European Commission adopts Delegated Regulation

On October 10, the European Commission adopted the Regulation that will introduce much of the detail of Solvency II. The framework Directive which was adopted in November 2009, and has been subsequently amended by Omnibus II, specifies that the European Commission should adopt a Delegated Act (the published Regulation) which sets out detailed implementing rules. Like most Regulations, the Solvency II Delegated Regulation will have direct effect once adopted to ensure that there is consistency in implementation.

The Regulation has not been subject to specific public consultation although various stakeholders have seen iterations of the Regulation in advance of its adoption. The Council of the EU and the European Parliament can object to the Commission’s Delegated Regulation but have a limited window in which to do so.

The Regulation as adopted by the Commission can be found here. A total of 26 annexes have also been published.

Solvency II is due to come into force on January 1, 2016.

PRA issues third consultation on Solvency II transposition

August 2014

On August 11, the PRA issued a consultation paper (CP16/14) setting out proposed changes to the PRA Rulebook in order to implement the Solvency II Directive, as amended by the Omnibus II Directive. This is the third consultation paper on Solvency II transposition and follows CP11/22 and CP12/13 published by the FSA in November 2011 and July 2012 respectively.


With Omnibus II now in force, the PRA is consulting on rules to transpose the amendments to Solvency II and implementation of those areas deferred from the previous two consultations. Omnibus II introduced a number of substantive changes, most significantly the long-term guarantees (LTG) package which comprises a set of measures to ensure that the new solvency regime is adequate for insurance products offering an element of guaranteed return. Draft rules consulted on in CP11/22 and CP12/13 therefore require amendments to reflect the LTG package along with the other provisions introduced by Omnibus II such as transitional arrangements and supervisory reporting.

CP16/14 consists of four sections:

  • Section 1 covers the proposed rule changes to implement changes introduced by Omnibus II including the matching adjustment, the volatility adjustment, risk management for LTG measures, transitional provisions, external credit rating assessments and requirements relating to groups.
  • Section 2 considers areas not covered in the previous two consultations or where the PRA’s approach has developed. In particular it includes new proposals on surplus funds following feedback on CP12/13. Other issues include insurance special measures, third country insurance branches and reporting.
  • Section 3 provides feedback on responses to two parts of CP12/13: the approach to Lloyd’s; and public disclosure of capital add-ons and undertaking specific parameters (USPs).
  • Section 4 provides an economic cost benefit analysis of the LTG package.

Future consultations

Further changes to the PRA’s Rulebook are expected, along with supervisory statements in order to implement the new solvency regime. Areas include but are not limited to:

  • The PRA’s expectations for approval processes (such as the volatility adjustment approval process, if implemented) planned for Q4 of 2014.
  • Further national specific reporting templates which the PRA may consider necessary.
  • Transitional measures to enable firms to adapt to the new regime in an appropriate and proportionate way.
  • Further rules covering third country branches.

The PRA states that it will need to make amendments to the Approved Persons Regime to take into account the Solvency II measures relating to governance and the fitness and propriety of relevant individuals. The PRA notes its intention to align the approved persons regime more closely to the regime proposed for banks, but explains that the regimes will not be identical. Recognising that many groups contain both banks and insurers, the PRA states that operating two distinct regimes would be complex and inefficient for such firms and the regulator itself. A consultation on proposals to implement changes in the Approved Person Regime is expected later this year.

Finally, the PRA intends to consult on rules relating to with-profits business (possibly alongside a supervisory statement) later this year. The consultation is likely to have regard to the PRA’s objectives, Solvency II requirements and the interaction with the FCA’s conduct regime in respect of with-profits.

The deadline for responses on CP16/14 is November 7, 2014. The PRA is expected to publish a policy statement with feedback, finalised rules and supervisory statements in early 2015. The deadline for transposition of Solvency II is March 31, 2015.

For further information:
CP16/14 – Transposition of Solvency II: Part 3

HM Treasury consultation on Solvency II policy issues

August 2014

HM Treasury has also issued a short consultation intended to complete the consultation process on how the government should implement the Solvency II Directive. The Treasury published a consultation in November 2011 but has been unable to proceed before now due to the delay in adopting the Omnibus II Directive.

