Solvency ii News August 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 a reallyinterestingpresentation.
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EIOPA Final Report on Public ConsultationsNo. 11/ 009 and
11/ 011On the Proposal for the Reporting and Disclosure
Requirements
1. Scope
1.This Final Report containsthe outcome of twoPublic
Consultations,No. 11/ 009and No. 11/ 011, whichwerelaunchedby
EIOPAon November 8 2011and on December 212011on the proposal for
reportingand disclosurerequirementson insuranceand reinsurance
undertakingsand insurancegroups.
2.It includesa feedback statement withEIOPA‟s opinion on themain
commentsreceived during the Public Consultation.
3.In theAnnexes, stakeholderscan find the detailed resolution template
withEIOPA‟s feedbackon all commentsreceived(Annex I), together
withupdated reportingand disclosuredocuments,which havebeen
revised asa result of the commentsreceived(Annex II).
4.In relation to thedraft Guidelineson Solvencyand Financial
ConditionReport and the Regular SupervisoryReport, Reportingunder
predefined eventsand undertaking‟sProcessesfor Reporting &
Disclosure, EIOPAhasincluded the explanatorytext in thisFinal
Report, asit did in the ConsultationPapers,in order toassist readers in
understandingthe thinkingbehind specific pointsin the Guidelines.
5.Therequirementson reporting and disclosuretemplatesdescribed in
thisFinal Report will be reflectedin a technical standard tobe drafted by

EIOPA and endorsed by the European Commission (EC) accordingto
Article 10 and 15of EIOPA Regulation.
6.Thedraft Guidelinesin thisFinal Report may still be subject to
amendmentsin order toreflect future developmentsof anyunderlying
legallybindingUnion acts.
7.TheOmnibusII Directive(OMDII) will set thedate of entry into
forceof theSolvencyII regime.
EIOPA stronglysupports,within the constraintsof thefinal decisionsof
theParliament and the Council on the timelineand the scope of the
technicalstandards,the entry intoforce of SolvencyII from 1January
2014.
2. Purpose
1.EIOPAacknowledgesthat the effectivetransitiontotheSolvencyII
regimeand in particularcompliancewiththe reportingand disclosure
requirementsfrom dayone requires that earlypreparationsare made for
implementation.
2.Consequently, EIOPA hasperformed informal consultationswith
stakeholdersover thelast few years and this wasfollowedbya period of
formal public consultationat the end of 2011on , Consultation Paper 9
(CP No. 11/ 009) and Consultation Paper 11(CP No. 11/ 011).
3.CP No. 11/ 009included the draft proposal on Quantitative
ReportingTemplatesand Draft proposal for Guidelineson Narrative
PublicDisclosure & SupervisoryReporting, Predefined Eventsand
Processesfor Reporting& Disclosure.
This consultation, included:
a)IssuesPaper;
b) Excel templatesfor reporting and disclosure;

c)Summary docsfor each template;
d) LOGs for each template;
e)Proposal for a Guidelineon NarrativePublicDisclosure &
SupervisoryReporting, Predefined Eventsand Processesfor Reporting
& Disclosure;
f)ImpactAssessment.
2.4. CP No. 11/ 011introducedinformationneedsrequired from insurers
for financial stability purposes.
This consultation included:
a)IssuesPaper;
b) Excel templatesfor reporting and disclosure;
c) LOGs for each template.
5.Thepackagein thisFinal Report reflectsEIOPA‟s position on the
commentsreceived on CP No. 11/ 009and CP No. 11/ 011.
6.EIOPAconsidersthat it is crucial for theeffectiveand timely
implementationof SolvencyII reportingand disclosurerequirements
(includingthereportingneeded for EIOPAfinancial stabilitypurposes)
that anupdatedpackageis provided, which undertakingscan use asthe
basisfor their preparations.
Furthermore, EIOPA believes that the package represents a stable view
of the level of granularity of the information that supervisory authorities
will need to receive.
7.Changesarising from thediscussionsof OMDII and the
implementingmeasuresarenot expected to be major and may
potentiallyincludeamendmentsin the followingtemplates:
a) Scopeof the quarterlyreporting;

b)Ownfunds;
c) SolvencyCapital Requirements(SCR) specificrisk modules;
d) Life TechnicalProvisions;
e) Activity by country;
f)Templatesapplicableto Ring FencedFunds(RFF) (asthematching
premium may impact RFF treatment).
8.Additionally, further clarificationswill need to bedeveloped
regardingthe use of thetemplatesby undertakingsthat usethe
simplificationson technical provisionsand SCR calculationsto be
definedby implementingmeasures.
9.Theapplicationof reporting and disclosurerequirementsto third
country brancheslocated in theEU will alsobe consideredfollowingthis
publication.
10.TheEuropean MarketsInfrastructureRegulation (EMIR)
consultation package, expectedin Julyof 2012will lead to an assessment
on theneed to revisethetemplateson derivatives.
Afull convergence of requirementsis not envisaged sinceEM IR servesa
different purposetoSolvencyII.
However, EIOPAbelievesit isimportant to align the requirementsasfar
aspossibleto limit the reportingburden on undertakings..
11.Finally, the packagemay be amendedduring the implementation
phase,in particular due tothedevelopment of the data point modelling
and eXtensibleBusinessReporting Language(XBRL) taxonomy, the
templatesmay require design or structural changes,but these will not
affect their content.
12.Thepackagepublished in this Final Report includes:a) Feedback
Statement for CP No. 11/009 and for CP No. 11/011;
b) Updated Excel templates(coveringsolo, groupsand financial
stability);

c)Updated Summary docs(coveringsolo, groupsand financial
stability);
d) Updated LOGs(coveringsolo, groupsand financial stability);
e)Updated proposal for the SFCR and narrative RSR, reportingunder
Predefined Eventsand undertakingsown Processesfor Reporting&
Disclosure;
f) Commentstemplate.
2.13. The updatedExcel filesare presentedin a different wayto the files
in CP no. 11/ 009and CP No. 11/ 011sincethis providesfor better
understanding
Thepackage now includessix Excel files, listedin thetablebelow,that
includeinformation for supervisorypurposesand for financial stability
purposes.
Thecontent for thesefiles is described at the end of the Feedback
Statement.
14.TheSummary docs, LOG filesand theproposal for theSFCR and
narrativeRSR, reportingunder Predefined Eventsand undertakingsown
Processesfor Reporting& Disclosurewereupdated accordingto the
changesmadetothetemplatesand further clarificationsrequestedfrom
stakeholders.
Future full and final package on Reporting and Disclosure
15.EIOPA expectsthat the final packageon reportingand disclosure
will be published during the courseof 2013and that it will incorporate
thepackagenow approved along withall foreseen changesdescribed at
paragraphs2.1to 2.10, and will include:

a) Draft Technical Standard
(includingsolo, groups, financial stabilityrequirementsand
requirementsfor third country branches):
i.Articles (will includecontent of IssuesPaper asconsultedand part of
thecontent of summary docsand LOGs that are “requirements”)
ii.Technical annexes(will includetemplatesplusdescriptionof the
items, basedon LOG files)
iii. Validation rules(tobe confirmed)
b) Guidelines
(includingsolo, groups, financial stabilityrequirementsand
requirementsfor third country branches), covering SFCR, RSR, pre-
defineseventsand undertaking‟s policies:i. Guidelines(wherea more
clear link betweentheSFCR and templatestobe disclosed will be done)
ii.Excel templates(if needed– dependsof the format tobe usedin the
Technicalannexesof the Technical Standard)
iii.Summarydocs(if needed, withinformationnot used in theTechnical
Standard but consideredhelpful for stakeholders)
iv.LOGs files(if needed, withinformationnot usedin the Technical
Standard but consideredhelpful for stakeholders)
c) Guideline on XBRL
3. Feedback Statement
I. Introduction
1.EIOPAwouldlike to thank all respondentswhoprovidedcomments
on theCP No. 11/009and CP No. 11/ 011.

These provided valuable suggestions for improving the reporting and
disclosure requirements package and helped to identify areas needing
further clarification.
2.Theamendmentsmade cover not only clarifications,includingthe
acceptanceof a number of rewordingsuggestionsfrom respondents,but
alsosome changestothecontent of theGuidelinesand the
accompanyingexplanatorytext.
3.Thefeedbackstatement outlinesfirst the commentsreceivedfrom
respondentstoCP No. 11/ 009and CP0No. 11/ 011and second the
review and resulting changesmade tothereportingand disclosure
package.
4.Thecommentsfrom theInsuranceand ReinsuranceStakeholders‟
Group are addressedin a specific section at the end of the feedback
statement.
II. Comments in general
Implementation and maintenance costs
5.Respondentsstated that the proposedreporting templateswouldput a
heavyburden on undertakings.
Thecostswill not onlybetheimmediatecostsof changing IT-systems.
They believe that there will also be a permanent increase in costsfor
reporting because additional human resources will be required in all
company functionsinvolved in reporting.
Timing 18 monthsfor implementation
6.If XBRL is chosen asthenew technical format for reporting templates,
respondentsstated that the industrymay require up to 2 years to
implement and test thenecessarysystems.

Respondentsurged EIOPA tocommunicatetheir decision on the format
of reporting templatesassoon aspossibleto allowsufficient time for
industrypreparation.
Proportionality in general
7.Respondentsbelievethat the principlesof proportionalityand
materialitywerenot adequately consideredin the general reporting
requirementsaswell asin theamount of informationto be reported.
Theyproposed that a cleardefinitionof materialitythresholdsshould be
consideredin several templates(e.g. reinsurance, technical
provisions,reposand securities lending, balance-sheet – in this case
respondentsrequested clarityon the criteria to report thebalancesheet
quarterly).
8.Respondentsstated that assuranceshould be provided that the
definitionof whichundertakingsare exempted from quarterlyreporting
will remain stableand that thismight bedone through a larger period of
observation of the conditionsfor inclusionand exclusion.
It wasstatedthat it isnot clear whodecideswhichundertakingsare
within thethreshold and for how long.
Threshold of 6bn for financial stability information
9.Respondentsbelievethe threshold is toolowand will includeinsurers
with no relevancefor financial stability.
In particular in largecountries,a relatively high number of insurerswill
beincluded.
10.Other respondentsexpressed some concern that a threshold of EUR 6
bn might have a negativeimpact on thesector coveragefor small and
medium sizedcountries.

Deadlinesfor financial stability information
11.Respondentsexpressed seriousconcern regarding the introduction of
shorter deadlinesfor groups. Several respondentsexpressedthat they
wouldfacesevere difficultiesin preparingconsolidateddata with the
shorter deadlinesand on a quarterly basis.
12.Other respondentsconsidered timelyinformation essential for
financial stabilityanalysis.
Quarterly reporting and 4th quarter reporting
13.Respondentsbelieve that national regulatory authoritiesshould be
giventhe flexibility of exempting companies with a stablerisk profile
from quarterly reporting in accordancewith the principleof
proportionality.
14.Reportingof the4th quarter template isconsideredveryburdensome
asit duplicatesa processwhichmust bedone at a later point again.
It is questioned whythesupervisory authorityrequestparts of the
information already9 weeksbeforetheannual report will be submitted.
Standard codesto be used in the reporting
15.Respondentshave many doubtson how the several codesrequired are
maintained, e.g. codesfor reinsurers,issuers,issuer group, issuer sector
and counterparties.
Respondentswelcomed the possibilitythat EIOPAintroducesentity s
codesto avoid incorrect legal namesof involved entities.
Howeverit isstill unclear whetherthese codeswill be determined by the
undertakingor by EIOPA.
16.On theCIC codesrespondentswelcomestandardised rules.

