Comments on Consultation paper 25 (CEIOPS-CP-02/08) CEIOPS Draft Advice on aspects of the Framework Directive Proposal related to insurance groups

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1 Comments on Consultation paper 25 (CEIOPS-CP-02/08) CEIOPS Draft Advice on aspects of the Framework Directive Proposal related to insurance groups Name company: Chief Risk Officer Forum Reference Comment (references to articles in the recast version presented in February 2008) General comments We have the following key points: 1. We do not support CEIOPS intentions to interpret Article 237 (3) (a) and (b) in a manner such that own funds in excess of the group SCR would be required as a precondition for group support. (Comments to paragraph 67, and related paragraphs 9 13, 14, 16 18, and 53.) 2. We do not agree with what we understand is CEIOPS proposal that the derogation of Article 136 provided for in Article 238 should be removed, so that the current status quo is maintained for the solo supervisor in enforcing the SCR of the subsidiary. We believe that group support changes the process of enforcement rather the overall responsibilities of the solo supervisor. (Comments to paragraphs ) 3. We support CEIOPS move to engage with the issue of recognition of the group support regime by third countries and diversification benefits. We encourage CEIOPS to consider the group support regime pertaining to both third-country parents as well as third-country subsidiaries. We do not agree with CEIOPS proposals to subordinate non-eu policyholders to EU policyholders. (Comments to paragraph 14.) 4. We wish to emphasise that a practical outcome of group support in a crisis situation where a solo MCR is breached is an eventual transfer of value that counts as own funds at solo level to meet the solo MCR. We encourage CEIOPS to differentiate CRO Forum /21 Response to CEIOPS Consultation Paper 25

2 the concepts of liquidity, fungibility and transferability and their applicability to the group support regime In particular, liquidity management is an important business activity for both subsidiaries and parents, rather than a particular focus or condition for the group support regime. Participations should not be ruled out as a source of value that can be accessed for group support. (Comments to paragraphs and 53.) 5. We believe that issues arising with the legal declaration of group support and the integration of risk management in the parent and the subsidiary should be addressed through a combination of implementing measures and supervisory convergence. We also believe that the level 2 measures should confirm that instruments using first demand guarantees meet the requirements in the draft directive while clearly allowing the possibility of other legal forms of group support that meet the requirements in the draft directive (Comments to paragraphs 22-23, 25, 29, 37, 56, , ) 6 The text refers to transfers of own funds to a subsidiary. As noted in Annex 1 paragraph 1, 'transfer of own funds' does not exist per se, and we understand it as a shortcut to mean an increase in eligible own funds in a subsidiary. In other words, it describes an intra-group transfer of assets (or liabilities) that will give rise to eligible own funds in the subsidiary that calls on the group support. The fulfilment of a group support obligation does not require the removal of or deduction of own funds from the parent. A transfer of capital arising from group support is limited to the amount of group support committed which cannot exceed the difference between SCR and MCR, as set out in the directive. Thus, we do not agree with some of CEIOPS reading of the draft directive about the commitment involved: o Case a) in paragraph 6: the MCR is no longer covered; we read the draft directive (article 238 (3)) as requiring a transfer of own funds aimed at restoring compliance with the MCR that is not in excess of the group support committed rather than the amount necessary to cover the MCR ; CRO Forum /21 Response to CEIOPS Consultation Paper 25

3 o Case b) in paragraph 6: if there is non-compliance with the solo SCR and a new declaration is either not provided or not accepted and then group support ceases to apply; we read the draft directive (article 238 (4)) as requiring a capital transfer aimed at restoring compliance with SCR, up to the level of the commitment made in the most recent declaration provided rather than the amount necessary to cover the SCR ; o Cases c) in paragraph 6: group support ceases to apply to all subsidiaries; we read the draft directive (article 243 (3)) as requiring a capital transfer aimed at restoring compliance with SCR, up to the level of the commitment made in the most recent declaration provided; and we agree with CEIOPS that in this case the provisions in article 244 for the reduction of group support may be relevant. o Case d) in paragraph 6: group support ceases to apply to one subsidiary; we agree that the amount of group support provided is set out in article 242 (2). We do not understand the comment about the missing derogation for compliance with the MCR (article 137). We have understood that the intention is to strike the appropriate balance between solo and group supervisor and that derogations were only put in place where needed to ensure a degree of capital mobility. We believe that article 137 has not been derogated because at that point the group support would have ceased to operate and responsibility would have already switched to the solo supervisor. For example, we understand that derogations provided by group support would cease to apply to all subsidiaries when the conditions in article 237 (3) cease to be complied with or the group does not have own funds in excess of the sum of the solo MCRs (article 243 (1) (a) and (b)). CRO Forum recommendation: clarify the advice. s 9 to 13 The CRO Forum understands that the draft framework directive requires the calculation of a group SCR and that this calculation is not dependent on the use or not of the group support option. We share the Commission s interpretation that the consolidation-based method, the default approach to the determination of CRO Forum /21 Response to CEIOPS Consultation Paper 25

