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McCreevy Discusses Solvency II Programme With Insurers

by Ulrika Lomas, for, Brussels

20 October 2006

Speaking to the Association Internationale des Sociétés d’Assurance Mutuelle and the Association des Assureurs Coopératifs et Mutualistes Européens at their Joint Congress on Thursday, Internal Market Commissioner, Charlie McCreevy gave further details on the Solvency II initiative and its likely impact on the sector.

He told the audience that:

"When I took over as Commissioner responsible for the Internal Market and Services, I made financial markets integration a top priority in my agenda. We are already witnessing the practical benefits of the 1999 - 2005 Financial Services Action Plan (FSAP) for banks and investment firms. Now, the focus is notably on the insurance industry, with the Solvency II proposal to be adopted by the Commission in the middle of next year."

"Our society is facing many challenges: rising liability costs, increasing longevity, natural and technological catastrophes, and terrorism, to name but a few. It is the role of the insurance industry to help us meet and manage those challenges. The cooperative and mutual sector already accounts for more than 20% of the European insurance market. Since it is progressively replacing the public authorities in certain fields - such as health compensation - your role and responsibilities will undoubtedly increase in the years to come."

"Europe needs cooperative and mutual insurers to be healthy, reliable and competitive. This will among others enable all European consumers to enjoy better coverage, at better prices."

"The Solvency II project, which is without doubt the main regulatory challenge the insurance sector will have to face in the near future, is being designed to achieve this."

Speaking with regard to the project's objectives, McCreevy explained that:

"It will seek to find a balance between the expectations of consumers, supervisors and insurers. It is crucial that the industry does not lose its appetite for risk because of excessive supervisory obligations. But it is also important that companies are fully aware of the risks they take and accept the corresponding consequences. Within the Solvency II framework, solvency requirements will be based on the company’s risk-profile. An insurer that better controls its risks may then hold less capital."

"Over the past 30 years, the legal and economic environment has changed a lot, and the responsibility for the insurer's financial soundness has been pushed back to where it ultimately belongs: the undertaking's management."

"Solvency II fully endorses this principle. Insurers will be provided with more freedom than before. They will be encouraged to design their own internal control and risk management system, on a principles-basis, instead of being asked to comply with “one-size-fits-all” rules. But on the other hand, they will be subject to strengthened supervisory review and will have to stand by their choices."

He went on to state that:

"As Commissioner responsible for the Internal Market, my first objective is of course to deepen the integration of the European insurance market: companies should be allowed to fully reap the benefits of the internal market – which is there for the benefit both of insurers and consumers. However, to ensure a level-playing field, some degree of harmonization must be achieved:

First, between national regulatory regimes, to ensure the same basic standards apply to all insurance companies;
Secondly, between local supervisory practices, because they differ greatly today.
When I call for hamonization, I mean genuine harmonization. We are not in the game of letting national regulators “goldplate” the new European framework, or of granting dozens of derogations and exemptions to Member States. We want a single, modern and proportionate European solvency system."

Under Solvency II, capital requirements will be modernised in order to make them tmore risk-sensitive and more comprehensive; they will rely more on a firm’s own risk assessment. For some insurers, this may mean that they will have to hold more capital, thus reflecting their true risk-profile.

However, Solvency II will also redefine eligible elements of capital. These elements will be recognised according to their “loss-absorbancy” potential, on an economic basis, according to the Internal Market Commissioner.

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