Theysaythat a possibilitywouldbe EIOPAtoappoint providersfor
determiningthe CIC Codesfor listedsecurities and providingguidance
on CIC mapping for unlisted securities,for examplevia a guidance
committee.
Technical provisions by line of business for financial stability
information
17.Respondentswereconcernedabout the request of technical
provisionsby lineof businessfor groupsasthey saw it to re-introduce
requirementson group level whichwerenolonger part of themicro-
prudential package.
Groupsare not required tofill in thetechnical provisionstemplatesin
themicro-packagebylineof business.
Quarterly SCR for financial stability information
18.Respondentsraised concernsabout providing quarterlyupdateson a
best effort basisof SCR if thisincludesa volatile element, in particular
for groups(for micro-prudential purposes,there is norequirement to
present either a soloSCR nor a SCR group calculationon a quarterly
basis).
19.Other respondentsstressed theimportanceof the reportingof
quarterlySCR, either soloor at a group level, important for financial
stability analysis.
Statutory accountsfor financial stability information
20.Respondentsraised concern regardingthe reportingof quarterly
statutoryaccountsasmany insurersonly disclosesemi-annual
information.

In particular, this concern related to the overall P&L figure, although
issues were also raised with the other statutory account figure of total
balancesheet.
Detailed list of assets and look-through principle
21.Respondents,and assetsmanagersin particular, expressed concern
about confidentiality, costsof provision of ratingsand availability of
investment returnson group level.
22.Respondentsbelieved the look-through principleof investment funds
wouldbe challengingto meet.
Best effort for financial stability information
23.Respondentsrequested clarityor guidanceregarding thecontent of
thebest effort principleto be applied for financial stabilityreporting.
Legal hook for financial stability information
24.Respondentsrequested clarityon thelegal hook for a separate request
for data for financial stabilitypurposesand arguedthat it wouldbe
insufficient tobasethe reportingrequirement on SolvencyII
requirements.
Lapse ratesfor financial stability information
25.Respondentsbelieved that lapserates, especiallynumber of
contracts,wouldnot provideuseful informationtoEIOPA.
Duration of liabilities for financial stability information
26.Respondentsquestioned theusefulnessof this information and argued
that it wouldbe difficult tocalculate, especiallyon a group basis.

III. Specific issuesraised by respondents
Balance Sheet
27.Thedisclosureof theAccounting BalanceSheet together with the
SolvencyII BalanceSheet wasconsidered asmisleading and addingno
additional benefit.
Respondentsbelieved that only the SolvencyII BalanceSheet should be
publicallydisclosed along witha narrativestatement explaining
differencesthat have arisenbetweenthetwobalancesheets.
CountryK1
28.Respondentsproposed tointroducea threshold for theEEA branches
reporting.
Own funds
29.Respondentscommentedon the apparent complexityof the own
fundstemplate.
Variation analysis
30.Respondentsmain commentswere:
a)No split by linesof business(LoB) should be required;
b)Theaccident Year and UnderwritingYear approachesfor explaining
variationsdue totechnical provisionsshould be authorised;
c)Thesplit of analysis betweenperiodsand detailedbreakdownon
reinsurancerecoverablesis considereddemanding;
d)Concernsaround the request of cash flowinformation (asopposed to
accountingor accrual based information);

e) Cost and timelinessissues.
31.Majorrespondentsrequested further discussionsto be held with
EIOPA on thesetemplates.
MCR / SCR
32.Respondentsaskedif a tool will be produced by EIOPAtohelp
undertakingsto calculate theSCR.
33.Doubtsregarding theapplicabilityof the templatesto companies
usinginternal models whenan estimateof the SCR is requestedunder
article 112of the Directive.
34.Respondentscommentedon the level of detail of thecatastrophicrisk
template(B3F).
Assets
35.Proposalstodeletesome columns, e.g. delta, rating, etc., that can be
retrieved form financial sources.
36.Commentsstatedthat the reportingof informationon credit rating
may have additionalcosts.
37.Respondentsstatedthat assetsof unit linkedproductsshould not be
reported.
38.Respondentsaskedfor the possibilityof allowingfor simplifications
in thereportingof investment fundsusing thelook-through approach.
Technical provisions Non-Life
39.There wasa request for guidanceon simplificationsand clarification
of the meaningof best effort basisregarding quarterlyreporting.

40.There wasa request for revisitingthresholdsregardingthesplit of
run-off trianglesbymaterial currency –
41.Respondentsquestioned the need for reinsurancetriangles.
Technical provisions Life
42.Commentsregardingthequarterly reporting – There wasa request for
guidanceon simplificationsregarding the quarterly reportingand for
clarification on themeaningof best effortsbasis.
Reinsurance
43.Commentswerereceivedregarding the request of information on
reinsurerscredit ratingand eventual costs(sameissueon assets), and
therequested materialitythresholds.
Specific commentson groupstemplates
Balance-sheet
44.Respondentsbelieved that theapplicability of thetemplatewasnot
clear (Deduction & Aggregation method: doubtson how to fill in the
template).
Also, theybelieved that onlythe Solvency II BalanceSheet should be
publicallydisclosed alongwitha narrativestatement explainingthe
differencesthat have arisenbetweentheSolvencyII BalanceSheet and
accountingBalanceSheet (consolidation scopemay even be different).
Own funds
45.Respondentsquestioned thequarterlyfrequency, thelevel of public
disclosureand the treatment of non-EEAentities.

SCR
46.Doubtswereexpressed on how the templatesshould be filled in when
a combination of methodsare used.
Assets
47.Respondentsrecommendedthat the scope of assetsreported at group
level should be reviewed. Respondentsconsidered that it ismore relevant
for assetsbereported on a consolidatedbasisfor the wholegroup
(insteadof theproposed requirement of reportingbeing limitedto non-
EEAentities and non-insuranceand non- regulated entities)
Intra Group Transactions (IGT)
48.Reportingat different levelswasconsidered to be excessive(sub-
groupsand groups).
It wasstatedthat thedefinitionsof “significant” and “very significant”
should be risk based; it wasalsoqueriedwhetherall IGTsshould be
reported, particularlythoseterminated during theperiod.
49.It wassuggestedthat transactionsshould be reported in thecurrency
of the group rather thanthecurrencyof thetransaction
Risk Concentration (RC)
50.Respondentscommentedthat the reportingof RC should not be
standardised.
Respondentsbelievethat thetemplate doesnot achievetheintended
purpose, and that thereportingof risk concentrationsshould be
performed on a qualitativebasis(in combination withquantitative
reporting).

Specific commentson Narrative reporting and disclosure
51.Regardingthe narrativepart, respondentscommentsaddressed
mainlythe SFCR:
a)Theamount of informationproposed for public disclosureis seen as
excessivein general;
b)Theindustryperception isthat requirementsgobeyond what is
definedin Level 2;
There is perceived tobe a duplicationof informationbetweentheSFCR
andquantitativetemplatesdisclosed.
IV. EIOPA review of the Guidelines based on the comments
received
Implementation and maintenance costs
52.EIOPAacknowledgestheimplementation and maintenancecostsof
thereportingpackage, but it should be consideredwithinthe context of
theoverall SolvencyII implementationEIOPA hasassessed thecosts
and benefitsarisingfrom thereportingpackageand believesthat the
revisedpackagerepresentsan appropriatebalance betweencostsfor the
undertakingsand theneedsof supervisoryauthoritiesto ensure the
protection of policyholders and theassessment of financial stability.
Furthermore, part of thecostsassociatedto thispackageshould not be
consideredsimplyassupervisoryreportingcosts,sincethe detailed
information reported is alsoneeded for the calculationof financial
requirementsand the proper management of theundertaking.
Timing of 18 months for implementation
53.EIOPAis awareof and sharessome of respondentsconcerns
regardingthetimingfor implementation.

This is thereason whyCP No. 11/009 and CP no. 11/ 011wereconsulted
withrespondentsin advanceof other SolvencyII technical standardsand
guidelinesand whyan updated packageis now beingpublished.
However, it should be noted that EIOPAis dependent on a number of
external factors.
TheOMDII and theimplementingmeasures,whicharestill under
discussion, areexpected to lead to changesin the reportingpackageand
thefinal draft of TechnicalStandard tobe developed by EIOPAwill have
toincorporate thosechanges.
54.Despitetheseexpectedchanges,EIOPAbelievesthat thispackage
representsa stableview of the level of granularityof the informationthat
supervisoryauthoritieswill need to receive.
Proportionality in general
55.Theprincipleof proportionalityis considered in thereporting
packagein threedifferent ways.
Firstlyit is inherent, in that a company withlesscomplexityin their
businesswill consequentlyhave lesscomplexitytotheir reporting, for
examplefewerLinesof Business,currencies,and noderivativesto
report.
Secondly, for some templatessuch asthedetailed list of
assets,thresholdsbased on size aredefined.
Thirdly, materialitythresholdsare considered in several templates.
56.In the revised package, thepotential for exemptionsand the
application of materiality principleswererevised and madeclearer.

Threshold of 6bn for financial stability information
57.In linewiththeproportionalityprincipleand takingthe concern of the
industryintoconsideration, the threshold will be increasedto12 billion
Eurosin assetsat SolvencyII balancesheet.
58.Anational market coveragesurveyindicatedthat for a few
countries,national market coveragewouldbe very limited.
In order toensurea minimum national market coverage, the12 billion
threshold will thereforebe complementedwitha criterion for obtaining
at least50 per cent coverageon a national level.
59.It is clarifiedthat thethreshold relatesto the SolvencyII balance
sheet.
60.It is noted that thesecriteria may besubject toa review (3 years after
thestart of reporting) followingmarket developmentsin order toensure
that reasonablesamplecoverageis obtainedfor financial stability
purposes,and alongthe further developmentsin thedefinitionof
systemic importance.
Deadlinesfor financial stability information
61.It is acknowledgedthat time is required for consolidationof the solo
reports.
Takingintoconsiderationthe concernsof industry, but alsothe tight
deadlinesEIOPAis bound by, 1additional weekwill be allowedfor
group consolidationfor the Financial Stability reporting, resultingin a
FS deadlineof 6 weeksafter transition.
For soloundertakingsfallingwithinthethreshold and that donot report
at a group level thereporting wouldneed to be made within5weeksfor
thefinancial stabilityitemswhich are in themicrosolopackageand 6
weeksfor the onesthat are not in themicro solopackage.

