A milestone on the road to making Solvency II
a reality appeared to have been reached after key amendments were
recently secured – yet KPMG’s Solvency II director Janine Hawes
says the

European Parliament’s new delay means the
implementation date of 1 January 2013 for the regulatory regime
will now be unachievable.

Solvency II is a new European regulatory
regime designed to establish a revised set of EU-wide capital
requirements and risk management standards that will replace the
current solvency requirements.

The UK insurance industry welcomed the
decision by the European Parliament’s Economic Affairs Committee
(ECON) on 21 March 2012 to pass Solvency II amendments – known as
Omnibus 2 proposals – because they allow for the continued use of
matching premiums.

The Association of British Insurers (ABI) says
the matching premium is needed to remove the requirement for
insurers to take into account market volatility that they are not
exposed to.

Paul Clarke, global Solvency II leader at
PricewaterhouseCoopers, (PwC), says: “Many insurers view the
inclusion of a matching adjustment under Solvency II as essential
for their ability to offer affordable long-term annuity
products.”

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Clarke comments that while it is positive that
the amendments approved include a version of this concept, it
remains to be seen whether this will address all of the industry’s
concerns.

Clarke adds that if an agreement can be
reached on matching adjustment that is acceptable to both policy
makers and the industry, this would be a significant win, not just
for the insurance industry but for consumers, as it should avoid
reductions in the range of long-term annuity products on offer and
increases in product prices.

Detail is key

“As always the devil is in the detail and the
industry will be keeping a close eye on the finer details as they
emerge over the coming weeks. In particular, progress on the
discount rate, equivalence, transitional measures and reporting
thresholds,” says Clarke.

Commenting on the Solvency II amendments,
Richard Baddon, an insurance partner at Deloitte, says:

“Currently when pricing and reserving for
products such as annuities, insurers discount future policyholder
liabilities allowing for a margin above risk free interest
rates.”

He adds that 2008 Solvency II proposals took
an approach that did not allow for this margin, and which would
have significantly increased capital requirements.

“Estimates suggested that there would be a
capital shortfall of as much as £50bn. This would have put extreme
pressure on the industry and reduced annuity payments for new
pensioners,” said Baddon.

Speaking to Life Insurance
International,
Tristan Garnons-Williams, policy adviser at the
Association of British Insurers (ABI), says the ABI was pleased
that a reference to the matching adjustments had been included.

However, Garnons-Williams explains that the
directive’s text was still quite restricted in terms of the assets
insurers can invest in, preventing them from investing in anything
below BBB-grade assets.

He added that this goes against the Prudent
Person Principle in the text of the Solvency II Directive, which
allows flexibility for insurers in their investments provided that
the risks are appropriately managed and capital is set aside to
cover them.

Equivalence

Garnons-Williams says the ABI would also like to see some
changes made on equivalence provisions.

Currently, the regulations on which
jurisdictions can be considered to be deemed ‘temporarily
equivalent’ to Solvency II does not guarantee the inclusion of key
markets for EU-based insurers such as the US.

Furthermore, the text currently allows for a
five-year temporary equivalence window with the possibility to
extend it for a further year.

“We are in a place where the next stage of
discussions can continue to work towards a sensible outcome,”
Garnons-Williams said.

In spite of all the apparent progress on
Solvency II, KPMG’s Hawes said the provider was extremely
disappointed by the decision on 27 March 2012 to delay the plenary
vote on Omnibus 2 until 10 September.

Hawes said that after ECON’s positive vote in
the previous week, the Omnibus 2 amendments could be approved ahead
of the parliamentary summer recess.

New delay

Hawes said it remains very unclear when the
timetable will become static and this latest delay makes it likely
that the Solvency II implementation date of 1 January 2013 that was
voted on will now be unachievable.

“Clarity is now desperately needed as to
whether the firm compliance date of 1 January 2014 will remain,
which realistically means firms will have less than a year between
final requirements being known and compliance being required, or
whether we can now expect to see an announcement of a year’s delay
to 1 January 2015,” said Hawes.

In spite of Hawes’ criticism, a spokeswoman
for the ABI said Omnibus 2 has not been delayed and the process
involves gathering further details.

Chris Finney, a partner in the insurance and
reinsurance department at law firm Edwards Wildman Palmer, explains
if the Parliament had approved Omnibus II in July, the European
Union would have spent the summer translating it into the official
languages of the EU member states before publishing the Directive
in the Official Journal in September.

The act of publication would then have brought
Omnibus II into force. Under the revised arrangements, Finney says
Omnibus II will still enter the translation process in about
July.

If the parliament approves it on 10 September,
the directive will be published, and brought into force, in
September 2012.

Finney says: “As always, the devil may still
be in the detail – the text of the matching and counter-cyclical
premiums hasn’t been published and may not appear officially until
mid-September. “Even so, the implementation dream is still alive –
for now.”