EIOPA indicates Solvency II implementation date of 2016
Gabriel Bernardino, EIOPA Chairman, has suggested that implementation of the Solvency II Directive could be delayed until 2016. In an interview with the Wall Street Journal, Bernardino stated that the 1 January 2014 start date is now "completely out of reach", confirming industry speculation that the current timetable will not be achieved. According to Bernardino, Solvency II could start to be implemented in either 2015 or 2016, but indicated that 2016 is more likely. It is anticipated that some elements of Solvency II, such as risk management, could be applied before the official start date which Bernardino states should be made clear in the new timetable.
Meanwhile, EU Commissioner Michel Barnier has reportedly proposed that implementation be delayed until 1 January 2015. In the absence of any official announcement, insurers have welcomed Bernardino’s comments. For those firms that have already invested significant resources to meet the 1 January 2014 deadline, however, further delays are not only frustrating but could prove very costly.
FSA delays IMAP submissions
Julian Adams, FSA Director of Insurance, has stated that recent events render the current Solvency II timetable as "completely unrealistic", and a 2015 date is likely to be "very challenging". Commenting on the vast amount of time, effort and money already expended by the industry and the regulator, Adams echoes Gabriel Bernardino’s call for a new timetable to be produced at the earliest opportunity.
Adams notes that alternative dates range from 2015 to 2017 and possibly later, however, the PRA proposes adopting its own “sensible planning period”. The new approach allows firms in the IMAP process to choose a date up to a maximum of 31 December 2015 to submit their internal models to the regulator. The PRA believes this reflects the most pragmatic way forward and allows firms more time to complete the work they need to do for their submissions. Should a credible official timetable emerge, the PRA will reconsider its timeline.
The PRA's proposals
In the light of the ongoing delays to the new regime, the PRA has been exploring an approach to Solvency II that is consistent with the regulator's approach to supervision, builds on firms’ existing preparations for the new regime and allows firms to use this work to meet current requirements where possible. Adams therefore proposes an optional two-phase process allowing firms to use their Solvency II models to meet their existing ICAS requirements. The first phase requires firms to provide a reconciliation between the calculations performed to take account of the differences in the two regimes. In the second phase, the PRA will allow firms to use their Solvency II balance sheet and model for ICAS purposes without any further reconciliation.
The PRA is also considering the possibility that firms with relatively advanced ORSAs may be able to utilise parts of it to satisfy current requirements. A further area of concern for the PRA is reporting. In order to achieve its objectives, the regulator will require “enhanced information”, and will therefore look into supplementing the existing data it receives from firms.
Adams is keen to point out that the PRA does not intend to implement Solvency II earlier than the rest of Europe or 'gold plate' any requirements, and instead aims to deal effectively with the ongoing delays. Adams concludes that the PRA has had constructive discussions with the industry regarding its new approach and will continue to do develop these proposals in the coming weeks.
For further information: Julian Adams - the PRA's approach to insurance regulation
Further evidence of impending delays to Solvency II
Following a number of recent developments, speculation is mounting that Solvency II may be pushed back by up to a year. EIOPA has been asked to carry out an impact assessment relating to the long-term guarantee package and report to the Commission before 1 February 2013. The Society of Lloyd’s has stated that the results of EIOPA’s impact assessment are expected in March 2013. Consequently, the adoption of Omnibus II could be delayed until the second quarter of 2013, as the final text cannot be agreed until the results of the impact assessment are known.
Insurance Europe issued a statement welcoming the impact assessment and stated that any subsequent delay in the implementation of Solvency II is regrettable but “it is vital that the results of the tests can be reflected in Omnibus II in order to ensure that the new regulatory regime is both appropriate and workable”.
Meanwhile, EIOPA has raised concerns regarding the "stagnant " Omnibus II negotiations and their impact on Solvency II in a letter from Gabriel Bernardino, EIOPA Chairman, to Michel Barnier, European Commissioner for Internal Market and Services and the other parties to the Omnibus II trialogue. Bernardino states that EIOPA is seriously concerned about the lack of a "clear and credible timetable" for Solvency II implementation. EIOPA requests "a realistic assessment of the expected time needed to deliver the different milestones" and asks that the parties set “operationally achievable timings". Finally, EIOPA states that consideration should be given to early implementation of some elements of Solvency II once the overall timetable has been agreed.