62.This should enablereportingundertakingstotake full advantage of
thetime allowedfor soloreporting(5 weeksafter transition), and then
have1weekfor consolidatingon a best effort basisfor financial stability
reporting.
63.During thetransition period, the deadlinesfor financial stabilitywill
followthesolodeadlines,plus1week (i.e. envisaged 8+1 week the first
year decreasingto5+1 weekfour years after implementationof Solvency
II).
Quarterly reporting and 4th quarter reporting
64.Frequencyand timelinessof reportingis crucial for the adequate
supervision of insuranceundertakings.
In thisregard, quarterlyreportingis crucial for thesupervisory process
whichis whyit alreadyexistsunder SolvencyI.
Under SolvencyII, quarterlyreportingis kept toa minimum of the
information needed.
65.However, followingthe consultation on thefinancial stability
reporting, EIOPAhasidentified several areaswhere it wasableto
reducethe reportingburdentoinsurers,and under the CP No. 11/009
packageEIOPAhasreviewedthethresholdsand criteria relatedto
quarterlyreporting, notablyasregardsAssetsD4.
66.Also, EIOPAagreesthat insurersshould not havetoreport the same
information twice.
Thereforesome changeswereintroduced in thesplit betweenquarterly
and annual information.
In the current packagethetemplatesAssetsD1,D2O and D2T are
quarterlytemplatesonly, although theyare tobe reported on thefourth
quarter by every undertaking, withno exemptionsand withinthe
quarterlydeadline.

Theywould onlyneed to occur after theduedate for thefourth quarter
reporting.
Standard codesto be used in the reporting
67.EIOPAacknowledgesthe concernsin this area.
Howeverit considersthat full harmonisationof the codestobe used is
currentlynot possible.
Afirst step will be done witha reinsuranceundertakingscodification
that will be developed and maintainedbyEIOPAtoguaranteea
common identifier of the reinsuranceundertakings.
Regardingthe other codes, codesavailablein the market will be used.
Additionally, in relation toEIOPA‟s dutiestoset up a register of all EU
insuranceand reinsuranceundertakings, harmonised codeswill be
implementedand will be made available.
68.In relation to the CIC codes, the aim of these codesis primarily to
assess an undertaking‟s ability to identify the risks of the investments
that it holds.
This is thereason whya harmonisation of the code isnot envisaged
within theshort term.
Theuse of this code by supervisorsto perform cross-sectorand market
analysisis a secondary aim.
This secondary purposeis not underminedby the lack of thelack of
harmonisationof theCIC, asit can be overcome by adequate
supervision and useof financial information from serviceproviders.

Technical provisions by line of business for financial stability
information
69.EIOPAacknowledgesthat thiswouldbe demanding for insurersand
will not require technical provisionsby lineof businessfor groups.
70.Instead, and astheSII Balance-sheetwill be required quarterly for
both soloand groups, technicalprovisionsitemswill be requestedfrom
theBalanceSheet templatequarterlywiththefollowingsplits:
i) Non-life (excludinghealth),
ii) Health (similar tonon-life),
iii)Health (similar tolife),
iv) Life (excludinghealth and index-linkedand unit-linked), and
v)Index-linkedand unit-linked.
Quarterly SCR for financial stability information
71.As quarterlyinformationon the solvencycapital positionof
undertakingsis consideredcrucial for financial stability purposes,the
overall SCR isrequested quarterlyfor undertakingswithintheFS scope.
However, asindicatedin CP no. 11/ 011, theSCR should onlybe updated
with volatile elements,and onlyon a best effort basis. See alsosub-
section f) on the best effort.
72. For (partial) internal model usersthiscan be based on their usetest.
73.Standard formula usersshould re-calculate the volatile components
of the SCR (this wouldusuallybe themarket risk module) in order to
report theoverall SCR on best effort basis.

Statutory accounts(i.e. P&L and Balance Sheet) for financial
stability information
74.Takingthe concernsof the industry intoconsideration, profit and
lossinformationwill be requested on a semi-annual basisand not
quarterly.
Theoverall profit and loss(P&L isseen asan important overall
performanceindicatorthat is not part of SolvencyII reportingfor micro
prudential purposes.
75.Based on industrycomments, semi-annual reporting should not be
tooburdensome.
76.Theother statutory accountingbalancesheet items(balancesheet
total, and capital and reserves) proposedin CP no. 11/011 areno longer
requested asthis will be reportedquarterlyon a Solvency-II basisfor
supervisorypurposes(seeitem Balancesheetsunder commentson
specific templates).
Detailed list of assets
77.TheSolvencyII framework givesundertakingsextensive freedom to
perform their activitiesastheyseefit.
Aprinciplebasedregime, with a reduction in the prescribedconstraints
on thewayundertakingsare managed should be balancedwitha higher
degreeof information to supervisoryauthoritiestoallowthelatterto
dischargetheir duties.
Furthermore, the information required for reporting purposes will also
be needed by undertaking to properly manage their investments under
SolvencyII.
78.In termsof the look-through approach, EIOPAnotesthat the
quarterlyreportingisonlyrequired from undertakingsthat hold more

than 30% of their portfolio in investment funds(the threshold wasraised
from 20% to 30%) and templateAssetsD4 only requiresthelook through
approachregarding theasset category, geographical exposureand
currencyexposure (and thereforenot a completelook-through).
Best effort for financial stability information
79.EIOPAacknowledgesthe need for Guidelineson best effort for
financial stabilityreporting.
80.As a principle,best effort isintended toprovidea limitedroom for
individual optimisation in data-provisionfor reporting undertakings,
while requiring a certain level of internalgovernance(not necessarythe
samelevel asgovernanceasfor regular reporting) to ensure the
necessaryquality.
While data provided need to be exact enough toserve asan indicator on
aggregate, there needstobe a clear distinction from theexactnessof
data for supervisory use.
81.MoreGuidelinesfrom EIOPAwill be availablefrom the start of the
reporting. TheseGuidelineswill includespecific information on the use
of estimationsfor particularitemsand thepreliminarystatusof the
figures.
Legal hook for financial stability information
82.Followingindustryconcern, EIOPAclarifiesthat thespecific reporting
requirementsfor financial stability are based onArticle 35of theEIOPA
regulationwhichprovidestheAuthoritywith thepossibilitytocollect all
thenecessaryinformation tocarry out thedutiesassignedto it, i.e. to
monitor and assessmarket development.

Lapse ratesfor financial stability information
83.EIOPArequiresan indicator for thepotential liquiditydrain dueto
policyholder behaviour for life business.
Although lapseratesby volume and number of contractsarenot perfect
measures,EIOPAconsidersthis information to be available on a best-
effort basistoundertakingsand that thebenefitsoutweigh thecostsof
thisrequest.
Duration of liabilities for financial stability information
84.EIOPArequiresan indicator for theinterest rate sensitivityof the
technicalliabilities, the risk-mitigatingeffect of hedging via derivatives
andpotential asset-liabilitymismatches.
EIOPAconsidersthis informationtobe availableon a best-effort basis
toundertakingsand that the benefits outweighthecostsof this request.
On the specific templates
Balance-sheet
85.EIOPAagreed on respondent‟scommentsregarding the disclosure
requirementsand hasprovided that for disclosurepurposesonlythe SII
BalanceSheet should be disclosed, both at soloand at group level.
86.As for thequarterlyreportingrequirement, CP No. 11/ 009proposed
that undertakingswereexempted from thequarterlyreportingof the
Balancesheet accordingtoa threshold and thiswaswelcomed by
respondents.
However, respondentscomplained that the threshold wasdifficult to
apply, creatinguncertaintyon the quarterlyrequirementsfor each
undertaking.

No solution waspresented by respondentstoovercome this problem and
anyrisk-basedthreshold that could be developedwould alwaysbesubject
tocriticism.
87.Moreover, respondentshighlighted that undertakingswouldhave to
establisha balancesheet in anycasetoreport ownfundsinformation
quarterlyand EIOPAconsidersquarterly ownfundsinformation as
crucial tosupervisethe MCR, asdefinedin the Directive.
88.Finally, respondentscorrectlyhighlightedthat thethresholdproposed
under CP No. 11/ 009wasnot possibletobe applied to groups.
89.Takingall this intoconsideration, EIOPAbelievesthat, both from a
supervisorypoint of view and from an operational point of view for
undertakings,the request of the balance-sheet quarterly without
exemptionsisthe best approach.
CountryK1
90.EIOPAdid not include, asrequested, a threshold sinceinformation
from all EEA branchesneedstobe reported (and exchangedbetween
supervisoryauthorities), accordingto theSII Directive.
91.Regardingthe non-EEAbranchesthethreshold wasremoved asthe
impact will be minor, and for the undertakingswherethe impact is not
minor theinformationon all non-EEA branches iscrucial for
supervision.
Own funds
92.Amendmentsto thistemplatewereintroduced tobetter reflect the
requirementsand a specific template on participations,withmateriality
thresholds,wasadded.

Variation analysis
93. EIOPAengaged in a discussion withsome respondentsand the
current proposal representsa balancedapproach betweensupervisory
needsand respondentscomments:
a)Thetemplateswererevisedin general to providea better link tothe
other templatesand a reduced burden in some areas(oneof the four
templatewasremoved);
b)It wasclarifiedthat both accident and underwritingbasisare allowed
– in linewiththe approach for TP templatesreporting;
c)Thedetailed breakdownon reinsurancerecoverableswasremoved;
d)Theorder of calculationin the roll-forwardof Best estimatewas
modified;
e)Thesplit per period waskept withinformationby LoB on Non-Life;
f)Theinformation on technical flowsarenow required on an accrual
basisinstead of a cash-flowbasis.
94. With respect totheinformation in thesplit per period in Life, it was
considered that a breakdownbetweenLife and Health could be
sufficient.
For Non-Life, consideringthe very different types of LoB, a breakdown
byLoB wasconsidered crucial.
Theintroduction of thresholdswasconsidered aslikely tointroduce
gapsin the information from one reportingyear tothe next that would
render the informationreported unusablefor supervisorypurposes.
For theanalysis of this information themaintenanceof historical data
with no gapswasconsidered asfundamental.