4 group SCR (article 228), allows the quantification of diversification effects across the whole group. 1 There is no qualification regarding EEA or non-eea parts of a group in article 228. Under the alternative deduction and aggregation method (article 231), the group may rely on article 225, which allows the use of equivalent third country assessments as inputs but does not require it (second sub-paragraph in article 225 (1) uses may ). The reference to sum of in article 231 (3) does not allow diversification effects at group level to enter the computation of Group SCR. Further, we also infer from article 237 (3) that a pre-condition for applying for group support is the calculation of the group SCR using the consolidated approach (reference to consolidated group Solvency Capital Requirement ). The CRO Forum also understands that the solo SCRs would not be reduced as a result of the calculation of a group SCR to take into account group diversification benefits. Equally, if there is a decision to approve group support, the solo SCR is unaffected and its calculation remains something monitored by the solo supervisor (notwithstanding the change from imposing a capital add-on to proposing it to the group supervisors). CRO Forum recommendation: modify the analysis accordingly to ensure its alignment with the draft directive. 14 EU-based groups could have policyholders in third countries through branches or subsidiaries. We appreciate that there is a tension between assessing the overall position of a group and the legal responsibilities for supervision of third country operations as set out in article 212(1) of the framework directive. We understand CEIOPS concern that policyholders in EU undertakings should not be disadvantaged compared to those in non-eu undertakings. However paragraph 14 could be read to require subordination of the non-eu to the EU. We think that discrimination equally undesirable as an objective and contrary to the way groups are properly run. It certainly would not be helpful when looking beyond Solvency II to wider convergence with non EU approaches and through IAIS discussions, which we support. 1 Letter from DG of internal market to CEIOPS chairman dated 23 Jan on QIS3: CRO Forum /21 Response to CEIOPS Consultation Paper 25

5 Where there are concerns that capital standards and/or other constraints would mean that funds held in non EEA entities would not be available to meet the needs of an EEA undertaking under the group support regime we would expect this to be investigated under the requirement to demonstrate that support can be made available when needed. We are also concerned with the references in the first sentence of the advice to all circumstances. We appreciate the point that CEIOPS is trying to make about a high level of consumer protection but the statement is not entirely consistent with a risk based regime providing protection that allows for a 0.5% probability of default over a one year horizon. The second sentence suggests a possible link between group diversification benefit and the recognition of group support by third countries. We do not agree with that. The calculation of the group SCR under the consolidated approach should not be affected by third-countries recognition of EU group support or by the decision to allow group support. CRO Forum looks forward to work with CEIOPS to ensure that group support works with third countries. CRO Forum recommendation: it is not clear to us what is the purpose of this advice ( grey text ) so we suggest deleting it. 15 We wish to clarify two aspects about our understanding of group support: o third bullet: the commitment is for each subsidiary (rather than subsidiaries) and it may be for any amount up to the full amount of the difference between the SCR and the MCR (rather than the full difference necessarily); o fifth bullet: transfers of own funds will occur only in the specific circumstances specified in the directive and would also be limited by the extent of group support committed as set out in the comment to paragraph 6. CRO Forum recommendation: amend accordingly. 16 and 18 CEIOPS interprets the requirement in article 237(3) (a) that the group SCR is covered by own funds at group level as requiring demonstration both at the time of authorisation and beyond. This does not appear to be consistent with the use of 'has' in article 237 (3) (a) which implies a test of the sufficiency of funds at a single point in time. However the CRO Forum CRO Forum /21 Response to CEIOPS Consultation Paper 25