For further information:
EIOPA letter to European Commissioner - 4 October 2012
Lloyds’s: Solvency II implementation date
Insurance Europe: Impact assessment results should be reflected in Omnibus II
EIOPA to examine calibration and design of Solvency II capital requirements
The European Commission has published a letter, dated 28 September 2012, to Gabriel Bernardino, EIOPA Chairman relating to work on the Solvency II regime. The letter highlights the essential role the financial sector plays in providing and channeling “long-term finance”. In light of this, EIOPA is asked to examine “whether the calibration and design of capital requirements for investments in certain assets under the envisaged Solvency II regime necessitates any adjustment or reduction under the current economic conditions, without jeopardising the prudential nature of the regime”.
EIOPA’s analysis will also consider the capital requirement for interest rate risk that reflects the difference in assets and liabilities matching between long and short term contracts; a component the Commission believes has been overlooked in studies on Solvency II incentives to date. The Commission requests that EIOPA focus mainly on “long-term finance” and includes a list of specific assets. Whilst there is no official definition of “long-term investment”, the Commission plans to publish a green paper on long-term finance in the EU later in 2012. In the meantime, EIOPA is advised to focus on finance over a time horizon that expands over the economic business cycle, such as 10 years. EIOPA is asked to coordinate its efforts, as far as possible, with both the EBA and ESMA.
Finally, in light of the urgency of the growth agenda and completion of the Solvency II implementing measures, EIOPA is asked to provide feedback before 1 February 2013.
For further information: European Commission letter to EIOPA
European Commission adopts Directive amending the transposition and application dates of the Solvency II Directive
On 12 September 2012, the European Commission adopted the Directive amending the transposition and application dates of the Solvency II Directive. The text of the Directive has been published in the Official Journal of the European Union.
The European Parliament adopted the proposal on 3 July 2012, and the Council of the EU approved Parliament's position on 5 September 2012.
Under the amended timetable, Member States will be required to transpose the Solvency II regime into national law by 30 June 2013, with the new rules coming into force on 1 January 2014.
For further information: Directive amending the transposition and application dates of the Solvency II Directive
FSA update on development and use of early warning indicators
The FSA has published a letter from Julian Adams, FSA Director of Insurance, to firms in its internal model approval process. The letter provides an update on the FSA’s plans to monitor the ongoing appropriateness of internal models after approval. In order to maintain an appropriate solvency standard delivered by internal models, the FSA is developing early warning indictors to ensure that the SCR will meet the Solvency II calibration on an ongoing basis. The regulator believes that early warning indicators:
- should be based on metrics that are independent from the internal model calculations;
- should be simple in their construction, calibration and application, avoiding complexity; and
- will, if breached, trigger an immediate supervisory response (likely to be a capital add-on).
The use of early warning indicators will form part of the supervisory review process for IMAP firms and the calibration of the indicators will, according to Adams “aim to identify significant deviations in firm risk profile with respect to the assumptions underlying the calculation of the SCR".
Following its June 2012 letter to firms setting out proposals for early warning indicators, the FSA received a number of responses. Adams notes that some respondents expressed support for a European approach and the FSA has shared its views with EIOPA. Some respondents suggested an alternative indicator to the proposed ratio between the pMCR and modelled SCR which the FSA is looking into. Adams also confirms that any early warning indicator will not be used as a condition to the approval of a firm’s internal model, with the fundamental purpose being “to limit subsequent downward SCR drift relative to risk profile”. Finally, Adams states that the indicator should be simple and easy-to-apply and, therefore, the FSA will not be providing calibration for indicators at individual firm level.
The FSA welcomes comments on early warning indicators by 26 October 2012.
For further information: Monitoring the ongoing appropriateness of internal models
FSA publishes IMAP data review findings
The FSA has published interim feedback to IMAP firms. The feedback report is based on the FSA’s review of the quality of data used in the internal model and includes:
- an outline of the approach for the data review;
- a summary of the results; and
- detailed observations, with areas for firms to consider when preparing their application to use an internal model.
In summary, the FSA notes that most firms are “moving in the right direction” in terms of data requirements for their internal model. The report identifies ten findings mapped to the five sections of the external review. The FSA highlights some common issues within each section and provides its comments on how firms may address these issues. The issues highlighted can be summarised as follows:
- Approach to managing data. The FSA notes that although all firms have established a data policy, ensuring a consistent interpretation and application of the policy remains a challenge for firms.
