Solvency II News September 2012

Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.solvency-ii-association.com
Dear member, Today we will start from an interesting speech Gabriel Bernardino, Chairman of E IOPA
Creating a global insurance supervisory Language

Conference on Global I nsurance Supervision
Good evening, ladies and gentlemen,

On behalf of EIOPA I would like to thank the I nternational Center for Insurance Regulation for the cooperation and efforts in organising together with us this Conference on Global Insurance Supervision. I am very happy to see today so many colleagues from the supervisory authorities as well as prominent experts and executive officers of the insurance industry. Our purpose with this Conference is to create a platform of discussion and exchange of views about the international context of insurance supervision. Your presence and contribution to this event is key to its success and will certainly contribute to a better understanding of the different
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regimes and will foster further convergence of practices of insurance supervision worldwide. Insurance markets are increasingly global. Many insurance groups have nowadays a huge part of their revenues coming from business outside their home countries. This creates new opportunities but also new challenges for insurers, but also for supervisors. The promotion of sound and stable insurance markets calls for more international cooperation. We firmly believe that the best way to reinforce financial stability and consumer protection is to develop strong global regulatory and supervisory standards. This will create a level playing field for international players, foster a common language between supervisors and improve international cooperation and information exchange. I would like to share with you some views on the ways of improving the efficiency of supervision from a global perspective. ComFrame ( Common Framework for the Supervision of I nternationally Active Insurance Groups (IAIGs) - ComFrame is an integrated, multilateral and multidisciplinary framework for the group(wide supervision of internationally active insurance groups. ComFrame was initiated in response to the recognition that, despite the growing relevance of IAIGs in the global insurance marketplace, no
internationally coherent framework exists for the supervision of such large, global groups. I would like to stress that E IOPA is highly committed to contribute to the establishment of such standards and, in this regard, we consider our participation in the I AIS very important. E IOPA is actively contributing to the work of ComFrame. We consider it necessary to enhance regulatory capital requirements in order to achieve adequate consumer protection on a global level. Of course, while calling for this measure, we take into account different perspectives and developments worldwide. Seen historically, the EU had experienced comparable discussions a decade ago.
We fully support the move to enhanced group-wide supervision.

Cooperation between supervisors in colleges is essential for the proper supervisory approach to Internationally Active I nsurance Groups. We believe that information sharing and supervisory cooperation under conditions of professional secrecy is a key, determinative element of effective supervision. We need more shared supervision. Furthermore, Comframe should comprise a capital element, establishing strong principles for group capital calculations concerning the risks included, the metrics used to assess them and the overall level of confidence. Without this consistency, there is no level playing field internationally. It is not about one unique system, but about a set of strong principles that would deliver a range of closer and compatible systems.
Comframe should not be another regime on top of the already existent ones. The local regimes should evolve to comply with Comframe. This is my vision. I recognize that we cannot deliver this immediately, but at the I AIS we need to set a timetable and concrete milestones to develop this concept in a step by step approach. We need to be courageous and open-minded. We need to be open to change and evolution because the industry reality is also evolving and changing. An extra effort needs to be done by all of us because like Charles Kettering (a famous American inventor) said one day: People are very open minded about new things as long as they're exactly like the old ones.
Systemic risk in insurance

The crisis prompted a new look at systemic risk, including in the insurance sector. The identification and regulation of Globally Systemically I mportant Insurers is currently being discussed under the umbrella of the Financial Stability Board and the I AIS. EIOPA is keen to contribute to a robust identification process of G-SIIs and to develop appropriate regulatory and supervisory tools to deal with their characteristics.
Traditionally, systemic risk was a banking concept.

However, the recent crisis showed us that certain activities developed under the insurance sector can also pose systemic risk.
Insurance companies or groups that engage in non-traditional, or noninsurance, activities (for example: CDS, financial guarantees or leveraging assets to enhance investment returns through securities lending are more vulnerable to financial market developments and, importantly, more likely to amplify, or contribute to, systemic risk. Of course, this assessment may change over time, depending on the innovations and changes in insurance business models, especially in life insurance, as well as in the complex interactions between insurance groups and financial markets. We should be especially attentive to any kind of maturity transformation and leveraging occurring in the insurance sector. As a consequence, the identification of a systemically important insurer as such, should be a direct reflection of its source of systemic importance. While the size of traditional insurance activity is still an important factor, it should not be the dominant factor in the identification process. Clearly, the non-traditional and non-insurance activities and the degree of interconnectedness with other components of the financial system are more relevant from a systemic point of view. Consequently, the differences between insurers and banks in the impact of failures suggest that requirements for loss absorbency and resolution regimes for insurers should accept these salient differences and propose solutions that differentiate accordingly. As a conclusion I would like to underline that we should have no illusions: the creation of global insurance supervisory standards is a very long process that is complicated by the difference of cultures and uneven development of supervisory systems in different countries. But it is important that the regulators all over the world are willing to reach mutual understanding and to develop a common supervisory
language, which will help us to promote stability of the financial markets, to enhance their transparency and to foster consumer protection. Together we can achieve these objectives.
Interesting comments for the ComFrame

A compilation of comments on a common framework for the supervision of internationally active insurance groups, known as ComFrame by the I nternational Association of I nsurance Supervisors (IAIS)
Bermuda, Association of Bermuda I nsurers and Reinsurers

ABIR does not support the current proposal to include companies that do business in 3+ jurisdictions as the first basis on which to determine a company may qualify as an IAIG.
(Note: IAIG stands for Internationally Active Insurance Group) (Note: ABIR stands for Association of Bermuda Insurers and Reinsurers)
ABIR would respectfully submit that one of the objectives of ComFrame is to develop harmonization of the application of group supervision and in this regard, if for example, a group is operating in 3 jurisdictions within the EEA, then under the proposed regime harmonization in principle will have been already statutorily mandated, thus the purpose of introducing another group supervisory regime is not clear. We would propose that an I AIG is one which operates with legal entities in multiple jurisdictions which have separate and distinct regulatory systems across 3+ supervisory frameworks; for example, Canada; US; Bermuda; India, etc. ComFrame should be applied only to those internationally active groups that have a global footprint and operate with legal entities in jurisdictions on multiple continents. The EU and the United States would each count as a single jurisdiction since they operate with a common cross-state regulatory system.
ABIR also recommends that a smaller number of groups -say the 20 largestbe targeted with COMFRAME; experiment first, learn from that before expanding the net. ABIR also is concerned with the proposed "constrained supervisory discretion" which grants "involved supervisors" the ability to consider an insurance group an I AIG even if it does not meet some of the proposed criteria or to exclude it as an I AIG. This type of discretion creates uncertainty for groups since it may be "deemed' to be an I AIG even if it doesn't meet the criteria. Whilst the ComFrame Paper provides examples of when this may be employed, the proposal is too far reaching. Given the proposed constrained supervisory discretion on the part of the supervisors, does ComFrame also propose an appeals process by which an identified I AIG can seek to have that designation lifted?
Canada, Office of the Superintendent of Financial I nstitutions

OSFI believes that the current criteria and process may be too prescriptive or mechanical. Further, OSFI discourages developing a discrete list of I AIGs that is determined mainly using quantitative requirements. Instead, a general definition as to the nature, size, complexity, international activity and risk profile of institutions to which ComFrame should apply would assist the supervisor in applying supervisory discretion to determine I AIGs. Rather than ranking insurers quantitatively and determining a cut-off point for IAIGs, the general definition should be applied on a continuum.
China, China I nsurance Regulatory Commission

The indentifying standards of IAIG include size, international activity, and constrained discretion, which can reasonably identify insurance group companies with international activity and the identification processes are comprehensive and reasonable. In our opinion, the "constrained discretion" should be prudently used while taking into consideration the development stage of each country's insurance market and the nature, function and risk condition of insurance groups.
EU, European I nsurance and Occupational Pensions Authority (EIOPA)

EIOPA strongly supports the work of the I AIS to develop a set of internationally consistent standards for the regulation and supervision of IAIGs. EIOPA would like to thank the I AIS for the work conducted up to now.
Let us first express that E IOPA considers the restructuring of the ComFrame Paper to be an important improvement from the point of view of readability, focus, addressee perspective, among others.
I n general the ComFrame criteria and process for identifying I AIGs seem to be appropriate. However there are no explicit rules to define the Head of the IAIG in case where there is no legal entity that controls or exerts dominant influence over the other elements of the I AIG. Another aspect which is not fully explained refers to cases in which entities may be excluded from supervision. The ComFrame only refers to the principle of proportionality whereas clearer and more detailed guidance would be helpful.
Moreover, E IOPA thinks that some redundancies with I CP's notions could be deleted
UK, Association of British Insurers

The criteria are too wide - insurers that are active only in countries that are part of a single regulatory and supervisory regime should not be classed as being internationally active. ComFrame should bring clarity to regulation and supervision of groups whose individual legal entities operate under multiple regulatory regimes - where a group is active in several countries which are all covered by the same regime, this need does not arise. It should not take three years before a designation as an I AIG can be retracted - this would lead to a situation where, for example, an insurer that had previously been designated an IAIG but had made significant changes to its business and was no longer internationally active in a meaningful way would still be subject to ComFrame for two years to no obvious benefit for policyholders, the company or the supervisors. In contrast other non-internationally active insurers operating on an identical basis but which had not previously been an I AIG would not be subject to ComFrame.
If an insurer ceases to meet the criteria for an I AIG then neither the company nor supervisors will materially benefit from the application of ComFrame.
An insurer's designation as an I AIG or not should be reviewed and updated at least annually.
USA, NAIC
The process for identifying I AIGs appears to be collaborative in nature and indicative of how ComFrame, as a working framework, should operate.
The criteria used to identify I AIGs should be clear and focused on identifying those entities which have a large presence internationally. The criteria should be simple and allow the involved supervisors to adjust using their judgment if circumstances necessitate a different answer ("constrained supervisory discretion"). The criteria currently under consideration by the I AIS attempts to strike a balance but should be carefully reviewed with these objectives in mind. As discussion on future steps (Field Testing, Implementation, etc.) progresses over the next year, the criteria and process for identifying may need to be reassessed to ensure it is appropriate to meet the intended objectives. With respect to the current draft, consideration should be given as to whether the criteria for the number of jurisdictions in which an I AIG operates should include threshold percentage of market share. This could either be part of the criteria itself or part of the supervisory discretion process. To read more: http:/ / iaisweb.org/ db/ content/ 3 /16037.pdf
Note:
ComFrame is a major project of the I AIS.
While the ultimate role of ComFrame remains under discussion and development, the intent is given by its name a common framework one that lays out how supervisors around the globe can work together to supervise internationally active insurance groups (IAIGs) and close regulatory gaps. IAIGs are the largest, most complex insurance entities.
ComFrame has three main objectives which include: 1)Developing methods of operating group-wide supervision of I AIGs;
2)Establishing a comprehensive framework for supervisors to address group-wide activities and risks, and
3)Fostering global convergence. ComFrame is neither intended to be a forum to create prescriptive ways to promote a particular means for solvency standards, nor to create additional layers of regulation. ComFrame is expected to evolve over time. It will be developed over a three-year period with the Development Phase completed by the end of 2013. The I AIS will issue a comprehensive report detailing the end of the Development Phase, following which there will be one or more impact assessments of both qualitative and quantitative requirements for IAIGs.
Solvency I I
In 2011, E IOPA focused on preparing the final set of regulatory measures for Solvency I I , the draft standards and guidelines. One of the main achievements of EIOPA in 2011 was the report on the Fifth Quantitative I mpact Study (QIS5) summarising the potential impact of the detailed implementing measures to be drafted for the Solvency I I regulatory framework. QIS5 has been the most ambitious and comprehensive impact study ever carried out in the financial sector, with the direct involvement of more than 2500 entities and 100 supervisors from member states and E IOPA, working together for almost a full year. EIOPA launched official public consultations in 2011 in two areas in which early discussion with and preparation by the industry are particularly important. These consultations were on the draft standards and guidelines on reporting and disclosure, and on guidelines on Own Risk and Solvency Assessment (ORSA). At the end of 2011, E IOPA submitted additional advice to the European Commission on the calibration of the non-life underwriting risk module. In the area of catastrophe risk, EIOPA made its final recommendation for the implementing measures on a number of outstanding non-life and health catastrophe risk issues. Several task forces concluded their work in 2011, resulting in the publication of the following reports: Calibration of the Premium and Reserve Risk Factors in the Standard Formula of Solvency I I and the Report of the Task Force on Expected Profits arising from Future Premiums.
Finally, since the creation of E IOPAs I nsurance and Reinsurance Stakeholder Group, E IOPA has benefited from their expertise and wide range of views and interests, and actively involved its members in major aspects of Solvency I I.
Occupational pensions
The main focus of EIOPAs work on occupational pensions in 2011 was developing E IOPAs response to the Call for Advice from the European Commission on the review of Directive 2003/ 41/EC on the activities and supervision of institutions for occupational retirement provision (IORP Directive). The work on the Call for Advice was organised in four sub-groups, all working in parallel, but all reporting to the Occupational Pensions Committee (OPC). In 2011, E IOPA also completed number of survey-based reports on reporting requirements, risks related to DC schemes and pre-enrolment information. These surveys were conducted to provide a common technical basis for responding to the Call for Advice. During 2011, E IOPA carried out two public consultations on its draft advice. The first between 8 July 2011 and 15 August 2011 on selected aspects of the Call for Advice. The second, between 25 October 2011 and 2 January 2012 on the entire draft advice.
EIOPA also submitted during the year 2011 its input to the ESRB on data requirements for IORP and published its recurrent report on market developments.
Consumer protection and financial innovation

EIOPA has considered, from day one, consumer protection as a cornerstone of its work and an area where a difference has to be made, and E IOPA has been proactive in the area of consumer protection and financial innovation. In the course of 2011, the Authority prepared The Proposal for Guidelines on Complaints- Handling by I nsurance Undertakings, the Report on Best Practices by I nsurance Undertakings in handling complaints and finalised a Report on Financial Literacy and Education Initiatives by Competent Authorities. EIOPA also collected data on consumer trends among its members to prepare an initial overview, analysing and reporting on those trends. The Authority also provided relevant input to the European Commissions revision of the Insurance Mediation Directive (IM D) by carrying out an extensive survey of sanctions (both criminal and administrative) provided for in national laws for violations of IMD provisions. External commitment, including benefiting from the expert input of EIOPAs two Stakeholder Groups and holding E IOPAs first Consumer Strategy Day, was also crucial to EIOPA achieving its goals in 2011.
Colleges of Supervisors and cross-border crisis management and resolution

