Critical Comments on Solvency II
Dr. Elke König, President of the German Federal Financial Supervisory Authority (BaFin)
On October 29, 2012, the ICIR hosted the 3rd Talk on Insurance and Regulation. The ICIR had the honor to welcome Dr. Elke König as the guest speaker, who is the President of the German Federal Financial Supervisory Authority (BaFin). The topic of her talk was: “Critical Comments on Solvency II”.
Before addressing the “critical comments”, Dr. König emphasized that Solvency II as a principles-based regulatory regime, being founded on market-consistent valuation, is the right approach to be adapted. It is by far superior to the present Solvency I rules book.
However, the implementation of Solvency II has been repeatedly delayed. Dr. König said that it might not be before 2016 that Solvency II will be introduced. However, she indicated that parts of the book can be carried out in advance. In particular she suggests that the “Own Risk Solvency Assessment” (ORSA), which is the core of the second pillar of Solvency II, could become mandatory even before the official introduction of Solvency II. This would allow for a smooth phasing-in, rather than a big-bang-introduction.
Another important issue which Dr. König raised is that certain “backstops” may become necessary in addition to the principle-based rules of Solvency II. She explained that such “backstops” could be some few, but strict strategic rules which would help supervisors to control risks more easily. For example, such a “backstop” could be a simple equity capital to premium income-ratio that must be maintained (similar to present Solvency I-capital requirements).
Regarding the previous quantitative impact studies of Solvency II, she remarked that their problem was that they all referred to different stages of the Solvency II development. What is needed are consecutive impact studies based on the same defined Solvency II-standard. The time until Solvency II will be introduced can be gainfully spent on carrying out such studies. They can help to obtain information on how well the insurance industry is prepared for the new regulation. In addition, supervisors can use these studies as a toolbox to help draw their conclusions.
In her talk, Dr. König also addressed the issue of long-term-guarantees in the prevailing low-interest-rate phase. The currently discussed “matching adjustment”, which allows for higher interest rates for discounting illiquid liabilities in the Solvency II-balance sheet, is a first important step for the life insurance industry to cope with the low interest rate problem. As for the “countercyclical premium”, Dr. König sees a difficulty in the fact that for its introduction EIOPA would first have to proclaim a “crisis time” which could send a detrimental signal to the markets. She said that adjusting the measurement of risks would, of course, not change the real-world environment for the industry.
With regard to the industry, Dr. König emphasized the importance of a well-functioning enterprise risk management and of internal control measures. Companies should not hesitate to set up a multi-year forward projection on their solvency situation. Based on that they could make strategic decisions on their equity capital endowment before the Solvency II rules come into force.