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IM 14 (Extension of Recovery Period) – CEA comments and suggestions shown in track changes
General Comments
The CEA acknowledges that the recovery plan itself is outside the scope of implementing measures on the extension of the recovery period, however without considering the plan, it is difficult to visualise the decision making process on whether to apply an extension or not.
The CEA appreciates that timelines for undertakings have been introduced but we believe that timelines should also be introduced for supervisory authorities in which to deliver their decision.
It is unclear in this text whether the considerations of supervisory authorities relating to the external and entity specific factors of the undertaking will be made public. The CEA believes that information surrounding these decisions, and also disclosure of the extension period itself, would endanger the undertaking’s ability to recover. Ceiops had suggested that this information could be included under disclosure of aggregate information, the CEA does not support this and have expressed this opinion in the response to draft implementing measures on Transparency and Accountability of Supervisory Authorities (IM 8).
The CEA acknowledges that the Level 1 text in Article 138 stipulates that the extension of the recovery period shall be withdrawn if quarterly progress reports show no significant developments. The CEA recommends that these implementing measures be subject to a review clause which will periodically allow re-assessment of the term ‘exceptional fall in financial markets’. Each financial crisis has, and will continue to be, unique. The CEA strongly believes that it is important to accommodate these factors which will essentially impact on each recovery period.
Brussels, 2 March 2010
Working document EIOPC/SEG/IM14/2010
DRAFT COMMISSION DOCUMENT ON
EXTENSION OF THE RECOVERY PERIOD
Important note: This document is a working document of the Commission services for discussion.
It does not purport to represent or pre-judge the formal proposals of the Commission
Having regard to the Treaty (…),
Having regard to Directive 2009/138/EC (…), and in particular Article 143thereof,
Whereas:
(1)The maximum extension period available under Article138 (4) of Directive 2009/138/ECshould be limited to the period necessary to provide sufficient flexibility for recovery measures for a large number of undertakings to be spread out so as to avoid pro-cyclical effects. The maximum extension should therefore result in a maximum period of up to 30 months (i.e. 6+3+21 months).[s1]
(2)When deciding on the adequacy and length of an extension, supervisory authorities should take into account whether and how the insurance or reinsurance undertaking concerned is affected by the exceptional fall [s2]in financial markets and periods of high market volatility[s3], the means available to the undertaking to solve its non-compliance with the Solvency Capital Requirement and the best interests of policyholders and beneficiaries.
(3)For the purpose of the application of Article 138 (4) of Directive 2009/138/EC relevant factors to be taken into account by the supervisory authority should include both, those which are independent of the undertaking (external factors) and those which are entity specific.
TITLE
CHAPTER
Article ERP1[s4]
An exceptional fall in financial markets and periods of high market volatility will trigger the ability of the supervisory authority to grant an extended recovery period. This period shall be declared by the European Systemic Risk Board.
Article ERP21
(Art. 138 (4) of Directive 2009/138/EC)
In the event of an exceptional fall in financial markets and periods of high market volatility, the maximum extension available under Article 138(4) shall be set at 21 months.
The supervisory authority shall take no longer than 8 weeks to notify the undertaking of their decision to grant an extension to the recovery period.
Article ERP 23
(Art. 138 (4) of Directive 2009/138/EC)
For the purpose of the application of Article 138 (4) external factors to be taken into account by the supervisory authority shall include the following:
(1)the possible detrimental impacts on policyholders and beneficiaries including whether more than one undertaking is affected and if they together could negatively affect the market;
(2)the stability of the financial markets, in particular the procyclical impact of distressed sales of assets on the financial markets;
(2)(3)cumulative falls, which would not be steep if taken individually, but which would occur in a short period of time and result in exceptional falls in financial markets;
(3)(4)the availability of new own funds;
(4)(5)the availability of an active market for assets held by insurance and reinsurance undertakings and the liquidity of the market;
(5)(6)the availability of other means to reduce risk-exposure of the undertaking;
(6)(7)the availability in financial markets of adequate financial mitigation instruments;
(7)(8)the capacity of the reinsurance market to provide reinsurance cover at a reasonable price; and
(8)(9)the anticipated behaviour of policyholders.
Article ERP 34
(Art. 138 (4) of Directive 2009/138/EC)
For the purpose of the application of Article 138 (4) entity specific factors to be taken into account by the supervisory authority shall include the following:
(1)the causes of non-compliance with the Solvency Capital Requirement;
(2)the degree of non-compliance with the Solvency Capital Requirement;
(3)the composition of own funds held by the undertaking;
(4)the composition of the assets held by the undertaking;
(5)the nature and duration of technical provisions and other liabilities;
(6)the solutions for remedial action effectively available to the undertaking;
(7)if applicable, the potential availability of financial support from other group entities and the legal infrastructure to support a transfer of funds[s5];
(8)the size or significance of the undertaking relativeto the market, including the risk of materially affecting the market and the interests of policyholders and beneficiaries if the undertaking were to experience severe financial problems; and
(9)any measures taken by the undertaking to limit the outflow of capital and the deterioration of its solvency situation.
Article ERP 5
(Art. 138 (4) of Directive 2009/138/EC)
The provisions in Articles ERP1 – ERP5 shall be reviewed periodically to capture developments in markets that may contribute towards the need for a longer recovery period[s6].
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[s1]Level 3 guidance should be developed to deal with the coordination of extension periods. While it is not appropriate to compare the treatment of undertakings (underlying factors will differ), it is unclear what effects may arise from a lack of harmonisation.
[s2]The CEA believes that there should be clarification in the Level 2 implementing measures as to what constitutes an ‘exceptional fall’. The EU market as a whole is systemically affected by movements in individual markets, there should not be a divergence in interpretation of an exceptional fall or periods of high market volatility.
[s3]The CEA finds that an extension of the recovery period should also be possible in periods of high market volatility as this situation is parallel to periods of exceptional falls in the financial markets. Periods of high market volatility can also result in pro-cyclical effects.
[s4]In line with the above comment, the CEA believes that more clarity at Level 2 is required around how an ‘exceptional fall’ is determined and who is responsible for making the decision.
[s5]For example letters of credit and guarantees.
[s6]Decisions cannot be based on any experience other than the recent crisis, the proposed maximum extension period is therefore based on a limited amount of data.