- Implementation of the data policy. Feedback focuses on data governance, data ownership and large insurance groups. The FSA found that the majority of firms underestimated the time required to embed a group-wide data governance framework into ‘business as usual’, and had difficulty assigning data ownership. In terms of groups, consistent interpretation and application of templates, assumptions and standards of complex data transformations is required between local entity and group level.
- Understanding of the data used. Key findings include the failure of firms to apply proportionality by conducting an impact and risk assessment. Most firms struggled with an efficient classification of data. The FSA’s comments note that efficient classification requires assigning each data item to exactly one class. In addition, the review revealed that many firms confused ‘data directory’ with ‘data dictionary’. The underlying purpose of the ‘data directory’ is to ensure good governance over data quality, therefore, the FSA suggests that firms should “consider all data and document the data items relevant to the internal model at a level of granularity that is appropriate for ongoing maintenance and use”.
- Controls over data quality. Some firms demonstrated inadequately designed or ineffective control over data quality. The FSA notes that it is critical for firms to be able to articulate the nature of data quality checks and demonstrate how the process operates with appropriate controls.
- IT environment, technology and tools. The review found that many firms were implementing complex IT systems without a clear definition of user requirements, design, testing and appropriate controls. In relation to the use of spreadsheets, the FSA notes that it will be looking for appropriate controls such as reasonableness checks, input validations, peer reviews, logical access management, change and release management, disaster recovery, and documentation.
The FSA’s review work is not yet complete; therefore the report includes only its findings to date. In line with the current Solvency II implementation plan, the FSA aims to complete its review process by the third quarter of 2013.
For further information: IMAP data review findings
FSA publishes second consultation on Solvency II transposition
On 11 July 2012, the FSA published CP12/13 Transposition of Solvency II Part 2; its second consultation on rules to transpose the Solvency II Directive into the UK Handbook. The consultation paper includes proposed rules and guidance on areas that were not covered, or were only partially covered, in the first consultation which was published in November 2011. In particular, the consultation focuses on: application of the rules to the Lloyd’s insurance market; FSA policy for separate disclosure of capital add-ons; and proposed changes to rules governing with-profits and unit linked business. The consultation paper is set out in four sections covering:
- Section 1 - Consultation process. This section discusses the European process and alignment with regulatory reform in the UK.
- Section 2 - This section includes feedback on the first consultation paper: CP11/22 Transposition of Solvency II - Part 1. The FSA received responses from 23 firms and organisations and summarises the key points raised in relation to the following issues: the FSA’s general approach to transposition; the SCR; the MCR; composites; conditions governing business; groups; and chapter 10 of SUP.
- Section 3 - SOLPRU. In this section the FSA sets out its approach to the Lloyd’s market and capital add-ons and USPs. The FSA comments that, due to its unique structure and multiple participants, Lloyd’s poses specific challenges in implementing Solvency II. For the most part, the FSA has sought to apply the SOLPRU rules and guidance set out in CP11/22 to the Lloyd’s market. Additional provisions have been developed where required and supplemented by a new application chapter, SOLPRU 14. The FSA’s approach to Lloyd’s is based on two fundamental principles: Lloyd’s policyholders should benefit from the same threshold level of protection as other Solvency II policyholders; and the Directive requirements should, in general, be applied at the level where risk is managed. In relation to capital add-ons and USPs, the FSA intends to exercise its option of non-separate disclosure by providing firms with a two year transitional period from the date of implementation. During this time, firms would not need to separately disclose, in their solvency and financial condition report, any capital add-ons or USPs required by a supervisor. It should be noted, however, that this proposal only relates to prudential reporting requirements.
- Section 4 - Proposed amendments to the parts of the Handbook covering with-profits and linked long-term insurance business are detailed in this section. The FSA has stated that it is not making any material changes to its underlying policy on conduct regulation for with-profits funds. For consistency with the Solvency II Directive, the FSA has proposed consequential and largely technical changes to the current rules. The proposals do not conflict with recent changes to the COBS as part of the ‘With-Profits Regime Review’. In relation to linked long-term insurance business, this consultation deals with issues related to derivatives, stock lending, and governance that were not covered in CP11/23 Solvency II and linked long-term insurance business.
