TUESDAY 4 DECEMBER 2007

Mr Alberto Corinti

  Q106  Chairman: Mr Corinti, welcome to the Committee and thank you very much for coming. Can I just state for the record that the session is being broadcast, so it will all be recorded. You will be asked to look at what you said and make corrections if it did not come out quite as you had meant to say it, but the whole session is in evidence. I would like to ask you to make an opening statement because I would like to ask you to tell us something about the CEA—who its members are, do you have any members among the smaller firms, and also anything else you would like to say, and then if we may we will start asking you questions. Thank you very much.

  Mr Corinti: My Lord Chairman, let me first thank you for having the opportunity to appear in front of this Committee; it is a great honour for CEA, which I represent, and also personally to be here with you, and it is also a great opportunity for explaining the position of the industry with regards to Solvency II. I am the head of the economic and financial department in CEA. This department deals directly with the Solvency II project. CEA is the federation of the European insurance industry; it gathers the national associations of insurers from 33 countries across Europe—the 27 countries of the European Union, plus the three countries of the European Economic Area (Norway, Lichtenstein and Iceland) plus Turkey, Croatia and Switzerland. In total CEA represents, in terms of premium, 94 per cent of the market in Europe. We are the representative and we would like to be the voice of all the industry—big, small and medium size firms regardless of their legal status, and nature of their business. CEA sees Solvency II as a priority. Solvency II is a project of paramount importance for the industry and the industry shares completely the objectives of Solvency II as represented in the proposal of the Commission. That is all for the moment, My Lord Chairman.

  Q107  Chairman: Thank you very much. I want to ask you about the Lamfalussy arrangements. The framework Directive, of course, only sets out the principles that constitute the core of the new prudential framework. What will be the European insurance industry's priorities as the technical detail is agreed, and would you like also to comment on what are likely to be the sticking points, where you see difficulties?

  Mr Corinti: As I said, the industry, the CEA, fully shares the objectives of Solvency II and, broadly, shares also the content of the framework Directive. Obviously you can say that the devil is always in the details. There are different ways of achieving those objectives and one can assume that all the interested parties could have different opinions on how to achieve those objectives. It is true in any case that when the principles of the framework Directive are crystallised in the legislation a lot of work has still to be done in filling in those principles with implementing measures. CEA is now looking at the preparation of those implementing measures and there are a number of issues on which a lot of work has still to be done. We have set up good co-operation with CEIOPS, which is the European Committee of Insurance Supervisors and we, I think, can provide CEIOPS with good insights and inputs in order for them to prepare their advice to the European Commission for the issuance of the implementing measures. We have just finished assessing the result of the third round of quantitative impacts study and we and all the interested parties—the industry, the Commission and the supervisors—are working to prepare the fourth round of quantitative impacts. The more critical point at this stage will be the calibration of the MCR (the Minimum Capital Requirements), which, as you know, is the requirement that should trigger ultimate supervisor action, and the calibration of some models of the Standard Capital Requirement formula like, for example, the model dealing with equity risk or the model dealing with non-life underwriting risks. Those, from a technical point of view, are the most challenging points. There are obviously other key issues in the project which are the object of a quite lively debate among the parties like, for example, the implementation of the group support regime which represents an innovative way to arrange the supervision of insurance groups in Europe.

  Q108  Chairman: I am sure that must be a difficult point. These in a way are the points you would expect to be difficult, calibration of the MCR and the SCR and of course the group supervision, which I have a colleague who is particularly interested to ask you about later on. The CEA is really going to be deeply involved in the production of the models.

  Mr Corinti: Absolutely. We have regular contact with the main actors, the European Commission and CEIOPS first and, now that the negotiation has started, also with the European Council and the European Parliament. From an operational point of view the link is particularly close with CEIOPS at this stage, as we are striving to input them with our stance before the finalisation of their advice. We are deeply involved.

  Q109  Lord Renton of Mount Harry: Could I ask a supplementary question, Señor Corinti, on the subject of the CEA. You said just now that you represented 94 per cent of the industry; that seems to me to be an astonishingly high proportion and I must congratulate you, but I wonder how you achieve it.

  Mr Corinti: It is difficult for me to answer because I omitted to explain at the beginning that I joined CEA very, very recently so I arrived when it was already a wonderful situation. For the sake of completeness and also transparency I have to say that I know the Solvency II project because I used to be involved in CEIOPS, the European Committee of Insurance Supervisors, as the secretary-general for three years. So the CEA is the voice of the industry. There are, as you know, other European associations reflecting particular portions of the market, for example mutuals, but most of the members of those specific associations are also members of CEA. I can say without fear of being contradicted that CEA is the voice of insurance in Europe.

  Q110  Lord Renton of Mount Harry: You must be a very popular person!

  Mr Corinti: Thank you.

  Q111  Chairman: Can I just pick up on that. I think you said that the CEA represented 94 per cent of the industry by premium.

  Mr Corinti: Yes.

  Q112  Chairman: That 94 per cent is 94 per cent of premiums paid. Who are the six per cent you do not represent? Are we missing representation of some very small insurance companies?

  Mr Corinti: I am not able to answer who is missing, but the 94 per cent results from the sum of the market shares represented by our members—it includes also small companies.

  Q113  Chairman: There are.

  Mr Corinti: Absolutely.

  Chairman: Thank you very much, I just thought it was important to get that out. Lord Trimble.

  Q114  Lord Trimble: I would like to turn to the implementation of the draft Directive and look at the consequences of that. Looking at the insurance industry, do you think there will be winners and losers, or sectors that will gain while others lose, will there be significant changes to the landscape of the European insurance industry and do you think that consumers will benefit and if so in what ways?