EIOPAs tasks go beyond pure regulatory work, and include concrete oversight responsibilities, including an enhanced role as members of the different colleges of supervisors. The overall strategic target of E IOPAs College work is to consolidate the position of the European Economic Area (EEA) supervisory
community vis-a-vis insurance groups operating across borders for the benefit of both group and solo supervision. I n 2011, around 89 insurance groups with cross border undertakings were registered in the EEA. During the year, Colleges of Supervisors having at least one actual meeting or teleconference were organised for 69 groups. A total of 14 national supervisory authorities acted as group supervisors to organise the events. During the setup phase in the first year after its establishment, EIOPA attended College meetings and/ or teleconferences of 55 groups. In early 2011, a set of interim procedures for dealing with emergency situations was developed by EIOPA in conjunction with the other ESAs. A seconded national expert in crisis management was appointed in March 2011, and work then commenced on the development of a permanent crisis management framework by EIOPA. Key to this was the development of a strategic policy on crisis management. In the end of 2011 a Task Force on Crisis Management delivered a comprehensive, decision-making framework on crisis pre-emption and crisis management.
Financial stability
The common theme of E IOPAs financial stability initiatives in 2011 was to identify, at an early stage, trends, potential risks and vulnerabilities stemming from micro and macroeconomic developments, and, where necessary, to inform the relevant EU institutions.
This was achieved by specific and regular market monitoring, information sharing and discussions on mitigating measures in the Financial Stability Committee (FSC). In line with this objective, EIOPAs FSC set up its first (pilot) risk dashboard in October 2011, containing a common set of quantitative and qualitative indicators that help to identify and measure systemic risk. This dashboard is to be developed further as a joint effort of the ESAs and the ESRB. In the course of 2011 E IOPA has been an active member of the ESRB Steering Committee that was established in order to assist in the decision-making process of the ESRB. EIOPA also was taking part in the ESRB Advisory Technical Committee (ATC) and its technical subcommittees with the main focus on identifying potential systemically important issues in the sectors of insurance and I ORPs. Furthermore, EIOPA participated in the joint ATC and Advisory Scientific Committee (ASC) expert group dealing with the regulatory treatment of sovereign exposures. In 2011, the three ESAs and the ESRB signed a joint Agreement on the establishment at the ESRB Secretariat of specific confidentiality procedures in order to safeguard information regarding individual financial institutions and information from which individual financial institutions can be identified.
EIOPA also began designing a database of current and historical data for I ORPs and insurance and reinsurance undertakings in the European Union.
During 2011, E IOPA conducted harmonised, pan-European core and low-yield stress tests for the insurance sector in cooperation with the ESRB, ECB and EBA.
In June and December 2011, E IOPA published its two semiannual Financial Stability Reports containing an assessment of the economic soundness of the European insurance, reinsurance and I ORPs. In December 2011, E IOPA put out for public consultation a set of data reporting templates necessary for regularly assessing sectoral risk and monitoring financial developments once Solvency I I enters into force.
EIOPA Overview Introduction

The European I nsurance and Occupational Pensions Authority (EIOPA) was established as a result of the reforms of the structure of supervision of the financial sector of the European Union (EU) that followed the financial crisis of 2007, as the crisis demonstrated that the pre-existing 3L3 Committees (CEIOPS, CEBS and CESR) had reached their limit. Before and during the financial crises of 2007 and 2008, the European Parliament called for a move towards greater European supervisory integration in order to ensure a true level playing field for all players at the level of the European Union and to reflect the increasing integration of the financial markets of the EU. In response to the global financial crisis, the European Commission tasked a High Level Group (Committee of Wise Men), chaired by Mr Jacques de Larosiere, to consider how the European supervisory arrangements could be strengthened, both to better protect EU citizens and to rebuild trust in the financial system. Among its many conclusions, the Group stressed that supervisory arrangements should not only concentrate on the supervision of individual firms, but also place emphasis on the stability of the financial system as whole.
Following the recommendations of the Committee of Wise Men, the European Commission initiated a reform, which was supported by the European Council and the European Parliament. As a result, the supervisory framework was strengthened to mitigate the risk and severity of future financial crises. EIOPA is part of a European System of Financial Supervision (ESFS), the purpose of which is to ensure supervision of the EU financial system. The ESFS comprises the three European Supervisory Authorities (ESAs): the European Banking Authority (EBA), based in London, the European Securities and Markets Authority (ESMA), based in Paris, and EIOPA, based in Frankfurt, as well as the European Systemic Risk Board (ESRB), based in Frankfurt, and the competent or supervisory authorities in the EU Member States as specified in the legislation establishing the three ESAs. EIOPAs main goals are: To better protect consumers, thus rebuilding trust in the financial system; To ensure a high, effective and consistent level of regulation and supervision, taking account of the varying interests of all Member States and the different nature of the financial institutions; To achieve a greater harmonisation and coherent application of the rules applicable to the financial institutions & markets across the European Union; To strengthen oversight of cross-border groups; To promote a coordinated European Union supervisory response.
EIOPAs core responsibilities are to support the stability of the financial system, ensure the transparency of markets and financial products and protect policyholders, pension scheme members and beneficiaries. EIOPA is commissioned to monitor and identify trends, potential risks and vulnerabilities at the micro-prudential level, across borders and across sectors. EIOPA is an independent advisory body to the European Parliament, the Council of the European Union and the European Commission. To account for the specific conditions in the national markets and the nature of the financial institutions, the European System of Financial Supervision is an integrated network of national and European supervisory authorities that provides the necessary links between the macro and micro prudential levels, leaving day-to-day supervision to the national level. EIOPA is governed by its Board of Supervisors, whose members are the heads of the relevant national authorities in the field of insurance and IORPs in each Member State. The European Unions national supervisory authorities are a source of expertise and information in the field of insurance and I ORPs.
Policy Working Groups

The majority of Policy Working Groups dealt with insurance and reinsurance-related issues, in particular Solvency I I . Two other Working Groups in the policy area dealt with I ORPs (IORP Directive) and equivalence-related issues.
Solvency I I Working Groups

The Solvency I I project is completely reshaping the supervisory and regulatory framework for insurance and reinsurance companies,
bringing a modern risk oriented, economic and principle based set of rules. One of the main tasks for EIOPA in the coming years is to prepare the new supervisory regime for insurance and reinsurance undertakings and particularly to conduct all the necessary work for implementation of the EU Directive on the taking-up and pursuit of the business of insurance and reinsurance (Solvency I I ). During 2011, the Solvency I I Working Groups developed draft standards and guidelines which are likely to be required by the Omnibus I I Directive, and which E IOPA considers as essential for ensuring the existence of convergent supervisory practices from Solvency I I s first day of entry into force. Pre-consultations with selected stakeholders were held as part of the continuous informal discussion with stakeholders while awaiting confirmation of the formal legal basis for public consultation on the standards. Each Working Group contributed to E IOPAs training programme for supervisors and, where relevant, Working Groups were involved in the discussions conducted by the European Commission on implementing measures. Working Groups contributed to those areas of each others work that required a cross-working group perspective, such as governance or reporting.
Insurance Groups Supervision Committee (IGSC)

The I nsurance Groups Supervision Committee (IGSC) focused on developing draft technical standards and guidelines for the convergent implementation of Solvency I I in the areas of group solvency calculations, intra-group transactions and risk concentration, the cooperation and exchange of information in Colleges, and the treatment of third country branches.
Financial Requirements Committee (FinReq)

The Financial Requirements Committee (FinReq) focused on developing draft technical standards and guidelines for the convergent implementation of Solvency I I in the areas of own funds, technical provisions, and the standard formula for capital requirements, including the use of undertaking-specific parameters. FinReq contributed to the development of calibration factors for non-life underwriting risk and catastrophe risk.
Internal Governance Supervisory Review and Reporting Committee (IGSRR)

The I nternal Governance, Supervisory Review and Reporting Committee (IGSRR) focused on developing draft technical standards and guidelines for the convergent implementation of Solvency I I in the areas of system of governance, including Own Risk and Solvency Assessment (ORSA), transparency and accountability of supervisory authorities, public disclosure and supervisory reporting, and valuation of assets and liabilities (other than technical provisions). Public consultation on the ORSA guidelines and reporting and disclosure requirements was launched at the end of 2011. IGSRR also started working on guidelines for external audit, the supervisory review process, capital add-ons, and the extension of the recovery period in the exceptional fall in financial markets. IGSRR prepared EIOPAs contribution to the I nternational Financial Reporting Standard (IFRS) setting process and to the EU endorsement process.
Internal Models Committee (IntMod)

The I nternal Models Committee (IntMod) focused on developing draft technical standards and guidelines for the convergent implementation of Solvency I I in the areas of tests and standards for full and partial internal models, requirements for the approval process, and the policy for introducing changes to the model. In order to increase supervisory convergence and to prepare industry and supervisors for the use of internal models under Solvency I I , I ntMod implemented initiatives for enhancing supervisory consistency across Europe in the pre-application process for internal models, and for ensuring adequate cooperation between supervisors when assessing internal models. These initiatives involved practical meetings between operational supervisors and training activities.
Task Force on Expected Profits arising from Future Premiums (EPIFP)

This task force was created to develop a common understanding of the element of expected profits included in future premiums (EPIFP) so as to advise the Commission on the drafting of implementing measures after the fifth quantitative impact study (QIS5). It was composed of representatives of industry, the European Commission and EIOPA members and discussed possible ways of harmonising the calculation of EPIFP under Solvency I I . EIOPA submitted a report to the European Commission which ultimately only represented the views of its own members.
Occupational Pensions Committee (OPC)

The main focus of the Occupational Pensions Committee (OPC) work between April 2011 and the end of the year was developing EIOPAs advice to the European Commission on the review of the I ORP Directive in response to the Call for Advice. Beyond this, OPC own initiative projects in 2011 included the publication of a number of survey - based reports as follows: Report on reporting requirements to supervisory authorities for IORPs Report on market developments 2011 Two reports on risks relating to members of defined contribution pension schemes (risks faced by members and mechanisms mitigating those risks) Report on pre-enrolment information as part of a wider OPC mandate on Packaged Retail Investment Products (PRIPs) and pensions Other inputs included a contribution to a report on the European Systemic Risk Board (ESRB) data requirements in respect of IORPs.
Equivalence Committee
In January 2011, the Equivalence Committee was set up with its main task being to respond to requests from the European Commission for final advice, after full consultation, on the equivalence of third countries supervisory systems. On 26 October 2011, upon request of the European Commission, E IOPA delivered its final advice, after full consultation, on the Solvency I I equivalence assessments of the supervisory systems in the following countries: - Switzerland,
- Bermuda and - Japan. The supervisory systems of Switzerland and Bermuda were assessed with reference to reinsurance, inclusion of the third country undertaking in the group solvency calculation and group supervision, while the supervisory system of Japan was assessed only with reference to reinsurance. The equivalence assessment was based on respective questionnaires filled in by the relevant supervisory authorities (Swiss Financial Supervisory Authority FINM A; Bermuda Monetary Authority BMA; and the Japan Financial Services Authority JFSA), followed by a deskbased analysis using E IOPAs methodology, and onsite visits by E IOPA experts to each of the three countries.
Regulatory Working Groups Committee on Consumer Protection and Financial I nnovation (CCPFI)
In 2011, the Committee on Consumer Protection and Financial Innovation (CCPFI) supported EIOPA in fulfilling the requirement laid down in its Regulation of taking a leading role in the area of consumer protection and financial innovation, as follows: preparing Guidelines on Complaints-Handling by Insurance Undertakings and Report on Best Practices by I nsurance Undertakings in handling complaints. preparing the Report identifying Good Practices for Disclosure and Selling of Variable Annuities. finalising the Report on Financial Literacy and Education Initiatives by Competent Authorities.
collecting data on consumer trends among its members so as to prepare an initial overview, analysing and reporting on those trends. carrying out an extensive survey of sanctions (both criminal and administrative) provided for in national laws for violations of IM D provisions.
Task Force on I nsurance Guarantee Schemes (TF-I GS)

This task force met in the course of 2011 to prepare the report on the cross-border cooperation mechanisms between I GSs in the EU. In accordance with EIOPAs mandate to contribute to assessing the need for a European network of IGSs that is adequately funded and sufficiently harmonised, the report was EIOPAs input to the European Commissions policy - making on I GSs. It summarised the findings from a mapping exercise of the existing mechanisms on cross-border cooperation between the I GSs of Member States, and provided general recommendations to the European Commission in the area of cooperation between I GSs and with their supervisors.
Oversight Working Groups Review Panel

At the beginning of 2011, the Review Panel , using the experience and lessons learned from its first peer review exercise completed in 2010, reviewed the methodology for peer reviews in line with the EIOPA Regulation.
In the middle of the year, the Review Panel started work on three peer review projects on supervisory practices for pre-application of internal models, supervision of branches of EEA insurance undertakings, and supervision of I ORPs.
These peer reviews are due to be completed in 2012.
Task Force on Crisis Management

In 2011 a Task Force on Crisis Management was established to develop EIOPAs structures for crisis prevention, management and resolution. In December 2011, this task force delivered a comprehensive, decisionmaking framework that was endorsed by the Board of Supervisors. This framework sets out in detail the processes that E IOPA will follow in discharging its crisis pre-emption and crisis management responsibilities under the EIOPA Regulation.
Financial Stability Working Groups Financial Stability Committee (FSC)

