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CEIOPS published its report on the main findings and possible conclusions for Levels 2 and 3 from its lessons to be learned project and calls for consistency in the regulatory treatment. The crisis has highlighted needs for a further refinement of the existing Solvency II calibrations, both at module and sub-module levels, CEIOPS states.
“We may want to strengthen the dependency structures underlying the standard formula”, the Committee proposes. Also, developments in various asset classes have provided fresh insights on the amount of volatility the system will have to absorb and the resulting calibration of the market risk module. Finally, experience has taught that in real crisis situations, only high-quality capital elements can truly be a first line of defense in the sense of absorbing losses without taking the insurer into full bankruptcy.
“We need to rethink the scope of regulation and supervision focusing more on consolidated entities rather than on solo entities only”, the Committee continues. Better functioning of supervision at the level of the group, and better co-operation among supervisors is urgently needed. When taxpayers’ money is at risk, successful cross-border rescue operations by national authorities need to be built upon a joint assessment of the risk situation as carried out by an existing supervisory college.
“We should take a similarly holistic approach to insurers' exposures to special purpose vehicles such as off-balance value-in-force securitizations, in order to provide supervisors with a consolidated perspective on the risk to which policyholders may become exposed”, CEIOPS says. “Where insurers apply complex holding structures possibly involving non-regulated entities, supervisory powers should include monitoring, data collection, and intervention at the holding level also. Mirroring the CRD amendment with respect to own retentions of banking risk securitizations, we may also want to contemplate a minimum risk retention requirement for insurance companies that originate insurance risk securitizations.
“The idea of consistency in the regulatory treatment should be extended to the treatment of Credit Default Swaps, as it would have a positive impact in avoiding regulatory arbitrage between Banking and Insurance”, CEIOPS states. The principle of substance over form should apply to CDS as compared to alternative mechanisms such as credit insurance, and a similar regulatory treatment, in particular regarding capital charges, should be introduced.