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European Commissioner for Internal Market and
Ladies and gentlemen,
After years of preparation, study, consultation and analysis, the Commission has today adopted the "Solvency II" Proposal concerning the taking-up and pursuit of the business of insurance and reinsurance.
This Proposal puts forward a comprehensive and far-reaching package to reform the prudential supervision of insurance in Europe. It will remove obstacles to the functioning of the internal market in insurance and improve the supervision of insurers. Consumers, the industry and the EU economy and financial stability will all benefit.
Our aim is to have this new system functional by the end of 2012.
A modern and innovative regime grounded on sound economic principles
With this Proposal, the Commission aims to establish a modern regime that is based on sound economic principles, to ensure the financial soundness of insurers in Europe.
When putting together this Proposal, we have not aimed at the lowest common denominator. Financial services is one of Europe's success stories globally. European insurers are world-leaders. If we are to maintain our position and to build on it, Europe needs to be prepared to step up its game and take the lead globally when it comes to the regulation of financial services. One cannot achieve this without being ambitious.
This reform is overdue. The current regime is over 30 years old. The financial sector has developed dramatically. Techniques for risk management have undergone a revolution in the past three decades. This has resulted in a great gap between the way in which insurance firms measure and manage their risks, and the basis on which they are regulated. This Proposal will eliminate this conspicuous disparity.
The present EU framework sets out minimum standards that are often supplemented by additional rules by Member States. These national differences distort and undermine the Single Market, as well as hinder effective competition. This results in increased costs for EU insurers, and higher premiums for European consumers and businesses, thus hampering growth. We must and we can do something about this.
Europe deserves a new, modern regulatory system for insurance
Europe needs a regulatory regime that is fit-for-purpose to face the future challenges. Lessons have been learnt from the old system. One of these is that capital is not enough in ensuring the soundness of insurers. What is needed is a greater focus on the prudent management of insurers and the management of risks.
An accurate reflection of an insurer's realistic financial situation is an essential prerequisite for sound risk management and timely management action. For the new framework this means a shift to market consistent valuation of assets and liabilities, as well as giving due recognition to the economic impact of modern risk mitigation techniques, such as securitisations and derivatives.
The new quantitative requirements will mean that the true risk position of an insurer is reflected on the amount of capital they need to hold.
In addition to more realistic solvency capital requirements, the new framework will turn the spotlight on the accurate identification, measurement and management of risk. The new rules will spur insurers to raise their game in this area.
The new qualitative requirements will strengthen the governance of insurers. Reporting and public disclosure will become more intelligent. Market discipline will be harnessed to support supervisory goals.
Policyholder protection is of course at the heart of this Proposal. Risk-based solvency requirements, together with the establishment of early warning mechanisms and strengthened governance requirements should help to avoid unfortunate incidents like Equitable Life. But we also need to recognise that no solvency regime can offer absolute certainty.
The supervision of groups will be streamlined
The Commission Proposal will be a big step forward in streamlining the supervision of insurance groups. The current 'solo plus' supervisory view of groups has increasingly become detached from the reality of how groups are actually structured and organised. Groups are increasingly managed in an integrated way and the current supervisory view of groups does not fit in well with the modern world.
Groups today are faced with unnecessary administrative burdens. Supervisory effort is being duplicated. Competition and the Single Market are being seriously hampered by the existing rules. The present system raises the danger that some group-wide risks may be overlooked. We must grasp this opportunity to shake things up.
The Commission's Proposal foresees that groups will be allowed to organise themselves in the most economically efficient way. A dedicated group supervisor will be appointed for each group, with real decision-taking powers and coordination responsibilities. Groups will need to demonstrate robust systems and controls and effective group-wide risk-management before being allowed to take advantage of group-wide diversification benefits, a lower capital burden and streamlined supervisory and reporting requirements. The group supervision requirements will be tough, but I am confident that European groups intent on leading the development of best practice world-wide are prepared to put in the investment to pass the test.
