30 September 2009

Published in: Regulation - supervision

CEIOPS is changing Solvency II “without any justification or evidence”

Their proposals will harm the competitiveness of Europe's insurance industry, argues Thomas Schubert of the German Insurance Association (GDV).

I am concerned that the supervisors have not stuck to the principles of the Solvency II level one directive in the second wave of consultation papers. The GDV fully supports the framework directive, as does the whole industry, but it is the united view among the insurance associations that CEIOPS has moved away from the principles set by the European Parliament (see also IERM, Regulation/supervision, 11 September, "CEA complains of CEIOPS' ‘excessive prudence'".)

There are two main problems. First there is the calibration. The problem is not just the supervisors being conservative -- it is that they have made changes without giving any justification or evidence for their need. CEIOPS has doubled factors, for example for operational risk or life underwriting risk, without considering correlations and without giving any reasoning.

We approve of a critical review of the planned measures against the background of the financial crisis, but we nevertheless expected CEIOPS to stick to the main principles of Solvency II. If they need to change the data and parameters they used in QIS 4, for instance, then they must give an explanation for their changes.

The second problem is the "own funds" where CEIOPS has developed very rigid requirements. One example is hybrid capital. These requirements are not consistent with market usage and would make it nearly impossible to raise the kind of capital CEIOPS is envisaging. In doing this, CEIOPS is moving away from the total balance sheet approach and it means that all sorts of risk buffers should be accepted.

It is difficult to say how much more capital the industry would need to raise under the current proposals. But the suggestions CEIOPS is making are very rigid, so we are not talking about marginal numbers. The numbers we are talking about will affect the whole industry and not just individual companies. So very quickly we are talking about billions and not millions.

This will have a major impact on the competitiveness of the European insurance market -- the premiums might rise and the customer might be less interested in buying its insurance products.

We are discussing our views constantly with all stakeholders and there is a continuous dialogue between the national associations and the national supervisors as well. The European Commission is keen to stick to what has been agreed in the Solvency II framework directive -- which means a risk-based and balance-sheet approach with market value.

My hope is that we will hold on to the overall principles of Solvency II. This is very important if we want to develop risk-based supervision. Indeed, it is crucial for the industry.

Thomas Schubert is head of the risk management department at the German Insurance Association (GDV).