The FSA continues to take a largely “intelligent copy-out” approach to transposition and has followed the Level 1 text as closely as possible. Comments are invited on policy decisions where Solvency II requires or permits Member State discretion and where Handbook rules are necessary to address UK specificities. The consultation reflects the mainly maximum harmonising nature of the Directive and, therefore, does not reopen discussions on policy that has been agreed in Europe. The FSA has opted to consult at this stage because it considers it has sufficient certainty with regard to the Level 1 text that must be transposed, and any amendments expected to be introduced by Omnibus II is unlikely to affect the core principles of the Solvency II framework. In line with its aim to provide firms with the earliest possible certainty on UK implementation of Solvency II, the FSA believes it is the appropriate time to consult.
Issued not covered in the consultation are: national specific reporting templates; external audit; amendments to the FIT and SUP reflecting change in controlled functions; grandfathering existing ISPVs; and cost comparisons of using internal models versus standard formula for calculating firms’ SCR. The FSA has indicated that it will communicate further on these issues as and when appropriate.
The deadline for comments on the proposals is 11 October 2012. The FSA intends to collate the feedback from both consultations, together with the conduct elements contained in CP11/23, and publish a policy statement. The FSA advises that this timeframe is dependent on the European Commission adopting the Omnibus II Directive and final Solvency II Level 2 measures and, in addition, the legislative timetable for UK regulatory reform and FSA Handbook designation. The FSA has indicated that further consultations may be required once Omnibus II is adopted and the Level 2 text is finalised. Details will be provided when the policy statement is published later this year or in early 2013.
For further information: CP12/13 Transposition of Solvency II Part 2
EIOPA final report on draft guidelines on the ORSA
On 12 July 2012, EIOPA published its final report on draft guidelines for the ORSA under the Solvency II Directive. The report sets out the outcome of, and provides feedback on, EIOPA's November 2011 consultation on the draft guidelines. In addition to underlining the purpose of the ORSA, the report provides details on how the ORSA is to be interpreted and sets out EIOPA’s expectations regarding the implementation of the ORSA by insurance undertakings. EIOPA has strongly encouraged the industry to use the current report in their early implementation of the ORSA. Among other things, the report raises the following issues:
- Insurers are expected to have the necessary competence and expertise to find “fit-for-purpose solutions” for the practical challenges of the ORSA.
- EIOPA points out that proportionality is a key feature of the ORSA and insurers should develop tailored processes to fit their own organisational structure and risk management systems.
- The undertaking’s AMSB needs to take an active role in the ORSA, particularly in relation to steering how the assessment is to be performed and challenging the results.
- Undertakings are required to submit a forward-looking assessment of their overall solvency needs to national supervisory authorities, indicating multi-year tendencies and developments. Overall solvency needs should be expressed in quantitative and qualitative terms and quantification complemented by qualitative description of the risks.
EIOPA explains in the report how it has amended and clarified the content of guidelines and the accompanying explanatory text in light of the feedback. Responses to the consultation have been published on EIOPA’s website.
For further information: EIOPA final report on ORSA
EIOPA publishes final report on Solvency II reporting and disclosure requirements
On 10 July 2012, EIOPA published its final report on the 2011 consultations on quantitative reporting templates and guidelines on narrative public disclosure and supervisory reporting, predefined events and processes for reporting and disclosure. EIOPA Chairman, Gabriel Bernardino, emphasised the significance of the report stating that “insurance undertakings and supervisors need to start as early as possible with the implementation of reporting and disclosure requirements”.
In its feedback statement, EIOPA addresses both specific issues and general comments raised by respondents including: implementation and maintenance costs; proportionality and materiality; financial stability information; quarterly and fourth quarter reporting; and standard codes to be used in reporting. Alongside the report, EIOPA has published on its website the updated reporting templates, responses received to the consultation and two opinions of the EIOPA insurance and reinsurance stakeholder group. In a press release accompanying the report, EIOPA states that its proposal reflects a balanced approach towards costs and benefits. The proposed reporting templates, EIOPA believes, will improve the efficiency of risk-based Supervisory Review Process and, therefore, increase policyholder protection. Furthermore, EIOPA expects the reporting requirements to contribute to financial stability and allow the assessment and monitoring of market developments.
The reporting requirements are expected to change as a result of the ongoing discussions relating to the proposed Omnibus II Directive, and the future Solvency II implementing measures. Furthermore, the design or structure of the reporting templates may be affected by the development of the IT reporting standards. Despite this, EIOPA believes that the current package provides a stable view of the level of granularity of the information that supervisory authorities will need to receive. EIOPA has, therefore, urged the industry to use this package now as the basis for ensuring compliance with the Solvency II reporting and disclosure requirements during the implementation stage.
