningof 2011to preparea
strategyfor EIOPAand tokick off EIOPA‘sparticipation in the
Colleges.
EIOPA staff‘scommitment tothe Collegesfocusedprimarily on the
followingissues:
• Toexplain EIOPA‘srolein the Colleges;
•Togain experiencefrom participatingin College meetingsfor the first
year;
•Tomonitor the collaboration of College membersregardingthe
appropriateinformation exchangeand the discussionof relevant topics
in theCollege;
•Toprovide input intotheagenda and stimulateinformation exchange
within Collegeson stresstest resultsand thedialogueon risk exposure,
financial strength and resiliencetoadverseeconomicand financial
market developments;
•Toprovide regular updateson the workingassumptionsin light of the
still pending decisionson the SolvencyII timelines;
•Toact asa link betweenthe Collegesand SolvencyII WorkingGroups
andprovidepractical input intoSolvencyII policy work.

During 2011, EIOPAstaff observed overall significant differencesin the
level of information exchange.
Areas for improvement include in particular a continuous and effective
information exchange, as well as discussion and assessment of risks by
takinga more prospectiveview.
EIOPA‘sAction Plan 2012for Collegeswasestablishedtaking into
account the experienceand conclusionsfrom Collegeworkin 2011.
Crisis Management
In early2011, a set of interim proceduresfor dealingwith emergency
situationswasdrawnup by EIOPAin conjunction with theother ESAs.
Aseconded national expert in crisismanagement wasappointed in
March2011, and work then commencedon the development of a
permanent framework for crisismanagement for EIOPA.
Key to thiswasthe development of a strategic policy on crisis
management that waspresented to theBoard of Supervisorsin June
2011.
The Board of Supervisors recognised the need to put a robust framework
in place at an early stage, and an ad hoc Board of Supervisor‘s task force
wascreated to develop this framework.
In December 2011, the taskforce delivereda comprehensive, decision-
makingframeworkwhich wasendorsedby the Board of Supervisors.
This frameworksetsout in detail the processesthat EIOPAwill followin
dischargingits crisispre-emption and management responsibilitiesunder
theEIOPARegulation.
A small standing group was created, comprising EIOPA members and
staff, that will consider on a regular basis whether EIOPA needs to act
under theRegulationand what actionsit may take.

This approachisseen asthemost efficient wayof carrying out regular
monitoring and preparing Board of Supervisors‘decisionson crisis
management issues.
EIOPA Work Programme 2012
In 2012EIOPAwill already operateasa fully-fledged European
agency, howevermany of theprocessesand procedureshave tobe
refinedor adapted to the growingorganisationand new responsibilities.
TheWork Programme setsout thegoalsand deliverablesfor the second
year of operations.
Regulatory tasks
In 2012,EIOPAwill deliver draft implementingand regulatory technical
standardsaswell asguidelinesin thedifferent workstreams, according
tospecificneedsto complement theprinciplesand regulationsissuedby
theEuropean Commission.
Theconcretescope and timingof these deliverablesdepend on thefinal
decision on theOmnibusII Directive(OMDII) aswell ason the
approval of the final DelegatedActsimplementingSolvencyII.
In 2012,EIOPAwill prepare itsfinal advicetotheEuropean
Commission on thereview of the Directiveon the activitiesand
supervision of institutionsfor occupational retirement provision (IORP
Directive).
EIOPA will then develop specifications and carry out a targeted
quantitative impact study (QIS) exercise in order to support the
Commission‘sproposal for a revised IORP Directive.

EIOPA will contributetothe revision of the InsuranceMediation
Directive(IM D), by providing a respectiveadvice to theEuropean
Commission.
Supervisory tasks
EIOPA will continue to participatein theworkof Collegesof Supervisors
and will specificallypromote frequent information exchangeand
discussionon risks.
Topromotetheexchangeof information in a safeand sound manner
within Collegesof Supervisors, EIOPAwill give priority toitsworkon the
implementationof a common IT solution for the secureexchangeof
information withinColleges, alsoin crisis times,withthe aim tohavethe
tool readyin 2012.
In the courseof 2012EIOPAwill launchingthreepeer reviewson the
followingtopics: supervision of branchesof EEA insurance
entities,supervisory aspectsof thepre-applicationof internal models
and supervisorypowerstoobtain information and intervention
regardingIORPs.
Consumer Protection and Financial Innovation
EIOPA will further develop and pursue itsleadingrole in promoting
transparency, simplicityand fairnessin themarket for consumer
financial productsand servicesacrossthe internal market.
This will be done by developing more standardisedand comparable
information about therisksand costsof products, relevant regulatory
requirementsand complaintshandling procedures.
TheCCPFI will continue itsmonitoringand assessment of new or
innovativefinancial activities, releasegood practicesreportsand, where
deemed appropriate, make proposalsfor the adoption of guidelinesand

