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European Commissioner for Internal Market and
Insurance Institute of London
Ladies & Gentlemen,
Thank you for inviting me to speak here today. I would like to talk today about our priorities for the insurance sector. Obvioiusly, Solvency II is currently our key insurance project and will remain so over the next few years. The Directive will transform insurance and reinsurance regulation in Europe, and probably influence regulation in other countries. A significant amount of work has taken place for us to get to this point – and much more is required of all stakeholders before the transposition in 2012.
The benefits of Solvency II will, I hope, be significant and will bring about a fundamental change in insurance regulation in all EU member states. Of course, the magnitude of that change will depend on each country's existing supervisory framework. Several countries have already introduced risk based capital requirements. The UK has the Individual Capital Adequacy Standards. While there are similarities between the framework proposed by Solvency II and that of the ICAS, there are also several differences. For example, the results of ICAS cannot be reported publicly. In contrast, under Solvency II there are disclosure requirements. Thorough preparation for Solvency II is key and it is very important for the Commission that firms understand what will be expected of them under Solvency II before the Directive is transposed.
Our key priority for this year is ensuring that the Solvency II Proposal is adopted without the substance of the Proposal being compromised. 2007 was a key year with the Commission adopting the Proposal in July. The Portuguese Presidency did an excellent job in negotiating it. The Council Working group met several times and agreement was reached on a substantial number of issues. The discussion on Pillar 2, which covers the supervisory review, and Pillar 3, which comprises disclosure and reporting, is almost complete. Agreement has also been reached on most of the recast. This is encouraging progress.
Naturally a number of key issues, such as the group supervision regime, remain to be agreed on. It is crucial that the member states and the European Parliament reach an agreement on these issues without changing the substance of the Proposal. In particular, it is important that the provisions on the group support regime and on streamlining the group supervision regime are preserved. It is widely accepted that the current framework for group supervision is inadequate. Solvency II recognises the economic reality of groups. Under Solvency II, a group supervisor is appointed with clear responsibilities and there is provision for better cooperation between supervisors and better recognition of group diversification effects. Solvency II also introduces a regime of “group support”, which facilitates capital management within a group. The ability of Solvency II to contribute to a more dynamic financial services sector is dependent on streamlining the current approach to group supervision. One of the Commission's political priorities is therefore to continue supporting the provisions on group supervision and group support contained in the Solvency II Proposal.
The Commission's Proposal is innovative and responds to a real need to improve the regulatory framework in the EU. The negotiations in the Council are now continuing under the Slovenian Presidency. Two Council meetings have already taken place and the Presidency has scheduled several other meetings. I am confident that good progress will be made.
You may have heard that the Commission will introduce an amended Solvency II Proposal in the near future. I want to assure you that no amendments will be made to the Solvency II part of the Proposal. The negotiations on Solvency II can therefore continue without interruption. However, there will be an amendment concerning the recast part of the proposal to take account of the observations made in the Report of the legal services of the Parliament, the Council and the Commission concerning that particular part. Besides a number of corrections to the recast, the changes will exclusively reflect amendments which are necessary in order to update the recast to reflect the latest developments in EU legislation.
It is also our key political priority that the Solvency II Project proceeds according to the timetable. Otherwise the Directive will not enter into force in 2012 as expected. This would be detrimental to both EU industry and policyholders. We therefore need to meet all the deadlines. Key milestones will be the votes in the Council and the European Parliament. In February this year the Parliament Rapporteur, Peter Skinner, will present his report to the Committee on Economic and Monetary Affairs. A vote in ECON is expected in the summer of 2008 and a vote in the Plenary in the autumn of 2008. The Council and the European Parliament are expected to adopt the Directive by the end of this year.
As you know, a Fourth Quantitative Impact Study will be run from April to July this year. After the end of the QIS 4 exercise, it will take a number of months to analyse the results. I anticipate, however, that the report on the final results of QIS 4 will be ready by November next. The votes in the European Parliament and in the Council will therefore most probably need to be taken before we have those results. This should not be a problem. QIS 3 was a success and QIS 4 very much builds on QIS 3. We should therefore be able to proceed with the votes in the European Parliament and the Council as planned.