EIOPA expects that the full package on Solvency II reporting and disclosure, with all changes incorporated, will be available later in 2012. The implementing technical standards will be submitted by EIOPA for endorsement by the European Commission.
For further information: EIOPA final report
FSA feedback statement on Solvency II and linked long-term insurance business
The FSA has published its feedback on linked long-term investments under Solvency II. The feedback considers the changes to rules currently contained in chapter 21 of the COBS. The consultation paper, published in November 2011, set out the FSA’s proposals for changes to the rules and guidance on the operation of unit-linked and index-linked insurance policies. In its feedback statement, the FSA commented that it was surprised to have only received 20 responses to the consultation, given its significance in the UK life insurance sector. Notably, the amended Handbook text was not published with the feedback statement. The FSA intends to publish a policy statement “in the near future” which will include all the Handbook changes consulted on as part of Solvency II transposition.
The rules relating to the operation of unit-linked and index-linked insurance policies are primarily contained in COBS 21. Chapter 2 of the feedback statement summarises the responses received to the FSA’s proposed amendments of COBS. The FSA notes that, despite a wide range of responses, there was broad agreement with its general approach and, therefore, the FSA intends to:
- Remove the exemptions to specific categories of linked business in COBS 21.1.R.
- Delete the parts of COBS 21.2 that effectively duplicate rules in chapter 7 of SOLPRU.
- Make some minor amendments to the rules in COBS 21.2 relating to issues that are specific to the conduct regulation of linked business and which are not affected by the prudential requirements of Solvency II.
- Remove the definition of an institutional linked policyholder in COBS 21.3.
- Amend COBS 21.3 to include a list of specified asset types that can be used where the policyholder is a natural person bearing the direct investment risk.
- Maintain its existing position in relation to unlisted securities and not introduce a limit for unlisted securities.
Chapter 3 of the feedback statement addresses some general points raised in the consultation. The FSA makes the following comments in response:
- Proposals on derivatives and governance will be included as part of a further consultation on implementing Solvency II.
- Where possible, the FSA will seek to give certainty as to implementation of Solvency II. It is the FSA’s intention that firms are given as much time as possible to implement the rule changes.
- Any security that is admitted to an official list in the EEA qualifies as a listed security. Under the current definition, securities listed in areas such as Japan and the US would be considered unlisted. It is not the FSA’s policy intention to limit listed securities to the EEA only, therefore, this will be given further consideration and clarified in the final Handbook rules.
For further information: Solvency II and linked long-term insurance business
EIOPA publishes paper on third country equivalence measures
On 14 June 2012, EIOPA published a paper on third country equivalence measures under the Solvency II Directive. The paper provides information on equivalence transitional measures, proposed under the draft Omnibus II Directive and explains work EIOPA is currently undertaking further to the European Commission’s request for technical input in February 2012.
The Commission has developed a transitional regime for Solvency II equivalence for third countries which either have a risk based regime similar to Solvency II or are willing and committed to move towards such a regime over a pre-defined period (5 years in the Commission’s initial proposal). For those third countries that have indicated that they are interested in being covered by the transitional provisions, the Commission has requested that EIOPA carry out an analysis including:
- Whether persons working for, or on behalf of, the supervisory authorities are bound by obligations of professional secrecy. Professional secrecy equivalence is a prerequisite to inclusion in a transitional regime.
- The main areas where the equivalence criteria would currently not be met.
To date, Australia, Chile, China, Hong Kong, Israel, Mexico, Singapore and South Africa have expressed an interest in being covered by the transitional provisions, and have received requests for information to enable EIOPA to carry out a Solvency II gap analysis. EIOPA has confirmed that its advice to the Commission will be based largely on the responses provided by these third countries to its questionnaire for equivalence gap analysis. The questionnaire was published as an annex to the paper. Following the adoption of the Omnibus II Directive, EIOPA expects to launch a call for evidence inviting any interested parties to provide input on the factors they think may be relevant to its gap analysis or professional secrecy equivalence assessment.
EIOPA stresses that its work is of a technical nature only and it will be up to the Commission to decide which third countries will be included in the equivalence transitional regime. The paper indicates that the Commission’s decisions will most likely be taken in mid-2013 under the working assumption that the Solvency II regime will be applied by EU firms from 1 January 2014.