The consultation seeks views on two policy issues related to Solvency II transposition:

The use by undertakings of the volatility adjustment and whether it should be subject to prior approval by the PRA

The volatility adjustment is one of the LTG package measures, introduced to cover those insurance products which would not be eligible for the matching adjustment. The detail on how the volatility adjustment is to be calculated and applied will be set out in the implementing measures. The volatility adjustment raises prudential issues, however, and it is the government’s view that the measure may be less appropriate for liquid or volatile liability types, such as products with significant surrender risk meaning a firm could be undercapitalised relative to the true risks it faces. To help avoid inappropriate use of the volatility adjustment, a safeguard was introduced which would allow the PRA to approve the use of the volatility adjustment on a firm by firm basis.

The government is seeking comments on whether the use of the volatility adjustment should be automatic, or whether approval from the PRA should be required before a firm could apply the volatility adjustment. Should the government decide that PRA approval is required, decisions on approval will be communicated within 6 months of application and the process would be transparent, proportionate and timely.

The approach to be adopted in removing business permissions where an undertaking fails to meet the Minimum Capital Requirement

The second issue the government is consulting on arises out of the obligation on the PRA to withdraw authorisation where an undertaking does not comply with the Minimum Capital Requirement. In the UK, the problem of insurance firms in financial difficulties has often been addressed by run-off over a course of time. The government considers that Article 144 of the Solvency II Directive would require a firm to be closed to new business but would permit the firm, where appropriate, to continue to manage existing insurance contracts, subject to on-going supervision by the PRA. Respondents are asked whether they agree with the government’s approach to the de-authorisation of insurance firms and, alternatively, what the consequences would be, particularly for policyholders, if firms were not permitted to enter into run-off.

The consultation closes on September 19, 2014. HM Treasury will issue a further consultation later this year to include feedback on this and the previous Solvency II consultation, an updated impact assessment and final statutory instrument to be submitted for Parliamentary approval.

For further information:
HM Treasury: Solvency II: resolving the remaining policy issues for UK transposition

Omnibus II published in OJ

May 2014

The text of the Omnibus II Directive was published in the Official Journal of the EU on May 22 and entered into force on May 23. 

The Omnibus II Directive, among other things, amends the Solvency II transposition date to March 31, 2015 and the application date to January 1, 2016.

For further information: Omnibus II published in OJ

PRA publishes Supervisory Statement on Solvency II technical provisions and internal models for general insurers

April 2014

The PRA has published Supervisory Statement SS 5/14: Solvency II: calculation of technical provisions and the use of internal models for general insurers.

The aim of the Statement is to set out the PRA's expectations in relation to the firms’ preparations towards Solvency II compliance by ensuring that general insurers are setting an adequate level of technical provisions and hold sufficient capital.

The Statement covers:

  • Technical provisions - Realistic assumption and adequate methods including the risk margin and events not in data (ENID).
  • Internal models – Material risks (including ENID), consistency of with technical provisions, assumptions and techniques, data, risk mitigation, management actions, validation standards, external models and data, and data from third party models.

For further information: PRA publishes Supervisory Statement on Solvency II technical provisions and internal models for general insurers

Council approves amending rules for the insurance industry

April 2014

The Solvency II amending directive, known as Omnibus II, was passed on April 14 having been adopted by the Council of the EU at first reading. Omnibus II was adopted by the European Parliament on March 11. 

The Directive is now awaiting publication in the Official Journal of the EU and will enter into force twenty days after it is published.  

With this stage near completion, the European Commission is expected to publish the draft level 2 delegated acts imminently.

For further information:

Council approves amending rules for the insurance industry

EIOPA issues first set of Solvency II Implementing Technical Standards

April 2014

On April 2, EIOPA issued the first set of Solvency II Implementing Technical Standards (ITS) for consultation. ITS are regulatory tools to assist firms and supervisors’ preparations for the Solvency II approval processes, due to start on April 1, 2015. The Omnibus II Directive grants power to EIOPA to draft these standards.

The consultation papers cover proposed ITS on:

  • Internal models approval processes.
  • Procedures to be used for granting supervisory approval for the use of ancillary own-fund items.
  • The process to reach a joint decision for group internal models.
  • Procedures to be followed for the approval of the application of a matching adjustment.
  • Special purpose vehicles.
  • The supervisory approval procedure to use undertaking-specific parameters.

