TUESDAY 4 DECEMBER 2007

Mr Alberto Corinti

  Q120  Lord Moser: My Lord Chairman, could I follow this up? It seems to me that the essence of the problem is that on the one hand you use the word "sophistication", quite rightly because Solvency II presents a very sophisticated approach towards measuring the capital requirement, and that is all fine except that one element of it, namely assessing risk, is very unsophisticated really, it is the unscientific part of the whole process. You are an economist and so am I, and this still worries me rather.

  Mr Corinti: Yes.

  Q121  Lord Moser: The quality of judgment, which is what Lord Renton's question was about, is rather dominant in this supposedly very sophisticated system. How do you feel about that?

  Mr Corinti: I agree with you that whatever sophisticated system you can put in place for measuring the risk, there is always the need for discretional judgment. Maybe this is the real challenge of Solvency II; having supervisors who are able to interpret the outcomes of the formula and to review the risk management of the companies. We should not forget in this regard, however, that Solvency II is based on three pillars—pillar one is the capital requirements, pillar two is the supervisory review process and pillar three is the disclosure of the financial situation of the market in order to trigger a market discipline effect. We should not consider those three pillars as standing alone but we should be aware of their interaction and the fact that all of them can contribute to the enhancement of the solvency of the company. Personally, when I was a supervisor, I thought it is a very ambitious project, but the objectives and the way in which those objectives are achieved are really quite shared.

  Chairman: Thank you, that leads directly into a question that Lord Woolmer wanted to ask.

  Q122  Lord Woolmer of Leeds: If I can ask you a question following directly on from that, the risk assessors in the businesses have to be sophisticated but so will the supervisory agencies have to be sophisticated. Looking across all Member States, are you satisfied that the regulators in all the Member States will themselves be sophisticated enough to monitor firms' risk management and internal models for calculating capital requirements?

  Mr Corinti: It is quite clear that there is a lot of room for improvement in this regard. The supervisors are aware of that. CEIOPS was created to foster the development of the supervisors. The main challenge for the supervisors is to change their attitude as Solvency II will be more difficult to apply than Solvency I. In Solvency I you could simply tick a box—I am exaggerating—it is a very legalistic, rule-based approach. In Solvency II supervision will consist not only of checking the compliance but will require more complex behaviour by the supervisors, who should interact with the management of the company and understand what the risk profiles are. Qualitative aspects, therefore, will be much more significant and important in the new system and I think this is a challenge for the supervisors. I know that supervisors are working to be ready to apply the new system. Obviously this depends on a lot of issues; first of all the availability of resources and not just the willingness of the supervisors. It is something on which from now until 2012 supervisors should work on.

  Q123  Lord Woolmer of Leeds: Can I link that with my second and last question and that relates to supervision at group level. As I understand it, in simple terms, insurance companies operating across the European Community will in future have all their operations supervised by one national regulator, in simple terms, regardless of where they are operating in the European Union. We have had evidence given to us of that idea, that you as a policyholder may find the insurance company you are doing business with is actually supervised by the supervisor of another Member State, not your own supervisor, and that that may cause some political opposition in the European Parliament. What is the CEA's answer to public and political concerns about the idea of group supervision being undertaken outside of the policyholder's country? If I could tack question (b) onto that, that may also raise a problem for large groups because they are going to be supervised differently depending on where their group headquarters are. How do large insurance companies feel about group supervision and does it depend on where their headquarters are?

  Mr Corinti: With regard to the first question, it is not completely correct to say that according to the new approach included in the Directive the supervision will be carried out by another supervisor. The Directive introduces the role of the group supervisor that should co-ordinate the supervision of the whole group by all the national supervisors involved and, in addition to that, should have also the final decision on some limited aspects of the supervision. The national supervisors will continue to have their tasks their powers and their responsibility for the supervision of the subsidiary established in their country. The group supervision approach is, again, recognition of the economic reality. The groups are, from an economic point of view, a single entity and the supervision should take account of this fact. Most of the groups have a centralised risk management function. Again, each group should not be obliged to deal with a set of different national supervisors, maybe behaving in different ways according to different rules, That is why, from an organisational point of view, it is very important to have a group supervisor who can co-ordinate the work of the other supervisors. In addition to that, the Directive introduces some rules allowing the recognition of the diversification effect that could occur at a group level whenever the risk of one entity is not fully correlated with the risk placed in another entity. It is important to say that the supervision of the group should be based on a collegiate approach; all the supervisors should co-operate under the co-ordination of the group supervisor. The Directive includes also a quite clear allocation of the responsibilities of the local supervisor and the group supervisor. Therefore, it is not fair to say that supervision will shift to the group supervisor, the role of the group supervisor will be emphasised but not so much as to make the local supervisor not responsible. If the groups are treated differently compared to each other: this is a concern because, potentially, the role of the group supervisor should be covered in different manners by different authorities. From this point of view we think that convergence of supervisory practices is a key objective and we really hope that with the establishment of CEIOPS and with the clear legislative framework that Solvency II is expected to provide, the supervisors will be able to converge their day-to-day supervisory practices.

  Q124  Chairman: It sounds to me as if we have hit the difficult bit there, the bit which may cause difficulties. Can I just pick away a little at the difference between detailed calculations and general regulation? The position paper that CEA published in October warned people not to specify how you do the detailed calculations. We have also noted that there were concerns over the apparently open-ended powers granted to regulators; are these desires mutually exclusive or is there a way of squaring this circle? If you do not tell people exactly how to do things does it leaves unlimited powers in the hands of the regulators?