MCR / SCR
95.Atool for thecalculationof theSCR may be consideredin future but
such a tool will not be used for reporting purposes.
96.It wasclarifiedthat whensupervisoryauthoritiesrequire an estimate
of the SCR in accordancewitharticle 112(7), asdefault, only SCR-B2A
should be used for the reportingof the estimate.
97.Thecounterpartydefault risk SCR templatewasadapted tobetter
reflect the SCR calculationrationale.
98.Regardingthe CatastrophetemplateEIOPA believesthat the
information containedwithin thetemplateis required in order for the
supervisortounderstand thematerial risk exposureswhichdrive the
catastrophecapital charge and to challengetheundertaking as
appropriate.
99.Usuallyundertakingsdonot have all typesof risks,sothe templates
are onlypartiallyapplicabletomost of the undertakings.
For undertakingsthat are exposed to all types of risksall information
needstobe reported duetothecomplexityof the portfolio.
100.Theapplicabilityof thesetemplatestoRFF waskept.
101.Finally, reporting requirementsfor undertakingsthat use
simplificationsin different riskmodulesneedstobe addressed after the
OMDII and the implementingmeasuresare known.
Assets
102.ThegranularityofAssetsD1waskept asthe templateisa crucial
tool for the supervisionof the prudent personprinciple.
103.Applicabilitytounit linked, includingthelook-through
template,waskept asit is understood that theprudent person
principleapplies

alsototheinvestmentsunderlying theseproductsand thisshould be
supervised asrisks,such asthe reputational risk, could be faced.
104.Thefrequencyof AssetsD4 waskept, howeverthethreshold was
increasedfrom 20% to30%. EIOPAhighlightsthat the templateAssets
D4 only requireslook-through of asset category, three geographicalzone
and currencyidentification(aslocalor foreign), not a full look-through of
investment fundsasrequired for SCR calculation.
Technical provisions Non-Life
105.EIOPAproposesthat the simplificationstobe used in thequarterly
calculationof technicalprovisionsarethe onesforeseen in thelegislation
and will be further developedin theGuidelineson the Valuationof
TechnicalProvisions.
106.Thethresholdsapplicabletothe templateswereclarified.
107.Thereinsurancetriangleswerekept however the“salvagesand
subrogation” trianglesweredeleted.
108.Thescope of thereportingof the cash-flowprojectionby
undertakingsthat use simplificationswasreduced but will still be
requested in definedsituations.
Theobligationto report futureexpected cash-flowswaskept for reporting
purposesonlywherea material part of TP (more than 10%) hasa long
settlement period, whileundertakingswill be allowedto excludefrom
templateE2 and F2 the cash-flowsrelatedtoTechnical Provisionswith a
short settlement period (lessthan 24months).
Technical provisions Life
109.EIOPAproposesthat the simplificationstobe used in thequarterly
calculationof technicalprovisionsarethe onesforeseenin thelegislation
and will be further developedinActuarial Guidelines.

Reinsurance
110.No materiality threshold wasintroduced in thesetemplates,but
templatesJ1and J2weresimplified (divided) toavoid theduplication of
information asmuch aspossible.Also, the frequencyof template J2was
revised.
Specific commentson groupstemplates
Balance-sheet
111.Thedoubtsraised on theapplicabilityof the template wereclarified.
112.EIOPA agreedwith respondent‟scommentsregarding the
disclosurerequirement and hasprovided that for disclosurepurposes
onlythe SII BalanceSheet should be disclosed, both at soloand at a
group level.
Own funds
113.Quarterlyown-fundsrequirementswerekept astheyare deemed
relevant at group level aswell.
However, the quarterly template islessdetailedcompared tothe annual
template.
114.Amendmentstothe annual template wereintroducedtobetter
clarify themeaningand thecalculation of some cells(for example
treatment on non-EEA entities,reconciliation reserve, calculationof
non-availableown funds).
115.At both soloand group level, thepart for the publicdisclosure has
been clearlyindicated.
SCR
116.Thedoubtsraised wereclarified.

Assets
117.EIOPA agreedwith the commentsreceivedand the scope of the
templatewasamended.
Thetemplatewill be applicablefor all methods(Accounting
consolidation-basedmethod and Deduction andAggregation method
and a combination of both methods).
Intra Group Transactions
118.Article 216of SII Directiverequiresthat if a national subgroup is
established, it is subject to group supervision.
As reportingis part of group supervision all reportingtemplatesmust be
reported at this level.
119.Definitionsof what constitutesthe „significant‟and „very significant‟
will be addressedbyseparately aspart of the overall SolvencyII package.
Thecollege will be ableto amend thesedefinitionstoaccount for group
specificities.
120.All IGTsthat occur or terminateover the period are to bereported.
This is alignedwiththe SII Directive(art. 245(2)).
121.Transactionsare to be reported in thecurrencyof the group, the
LOGS havebeen updatedtoreflect this.
Risk Concentration
122.Reportingof risk concentrationswill be done in a quantitativeform
through a RC template and will be binding for all insurancegroups.
Additionally, qualitativeinformationmay be reported. Duetostrong
concernsfrom of theindustry, public disclosureisnolonger requested.

Specific commentson Narrative reporting/ disclosure
123.EIOPAconsidersthat thenarrativereporting Guidelines
complement what will be prescribedunder the Directiveand the
implementingmeasuresand givesimportant guidanceon the expected
level of reporting and disclosure.
However, the content of the SFCR wasrevisedand whereappropriate
some informationwasmoved tothenarrative part of the RSR.
Toread more:
https://eiopa.europa.eu/consultations/consultation-papers/2011-closed-
consultations/november-2011/draft-proposal-on-quantitative-reporting-
templates-and-draft-proposal-for-guidelines-on-narrative-public-disclosure-
supervisory-reporting-predefined-events-and-processes-for-reporting-
disclosure/index.html

EIOPA HOSTSAMEETING OF THE EU - US
INSURANCE DIALOGUE
Themeeting further enhancedmutual understandingand cooperation in
theinsurancesector
TheEuropean Insuranceand Occupational PensionsAuthority (EIOPA)
hostedon 11Julya SteeringCommitteeMeetingof the EU/US insurance
dialogueproject.
The4th SteeringCommitteeMeetingwashosted by Gabriel
Bernardino, Chairman of EIOPA.
TheEU and theUS have recentlystarteda dialogueto increasemutual
understandingand cooperation witha view toidentifying themain
commonalitiesand differencesof thetwoinsurance regulatory and
supervisoryregimes.
This dialoguewill allow regulatorsat both sidesof theAtlantic to find
areaswherefurther compatibilityand convergencewill be possibleand
could pave the wayfor future decisions.
Gabriel Bernardino, Chairman of EIOPA, said:“Financial systemsin the
EU and the USstill have significant differencesand some of theseare
dictatedby cultural differencesand legitimatepolitical options.
However, webelieveit is the responsibilityof public authoritiestocreate
conditionsto foster consumer protection, facilitatebusiness relationships
and enhancetheefficiencyof supervision.

We are certainlycommittedtotheseobjectives”.
MichaelMcRaith, Director of the USFederal InsuranceOffice,
underlined:“Theinsurancedialoguebetweenthe EU and USis critical
tothe promotion of transatlantic understandingand cooperation, and to
thepromotion of greater consistencyand alignment in insurance
regulation.
We look forwardtocontinuingour workwith our EU counterpartsand
US state regulatorsfor thebenefit of insurance consumer protectionand
businessopportunityin both jurisdictions.”
In addition toGabriel Bernardino, Chairman of EIOPA, and Michael
McRaith, Director of FIO, themeetingwasattendedby Edward
Forshaw, Managerin the Prudential Policy division, UK Financial
ServicesAuthority, Charlotte Paterson, Internal Market and Services
DirectorateGeneral of the European Commission, Susan Voss, Iowa
Commissioner and ImmediatePast President of the USNational
Association of Insurance Commissioners(NAIC), and Terri Vaughan,
NAIC ExecutiveDirector.
Themeeting focused on theprogressin the analysis of the EU and US
regulatoryand supervisorysystems.
This analysisis relatedto seven keyareas:professional secrecy; group
supervision;solvency& capital requirements;reinsuranceand
collateral requirements;supervisoryreporting, data collection& analysis
andtransparencyto the market; supervisorypeer reviews;independent
third partyreview and supervisoryon/ siteexams/ inspections.
Thenext SteeringCommitteemeetingisscheduledfor October 2012and
will take placein Washington (USA).
Note for Editors:
TheEuropean Insuranceand Occupational PensionsAuthority
(EIOPA) wasestablishedasa result of thereformstothe structure of
supervision of the financial sector in theEuropean Union.

Thereform wasinitiatedby theEuropean Commission, followingthe
recommendationsof a Committee of Wise Men, chaired by Mr. de
Larosière,and supported by theEuropean Council and Parliament.
EIOPA is part of theEuropeanSystem of Financial Supervision
consistingof threeEuropean SupervisoryAuthorities, the National
SupervisoryAuthorities and the European Systemic Risk Board.
It is an independent advisorybody to the European Commission, the
European Parliament and the Council of the European Union.
EIOPA‟score responsibilitiesaretosupport thestabilityof thefinancial
system, transparencyof marketsand financial productsaswell asthe
protection of insurancepolicyholders, pension schememembers and
beneficiaries.

Updated list of identified Financial Conglomerates
EBA hasjointlypublishedwithEIOPAand ESMAthe list of identified
Financial Conglomerates, asat 1st July2012,asrequired underArticle
4(3) of theFinancial ConglomeratesDirective.
Joint Committee
TheJoint Committeeis a forum for cooperationthat wasestablishedon
1stJanuary 2011, withthegoal of strengtheningcooperationbetweenthe
European BankingAuthority (EBA), European Securitiesand Markets
Authority (ESMA) and European Insuranceand Occupational Pensions
Authority (EIOPA), collectivelyknownasthe three European
SupervisoryAuthorities (ESAs).
Throughthe Joint Committee, thethreeESAs cooperateregularlyand
closelyand ensure consistencyin their practices.
In particular, theJoint Committeeworksin theareasof supervisionof
financial conglomerates,accountingand auditing, micro-prudential
analysesof cross-sectoraldevelopments, risksand vulnerabilitiesfor
financial stability, retail investment productsand measurescombating
moneylaundering.
In addition tobeinga forum for cooperation, the Joint Committeealso
plays an important role in theexchangeof information withthe
European Systemic Risk Board (ESRB) and in developingthe
relationship betweenthe ESRB and theESAs.

Solvency II News
Ashort amending Directivewasadopted on 3 July.
This meansthat theoriginal implementationdate of
1November 2012in theSolvency II Directivehas
been changed, withthe new timetablerequiring
transpositionby MemberStateson 30 June 2013and implementationby
firmsfrom 1January 2014.
Article 1
Directive2009/ 138/ EC is herebyamended asfollows:
(1) Article309(1) is amended asfollows:
(a)In the first subparagraph, thedate"31October 2012" isreplacedby
that of "30 June 2013";
(b)After the first subparagraph, the followingsubparagraph is inserted:
"Thelaws,regulationsand administrativeprovisionsreferred to in the
first subparagraph shall applyfrom 1January 2014.";
(2)In thefirst paragraph ofArticle 310, thedate"1November 2012" is
replaced by that of "1January 2014";
(3)In thesecond paragraph ofArticle 311,thedate "1 November 2012" is
replaced by that of "1January2014".
TheEuropean Parliament isnow in recessand theOmnibusII Directive
is scheduled for a plenary vote on 22 October.
We will continuetomonitor developmentsover thecoming monthsand
consider anyimplicationsfor our domesticimplementationplan.
In the meantime, wewill continueto work withfirms towardsthe
implementationdateof 1January 2014.

On 18 July, weupdatedour internal model approval process(IM AP)
pageswith the question bank for life insurers,aspart of our review of
technical provisions.
On 11Julywepublishedthe second in a seriesof Consultation Papers to
transposetheSolvencyII DirectiveintotheUK Handbook.
Thefull paper CP12/ 13and further informationisavailableon our
consultationson SolvencyII page.
http:/ / www.fsa.gov.uk/library/policy/cp/ 2012/12-13.shtml
On 10 and 12July EIOPApublished theoutcomesof itspublic
consultationson reportingand the OwnRiskand SolvencyAssessment
respectively. We will update our Pillar 2 and Pillar 3 pagesfrom 23July
onwardswithmore information.
Followingour industry briefing on 27 February 2012,wegavefurther
information about our approach tothe review of technical provisionsin
our workwithfirmsin our internal model approval process.