Responses to all six consultations should be submitted by June 30 using the template provided. EIOPA is expected to submit the final draft ITS for endorsement by the European Commission by October 31, 2014. The second set of ITS is likely to be consulted on late this year or early in 2015. Meanwhile, the Commission’s Delegated Acts containing detailed implementing measures are expected to be made public in the summer.

Firms should review their preparations for Solvency II in light of the ITS consultations. The timetable leading up to implementation on January 1, 2016 is challenging and firms should have a clear understanding of the key dates on the horizon and ensure their preparations for the new regime are well advanced.

For further information:

EIOPA consultation papers

Omnibus II adopted in European Parliament plenary

March 2014

On March 11, the European Parliament adopted the Omnibus II Directive, the last element needed to amend the Solvency II framework directive, granting additional powers to EIOPA and introducing a package of measures to support long-term products. Firms can now continue their preparations on the basis that the new Solvency regime will come into force on January 1, 2016.

The final Omnibus II text agreed by the trialogue in November last year introduces substantive changes to the Solvency II Directive. In particular, Omnibus II clarifies the role of EIOPA, specifies areas in which EIOPA can propose harmonised technical standards and ensures supervisory convergence and cooperation between national supervisors. Omnibus II also includes a package of measures to facilitate insurance products with long-term guarantees and transitional measures both for EU insurers and third countries moving towards equivalence. Insurers will continue to be able to match long-term liabilities with investments in long-term assets such as infrastructure projects. Omnibus II also contains measures to mitigate the effects of artificial volatility, such as a matching adjustment for annuity business, a volatility adjustment, extrapolation of the risk-free interest rate, transitional measures and the extension of the recovery period.

The final Omnibus II text has not been published yet. The Council of the EU will need to formally adopt the Directive before it is published in the Official Journal. The next stage of Solvency II implementation is now underway. The Commission is preparing a Delegated Act containing a large number of detailed implementing rules which is expected this summer. Meanwhile, EIOPA is developing implementing technical standards aimed to ensure implementation on January 1, 2016 goes smoothly.

There is significant work for firms to do to finalise their preparations. Reporting has perhaps lagged behind internal model preparations but financial information for 2014 will need to be submitted in July 2015 and own risk and solvency assessments will be required even sooner.

For further information:

European Parliament: Omnibus II vote press release

Lloyd’s Solvency II 2014 guidance notes

February 2014

The Society of Lloyd’s has issued 2014 guidance notes on Solvency II and risk assurance. The guidance notes provide information on Lloyd’s ongoing approach to the implementation of Solvency II, the proposed Solvency II and risk assurance timetable and expectations of managing agents for 2014 during the current ‘soft landing’ approach. Lloyd’s continues to assume an implementation date of January 1, 2016 but notes that this could still be subject to change.

Points of interest include:

  • Agents are expected to refocus their efforts on their Solvency II programmes in 2014 and Lloyd’s aims to make its Lloyd’s internal model IMAP submission to the PRA during spring 2015. The expectation on managing agents is that all syndicates are able to demonstrate that they have an internal model which meets the full Solvency II tests and standards by the end of 2014. Lloyd’s anticipates that the level of PRA review and interaction with both Lloyd’s and the market on Solvency II will increase in 2014, and those agents that cannot demonstrate that they will meet the tests and standards should expect increased scrutiny.
  • Lloyd’s is comfortable that EIOPA’s guidelines do not impose any requirements on managing agents not already covered by the Lloyd’s Solvency II programme. Lloyd’s will not be rating agents against the guidelines in 2014, however Lloyd’s does need to be able to demonstrate to the PRA that managing agents are meeting the guidelines. A mapping exercise will be conducted in 2014 to assess the requirements of EIOPA’s guidelines against the elements of Lloyd’s Solvency II programme.
  • Two new quantitative returns will be required for 2014: a standard formula SCR calculation in May and a Pillar 3 dry run in September.
  • Lloyd’s will require a Board confirmation of Solvency II status to be submitted in December 2014. Lloyd’s will review and evaluate all submissions to determine each agent’s final Solvency II rating and these ratings will form a key part of the Lloyd’s internal model submission in 2015.