For further information: Solvency II - Equivalence Transitionals measure
FSA publishes feedback letter and speech on Solvency II IMAP work
On 15 May 2012, the FSA published a letter from Julian Adams, FSA Director of Insurance Supervision, sent to firms involved in the FSA’s IMAP in preparation for the implementation of Solvency II. In addition, Adams gave a speech discussing specific feedback issues from the letter.
In his speech, Adams explains that firms will shortly be moving from the ‘pre-application’ to the submission phase of IMAP, with the FSA expecting the first submissions in May 2012. Submissions will be reviewed against the FSA’s current requirements and feedback on the model provided to the firm in question. The letter sets out the FSA's feedback on firms' IMAP work to date, including observations on the following issues where the FSA has observed weaknesses in its reviews of firms' work:
- Methodology and assumptions. Models should be pitched at an appropriate level, adequately reflecting the risk a firm is exposed to but avoiding unnecessary complexity.
- Aggregation and dependency. The FSA expects firms to be able to explain and validate the choices and assumptions made in relation to the amount of diversification credit a firm seeks to take, and in particular whether it presents a capital number which is adequately reflective of risk.
- Validation. The FSA expects decisions about materiality thresholds to be clearly articulated and justified. Adams states that many of the validation policies already seen are too vague, and that the level of detail should reflect the materiality of the elements of the model.
- The use test. Firms are expected to demonstrate how the internal model has been embedded, and where it will be used within the business.
The FSA has also identified model change policy, un-modelled risk and documentation requirements for Solvency II as further areas of weakness.
The date at which the FSA can begin accepting formal applications is dependent on when it assumes formal legal powers under Solvency II, which in turn is dependant on the finalisation of the Omnibus II Directive, however, Adams suggests it will be “some time in 2013”.
For further information:
Feedback from our IMAP work to date
Solvency II and the London Market
EIOPA opinion on external models and data used for calculating Solvency II capital requirements
On 7 May 2012, EIOPA published an opinion, addressed to supervisors, regarding the process for approving the use by insurers of external models and data to calculate the SCR using a full or partial internal model, under the Solvency II Directive.
In the opinion, EIOPA states that an insurer should provide the specific information required to enable its supervisor to assess whether an internal model approval to calculate its SCR should be granted. The supervisor should reject an insurer’s application if it fails to provide the specific information or documentation required for a proper assessment. The opinion further provides that any insurer seeking to obtain approval of an internal model application, which includes the use of an external model or data (that is, external models or data an insurer has obtained from a third party vendor), must demonstrate to its supervisor that it has complied with all the requirements for internal model approval.
Applications which include the use of an external model or data must be assessed by the supervisor on the appropriateness of each individual application. EIOPA states that particular attention should be paid to how the external model or data has been adapted to take into consideration the insurers risk profile and specificities. In these cases, the supervisor may request additional information about either the external model or data in order to assess whether the requirements have been complied with. Again, failure to provide such information will result in the application being rejected. The opinion states that contracts between insurers and third party vendors of models or data should specify how to deal with providing information to supervisors for approving an internal model application. The contract terms cannot be used to justify an insurer's refusal to demonstrate that its external model or data fulfils the necessary requirements.
In order to address confidentiality concerns raised by some vendors of external models and data, the opinion emphasises that confidentiality provisions are already in place under Solvency I, and these provisions extend to confidential information received by supervisors during the pre-application process.
Gabriel Bernardino, EIOPA Chairman, confirmed that EIOPA intends to make use of opinions as a “tool” to promote common supervisory approaches and practices in the EU.
For further information: EIOPA opinion on external models and data
FSA publishes policy statement on RDR adviser charging and Solvency II disclosures
On 22 March 2012, the FSA published PS12/5 Distribution of retail investments - RDR Adviser Charging and Solvency II disclosures - feedback to CP11/25 and final Adviser Charging Rules. The policy statement follows the publication of CP11/25 Distribution of retail investments - RDR Adviser Charging and Solvency II disclosures in November 2011.
The consultation paper considered the changes needed to implement the disclosures required by Article 185 of the Solvency II Directive, and included amendments to Chapters 1, 13, 14, 15 and 16 of COBS. The disclosures required by Article 185 incorporate and extend those under the current CLD and most of the additional Solvency II disclosure information is already contained in the FSA rules. Where this is the case, the FSA has replaced references to the CLD with references to the relevant provisions in Solvency II. The Solvency II disclosure rules are "near final", and will be made at the same time as the main Solvency II rules. The FSA confirms that it expects this to be at the end of the year and the rules should come into effect on 1 January 2014.
