Modification of regulatory models: supranational, regional and...

Modification of regulatory models: supranational, regional and national scenarios

The financial crisis of 2007 seriously changed the landscape of the general insurance market in Europe. As the studies of the European Bank for Reconstruction and Development have shown, in the long term, the growth of financial integration has a positive impact on economic growth, and in the short term there are negative consequences in the form of a significant inflow of foreign capital leading to a credit boom and growth in foreign currency borrowings. These phenomena correlate with certain risks that were manifested during the global financial and economic crisis and aggravated the economic situation of many countries, including the European Union. To avoid catastrophic consequences, the governments of these countries were forced to implement costly measures in the form of anti-crisis measures designed to keep financial institutions at the required level.

In modern conditions in the insurance market of the European Union, the following most significant problems can be singled out:

• increasing the state's influence on the insurance market through public-private partnerships

• the volatility of the euro;

• raising the capital requirements of insurers (the Solvency II system) adopting the EU Directive on Sex, which should increase the cost of insurance services.

January 1, 2013 came into force the most large-scale in recent decades, the European reform of insurance supervision. On November 25, 2009, Directive 2009/138/EC was adopted on the approval of the Solvency II system, which was to be effective as of January 1, 2014.

The goal of the reform is a widespread quantitative and qualitative approach to monitoring the solvency and availability of equity funds of insurance companies, in accordance with the three pillars of the Solvency II:

• quantitative requirements for regulatory capital;

• Qualitative requirements for risk management;

• reporting requirements.

For the supervisory authorities, this means a consistent transition of existing supervisory practices from previous rule-based supervision to a system based on risk management principles. Solvency II uses the experience of the concept of risk capital and banking supervision. The purpose of the new generation of guidelines for the control of solvency of insurance companies - Solvency is the creation and implementation of a risk-based system of requirements for equity of the subjects of the insurance market of united Europe (SCR - Solvency Capital Requirements; requirements for capital, which forms a solvency margin), protection of consumers of insurance services. The creation and introduction of this system of requirements represents the first stage of implementing directives.

The following steps supplement the new model with requirements based on quantitative measures of evaluation (Part 2), and the requirements for the forms and responsibilities of reporting according to the new model (Part 3). At the very first stage of implementing the Directives, a system is introduced that allows insurance companies to use the so-called standard model when assessing risks. As an additional tool or alternative Solvency II, it is possible to use internal models for capital calculation, however, only in consultation with the insurance supervision bodies. Its architecture is largely similar to the Basel II architecture, the document of the Basel Committee on Banking Supervision, and also consists of a three-level structure:

Solvency II - three-level structure

Fig. 4.5. Solvency II - three-level structure

The first level (Figure 4.5) is a quantitative risk assessment. There are technical reserves (costs of the insurer); minimum capital requirements (MCR - Minimum Capital Requirement ) is an indicator whose failure to fulfill the requirements will be the basis for termination of the insurer's activity; solvency requirements based on the calculation model (SCR); coordination with insurance supervision and the chosen model.

Practice questions

In Germany, the Federal Office for the Control of Financial Services (BaFin) classifies insurance organizations under surveillance as part of a range of risks to determine how strictly the insurers should be supervised. Insurers are divided into classes using a two-dimensional matrix that reflects their market relevance. Market compliance of life insurers and pension funds is estimated on the basis of their total investment. A key parameter for companies offering health insurance, property insurance, and reinsurers is the gross income from collecting insurance premiums of such organizations. Market compliance is assessed on a three-level scale: "high", "average" π low levels. The quality of insurers is based on an assessment of their net assets, financial position and performance, growth and quality of management. The first two criteria are estimated using the actual insurance indicators, and the quality of management - using quality assurance criteria. The rating system takes into account the ratings of individual criteria for the purpose of compiling a general rating on a four-level scale: from A (high quality) to D (low quality).

The second level is risk management and management system. At this level, both the regulator and the insurer interact. On the part of the regulator, control and control procedures are checked; proof of use by the insurance company of management and control procedures; reliability assessment. For an insurance company, this is the adequacy of capital (ORSA and SFCR) and an internal assessment of risks and solvency.