The Financial Stability Committee (FSC) focused on monitoring and analysing developments in the insurance and I ORPs sectors. This included in particular the impact of sovereign debt situation in some European countries and also that of other events such as natural catastrophes, including the impact of the Japanese earthquake in March 2011 and the subsequent devastating tsunami. Furthermore, the FSC developed a 2011 stress test exercise for the European insurance sector, including a subsequent satellite exercise for a low-yield environment. The FSC also developed and implemented the EIOPA risk dashboard based on quarterly information collected from national supervisors. The FSC contributed to the work of the cross-sector risk subcommittee of the Joint Committee.
FSC also contributed to the two half-year Financial Stability Reports monitoring both sectors (IORPs and insurance undertakings), which were also submitted to the EU Economic and Financial Committee (EFC) and the ESRB.
Corporate support Working Groups Information Technology and Data Committee (ITDC)
In 2011, the I T and Data Committee (IT DC) focused on developing EIOPAs I T and data strategy and, following on from this, it worked on IT specifications and implementation plans. The I T strategy set out the I T-related goals needed to fulfil E IOPAs mission. The Board of Supervisors adopted the I T and data strategy reports at its October 2011 meeting and mandated E IOPA to implement the I Trelated goals set out therein. The Board of Supervisors required the IT DC to produce high - level and outline I T plans and specifications, with particular focus on an EIOPA IT implementation plan.
Update on Solvency I I
Solvency I I is a new regulatory framework providing supervisors with the appropriate tools for assessing the overall solvency of insurance and reinsurance undertakings by quantitative and qualitative means, thus improving understanding and management of these undertakings risks. I t is based on three pillars: quantitative requirements (pillar I); governance, risk management and supervisory review (pillar I I ); and supervisory reporting and public disclosure (pillar I I I). The framework directive was published on 17 December 2009.
The Omnibus I I Directive is under discussion in the European Parliament and Council of the European Union following the legislative proposal from the European Commission on 19 January 2011. I mplementing measures have been discussed between the European Commission and Member States since the end of 2009. Standards are being drafted by E IOPA to be endorsed by the European Commission. Guidelines are being drafted by EIOPA to ensure the convergent application of the regulation. Date of entry into force of Solvency I I: 1 January 2014.
Omnibus I I Directive and implementing measures

Following the creation of E IOPA, the Solvency I I Directive required revision to reflect the new supervisory structure; these revisions will form part of the Omnibus I I Directive (OMDII). OMDII will introduce into the Solvency I I Directive the necessary regulatory and supervisory powers for E IOPA to discharge its responsibilities. In addition, OMDI I also includes transitional measures allowing gradual implementation of Solvency I I . This extension means that the beginning of the regime would be aligned with the end of the financial year for most insurance undertakings. During 2011 E IOPA continued to provide technical and analytical support to the Commission and gave further input to clarify its previous advice on the development of the implementing measures for Solvency II.
While deliberations were taking place in the European Parliament and the Council of the European Union on OMDI I , the Commission, Member States and stakeholders also examined the draft implementing measures. Key areas under discussion were the sustainability of long-term insurance guarantees, the volatility of elements in undertakings solvency balance sheets, and reporting and disclosure requirements.
Standards and guidelines

In 2011, E IOPA focused on preparing the final set of regulatory measures, the draft standards and guidelines. Solvency I I will be one of the first projects to benefit directly from EIOPAs regulatory powers to draft standards and subsequently to ensure consistent implementation of legislation through binding mediation and oversight of Colleges of Supervisors. Until there is agreement on the proposals for OMDI I Directive, EIOPA will not have complete certainty on the scope of its powers for drafting the standards for Solvency I I and the detail of the regulatory provisions which the standards and guidelines are intended to support. Consequently, it was important for EIOPA to monitor the various OMDII proposals and thus identify the standards which the Authority expects it will have to draft before Solvency I I enters into force on 1 January 2014. During 2011, E IOPA also identified those areas in which it is essential to have guidelines in place before the entry into force of Solvency I I. EIOPA is committed to effective consultation and communication with its stakeholders to improve the quality of the regulatory provisions and assist the industry in preparing for the new regime.
Subject to the conclusion of the negotiations on OMDI I and the implementing measures, EIOPA plans public consultation on the packages of draft standards and guidelines during 2012. In 2011, EIOPA launched official public consultations in two areas in which early discussion with and preparation by the industry are particularly important. These consultations were on the draft standards and guidelines on reporting and disclosure, and on guidelines on Own Risk and Solvency Assessment (ORSA). In other areas, E IOPA continued its informal pre-consultations with selected stakeholders (European I nsurance and Reinsurance Federation (CEA), Association of Mutual I nsurers and I nsurance Cooperatives in Europe (AMICE), Chief Risk Officers (CRO) Forum and Chief Financial Officers (CFO) Forum, Groupe Consultatif Actuariel Europeen), thus having an ongoing dialogue with the industry ahead of the public consultation. A number of other initiatives were set up specifically to improve EIOPAs cooperation and exchange of information with its stakeholders. Several task forces completed their work in 2011, which resulted in the publication of the Report on the Calibration Factors in the Standard Formula of Solvency I I and the Report of the Task Force on Expected Profits arising from Future Premiums. Finally, following the creation of E IOPAs I nsurance and Reinsurance Stakeholder Group, E IOPA actively involved its members in major aspects of Solvency I I.
Areas in which EIOPA prepared draft standards and guidelines during 2011:
Solvency capital requirements for standard formula as well as for internal model users; own funds; valuation of technical provisions; valuation of assets and liabilities. Group supervision. Supervisory transparency and accountability, reporting and disclosure, external audit.
Governance, ORSA.
Supervisory review process; capital add-ons; extension of recovery period (Pillar 2 dampener); finite reinsurance; special purpose vehicles.
Quantitative Impact Study 5

One of the key achievements of E IOPA in 2011 was completion of the report on the Fifth Quantitative I mpact Study (QIS5) in March 2011. The results of the QIS5 exercise were taken into account in discussions on the implementing measures and are being reflected in the drafting of standards and guidelines.
The QIS5 exercise

In March 2011, E IOPA delivered to the European Commission a report on the results of the fifth pan-European quantitative impact study organised to inform policymakers on the potential effects of the detailed implementing measures which are being drafted for the Solvency I I regulatory framework. More than 2 500 individual undertakings and 160 groups from the 30
members of the European Economic Area participated voluntarily in this simulation exercise, providing detailed quantitative and qualitative inputs on the various elements of the future regulation. The study confirmed that overall the industry remained well capitalised under the draft provisions and options tested. The study gathered useful input on transitional provisions for discounting, the grandfathering of specific elements of own funds, and the transitional equivalence of third-country regimes, for example. Valuable insight was gained about the characteristics of internal models under development by undertakings, the difficulties in calculating the loss - absorbing capacity of technical provisions and deferred taxes, and the potential impact of the introduction of an illiquidity premium in the valuation of technical provisions. The study also covered the treatment of participations; it gathered information on the relevance of expected profit in future premiums, and on the group solvency assessment under the consolidation and deduction and aggregation methods. The study results highlighted the areas in which further work would be desirable. This was then initiated by EIOPA as follows: definition of contract boundaries in the valuation of technical provisions; the need to reduce complexity in certain areas; developments in the calibration of catastrophe risk; and the treatment of long-term guarantees in the context of Solvency I I . A particular topic the refinement of factors used in non-life underwriting and health non - similar to life underwriting risk modules was addressed by specific data collection in the QIS5 exercise. The data were analysed using a methodology drawn up by a task force of supervisors, actuaries and industry representatives.
For most business lines, the report published in December 2011 facilitated joint recommendations for amendments of the factors used in the QIS5 exercise. EIOPAs current and future work on the development of draft technical standards and guidelines for Solvency I I will benefit greatly from the lessons learned during the QIS5 exercise, in particular by enhancing the practicability and feasibility of the rules for a single rule book of standards and guidelines to ensure convergent application of the new system.
Standard formula capital requirements

EIOPA prepared draft standards and guidelines on the approval process and data quality for undertaking-specific parameters for solo undertakings and groups; methods for the calculation of undertakingspecific parameters for solo undertakings; the loss-absorbing capacity for deferred taxes and technical provisions; and standard capital requirements for health underwriting risk. Informal pre - consultations will be launched and further draft standards and guidelines developed in 2012. One key area in which E IOPA delivered further advice to the Commission was the calibration of the non-life underwriting risk module. The advice was based on a European-wide data request to the industry launched in September 2010, and on discussions with industry representatives and the European Commission to consider the most appropriate calibration methodologies. The results of this work were published in December 2011. In the area of catastrophe risk, following discussions with the industry, EIOPA made its final recommendation on a number of outstanding nonlife and health catastrophe risk issues for the implementing measures.
In the second half of 2011, E IOPA continued working with industry representatives on zoning and reinsurance standards, as well as on catastrophe risk guidelines.
Technical provisions
Informal pre-consultations were held on actuarial guidelines for the valuation of technical provisions. EIOPA began developing the draft standard on the risk-free interest rate curve and contract boundaries. For the first time, the European Commission tested in QIS5 a risk-free interest rate term structure which included a so-called illiquidity premium. The term structure was based on an adjusted swap rate, and a new extrapolation method was applied for long maturities.
During 2011, discussions continued on adjustments to the risk-free rate following the QIS5 results and on the sustainability of long - term insurance guarantees.
EIOPA participated in these discussions organised by the European Commission with Member State and industry representatives. Proposals emerged from Member States and industry on new adjustments, the so-called counter-cyclical premium and the matching premium. These proposals were analysed by EIOPA in the context of developing a standard for the risk - free rate that EIOPA will define and publish. Discussions are expected to continue in 2012.
Valuation of assets and liabilities (excluding technical provisions)

Informal pre-consultations were held on draft standards and guidelines concerning the valuation of assets and liabilities. This included guidelines on the use of mark-to-model techniques and the compatibility of International Financial Reporting Standards (IFRS) with Solvency I I. During 2011, E IOPA also contributed to the process of IFRS standardsetting and subsequent EU endorsement of those standards.
Reporting and disclosure

In 2011, E IOPA launched a public consultation on its draft guidelines and standards for reporting and disclosure. This marked the end of an ongoing and fruitful process of informal consultation with stakeholders since 2009. Due to the importance of harmonised reporting requirements for the Solvency I I project, and also for other areas of E IOPAs work, such as financial stability and the level of preparation that will be required from the industry, one of E IOPAs key aims is to arrive at stable reporting requirements as soon as possible. Further discussions on specific aspects of the reporting templates and the frequency of reports are expected to continue in the first half of 2012.
Governance and risk management requirements

Informal pre-consultations were held on standards for governance, including ORSA (the latter issue was also subject to public consultation later on). E IOPA began developing draft standards and guidelines on transparency and accountability of supervisory authorities and the
supervisory review process, capital add-ons and extension of the recovery period in deteriorating market conditions as well as on external audit.
Own funds
Informal pre-consultations were held on draft standards and guidelines for ancillary own funds and the classification of own funds.
Further work was carried out on the treatment of participations and ringfenced funds.
Internal models
Informal pre-consultations were held on draft standards and guidelines for the following: application processes for internal models; policies for changing the model; partial internal models; use tests; expert judgments; probability distribution forecasts (PDF); and consistency between the methodology used for the PDF calculation and the methodology used for valuation of assets and liabilities (e.g. the calculation of technical provisions, approximations for calibrations, profit and loss attributions, validation policy and validation tools, documents and the use of external models). Following the publication in 2010 of guidelines supporting the preapplication process for internal models, EIOPA monitored the activities of supervisors and industry, using this opportunity to check the day-1 applicability of internal models. This included informal practical meetings of supervisors involved in the pre-application process.
Insurance stress test