A proposed timetable of key dates for 2014 can be found in Appendix 1.

For further information:

Lloyd’s Solvency II and risk assurance 2014 guidance notes

EIOPA report on the functioning of colleges

February 2014

On February 20, EIOPA published a report on the functioning of colleges of supervisors and the accomplishments of the 2013 action plan.

In 2013, the main aim of the action plan was to make further progress in improving effectiveness by enhancing the risk analysis and efficiency of supervision, and enhance the understanding and knowledge of EIOPA's guidelines for preparing for implementation of Solvency II. Generally EIOPA found, during last year, colleges improved the efficiency and effectiveness of their work. Consequently, the quality of supervision of EU insurance groups has improved. 

The majority of colleges now have in place their basic procedural and organisational architecture. EIOPA explains that the focus for 2014 should be on: risk assessment; agreement on a co-ordination arrangement; and implementing the Solvency II guidelines.

The report also lists the priorities and tasks for colleges in 2014, which are outlined in more detail in EIOPA's 2014/15 action plan for colleges.

For further information: 

Report on the Functioning of Colleges and the Accomplishments of the 2013 Action Plan

Omnibus II plenary vote delayed

January 2014

The European Parliament has updated its procedure file indicating that the Omnibus II Directive will be considered at its 10 to 13 March 2014 plenary session.

The plenary vote on Omnibus II was previously expected to take place on 25 February. 

In terms of the Solvency II timeline, current expectations (subject to change if the Omnibus II Directive is delayed) are that the European Commission will publish ‘near final’ delegated acts in April 2014 for formal adoption in August/September 2014. Final agreement on the delegated acts is expected in February 2015. 

EIOPA has indicated that it will consult on the level 3 technical standards and guidelines as soon as possible during 2014. The Commission is due to start implementing technical standards early in 2015. 

Regulators will be given the powers they need to take decisions from April 2015 and the regime will go live on 1 January 2016.

2013 articles

Quick Fix Directive published in Official Journal of the EU

On 18 December 2013, the second Solvency II Quick Fix Directive was published in the Official Journal of the EU.

The Directive extends the implementation date of the Solvency II Directive to 1 January 2016. The deadline for transposition into national law is extended to 31 March 2015.

The Quick Fix Directive entered into force on 19 December 2013.

For further information: Solvency II Quick Fix Directive (2013/58/EU)

Solvency II – a turning point

On 12 December, the PRA published a speech by Julian Adams, Director of Insurance, on what the latest Solvency II developments means for the PRA’s implementation of the new regime. Firms should note the followings points highlighted by Adams:

  • The transposition date has been set for 31 March 2015, meaning that the Member States will be empowered to give Solvency II regulated approvals from 1 April 2015. Now is the time for firms to reassess priorities and make a concerted push to be able to demonstrate compliance in two years time.
  • Adams focuses on three areas of the trialogue agreement on Omnibus II: the matching adjustment; equivalence; and transitional arrangement for technical provisions. Generally, the PRA welcomes the measures agreed by the trialogue parties but notes that a number of details are still to be determined and it expects to have discussions with firms on some of the issues.
  • The PRA understands that the Commission aims to publish delegated acts next summer, but that a stable version is likely to be ready by March. Implementing technical standards are expected to be produced by the Commission in three waves, with the first wave due to be adopted in October 2014. These instruments will translate high level policy into practical reality and Adams urges firms to stay apprised of developments in delegated acts, technical standards and guidelines.
  • The PRA will be adopting an ‘intelligent copy out’ approach to its Handbook, meaning it will follow the words of the Directive text as closely as possible. The PRA 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 will be asking groups to discuss with their supervisor how they intend to prepare for the new regime and the specific requirements it places on groups.
  • Adams describes the ORSA as the cornerstone of Solvency II and firms are expected to submit an annual ORSA supervisory report from January 2014 onwards. The PRA attaches considerable importance to the ORSA and the role it will play in future to support 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.
  • Now that the timetable is certain, the PRA will no longer be flexible in terms of IMAP submissions. The PRA will continue to be robust in its approach to internal model approval and models must meet the required tests and standards, capture all quantifiable risks, and deliver prudently sound outcomes in a range scenarios.