recommendationswitha view topromoting the safety and soundnessof
marketsand convergenceof regulatory practice.
Financial Stability
EIOPA will carry out a harmonised, pan-European stresstest for the
insurancesector in cooperation withthe ESRB, the ECB and EBA.
In autumn 2012EIOPAwill deliver an annual assessment of sector
developments, highlightingimplicationsfor financial stability, witha
provisional report in thespring of 2012,outliningmain market trends
sincethe end of 2011.
TheAuthority will alsofurther develop and monitor a risk dashboard in
cooperationwiththeESRB and other ESAs.
Crisis management
EIOPA will continue to develop its crisis management framework with
the focus on the pre-emption element and analytical tools to be used in
decision- making.
Later in 2012a simulation exercisetotest theoperation of thenew
frameworkwill be carried out.
EIOPA will alsocontributeto theworkof the European Commission in
developing crisismanagement proposalsfor insurance, alongwiththe
workof the IAIS on resolution tools for systemically important insurance
undertakings.
External Relations
EIOPA‘sview is elaboratedwiththe Members‘support and set forth in
therelevant committeesof IAIS. Particular focus will be given to raise
EIOPA‘svoice in theIAIS Executive Committeeand topromote the
Common Framework for theSupervision of InternationallyActive
InsuranceGroups(ComFrame).

At the same time, EIOPA will continuetodevelop itsinternational
relationsby holdingregulatory dialoguesand maintaininga close
contact withthird countries includingtheUS, China, Japan and Latin
America.
EIOPA will alsocontinuetoassist the European Commission in
preparingequivalencedecisionspertainingto supervisoryregimesin
third countriesby wayof producingfinal, fullyconsultedupon advice.
Joint Committee
In 2012theJoint Committeewill further develop
itsworkin the sub- committeeson financial
conglomerates,on crosssector
developments, risksand vulnerabilitieson anti-
moneylaunderingand on consumer protection
and financial innovation.
Theexchangeof information with the ESRB
will alsobe further developed.

List of the Members and Observersof the EIOPA Board of
Supervisors

Agathe Côté: Modelling risks to the financial
system
RemarksbyMsAgathe Côté, DeputyGovernor of
theBank of Canada, to the CanadianAssociation
for BusinessEconomics,Kingston, Ontario, 21
August 2012.
* * *
Introduction
It hasbecome a summer tradition for theBank of Canada to addressthe
CanadianAssociation for BusinessEconomics.
This year it is my pleasureand I thank you for the kind invitation.
An audienceof colleaguesand felloweconomists offersme an
opportunitytodelveintoa complex subject, and onethat is particularly
timely: financial system risk.
We continueto seetodaytheenormouscoststo the global economy of
thefinancial crisisthat started five years ago.
Of the many lessonswehave learned from the crisis, a keyone is this:we
need to paymore attention tothe stabilityof the financial system asa
whole.
This meansunderstandingbetter how risksget transmittedacross
financial institutionsand markets, and understandingbetter the
feedbackloop betweenthe financial system and the real economy.
From a policyperspective, this meanstakinga system-wideapproachto
financial regulationand supervision.
Majorreforms of theglobal financial system now under wayaddressthis
need.