At the end of March 2011, E IOPA launched the second Europe-wide stress test for the insurance sector, which was followed in mid-August by
a satellite exercise assessing the effects of a prolonged period of low interest rates. This satellite exercise is often referred to as the lowyield stress test, and while it was planned in conjunction with the core stress test, its launch was postponed to ease the workload of participating undertakings. In accordance with its regulation, E IOPA shall conduct stress test exercises for the insurance and I ORPs sectors at least once a year. The 2011 core and low-yield stress test exercises were to assess the strength of individual institutions and evaluate the overall resilience of the industries to several clearly defined adverse economic and financial market environments.
The core stress test was launched in March 2011 based on data as of 31 December 2010, and the aggregated results of the exercise were published in July 2011.
Of the 221 insurance and reinsurance groups and undertakings covered, 58 groups and 71 single entities reported results to E IOPA, representing approximately 60% of the whole European insurance market. The results of the stress test exercise confirmed that the insurance market in Europe as represented by the 129 participating entities is robust and is well prepared for potential future shocks. Data showed that approximately 10% (13) of the groups and undertakings which responded did not meet the minimum capital requirement (MCR) in the adverse scenario. A total of 8% (10) failed to meet the MCR in the inflation scenario. Overall, E IOPA identified the main drivers of the results as adverse developments in equity prices, interest rates and sovereign debt markets.
On the liability side, non - life risks were more critical, triggered by increased claims inflation and natural disasters. Risks from sovereign bond exposures were covered separately in a supplementary test and the results showed that approximately 5% (6) of the participating groups and undertakings would not meet the MCR. The satellite exercise was launched after the E IOPA 2011 core stress test exercise. This was to analyse the risks that European insurers would face in a scenario where interest rates remained low for a prolonged period of time, and to understand the development of insurers capital positions in adverse economic conditions, as well as to evaluate the overall stability of the insurance market. It was targeted at those insurers that are exposed to interest-rate sensitive products, since a low-interest scenario would significantly jeopardise the ability of these undertakings to meet the performance guarantees provided in certain insurance contracts. For this reason, compared to the scope of the core stress test, the sample of reporting undertakings was slightly reduced to 82 in total. Otherwise, the setup of the low-yield stress test was identical to the core test, i.e. valuations were based on Solvency I I / QIS5 technical specifications, and the reference date was 31 December 2010. Based on these results, EIOPA concluded that, on average, the industry would be adversely affected by a prolonged period of low yields. Depending on the particular shape that such a low-yield curve would take and where the low yields were located along the curve, results suggest that 5%-10% of the insurers included in the test would face severe problems in the sense that their solvency ratio would fall below 100%.
In addition, an increased number of insurers would see their capital position deteriorate with solvency rates only slightly above the 100% mark, meaning they could become vulnerable to other potential external shocks.
Risk dashboard
In October 2011, the EIOPA FSC set up its first (pilot) risk dashboard, in line with the framework of the joint group on the cooperation between the ESAs and the ESRB on systemic risk. As part of the new European supervisory legislation, E IOPA, the other ESAs and the ESRB are called upon to develop a common set of quantitative and qualitative indicators (risk dashboard) to identify and measure systemic risk. This dashboard should be constructed as a joint effort of the ESAs and the ESRB to give a structured view of risks to the financial sector and thus to facilitate a regular assessment of these risks and possible mitigation policies. It is envisaged that the risk dashboards of the various institutions be discussed at ESRB meetings (General Board and/ or Advisory Technical Committee) to assess systemic risk. The two main outputs required are risk vulnerabilities and solvency profitability (meaning the ability to withstand shocks). A first pilot risk dashboard has been approved by EIOPA but is still in a development phase and needs to be further refined and finalised after completion of the quality control phase. As far as the methodology is concerned, the EIOPA risk dashboard is based both on public sources (market data) and the confidential quarterly fast-track reporting from the 30 largest European insurance groups and it contains both quantitative and qualitative indicators.
Data availability for dashboard purposes is expected to further improve with the introduction of Solvency I I reporting from 2014 onwards. A set of some 50 quantitative indicators form the basis of the risk assessment, and these are mapped into aggregated categories that are also used by the other ESAs. These are macro risk, credit risk, market risk, funding and liquidity risk, profitability and solvency interlinkages and imbalances, and a specific category for insurance risk. The risk dashboard is then obtained through the mechanical aggregation of these indicators and additional expert judgment which is important for filtering out noise from the data and producing credible risk assessments.
The risk dashboard will be shown in the form of a graph with colour coding.
In addition to work on the risk dashboard, E IOPA launched several initiatives during 201 1 to improve market monitoring. For example, a daily financial market monitor was launched, and this is now produced and circulated among E IOPA Staff and E IOPA FSC Members. A more comprehensive bi-weekly briefing containing risk assessments and market analysis was also developed, and regular production of this briefing is planned for 2012.
Oversight
During 2011 E IOPA undertook significant work in relation to insurance groups under the current regime (Solvency I), whilst in parallel preparing itself for the Solvency I I framework.
This has included initiatives to harmonise and streamline group supervision for cross-border groups and enhance co-operation between supervisors within the Colleges of Supervisors. EIOPA has started to attend the meetings of Colleges of Supervisors since the beginning of 2011, and this has been a vital mechanism for helping supervisors to prepare for the entry into force of Solvency I I , in particular with regard to the pre-applications for internal models. In March E IOPA published its report on the functioning of colleges, and also the targets to be achieved during 2011, as included in E IOPAs 2011 Action Plan for Colleges of Supervisors. The overall strategic target of E IOPAs College work is to consolidate the position of the EEA supervisory community vis-a-vis the cross- border operating insurance groups for the benefit of both group and solo supervision. The focus is on combining and leveraging the knowledge and forces of the national supervisory authorities in the EEA to form a strong and equal supervisory counterpart to the mostly centrally organised and managed undertakings. In this respect, E IOPA as a member of the Colleges of Supervisors (Colleges) promotes communication, cooperation, consistency, quality and efficiency in the Colleges. In 2011, 89 insurance groups with cross-border undertakings were registered in the EEA.
During the year, Colleges of Supervisors with at least one physical meeting or teleconference were organised for 69 groups.
A total of 14 national supervisory authorities acted as group supervisors to organise the events.
Some 6 Colleges were chaired by the Swiss Financial Market Supervisory Authority (FINM A) as group supervisor. During the setup phase in the first year after its establishment, E IOPA attended College meetings and/ or teleconferences of 55 groups. The main conclusions from E IOPAs observation in the Colleges in 2011 are as follows: Substantial efforts were made by supervisors in preparing, organising and contributing to the College; The exchange of the QIS5 and stress test results in most of the Colleges enhanced the quality of the discussions and improved the supervisors common understanding of the undertakings risk exposure and solvency position; Similarly, the discussion of financial conglomerate aspects, where relevant, helped to improve College members awareness of the financial strength of the groups as a whole; Concerns or legal constraints in some Member States relating to the exchange of confidential information hampered the scope and quality of discussions in the Colleges; Differences observed between the Colleges regarding: -Scope, content and the frequency of information exchange in the Colleges, -Preparation and focus of presentations and discussions with the firmss representative are areas for improvement in implementing an EEA-wide consistent, coherent and effective supervision for cross-border groups; The emergency infrastructure test was successfully completed by most of the Colleges;
The Colleges are making great efforts to prepare for the implementation of the Solvency I I Directive, in particular the preapplication process for use of an approved internal model.
Participation in Colleges by EIOPA staff

During 2011, five full-time equivalent staff were recruited to constitute EIOPAs College team. A coordinator had been appointed at the beginning of 2011 to prepare a strategy for E IOPA and to kick off E IOPAs participation in the Colleges. EIOPA staffs commitment to the Colleges focused primarily on the following issues: To explain EIOPAs role in the Colleges; To gain experience from participating in College meetings for the first year; To monitor the collaboration of College members regarding the appropriate information exchange and the discussion of relevant topics in the College; To provide input into the agenda and stimulate information exchange within Colleges on stress test results and the dialogue on risk exposure, financial strength and resilience to adverse economic and financial market developments;
To provide regular updates on the working assumptions in light of the still pending decisions on the Solvency I I timelines;
To act as a link between the Colleges and Solvency I I Working Groups and provide practical input into Solvency I I policy work.
During 2011, E IOPA staff observed overall significant differences in the level of information exchange. Areas for improvement include in particular a continuous and effective information exchange, as well as discussion and assessment of risks by taking a more prospective view. EIOPAs Action Plan 2012 for Colleges was established taking into account the experience and conclusions from College work in 2011.
Crisis Management
In early 2011, a set of interim procedures for dealing with emergency situations was drawn up by E IOPA in conjunction with the other ESAs. A seconded national expert in crisis management was appointed in March 2011, and work then commenced on the development of a permanent framework for crisis management for EIOPA. Key to this was the development of a strategic policy on crisis management that was presented to the Board of Supervisors in June 2011. The Board of Supervisors recognised the need to put a robust framework in place at an early stage, and an ad hoc Board of Supervisors task force was created to develop this framework. In December 2011, the task force delivered a comprehensive, decisionmaking framework which was endorsed by the Board of Supervisors. This framework sets out in detail the processes that E IOPA will follow in discharging its crisis pre-emption and management responsibilities under the E IOPA Regulation. A small standing group was created, comprising EIOPA members and staff, that will consider on a regular basis whether EIOPA needs to act under the Regulation and what actions it may take.
This approach is seen as the most efficient way of carrying out regular monitoring and preparing Board of Supervisors decisions on crisis management issues.
EIOPA Work Programme 2012

In 2012 E IOPA will already operate as a fully-fledged European agency, however many of the processes and procedures have to be refined or adapted to the growing organisation and new responsibilities. The Work Programme sets out the goals and deliverables for the second year of operations.
Regulatory tasks
In 2012, E IOPA will deliver draft implementing and regulatory technical standards as well as guidelines in the different work streams, according to specific needs to complement the principles and regulations issued by the European Commission. The concrete scope and timing of these deliverables depend on the final decision on the Omnibus I I Directive (OMDII) as well as on the approval of the final Delegated Acts implementing Solvency I I. In 2012, E IOPA will prepare its final advice to the European Commission on the review of the Directive on the activities and supervision of institutions for occupational retirement provision (IORP Directive). EIOPA will then develop specifications and carry out a targeted quantitative impact study (QIS) exercise in order to support the Commissions proposal for a revised I ORP Directive.
EIOPA will contribute to the revision of the I nsurance Mediation Directive (IM D), by providing a respective advice to the European Commission.
Supervisory tasks
EIOPA will continue to participate in the work of Colleges of Supervisors and will specifically promote frequent information exchange and discussion on risks. To promote the exchange of information in a safe and sound manner within Colleges of Supervisors, E IOPA will give priority to its work on the implementation of a common IT solution for the secure exchange of information within Colleges, also in crisis times, with the aim to have the tool ready in 2012. In the course of 2012 E IOPA will launching three peer reviews on the following topics: supervision of branches of EEA insurance entities, supervisory aspects of the pre-application of internal models and supervisory powers to obtain information and intervention regarding IORPs.
Consumer Protection and Financial Innovation

EIOPA will further develop and pursue its leading role in promoting transparency, simplicity and fairness in the market for consumer financial products and services across the internal market. This will be done by developing more standardised and comparable information about the risks and costs of products, relevant regulatory requirements and complaints handling procedures. The CCPFI will continue its monitoring and assessment of new or innovative financial activities, release good practices reports and, where deemed appropriate, make proposals for the adoption of guidelines and
recommendations with a view to promoting the safety and soundness of markets and convergence of regulatory practice.
Financial Stability
EIOPA will carry out a harmonised, pan-European stress test for the insurance sector in cooperation with the ESRB, the ECB and EBA.
In autumn 2012 E IOPA will deliver an annual assessment of sector developments, highlighting implications for financial stability, with a provisional report in the spring of 2012, outlining main market trends since the end of 2011. The Authority will also further develop and monitor a risk dashboard in cooperation with the ESRB and other ESAs.
Crisis management
EIOPA will continue to develop its crisis management framework with the focus on the pre-emption element and analytical tools to be used in decisionmaking. Later in 2012 a simulation exercise to test the operation of the new framework will be carried out. EIOPA will also contribute to the work of the European Commission in developing crisis management proposals for insurance, along with the work of the I AIS on resolution tools for systemically important insurance undertakings.
External Relations
EIOPAs view is elaborated with the Members support and set forth in the relevant committees of IAIS. Particular focus will be given to raise EIOPAs voice in the I AIS Executive Committee and to promote the Common Framework for the Supervision of I nternationally Active Insurance Groups (ComFrame).
At the same time, EIOPA will continue to develop its international relations by holding regulatory dialogues and maintaining a close contact with third countries including the US, China, Japan and Latin America. EIOPA will also continue to assist the European Commission in preparing equivalence decisions pertaining to supervisory regimes in third countries by way of producing final, fully consulted upon advice.
Joint Committee
In 2012 the Joint Committee will further develop its work in the subcommittees on financial conglomerates, on cross sector developments, risks and vulnerabilities on anti- money laundering and on consumer protection and financial innovation. The exchange of information with the ESRB will also be further developed.
List of the Members and Observers of the EIOPA Board of Supervisors
Agathe Ct: Modelling risks to the financial system

Remarks by Ms Agathe Ct, Deputy Governor of the Bank of Canada, to the Canadian Association for Business Economics, Kingston, Ontario, 21 August 2012.
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Introduction
It has become a summer tradition for the Bank of Canada to address the Canadian Association for Business Economics. This year it is my pleasure and I thank you for the kind invitation. An audience of colleagues and fellow economists offers me an opportunity to delve into a complex subject, and one that is particularly timely: financial system risk. We continue to see today the enormous costs to the global economy of the financial crisis that started five years ago.
Of the many lessons we have learned from the crisis, a key one is this: we need to pay more attention to the stability of the financial system as a whole.
This means understanding better how risks get transmitted across financial institutions and markets, and understanding better the feedback loop between the financial system and the real economy. From a policy perspective, this means taking a system-wide approach to financial regulation and supervision.
Major reforms of the global financial system now under way address this need.
System-wide risk has been a focus of attention at the Bank of Canada, and at other central banks, for some time. Ten years ago, the Bank issued the first edition of its semi-annual Financial System Review in which it identifies key sources of risks to the Canadian financial system and highlights the policies needed to address them. A year later, in 2003, we organized our annual conference on the theme of financial stability. In the wake of the global financial crisis, the Bank has intensified its research efforts in this area. In particular, a priority is to improve the theoretical and empirical models we use to analyze elements of the financial system that can lead to the emergence of risks and vulnerabilities. With more finely tuned quantitative models and tools, the Bank will be better able to identify risks on a timely basis so that the private sector and policy-makers can take corrective action to support financial stability. Let me acknowledge upfront that this task is complex. While macroeconomic models have long been used to guide monetary policy decisions by central banks, models of financial stability and systemic risk are much less advanced. In my remarks today , I want to talk about the progress that we have made at the Bank in modelling risks to the financial system. I will start by briefly describing the notion of systemic risk and various approaches used to identify and measure it.
I will then discuss two state-of-the-art quantitative models that we have developed to improve our assessment of risks to the Canadian financial system.
The multiple dimensions of systemic risk

Systemic, or system-wide, risk goes beyond individual institutions and markets. It is the risk that the financial system as a whole becomes impaired and that the provision of key financial services breaks down, with potentially serious consequences for the real economy. Systemic risk manifests itself in different ways. There is a time dimension, which refers to the accumulation of imbalances over time, and a cross-sectional dimension, which refers to how risk is distributed throughout the financial system at a given point in time. Procyclicality is the key issue in the time dimension. It reflects the tendency to take on excessive risk during economic upswings too much punch from the punchbowl, if you will and to become overly risk averse during the downturns. Procyclicality makes the financial system and the economy more vulnerable to shocks, and increases the likelihood of financial distress. Risk concentrations and interconnections are the key issues in the crosssectional dimension. Financial institutions can have similar exposures to shocks or be linked through balance sheets. As a result, losses in one institution can lead to fears of contagion that
amplify the adverse effects of the initial shock. For instance, uncertainty about the viability of counterparties can lead to hoarding of liquidity , which may seem like an appropriate action for the individual institution but can have disastrous consequences for the financial system as a whole. System-wide surveillance requires that we regularly assess the importance of various types of systemic risk. How we judge a particular risk will be based on the probability that it will lead to financial system distress, and on the extent of its impact should that distress materialize.
Early-warning indicators
A fundamental challenge is to detect the risks arising from both global and domestic sources in an environment with a vast number of potential indicators.
Therefore, one direction of research at the Bank has been to isolate the key signals from this broad information set by identifying a smaller group of variables that can serve as early-warning indicators of emerging imbalances. Since financial crises in Canada have been rare, international data are used to help establish numerical thresholds for each domestic indicator. For example, if international evidence suggests that credit growth above a certain rate tends to be associated with increased risk, then a period with credit growth above the threshold would suggest an elevated probability of financial stress. Selecting the level of thresholds involves a difficult trade-off between false alarms and failure to signal an event, so in practice the early-
warning indicators are used mainly to identify areas where more detailed investigation may be warranted. They provide an objective, practical starting point to detect the buildup of imbalances in the financial system. One early-warning indicator that we regularly track is the deviation of the aggregate private sector credit-to-GDP ratio from its trend (the credit-to-GDP gap), which serves as a rough measure of excessive leverage across the financial system (Chart 1).
This indicator has been shown to provide some leading information as a predictor of banking crises, and has been proposed by the Basel Committee on Banking Supervision (BCBS) as a useful guide for decisions about when to activate the countercyclical capital buffer an important macroprudential policy instrument in the Basel I I I agreement. Given the complexity of systemic risk, it is unrealistic to expect a single measure or indicator to serve all purposes.
Combining indicators can produce better signals with fewer false alarms and undetected crises. For example, research shows that combining the Credit - to - GDP gap with a measure of real estate prices produces an indicator that performs better than either variable on its own. Our own work at the Bank reinforces findings elsewhere that aggregate private sector credit and real estate prices are among the most reliable indicators of financial stress. Identifying sources of risk is essential, but so is determining the likelihood that these risks will materialize. Therefore, another important aspect of ongoing research is the development of statistical models to help us forecast the probability that a crisis will occur based on a group of indicators.
Macro stress tests

