Solvency II update on the timetable for implementation and recent developments

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This update sets forth EY's current views on the timetable for implementation of Solvency II, and recent developments at the level of the European Institutions. EY remains supportive of the Solvency II objectives to improve risk management in the insurance industry, and to both modernize and harmonize prudential supervision of insurance across Europe.

The European Commission (Commission) previously proposed in the original Omnibus II that Solvency II would be applicable from 1 January 2013. Recent concerns over the preparations of some Member States and the European insurance industry, is likely to delay this date to 1 January 2014, reflected in the draft of Omnibus II published 21 June 2011.

Any draft Directive or proposal amending Directive, such as Omnibus II, requires approval from the European Parliament (Parliament), the Council of the European Union (Council) and the Commission, in accordance with their procedures – and will be subject to intense political debate and compromises. Part of this legislative process and political debate will involve a trialogue exercise comprised of the Commission, Polish EU Presidency and rapporteurs from the European Parliament (MEPs). This exercise is expected to be completed by the year end 2011, but may involve further changes to the Omnibus II text prior to a plenary vote by MEPs.

It is expected that Omnibus II will be voted on by the European Parliament in February 2012 and will be published in the Official Journal of the European Union in March/April 2012. This will update the Level 1 measures set forth in the original Solvency II Directive (2009/138/EC), including: the implementation date for Solvency II, defining the transitional measures and their maximum duration, and vesting significant powers in European Insurance and Occupational Pensions Authority (EIOPA).

In particular, we note that certainty on the implementation date is not achieved until Level 1 is approved.

The draft Level 2 delegated acts are expected to appear in March/April 2012, directly after the publication of the Omnibus II Directive, with approval expected by September 2012.

EIOPA is responsible for providing draft implementing acts (“binding technical standards”) to a schedule given in Omnibus II, and also Level 3 guidance which completes the legislative jigsaw. These will follow the Level 2 delegated acts.

EIOPA and national supervisors are expected to make productive use of the additional year ahead of full implementation to test the appropriateness of System of Governance of firms within the European insurance industry. Continued scrutiny of firms' readiness to meet the Solvency II requirements from 1 January 2014 is also likely.

In summary, our expectations of the revised Solvency II timetable are set forth below:

  • Final Level 1 measures – March/April 2012 – updated by Omnibus II Directive
  • Draft Level 2 delegated acts measures – March/April 2012
  • Final Level 2 delegated acts – September 2012
  • EIOPA implementing acts and Level 3 guidance – after September 2012
  • Solvency II goes live date – 1 January 2014

Emerging technical developments
In addition to the developments with Omnibus II, and the implementation date of Solvency II, there has also been significant development with the technical aspects of the Level 2 implementing acts after the publication of the QIS 5 results.

Some of the key issues discussed between Commission and Council's Solvency Experts Group are described below. We note, however, that although the Commission will subsequently seek an early consensus with Parliament, certainty will not be possible in the above timetable until September 2012.

  • Non-life and health underwriting modules – a Joint Working Group (JWG) has performed a recalibration exercise for the underwriting risk parameters. Whilst potentially neutral overall, entities that write specific or significant amounts of certain lines of business, may see a material movement within their capital requirements. The Catastrophe Risk Task Force was reactivated to reconsider the catastrophe risk sub-module of the SCR Standard Formula. Given concerns raised regarding this area of QIS 5, we would expect there to be a number of proposed changes for natural, man-made and health catastrophes, ranging from updates of the parameters to changes in the scenarios and calculation formulas.
  • EPIFP – under Solvency II the expected profits in future premiums (EPIFP), forms part of Tier 1 capital. There are a range of views on the appropriateness, EIOPA and some Member States believing that such profits should not be recognized in part or in total as Tier 1 capital. Whilst the liquidity of the EPIFP is certainly an issue for firms to consider in their financial management, QIS 5 has shown that EPIFP is a material source of capital for the industry. Our view is that the current proposals for restricting EPIFP Tier 1 eligibility move away from the fundamental principles of Solvency II.
  • Matching premiums – have been proposed as a solution for insurers with long-term predictable obligations operating a buy-and-hold asset strategy, with assets expected to produce cash flows matching the insurance obligations.
  • Counter-cyclical premiums – it appears likely that the concept of the liquidity premium used in QIS 5 will be replaced with the counter-cyclical premium, allowing firms to use a higher discount rate for their liabilities only in times of financial stress; as determined by EIOPA.

We recognize that given the potential for a postponement of one year, this could have significant consequences on Solvency II programmes. The delay in Level 1 and Level 2 legislation and Level 3 guidance continues to provide challenges for firms with all aspects of their programmes, including system development, processes and project costs.

We recommend taking advantage of the additional time to prepare dry runs during 2013, and prioritizing such developments in line with the timing of your programme plans for Pillars 1, 2 and 3.

To read the full text of the latest Omnibus II release, click here