  Mr Corinti: Who will be the winners and the losers? I think that Solvency II has as its main objective the improvement of the internal risk management of the companies, because it is seen as the main safeguard against failure. Indeed, the primary cause of any failure in the past was not e.g. the wrong calculation of technical provisions, or the wrong calculation of the valuation of assets. The primary cause was rather related to wrong risk decisions. Everybody is convinced now, therefore, that improving the internal risk management of the company should be the first objective of prudential supervision. The loser could be all the companies which are not ready to improve its internal risk management.

  Q115  Lord Trimble: What companies would not be ready to do this? Is it particular sizes of companies, or is it companies in particular sectors?

  Mr Corinti: At this stage Solvency II is expected to be implemented in 2012 and most of the companies have already started to improve their internal risk management in view of applying Solvency II. A recent study that CEA, undertook in the framework of the impact assessment that the Commission published together with the proposed Directive, showed that the majority of companies have already implemented Solvency II—consistent internal risk management systems or are going to implement them soon. What is interesting perhaps is the fact that these changes, these improvements to internal risk management, were not considered as necessary only due to the change in the regulation but also in relation to other objectives, for example responding more appropriately to the request of the shareholders, to the demands of the policyholder or the need to allocate better the capital. There are no specific categories or portions of the market that we expect to be the losers.

  Q116  Lord Trimble: It has been suggested that smaller companies will have difficulties in doing this. Do you share that view or do you think the smaller companies will be able to manage?

  Mr Corinti: In principle, small companies are expected to have simpler internal risk management. The simplicity of the internal risk management, provided that it is consistent with the simplicity of the risk profile of the company, is not an issue in terms of the application of Solvency II. It is an issue when there is an inconsistency between the simplicity of the system and the risk profile of the company. It is true to say that the Solvency II regime is quite a sophisticated regime, because one main objective was to create a regime which reflects, to the possible extent, the risk profile of the individual undertakings. In order to have something which is risk-sensitive you should accept a certain degree of sophistication. The challenge is to strike a balance between the sophistication and the practicability of the system. It is a key criterion in this regard to make reference to the proportionality principle. The requirements should be the same, therefore, for all the companies, but their implementation should be proportionate to the size, nature and complexity of the companies.

  Q117  Lord Trimble: What are the consequences for consumers?

  Mr Corinti: We think -and this feeling is quite shared across the parties—are that consumers will benefit from Solvency II because the capital requirements and the general supervisory actions will be more consistent with the specific risk profile of each company. Up to now, under the Solvency I regime each company is asked to meet a certain capital requirement which does not reflect its risk profile. Two companies with a completely different risk profile, with a completely different risk for the policyholders, are now asked to put aside the same amount of capital. This is something which does not allow providing an even level of protection for policyholders across Europe. Solvency II is also important because, while improving the internal risk management of the company and the capability of the management to understand and manage the risk, it leads also to the possibility for the company to design and price products in a way that better reflect the needs of consumers. Finally, we should not forget that Solvency II should lead to more harmonisation in Europe, creating a level playing field in the supervision across Europe. This will foster competition and help to create a deeper integration of the single market. This is the benefit of Solvency II for consumers.

  Chairman: Thank you very much. Because we seem to be talking about risk I am going to move on and ask Lord Renton to ask a question and we will ask Lord Moser to come in later.

  Q118  Lord Renton of Mount Harry: Thank you, My Lord Chairman. I was very interested in what you have just been saying, Señor Corinti. I have always taken the view that insurance is about risk and there are also very often different judgments about risk, particularly in the non-life business. I find it quite hard, that degree of individual specialisation, knowing your client very well and therefore you have more confidence in him than in the other company that has not dealt with that client before. I find it quite difficult to understand how, in a sense, that can be put into a uniform position within the Directive? Therefore, the question inevitably is can a Directive such as that which is envisaged take enough account of the different risk mitigation and decision-making qualities of managers when often, of course, a really successful manager will be wooed away to join another company because he or she has been so successful. Can the Directive really cope with that?

  Mr Corinti: Yes, the Directive should cope with this issue, and in my opinion the way in which it could cope with this issue is being a principle-based directive. A principle-based directive allows the necessary flexibility for taking into account the elements you have just mentioned. It is true to say that, whatever the system is, it should have some kind of crystallised principles for allowing also the necessary harmonisation in Europe, The issue is again striking a balance between harmonisation and reflection of the specificity of the companies. I think the best way is to use the Lamfalussy model and to fix very clear and appropriate principles, and then to give content to those principles through implementing measures. In my opinion, therefore, Solvency II is not only one directive it is rather a set of measures that should be built on the principles included in the Directive.

  Q119  Lord Renton of Mount Harry: Quite apart from the capital requirements could you define the principles to us, to people who are not involved in the insurance industry. What are the precise principles of which you are talking?

  Mr Corinti: The main principle is, as I say, to create requirements which are risk-sensitive. Risk-sensitive means creating capital requirements which reflect the risk; specific risk profile of the company, and this is not easy. The other principle is to foster the internal risk management of the company. That is why e.g. the standard formula could be replaced by the use of internal models; this is a main element of the new regime. Internal models, provided that they are validated, can be taken as a basis for calculation for the capital requirement. I would add an overall principle that maybe comes before those two, which is the use of an economic approach in supervision. Most of the supervision in Europe has been based on rule-based, legalistic rules up to now. The intention of the system is to bring the economy also into the supervision and make supervision consistent with the economic reality of the business.