When the final version of the Omnibus II Directive comes into force, it will amend the Solvency II Directive so that it includes a sunrise clause, a phasing-in clause, and a run-off and restructuring exemption, as well as significant reporting and other transitional measures. It will also allow or require the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA) to adopt “regulatory technical standards”, “implementing technical standards” and “comply or explain Guidelines”. When all of that’s been done, we’ll finally have the whole of the Solvency II regime, even if it won’t be fully in force until the transitional measures expire in 2032.
Regulatory technical standards and implementing technical standards
The EIOPA Regulation lays down a process for making “regulatory technical standards adopted as delegated acts” (RTS) and “implementing technical standards adopted as implementing acts” (ITS). The two processes are broadly the same, but RTS cannot come into force until a standstill period of up to 3 months has elapsed. This period gives the European Council and Parliament an opportunity to consider the Commission’s RTS, before objecting to stop them coming into force, if they wish.
Omnibus II’s sunrise clause
The Omnibus II sunrise clause will allow the Commission to adopt some RTS as if they were ITS. This effectively removes the standstill period from the RTS process, and materially reduces the amount of time it takes for RTSs to come into force.
The European Member States must give their regulators the power, and require them, to consider whether:
- (From 1 April 2015), to approve the use of ancillary own fund items; the classification of own fund items; undertaking specific parameters; full and partial internal models; the use of the matching adjustment; and the use of the volatility adjustment (if applicable – see my earlier blog) ; and
- (From 1 July 2015), to allow the groups they supervise to calculate their group solvency on a full or partial “deduction and aggregation” basis, instead of “consolidated accounting principles”.
The run-off exemption
A firm that is run-off by 1 January 2016 will not have to comply with Solvency II if: (a) its regulator is satisfied that it will terminate its activities before 1 January 2019; or (b) it is subject to “reorganisation measures”, and an administrator has been appointed. But these exemptions will cease to apply on or before (a) 1 January 2019; and (b) 1 January 2021 (respectively), if the regulator is not satisfied with the progress that’s being made towards terminating the relevant firm’s activities.
Internal and external reporting transitionals
Solvency II will require firms to submit information to their regulator at pre-defined intervals, and to publish a Solvency and Financial Condition Report annually. The internal and external reporting transitionals will allow the Member States to require firms to:
- Submit their annual regulatory returns within 20 weeks of the firm’s financial year end, with that period being reduced to 14 weeks by 2020;
- Submit their quarterly returns within 8 weeks of the end of the relevant quarter, with that period being reduced to 5 weeks by 2020; and
- Publish their Solvency and Financial Condition Report within 20 weeks of the firm’s financial year end, with that period being reduced to 14 weeks by 2020.
Classifying existing capital instruments
Omnibus II will allow firms to classify some capital instruments as tier 1 basic own funds items, and others as tier 2 basic own fund items, until the end of 2025, even if they would not qualify into those tiers under the full Solvency II regime.
The standard parameters
The standard parameters to be used when calculating the concentration risk sub-module, the spread-risk sub-module; and the equity risk sub-module in the standard formula will be phased in over a 4 or 7 year period.
SCR breach on entry into force
Some of the firms that meet their Solvency I Required Solvency Margin, but cannot meet their Solvency II Solvency Capital Requirement will be given until the end of 2016 to adjust to the new regime.
Transitional measures on the risk-free interest rates and technical provisions
Subject to prior regulatory approval, life firms will be able to adjust the relevant risk-free interest rate term structure they use for pre-Solvency II policies so they gradually move towards the Solvency II structure over a 16 year period beginning in 2016. Others will be able to adjust the way they calculate their life and non-life technical provisions, so that they also gradually move towards Solvency II’s technical provision calculation methodology over the same 16 year period.
So what next?
Some of these transitional measures are discretionary. So each Member State can choose whether to allow its firms to take advantage of them for a period, or at all. I suspect the PRA will choose not to take advantage of some transitional measures, and that it will restrict the availability of others by reducing the period during which firms can rely on them, or by restricting access to the transitional measures to those firms that apply for and receive a waiver. But we’ll have to wait and see.