  Mr Corinti: This is a fair question. The position of CEA with regard to what should be included in the Directive is that most of the detailed aspects should be included in the level two legislation. So I expect that the content of the Solvency II legislation will mainly be included in the level two regulation. Also the supervisory measures, the level three legislation, should have a role here. The supervisory measures, despite the fact that they are not legally binding, are important to identify a benchmark for supervisory practice. We expect that when CEIOPS starts issuing the supervisory practices, a transparent process will be put in place, as was the case for the level one and level two measures.

  Q125  Chairman: I would like to pick up another point out of your position paper which suggests that future profits and losses should be allowed to contribute towards the capital requirements, towards the MCR and the SCR. Can firms make accurate predictions of future business? Are we not increasing the risk by asking them to do so?

  Mr Corinti: This aspect is a very technical aspect and the answer is yes, this is possible, through actuarial techniques. Obviously, when we calculate the risk charge there is some degree of uncertainty as there are some assumptions taken. However, based on the historic experience it is possible to infer the future cash flows also with regard to expected profits and losses. It is not only a question of profit but also expected losses from the portfolio. It is true to say that the more you include aspects that make the system more accurate in reflecting the economic reality, the more complex and sophisticated the system is. I know that CEIOPS excluded this profit and loss calculation not because of the uncertainty which is implicit in this calculation, but because of the need to make the formula a bit more simple.

  Q126  Lord Moser: You have talked, very understandably, about Europe as a whole and the 27 countries, and left us in no doubt that the industry is keen on the new Directive. Can you disaggregate a bit, are all countries equally keen or are some countries in more difficulty in implementing the new Directive than others? Secondly—that is the industry—what about the politicians, are they behind it all everywhere?

  Mr Corinti: With regard to the industry it is difficult to identify well-prepared and less-prepared geographical areas. As I said before, the industry, as well as supervisor should start as soon as possible to put in place a Solvency II-consistent system, but it is difficult to say to what extent the whole industry in Europe will succeed in that. Maybe, the companies which are more used to a very legalistic compliance will face more difficulties in developing their risk management and moving to Solvency II.

  Q127  Lord Moser: The newer European countries.

  Mr Corinti: One would think that the newer European countries would lag behind the others and this, to a certain extent, is to be expected; but, based on my experience, sometimes the newcomers are also the quickest to change and to react to the changes in the regulations and in the market. We in CEA are trying to assist the industry in those countries as far as possible by visiting them, by answering their questions, by organising events and so on. It is a challenge and the risk that the new countries will be less ready is maybe higher, However this issue is not exclusively related to the new countries. With regard to supervisors, regulators and politicians, it is difficult to say. At this stage, I tend to think that supervisors still have to improve a lot to have resources and practices which are consistent with Solvency II.

  Q128  Lord Moser: We have heard so much in our various meetings about the enthusiasm of the industry, including from you, I just wonder whether the political will which ultimately matters can also be depended on by the industry.

  Mr Corinti: We have a Directive negotiated at the European Council and Parliament and I have to say that I do not see any country opposing this legislative initiative. Obviously, as I said, there are different views about group supervision, about the calculation of the MCR and some other key aspects of the model, but the objectives of the model are fully shared and in general the trend is shared.

  Q129  Lord Haskins: How will this Directive affect the non-EU members of your association? Will they be following it or will they be just outside it, and if they are inside it how will they be regulated?

  Mr Corinti: The non-EU members of our association, mainly Switzerland, are very interested in the development of this system and I have to say that in Switzerland there is a system which can be considered the predecessor of Solvency II because it contains a lot of aspects which are also common to Solvency II. They are obviously interested in having a Solvency II system which reflects their views about the way in which supervision should be carried out. This is true not only for the European countries but for all the other non-EU countries, which are very interested in knowing how Solvency II develops. Indeed, supervision could be also a factor affecting competition. This is particularly relevant with regard to the US market. I have to say that they are very interested and sometimes a bit concerned about the development of Solvency II. Maybe they realise that also in their countries they have to do something similar.

  Q130  Lord Renton of Mount Harry: This is a slightly unkind question, only in terms that the opening sentence of the document from CEA talks about "advocating from the outset an economic approach as the basis for Solvency II" and you, Señor Corinti, in talking to us have used the words yourself, "economic reality". Do you think that the economic reality or the economic approach could ever, for example, have forecast the effect of sub-prime mortgages on banks and insurance companies?

  Mr Corinti: It is difficult to say. However, using an economic approach I think the probability to detect in time such a failure is higher. Solvency II cannot avoid any turbulence in the market and cannot avoid any failure, but it is true to say that with the new system supervisors will have a higher probability to detect the failure at an earlier stage. Solvency II includes tools and actions for supervisors which allow taking care of those aspects before they explode. Solvency II is not intended to be "zero failure" a system this would be also inefficient in terms of cost of the supervision, but I can say that say that it will include a system for allowing supervisors to detect the problems earlier.

  Q131  Chairman: Thank you very much, Senor Corinti. Have we left you space to say everything that you came to say or is there anything else you would like to say?

  Mr Corinti: I found your questions very, very interesting and, to the point, in answering them I have explained most of what I wanted to say about our vision of Solvency II.

  Chairman: It remains for me to thank you very much for coming; we have found this session very useful. Thank you indeed.