6 accepts that there would be obligations at the group level concerning Own Risk and Solvency Assessment (ORSA), which include the consideration of short and long term risks in the context of the own risk assessment (article 44 (1) (a) and 44 (2)). This is very different from a legal requirement to meet all possible future SCRs with current own funds. As set out in our comments to CEIOPS CP17: we are very concerned about how to ensure that the use of the multi-year analysis does not lead to capital add-ons that reflect the maximum of the one year VaR and the multi-year approach. In our view the forward looking assessment in ORSA would be met by normal capital planning at group level. Future capital raising must be recognised as a valid element of such planning. The supervisory assessment at group level should be consistent with the requirements placed on stand alone undertakings. CRO Forum recommendation: clarify in the advice that this is not intended to be a requirement in addition to those in the framework directive and that it is about building on Pillar 2 assessment in an appropriate manner to meet the requirement in the directive. 16 and 18 The meaning of requiring the adequacy of the distribution of the own funds within the group as a pre-condition for approving group support is not clear to us. Simply put, in our view, it is the application of group support that would enable insurance groups to improve the distribution of own funds within the group. In our view under the group support regime, holding own funds at solo level to meet the MCRs and meeting the group SCR together with the demonstration that support commitments can be met and the application of the prudent person approach is the evidence of an adequate distribution of own funds. We believe this is fully consistent with Recital 70. CRO Forum recommendation: we ask CEIOPS to clarify its view. The advice could be clarified along the following lines adequacy of the distribution of the distribution of the own funds within the group to meet calls for transferring eligible own funds to meet the commitments arising from group support. CRO Forum /21 Response to CEIOPS Consultation Paper 25

7 22 It is important that CEIOPS advice provides clarity about the issues that should be covered by the declaration of group support the parties to it, whose interests need to be taken into account and how regardless of its legal form. The choice of a precise legal form should not be prescribed in the level 2 measures but it is also important that the level 2 measures provide some certainty to supervisors and groups about what would be an acceptable legal form of group support because of the innovative nature of group support. As noted in the CRO Forum paper on group support first demand guarantees appear to be an approach to deliver group support. We therefore suggest that the level 2 measures confirm that instruments using first demand guarantees meet the requirements in the draft directive while clearly allowing the possibility of other legal forms of group support that meet the requirements in the draft directive. CRO Forum recommendation: modify the advice accordingly. 23 We do not support the treatment of the instrument of group support as a credit from the supporting to the supported undertaking. This may be inconsistent with current approaches to capital management in groups and in particular with the approaches of allocating capital charges to the subsidiaries. We believe that treating the declaration itself as a credit (and therefore as a liability) seems to contradict the system of group support, according to which only the performance under the declaration in the circumstances set out in the instrument consists of a transfer of own funds. Furthermore, the notion of a credit seems to assume that there will be a transfer of capital in excess of the MCR as a result of group support. As noted in the CRO Forum s paper on group support: it does not necessarily follow that a group will choose to re-deploy surplus capital. This is a separate consideration that would take into account wider market conditions and commercial strategy. If it results in a re-deployment of capital it is more than likely to involve holding a buffer. CRO Forum recommendation: delete references to credit approach in the advice to the Commission (grey text). We agree with the logic that group support should be enforceable by the subsidiary, to require the parent to provide own CRO Forum /21 Response to CEIOPS Consultation Paper 25