Report on the Role of Insurance Guarantee Schemes in the
Winding Up Proceduresof Insolvent Insurance Undertakings
in the EU/ EEA
1. Introduction
This report isprepared aspart of EIOPA‟s input tothe European
Commission‟spolicymaking on InsuranceGuaranteeSchemes(IGSs)
and asspecifiedin the mandate of the Task Forceon Insurance
GuaranteeSchemes.
Thepurposeof the report is tosummarisethe findingsof a mapping
exerciseon the roleof the IGSin the windingup proceduresof insolvent
insuranceundertakingsacrossthe EU /EEA.
Aquestionnairewasused for the purposeof thisexerciseand sent to30
EU/EEA states.
MemberStatesresponded. Where referencesare made tothemajority or
minority of MemberStates,thisrefers to thenumber of respondents
rather than the full membership of theEU/EEA.
For thepurposeof this report, an IGSis a body that provideslast resort
protectiontoconsumerswheninsuranceundertakingsare unableto
fulfil their contractual commitments.
Motor insuranceguarantee schemesarecovered in this report only to
theextent that theyprovide cover in such windingup situations.

An IGSmay have a wideranging scope, coveringlife, non lifeor both
typesof insurancecontracts.
In the majorityof MemberStates‟jurisdictions,onlycertain classesof
insurancecontractsare covered.
2. Topics covered
Thefollowingareasare coveredin this report:
(1)Typesof IGSs(thediversity of IGSsin the EU/ EEA, crossborder
IGS membership and the permanent or ad hoc character of the IGS);
(2)Roleof the IGSprior toinsolvency(formal or informal pre-warning
systems, freeexchangeof information betweentheIGSand the
supervisoryauthorityand preventativemeasurestaken by theIGS);
(3)Roleof the IGSin theinsolvencyprocess(decidingwhento
intervene, optionsfor exit from insolvency, continuanceof
coverage, criteria taken intoaccount by an IGSfor portfolio transfer, role
of theIGSwhenan insuranceundertakingbecomesinsolvent, cross-
border cooperation and co-ordinationarrangements);
(4)Roleand interaction of other bodieswith the IGS(roleof the
supervisoryauthority, differencesbetweenlife and non-life insurance
insolvencyand their treatment by thesupervisoryauthority);
(5)Roleof the court in winding-up proceedingswhentheinsolvency
proceduresare initiatedand/ orthroughout theinsolvencyor the
winding-upprocedures;and
(6)Roleof the IGSin theclaimsprocess(time limit for claimspayments
and observed payment times,treatment of unearned premia, funding
payment of claims, rightsof policyholdersto taketheIGSto
court, payment of claimsupfront and reimbursement, subrogation rights
of theIGS,other rightsand rightsof creditors).

3. Summary of findings
3.1Types of IGSs
3.1.1Diversity of IGSsin theEU/ EEA
Onlytworespondents(IS and SE) reportedhaving no IGSat all.
TwoMember Stateshave a dedicated IGSfor accidentsat work (in
certainjurisdictionsthisrisk is coveredbya public social security
scheme).
Seven respondentshavea life insuranceIGSand five havea non_life
insuranceIGS.
Fivehave IGSswhichcover both sectors.
This sampleof MemberStatesis not representativeand cannot lead to
an obviousconclusion concerning MemberStates‟appetitetohave
separateor common IGSs.
Theconclusion tobe drawnfrom this isthat although nearlyall Member
Statesprovidesome form of coverage, comprehensiveprotection isscarce
and cover is often limitedtothe motor insurancesector.
18respondentsreportedhavingan IGSwhichcoversmotor insurance.
Of these18countries,ninehave reported that the IGScoveringmotor
insuranceis theonly IGSin their country.
Motorinsuranceguarantee schemesare well developed throughout
MemberStatesand some of thesecountries have extended thescope of
their guaranteefundsset up under theEU MotorDirectivestoinclude
insolvencycases.
3.1.2IGSmembership – crossborder

MemberStateswereasked whethera foreign insuranceundertaking (3rd
country insuranceundertakingsor insuranceundertakingsestablishedin
MemberStatesor both) withbranchescould become a member of an IGS
in their jurisdiction (either on a voluntary or compulsorybasis).
For life and non-life IGS(11respondents), the answerscan be dividedinto
twogroups, for branchesfrom third countriesand for branchesfrom
EU/EEA Member States:
- For branchesfrom non EEAthird countries, eight respondents
reportedthat theseinsuranceundertakingscan (sometimessubject
tocertain conditions) become a member of an IGS, either on a
voluntary or mandatory basis.
- For branchesfrom EU/EEA Member States:
_ four reported that such insuranceundertakingscannot become a
member of their IGS;
_ three answeredthat theycan become amember of their IGS(either on
a compulsory or voluntary basis);and
_ in a few Member States, branchesof insuranceundertakings
established in other Member Statesare required tobecome membersof
thehost stateIGSonlywherethe IGSin thehome state doesnot provide
equivalent protection to policyholdersestablishedin the host Member
States.
Theseanswersmay reflect the principle(home or host stateprinciple)
chosenby thecountries.
For motor IGS,13 respondents(of 18Member Statesconcerned)
answeredthat foreign companiesmust becomemembers of their IGS.
In summary, it appearsthat wherecross-border operationsfrom third
countrieshavebeen addressed(eight respondents), MemberStatesare
more likely torequire mandatory membership for third countries

insuranceundertakingsoperating in their jurisdictions,whereasfor
operationsfrom other Member States,membership isoften on a
voluntarybasis.
3.1.3Permanent or ad hoc character of theIGS
Almost all IGSsare “active” at all times.
However, there seemstobe a varietyof definitionsof what “active”
means,ranging from being fullyoperational permanent institutionstoa
more reducedpresence(that isto sayonlythe legal framework exists
without theadministrativefunctionsin place).
All life insuranceIGSsare operational at all times.Five out of six non-life
IGSsare alsooperational at all times.
3.2 Role of the IGSprior to insolvency
3.2.1Formal or informal pre-warningsystemswhenan insurance
undertakingwill soon be subjectedtoliquidationproceedings
(a) Pre-warningan IGS
Pre-warningan IGSthat an insuranceundertakingwill soon be
subjectedto liquidation proceedingsis important for organisational and
financial reasons.
Keepingthe IGSinformed of any potential insolvencyenablesthem to
bebetter prepared toperform their function.
Although onlyFR reportedthe existenceof a legal provisionbetweenthe
supervisorsand the IGS, variousMember States:
- suggestedthe existence(or potential existenceif needed) of an
informal flowof informationbetweenthesupervisorand theIGS

beforethedecision towindup the insuranceundertaking(four
Member States);
- emphasizedthe absenceof legal constraintstosuch flowof
information, or the empowerment of thesupervisortodeliver such
information (four Member States).
Eight Member Statesreported an absenceof a pre-warningsystem.
TwoMember Statesnotedthat the supervisoryauthority shall warnthe
IGSof the withdrawal of the insuranceundertaking‟sauthorisation.
Overall, Member Statesreportedthat such pre-warningsystems arenot
aswidelyused asin the US, wherethere is a very activebut informal
system of pre-warningbetweenguarantyassociations(GA) of probable
insolvenciesof insuranceundertakingswhichcould affect multiple
states.
(b) Pre-warningof the supervisoryauthority
Besides thesupervisor‟sregular monitoring of the insurance
undertaking, (and the insurance undertaking‟sobligationtoinform the
supervisorof non-compliancewithfinancial requirements), in general
theinsuranceundertaking‟sdecision to liquidateitself(voluntary
dissolution or petition to thecourt) is subject toauthorisation/ non-
oppositionby thesupervisor.
3.2.2Free exchangeof information betweenIGSsand the supervisory
Authority
MemberStateswereasked whetheran IGSand the supervisory authority
could freelyexchangeinformation necessarytoperform their
duties,particularlywhenthe supervisoryauthoritydetectsproblemswith
aninsuranceundertakingwhichislikely toresult in intervention by the
scheme.

12Member Statesreported theexistenceof a free exchangeof
information (without legal or other barriers) betweenthesupervisory
authorityand theIGS.
In some Member Statessuch exchange is due to institutional aspects –
the fact that the supervisory authority is the manager of the IGS (noted
by two Member States), or the supervisor of the IGS (observed by three
MemberStates).
Three MemberStatesemphasized that such flowisnot blocked by
professional secrecynormsbecausetheneed tocomplywiththesecrecy
regimewouldhavebeen communicatedto theentity whichreceivesthe
information.
Onlyone Member State reported that such flowof information is based
on a formal agreement.
3.2.3Preventativemeasurestakenby theIGS
Although noMember State reported that their IGShaspowersto act on a
preventativebasis,a few noted that their IGScan takecertain measuresto
enableinsuranceundertakingsto continueto meet their contractual
obligationsunder certain conditions:
In IE, if the non-life insuranceundertakingaveraged over 70% of their
businessin IE, (over thethree yearsprior to theappointment of the
administrator) theAccountant of theHigh Court can sanctionpayments
from theIGSto enablean administratorto carry on the businessof the
non-life insuranceundertaking and run the businessasa going concern.
In the UK, wherean insolvencyevent hasoccurredor the regulator
determinesthat the insuranceundertakingcannot pay claimsagainst
it, the IGScan seek tosecure continuityof cover.
This can include giving assistance to the insurance undertaking to
enable it to continue to effect contractsof insurance or to carry out
contractsof insurance,if certain criteriaare met.

Thecriteria arethat it wouldbe generallybeneficial tothe eligibleclaims
coveredby the proposed assistanceand, wherethe cost of providing
assistancemight exceed thecost of paying compensation, any additional
cost islikely tobe justifiedby the benefits.
TheIGScannot exercisethesepowerson a preventativebasisto keep an
insuranceundertakingsolvent.
In conclusion, the IGSsappear to be more of a last-resort
scheme, interveningonly whenall other measureshave been
exhausted, rather than competent to act on a preventativebasis.
3.3 Role of the IGSduring the insolvency process
3.3.1Decidingwhento intervene
When asked which authority takes the decision on when to intervene
when an insurance undertaking becomes insolvent, about half of the
respondents reported that this is the responsibility of the supervisory
authority.
However, the situationis not harmonised throughout Member States
and/ orsectors.
For life and non-life IGS,seven countrieshave reported that the
supervisoryauthoritygenerallydecideswhento intervene, whenan
insuranceundertakingbecomesinsolvent.
In one MemberState, only the court can initiate the procedure.
In another, theprocedureis initiatedbyitsIGS.
One Member State alsoreported that either the court, thesupervisory
authorityor theinsuranceundertakingcan initiatethe procedure.