Early-warning indicators are useful to gauge the probability of financial stress, but a thorough assessment also requires an analysis of what could happen if the risk materializes. This is the goal of macro stress testing.
A good part of the Banks efforts in recent years has been devoted to developing and refining stress-testing models.
This class of models takes a large but plausible macroeconomic shock as a starting point and analyzes its impact on the balance sheets of banks or other sectors of the economy. The Bank now has two main stress-testing models to help monitor risks to the financial system.
These models can also be used to assess the potential impact of policy tools or regulatory actions in mitigating financial system risks.
Assessing risks from elevated household debt

The first, the Household Risk Assessment Model, or H RAM, is a microsimulation model that assesses how the debt burden of Canadian households can affect financial stability.
Using microdata from household balance sheets, the model allows us to estimate how various shocks would affect the distribution of debt within the household sector. The simulations take into account changes over time in individual debt levels, as well as changes in household wealth from savings and fluctuations in the value of financial assets. Tracking the asset side of household balance sheets gives us a more accurate picture of systemic risk since changes in wealth affect households ability to pay their debt. Household vulnerabilities depend not only on the average level of debt, but also on how debt is distributed across individuals. One strength of the model is precisely its ability to account for this distribution. For instance, while record-low interest rates in recent years have contributed to a relatively low aggregate household debt-service ratio, the share of Canadian households that are considered most vulnerable those with a debt-service ratio equal to or higher than 40 per cent has climbed to above-average levels, as has the proportion of debt held by these vulnerable households (Chart 2).
Using H RAM, we estimate that if interest rates were to rise to 4.25 per cent by mid-2015, the share of highly indebted households would rise from slightly above 6 per cent in 2011 to roughly 10 per cent by 2016, while the proportion of debt held by these households would rise from 1 1.5 per cent to about 20 per cent over the same period. So while the aggregate household debt-service ratio paints a somewhat rosy picture, taking into account distributions gives us a clearer and more cautionary indication of how vulnerable our financial system actually is to household debt. Another strength of the model is that it provides a flexible tool for simulating the impact on household solvency of a wide range of potential shocks, such as an increase in unemployment. HRAM indicates that household loans in arrears would more than double under a severe labour market shock similar to that observed in the recession of the early 1990s.
Despite the models strengths, we continue to enhance our analysis by improving H RAM. Expanding the behavioural aspects of the model is one way to do this. For instance, the model currently allows distressed households to pay their debts by selling their liquid assets, but not their homes. Work is also under way to improve the design of the shock scenarios. Results of stress tests using H RAM are regularly reported in the Banks Financial System Review and constitute an important element of our overall assessment of the risks associated with household finances.
Assessing contagion effects in the banking system

HRAM provides invaluable information on vulnerabilities in the household sector, but the Bank is also interested in assessing risks more broadly within the Canadian financial system.
To this end, we have been working for several years on developing a Macro Financial Risk Assessment Framework (or MFRAF). Drawing on detailed data from bank balance sheets, MFRAF is a quantitative model that tracks the contribution of individual banks to systemic risk. Traditional stress-testing models focus exclusively on solvency risk, and estimate the overall risk to the financial system by simply aggregating credit (or other asset) losses that would materialize at individual banks in the event of a severe shock. MFRAF goes beyond this traditional approach by taking into account linkages among banks arising from counterparty exposures or network spillover effects as well as funding liquidity risk, that is, the risk of market-based runs on banks.
The financial crisis illustrated the significant risks associated with a deterioration of funding liquidity. The collective reactions of market participants led to mutually reinforcing solvency and liquidity problems at banks around the world. As funding liquidity evaporated, many well-capitalized institutions had to take writedowns on illiquid assets, or sell them at a loss, creating uncertainty in the market about their solvency and adding to the downward pressure on asset prices. MFRAF has been built to integrate funding liquidity risk as an endogenous outcome of the interactions between solvency concerns and the liquidity profiles of banks. This strong microeconomic foundation constitutes a major innovation in macro stress-testing models. MFRAF also incorporates network externalities caused by the defaults of counterparties, with the size of a counterpartys interbank exposures increasing the likelihood of spillover effects. A key lesson from the model is that failure to account for either funding liquidity risk or interbank exposures could lead to significant underestimation of the risks to the financial system as a whole if the banking system is undercapitalized and relies extensively on the short-term funding market. Importantly, the loss distributions generated by the model exhibit fat tails, a key feature of the actual distribution of financial system risks (Chart 3).
The fact that the model is able to replicate this important stylized fact demonstrates that it has significant potential as a tool for assessing systemic risk. Nevertheless, while MFRAF is already somewhat complex, the layers of interaction will need to be further augmented. For instance, the model misses any negative feedback that could occur between heightened risks to the banking system and the real economy. The model could also be expanded over time to include other types of financial institutions and markets. Compared with other approaches that use market-based data, such as the asset-pricing approach, the transmission channel in models like MFRAF is transparent, and this improves our interpretation of results. Because of this story-telling ability, many central banks have begun to use this type of framework in their financial stability analysis.
In addition to assessing risks, MFRAF can be used to examine the merits of policy or regulatory initiatives such as capital and liquidity rules. As the model becomes more refined, the objective is to use it more to complement other existing macro stress-testing exercises and to sharpen our analysis and communication of risks in the Banks Financial System Review.
Conclusion
Let me conclude. The Bank of Canada is conducting extensive research into finding methodologies and tools to identify and measure systemic risk. While work in this area is extremely complex, the Bank has made substantial progress in recent years.
We now have two state-of-the art models. And with H RAM, the Bank of Canada is one of the few central banks at the leading edge of using microsimulation models to assess vulnerabilities in the household sector.
Our efforts to build these models have provided us with important lessons. First, distributions matter we cannot rely solely on aggregate data: distributional features and complex interactions are very important for assessing risks.
This means developing models that capture these effects.

Our household simulation model is aimed directly at understanding how the distribution of debts, assets and income affects financial stability.
MFRAF uses information about the interconnections of individual financial institutions because these can lead to non-linear network effects that are also important for assessing systemic risks. Second, predicting behaviour under stress conditions is very difficult. Models need to be able to handle a variety of what-if scenarios corresponding to different assumptions about behaviours under stress. Finally, we need to consider the many different sources of risk to the financial sector and take into account their cumulative effects and interactions; otherwise we may underestimate risks. Obviously, quantitative measures alone will never be enough to get a complete picture, especially since the financial system evolves rapidly. Intelligence gathered from discussions with the financial sector, as well as information shared with other policy-makers and supervisors here in Canada and in the international community, will always be critical to the overall assessment of the risks. While we are making progress, it is important to remember that financial system modelling is still in its infancy. The goal understanding, preventing, and reducing systemic | risk deserves our attention, diligent research and hard work. It has been my pleasure to share some of the Banks efforts with you today. Thank you very much.
EBA, EIOPA and ESMA

Joint Consultation Paper on Draft Regulatory Technical Standards on the uniform conditions of application of the calculation methods under Article 6.2 of the Financial Conglomerates Directive (JC/ CP/2012/02)
I. Responding to this Consultation

EBA, EIOPA and ESMA (the ESAs) invite comments on all matters in this paper and in particular on the specific questions stated in the attached document Overview of questions for Consultation at the end of this paper. Comments are most helpful if they: - respond to the question stated; - indicate the specific question to which the comment relates; - contain a clear rationale; - provide evidence to support the views expressed/ rationale proposed; and - describe any alternative regulatory choices EBA should consider.
II. Executive Summary

The CRR /CRD I V proposals (the so-called Capital Requirements Regulation - henceforth CRR- and the so-called Capital Requirements Directive henceforth CRD) set out prudential requirements for banks
and other financial institutions which are expected to apply from 1 January 2013. In anticipation of the finalisation of the legislative texts for the CRR/ CRD IV, the EBA, EIOPA and ESMA (hereafter the ESAs) through the Joint Committee, have developed the draft RTS in accordance with the mandate contained in Article 46(4) of the CRR and Article 139 of CRDIV (amending Article 21 a (2a) of the Directive 2002/ 87/ EC) on the basis of the European Commissions proposals. This Article provides the ESAs through the Joint Committee, to develop draft Regulatory Technical Standards (RTS) with regard to the conditions of the application of the Article 6(2) of the Directive 2002/ 87/ EC (hereafter the Directive). Further the ESAs have developed the draft RTS having regard to Article 230 in connection with Articles 220 and 228 of the Directive 2009/ 138/ EC2. To the extent that the texts may change before their adoption, the ESAs shall adapt its draft RTS accordingly to reflect any developments. The RTS included in this consultation have to be submitted to the EU Commission by 1 January 2013. Please note that the ESAs have developed the present draft RTS based on the European Commissions legislative proposals for the CRR/ CRD IV. They have also taken into account major changes subsequently proposed by the revised texts produced by the Council of the EU and the European Parliament, during the ordinary legislative procedure (co- decision process). Following the end of the consultation period, and to the extent that the final text of the CRR/CRD IV changes before the adoption of the RTS,
the ESAs will adapt the draft RTS accordingly to reflect any developments.
Main features of the RTS

This consultation paper puts forward draft RTS in order to ensure that institutions that are part of a financial conglomerate apply the appropriate calculation methods for the determination of required capital at the level of the conglomerate.
They are based in particular on the following elements:
General Principles
o Elimination of multiple gearing; o Elimination of intra-group creation of own funds; o Transferability and availability of own funds; and o Coverage of deficit at financial conglomerate level having regard to definition of cross-sector capital.
Technical calculation methods 1. Method 1: Accounting consolidation method:

The FICOD provides in relation to Method 1 that the own funds are calculated on the basis of the consolidated position of the group. According to this general provision, the calculation of own funds should be based on the relevant accounting framework for the consolidated accounts of the conglomerate applicable to the scope of the Directive. The use of consolidated accounts eliminates all own funds intragroup items, in order to avoid double counting of capital instruments.
According to the Directive provisions, the eligibility rules are those included in sectoral provisions.
2. Method 2: Deduction and aggregation method.

This method calculates the supplementary capital adequacy requirements of a conglomerate based on the accounts of solo entities.
It aggregates the own funds, deducts the book value of the participations in other entities of the group and specifies treatment of the proportional share applicable to own funds and solvency requirements. All intra-group creation of own funds shall be eliminated.
3. Method 3: Combination of methods 1 and 2.

The use of combination of accounting consolidation method 1 and deduction and aggregation method 2 is limited to the cases where the use of either method 1 or method 2 would not be appropriate and is subject to the permission by the competent authorities.
I I I. Background and rationale

The supplementary supervision of financial entities in a financial conglomerate is covered by the Financial Conglomerates Directive 2002/ 87/ EC, hereafter known as the Directive. This Directive provides for competent authorities to be able to assess at a group-wide level the financial situation of credit institutions, insurance undertakings and investment firms which are part of a financial conglomerate, in particular as regards solvency (including the elimination of multiple gearing of own funds instruments).
The nature of RTS under EU law
Draft RTS are produced in accordance with Article 10 of the ESAs regulation. According to Article 10(4) of the ESAs regulation, they shall be adopted by means of Regulations or Decisions. According to EU law, EU regulations are binding in their entirety and directly applicable in all Member States. This means that, on the date of their entry into force, they become part of the national law of the Member States and that their implementation into national law is not only unnecessary but also prohibited by EU law, except in so far as this is expressly required by them. Shaping these rules in the form of a Regulation would ensure a levelplaying field and would facilitate the cross-border provision of services.
Background and regulatory approach followed in the draft RTS

These draft RTS are produced in accordance with CRD IV/ CRR proposals, which provide that the EBA, ESMA and EIOPA (hereafter the ESAs), through the Joint Committee, shall develop draft regulatory technical standards with regard to the conditions of the application of the calculation methods with regard to Article 6(2) of the Directive and shall submit those draft regulatory technical standards to the Commission by 1 January 2013. The proposed draft RTS covers the uniform conditions for the use of the methods for the determination of capital adequacy of a financial conglomerate under the Directive. They elaborate on Technical principles applying to all of the three methods provided for by Directive; and also contain an Annex providing further detail for Method 2.
The requirements contained in the draft RTS are mainly directed at institutions, although some of them are directed at competent authorities.
IV. Draft Regulatory Technical Standards on the uniform conditions of application of the calculation methods under Article 6.2 of the Financial Conglomerates Directive
Commission Delegated Regulation (EU) No XX/ 2012 supplementing Directive xx/ XX/ EU [CRD] of the European Parliament and of the Council of [date], Regulation (..) No xx/XXXX [CRR] of the European Parliament and of the Council of [date] and Directive 2002/ 87/ EC [Financial Conglomerates Directive] of the European Parliament and of the Council of [date] with regard to regulatory technical standards for the uniform conditions of application of the calculation methods under Article 6.2 of the Financial Conglomerates Directive of XX Month 2012
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union,