8 25 funds in the circumstances set out in the directive. As there are clearly defined triggers non-compliance with the MCR - then we do not really see why the supervisors also need to be able to enforce the guarantee directly as recommended in the last sentence. Their powers should be against the parent to meet its commitments arising from group support and against the subsidiary to force it to enforce what it is legally and contractually entitled to. We believe that the former is already provided for in the draft directive (article 240 (1)) and that the latter is part of the general supervisory powers over the solo entity which are unaffected. Finally, we also note that the directive also allows the solo supervisor to call on the parent undertaking to fulfil its commitment. CRO Forum recommendation: modify the advice. 29 It would be useful to recognise in the advice that it would not be appropriate to resolve all legal issues arising from writing an instrument of group support through legislative means (level 2 measures). Many of the issues should be addressed through supervisory convergence and it is therefore important that level 2 measures create the appropriate checks and balances. The first and second bullets refer to a specific form of group support that the CRO Forum identified as an example in its paper on group support first demand guarantees. The advice should clarify that this is one possibility to meet the criteria in the draft directive and that there may be others but see our comments to paragraph 22. The fifth bullet an explicit requirement to update the declaration of group support to adapt to future circumstances could be a step towards an unlimited guarantee. This is not the intention and should be amended accordingly. The last bullet introduces a requirement that policyholders rights are guaranteed. We are concerned about this as it could suggest an open ended guarantee and certainly one that could be in excess of the amount of the group support committed (up to the full difference between the SCR and the MCR), which is inconsistent with the approach in the framework directive. We therefore disagree with such requirement. We now understand that this may reflect CEIOPS concern that if the commitment for group support has not been fulfilled before a parent becomes insolvent the commitment would remain a CRO Forum /21 Response to CEIOPS Consultation Paper 25

9 contingent asset and we would encourage CEIOPS to flesh out their concerns. CRO Forum recommendation: split this advice into two paragraphs; the first paragraph should clarify the general requirements that any form of group support should fulfil while recognizing the limits to prescription in level 2 measures and the comments above; the second paragraph should set out CEIOPS view that first demand guarantees are a possible way of providing a declaration of group support. Please note that we are not commenting on the relevant legal requirements for group support under the credit approach set out in this paragraph given our recommendation to paragraph and 36 We note that the concept of a group support declaration between subsidiaries is not consistent with the draft directive, according to which the parent provides the commitment (article 234 (c)). CRO Forum recommendation: amend the advice accordingly. 37 The directive outlines a process for selecting the group supervisor which would then lead the assessment of the instrument for group support if this option is exercised (article 235). We have understood that the reference to the law of the parent is intended to ensure that the group supervisor can meaningfully assess the instrument of group support. We believe that this is a valid principle that should be elaborated in level 2 measures. CRO Forum recommendation: CEIOPS advice should be modified to say that the law of the parent should be interpreted as the law of the group supervisor. s 47, 49, 50 and 53. These paragraphs refer to liquidity (paragraph 47), fungibility (paragraphs 49 and 50) and transferability (paragraph 53). We have the impression that these terms are being used almost as substitutes and we have some concerns about that. The concepts are certainly different so we start by setting out some definitions: o liquidity: the ability of an asset to be converted into cash; CRO Forum /21 Response to CEIOPS Consultation Paper 25

10 o transferability: refers to the ability to move assets (or liabilities) from one ownership to another, this is often implicitly or explicitly within a given time frame; and o fungibility: when two or more things are inter-changeable or can be substituted for each other to achieve the same purpose; some would say assets held by different entities may be fungible after transfer but will not be prior to transfer others refer to assets held by different entities as being fungible if it is possible to effect a transfer into the same entity and then have assets that achieve the same purpose. o some examples: o cash in the same entity is fungible o cash in different entities is fungible within the timescales necessary to transfer it. If cash in different entities cannot be transferred within the necessary timescales then it is not fungible. o a title to property can be transferred to another entity. In this case, the property would be fungible with (say) cash or other assets for the purposes of counting as own funds. o It is essential that we look through to understand the requirements to be met rather than rely on terms that may be misinterpreted. The relevant requirement in the Solvency II directive is about the absence of impediments to the prompt transfer (article 237 (3) (b)) rather than about liquidity. The principle of transferability is set out in article 220 (3), i.e. not in the subsection dealing with group support. It is therefore part of the normal group solvency assessment that should take place in all cases of group supervision rather than part of a discussion about the approval of group support. We wish to note that transferability is the result of economic ownership and control. Where these criteria are met the group will be able to access those amounts within an appropriate timescale. Once transferability in a general sense is established, it is important to consider whether these resources can be accessed in a CRO Forum /21 Response to CEIOPS Consultation Paper 25