At the third level, risks are disclosed through reporting to insurance supervisors; transparency and, if necessary, providing additional information to the supervisory authority. Thus, the structure Solvency II forms the main focus on the risk management within the insurance company, and the capital requirements of the insurance company depend on the risks accepted for insurance. The innovation of Solvency II is the need for the interaction of insurance supervisors and insurers on the basis of cooperation.

Practice questions

A study conducted by Ernst & amp; Young , indicates that approximately 43% of insurers would not have had time to align their activities with the Solvency directive II, if the new rules, as planned, would have entered into force on January 1 2014 In addition, insurers need to make changes to the architecture of their databases, which certainly entails additional costs.

The European Commission announced that the entry into force of the European directive Solvency II was postponed until January 1, 2016.

This decision was made as a result of the delay Omnibus II - Legislative proposals, which must make significant changes in regulation Solvency II and which could not be published in the European Parliament magazine until January 1, 2014 - the date on which was to take effect, and Solvency II

.

I've always wanted a quick implementation of Solvency II, but before the set date, it's just unrealistic. Therefore, we proposed a postponement, in order to avoid legislative uncertainty. We took this step after the European Parliament assured us that there will be no more changes until the effective date of Solvency II, "- said Michel Barmer, European Commissioner for the Internal Market and services.

Although Solvency II (The second solvency directive) is an initiative of European regulators, it will have a big impact on the entire global insurance industry. Equivalent regulatory regime is not present either in the leading world insurance market of the USA, or on any other. With the introduction of solvency requirements Solvency II changes will occur both in the competitive strategies of companies, and in rating agencies and regulators. However, as an international solvency standard Solvency II IAIS (International Association of Insurance Supervisors) has not yet been considered. Its approbation will take place in the European market, and then a document that unifies the international legal field may appear.

The standard formula Solvency II forms a modern, risk-sensitive model. It is believed that the new structure will have a significant impact and will largely change the insurance conditions in Europe. The European insurance market, in particular the CEA (European Committee of Insurers) and the Forum of Executive Risk Managers (CRO), support new conditions, the full implementation of which was planned for the end of 2012.

Historical excursion

The standard Solvency I was adopted as a result of formalization, revision and updating of existing standards in the European Union. The reform was approved by the European Parliament and the Council of Europe in 2002 and was named Solvency I. It includes special requirements for a minimum level of the solvency ratio, as well as a number of additional adjustments for reinsurance accounting, etc. In turn, in the person of rating agencies, developed its own models for assessing the solvency of insurance companies. However, these models had significant drawbacks. The Solvency model I takes into account only the insurance risk in determining the capital requirements of the insurer. Other risks, such as market and credit, are not taken into account. Accounting for insurance other than life insurance for reinsurance is limited to a 50% retention rate (defined as the average net declared loss as a percentage of the average gross claimed loss). The Solvency model does not take into account the fact that companies can suffer due to the risk of natural disasters or market risk. These risks are taken into account by the standard Solvency II, which can lead to a significant increase in solvency requirements for capital (SCR). On the other hand, a well-diversified portfolio of assets and liabilities can cause a diversification effect that leads to a reduction in SCR.

However, the Solvency II system, on which the supervision of insurance companies in most EU countries is based, is not designed to assess the systematic risks that are most serious from the point of view of developing the insurance market in modern conditions.

At the beginning of the crisis, the regulators of many European countries put forward views that systemic risk in the insurance business is imported from the banking sector. In this regard, the International Monetary Fund proposed the introduction of a system of so-called macroprudential instruments that take into account the contribution of individual financial institutions to the systemic liquidity risk and thereby contribute to minimizing the tendency of financial organizations to collectively underestimate the cost of liquidity risk. A macroprudential instrument can take the form of an additional requirement for capital, collection of tax or insurance premium. To date, the problem has been the lack of a methodology for measuring systemic liquidity risks and the amount of contribution of individual organizations to the creation of these risks.

Practice questions

The concept of macroprudential supervision was developed under the aegis of the Bank for International Settlements in 2000-2006. The purpose of such supervision is to reduce the costs of financial instability associated with banking crises caused directly by banking regulation and supervision.