Adams concludes that there is a significant amount of work to be done to be ready for 1 January 2016. Beyond Europe, Adams notes that the industry is at a point of fundamental change in the development of global insurance regulation with the IAIS’ work on the ComFrame initiative and a global insurance capital standard. It is imperative that firms stay abreast of the wider global developments and commit the time and resource need to keep pace.

For further information: Julian Adams speech: Solvency II – a turning point

PRA publishes a supervisory statement on how firms should apply the EIOPA Solvency II preparatory guidelines

On 12 December, the PRA published a supervisory statement to assist firms within scope of Solvency II in their preparations for its implementation in 2016. The statement sets out the PRA’s expectations for firms in terms of meeting the outcomes envisaged in the Solvency II guidelines published by EIOPA in October (the Guidelines). The statement provides some limited national interpretation on aspects of the Guidelines.

The statement will come into effect on 1 January 2014 and cease to operate on the day prior to implementation of Solvency II, 1 January 2016.

Although the Guidelines are addressed to the competent authorities of each Member State, the PRA expects firms to have regard to the outcomes in the Guidelines whilst also continuing to meet the existing PRA rules. Much of the Guidelines are consistent with existing PRA handbook provisions but firms should read, assess and implement the substantive provisions of the Guidelines in order to ensure that they are ready for the new regime. The PRA has sought to be proportionate in its application of the Guidelines to ensure that there is a minimal risk of two regimes running concurrently.

The Guidelines cover four fundamental aspects of firms’ preparations for Solvency II, namely:

  • systems of governance;
  • forward-looking assessment of the undertaking’s own risks based on the principles in the Own Risk and Solvency Assessment (ORSA);
  • submission of information to national competent authorities; and
  • pre-application for internal models.

The statement recognises that firms’ progress towards the Guidelines will be incremental. There will be a general ‘phasing-in’ in areas where there will be different expectations regarding a firm’s progress over time. The ORSA submitted in 2015 should therefore be more advanced than the one submitted in 2014.

More specific phasing-in periods will be applied to the submission of information. Thresholds will be applied to ensure that only firms above a certain threshold will need to meet these submission of information requirements.

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.

For further information: PRA publishes Solvency II supervisory statement

Solvency II timetable finally takes shape as agreement is reached on Omnibus II

Late on 13 November agreement was reached between the European trialogue parties on the Omnibus II Directive which is likely to enable the introduction of Solvency II with effect from 1 January 2016. The agreement is expected to be approved when the European Parliament votes on Omnibus II, currently scheduled for 25 February 2014.

Omnibus II contains amendments to the Solvency II Framework Directive and includes the provision of specific tasks for EIOPA. In particular, it clarifies the role of EIOPA in ensuring harmonised approaches on the calculation of technical provisions and capital requirements.

Progress on Solvency II had stalled because of negotiations on the treatment of long-term guaranteed products and issues related to the calculation of annuity liabilities. The agreed version of Omnibus II means that insurers will continue to be able to match long-term liabilities with investments in long-term assets such as infrastructure projects. Omnibus II will also contain measures to mitigate the effects of artificial volatility, such as matching adjustment for annuity business, a volatility adjustment, extrapolation of the risk-free interest rate, transitional measures and the extension of the recovery period.

In addition, the Omnibus II agreement contains:

  • measures to alleviate the burden in terms of reporting for what the Commission describes as small and medium sized insurers; and
  • agreed transitional measures on third country equivalence which could include long term (e.g. 10 years) equivalence assessments by the European Commission which could be of significant value for international groups.

The “quick fix” Directive extends the Solvency II application date to 1 January 2016. The proposed date for transposition has been delayed until 31 March 2015.

Omnibus II to be considered at 24 to 27 February 2014 plenary session

The European Parliament's procedure file currently indicates that the proposed Omnibus II Directive will be considered at the plenary session to be held from 24 to 27 February 2014.

Agreement on Omnibus II has been delayed several times due to ongoing negotiations between the European Parliament, the European Commission and the Council of the EU.

The detailed rules of Solvency II cannot be finalised until the text of the Omnibus II Directive is adopted.