Having regard to the [proposal for a] Regulation (...) No xx/ xxxx of the European Parliament and of the Council of dd mm yyyy on prudential requirements for credit institutions and investment firms Regulation xx/ xxxx [CRR] and in particular Article 46 (4) thereof. Having regard to the [proposal for a] Directive (...) No xx/ xxxx of the European Parliament and of the Council of dd mm yyyy on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms [CRDI V] and in particular Article 139 thereof. Having regard to the Directive 2002/ 87/ EC, as amended, of the European Parliament and of the Council on the supplementary supervision of credit institutions, insurance undertakings and investment
firms in a financial conglomerate (hereinafter the Directive) and in particular to Article 6(2) and Annex 1 thereof. Whereas: (1)Directive 2002/ 87 /EC provides in Chapter I I , Section 2, rules on capital adequacy of financial conglomerates, such that the elements of own funds are available at the level of a Financial Conglomerates are always at least equal to the capital adequacy requirements as calculated in accordance with Annex I of the Directive. (2)Regulation (...) No xx/ xxx (CRR) provides in Article 46, within Part I I , Chapter 2, Section 3, Sub-Section 2 and in the context of common equity Tier I rules, requirements for deduction where consolidation or supplementary supervision are applied. This section of the CRR provides empowerments to the European Commission to adopt delegated acts (regulatory technical standards) in accordance with articles 10-14 of the Regulation (EU) No 1093 /2010 establishing the European Banking Authority (EBA), Articles 10-14 of the Regulation (EU) No 1094/ 2010 establishing the European I nsurance and Occupational Pensions Authority (E IOPA), and Articles 10-14 of the Regulation (EU) No 1095/ 2010 (ESMA), establishing the European Securities and MarketsAuthority. These acts will complete the EU single rulebook for institutions in the area of own funds. (3)Directive (...) No xx/xxx (CRDIV) provides in Article 139 that the Directive 2002/ 87/ EC shall be amended, such that the EBA, EIOPA and ESMA through the Joint Committee, to develop draft Regulatory Technical Standards (RTS) with regard to the conditions of the application of the Article 6(2) of the Directive.
(4)For effective supervision of Financial Conglomerates, supplementary supervision should be applied to all such conglomerates, the crosssectoral financial activities of which are significant, which is the case when certain thresholds are reached, no matter how they are structured. Supplementary supervision should cover all financial activities identified by the sectoral financial legislation and all entities principally engaged in such activities should be included in the scope of the supplementary supervision, including asset management companies and alternative investment fund management companies. (5)Without prejudice to sectoral rules, supplementary supervision of the capital adequacy rules is necessary to bring more convergence in the application of the calculation methods listed in Annex 1 of the Directive. (6)For financial conglomerates which include significant banking or investment business and insurance business, multiple use of elements eligible for the calculation of own funds at the level of the financial conglomerate (multiple gearing) as well as any inappropriate intra-group creation of own funds must be eliminated. (7)The financial conglomerate should seek an acceptable timeframe for the transferability of funds across entities within the financial conglomerate, which shall depend on whether the specific entity is subject to the Directive 2009/ 138/ EC or the CRDIV / CRR. Moreover for an entity subject to the CRD IV/ CRR this timeframe should be expediated based on the fact that due to the nature of their activities, they are more vulnerable to a rapid deterioration in confidence and/ or sudden resolution situation. (8)In addition any non-sector-specific own funds, in excess of sectoral requirements, need to originate from entities which are not subject to transferability/ availability impediments. (9)It is important to ensure that own funds are only included at conglomerate level if there are no impediments to the transfer of assets
or repayment of liabilities across different conglomerate entities, including across sectors. ( 1 0 ) I f there is a deficit of own funds at the level of the financial conglomerate, the financial conglomerate should inform the coordinator on the measures taken to cover this deficit. (11)Further convergence in the way that financial conglomerates apply these rules shall ensure the robust and consistent application of the methods of calculation. (12)For bank-led conglomerates it is necessary to apply the most prudent method of calculation for the treatment of insurance holdings to avoid regulatory arbitrage. ( 1 3 ) I t is important that sector-specific own funds cannot cover risks above sectoral requirements. The financial conglomerate should first count sector-specific own funds against their requirements (while respecting sectoral rules and limits) for each relevant entity or group of entities. If there is an excess of sectorspecific own funds, this should not be recognised at conglomerate level. (14)When calculating supplementary capital adequacy of a financial conglomerate, in respect to non-regulated financial entities within the financial conglomerate, both a notional capital requirement and a notional level of own funds shoud be calculated. (15)Under Solvency I I , method 1 is applied on the basis of consolidated data which are set out at Level 2 and not on the basis of consolidated accounts. (16)Further changes to the capital adequacy rules may be addressed in the European Commissions review of Directive 2002/ 87/ EC.
( 1 7 ) I t is necessary that the new regime for treatment of methods of consolidation enters into force the soonest possible following the entry into force of the CRR /CRD I V and Solvency I I . (18)This Regulation is based on the draft regulatory technical standards submitted jointly by the EBA, EIOPA and ESMA to the Commission. (19)The EBA, EIOPA and ESMA have conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits, in accordance with Article 10 of Regulation (EU) No 1093/ 2010, Article 10 of Regulation (EU) No 1094/ 2010, Article 10 of Regulation (EU) No 1095/2010,and requested the opinion of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010, I nsurance Stakeholder Group and the Occupational Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1094/ 2010, and the European Securities and Markets Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1095/ 2010.
HAS ADOPTED THIS REGULATION:

TIT LE I Subject matter and definitions Article 1 Subject matter
This Regulation lays down rules of the uniform conditions of application of the calculation methods under Article 6.2 of the Directive.
Article 2 Definitions
1.Definitions of the CRD IV/ CRR, Directive 2002/87/ EC and Directive 2009/ 138/ EC shall apply to this Regulation. 2.Capital instruments are those capital instruments eligible under CRR (Regulation 2012/./ EC) and those capital instruments referred to as own funds in Directive 2009/138/EC. 3.Ultimate responsible entity is the entity within the financial conglomerate that is responsible for determining the capital for the financial conglomerate having regard to the following minimum criteria: control, the dominant entity from the markets perspective (market listed entity) and the ability to fulfill specific duties towards its subsidiaries and its supervisor. 4.indirect holding as defined under definition 17 of Article 22 of CRR [to be added if not in final CRR text]. 5.Insurance-led financial conglomerate is a financial conglomerate whose most important sector is insurance as defined under Article 3(2) of the Directive. 6.Bank-led financial conglomerate is a financial conglomerate whose most important sector is banking as defined under Article 3(2) of the Directive. 7.Investment firm-led financial conglomerate is a financial conglomerate whose most important sector is investment services as defined under Article 3(2) of the Directive.
TIT LE I I Technical Principles Article 3 Elimination of multiple gearing and the intra-group creation of own funds
The ultimate responsible entity shall ensure that own funds, which have been created by intra-group transactions, be it direct or indirect, shall be eliminated for the purpose of determining the required capital on a consolidated basis.
Article 4 Transferability and availability of own funds

1. For all entities of a financial conglomerate, own funds, in excess of sectoral solvency requirements, shall be considered available to absorb losses elsewhere in the financial conglomerate provided that all of the following conditions are fulfilled: (a)There are no practical, legal, regulatory, contractual or statutory impediments to the transfer of funds or repayment of liabilities across conglomerate entities in due course. This is the case when the transfer of own funds from one conglomerate entity to another is not barred by a restriction of any kind and there are no claims of any kind from third parties on these assets. The ultimate responsible entity of the financial conglomerate shall confirm to the satisfaction of the coordinator that the conditions set out in this point are met. (b)For the purpose of assessing the transferability of funds to entities subject to 2009/ 138/ EC, in due course shall mean no later than 9 months; for the purpose of assessing the transferability of funds to entities subjected to CRR, in due course shall mean no later than, three calendar days with no impediments on the coordinator requiring a faster transfer if necessary.
2.Own funds, in excess of sectoral solvency requirements, which do not meet the criteria under point 1 shall be excluded from the conglomerates own funds. 3.The financial conglomerate shall demonstrate that measures have been taken to mitigate the risk that transfer of funds would have a material effect on the transferors solvency.
EXPLANATORY TEXT for consultation purposes

This text is consistent with Annex 1 of the Directive which states when calculating own funds at the level of the financial conglomerate, competent authorities shall also take into account the effectiveness of the transferability and availability of the own funds across the different legal entities in the group, given the objectives of the capital adequacy rules. Point 1(a) aims to ensure that own funds are only included at conglomerate level if there are not impediments to the transfer of assets or repayment of liabilities across different conglomerate entities, including across sectors. If the conglomerate cannot confirm to the satisfaction of the coordinator that there are no inherent impediments in relation to a given entity, that entitys own funds in excess of its sectoral requirements cannot be included at conglomerate level. The impediments to be considered include practical, regulatory, contractual or statutory ones. Point 1(b) establishes an acceptable timeframe for the transferability of funds across conglomerate entities. There is a differentiation based on the fact that entities subject to CRR, due to the nature of their activities, are more vulnerable to a rapid deterioration in confidence and/ or sudden resolution situation.
Article 5 Deficit of own funds at the financial conglomerate level

1.When the difference calculated according to method 1, 2 or 3 as detailed in Annex 1 of the Directive is negative, the financial conglomerate shall ensure that the deficit is remedied with cross-sector own funds elements as defined in point 2 below. 2.When calculating own funds at the level of the financial conglomerate, cross sector own funds are elements eligible for: (a)Common Equity Tier 1 in accordance with Regulation / 2012/ EC [or Tier 1 Unrestricted Basic Own Funds in accordance with Directive 2009/ 138/ EC], or (b)Elements that meet both sets of rules for Additional Tier 1 in accordance with Regulation /2012/ EC and Tier 1 [Restricted Basic Own Funds in accordance with Directive 2009/ 138/ EC], or (c)elements that meet both sets of rules for Tier 2 in accordance with Regulation /2012/ EC and for Tier 2 in accordance with Directive 2009/ 138/ EC. 3. Cross-sector own funds elements mentioned in point 2 shall only be taken into account if their transferability and availability across the different legal entities in the financial conglomerate meet the conditions set out in Article 4.

The text is based on the Technical principles in Annex 1 of the Directive Whichever method is used, when the entity is a subsidiary undertaking and has a solvency deficit, or, in the case of a non-regulated financial sector entity, a notional solvency deficit, the total solvency deficit of the subsidiary has to be taken into account.
Where in this case, in the opinion of the coordinator, the responsibility of the parent undertaking owning a share of the capital is limited strictly and unambiguously to that share of the capital, the coordinator may give permission for the solvency deficit of the subsidiary undertaking to be taken into account on a proportional basis. In line with the Directive only cross-sector own funds are allowed as a remedy to a conglomerate deficit. That is, from the point at which a conglomerate deficit is observed, that shortfall amount shall be covered by the issuance of cross-sector own funds, regardless of the cause of the conglomerate deficit. The financial conglomerate shall inform the coordinator about the deficit and the measures to cover this deficit without delay.
Article 6 Consistency
1.The Method of Calculation selected from those methods defined in Annex 1 of the Directive shall be applied in a consistent manner over time. 2.For the purpose of Article 6(2) and Annex 1 of the Directive, for a banking led conglomerate, where Article 46 (1) of the CRR is applied, the coordinator, after consulting with other competent authorities concerned, shall decide the most prudent method to be applied by the financial conglomerate.
Article 7 Consolidation
For the purpose of Art 6(2) and Annex 1 of the Directive, Method 1 of the Directive 2009/ 138/ EC shall be considered as equivalent to the consolidation as defined under Method 1 of the Directive, for insuranceled financial conglomerate.
The equivalence assessment is valid provided that the scope of the group under Solvency I I is the same under the Directive or the difference in the scope is not material.

This text is based on the Directive 2009/ 138/EC, Article 230 in connection with Articles 220 ss. The Solvency I I Implementation measures will need to be considered once they have been published. According to Directive 2009/138/EC, for the calculation of group own funds all the multiple use of eligible own funds and intra-group creation of capital should be eliminated. Moreover, own funds of other financial sectors should be calculated according to the relevant sector rules.
As a result, both Method 1 of the Directive 2009/138/EC and Method 1 of the Directive are consistent with the main objectives of the supplementary supervision since they ensure that: all double-counting is removed; own funds are calculated in accordance with the definitions and limits established in the relevant sectoral rules.
The equivalence assessment is valid provided that the scope of the group under Solvency I I is the same under the Directive or the difference in the scope is not material.
Article 8 Solvency requirement

1. For the purpose of the calculation of the supplementary capital adequacy requirements of the regulated entities in a financial conglomerate, a solvency requirement shall satisfy either of the points laid down in (a) and (b):
(a)Where the rules for the insurance sector are to be applied, solvency requirement means the Solvency Capital Requirement as defined by Article 100 or 218 of Directive 2009/ 138/ EC as applicable, including any capital add-on applied in accordance with Articles 37, 231(7) or 232 of the same directive as applicable, and any other capital or own funds requirement applicable under Union legislation. (b)Where the rules for the banking or investment services sector are to be applied, solvency requirement means the sum of own funds requirements as defined by Articles 87 to 93 of CRR, combined buffer requirements as defined by Article 122 of CRD IV, and specific own funds requirements as defined by Article 100 of [CRDIV], and any other requirement applicable under European Union law.
Article 9 The financial conglomerate's own funds and capital requirements

1.Except where expressly stated in this Regulatory Technical Standard, the financial conglomerate's own funds and capital requirements shall be calculated in accordance with the definitions and limits established in the relevant sectoral rules. 2.The own funds of asset management companies shall be calculated according to Article 2 (l) of Directive 2009 /65/ EC; the capital requirements are calculated according to Article 7(1) (a) of Directive 2009/ 65/ EC. 3.The own funds of alternative investment fund managers shall be calculated according to Article 9 of Directive 2011/ 61/ EU.
Article 10 Sector specific own funds

1. Sector specific own funds, are recognised for the coverage of risks at the sectoral level only and cannot be used to cover risks of another sector and shall not be included (above or) beyond the sectoral level.
Sector specific own funds are own funds recognised under sectoral rules that do not fall within one of the following categories: (a)Common Equity Tier 1, Additional Tier 1 and Tier 2 own funds under [CRR]; or (b)Tier 1 unrestricted basic own funds, Tier 1 restricted basic own funds, and Tier 2 basic own funds under Directive 2009/ 138/ EC. 2. Risks originating from the other sector shall not be covered by sector specific own funds.

