The Omnibus II directive, which amends the text of the Level 1 Solvency II directive, has finally been agreed. Amongst the numerous administrative and other amendments can be found a large number of transitional arrangements. These effectively operate as a grace period in certain areas that delay the full force of the new regime taking effect from the implementation date of 1 January 2016.
Amongst these are transitional periods for insurers that are in run-off and in the process of seeking finality. The detail can be found at article 308b on pages 163 - 167 of the directive. In summary, these provide for a grace period of three years from 1 January 2016 (or five years if the process is already underway). Whilst this is of course helpful, there are some important caveats.
The first is that the undertaking in question must not form part of a group that contains live carriers. This will in practice severely limit the benefit of this provision.
Another is that the regulator must be satisfied with the progress that is being made towards achieving finality. This may be a grey area. How quickly must an insurer move? What active steps are required? And what happens if it encounters bona fide obstacles along the way? What happens if these obstacles take the form of resistance from the regulator to the finality proposals themselves? The following example illustrates the point. The PRA has made clear in a recent supervisory statement that it will take some considerable persuasion to support a scheme of arrangement for a run-off book that is solvent. It has however left the door open in that it has said that it will consider proposals on a case by case basis. This means that there will need to be careful analysis of what a company is seeking to achieve in the scheme and a convincing case must be made to the regulators that a scheme is right in the circumstances. There is the intriguing possibility of the PRA effectively blocking a proposal for a scheme, which would derail an insurer's plans for finality. If this in turn lifts that insurer out of the criteria for the transitional period, it will find itself subject to the full force of Solvency II. If the effect of this were to force a company in run-off into insolvency, then would this be enough to persuade the PRA not to object to the scheme in the first place? Also, could the PRA's implementation of this recent supervisory statement lead itself unwittingly into a conflict with Solvency II by depriving a run-off insurer of the benefit of the transitional period in a way not envisaged by the Solvency II law-makers. There is a requirement for each EU State to apply Solvency II on a maximum harmonisation basis. Could it fall foul of that?