System-widerisk hasbeen a focusof attention at the Bank of
Canada,and at other central banks,for sometime.
Ten yearsago, theBank issued the first editionof itssemi-annual
Financial System Review in whichit identifieskeysourcesof risksto the
Canadian financial system and highlightsthe policies needed to address
them.
Ayear later, in 2003,weorganized our annual conferenceon the theme
of financial stability.
In the wakeof theglobal financial crisis, the Bank hasintensified its
research effortsin this area.
In particular, a priorityis toimprove thetheoretical and empirical
modelsweusetoanalyze elementsof thefinancial system that can lead
tothe emergenceof risks and vulnerabilities.
With more finely tunedquantitativemodels and tools, theBank will be
better ableto identifyriskson a timelybasissothat the private sector
andpolicy-makerscan take correctiveaction to support financial
stability.
Let me acknowledgeupfront that this task is complex.
While macroeconomic models havelong been usedtoguidemonetary
policy decisionsby central banks, modelsof financial stability and
systemic risk aremuch lessadvanced.
In my remarkstoday, I want to talk about the progressthat wehave
madeat the Bank in modellingriskstothefinancial system.
I will start by brieflydescribingthe notion of systemic riskand various
approachesused to identify and measure it.

I will then discuss two state-of-the-art quantitative models that we have
developed to improve our assessment of risks to the Canadian financial
system.
The multiple dimensions of systemic risk
Systemic, or system-wide, risk goesbeyond individual institutionsand
markets.
It is the risk that the financial system as a whole becomes impaired and
that the provision of key financial services breaks down, with potentially
seriousconsequencesfor the real economy.
Systemic risk manifestsitself in different ways.
There is a time dimension, whichreferstothe accumulationof
imbalancesover time, and a cross-sectional dimension, whichrefers to
how risk isdistributedthroughout the financial system at a givenpoint
in time.
Procyclicality isthekey issuein thetimedimension.
It reflectsthetendencytotake on excessiverisk during economic
upswings– toomuch punch from thepunchbowl, if you will – and to
become overly risk averseduring the downturns.
Procyclicalitymakes the financial system and the economy more
vulnerable toshocks, and increasesthe likelihoodof financial distress.
Riskconcentrationsand interconnectionsare thekey issuesin the cross-
sectional dimension.
Financial institutionscan have similar exposurestoshocksor be linked
through balancesheets.
As a result, lossesin one institution can lead tofearsof contagion that

amplify the adverseeffectsof the initial shock.
For instance, uncertaintyabout the viabilityof counterpartiescan lead to
hoardingof liquidity, whichmay seem like an appropriate action for the
individual institutionbut can havedisastrousconsequencesfor the
financial system asa whole.
System-widesurveillancerequires that weregularly assessthe
importanceof varioustypes of systemic risk.
How wejudgea particular risk will be basedon theprobabilitythat it
will lead to financialsystem distress, and on theextent of itsimpact
should that distressmaterialize.
Early-warning indicators
Afundamental challengeis todetect the risksarisingfrom both global
and domestic sourcesin an environment witha vast number of potential
indicators.
Therefore, one directionof research at the Bank hasbeen toisolatethe
key signalsfrom this broad information set by identifying a smallergroup
of variablesthat can serve asearly-warningindicatorsof emerging
imbalances.
Sincefinancial crisesin Canadahave been rare, international data are
used to help establishnumerical thresholdsfor each domesticindicator.
For example, if international evidencesuggeststhat credit growthabove
a certain rate tendstobe associatedwithincreasedrisk, thena period
with credit growth above thethreshold wouldsuggest an elevated
probabilityof financial stress.
Selectingthe level of thresholdsinvolvesa difficult trade-off between
falsealarms and failure to signal an event, soin practice theearly-

warningindicatorsare used mainlytoidentify areaswheremore detailed
investigationmay bewarranted.
Theyprovide an objective, practical startingpoint todetect the buildup
of imbalancesin thefinancial system.
One early-warningindicatorthat weregularlytrack is the deviation of
theaggregateprivatesector credit-to-GDP ratiofrom itstrend (the
credit-to-GDPgap), whichservesasa rough measure of excessive
leverageacrossthe financial system (Chart 1).
This indicatorhasbeen shown toprovidesome leadinginformationasa
predictorof bankingcrises,and hasbeenproposed by theBasel
Committeeon BankingSupervision (BCBS) asa useful guide for
decisionsabout when to activatethecountercyclical capital buffer – an
important macroprudential policy instrument in the Basel III agreement.
Given the complexityof systemic risk, it is unrealistic toexpect a single
measure or indicatortoserve all purposes.