11 timely manner as required in the directive. The group should perform regular scenario analyses to determine whether any capital shortfalls arise in individual subsidiaries or whether the group support obligations be called (non-compliance with the MCR), and if so how those shortfalls could be met in a timely manner. This analysis should consider the location of capital (see comment to paragraph 51); the capital positions in adverse scenarios and whether capital transfers would be required; and whether there are funds to meet the commitments arising from group support ( prompt transfer ). We also wish to emphasise that the practical outcome is transferring value that counts as own funds to meet the MCR and that value can be provided in various ways. A transfer from the group s liquid resources is perhaps the easiest one to envisage but there will be many others and it is essential for the success of group support that these are not ruled out as we have noted below in our comment to paragraph 48. It is therefore important to emphasise that unlike banks, insurers risks do not tend to crystallise in a matter of hours or days but rather over months or years so it is not necessary or appropriate to restrict capital to what is immediately liquid. Indeed there is no such restriction about liquid capital at solo level. As noted in the CRO Forum paper on group support, the draft directive allows the imposition of other terms and conditions as a condition for group support (article 235(1)). It is not entirely clear at this stage what these conditions might be and under what circumstance they might be imposed. In the CRO Forum paper, we suggested that these conditions could be used to clarify how the solo and group supervisor would interact in deteriorating financial conditions which may be relevant in this respect. For the avoidance of doubt, we wish to clarify that we fully accept the general approach for liquidity management as set out in the draft directive. It is one of the risks that are not fully covered in the SCR which are then covered by the application of risk management systems, article 43 (2) (d). CRO Forum recommendation: Clarify in the advice to the Commission that liquidity is a relevant issue for Solvency II in general and that there is no additional need in connection with group support (see comment to paragraph 47). It would also be useful if the advice clarified that transferability would have been established as part of the group solvency assessment and that the level CRO Forum /21 Response to CEIOPS Consultation Paper 25

12 2 measures for group support should focus on timeliness of the transfer. 47 This is assuming that groups will transfer out of the subsidiary all assets that can be transferred as a result of group support. As noted in our paper on group support, it does not necessarily follow that a group will choose to redeploy capital. We do not believe that the reference to a liquidity policy is appropriate here. This would be relevant anyway as a matter of good business practice. In addition, as noted earlier liquidity is one of the risks that are not fully covered in the SCR which are then covered by the application of risk management systems (article 43 (2) (d)) which together with the Prudent Person approach would provide sufficient supervisory control CRO Recommendation: amend the advice. 48 We note that Annex 1 describes methods of transferring own funds without differentiating between a downstream and an upstream transfer. In the context of the CP 25, we believe that it is the down-streaming of own funds from the parent to the subsidiary in need that should be of primary concern. The transfer of own-funds from a subsidiary to the parent to meet the commitments arising from group support allowed in article 240 (2) may or may not happen but should not be ruled out as a matter of principle. We would expect the process of approval of group support to show that the parent expects to rely on own funds in another subsidiary to meet the commitments arising from group support and, in that case, to demonstrate that, for example, there are no impediments arising from the subsidiary s corporate law that would invalidate that would run counter to the requirement about absence of material practical or legal impediment to the prompt transfer of eligible own funds (article 237 (3) (b)). We believe that this an issue that should be considered as part of the process for approval of group support and that should not result in artificial limits to the provision of group support in level 2. We agree that as set out in Option B one way to transfer own funds is a capital increase, either in cash or in kind. We would like to emphasise the importance of the latter and that there are many possibilities as hinted in our comments on liquidity, fungibility and transferability. Examples would include injecting hybrid capital into the subsidiary (which is very flexible and CRO Forum /21 Response to CEIOPS Consultation Paper 25