For further information: PS12/5 Distribution of retail investments - RDR Adviser Charging and Solvency II disclosures - feedback to CP11/25 and final Adviser Charging rules
Official white paper published on the transposition of the Solvency II Directive into German law
The official white paper on the transposition of the Solvency II Directive into the VAG has just been published. After going through the legislative process, the law will come into effect on 31 October 2012. The white paper does not attempt to harmonise the VAG and the Directive. It does, however, seek to avoid the imposition of any additional requirements on top of those provided for in the Directive, unless they already exist in the VAG. The following issues will be of greatest interest:
- The risk-based capital requirements (including enhanced solvency requirements based on an integral risk analysis and new valuation rules based on market value) are transposed in line with Solvency II’s three-pillar approach.
- There will be a greater focus on group supervision. It will be enforced through the establishment of a group supervisor as well as better cooperation between the supervisory authorities of respective Member States.
- BAFin will focus more on the active review of risk profiles of insurance companies and on the quality of their risk management and governance systems. The white paper gives BaFin greater discretion regarding the application of the regulations. As BaFin will increasingly be incorporated into the European system of financial supervision, which is headed by EIOPA, the VAG will be just one of several levels of legal provisions.
- Any debt financing for insurers (outside of the permitted types of Tier-1 and Tier-2 capital) will continue to qualify as non-insurance business and will not be permitted for German regulated insurers.
- The current system of keeping a register of specific assets covering technical reserves will be maintained.
- Where a cross-border portfolio transfer within the EU leads to a change in the competent EU supervisory authority, the policyholder will be entitled to terminate their policy.
- Certain transitional provisions do exist under certain circumstances. For example, there are provisions regarding minimum capital requirements (one to two years) and disclosure requirements (five years).
The GDV has commented positively on the white paper’s clear and comprehensive structure. However, one of the main objectives was to keep the cost and effort connected with the new requirements as low as possible for the insurance industry. The GDV noted that the white paper could cause enormous practical challenges for insurance companies attempting to comply with the new requirements.
For further information, please contact Andreas Börner in Munich.
FSA publishes general and life insurance newsletters
The FSA has published Issue 7 of both the General Insurance Newsletter and the Life Insurance Newsletter. In his introduction, Julian Adams, FSA Director of Insurance, comments that the evolving shape of regulation (both domestically and globally) is likely to continue to influence significant changes in the wider insurance market. According to Adams, Solvency II, changing accounting standards, regulatory reform, the gender ruling and the implementation of the RDR are just some of the changes ahead. These will require careful consideration and firms will require an in-depth understanding of the changes they face in order to respond with adequate strategic solutions.
On the subject of Solvency II, both newsletters contain an article providing a policy and implementation update. The article confirms that, whilst the vote by ECON has been rescheduled to 21 March 2012, the FSA has no information to suggest that the dates beyond 2014 will change. Therefore, firms should continue to work on this basis and the FSA will provide further updates as appropriate. The article also states that, owing to the complexity and lead times involved, the FSA is continuing with its preparations for accepting submissions from internal model firms from 30 March 2012. The FSA encourages firms in the pre-application phase of the internal model approval process to register for the half-day industry briefing, which is due to be held on 27 February 2012. For all other firms, the FSA will be open to receive applications from 1 January 2013, for approvals that firms will require from 1 January 2014. The FSA may, however, exercise its discretion to deal earlier with more complex issues and will continue to monitor firm readiness for the new regime through its ongoing supervisory engagement.
For further information:
General Insurance Newsletter - Issue 7
Life Insurance Newsletter - Issue 7
European Commission publishes letter on third country equivalence
The European Commission has published a letter, dated 2 February 2012, sent by Jonathan Faull, Director General for Internal Markets and Services, to Gabriel Bernardino, Chairman of EIOPA.
The proposed Omnibus II Directive introduces the possibility for third countries (which meet defined criteria) to be included in a transitional regime for Solvency II equivalence. Whilst many of the details of the transitional regime, including the criteria for eligibility and the length of the transitional period, are yet to be agreed, the Commission understands that the co-legislators are supportive of such a regime for third country equivalence.
In his letter dated 22 November 2011, Faull asked EIOPA to carry out an analysis of the following:
- whether persons working for, or on behalf of, the supervisory authorities are bound by obligations of professional secrecy, which are equivalent to those established under Solvency II; and
- the areas where the third country’s supervisory regime does not currently meet equivalence criteria.