Article 10 sets out that sector-specific own funds cannot cover risks above sectoral requirements. In practice, this means that, for each relevant entity or group of entities, conglomerates need to first count sector-specific own funds against their requirements (while respecting sectoral rules and limits). If there is an excess of sector-specific own funds, this shall not be recognised at conglomerate level. In addition, as stated in Article 4, any non-sector-specific own funds in excess of sectoral requirements need to originate from entities which are not subject to transferability/availability impediments.
Article 1 1 Treatment of cross sector holdings for the calculation of capital requirements
Where an insurance holding of a bank-led financial conglomerate or an investment firm-led financial conglomerate is eliminated pursuant to Articles 14.3 and 14.4 or Article 15.2 or the application of these Articles as part of Method 3, no capital charge for that holding shall be applied at
the financial conglomerate level for the purpose of supplementary supervision, even if a capital charge is applied at sectoral level.

At sectoral level, holdings may receive a risk weight or capital charge. At the financial conglomerate level, the same holding may be deducted or eliminated from own funds through consolidation, making the risk weight or capital charge superfluous. This capital charge shall thus not be applied for the purposes of the calculation of the conglomerates solvency requirements.
Article 12 Non-regulated financial entities

1.For a non-regulated mixed financial holding company and for a nonregulated entity held by a mixed financial holding company, the own funds and the capital requirements attributable to the non-regulated financial sector entities shall be calculated according to the most important sector in the financial conglomerate in accordance with Article 3(2) of the Directive. 2.The own funds and the solvency requirements attributable to other non-regulated financial entities shall be calculated according to the sectoral rules of the sector (insurance or banking) to which the non regulated entity is designated.

A mixed financial holding company is defined under Article 2(15) of the Directive. Whichever method is used, for the purpose of the calculation of the supplementary capital adequacy of a financial conglomerate, both a
notional capital requirement and notional level of own funds should be calculated for non-regulated financial entities. These should be calculated according to the rules of the sector to which the non regulated entity belongs, or according to the most important sector in the conglomerate, having regard to Annex 1 of the Directive In the case of a non-regulated financial sector entity, a notional solvency requirement is calculated in accordance with section I I of this Annex, notional solvency requirement means the capital requirement with which such an entity would have to comply under the relevant sectoral rules as if it were a regulated entity of that particular financial sector; the notional solvency requirement of a mixed financial holding company shall be calculated according to the sectoral rules of the most important financial sector in the financial conglomerate.
Article 13 Transitional and grandfathering arrangements

The sectoral rules applied in the calculation of conglomerate own funds and solvency requirements shall take into account any transitional or grandfathering arrangements in force at sectoral level.
TIT LE I I I Technical calculation methods Article 14 Method 1 Calculation criteria

1.The own funds of a financial conglomerate shall be calculated on the basis of the consolidated accounts (according to the relevant accounting framework) applied to the scope of supplementary supervision of the Directive. 2.The calculation of own funds shall take into account the removal of intra group balances, transactions and income and expenses related to
the process of accounting consolidation. 3.For bank-led and investment firm-led conglomerates, unconsolidated significant investments in a financial sector entity pursuant to Article 40 of the CRR shall be fully deducted, if the entity belongs to the insurance sector as defined in Article 2(8) of the Directive. 4.Unconsolidated non significant investments are deducted in accordance with the treatment described in Article 43 of CRR. 5.For bank-led and investment firm-led conglomerates, the sectoral treatment in Part 2, Title I I of the CRR shall apply to all unconsolidated investments, participations and holdings of a conglomerate entity, provided that: (a)The conglomerate entity is a credit institution or an investment firm; and (b)The investment, participation or holding is in a credit institution or in an investment firm. 6.Without prejudice to points 3 and 4, any other own funds issued by one conglomerate entity and held by another, if not already eliminated in the accounting consolidation process, shall be deducted. 7.Joint controlled entities shall be treated in accordance with sectoral rules. 8.The valuation of assets and liabilities calculated for the purposes of Directive 2009/ 138/ EC shall be used at the level of the financial conglomerate. 9.Where asset or liability values are subject to the calculation of prudential filters and deductions in accordance with those required under CRR, the asset or liability values used shall be those attributable to the relevant entities under CRR, excluding assets and liabilities attributable to other entities of the financial conglomerate.
Where calculation of a threshold or limit is required in order to respect sectoral rules, the threshold or limit shall be calculated on the basis of the consolidated data of the financial conglomerate and after the removal of holdings called for by these standards. 10.Where credit institutions/ investment firms and related entities are consolidated under CRR, the same entities shall be considered together. 11.Where insurance and related entities are consolidated under Directive 2009/ 138/ EC, the same entities shall be considered together. 12.Conglomerate entities that are not consolidated under CRR or Directive 2009/ 138/ EC shall be treated separately. 13.For the purpose of the calculation of solvency requirements, each sector shall respect the requirements as calculated under the relevant sectoral rules. When summing the relevant sectoral solvency requirements there shall be no adjustment other than as foreseen by Article 1 1 of Title I I or as caused by adjustments to sectoral thresholds and limits pursuant to point 9 of this Article 14.
EXPLANATORY TEXT for consultation purposes ACCOUNTI NG CONSOLIDATI ON AND JOINT CONTROLLED ENTITIES (Points 1, 2 and 7)
Under Method 1, the Directive requires the calculation of the own funds of the conglomerate on the basis of the consolidated position of the group. In addition, any inappropriate intra-group creation of own funds must be eliminated. In order to ensure these provisions are respected, points 1 and 2 of Article 14 requires the conglomerate to use consolidated accounts
(applied to the scope of the conglomerate) as the starting point for the calculation of the own funds. In doing so, the conglomerate must allow all eliminations of own funds arising from the process of accounting consolidation to take place. Jointcontrolled entities are to be proportionally consolidated in line with point 6.
OTHER I NTRA-GROUP CREATI ON OF OWN FUNDS (Point 6)

In line with the Directives principles, Article 3 of this Regulation calls for the elimination of all own funds that have been created by intragroup transactions, be it direct or indirect. For the avoidance of doubt in the context of Method 1, point 5 further specifies that all intra-group creation of own funds should be eliminated on top of accounting consolidation, if not already eliminated as part of the accounting consolidation process. Such additional elimination may be required in particular where the treatment of the participation called for by the Directive is different from that provided for by accounting rules, considered that accounting rules doesnt consider the multiple gearing issue.
CROSS SECTOR HOLDINGS AN D OTH ER H OLDINGS (Points 3, 4 and 5)

For bank-led and investment firm-led conglomerates, the calculation of own funds at the level of the conglomerate should also take into account that the sectoral rules allow institutions to risk weight and not deduct some cross-sector holdings. For this reason, in order to ensure the elimination of multiple gearing at the level of conglomerate, point 3 of Article 14 requires the deduction of holdings that are neither consolidated nor eliminated (by deduction) at
sectoral level, where those holdings are in entities belonging to the insurance sector. Point 4 describes the treatment of unconsolidated non-significant investment holdings where those holdings are in entities belonging to insurance entities. Point 5 describes the treatment of other holdings, specifying that other holdings are treated according to sectoral rules (see the table in Annex I I ).
SOLVENCY 2 VALUATION CRITERIA (Points 8)

For insurance parts of the conglomerate, given that Article 75 of Directive 2009/ 138/ EU sets out specific valuation rules for assets and liabilities, point 8 of Article 14 specifies that assets and liabilities for those entities within the conglomerate should follow the valuations calculated for the purpose of Directive 2009/138 /EU. This point is aimed at ensuring that the calculation of the elements of own funds at the level of conglomerate is consistent with sectoral rules.
RECALCULATION OF LI M ITS AND THRESHOLDS, TAKING I NTO ACCOUNT REMOVAL OF H OLDINGS (Points 9)
Once the accounting consolidation has been carried out, as well as the other provisions already mentioned, amounts of CET1 attributable to conglomerate entities that are subject to CRR at sectoral level, as well as amounts of holdings belonging to such entities that are neither deducted nor consolidated, will change.
So the calculations based on CET1 in Article 45 of CRR, which measure the threshold for the deduction of deferred tax assets and significant investments, should be recalculated.
The recalculation should take into account the effect on CET1 of the conglomerate accounting consolidation process, proportional consolidation in accordance with point 7, the removal of holdings in point 3, and any other factors stemming from the conglomerate calculation that have led to a change in CET1 . In the calculation according to Article 45 of CRR for an entity or group of entities, the deferred tax assets and significant investments to be taken into account are only those belonging to that entity or group of entities within the conglomerate. These rules are provided for in point 9.
MULTI -LAYER CONGLOMERATES (Points 10, 1 1 and 12)

This Regulation recognises that financial conglomerate structures may be very complex and involve different layers (see graph example below).
In cases like this, where a banking group controls an insurance group, which in turn controls a bank, in order to calculate the limits or
thresholds provided at sectoral level, the data of the banking group at the top of the group shall not be calculated jointly with the data belonging to the bank (B) controlled by the insurance group. In this case, bank (B) calculates a threshold on its Deferred Tax Assets. Bearing in mind that the Directive states the elements eligible for the calculation of the own funds are those that qualify in accordance with the relevant sectoral rules, point 10 calls for the relevant groupings at sectoral level to be maintained also at the conglomerate level for the purposes of calculating limits and thresholds.
SOLVENCY REQUIREMENTS (Point 13)

Finally, point 13 specifies that the calculation of solvency requirements is based on the sum of sectoral and notional requirements, except for the provision included in Article 1 1 (no capital charge for holdings that are consolidated or deducted at the conglomerate level).
See also the Annex - Summary of the treatment of holdings and participations for the purpose of the calculation of the own funds of the conglomerate.
Article 15 Method 2 Calculation criteria

1. For the purpose of calculating Method 2 as set out in Annex I part I I of the Directive:
(a)The proportional share applicable to own funds and solvency requirements shall relate to the proportion of the subscribed capital which is directly or indirectly held by the parent undertaking or undertaking which holds a participation in another entity of the group;
(b)The book value of participations in other entities of the group shall be the book accounting value for the parent undertaking or for the
undertaking that holds a participation in another entity of the group; (c) Where the own funds of a holding is subject to a prudential filter, the filtered amounts shall be: i)Added to the book value mentioned in b), if the filtered amount increases regulatory capital; or ii)Deducted from the book value mentioned in b), if filtered amount decreases regulatory capital. (d) For the purpose of point (c), the filtered amounts pertains to the net amount affecting own funds of the holding. 2. For bank-led and investment firm-led conglomerates, significant investments in a financial sector entity pursuant to Article 40 of the CRR, if the entity belongs to the insurance sector as defined in Article 2(8) of the Directive, shall be: (a)Fully deducted, where the holding is not a participation as defined in Article 2(1 1) of the Directive, and (b)Treated according to Method 2, where the holding is a participation as defined in Article 2(11). 3.For insurance-led conglomerates, participation as defined in Article 2(11) of the Directive shall be considered for the application of point 1. 4.For the purpose of the first point, to eliminate the intra-group creation of own funds, the eligible amount of intra-group investments in any capital instruments that are eligible as regulatory capital, respecting relevant sectoral limits, shall be eliminated.

Point 1(c) addresses cases where prudential filters affect the own funds
of a participation for prudential purposes by adding back unrealised losses or subtracting unrealised gains, for example in the case of a holding held in the Available For Sale category. If this is the case, the effect of the prudential filter should be reversed [by adjusting the book value of the participation to be deducted]. Without this reversal the filtering of unrealised gains would unduly reduce own funds after deduction of accounting book value, while the filtering of unrealised losses would unduly flatter own funds after the deduction of accounting book value. Referring to the formula in the Annex: if, because of the application of a prudential filter the Own Funds term xi(OFi-REQi) changes, then its effect should be neutralized by an offsetting adjustment in the book value term: BVi. See also the Annex - Summary of the treatment of holdings and participations for the purpose of the calculation of the own funds of the conglomerate.
Article 16 Method 3 Calculation criteria

1. The competent authorities may permit the financial conglomerate to use a combination of methods 1 and 2, only where the financial conglomerate can demonstrate to the competent authorities that its request has been made: (a) Further to its best effort to apply either, Methods 1 or 2; and ( b ) H aving regard to the cases in Article 6 (5) of the Directive. 2. If several entities are collectively of non neglible interest, the competent authorities shall take this into account in assessing the request to use Method 3.
3.The application of the specific combination of Methods 1 and 2 to entities within the financial conglomerate that was permitted by competent authorities shall be applied in a consistent manner over time. 4.The coordinator shall consult the other relevant competent authorities before taking a decision on whether to permit the use of the combination of methods 1 and 2.

