EIOPA preparatory guidelines
EIOPA began preparing supervisors and undertakings for Solvency II by developing guidelines covering the key areas of the new regime:
- System of governance
- Forward looking assessment of the undertaking's own risk
- Submission of information to national supervisors
- Pre-application of internal models.
EIOPA received over 4000 comments during the consultation period and issued final guidelines on 27 September 2013. The guidelines were addressed to National competent authorities (NCAs) which had to decide how best to implement the guidelines into their national regulatory or supervisory framework by the application date of 1 January 2014.
The PRA consulted on its approach to implementing EIOPA’s guidelines and, in December 2013, issued a final supervisory statement (SS4/13 Solvency II: applying EIOPA’s preparatory guidelines to PRA-authorised firms). The statement came into effect on 1 January 2014 and will cease to operate on the day prior to implementation of Solvency II, 1 January 2016.
The statement explains that the PRA expects firms to have regard to the outcomes in the guidelines whilst also continuing to meet the existing PRA rules. Whilst the guidelines are generally consistent with existing PRA handbook provisions, firms are required to implement the substantive provisions in order to ensure that they are ready for the new regime.
The PRA sought to be proportionate in its application of the guidelines to ensure that there is a minimal risk of two regimes running concurrently. For each of the four areas of preparation the statement identifies where firms need to focus their efforts and where the guidelines require more than existing PRA handbook provisions. The PRA will assess firms’ preparations in a proportionate and risk-based manner and expects firms to apply the guidelines according to the nature, scale and complexity of their business. The key issues are summarised below.
System of governance
- Generally consistent with current expectations around standards of group governance, systems and controls and the fit and proper criteria applied to approved persons.
- Review of existing governance and risk management systems required to take into account the greater scope and granularity under Solvency II.
- Guidelines will assist firms in preparing their annual SFCR covering governance issues once Solvency II enters into force.
- Organisational structure, group governance and board responsibility will need to be reviewed for compliance.
- Firms are encouraged to review their existing outsourcing arrangements and document their outsourcing approach, including contingency plans in the event of a service provider failure.
Forward-looking assessment of the undertaking’s own risks, based on the principles for the ORSA
- Guidelines will assist firms in designing, compiling and trialling their risk management framework in preparation for the standard expected for an ORSA from 1 January 2016.
- Firms should have a robust process in place to assess, monitor and measure all risks and to ensure that the output from the assessment forms an important part of the firm’s strategic and decision-making processes.
- Board involvement will be more extensive and members are expected to play an active part in how the ORSA should be designed and documented, risk identification and mitigation and approving and communicating the finished product.
- Results and insights from the ORSA should inform firms’ capital management and business planning, as well as product development and design.
- Two annual assessments are proposed during the preparatory phase. The second assessment is expected to be of a higher standard taking into consideration market conditions, risk profile changes and experience gained from the previous year.
Submission of information to NCAs
- The PRA will apply proportionate, risk based thresholds for quantitative and qualitative reporting from life, non-life, individual firms and groups.
- Firms are expected to develop systems and structures aimed at delivering high quality information for supervisory purposes.
Pre-application for internal models
- Internal models will continue to be developed and firms with models that are sufficiently stable are encouraged to begin testing and refining their models based on experience.
- Firms engaged in the pre-application process are reminded that it is not a pre-approval process and the PRA may not approve their model.
Long-term guarantees assessment
Summer 2013 saw EIOPA complete an assessment of the long-term guarantees (LTG) package proposed under Solvency II. Disagreement on the treatment of long-term guarantees in times of market stress had stalled EU negotiations on the final Omnibus II text.
EIOPA published the results of the LTG assessment which considered the following six regulatory measures aimed at ensuring an appropriate supervisory treatment of long-term guarantee products under volatile market conditions:
- Adaptation to the relevant risk-free term structure or Counter-Cyclical Premium (CCP)
- 'Classical' Matching Adjustment
- Extended Matching Adjustment
- Transitional measures
- Extension of the Recovery Period.
Based on the outcome of the assessment, EIOPA supported (subject to some minor amendments) the inclusion of the extrapolation, classical matching adjustment, extension of the recovery period, and transitional measures. EIOPA also advised the trialogue parties to replace the CCP with a formulaic, more reliable measure, known as the 'volatility balancer'. EIOPA recommended excluding the extended matching adjustment altogether, whilst retaining the 'classical' matching adjustment.
The conclusion of the LTG assessment meant that EU trialogue discussions could resume.
A turning point – the PRA approach
Late in 2013, Julian Adams, PRA Director of Insurance, highlighted some key issues concerning the progress of the Solvency II regime for UK firms. Adams encouraged firms to reassess priorities and make a concerted push to ensure compliance. The regulator will adopt an ‘intelligent copy out’ approach to its handbook, meaning it will follow the words of the Directive text as closely as possible, and may issue supervisory statements where it considers that general guidance is needed to clarify its expectations of firms.
Firms will need to continue to meet existing regulatory requirements until Solvency II is implemented. Where possible, the PRA will look for ways that firms may be able to use their preparations for Solvency II to meet the current supervisory regime. The PRA attaches considerable importance to the ORSA, describing it as the ‘cornerstone’ of the new regime. It will play a key role in supporting the threshold condition that insurers must have appropriate non-financial resources and robust risk and capital management systems
The PRA thinks it reasonable to expect firms to be ready for Solvency II based reporting six months before implementation, meaning that firms falling within the thresholds should be able to submit their reports in July 2015. The PRA will continue to review the practicability of the reporting timetable but warns firms to prepare for higher quality reports and better synchronised reporting under Solvency II.
With transposition now set for 31 March 2015 (subject to adoption of Omnibus II), the PRA can formally approve internal models from 1 April 2015. The PRA will operate a two-stage approach to the review of IMAP technical provisions. The first stage of the review looks at the approach and methodology used by firms, and the second stage will focus on the actual calculation of technical provisions. The PRA intends to publish information in the first quarter of 2014 on the progress of the first stage as well as an update on the second stage, which has been deferred as a result of Omnibus II delays. Now that the timetable is certain, firms must be prepared for their IMAP submission slots.