Combining indicatorscan producebetter signals withfewerfalsealarms
andundetected crises.
For example, research shows that combining the Credit - to - GDP gap
with a measure of real estate prices producesan indicator that performs
betterthan either variable on itsown.
Our own workat theBank reinforcesfindingselsewherethat aggregate
private sectorcredit and real estatepricesare among the most reliable
indicatorsof financial stress.
Identifying sourcesof risk is essential, but sois determiningthe
likelihoodthat theserisks will materialize.
Therefore, another important aspect of ongoingresearch is the
development of statistical models to help usforecast theprobabilitythat
a crisiswill occur basedon a group of indicators.
Macro stresstests
Early-warningindicatorsareuseful to gaugethe probabilityof financial
stress, but a thorough assessment alsorequiresan analysis of what could
happen if the risk materializes.
This is thegoal of macro stresstesting.
Agood part of theBank‘seffortsin recent years hasbeendevotedto
developing and refiningstress-testingmodels.
This class of models takes a large but plausible macroeconomic shock as
a starting point and analyzesitsimpact on the balance sheets of banksor
other sectorsof theeconomy.
TheBank now hastwomain stress-testingmodels to help monitor risks
tothe financial system.

Thesemodels can alsobeused toassessthepotential impact of policy
toolsor regulatoryactionsin mitigatingfinancial system risks.
Assessing risks from elevated household debt
Thefirst, the Household RiskAssessment Model, or HRAM, is a
microsimulationmodel that assesseshow the debt burden of Canadian
householdscan affect financial stability.
Using microdata from household balance sheets, the model allows us to
estimate how various shocks would affect the distribution of debt within
thehousehold sector.
Thesimulationstake intoaccount changesover time in individual debt
levels,aswell aschangesin household wealth from savingsand
fluctuationsin thevalue of financial assets.
Tracking theasset sideof household balancesheetsgivesusa more
accuratepicture of systemic risk sincechangesin wealth affect
households‘abilitytopay their debt.
Household vulnerabilitiesdepend not onlyon the averagelevel of
debt, but alsoon howdebt is distributedacrossindividuals.
One strength of themodel is precisely itsabilityto account for this
distribution.
For instance, while record-lowinterestratesin recent years have
contributedtoa relatively lowaggregate household debt-service
ratio, theshare of Canadian householdsthat are consideredmost
vulnerable– thosewithadebt-serviceratio equal toor higher than 40per
cent – hasclimbedtoabove-averagelevels,ashasthe proportion of debt
heldbythesevulnerable households(Chart 2).

Using HRAM, weestimatethat if interest rateswereto riseto 4.25per
cent by mid-2015,theshare of highly indebtedhouseholdswouldrise
from slightlyabove6 per cent in 2011toroughly 10 per cent by
2016,while theproportionof debt heldby thesehouseholdswouldrise
from
11.5per cent to about 20 per cent over thesame period.
Sowhile theaggregate household debt-serviceratiopaintsa somewhat
rosypicture, takingintoaccount distributionsgivesusa clearer and
more cautionaryindicationof how vulnerable our financial system
actuallyis to household debt.
Another strength of themodel is that it providesa flexibletool for
simulatingtheimpact on household solvencyof a widerangeof
potential shocks, such asan increasein unemployment.
HRAM indicatesthat household loansin arrearswouldmore than
doubleunder a severelabour market shock similartothat observed in
the recession of theearly1990s.

Despitethe model‘sstrengths, wecontinue to enhanceour analysisby
improvingHRAM.
Expandingthe behavioural aspectsof the model is one waytodo this.
For instance, the model currently allowsdistressed householdstopay
their debtsbysellingtheir liquidassets,but not their homes.
Work is alsounder waytoimprovethe design of the shock scenarios.
Resultsof stresstestsusing HRAM are regularly reported in the Bank‘s
Financial System Review and constitutean important element of our
overall assessment of the risksassociated withhousehold finances.
Assessing contagion effects in the banking system
HRAM providesinvaluableinformation on vulnerabilitiesin the
household sector, but the Bank is alsointerestedin assessingrisks more
broadly withinthe Canadian financial system.
Tothisend, wehavebeen workingfor several years on developinga
MacroFinancial Risk Assessment Framework(or MFRAF).
Drawingon detaileddata from bank balancesheets,MFRAF is a
quantitativemodel that tracksthe contribution of individual banksto
systemic risk.
Traditional stress-testingmodels focusexclusivelyon solvencyrisk, and
estimatetheoverall risk to thefinancial system by simplyaggregating
credit (or other asset) lossesthat wouldmaterialize at individual banksin
theevent of a severe shock.
MFRAF goesbeyond this traditional approach by taking intoaccount
linkagesamongbanks arisingfrom counterpartyexposures– or network
spillovereffects– aswell asfunding liquidityrisk, that is, therisk of
market-basedrunson banks.