The adoption of the Level 1 Framework Directive is not the end of the Solvency II Project. As you are aware, Solvency II is adopted under the Lamfalussy procedure. It is very important for the Commission that the Level 2 implementing measures, which give further detail to the Directive, are also developed and adopted according to the timetable. We expect that the implementation measures will be adopted by the European Parliament in 2010. CEIOPS has already started working on the areas where it is likely that implementing measures are needed. We have asked CEIOPS to deliver advice on these measures by October 2009. The advice on the implementation of group supervision and on the group support regime is particularly important and, I know, is an area that will be of particular interest to many stakeholders. It is also one of the most innovative aspects of the Solvency II Proposal. We have therefore asked CEIOPS to deliver their advice on groups by May. In addition, we have asked and obtained commitment from the industry to give us their views on how they see the new regime operating in practice.
The other area where we have asked CEIOPS for advice by next May the proportionality principle. I am aware that there is some concern amongst small and medium sized companies over the burden of Solvency II. Let me assure you, a proportionate approach will be undertaken to ensure that SMEs are not unduly burdened. Simplifications will be provided for the calculation of technical provisions and the future European Standard Formula.
Getting buy-in from all stakeholders is one of our key priorities. There is little point in introducing a new innovative regulatory framework for insurance if only the Commission believes in its benefits. We therefore want to operate in a very transparent way and consult our stakeholders as much as possible. I encourage you to participate in the Solvency II Project. In particular, our current consultation on the draft specifications of QIS 4 is an opportunity for you to have an early input into the Level 2 implementing measures. The deadline is 15th February.
I am encouraged by the widespread support for Solvency II. Indeed, there is significant interest also from countries outside the European Union. Our regulatory framework will be, I hope, world leading, but Solvency II does give the Commission the option to recognise a third country regulatory regime as equivalent. The third country would then be able to benefit from the group supervision provisions in Solvency II. This may incentivise the United States to reform its rules on collateral. Speaking here at Lloyd's of London, I want to reiterate my view that the collateral requirement, as imposed in the US, is not justified. We have been urging the US to reform these rules but progress has been slow. If real progress is not made soon, this could have a negative impact on US insurers and reinsurers as they will only receive the full benefits under the new EU Solvency II Directive if they are subject to an equivalent solvency regime.
Before I move on to pension funds, I want to say a few words about the implementation of Solvency II once adopted. The adoption of the legal text is not enough. There needs to be a high degree of supervisory convergence in practice. This cannot be achieved overnight. CEIOPS will need to start preparing work on Level 3 supervisory guidance, which will need to be finalised during the second half of 2010. It is also important that national supervisory authorities embrace the fundamental changes brought about by Solvency II. We do not only want buy-in from industry and consumers but also from insurance supervisors. They will be at the forefront of the new regulatory framework. They need to demonstrate that the supervision of insurers has changed.
Finally I turn to pension funds. Occupational defined benefit pensions have a very important role in the provision of pensions in the UK and some other Member States. I know that there is a great deal of interest in the UK on whether Solvency II will be extended to pension funds. The Directive on Institutions for Occupational Retirement Provision, the IORP Directive, has now been implemented by all Member States. In order not to slow down the finalisation of the Solvency II Proposal, it was agreed with Member States in 2006 to come back to the issue of possible extension of the new solvency regime to pension funds in 2008 in the context of a review of the Directive. In order to prepare the discussion, CEIOPS is presently examining the existing solvency rules for pension funds. It is only after this first fact-finding exercise has been finalised that we will be able to better understand which solvency rules apply to the area of pension funds.
I believe that further work is needed here before we can commit ourselves to any specific regime. Stakeholders will have an opportunity to provide us with their views. But a very strong business case would be required before we start shifting Solvency II rules to pension funds, and frankly, I would be surprised if there is such a case. I have no intention of sponsoring proposals that would risk closing down defined benefit pension schemes.
I believe that the next few years will be a very interesting time for the insurance and pensions sector. Our political priorities are clear. We want to deliver a high-quality Solvency II Directive on time and we want the support of all stakeholders. Your role is crucial. For the project to be a success you need to provide your input. I therefore encourage you to participate in the Fourth Quantitative Impact Study and to further support our proposal throughout the negotiation in the Council and the Parliament.