Article 6 (5) (a) (b) and (c) of the Directive states: (a) I f the entity is situated in a third country where there are legal impediments to the transfer of the necessary information, without prejudice to the sectoral rules regarding the obligation of competent authorities to refuse authorisation where the effective exercise of their supervisory functions is prevented; ( b) I f the entity is of negligible interest with respect to the objectives of the supplementary supervision of regulated entities in a financial conglomerate; (c) If the inclusion of the entity would be inappropriate or misleading with respect to the objectives of supplementary supervision. However, if several entities are to be excluded pursuant to (b) of the first subparagraph, they must nevertheless be included when collectively they are of non-negligible interest.
TIT LE IV Final provisions Article 17

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
This Regulation shall be binding in its entirety and directly applicable in all Member States. Done at Brussels, For the Commission The President [For the Commission On behalf of the President [Position]
ANNEX I Calculation methodology for Method 2 Deduction and aggregation method 1. General principles
The calculation of method 2 shall be carried out on the basis of the regulatory reporting required under the applicable accounting framework of each of the entities in the group following the formulaic expression below:
where own funds (OFi) exclude intra-group capital instruments. The supplementary capital adequacy requirements (scar) shall thus be calculated as the difference between: (1) The sum of the own funds (OFi) of each regulated and non-regulated financial sector entity (i) in the financial conglomerate; the elements eligible are those which qualify in accordance with the relevant sectoral
rules; and (2) The sum of the solvency requirements (REQi) for each regulated and non-regulated financial sector entity (i) in the group (G); the solvency requirements shall be calculated in accordance with the relevant sectoral rules; and the book value (BVi) of the participations in other entities (i) of the group. In the case of non-regulated financial sector entities, a notional solvency requirement shall be calculated according to Article 1 1. Own funds and solvency requirements shall be taken into account for their proportional share (x) as provided for in Article 6(4) and in accordance with Annex I . The difference shall not be negative.
ANNEX I I - Summary of the treatment of holdings and participations for the purpose of the calculation of the own funds of the conglomerate
V. Accompanying documents a. Draft Cost- Benefit Analysis / I mpact Assessment 1. Introduction

According to CRDIV / CRR proposals, the EBA, E IOPA and ESMA (hereafter the ESAs) through the Joint Committee, shall develop draft regulatory technical standards with regard to the conditions of the application of the Article 6(2) of the Directive, and shall submit those draft regulatory technical standards to the Commission by 1 January 2013. The Technical Standard describes how institutions following the consolidation methods set out in this Directive shall calculate own funds in the parent institution in a financial conglomerate.
The standard introduces restrictions on which elements of own funds in subsidiaries and other participated entities of a financial conglomerate can be used in the calculation of own funds. The main rationale underpinning this Technical Standard is to avoid an inflated calculation of own funds of cross-sector financial conglomerates. This Technical Standard focuses on harmonising the calculation of financial conglomerates own funds.
2. Problem definition
A lesson learned from recent financial crises is that the regulation of supplementary supervision, in particular the current set of rules on determining own funds at the conglomerate level, deserves a thorough rethink. For example, in the recent past it became clear that parent institutions could report strong levels of own funds, giving an impression of a robust solvency. In some cases that impression turned out to be misleading as significant amounts of own funds were, in practice, locked-in in the subsidiaries. This consequently rendered the Directives assumption of availability of funds at the conglomerate level rather uncertain - because of a lack of harmonisation of rules on conglomerate own funds. This affects the ability of conglomerates own funds to absorb losses, which makes financial conglomerates more fragile than figures on own funds would suggest.
Multiple gearing
Uncertainties in the application of the methods for determining own
funds at the conglomerate level may have led to undesirable levels of multiple gearing. This Technical Standard therefore builds upon the Directive and contributes to achieving its objective to eliminate the multiple use of elements eligible for the calculation of own funds at the level of the financial conglomerate (see for example Recital 7, Article 31 point 2, and Annex I , section I of the Directive).
Methods to determine Own funds at the Financial Conglomerate Level.

Uncertainties in the guidance about the choice of methods for determining own funds at the conglomerate level may have led to an arbitrary combination of the methods that are offered under Annex I of the Directive. This Technical Standard therefore provides additional clarity on the calculation methods for conglomerate own funds.
3. Objectives of the Technical Standard

The objective of this Technical Standard is to achieve a more consistent harmonisation of the calculation methods of Own Funds listed in Annex I of Directive.
This should translate in increased efficiency and effectiveness of conglomerate supervision by competent authorities, more clarity on the availability and transferability of own funds for the conglomerate, as well as tightly controlled levels of multiple gearing.
4. Options
Annex I of the Directive, describes three methods to calculate a conglomerates own funds.
This Technical Standard concentrates on the application of these methods. There is not a wide selection of options available for this Technical Standard. Any choice made with respect to this Technical Standard derives from the text of relevant Directives, predominantly the sectoral directives, CRR /CRD4 and Solvency I I . The guiding principles used by this Technical Standard to achieve more consistent harmonisation of calculation methods mentioned in Annex I of the Directive are: 1.To offer clarity in rules regarding transferability and availability of conglomerate own funds, 2.To eliminate the multiple use of elements eligible for the calculation of own funds at the level of the financial conglomerate, 3.To avoid double deduction of items and amounts from own funds, and 4.To respect sectoral rules.
Method 1
Method 1 is based on consolidated position of the conglomerate in order to avoid multiple gearing. For this purpose, the RTS requires the elimination of all intra-group creation of own funds; the scope of the group is defined according to article 2, point 12 of the Directive. Adjustments are required to sectoral rules in the treatment of banking cross holdings and some instructions not included in the Directive are provided for unregulated entities. According to the Directive provisions, the capital requirements are
calculated as sum of sectoral requirements without the elimination of intra-group transactions.
Method 2
The description of this method in its current form is already quite prescriptive and unambiguous.
However, this Technical Standard elaborates on two issues that may lead to disharmonised interpretations: i.The proportional share applicable to own funds and solvency requirements; ii.The interpretation of the book value of participations in other entities of the group. With respect to the latter issue, this Technical Standard uses the book value from the accounts of the parent as a starting point, but applies adjustments to any book values subjected to prudential filters in order to safeguard consistency in the calculation of this methods deduction of book value. The method requires, according to the general principle of avoiding inappropriate creation of intra-group own funds, the deductions of all the intra-group investments in capital instruments eligible according to sectoral rules. This provision ensure also an equivalence between this method of calculation of the own funds and the others allowed according to the Directive.
Method 3
The use of combination of methods 1 and 2 is limited only to the cases where the use of either method 1 or method 2 solely would not be
appropriate due, for example, to the lack of information on specific entities within the group. The use of method 3 shall need the permission of the competent authorities or the coordinator after consultation of the relevant other competent authorities. The combination method 3 shall be applied in a consistent manner over time. The supervisory consent is needed in order to prevent regulatory arbitrage.
5. Impacts
This technical standards objective is to achieve a more consistent harmonization of the methods mentioned in Annex I of the Directive. This may limit the degree of freedom with respect to the ways of calculating own funds of conglomerates. The expected impact compared to the sectoral rules for insurance-led conglomerate that apply method 1 of the Directive, where the scope of the insurance group under Solvency I I is not the same as the financial conglomerate under the Directive (see Article 7), is due mainly to the line by line consolidation of the items of the banking subsidiaries and banking joint controlled entities instead of the consolidation procedures provided under the Solvency 2 framework. In the case the scope is the same or difference is not material, insuranceled conglomerate applies Solvency 2 rules as they will be defined in the implementing measures Solvency 2. For banking-led and investment firm-led conglomerate the main expected impact compared to the sectoral rules is due to the consolidation of the insurance subsidiaries and joint controlled insurance entities that are risk weighted or deducted according to CRR.
Both insurance and banking group shall also adjust, where applicable, the amount of the threshold and parameters used for their eligibility limits (for example, thresholds on Deferred Tax Assets and on deduction of holdings under Article 45 of CRR), considering the effect of the consolidation of cross sector holdings at conglomerate level. Insurance, bank and investment firm-led conglomerates shall take into account of limits to transferability and availability of own funds as foreseen in the Technical Standard. A cost factor relates to the alignment of the entities to the requirements of this Technical Standard. Such costs may arise if current national regulations need to be amended to comply with the Technical Standard. Another cost factor may arise in the cases where competent authorities are called upon to approve the use of Method 3. Lastly, this Technical Standard may also affect the business model for a group to organize itself as a financial conglomerate.
There are a number of expected benefits related to this Technical Standard. They are:
i.More consistency in the selection and application of the methods of Annex I of the Directive; ii. Increased efficiency and effectiveness of conglomerate supervision; iii.More clarity on the amount, availability, and transferability of own funds within a financial conglomerate;
iv. More effective loss absorption of the capital held by conglomerates;

v.An increased standardization of the use of the methods, leading to lower costs of their application; and
vi. A contribution to greater financial stability.
b. Overview of questions for Consultation

1.What are the cost implications of a requirement for conglomerates to follow the clarifications for calculating own funds and solvency requirements described in this paper? If possible, please provide estimates of incremental compliance cost that may arise from the requirements, relative to following the Directive in the absence of the Regulatory Technical Standards. 2.How, in your opinion would the proposed clarifications impact on conglomerates business models? 3.How far would the suggested clarifications change current market practices? 4.Are the Technical Principles in Title I I sufficiently clear? I f not, what areas require further clarification? 5.Are there any areas of ambiguity in the way that the Technical Principles in Title I I apply to the three consolidation methods? 6.Are there any areas of ambiguity in the way that Method 1 needs to be carried out? 7.How much of an operational burden is the use of consolidated accounts of the conglomerate as a starting point for Method 1? I s there an alternative more straightforward method/ way to eliminate the intragroup creation of own funds? 8.Do you foresee any problems in applying sectoral rules to own funds under Method 1? I f so, what refinements to the method would you propose?
9.Are they any areas of ambiguity in the way that Method 2 needs to be carried out? 10.For the purpose of assessing the transferability of funds to entities subject to CRR, under Article 4, is three calendar days a sufficient timeframe in a period of stress?
Solvency I I Speakers Bureau

The Solvency I I Association has established the Solvency I I Speakers Bureau for firms and organizations that want to access the expertise of Certified Solvency ii Professionals (CSiiPs) and Certified Solvency ii Equivalence Professionals (CSiiEPs). The Solvency I I Association will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers. To learn more: www.solvency-ii-association.com/ Solvency_I I _Speakers_Bureau.html
Course Title Certified Solvency ii Professional (CSiiP): Preparing for the Solvency ii Directive of the EU (3 days)
Objectives: This course has been designed to provide with the knowledge and skills needed to understand and support compliance with the Solvency ii Directive of the European Union. Target Audience: This course is intended for decision makers, managers, professionals and consultants that: A.Work in I nsurance or Reinsurance firms of EEA countries. B.Work in Groups - Financial Conglomerates (FC), Financial H olding Companies (FHC), Mixed Financial Holding Companies (MFHC), Insurance Holding Companies (IH C) - providing insurance and/ or reinsurance services in the EEA, whose parent is located in a country of the EEA.
C.Want to understand the challenges and the opportunities after the Solvency ii Directive. This course is highly recommended for supervisors of EEA countries that want to understand how countries see Solvency I I as a Competitive Advantage. This course is also recommended for all decision makers, managers, professionals and consultants of insurance and/ or reinsurance firms involved in risk and compliance management. About the Course INT RODUCTION The European Unions Legislative Process Directives and Regulations The Financial Services Action Plan (FSAP) of the EU Extraterritorial Application of European Law Extraterritorial Application of the Solvency I I Directive Solvency ii and the Lamfalussy Process Level 1: Framework Principles Level 2: Detailed Technical MeasuresLevel 3: Strengthening Cooperation Among Regulators Level 4: Enforcement Weaknesses of Solvency I From Solvency I to Solvency I I Solvency ii Players Solvency ii Objectives THE SOLVENCY I I DIRECTIVE A Unified Legislative Basis for Prudential Regulation of I nsurers and Reinsurers Risk-Based Capital Allocation Scope of the Application Important Definitions
Value-at-Risk in Solvency I I Authorisation Corporate Governance Governance Functions Risk Management Corporate Governance and Risk Management - Level 2 Fit and proper requirements for persons who effectively run the undertaking or have other key functions Internal Controls Internal Audit Actuarial Function Outsourcing Board of Directors: Role and Solvency ii Responsibilities 12 Principles System of Governance (Level 2)
PILLAR 2 Supervisory Review Process (SRP) Focus on Risk Management and Operational Risk Own Risk and Solvency Assessment (ORSA) ORSA - The I nternal Assessment Process ORSA - The Supervisory Tool ORSA - N ot a Third Solvency Capital Requirement Capital add-on
PILLAR 3 Disclosure Requirements The Solvency and Financial Condition Report (SFC)
PILLAR I Valuation Of Assets And Liabilities Technical Provisions The Solvency Capital Requirement (SCR) The Value-at-Risk Measure Calibrated to a 99.5% Confidence Level over a 1-year Time Horizon
The Standard Approach The I nternal Models The Collection of Additional H istorical Data External Data The Minimum Capital Requirement (MCR) Non-Compliance with the Minimum Capital Requirement Non-Compliance with the Solvency Capital Requirement Own Funds Investment Rules
INT ERNAL MODEL APPROVAL CEIOPS Level 2 - Tests and Standards for Internal Model Approval CEIOPS Level 2 - The procedure to be followed for the approval of an internal model Internal Models Governance Group internal models Statistical quality standards Calibration and validation standards Documentation standards SOLVENCY I I , GROUP SUPERVISION AND TH IRD COUNTRIES Solvency I: Solo Plus Approach Group Supervision under Solvency I I Rights and duties of the group supervisor Group Solvency - Methods of calculation Method 1 (Default method): Accounting consolidation-based method Method 2 (Alternative method): Deduction and aggregation method Parent Undertakings Outside the Community - Verification of Equivalence Parent Undertakings Outside the Community - Absence of Equivalence
The head of the group is in the EEA and the third country regime is not equivalent The head of the group is in the EEA and the third country regime is equivalent The head of the group is outside the EEA and the third country is not equivalent The head of the group is outside the EEA and the third country regime is equivalent Small and Medium-Sized I nsurers: The Proportionality Principle Captives and Solvency I I EQUIVALENCE WIT H SOLVENCY I I AROUND THE WORLD Solvency ii and Countries outside the European Economic Area The I nternational Association of I nsurance Supervisors (IAIS) The Swiss Solvency Test (SST) and Solvency ii: Solvency ii and the Offshore Financial Centers (OFCs) Solvency ii and the USA Solvency ii and the US National Association of I nsurance Commissioners (NAIC) - The Federal I nsurance Office created under the Dodd-Frank Wall Street Reform and Consumer Protection Act in the USA, and the ORSA in the USA FROM THE REIN SURANCE DIRECTIVE TO THE SOLVENCY I I DIRECTIVE Directive 2005/ 68/ EC of 16 November 2005 on Reinsurance - The Reinsurance Directive (RID) CLOSING The I mpact of Solvency ii Outside the EEA Providing I nsurance Services to the European Client Competing with Banks Learning from the Basel ii Framework Regulatory Arbitrage: A Major Risk for Countries that see Compliance as an Obligation, not an Opportunity
Basel I I , Basel I I I, Solvency I I and Regulatory Arbitrage Challenges and Opportunities: What is next Regulatory Shopping after Solvency I I To learn more about the course: www.solvency-ii-association.com/ Certified_Solvency_ii_Training.htm

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Creating a global insurance supervisory Language

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We fully support the move to enhanced group-wide supervision.

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