Thefinancial crisisillustratedthesignificant risks associatedwitha
deteriorationof fundingliquidity.
Thecollectivereactionsof market participantsled to mutually
reinforcingsolvencyand liquidityproblemsat banks around theworld.
As funding liquidityevaporated, many well-capitalizedinstitutionshad
totakewritedownson illiquidassets,or sell them at a loss, creating
uncertaintyin the market about their solvencyand adding to the
downward pressure on asset prices.
MFRAF hasbeenbuilt tointegratefundingliquidityrisk asan
endogenousoutcome of the interactionsbetweensolvencyconcernsand
theliquidityprofilesof banks.
This strong microeconomicfoundationconstitutesa major innovation in
macro stress-testingmodels.
MFRAF alsoincorporatesnetworkexternalitiescaused by thedefaultsof
counterparties, withthesizeof a counterparty‘sinterbank exposures
increasingthe likelihoodof spillover effects.
Akey lesson from the model is that failureto account for either funding
liquidityrisk or interbank exposurescould lead tosignificant
underestimationof therisksto the financial system asa wholeif the
bankingsystem isundercapitalizedand relies extensively on the
short-term fundingmarket.
Importantly, thelossdistributionsgeneratedby themodel exhibit
fat tails, a key featureof the actual distribution of financial system risks
(Chart 3).

Thefact that the model is ableto replicatethisimportant stylized fact
demonstratesthat it hassignificant potential asa tool for assessing
systemic risk.
Nevertheless, while MFRAF is alreadysomewhat complex, the layers of
interaction will need to be further augmented.
For instance, the model missesany negativefeedback that could occur
betweenheightenedrisks to the banking system and the real economy.
Themodel could alsobe expandedover timetoincludeother types of
financial institutionsand markets.
Compared withother approachesthat use market-based data, such as
theasset-pricingapproach, the transmissionchannel in models like
MFRAF is transparent, and this improvesour interpretationof results.
Becauseof this ―story-telling‖ ability, many central bankshave begun to
usethistype of framework in their financial stability analysis.

In addition toassessingrisks, MFRAF can be used toexaminethe
meritsof policyor regulatory initiativessuch ascapital and liquidity
rules.
As the model becomesmore refined, theobjectiveis touse it more to
complement other existingmacro stress-testingexercisesand to sharpen
our analysis and communication of risksin the Bank‘sFinancial System
Review.
Conclusion
Let me conclude.
TheBank of Canada is conductingextensiveresearchintofinding
methodologiesand toolstoidentify and measure systemic risk.
While work in thisarea is extremelycomplex, the Bank hasmade
substantial progressin recent years.
We now have twostate-of-theart models.And with HRAM, the Bank of
Canada isone of thefew central banksat theleadingedge of using
microsimulationmodels toassessvulnerabilitiesin the household sector.
Our effortsto build these models haveprovideduswithimportant
lessons.
First, distributionsmatter – wecannot rely solely on aggregate data:
distributional featuresand complex interactionsare very important for
assessingrisks.
This meansdevelopingmodels that capture theseeffects.
Our household simulationmodel is aimed directlyat understandinghow
thedistribution of debts,assetsand income affectsfinancialstability.