For motor IGS,seven Member Statesreported that thedecisionto
interveneistheresponsibilityof thesupervisoryauthority; for five this is
theresponsibilityof the court; for three, it is the IGSand for twoMember
States,the insuranceundertaking.
2.Optionsfor exit from insolvencye.g. schemesof arrangement or
transferof business
Although there appears to be no mechanism for exit from insolvency, six
Member States noted that certain remedial measures such as a partial or
total portfolio transfer may be possible.
One Member State alsoreported that thetermsof the insurance
agreementscan be amended.
3. Continuanceof insurance cover
MemberStateswereasked whethertheir IGSprovidescontinued
insurancecoverageoncethe winding-upbegins.
14Member Statesreported that their IGSdoesnot providefor
continuanceof insurance cover once thewinding-upbeginsalthough
onenoted that portfolio transfers may havethesimilar effect for
policyholders astheir contractswouldstill be in place.
In other Member States (ninein total), theIGSprovidescontinuanceof
cover oncethewindingup of the insuranceundertaking begins.
This seemsto be more prominent in thecaseof life business(asin the
US law model) and compulsory insurance.
3.3.4Criteria taken intoaccount by an IGSfor transferringtheportfolio
of a failing insuranceundertaking
Few Member Statesreported havingcriteria for transferringportfoliosof
business.

For some Member States, it fallsoutsidethescope of their IGStobe
involvedin portfolio transfer.
For the five Member States that reported that their IGSs may be involved
in portfolio transfer, four Member States noted that various criteria must
bemet:
In DE, both for the life and health insuranceguaranteeschemes,the
portfolio transfer is the solution of last resort, i.e. it is taken intoaccount
whenother measuresdesigned tosafeguard the interestsof theinsured
are deemed insufficient.
In IE, the court appointedadministratorshall have all such powers
necessaryfor their functionsin relationtothe insuranceundertaking.
This would extend topowersover portfolio transfers, albeit that anysuch
portfolio transfer wouldrequire prior approval from the supervisory
authorityand theHigh Court.
In PL, the IGSmay grant a loantothe insuranceundertakingtaking
over the compulsoryinsuranceportfolio of the insuranceundertaking
beingwoundup, up to theamount of technicalprovisionscalculated in
respect of thetaken over insuranceportfolio.
In the UK, wherean insolvencyevent hasoccurredor the regulator
determinesthat the insuranceundertakingcannot pay claimsagainst
it, the IGShasdutiesand powersto seek tosecureportfolio transfer.
Theobjectiveis toprotect consumers rather than insurance
undertakings.
Thecourts wouldexerciseoversight.
For life insuranceundertakingsthe IGSmust, and for general insurance
undertakingsthe IGSmay, seek to securea transfer and alsoprovide
fundsto support thetransfer in caseswhere:

- it is reasonablypracticableto secure a transfer;
- a transfer wouldbe beneficial topolicyholders; and
- wherethe costsexceedthe cost of paying compensation, any
additional cost is likelytobe justified bythebenefits.
5. Role of the IGSwhenan insuranceundertakingbecomesinsolvent
Generallythe vast majority of MemberStates‟IGSsare either directly
responsiblefor payment of claims(15Member States) or for supporting
or ensuring such paymentsare made (twoMember States), or both (one
MemberState).
However, payment arrangementsaswell asother duties of IGSswhenan
insuranceundertakingbecomesinsolvent vary significantlyacross
MemberStates.
Themain differencesare:
- some IGSscan either pay compensationor seek portfolio transfer;
- assessment of claimscan be the responsibilityof:
thecourt or theliquidatorsappointedby the court;
theinsuranceundertakingsof the claimants; or
theIGS;
- theIGSmay be responsiblefor auditingclaims_assessment
processes(toensure claims arebeinghandled effectively and/ or
economically);
- theIGSmay grant a loanto the insuranceundertakingtakingover
thetransferredportfolio; and

- thepayment may bepossibleonlyafter the insuranceundertaking‟s
authorisationhasbeen revoked by itssupervisoryauthority.
3.3.6Cross-border cooperation and coordinationarrangements
Member Stateswereasked what cross-border dimensionsare taken into
considerationby their IGSwhenan insuranceundertakingisbeing
woundup.
Respondentsmostlyreferred to the European Passport, withsituations
differinglargely with regardstothehome stateor host stateprinciple
adopted.
For life and non-life IGS,most MemberStatesconcerned reported no
actual or potential cross-border dimensions.
Onlythree countriesreported cross-border dimensionssuch asdirect
contact betweensupervisoryauthoritiesor the relationship betweenthe
IGSs.
For IGSfollowingthehost stateprinciple, or mixed home/ host
principle,cross-borderdimensionsconsist mainlyof claimspayments.
For motor IGS,seven Member Statesstatedthat cross-border
dimensionsare not taken intoaccount besideswhat arisesfrom the
international nature of the coverageof compulsory motor insurance
(obligation of payment irrespectiveof the accident location).
In its report (CEIOPS_DOC_18/09) “CEIOPSInput to theEC workon
InsuranceGuarantee Schemes”, CEIOPShighlighted the importanceof
harmonisingthegeographical scope of an IGS, and expressed a
preferencefor thehome state principle, sothat insuranceundertakings
are coveredby the IGSin thestate wheretheinsuranceundertakingwas
authorised.
This includesthe insuranceundertaking‟sbranch and servicebusinesses
throughout the EEA.

3.4 Role and interaction of other bodies with the IGS
3.4.1Roleof thesupervisoryauthority whenan insuranceundertaking
becomesinsolvent
MemberStateswereasked whetherthesupervisory authoritywasthe
competent authorityfor the winding-upof an insolvent insurance
undertaking.
Under Directive 2001/17/EC on the reorganisationand winding-upof
insuranceundertakings,“competent authorities” of theMemberStates
are responsiblefor decidingon the commencement of winding-up
proceedings.
Thecompetent authoritiesmay be judicial or administrative
depending, upon Member State‟slegislation.
Insolvencylawsand in particular insolvencyproceduresappear tovary
quitesignificantlythroughout Member States.
Accordingly, Article 9 of thesaid Directivestatesthat thedecisionto
commence winding-upproceedingsfor an insuranceundertakingshall
begoverned by thelaws,regulation and administrativeprovisions
applicablein itshome state.
Responsesindicatedthat the supervisoryauthorityplaysa pivotal role
whenan insuranceundertaking becomesinsolvent.
NineMember Statesreported that the supervisoryauthorityhassole
responsibilityfor decisionsregardingre-organisational measures
(transfer of portfolio, stay in payments, etc).
Three MemberStatesreported that the court‟s authorisation is required.
Most replieshowever, indicated that theliquidation procedure is judicial
and governed by thecourts(20Member States), although four Member

Statesnoted that there are caseswheretheprocedure is administrative,
with the supervisoryauthoritydecidingthetiming, nominatingthe
liquidatorand monitoring the merit and thelegalityof the proceedings.
In the caseof judicial liquidation:
- in some Member States,winding-upproceedingscannot be initiated
without theconsentof the supervisoryauthority;
- thesupervisory authority oftenhasthepowerto advise thecourt on
thenomination of theliquidator(notedby nineMemberStates);
- two Member Statesnoted that a condition of the court issuing the
liquidation decree is the supervisory authority‟s withdrawal of the
insuranceundertaking‟sauthorisation.
Most replies alsogave prominencetotherole of theliquidator
(administratorof the insolvency, or bankruptcy) whois responsiblefor
theday-to-day activitiesof the liquidationprocedure.
Theliquidatoris appointed by the competent authoritiesasreferred to
above.
One Member State emphasizedthefact that the liquidationdoesnot
prevent the supervisoryauthority from exercisingits general power/ duty
to supervisetheinsuranceundertaking‟sactivities.
Thediversityof regimesacrossMemberStatesindicatesthat anyfuture
proposalfor EU harmonisationregardingIGSshould leavethe role of
thesupervisory authority to theindividual MemberStates.
However, the diversity of situationsalsohighlightsthe importanceof
addressingthe issueof cross-border communicationbetween
supervisoryauthoritiesin any futuredirective.
3.4.2Differencesbetweenlife and non-life insuranceinsolvencyand their
treatment by thesupervisoryauthority

MemberStateswerealsoasked whetherthere weresignificant
differencesbetweenlife and non-life insuranceundertakingswith
regards tothewinding-upproceduresand the roleof the supervisory
authority.
Themajority(15MemberStates) stated that noapparent differences
existed, witha few indicatingminor differences(for exampleone
MemberState observedthat the court hasgreater powersover the
continuation of life businessand thetermsof life insurancecontracts).
Therepliesindicatedthat Member Statesdonot generallytreat the
insolvencyof life or non-life insuranceundertakingsdifferently.
There is nothing in thewinding-upproceduresthereforethat would
prevent a potential directiveon IGSfrom addressing both sectorsat the
sametime, and contributingto the creationof general IGSsfor
enhancingconsumer protection and confidencein financial services.
3.5 Role of the court in winding-up proceedings
3.5.1During winding-upproceedings
Directive2001/17/ EC on the reorganisation and winding-upof
insuranceundertakingssetsout theprovisionswhichmust be followed
byinsuranceundertakingsthat are being wound up.
Article 9 of thesaid Directivealsoprovidesthat the winding-up
proceedingsand their effectsshall be governedby the laws,regulations
and administrativeprovisionsapplicablein each home MemberState
unlessotherwiseprovided inArticles 19to26of the same directive.
In linewiththisapproach, it appearsthat most Member Statesreferred
tothe general lawsrelatingtothe insolvencyof companieswhen
describingthe roleof the court in this question.

3.5.2When the insolvencyproceduresare initiated
In most Member States,the court issuesan order initiatingthe
insolvencyprocedure, unlessit isa voluntary winding-upprocedure.
Most MemberStates(17) reported that theroleof the court is toensure
that orderlyand effectiveinsolvencyprocedures are in place.
Thecourt is responsiblefor initiatingliquidationproceedings,issuinga
bankruptcydecreeand appointing a person responsiblefor the winding-
up of theinsuranceundertaking, usuallyreferred to in Member States‟
legislationasa liquidator, receiver, administrator or trustee.
Throughout the winding-upprocess, thecourt‟sroleis mainly to
monitor and supervisethe process, tooverseethe actionsand
arrangementsproposedby the trustee, receiver or liquidatorand to
approvereportsrelatingto thewindingup.
Thecourt monitorstheprocessand is referredtowhenthere is
disagreement or theneed for direction.
We notethat the roleof the court in winding-upproceedingsasreported
in themajorityof responses, isakin totheUS regime, with the
distinctionthat in theUS the supervisoryauthority(theinsurance
commissioner) is itself the liquidator appointed by thecourt.
Afew Member States(four) statedthat thecourt isnot involvedin
winding-upprocedures.
One Member State reportedthat the court plays norole in the IGStasks
asa portfolio transfer takesplacebeforetheinsuranceundertaking
becomesinsolvent, whilst another noted that, sincetheprocessis
entirelyconducted by the supervisoryauthority, the role of the court is
merelyasa last resort to resolve conflictsregardingthe
verification, valuation, graduation and payment of claimsby the
liquidationprocedure.

