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03 April 2013

EIOPA/Bernardino interview: "It's not Solvency II that provokes challenges to business, it's the economic environment"

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In an interview with Versicherungs-Wirtschaft (Germany), the EIOPA chairman talked i.a. about Solvency II, artificial volatility, the long-term guarantee assessment and pension funds.

One misunderstanding that needs clearly to be spelled out is that it’s not Solvency II that provokes challenges to business. It’s the economic environment. Solvency II makes one difference: You need to recognise it earlier. If you have a market consistent valuation of assets and liabilities it will be much more clear that you have a challenge in your portfolio. If you continue to have a valuation that does not reflect the market, then you can pretend that there is no problem. But the problem exists. Solvency II makes this transparent and that is good for consumers, for companies and also for supervisors. We need to have a preventive supervision. Supervision should not be there to act when the fire is already in your home. Supervision should be there to prevent that the fire occurs.

My term finishes in 2016. That’s a date that is still possible to have Solvency II in place. Before that we need a number of political decisions, but I believe that Solvency II will be in place. It’s fundamental from a supervisory perspective because we now have a regime that does not respond to the risks. We have to remember why we started Solvency II. The purpose was to increase policyholder protection and incentivise better risk management. And from all the work that we have done in Solvency II there is already some positive evolution in the way insurers manage risks.

No regulatory regime can avoid crisis. There is no perfect regime. Solvency II brings much more awareness of risks at an early stage. From the side of the companies it’s a fundamental change of culture when companies while investing in markets, need to understand the risks that they are running. The supervisors in their turn will also have necessary tools and information in order to look at the companies from the risk+based prospective. Is this a zero failure system? No.

There are no zero failure systems. But there has been progress. You mentioned the crisis of 2001 until 2003. The industry has learned from that and we incorporated it in Solvency II. The push for increased risk management and for better understanding by companies when they invest in certain types of assets – these are the lessons learned from that past.

This is fundamental right now: one of the consequences of the low interest rates is that insurance companies are searching for yield. It’s bound to happen that they go to other types of investment. But then it’s fundamental that they have a good understanding of those classes. And that’s what Solvency II brings...

For some long-term liabilities we need to have some adjustments to cope with the fact that the products and the liabilities are long term and the short term volatilities in the assets have a meaning, but they don’t have an economic meaning for the type of liability that insurers have. This is the adjustment that we are trying to effect right now. The regime was since the beginning based on the idea that we want to see the reality. And the reality is that markets are more volatile nowadays. We need to recognise the reality.

What would be a positive political solution for that?

An agreement on Omnibus II which is preserving the fundamental elements of Solvency II, preserving the market consistent valuation that we have got in Solvency II and preserving the principles of a robust and prudential regime while considering also the economic nature of the liabilities. I think that we have got some good proposals on the table...

Should pension funds be obliged to fulfil the requirements of Solvency II?

It’s not our intention that pension funds should follow Solvency II. When we advised the European Commission, we said that there are some areas, where we see an advantage of applying the same basic structure Pension funds are dealing with the similar kind of risk, so it’s important for the protection of members and beneficiaries to have good risk management, good governance, better transparency et c. But we said also that a straight forward approach like in Solvency II is not the best solution for pension funds. There are different types of security mechanisms around Europe. It’s important in any kind of solvency regime that the calculation of liabilities and the value of the assets are taken more realistically. We made a QIS exercise and we will have preliminary results from this test at the end of March or in the beginning of April. Some of the QIS options were consistent with Solvency II, others were less consistent. But we never said that we should follow Solvency II.

Full interview


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