MFRAF uses information about the interconnections of individual
financial institutions because these can lead to non-linear network
effectsthat are alsoimportant for assessing systemic risks.
Second, predictingbehaviour under stressconditionsis very difficult.
Modelsneed to be ableto handlea variety of ―what-if‖ scenarios
corresponding to different assumptionsabout behavioursunder stress.
Finally, weneed to consider themany different sourcesof risk tothe
financial sector and take intoaccount their cumulativeeffectsand
interactions;otherwisewemay underestimaterisks.
Obviously, quantitativemeasuresalonewill never be enough to get a
completepicture, especiallysincethe financial system evolvesrapidly.
Intelligencegathered from discussionswith the financial sector, aswell
asinformationshared withother policy-makers and supervisorshere in
Canada and in the international community, will always be criticaltothe
overall assessment of the risks.
While weare makingprogress,it isimportant to remember that financial
system modellingis still in itsinfancy.
Thegoal – understanding, preventing, and reducingsystemic | risk –
deservesour attention, diligent research and hard work. It hasbeen my
pleasuretosharesome of the Bank‘seffortswithyou today. Thank you
very much.

EBA, EIOPAand ESMA
Joint ConsultationPaper on Draft Regulatory Technical Standardson
theuniform conditionsof application of the calculation methodsunder
Article 6.2of the Financial ConglomeratesDirective (JC/ CP/2012/02)
I. Responding to thisConsultation
EBA, EIOPAand ESMA(theESAs) invitecommentson all mattersin
thispaper and in particular on thespecificquestionsstatedin the
attacheddocument ―Overview of questionsfor Consultation‖ at the end
of this paper.
Commentsare most helpful if they:
- respond to thequestion stated;
- indicatethespecific question towhichthecomment relates;
- contain a clear rationale;
- provideevidencetosupport the viewsexpressed/ rationaleproposed;
and
- describeany alternativeregulatory choicesEBA should consider.
II. Executive Summary
TheCRR /CRD IV proposals(the so-calledCapital Requirements
Regulation - henceforth ‗CRR‘- and theso-calledCapital Requirements
Directive– henceforth ‗CRD‘) set out prudential requirementsfor banks

and other financial institutionswhich are expected to applyfrom 1
January2013.
In anticipationof thefinalisationof the legislativetextsfor the
CRR/ CRD IV, theEBA, EIOPAand ESMA(hereaftertheESAs)
through the Joint Committee,have developed the draft RTSin
accordancewiththemandatecontained inArticle 46(4) of theCRR and
Article 139of CRDIV (amendingArticle 21a (2a) of the Directive
2002/ 87/ EC) on thebasisof the European Commission‘sproposals.
ThisArticle providesthe ESAs through the Joint Committee,to develop
draft Regulatory TechnicalStandards (RTS) withregard to the
conditionsof theapplication of theArticle6(2) of the Directive
2002/ 87/ EC (hereafter the Directive).
Further the ESAshave developed the draft RTShaving regard toArticle
230in connection withArticles220and 228of the Directive
2009/ 138/ EC2.
Tothe extent that thetextsmay changebeforetheir adoption, theESAs
shall adapt itsdraft RTS accordinglyto reflect anydevelopments.
TheRTS included in this consultation have tobe submittedtothe EU
Commissionby 1January2013.
Pleasenotethat theESAshave developed thepresent draft RTSbased
on theEuropean Commission‘slegislativeproposalsfor the CRR/ CRD
IV.
Theyhave alsotaken intoaccount major changessubsequentlyproposed
bytherevisedtextsproduced by theCouncil of the EU and the European
Parliament, during the ordinarylegislativeprocedure (co- decision
process).
Followingtheend of theconsultation period, and to the extent that the
final text of the CRR/CRD IV changesbeforethe adoption of the RTS,

theESAswill adapt the draft RTS accordinglytoreflect any
developments.
Main features of the RTS
This consultation paper putsforwarddraft RTSin order toensure that
institutionsthat are part of a financial conglomerateapplythe
appropriatecalculationmethodsfor thedetermination of required
capital at the level of the conglomerate.
Theyare based in particularon thefollowingelements:
General Principles
oEliminationof multiplegearing;
oEliminationof intra-group creationof ownfunds;
oTransferability and availability of ownfunds;and
oCoverageof deficit at financial conglomeratelevel having regard to
definitionof cross-sectorcapital.
Technical calculation methods
1. Method 1:―Accounting consolidation method‖:
TheFICOD providesin relationtoMethod1that the own fundsare
calculatedon thebasis of the consolidatedposition of the group.
Accordingtothis general provision, thecalculationof own fundsshould
bebased on the relevant accountingframework for the consolidated
accountsof theconglomerateapplicabletothescope of the Directive.
Theuse of ―consolidatedaccounts‖ eliminatesall ownfunds‘intra-
group items,in order toavoid doublecounting of capital instruments.

