ABI

Comments Template on CEIOPS-CP 68
Consultation Paper on the Draft L2 Advice on Treatment of ring fenced funds / Deadline
11.12.2009
12.00 CET
Name of Company: / Association of British Insurers
Disclosure of comments: / CEIOPS will make all comments available on its website, except where respondents specifically request that their comments remain confidential.
Please indicate if your comments should be treated as confidential: / Confidential/Public
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The numbering of the paragraphs refers to Consultation Paper No. 68 (CEIOPS-CP-68/09).
Reference / Comment
General Comment / For the UK market RFF should only apply to With Profit Funds. None of the CEIOPS definitions by themselves is appropriate as they have the potential to include other business which should be excluded. Alternative B may also fail to recognise the 90/10 with profit funds.
RFF coveravery different reality across Europe, and are proving very difficult to identify using only principles. Although we recognise that level I and II should aim at consistency of principles the ultimate goal should be the consistency in the outcome. We would therefore support approach A limited to Life insurance with the possibility for local regulatorsto specify which arrangement should be treated as RFF.
General insurance profit sharing arrangements and unit linked should specifically be excluded, at least in the UK.
The fund owner value within RFF should be recognised. As it stands the proposal is unclear and we strongly believe that shareholder’s value embedded within the RFF must be recognised.
Internal and partial models should have the freedom to adopt a more sophisticated approach such as future projection of SCR.
There is not specific mention of how RFF should be treated at group level. We would like a confirmation from CEIOPS that there will be consistency of treatment at entity and group level and when there are several RFF.
The proposed adjustment to the SCR makes perfect sense but may add undue complexity to the calculation of the SCR where the impact may be immaterial for non-life companies with very small levels of Ring Fenced Funds. We suggest a simplification in cases where the impact is not material e.g. assess the surplus/deficit in Ring Fenced Funds separately and adjust the SCR directly, rather than the more complex method proposed, subject to materiality considerations.
1.1.
1.2.
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1.4.
2.1.
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2.3.
3.1.
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3.13.
3.14. / We general agree with the principle based approach however in light of the difficultly to come up with a satisfactory definition of RFFat European level we are proposing an alternative.
We would recommend keepinga broad definition at this stage along the lines of proposition A but restricted to life insurance and supplemented with level 3 procedures.
This would give power to local regulators to establish a list of arrangements that should be considered as RFF in each country, thus delivering the necessary legal certainty.
3.15.
3.16.
3.17. / We consider that CEIOPS definition is unclear, too wide and goes beyond initial scope objective making it unpractical.
3.18. / In our view this definition might capture some unintended product such as unit linked in particular.
3.19.
3.20.
3.21.
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3.34. / In our view this definition might capture some unintended product such as finites in particular and would also exclude some 90/10 type of with Profit Funds that we believe should be included.
3.35.
3.36.
3.37. / The fund’s owner value within RFF should be recognised. As it stands the proposal is unclear whether the shareholder value embedded within the RFF is fungible.
3.38.
3.39.
3.40.
3.41.
3.42. / Currently any arrangement defined as a RFF per the definition of the CP would become protected in case of default.
In our view the legal protection in case of default is not defining criteriato be considered a RFF in the UK.
3.43.
3.44.
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3.65.
3.66. / We agree with the importance of highlighting diversification across funds in case of deficit.
3.67.
3.68. / In our view none of the proposal is appropriate by themselves:
  • Proposal A could apply to any profit sharing arrangement
  • Proposal B could capture unit linked funds and fail to recognise 90/10 WPF
Taking a pragmatic approach, we are proposing to keep a broad definition at level II such as proposition A supplemented by a list of the products that should be considered as RFF to be established by local regulators.
3.69.
3.70.
3.71.
3.72.
3.73.
3.74. / The advice is unclear on the recognition of the shareholders’/fund owner embedded value within a RFF. The following arguments need to be considered in light of the proposal set out in the advice;
We welcome CEIOPS recognition that where a legal arrangement exists between policyholders and shareholders’/fund owner however, this contradicts with the advice in bullet 1 where CEIOPS fails to recognise any shareholders’/fund owner embedded value in the RFF.
It is our interpretation that CEIOPS recognises the existence of shareholders’ embedded value, which is consistent with the economic based approach that underpins Solvency II. We support this interpretation and strongly recommend CEIOPS to clarify this in their final advice to indicate that recognition of shareholders’ embedded value is allowed. We consider that the shareholders’ embedded value can be reliably calculated using the valuation approaches in Solvency II.
2nd bullet. We agree with the principle being considered here by CEIOPS where SCR diversification between RFF and other funds is allowed when the RFF is in deficit.
Annex A
A.1.1.
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A.1.3.
A.1.4.
A.1.5.
A.1.6.
A.1.7.
A.1.8.
A.1.9.
A.2.1.
A.2.2.
A.2.3.
A.2.4.

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