Beginning of the end?-Karel Van Hulle
Adrian Ladbury: Will CEIOPS hit the deadline for the QIS5 project and when can the market expect to see the results?
Karel Van Hulle: The QIS5 deadline was the end of October as agreed with CEIOPS but we have found that it would be difficult for a number of insurers to respect this deadline and we have therefore asked CEIOPS to accept that insurers could ask their supervisor to hand in the data up to two weeks later. The industry has therefore been given a period of grace. The group results will be provided in mid-November and there is no reason to believe they [CEIOPS] will not stick to the deadline.
This is a very significant exercise and very complicated but we need the data in order to take forward the decisions. This will happen by June 2011 and it will then be exposed to the Parliament and Council of Ministers and in both cases there will be a period of three to four months to hear objections. The final text should be published by the end of 2011 if we wish the project to start on 1 January 2013. We have been discussing draft texts with the member states since last year and we have kept the parliament informed about that work. We will also have several meetings with MEPs during the coming months. Therefore I hope that we will be able to respect the tight deadlines.
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AL: Is it fair to say that you came under a lot of pressure to dilute what CEIOPS originally proposed late last year as it appeared to adopt a very conservative position on Solvency II and can the insurance industry be assured that you have managed to do this?
KVH: It is true that there were a lot of complaints from the industry and we faced considerable difficulties in the preparation of QIS5. A number of issues were raised both by the industry and by CEIOPS. The problem is that sometimes the devil is in the detail and some detail is spotted and then lobbying begins and you have to decide to what extent the criticisms are well founded. Sometimes we are accused of being too liberal or too conservative. If you ask the industry what they expect out of QIS5 they will tell you that the capital levels will increase. Sometimes this will be so and sometimes they will decrease. If you ask CEIOPS, they will say that capital levels will decrease. This is the best example of why we need facts and QIS5 is there to deliver these facts. Of course, the final calibration in Solvency II will never be perfect and we will no doubt have to make further changes as we progress. But the fact is that when you have two different positions you need real evidence such as that provided by QIS5 to tell us the real situation and we will respond to the numbers. We will take account of QIS5 whatever it states.
AL: Are you happy with the level of participation. You worked hard to try and raise the level compared with QIS4 to ensure the numbers are truly representative. Has this been achieved?
KVH: We set a very high target participation percentage. Take a look at the banking sector. I believe that no more than 350 banks ever participated in the impact assessments organised under the Basle II process and there are close to 8,000 banks in Europe. This contrasts with the insurance sector. Some 1,500 of the 5,000 insurance undertakings participated in QIS4 and we want to raise this level to 3,000 in QIS5. It has been difficult and I want as much participation as possible because the more companies that participate in the process the more representative the data will be. But remember it is a voluntary exercise. I do not have the exact statistics but with any major reform it is amazing that a large portion of those affected will only hear about the reform the day it has to be implemented. It seems to be human nature to wait and see until the last minute.
AL: Insurance buyers are still very worried that despite your efforts to make the rules less severe than they looked this time last year, it will still drive smaller and niche insurers out of the market because of the higher capital charges for such companies. Is it fair to state that Solvency II favours only the biggest and most diverse insurers?
KVH: I believe that there has been too much emphasis placed on capital. A key element of Solvency II is that a company has to know and properly understand the risks that it manages and if a company does that, it will not have a problem with capital. If you do not want to underwrite business that eats capital more than other lines then do not write the business that eats the capital. Smaller companies can be OK under these rules, it is not just a question of size. This is not rocket science. Many of the numbers do cause problems and questions and you have to find a good balance. But to do this you need the data and companies need to help us achieve that. It is no good coming to complain to us that you don’t like what you see if you did not participate in QIS5. I also want to stress that we discuss matters not only with the large insurers. We have engaged very much with the smaller players in the market and want to continue doing so. We want to keep a European insurance market with many players so that policy holders have a choice.
AL: And what about captives? You have stated previously in interviews with Commercial Risk Europe that you are keen to ensure that captives benefit from the proportional treatment and simplifications clearly stated in the Framework Directive and will work to ensure that this is not overlooked by CEIOPS. Have you managed to achieve this?
KVH: It is fair to say that we have done a lot to accommodate captives and to address the potential differences with the insurance industry. We would like to continue to have an active captive industry in Europe but, as always, there needs to be a balance between the requirements put upon captives and the requirements that apply to the insurance industry. We listen to the captive lobby and take note but the insurance industry also has a strong voice and raises objections if they believe that we give captives an advantage which they see as unfair. Therefore we need to strike a balance and not overdo it in any party’s favour. The captive lobby must realise that Solvency II is not just for them and they are part of a wider system. They also underwrite insurance and need to know, understand and manage their risks. It is not in their interests not to know their risks and so the basic principles of Solvency II should also apply to captives just as they do to insurers. Where there are differences, they should be taken into account.