Accordingtothe Directiveprovisions, theeligibilityrulesare those
includedin sectoral provisions.
2. Method 2: ―Deduction and aggregation method‖.
This method calculatesthesupplementary capital adequacy
requirementsof a conglomeratebased on the accountsof soloentities.
It aggregatestheown funds, deductsthebook valueof the participations
in other entitiesof the group and specifiestreatment of the proportional
shareapplicabletoown fundsand solvencyrequirements.
All intra-groupcreation of own fundsshall be eliminated.
3. Method 3: ―Combination of methods1and 2‖.
Theuse of combination of accounting consolidationmethod 1and
deductionand aggregationmethod 2 islimitedtothe caseswherethe
useof either method 1or method 2 wouldnot be appropriateand is
subjecttothepermission by the competent authorities.
III. Background and rationale
Thesupplementarysupervision of financial entitiesin a financial
conglomerate iscovered by the Financial ConglomeratesDirective
2002/ 87/ EC, hereafter knownasthe Directive.
This Directiveprovidesfor competent authoritiestobe able toassessat a
group-widelevel the financial situationof credit institutions,insurance
undertakingsand investment firms whicharepart of a financial
conglomerate,in particular asregards solvency(includingthe
elimination of multiplegearingof own fundsinstruments).
The nature of RTSunder EU law

Draft RTSare produced in accordancewithArticle 10 of the ESAs
regulation.
AccordingtoArticle 10(4) of the ESAs regulation, they shall be adopted
bymeansof Regulationsor Decisions.
AccordingtoEU law, EU regulationsare bindingin their entiretyand
directlyapplicablein all Member States.
This meansthat, on thedateof their entry intoforce, theybecomepart
of the national law of the Member Statesand that their implementation
intonational law is not onlyunnecessarybut alsoprohibitedby EU law,
except in sofar asthis is expresslyrequiredby them.
Shapingtheserulesin the form of a Regulation wouldensure a level-
playing field and wouldfacilitatethe cross-borderprovisionof services.
Background and regulatory approach followed in the draft RTS
Thesedraft RTSareproduced in accordancewithCRD IV/ CRR
proposals,which providethat the EBA, ESMA and EIOPA(hereafter the
ESAs), through the Joint Committee, shall develop draft regulatory
technicalstandardswithregard tothe conditionsof the applicationof the
calculation methodswithregard toArticle 6(2) of the Directiveand shall
submit thosedraft regulatory technical standardstotheCommissionby 1
January2013.
Theproposeddraft RTS coverstheuniform conditionsfor the useof the
methodsfor thedetermination of capital adequacyof a financial
conglomerateunder the Directive.
Theyelaborate on Technical principlesapplying to all of thethree
methodsprovided for by Directive; and alsocontain anAnnex providing
further detail for Method2.

Therequirementscontained in thedraft RTSare mainlydirected at
institutions,although some of them are directedat competent
authorities.
IV. Draft Regulatory Technical Standardson the uniform
conditionsof application of the calculation methods under
Article 6.2 of the Financial Conglomerates Directive
CommissionDelegatedRegulation (EU) No XX/ 2012
supplementingDirectivexx/ XX/ EU [CRD] of the European Parliament
and of the Council of [date], Regulation (..) No xx/XXXX [CRR] of the
European Parliament and of the Council of [date] and Directive
2002/ 87/ EC [Financial ConglomeratesDirective] of the European
Parliament and of theCouncil of [date] with regard toregulatory
technicalstandardsfor theuniform conditionsof application of the
calculationmethodsunderArticle 6.2of theFinancial Conglomerates
Directiveof XX Month2012
THE EUROPEAN COMMISSION,
Havingregard to the Treaty on the Functioningof theEuropean
Union, Having regard to the[proposal for a] Regulation (...) No xx/ xxxx
of the
European Parliament and of the Council of dd mm yyyy on prudential
requirementsfor credit institutionsand investment firmsRegulation
xx/ xxxx [CRR] and in particularArticle 46 (4) thereof.
Havingregard to the [proposal for a] Directive(...) No xx/ xxxx of the
European Parliament and of the Council of dd mm yyyy on the accessto
theactivityof credit institutionsand theprudential supervisionof credit
institutionsand investment firms[CRDIV] and in particularArticle 139
thereof.
Havingregard to the Directive2002/ 87/ EC, asamended, of the
European Parliament and of the Council on the supplementary
supervision of credit institutions,insuranceundertakingsand investmentSolvency ii Association