13 can be arranged at short notice) and asset transfers. In these cases, it may be reasonable to set out some of the principles for a transfer of value in the instrument for group support as well as the process for reviewing and updating it. CRO Forum recommendation: we believe that CEIOPS advice should clarify that there is no unique approach to transfer own funds and that level 2 measures should allow the choice of the most appropriate approach as part of the approval of group support; CEIOPS advice should also recommend that the process of approval group support should take regard to determining the location of the funds that would be used to meet the commitments arising from group support as well as any constraints arising from its location, consistent with the requirement in the draft directive about prompt transfer of own funds. 49, 52 54, 67, (and paragraph 2 in Annex 1) It would be more appropriate to refer in these paragraphs to assets and liabilities rather than own funds as discussed in our comment to paragraph 6 (first bullet). We refer to the comments about the value of participations in other insurers. We welcome CEIOPS recognition that at solo level participations in another insurer provide value that can be used to meet the solo SCR. At group level, we believe that these participations provide value that should be appropriately recognised so we disagree with the suggested possible solution that values at zero participations (paragraph 2 of Annex 1). For the purposes of group support, we agree that it is important to identify the location of assets that may be needed to meet the commitments arising from group support. We would expect the process of approval of group support to show that the parent expects to rely on the value arising from participations in other subsidiaries to meet the commitments arising from group support and, in that case, to demonstrate that, for example, there are no impediments arising from the subsidiary s corporate law that would run counter to the requirement about absence of material practical or legal impediment to the prompt transfer of eligible own funds (article 237 (3) (b)). We believe that this an issue that should be considered as part of the process for approval of group support and that should not result in artificial limits to the provision of group support in CRO Forum /21 Response to CEIOPS Consultation Paper 25

14 level 2. CRO Forum recommendation: CEIOPS advice should also recommend that the process of approval group support should take regard to determining the location of the funds that would be used to meet the commitments arising from group support as well as any constraints arising from its location, consistent with the requirement in the draft directive about prompt transfer of own funds. 52 We believe that CEIOPS is aiming to define transferable own funds in the first three main bullets of this paragraph. We have already referred to the issue of own funds and assets and the consistency with Annex 1 and we wish to add the following: o This is not a concept that we have seen in the directive where each instrument of group support is assessed individually. We are concerned that this might lead to an inappropriate link between extent of group support and group diversification benefits. o We would suggest a definition of capacity to provide group support in terms of financial resources available in order to effect a transfer of assets or liabilities that gives rise to eligible own funds in the subsidiary, net of frictional costs. CRO Forum recommendation: clarify the advice. 53 We have commented on this paragraph as part of our general comments about liquidity, fungibility and transferability above. However, we wish to point out that the advice in this paragraph could be read as suggesting that capital in excess of the group SCR is required whereas the directive is simply requiring that group support is approved if there are no restrictions to the prompt transfer of own funds. If there are transferability restrictions impeding a prompt transfer of own funds the group support should not be approved. We also note that independent legal opinions may go a long way to demonstrate compliance with articles 237 (3) (b) and (c). CRO Forum /21 Response to CEIOPS Consultation Paper 25

15 CRO Forum recommendation: clarify the advice On enforceability of group support by supervisors, see comment to paragraph 25. This paragraph ends up suggesting that parts of the winding up directive now part of the white text in the recast draft Solvency II directive are amended to give preferential treatment to the claims arising from group support commitments made to subsidiaries. This is entirely a decision for the European Commission and we have no comment to offer on this subject other than noting that we appreciate that this is a complex issue, but however we would not support any changes that delay the approval of the Solvency II draft directive. Having said that, we wish to point out that we fully agree with the aim of equal treatment of policyholder (see for example our comment to paragraph 14) and that we have also doubts about CEIOPS proposals: o Suppose that both the member state of the parent and the subsidiary have implemented the relevant provisions in the winding up directive by giving absolute precedence over any claims to assets covering technical provisions (now option (a) in article 277 (1)). o Under group support, the subsidiary has received a contingent asset instead of paid-up own funds to cover (say) the full difference between the SCR and the MCR. The provision of group support in itself does not affect in any way the assets covering the technical provisions, which are earmarked for covering claims under insolvency. o Suppose that the parent is also an insurer. There are now claims against the assets covering the parent s technical provisions from the parents policyholders and from the subsidiary, in respect of the difference between the SCR and the MCR. o This would represent an unequal treatment of policyholders where the subsidiary s policyholders get a preferential treatment to the parent s policyholders. CRO Forum /21 Response to CEIOPS Consultation Paper 25