AL: What else is on your plate currently? How about the review of the Insurance Mediation Directive that could produce a new set of rules on how brokers are paid and what they should or should not disclose. Why did CEIOPS not deliver its advice to you on this by the summer as requested and has this been delayed because of the mountain of work caused by Solvency II?
KVH: It is true that the advice from CEIOPS on the revision of the IMD is more likely to arrive at the end of November. The issues we asked them to consider are not easy and there are different views which may not be easy to reconcile. But this should not affect our timing. We plan to come forward with a final proposal in December 2011. There is a public hearing on the revision of the IMD on 10 December. CEIOPS will have delivered its work by then. Meanwhile, we will publish a consultation document in November. Both the CEIOPS document and our consultation document will be on the table for the public hearing.
AL: Is there a danger that the wholesale and large industrial insurance market could find itself lumbered with inadequate rules that are really designed to protect individual policyholders?
KVH: The primary goal of the IMD is to protect policyholders whether they are retail or wholesale. But it is recognised that in the business to business market this is less of an issue.
AL: What else is on your busy agenda for the next 12 months?
KVH: Next year we have a proposal on insurance guarantee schemes. A white paper has been published and we are awaiting comments by the end of November. We will have to analyse the comments and start to work early next year on the preparation of a proposal for a directive. It is important to see this issue in the context of all the problems that we have experienced in banking. People feel that a guarantee system is also needed for insurance although it is true to say that it is not that
likely that an insurance company will fail or that policyholders are not protected in the case of bankruptcy. Insurers must hold sufficient assets to match their technical provisions. These assets are a guarantee for policyholders also in the case of bankruptcy. Nevertheless, history has shown that there could also be problems in insurance and we need a consistent approach throughout the European Union. Some Member States [13] have a guarantee system while others do not.
And the systems are different. This is a problem in the case of cross-border business. We do not intend to create a pan-European scheme but rather ensure that each member state has a scheme and that the schemes are consistent. Another important file on which we will work is the revision of the IORP Directive [pension funds]. This will follow the publication of a green paper in September. The objective is to come forward with a proposal by the end of next year.
AL: What about the European Insurance and Occupational Pensions Authority (EIOPA) that is set to replace CEIOPS and take on a much bigger and more active role. When and how will this happen?
KVH: This is also an important work-stream. Next month we will propose Omnibus II. This proposal will include the various changes that are needed in the existing insurance legislation to adapt it to the creation of this new authority. We have been busy also discussing the practical changes following from the transition from CEIOPS to EIOPA in terms of staff, budget, procedures and so on. In the end, EIOPA will have a full time chairman, an executive director and more staff. This is needed because EIOPA will have more powers than CEIOPS. It is the intention to increase the European component in supervision although for the moment supervision will still remain at national level. The main advantage for the policyholder is that there will be more consistency in the way supervision takes place, more of a level playing field. If there are disagreements between national supervisors then EIOPA will be able to decide if they cannot agree. In a way, one could look at the head of EIOPA as the boss of the bosses.
AL: Have you chosen the head of EIOPA yet or can anyone apply?
KVH: The person has not been selected yet and the formal application procedure starts at the end of October. Anyone, who satisfies the criteria listed in the conditions that will be published, can apply. There is no specific requirement that the chair should be a present or former insurance regulator but direct experience of regulation and supervison in insurance would of course be essential. Although some people say that this will in the end be a political decision, the Commission wants the best man or woman for the job. It is an important position and the first chairperson will definitely leave his or her mark.
AL: What about negotiations with the United States on efforts to achieve greater consistency in regulation? Any progress to report there?
KVH: I do not see much improvement there to be honest because the structures are so complicated. For us it would be easier if there was a contact point at federal level. A first step has been made with the creation of the FIO [Federal Insurance Office]. However, nobody knows at this stage what the exact powers of this office will be in practice and how it will affect our relationship with the US. For the moment, we have to work with the National Association of Insurance Commissioners [NAIC]. This is sometimes good and sometimes less good. Much depends on the individual Commissioners. It is however important to keep in mind that the NAIC is not the same as EIOPA. It does not have the same status nor does it have the same powers. Although things are not easy, I still believe that we need to engage with regulators in the US as the US is still the biggest insurance market in the world.