firmsin a financial conglomerate(hereinafter―theDirective‖) and in
particular toArticle 6(2) andAnnex 1thereof.
Whereas:
(1)Directive2002/ 87/EC providesin Chapter II, Section 2, rules on
capital adequacyof financial conglomerates, such that the elementsof
ownfundsare available at the level of a Financial Conglomeratesare
alwaysat least equal to the capital adequacyrequirementsascalculated
in accordancewithAnnex I of theDirective.
(2)Regulation (...) No xx/ xxx (‗CRR‘) providesin Article 46, within Part
II, Chapter 2, Section 3, Sub-Section 2 and in thecontext of common
equity
Tier I rules, requirementsfor deductionwhereconsolidationor
supplementarysupervisionare applied.
This section of theCRR providesempowermentsto the European
Commissiontoadopt delegatedacts(regulatory technical standards) in
accordancewitharticles10-14of the Regulation(EU) No 1093/2010
establishingthe European BankingAuthority (‗EBA‘), Articles10-14of the
Regulation (EU) No 1094/ 2010establishingthe European Insuranceand
Occupational PensionsAuthority (‗EIOPA), andArticles10-14of the
Regulation (EU) No 1095/ 2010(‗ESMA), establishingtheEuropean
Securitiesand MarketsAuthority.
Theseactswill completetheEU singlerulebook for institutionsin the
area of ownfunds.
(3)Directive(...) No xx/xxx (‗CRDIV‘) providesin Article 139that the
Directive2002/ 87/ EC shall be amended, such that the EBA, EIOPA
and ESMAthrough the Joint Committee, to develop draft Regulatory
TechnicalStandards(RTS) with regard totheconditionsof the
application of theArticle 6(2) of the Directive.

(4)For effectivesupervisionof Financial Conglomerates, supplementary
supervisionshould be appliedtoall such conglomerates, the cross-
sectoral financial activities of whichare significant, which is the case
whencertain thresholdsare reached, no matter how theyare structured.
Supplementarysupervisionshould cover all financial activitiesidentified
bythesectoral financial legislationand all entitiesprincipallyengagedin
such activitiesshould be included in thescopeof thesupplementary
supervision, includingasset management companiesand alternative
investment fund management companies.
(5)Without prejudiceto sectoral rules, supplementarysupervision of the
capital adequacyrulesis necessaryto bring more convergence in the
application of the calculationmethodslistedin Annex 1of the Directive.
(6)For financial conglomerateswhichincludesignificant banking or
investment businessand insurancebusiness, multipleuseof elements
eligiblefor the calculationof own fundsat the level of thefinancial
conglomerate (multiplegearing) aswell asany inappropriateintra-group
creationof own fundsmust be eliminated.
(7)Thefinancial conglomerateshould seek an acceptabletimeframe for
thetransferability of fundsacrossentitieswithin the financial
conglomerate,whichshall depend on whetherthespecific entity is
subjecttothe Directive2009/ 138/ EC or the CRDIV/CRR.
Moreoverfor an entitysubject tothe CRD IV/ CRR this timeframe
should be expediated basedon the fact that due tothenature of their
activities, theyare more vulnerable toa rapid deteriorationin confidence
and/ orsudden resolutionsituation.
(8)In addition any non-sector-specificown funds,in excessof sectoral
requirements,needtooriginatefrom entitieswhicharenot subject to
transferability/ availabilityimpediments.
(9)It is important toensure that own fundsare onlyincludedat
conglomerate level if there are no impedimentsto thetransfer of assets

Solvency ii News September 2012

Solvency ii News September 2012

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Solvency ii News September 2012