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April 24, 2012updated 13 Apr 2017 8:45am

Call for more clarity on Solvency II

A milestone on the road to making Solvency II a reality appeared to have been reached after key amendments were recently secured yet KPMGs Solvency II director Janine Hawes says the European Parliaments 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.

By Thomas McMahon

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.”

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.”

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