According to the concept, macroprudential supervision should focus on the systemic stability of the financial sector, and not on preventing the insolvency of individual banks. When applying the macro prudential approach, particular attention is paid to the system-forming institutions and the interrelationships in the financial sector. This is explained by the fact that the risk of systemic stability depends on the collective behavior of financial market participants, as a result of which the risks in the financial sector for the regulator become endogenous. * 1

Special attention was paid to changes in the risk management system.

Specialists of the International Monetary Fund (J. Goba, T. Barnhill-Jr., A. Jobst and others) in recent published studies, in particular in Ch. 2 "Report on Global Financial Stability, 2011", there are three ways to measure systemic liquidity risk:

1. The systemic liquidity risk index (SIRL) on a market basis. It covers the increase in conventional spreads of financial instruments that may occur during periods of tension. For the particular set of investment strategies considered, investors can open compensatory positions at the usual time in order to keep narrow spreads (turning them into almost risk-free transactions), but they can not do it during periods of tension, because they may not have funding to do so.

During the financial crisis, the global market environment and conditions for obtaining liquid funds deteriorated sharply (this manifests itself as a sharp decline), while periods of extreme tension for systemic liquidity are defined as exceeding two standard deviations from zero.

2. The liquidity model adjusted for systemic risk (LSR) , which combines the data of financial balances and market data to create a future-oriented indicator of liquidity risk for financial institutions. Using this indicator, option pricing model and overall statistics, it is possible to calculate the chances of a general expected liquidity shortage (or events in the area of ​​systemic liquidity) for a number of organizations, as well as the contribution of individual organizations to the formation of such deficits.

3. The model of macroeconomic stress tests (ST). Measures the impact of unfavorable macroeconomic or financial situation on the liquidity risk of this group of organizations by determining how close they are to insolvency and, therefore, to the inability to finance their activities.

All of the above methods are based on risk measurement and are flexible enough. They can also be used for the insurance sector of the financial market, since insurers also contribute to the emergence of systemic liquidity risks. All three methods take risks into account in different periods of time and in different financial institutions and, along with macroprudential instruments, must solve the following regulatory tasks:

1) to measure the contribution of this financial institution to systemic liquidity risks;

2) use the calculated value to indirectly determine the price of liquidity support that the financial institution will receive from the central bank as the lender of last resort.

Conclusions

1. Six coordinating directives are the main elements of the EU legislative framework for regulating insurance activities.

The first-generation directives provided for:

• Definition of a single conceptual apparatus;

• differentiation of life insurance and insurance other than life insurance, and the introduction of a unified classification of types of insurance;

• a unified procedure for the establishment and licensing of an insurance organization.

The adoption of the first-generation directives laid the foundation for the creation of a single insurance market in Europe.

2. The second-generation directives provided for:

• Introduction of the concept of a Member State of the EU where the risk is located, the definition of the law used in contracts;

• the introduction of the single license rule;

• freedom of cross-border activities of insurance companies without establishing a branch or representation on the territory of EU member states.

3. In the Directives of the third generation the following achievements were fixed:

• introduction of a single license for insurance activities;

• Significant simplification of the procedure for obtaining a license and opening offices and representative offices on the territory of EU member states

• removal of control of supervisory authorities in the field of pricing and development of insurance products;

• Definition of uniform rules for assessing and controlling the financial stability of insurance companies, rules for placing insurance reserves;

• Defining the functions of supervisory authorities, delineation of powers between the supervisory authorities of EU member states, fixing the law applicable to participants in the insurance market.

4. The ratification of the Third Generation Directives radically changed the situation with entry barriers to the market: the licensing required before was abolished in accordance with the "single license" rule. Harmonization of insurance legislation has become a factor in increasing the concentration of insurance markets. European insurance companies have revised their strategy towards mandatory presence in all countries of the community.

5. In 2010-2012. and in 2013 the world financial markets remained a high level of instability associated with economic and political risks, which was reflected in the insurance market both in the life insurance segment and in insurance other than life insurance.

6. The dominant markets in Europe are the markets of six countries (the United Kingdom, Germany, France, Italy, Spain and the Netherlands), which for the period 2002-2011. account for 86-87% of the all-European market.

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