This technical analysis will help the Commission prepare for future discussions in relation to both full and transitional equivalence determinations under Articles 127, 227 and 260 of the Solvency II Directive. The Commission expects EIOPA to adopt a different approach to that taken when considering full equivalence assessments.
The Commission has already entered into informal discussions regarding a potential transitional regime with a number of countries, and Australia, Chile, Hong Kong, Israel, Mexico, Singapore, and South Africa have expressed an interest in being part of the regime. Faull stresses that these countries are not certain of inclusion in the transitional regime. Discussions are ongoing and a decision will not be taken by the Commission until next year.
The Commission is also engaged in discussions with Brazil, China and Turkey. Discussions are at an early stage, but the Commission understands that the countries are, in principal, interested in inclusion in a transitional regime. In addition, the JFSA indicated its interest in being included in a transitional regime for third country equivalence in relation to group solvency and supervision, under Articles 227 and 260, when EIOPA provided its assessment of the solvency regime applied to the Japanese reinsurance sector under Article 172.
In relation to the United States, representatives from the Commission and EIOPA recently met with representatives from the Federal Insurance Office and State insurance regulators to define a workplan, which is designed to lead to increased mutual understanding and cooperation in the insurance sector. Faull suggests that the outcome of this work could serve as a basis for future discussions on equivalence. However, the prudential regulation of insurance undertakings remains a State competence under US law and Faull recognises that a different approach to equivalence will be required.
For further information: Letter dated 2 February 2012
ABI publishes volume 22 of its Solvency II Bulletin
The ABI has published volume 22 of its Solvency II Bulletin. In his introduction, Hugh Savill, ABI Director of Prudential Regulation, states that European policymakers must aim to end 2012 with full certainty on the Solvency II rules that will be binding on insurers from 1 January 2014. For their part, Savill suggests that, insurers need to use the next 11 months to enact their implementation plans to the greatest extent possible.
2011 proved to be an extremely challenging year in the development of the Solvency II Directive. However, Savill believes that it would be unkind for the year to go down in the annals as a failure. For example, the recognition of EPIFP as Tier 1 capital and the appreciation of the need for adequate solutions to the issues of pro-cyclicality and long-term insurance business were just two significant developments in a number of positive gains for the industry in the past 12 months. According to Savill, the immediate priority must now be to reach an agreement on the Omnibus II Directive.
ECON has now moved its ballot back to late March. The principal reason for the delay is that compromise amendments are still to be produced in key areas of debate. Most significantly, in relation to long-terms guarantees, which covers essential elements of the new regime such as the Matching Premium, the extrapolation methodology and the Counter-Cyclical Premium. Whilst this delay would appear to place more strain on the Solvency II implementation timeline, it appears increasingly likely that the European Parliament will seek to assess the details of the Level 2 package in parallel with Omnibus II. The aim of such a move would be to approve the Level 2 measures in as short a period of time as possible, following publication of the final Omnibus II text.
In Savill’s opinion, European policymakers are clearly aware of the need for movement. For example, EIOPA recently consulted on two Level 3 papers, having been given special dispensation to do so in order to provide the industry with some clarity. The Bulletin includes articles on both papers.
In relation to EIOPA’s consultation on the detailed features of Solvency II’s supervisory reporting and public disclosure requirements, the Bulletin notes the presence of two key topics in the paper. Namely: (i) reporting processes; and (ii) pre-defined events that would trigger public or private reporting by insurers outside of their regular reporting cycle (for example, in the case of relevant merger or acquisition activity involving the insurer in question). In its response to the consultation, the ABI emphasised the importance of the principles of proportionality and materiality by insurers when constructing their reports. In particular, the guidelines on the SFCR are considered to be excessively detailed for the purposes of public disclosure. Given the wide-audience that such reports will address, the ABI states that, it is of utmost importance that the content of the SFCR should be easily understandable and its content carefully explained by insurers.
The consultation on the ORSA was also welcomed by the industry and provided some useful clarifications. However, the ABI believes that there are still some areas in the consultation where feedback suggests that the European body should issue more information. In particular, whilst the consultation notes that the internal report on the ORSA produced by an insurer could be used as the basis for the ORSA report to supervisors, the potential for duplication of documentation is not alleviated to the same degree when referring to the ORSA policy and the record of each ORSA process.
For further information: Solvency II Bulletin volume 22