3.6 Role of the IGSin the claimsprocess
3.6.1Timelimit for IGSpay-outsand observed payment times
MemberStateswereasked whetherthere are any specific timelimitsfor
theIGStopayclaims.
Onlysix Member Statesreported havinga prescribed time limit:
•In four Member Statesthetime limit is fixedby law and in two
MemberStates, by thesupervisoryauthority.
•Thetimelimit is triggeredby declarationof bankruptcy, request/ report
of claim or end of calculation(reported by twoMember Statesin each
case).
•Thetimelimit variesfrom 15days tothree months. In some casesthe
limit can be extended for another twoor three months.
One Member Statenotedthat the timeperiod starts from whenthe
liability of theinsuranceundertakingand theamount of the claim have
been established.
Most of theMemberStatesdid not provide any information about the
payment timesobserved.
Somerespondentsindicatedthat theycannot report time limitsdue to
no(or only a small number of) insolvencycaseswiththe involvement of
an IGS.
One respondent‟sexperienceisthat the timescalesfor windingup of
insuranceundertakingsand paymentsof dividendsare lengthy.
OnlyNorway reportedobservedtime limitsfrom one week to three
months(from whenthe individual claim hasbeen regulated/ adjustedby
theinsolvencyadministrator) in practice.

2. Treatment of unearnedpremia
MemberStateswereasked whethertheir IGStreatsunearnedpremia
differentlyfrom other insuranceclaims.
About half of respondentsreported that the treatment of unearned premia
is not applicableto their IGS,astheir scheme providesnocover for
unearned premia, or in other casesMember Statesonlyhave schemesfor
motor insurancewhichcover claimsbut not unearned premia.
Anumber of Member Statestreat unearnedpremia on equal termswith
other insuranceclaims(six MemberStates) although a few treat them
separately(twoMemberStates).
TwoMember Statesreported no relevant legal provisions.
3. Funding payment of claims
MemberStateswereasked what happensif there are insufficient funds
in theIGStopay all claimants.
Some Member States just explained the way the IGS is financed and
reported capsfor the coverage without giving a precise answer to the
question.
Others reported a range of solutions,whichincludea proportionate
reduction of claimson a pro rata basis, full payment of all claims with
additional ex post contributionsby IGSmembers, loans(withand
without stateguaranteefor the repayment), the ability to request
borrowingfrom thegovernment/ other sourcesand additional public
money.
Themost reportedsolution is additional contributionsby scheme
members.
4. Rightsof policyholders to take IGSto court

Most MemberStates(15) reported that policyholders have onlygeneral
legal rightsto contact the IGSor totake it to court.
FiveMember Stateswith only a motor IGSstated that third party
claimants/ injuredparty/victimshavethoserightsrather than
policyholders.
3.6.5Payment of claimsupfront and reimbursement
Thevast majority of IGShave the abilitytopay out claimsup front:
•In Member Stateswithlife, non-life or more general schemesin
place,11out of 12IGSsmay pay out claimsupfront.
•Eight Member Stateswithan IGSexclusivelyfor compulsorymotor
insurancereported that thescheme hasthe ability topayout claims
upfront.
However, wheninterveningin caseof the insolvencyof an insurance
undertakingor in thecaseof a winding-up, the vastmajorityof IGSs
havepowerstopay out claimsup front (in the sensethat theyoffer
payment tothe clientsonceeach claim hasbeen established), whichis
in theinterest of policyholders.
3.6.6Subrogationrightsof the IGS
Providingan IGSwithsubrogation rightsallowsthe IGSto take over the
rightsof policyholders against the insuranceundertakingand therefore
receiverecoveriesagainst compensationpaymentsit hasmade directly.
Amajorityof respondentsindicated theexistenceof subrogationrights
(20Member States) without commentingspecificallyon whethertheIGS
is subrogatedwith the same priorityasdirect insuranceclaims.
It seemsappropriatefor a directivetoprovidefor IGSsto have
subrogationrights.

It alsoappearsbeneficial to provideIGSswiththeright to benefit from
thesame level of priority aspolicyholders(i.e. preferential treatment
wherebythe policyholder‟sclaim isprioritisedabove most other
creditors).
Unlessthe IGStakesover the same creditorpriority asheld by the
policyholder, it will be unlikely for the IGSto recover itscompensation
payments.
This will increasetheIGS‟sfunding requirements.
This alsomeansthat the IGSwill effectivelybesubsidisingthepayment
of other creditorsand giving them a greater chanceof gettingtheir
moneyback (whichshould not be the purposeof the IGS).
3.6.7Other rightsof the IGSincludingapply tothe court for a winding-
up Order
Another important right that some IGSsmay have isthe right to be a
member of thecreditors‟committee.
Themajorityof respondentsstated that their IGSshave no specific
rightsin thisregard (13Member States).
Four Member Statesreportedthat thisquestion is not applicable.
One Member State reportedthat their IGSmay appoint a member in the
creditors‟committee, whilstanother noted that the IGShasthe
expectation, but not the right, tohave a representativeasa member of
thecreditors‟committee.
In another, the IGSor other creditorsmay be appointed in the
committeeby the judgecommissioner.
Four Member Statesnoted that their IGSshave general/ standard rights
in their capacityascreditorsof an insuranceundertaking(e.g. to be a
member of thecreditors‟committee,topresent proposals, to file

petitionsagainst decisionsof creditorsmeetings,tobe heardby the
court and to file appealsagainst court decisions).
3.6.8Rightsof creditors
Six Member Statesreportedthat creditorshave rightsto be heard bythe
court.
4. Conclusions
Thefindingsof the report highlight the lack of harmonisationin a
number of areassuch as:
- whichauthoritytakesthe decisiontointervene whenan insurance
undertakingbecomesinsolvent;
- theabilityto providefor portfolio transfer;
- a lack of pre-warningsystem when an insuranceundertakingis in
difficulty; and
- therole of thesupervisoryauthority when an insuranceundertaking
becomesinsolvent.
Overall thereport highlightsthe diversityof regimes acrossMember
Statesand the importanceof cross-border communication between
MemberStates.
Thereport alsoillustrateshow MemberStateshave exercisedtheir
discretionin implementingDirective2001/17/ EC on the reorganisation
and winding-upof insurance undertakingstofit withtheir legal and
institutional framework.
This pointstothepotential need for anyfuture directiveon IGSto
provideMember Stateswithsufficient flexibility to adapt thedirective‟s
requirementstofit with their national framework.

____________
n
on.com
Is globalisation great?
StephenCecchetti
EconomicAdviser at the Bank for
International Settlements(BIS), and Head
of itsMonetaryand EconomicDepartment
Solvency ii Associatio
www.solvency-ii-associati

Remarksprepared for the 11th BIS Annual
Conference, Lucerne, Switzerland, 21–22June2012
It is my pleasure and privilegeto welcomeall of you tothe 11th BIS
annual conference.
This year our theme is thefuture of financial globalisation.
Anyone whohaslived through the last five years must surely ask:Is
globalisationgreat?
Given the orientationof the BIS, weareforced toask this question.
In fact, I am ledtoask twoquestions, namely: how much globalisationis
good and how much financeis good.
Over thenext twodays wewill reflect on thesequestions. Let me give
you my answersto my questionsup front: financial deepeningis
great, but only up toa point.
And, thismeansthat theglobalisationof financeis great, too;but only
up toa point.
ToseewhyI have come totheseconclusions,I will take a minuteto
describethe relationshipof financetogrowthin general, and then draw
out implicationsfor cross-border banking;that is, thepart related to the
globalisationof finance.
My commentsbuild on workthat hasbeen goingon at theBISfor some
time.
For most people, theterm globalisationmeanscross-bordertrade in real
goodsand services;somethingthat wewouldall agree hasbrought the
greatest benefits toa largenumber of people.

Tradevery clearlysupportsmiddle-classlivingstandards, among other
thingsputtingliterallytensof thousandsof different productson the
shelvesof even a modest-sized supermarket.
But thisreal sideof globalisationrelieson financial intermediaries to
fund the tradingof all this stuff acrossborders.
And the recent crisisshowedhow problemsboth on and off the
intermediaries‟balancesheetscan havevery large, very real and very bad
implications.
Many of ushave startedtoask if financehasa dark side.
First, can a financial system get toobig? Put differently, is there some
optimal size for the financial industryafter whichit dragsdown the rest
of the economy?
Second, how far should countries go in outsourcing the provision of
financial services?Does specialisation in financial services by some
countriesimposevulnerabilitieson others?
How we think about and answer these questionswill surely have an
impact on the financial system‟s structure and thus on the future of
globalisation.
Turning to some facts,consider the relationshipbetweenthesizeof a
country‟sfinancial system and growth.
We teach that, becauseit allocatesscarceresourcestotheir most
efficient uses, one of thebest waysto promote long-run growthis to
promotefinancial development.
And, a sufficientlywell-developed financial system providesthe
opportunityfor everyone – households,corporationsand governments–
toreducethe volatilityof their consumption and investment.

It sure soundslike financeis great. But experienceshowsthat a growing
financial system is great for a while– until it isn‟t.
Look at how, by encouragingborrowing, thefinancial system
encouragesan excessiveamount of residential construction in some
locations.
Theresults, empty three-car garagesin thedesert, do not suggest a more
efficient useof capital!
Financial development can createfragility.
When credit extension goesintoreverse, or even juststops,it can induce
economicinstabilityand crises.
Bankruptcies,credit crunches,bank failuresand depressedspending are
now theall-toofamiliar landmarksof thebust that followsa credit-
inducedboom.
What is more, financial development is not costless.
Theexpansion of financeconsumesscarceresourcesthat could be used
elsewhere.
And finance‟slargerewardsattract the best and thebrightest.
When I wasa student, my classmatesdreamed of curingcancer, unifying
fieldtheory or flying to Mars.
Thosein today‟scohort want tobecome hedgefund managers.
Given finance‟sbooms and busts, is this themost efficient allocationfor
such scarceresources?I doubt it.
So, when does financial deepening turn from good to bad and become a
drag on the economy? Somewhat surprisingly, we get a consistent story
regardless of how wemeasure financial development.

In our 2011paper for the Federal ReserveBank of KansasCity‟s Jackson
HoleSymposium, MadhuMohanty, Fabrizio Zampolli and I found that
theeffect of debt – public, household or corporate– turnsfrom good to
bad, whenit reachessomethinglike 90% of GDP, regardlessof thetype
of debt.
Toprevent adversedevelopments– both natural and man-made– policy
shouldnormally striveto keep debt levelswell below thisline.
If wemeasure the scaleof the financial industry byemployment or
output, asEnisseKharroubi and I do in a paper completed earlier this
year, wecome tothe sameconclusion.
When average growth in output per worker is plotted, as shown in Graph
1, against the share of employment in finance on the left and value added
on theright, a parabola summarisesthescatter.
(Notethat a multivariate regression lies behind thesegraphs, sothat the
parabola isa slice out of a more complex surface.)
Again, the conclusion emergesthat there is a point whereboth financial
development and the financial system‟s sizeturn from good tobad.
That point lies at 3.2% for the fractionof employment and at 6.5% for the
fractionof value addedin finance.
Basedon 2008data, theUnited States,Canada, the United Kingdom and
Ireland wereall beyond thethreshold for employment (4.1%, 5.7%, 3.5%
and 4.5%).
And the UnitedStatesand Ireland werealsobeyond thethreshold for
valueadded (7.7% and 10.4%).

Moreover, theevidencesuggeststhat a growingshare of thefinancial
system actuallyslowsoverall economicgrowth.
Financial sector booms consume scarceresources, especiallyskilled
labour and specialisedcapital.
Panel regressionsof the five-year averagegrowthrateof labour
productivityon, among other variables,the growthrate of theshare of
financein total employment yield thestrong negativerelationship
displayed in Graph 2.