16 CRO Forum recommendation: this issue should be considered outside Solvency II. 67 We have read this paragraph as suggesting that the there should be a legal requirement that groups hold own funds in excess of the group SCR, which would contradict article 237 (3) (a). Needless to say we do not support such additional requirement. However, we now understand that CEIOPS original intention was to focus on a very specific case where there are no group diversification benefits and no capital in excess of the group SCR. Leaving aside the low likelihood of this event, we believe that the advice should clarify this point to ensure that it is not read as a general comment. More generally, our views on group SCR are set out above, under our comments to paragraph 9 to 13 of this CP. CRO Forum recommendation: amend the advice as suggested above to ensure its alignment with the draft directive. 72 We believe that this paragraph is referring to Insurance Holding Companies (IHC) covered in article 233 rather than mixed activity holding companies supervised under articles 267 and 268. We believe that supervision of IHC taken individually is unnecessary because they do not provide financial services. However, we appreciate that aspects of supervision are necessary to ensure the effective supervision of a group headed by an IHC, which the draft directive already contemplates (articles 247, 250, 261 and 262). We share CEIOPS observation that the application of Pillar 2 assessment to IHC is not entirely clear we note that article 250 (1) refers to all the articles concerning risk management and governance but without referring explicitly to IHC whereas article 250 (4) refers to the application of ORSA at group level where an IHC is involved as well. However, we believe that the power of declaring the senior management of a group as not being fit and proper individuals is a very strong supervisory tool. We encourage CEIOPS to rely on this requirement to supervise IHC and require risk-based information. The CRO Forum has nevertheless identified a possible gap in the supervisory tool kit available in connection with IHC and has suggested an adaptation of the prudent person approach to the ultimate IHC (see suggestion 3 in the CRO Forum paper on group support). CRO Forum /21 Response to CEIOPS Consultation Paper 25

17 CRO Forum recommendation: advice the Commission on ways that level 2 measures could build on the existing requirements in the draft directive including fit and proper requirements for senior management. s 82 to 84 This paragraph appears to refer to CEIOPS intention to maintain the status quo, presumably under Solvency I. Given the extent of the change that the draft directive represents for the industry and supervisors alike we find this somewhat unclear. We are also concerned because this could appear to challenge the draft directive. As risk practitioners, we can see two possible issues here: o the derogation of article 136 is read as removing all enforcement powers for non-compliance with the SCR for subsidiaries covered by group support (the status quo is not maintained); o the derogation of article 136 is read as removing the power to use the specific enforcement tools in that article (the status quo is maintained). As set out in the CRO Forum paper on group support (third bullet in page 6), we believe that Solvency II aims to maintain the status quo in connection with enforcement of the SCR by solo supervisor: the EC has helpfully clarified that one should not infer any additional changes in addition to the explicit derogations in the draft directive text; We read the derogation about enforcement of the SCR in article 238 (1) in the narrow sense of derogating the application of a particular tool so that the solo SCR is not a trigger for recapitalising the business with own funds. As noted in the executive summary of our paper on group support: The proposals in the draft directive in no way entail the end of solo supervision. For example, authorisation, monitoring of technical provisions, MCR, solo SCR and Pillar 2 review will continue to apply at a solo level and the solo supervisor would still be empowered (and indeed expected) to ask that remedial action is taken where appropriate. We appreciate that the directive requires the solo supervisor to address the formal requests to amend the group support to CRO Forum /21 Response to CEIOPS Consultation Paper 25

18 the parent undertaking (article 238 (2) and also 238 (3) for transferring own funds) with whom the solo supervisor has no formal relationship. Given that the instrument providing group support involves in practice the parent and the subsidiary and that the college of supervisors would be involved, we do not see any legal or policy issues from requiring the solo supervisor to address the formal request to the entity that it has authorised. CRO Forum recommendation: Our reading of the draft directive is that it appears to maintain the status quo under Solvency I that CEIOPS would appear to have in mind. It would be useful to clarify in CEIOPS advice that the concern here is based on a specific reading of the directive. CEIOPS might wish to express a view in its advice to the Commission about the reading of the directive that the CRO Forum has suggested. 85 to 108 We welcome CEIOPS initial thinking on this issue and we recognise that progress in this area is dependent on the development of risk management requirements for solo entities, which in turn apply at group level. The CRO Forum believes that it is important to recognise explicitly in the advice on level 2 measures that integration should not mean that the parent s senior management should be running the subsidiary. The appropriate degree of integration will provide the parent with systems and controls to monitor group aggregated exposures and with the ability to require actions to be taken when groups aggregate limits are threatened. It would also be useful to recognise in the advice that it would not be appropriate to resolve all issues arising from the integration of risk management through legislative means (level 2 measures). Many of the issues wculd be addressed through supervisory convergence and it is therefore important that this is explicitly recognised in CEIOPS advice. CRO Forum recommendation: qualify the advice to set out the limits to integration. 103 to 107 We believe that risk management is good business practice and we welcome the recognition that the draft directive provides with its emphasis on risk management and internal controls. Equally, we understand the thinking behind the requirement in CRO Forum /21 Response to CEIOPS Consultation Paper 25