The provisions on groups aim at establishing the right balance between the needs of the industry and achieving high protection for policyholders. Insurers will be able to operate more efficiently. Policyholders acquiring products from insurers that are part of a group will be afforded the same level of protection as those who take out their insurance from a 'solo' insurer.
What the Commission is proposing today is a truly European solution. Group-wide supervision by a network of European supervisors will better enable an effective monitoring of the activities of a group and the early detection of potential problems. We must cast aside our narrow interests and strive for a genuine European answer.
Member State supervisors should cooperate closely, share information and jointly oversee the groups under their responsibility. The group supervisor is in the best position to monitor the situation and developments in the group as whole. The local supervisors are the best placed to keep an eye on the developments in the subsidiaries.
I would also like to make it clear that the Commission's Proposal does not mean the end of 'solo' supervision. On the contrary, Local supervisors will retain oversight of the subsidiary's technical provisions and the Minimum Capital Requirement. Local supervisors have a central role to play when it comes to the validation of internal models and the supervisory review process. And, we should not forget that they also keep control over market conduct issues.
Importantly, technical provisions, topped up with the capital to cover the Minimum Capital Requirement means that there will be, at all times, real, hard capital to cover any funds due to policyholders, in the unlikely event that something should go wrong for the group.
This streamlined approach to group supervision is fully in line with the underlying philosophy of the Commission's Proposal – that is to say – a risk-focussed prudential system based on sound economic principles. As the 20 largest insurance groups account for more than 50% of the market, progress in this area has the potential of yielding significant benefits for the European economy and consumers, and safeguard the continued international competitiveness of the European insurance sector.
In brief, our proposal on group supervision is a European solution to adapt our supervisory arrangements to the reality of the Single Market. I sincerely hope that it will be supported by the Parliament and that protectionist reflexes will be resisted.
Europe can take the global lead
This reform is a real opportunity to improve the international competitiveness of European insurers. It is already evident in other sectors that the sensible and modernising regulatory approach of the EU is paying dividends. The same will be true for insurance. We have a chance of creating a true global benchmark. We are already seeing great interest from the US, Japan and China in this project. There is growing nervousness in the US about the EU surging ahead while the US itself is stuck with a highly fragmented insurance regulation. Let's make sure we use this opportunity to give EU insurers a head start in the global economy.
Our Proposal will force closer co-operation between supervisors. Trust is the basis for a true European supervisory culture. The Proposal is also ambitious in this respect. Progress is already evident, undoubtedly helped by having the supervisors so intimately involved from the very beginning in the designing of the new system. Further convergence and closer cooperation will be for the benefit of us all.
Our Proposal has benefited enormously from the contribution of numerous stakeholders thus far. We have drawn on a wide variety of sources, including CEIOPS, the insurance industry, the actuarial profession and other stakeholders. I would like to take this opportunity to thank all those who have contributed.
We now hand over the proposal to the European Parliament and the Council of Ministers. I am pleased that Peter Skinner is taking the task of steering the proposal through the parliament. We have had the opportunity to discuss our approach on a number of issues already and he has demonstrated that he has a real grasp of the issues at stake. I look forward to our continued co-operation in the time ahead, so that the ideas we set out in the proposal become a reality for all involved.
'Solvency II' is a Lamfalussy-style Proposal focusing on the high-level enduring principles and political choices. That said, it is also sufficiently detailed to ensure that co-legislators will pronounce themselves on all important issues. We want to avoid at any rate that political choices are passed on from the co-decision procedure to the comitology process. Only technical details should be dealt with in the implementing measures.
To conclude, I believe Europe has now a real chance of setting the pace in this area globally. We need to be ready to ditch old habits. And we need to be courageous in seeking new approaches. The Proposal is ambitious. It will benefit the European industry, the policyholders and financial stability. I count on all of your support to achieve these goals.
Thank you for your attention.