Faster-growingfinancial employment hurts averageproductivity
growth, asdoes“toomuch” value added.
In particular, a 1percentage point increasein the growth rate in
finance‟sshare of employment cutsaverageproductivity growthby
nearlyone-third of one percentagepointsper year.
Combined, thesefactsleadtothe inescapableconclusion that, beyond a
certainpoint, financial development is bad for an economy.

Instead of supplying the oxygen that the real economy needs for healthy
growth, it sucks the air out of the system and startsto slowly suffocate it.
Householdsand firms end up withtoo much debt.
And valuableresourcesare wasted. We need todo something about this.
If financial development is onlygood up to a point, it followsthat
financial globalisationmight onlybegood up to a point.
Financial globalisation is about making it irrelevant to investors and
borrowerswhere the services and the funds they draw on are actually
located.
But thespilloversduring thefinancial crisis, whenone country‟s troubles
spread to others,raisethe question:doesit matter wherethefundsare
comingfrom?
That is, how should wethink about cross-borderflowsand financial
specialisation?
As economists,weare trainedtothink that specialisationisgreat.
Withinan economy, webelievethat when individualsexploit
comparativeadvantage, it benefitseveryone.
And, wehave created an entire infrastructurewhere, for example, I am
ableto writeand speak about macroeconomic and financial stability
policy full time, but still purchasegroceries.
Thealternative, whereI wouldbarter my insightsfor food, wouldsurely
not work aswell.
I‟ll let you be the judgeof whether, in my specific case, the market is
yielding the right social solution.
But for the worldasa whole, global welfareis enhanced when we
encourageinternational trade in goodsand services.

And international tradebenefitsemerging and advanced countries alike
whenit exploitscomparativeadvantage.And this inevitablyleadsto
specialisation.
Tradeand specialisationreach their limitswhereeconomicsmeets
national security.
As an individual, I can relyon someone elsetoproducemy food, trusting
that some combinationof the market and the legal system will look out
for me.
But woulda country want tooutsourceitsentire food production?And
what about energy?
National securityconcernsdictate that some amount of self-sufficiency
is cultivated, simplyasa precaution.
Someconcern about food and energy security is certainlywarranted.
Thesame is probablytrue for strategic technologies.
But clothingor coffee securityis probablynot worthworryingabout.
Wheredoesfinancestand on thisspectrum betweenthe essential and
thesuperfluous?
Morespecifically, can countries becomevulnerable by excessively
specialisingin financeor by overly relying on peopleoutsidetheir
bordersfor the provision of financial services?Has financial
globalisationgone toofar in some countries?
Over the past 30 years, the international financial system hascome to be
dominated by a relatively small number of large banks headquartered in
a handful of advancedcounties.
Their growthhascoincided witha push toremove impedimentsto the
freeflowof capital.

As a result, a highly concentratedbankingsector dominatesthe
international provisionof capital and maintainslargebalance sheet
positionswithrespect to many countries.
And when these balance sheet linkages are large (relative to GDP or the
capital stock or domestic tax base), problems in one country‟s financial
sector quickly transmit themselvesto other countriesand markets.
In short, financial globalisationis bound up witha specialisationin
financial servicesthat makescountriesmuch more vulnerableto each
other‟smishaps.
Theexperienceof some countriesduringthe crisissuggeststhat too
much international capital, like too much debt, can be bad.
For example, credit booms in the yearsprecedingthecrisistended to
outrun domestic fundingand todepend on fundsfrom abroad at the
margin.
Countries that relied heavily on international credit sources to finance
domestic booms found themselves high and dry when these off-shore
sources of funding went into reverse – which happened assoon asthe
foreign creditorbanks ran in totrouble.
Afew examplesillustrate justhow important cross-border credit can
become.
Graph 3 showsthe casesof Ireland and Latvia.Thelight shaded areas
depict credit provided bydomestic banksto non-bank borrowers,that is,
domestic credit.
As you can seefrom thepicture, Ireland‟snon-bank borrowersalso
directlytapped cross-borderbank credit (shownhere asthe green
shaded area).
Such credit – whichbypassesthedomestic banking system and, asa
result, is difficult for localauthoritiestomonitor, much lesstoconstrain

– accounted for almosthalf of total credit to non-financial borrowersin
Ireland during thelast decade!
International credit can alsoflowintoa booming economy indirectly. In
Latvia, shown in theright-hand panel of Graph 3, banks financed their
domestic credit expansion by borrowingfrom abroad.
This indirect financing of domestic credit is shown as the dashed brown
line. While the credit was actually extended by domestic banks (or local
subsidiariesof foreign banks), the fundswereraised cross-border.

This indirect form of international credit – from a foreign bank toa
domestic bank and then on toa domesticborrower – is often overlooked
whenpeople analyse credit booms.
However, by some measures,it is at leastasimportant asdirect cross-
border credit.
Graph 4 showson thevertical axesthechangein thecredit-to-GDP ratio
in emergingmarketsbetween2002and 2007.
In the left-handpanel, thehorizontal axisplotsthe changein direct
cross-border credit;in theright-hand panel, the horizontal axisplots
direct plusindirect cross-border credit.
Thefaster cross-bordercredit grows,thefaster domestic credit grows.
And, the relationshipin the right-handpanel includingindirect cross-
border credit is much stronger both statisticallyand economically.

A1percentagepoint increasein direct and indirect cross-border credit is
associatedwitha 1.6percentagepoint increasein theratio of credit to
GDP.
While, in principle,financial over-development and financial
globalisationmay beorthogonal, in practice, cross-borderfinanceseems
tobe implicatedin financial over-development.
After trying toconvinceyou that financeis only great up toa point, I
havetried to persuadeyou that the same may applyto financial
globalisation, at least in the form of cross-borderbanking.
It providesuswithopportunities, but there are alsosome pitfalls.
As is often the case, you can havetoomuch of a good thing.
But I have lesscompellingevidencehere, soI am left witha more
tentativeconclusion:financial globalisationis great most of thetime but
not always.
During the conference,Philip Lane, in his paper on financial
globalisationand the crisis,digs deeper intothe roleof global
imbalancesin driving cross-border balancesheet integrationin thepre-
crisisyears.
Then, Alan Taylor systematically studiesthe relationship betweencredit
and financial crisesover thelong haul.
Tomorrow morning, Pierre-Olivier Gourinchas and Olivier Jeanne offer
us a view into a world in which safe and unsafe assets fight for room in
global portfolios.
And, finally, Hyun Song Shin, in his paper with ValentinaBruno, provides
a model for cross-border capital flows, includingtheir dark side.

Thesepresentationsand the discussionsthat theyspawn will give us
new perspectiveson thepositiveand normativeaspectsof financial
globalisation.
We hope to come away with a better understanding of both what may
happen and what should happen to ensure that financial globalisation
makes a positivecontribution to growthand worldwelfare.
Thank you all for coming, and I look forwardto the next day and a half
of discussion.

Synthesisof the Commentsfrom the
Call for Evidenceof the Internal Market
and ServicesDirectorate –
General on the fundamental review of
theFINANCIAL CONGLOMERATES
DIRECTIVE
EXECUTIVE SUMMARY
TheCall for Evidencefor the
Fundamental Review of theFinancial
ConglomeratesDirective (hereafter
"FICOD"), whichwasannounced in February 2012,aimed at engaging
interestedstakeholderswith thedebateon the supervision of large
complex financial groupsin Europe in thecontext of theFinancial
ConglomeratesDirective review.
TheEuropean Commission asked interestedstakeholdersto reply to
threesetsof questions,relatingto:
a)Thegeneral concept of supplementarysupervisionon groupsthat
meet certain thresholds;
b)An invitation for commentson the European specific perspectiveon
Joint Forum principlesof supervisionin their five areas(Supervisory
powers,Supervisory Responsibilities, Governance, Capital adequacyand
liquidityand Risk management),
c)Certain specific elementsof the Financial ConglomeratesDirective.
TheCommission received13responsestothe Call for Evidence. More
than half of respondentsrepresent banking and insuranceindustry
views.
Other respondentsconsist of privatestakeholdersand one supervisory
authority.

Fiveresponseswerereceivedfrom theUnited Kingdom, and one from
France, Portugal, theNetherlands, Germanyand Belgium each. Four
responseswerereceivedfrom European level organizations.
Many respondentswelcomethe ideaof revisitingthecurrent supervisory
frameworkfor financial conglomerates.
However, onlya few are advocatingfor a strengtheningof thecurrent
supervisoryregime for conglomerates.
Theoverall impressionis that most respondentsaresatisfiedwiththe
current regulatory frameworkon financial conglomeratesand find it
adequatelyensuresefficient supervisionin the EU.
Someagree that potential gapsarisingfrom cross-sectoralrisksand
unregulated entitiesneed to be captured in order toensure effective
supervision, however most respondentsbelievethat upcoming
improvementsin the sectoralsupervisoryregimes alreadyguarantee
comprehensivegroup-widesupervision.
While manyof the respondentsacknowledgethat coherencebetween
sectoralrulescould be improved, most claim that current sectoral rules
are sufficient and adequate.
Takingintoaccount the fact that prudential frameworks(CRD, Solvency
II, shadowbanking) arecurrentlyundergoinga review,theyexpressthe
need for thenew prudential rulesto settleand for the gaps, where
supplementaryregulation is necessary, tocrystallise.
Onlya few respondentsexpressmore ambitiousviewstowards
strengtheningsupplementary supervision of financial conglomerates.
Theyadvocate for powersfor supervisorsto imposeall group
requirementson theparent entity whether regulatedor unregulated and
for capturing special purposevehicles (SPVs) withinthescope of group
supervision.

First set of questions - viewson the general concept of
supplementary supervision on groupsthat meet certain
thresholds
In the light of theobjectiveof this kind of supervision, thedetection and
correction of group risks in groupswithmany different licenses(i.e.
contagion, concentrationof risks, conflictsof interest, management
complexity, multipleuse of capital), is theconcept of supplementing
group risk related supervision to the sector-specific supervisionof
individuallyauthorized entitiesin a financial conglomeratestill effective?
Themajorityof respondentsshare theopinion that thecurrent
regulatoryframework on financial conglomeratesisadequateand
ensuresefficient supervision.
Thoserespondentsthink that existingsectoral rulesare sufficient and
that proposed changestocurrent legislation should be allowedto settle
beforefurther reform.
Accordingtothe some industry stakeholders,the upcomingSolvencyII
regimeprovidesfor an extensiveset of rulesfor insurancegroups'
supervision.
Enhancedcooperationand information sharingwill enablesupervisorsto
maintain asufficient level of oversight at the group level. Intragroup
transactionsand risk concentrationswill be continuouslymonitored and
reportedto the supervisors.
Afew respondentsthink that financial conglomeratesshould be subject
toa supplementarysupervisory framework.
This is necessaryfor addressingcross-sectoralriskswhichmay not be
adequatelyaddressed in sectoralgroup supervision toensure that all
avenuesfor contagion betweenthe twosectorsare captured.

Solvency ii News August 2012

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Solvency ii News August 2012