19 the directive about integrated risk management in the parent and subsidiaries covered by group support. However, we read these paragraphs as suggesting that each solo supervisor within a group may apply different criteria to risk management and governance. This would pose a challenge to integrate these processes within the group, which can be avoided by clarifying that there should not be different criteria to assess risk management and governance across a group, as set out in article 234 (b), and that such assessment should be undertaken by the College of Supervisors. The level 2 measures should be drafted so that there are one criteria and one assessment of integration of risk management and governance. CRO Forum recommendation: CEIOPS should advice the Commission to take steps to prevent this. 75 and 107 (penultimate bullet) We accept that a discussion about re-financing options in a crisis situation might be appropriate if the stress tests show that there will be a shortfall in such situation. However, there are references in these paragraphs to requiring external guarantees. We understand that this was debated before the publication of the Solvency II draft directive. At that time, the CRO Forum view was that it would be inappropriate an impractical to require external guarantees as a pre-condition to back the commitment for group support. We are still of the same view and do not wish to see this re-introduced through the development of the criteria for approval of group support at level 2. CRO Forum recommendation: these references should be deleted in the advice to the Commission. 120 We would expect some of the information covered in this paragraph to be published anyway, regardless of any group support and we are keen to ensure that we avoid duplication. Fifth bullet. This calls for the allocation of diversification effects to the undertakings of the group. This is inevitably an arbitrary calculation. This is also inconsistent with the view that CEIOPS has expressed in paragraph 7 of this CP, which says that group support is different from diversification benefit. We agree. We therefore see no useful purpose in this calculation and we ask CEIOPS to explain what it seeks to achieve with such a requirement and how the information requested achieves CRO Forum /21 Response to CEIOPS Consultation Paper 25

20 that objective. CRO Forum recommendation: CEIOPS should advice the Commission to require the provision of information on the main sources of diversification benefits at group level and should also clarify that this is relevant to groups more generally regardless of group support. Sixth bullet. This refers to the total amount of capital eligible for group support. This is not a concept that we have seen in the directive. We do not understand the purpose of such calculation (the percentage of group support to the total amount of capital eligible for group support). In our view, it says nothing about the security of the subsidiary or the group. If CEIOPS believes this to be useful it should explain the use it envisages for it. CRO Forum recommendation: It would be useful if CEIOPS provided advice on the underlying concept before requiring disclosures. 121 As noted in the CRO Forum paper on group support, we welcome disclosures associated with group support as an appropriate step to give confidence to markets about a level playing field. However, all disclosures mentioned in this paragraph appear to be immediate. We question whether this is appropriate because there will be circumstances where it may be counterproductive to, for example, restoring compliance with the solo SCR. We believe that the solo treatment provides a more nuanced approach to timeliness of disclosures that should be considered here. CRO Forum recommendation: delete references to immediate in the advice and introduce an explicit reference to solo timelines for non-compliance with SCR and MCR as benchmark for appropriate disclosures under group support. Not covered We note that the directive makes provision for an assessment of the equivalence of third-countries group supervision (article CRO Forum /21 Response to CEIOPS Consultation Paper 25

21 263). It is however unclear what the consequences of equivalence are. This should be clarified in the implementing measures, including the development of criteria for the recognition of group support. Groups may held significant own funds in non-insurance legal entities and it is not clear how this would be treated under group support. We would expect this to be clarified in the implementing measures. Equally, there will be non-insurance liabilities that need to be taken into account. CRO Forum recommendation: CEIOPS should advice the Commission on this issue. CRO Forum /21 Response to CEIOPS Consultation Paper 25