PRA plans to assess firms’ compliance with EIOPA’s preparatory guidelines over 2014 and 2015

After an extended period of very little progress on Solvency II, preparations for the new regime appear to be gathering pace. In a consultation paper published on 21 October, the PRA has set out its proposals for implementing EIOPA's Solvency II preparatory guidelines (the Guidelines). Firms are reminded that the Guidelines apply to NCAs and will be used by the PRA to assess firms’ preparedness for the new regime.

The PRA notes that it will review 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 draft supervisory statement aims to clarify the PRA’s expectations of firms, approach to the Guidelines, and interpretation of certain aspects. The four areas covered by the supervisory statement are set out below with a link to the relevant EIOPA guidelines.

System of governance

The PRA generally considers the system of governance guidelines to be consistent with current expectations around general standards of group governance, systems and controls and the fit and proper criteria applied to approved persons. Firms are, however, encouraged to make the necessary changes to ensure their governance issues take into account the greater scope and granularity of requirements under Solvency II. Firms should be prepared to explain to the PRA any changes required to satisfy governance requirements, measures for making these changes and any difficulties faced. The Guidelines will also assist firms in preparing their annual SFCR covering governance issues once Solvency II enters into force. Firms will need to review their existing governance and risk management systems, identify where improvements need to be made, and take appropriate action ahead of the implementation deadline.

Organisational structure is a key issue that firms can start to address now. Group governance and Board responsibility will need to be reviewed for compliance and firms must ensure that Board members and key function holders are fit and proper and have the appropriate skills and experience for their respective roles. The PRA warns that firms must ensure the Board is fully aware of its responsibilities post-implementation and recommends using the preparatory phase to allocate and segregate responsibilities and reporting lines, and consider provisions to deal with conflicts of interest. Firms are also encouraged to review their existing outsourcing arrangements and reliance on outsourcing. Firms should be prepared to document their outsourcing approach, including contingency plans in the event of a service provider failure.

EIOPA proposal for guidelines on the system of governance

Forward-looking assessment of the undertaking’s own risks, based on the principles for the Own Risk and Solvency Assessment (ORSA)

Firms are advised to use the time before implementation to develop their ORSA. The 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. The ORSA should reflect the specific risk profile and governance mechanism of each firm and group, capturing all known risks. As such, the PRA will not prescribe the format or content of the ORSA but will review firms’ assessments and provide feedback where appropriate. The PRA makes the following key points that firms should bear in mind when developing their ORSA:

  • A robust process should be put 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. Once in place, firms can then start to perform the assessment based on their overall risk profile and solvency needs.
  • Board involvement will be more extensive and members are expected to play an active part in various stages including how the ORSA should be designed and documented, risk identification and mitigation and approving and communicating the finished product. Firms will need to plan a schedule of Board meetings to allow adequate time to work on ORSA development.
  • Results and insights from the ORSA should inform firms’ capital management and business planning, as well as product development and design.
  • Firms should identify the best time to complete work on the ORSA and inform the PRA well in advance of when their ORSA will be submitted. Due to the volume of ORSAs expected, the PRA plans to stagger its review in a risk based, proportionate approach.

Two annual assessments are proposed during the preparatory phase, intended for firms to demonstrate their ORSA progress to the PRA. 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. EIOPA has adopted a staggered approach to the ORSA guidelines. In 2014, firms will need to base the assessment of own solvency needs on valuations and capital requirements applicable to the individual firm (ICAS, ICAS+ or Solvency I). In the second year, firms are expected to perform their forward calculations on a Solvency II basis. The PRA recommends that the 2015 assessment should cover all material risks, including non-quantifiable risks such as reputational or strategic risk, and the extent to which they are to be covered by capital or addressed by way of risk management techniques, or a combination of both.

EIOPA proposal for guidelines on forward looking assessment of own risks

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. During the preparatory period, firms are expected to develop systems and structures aimed at delivering high quality information for supervisory purposes. The PRA plans to review and evaluate information submissions to ensure firms are making adequate progress in time for full implementation.

EIOPA proposal for guidelines on submissions of information to NCAs

Pre-application for internal models

The PRA explains that it will continue to work with firms in the internal model approval process (IMAP). Internal models continue to be developed and firms are expected to put into practice the relevant guidelines. 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. Feedback on models will be provided in line with the agreed timetable.

EIOPA proposal for guidelines on pre-application for internal models

The PRA suggests that many of the Guidelines should not present an additional burden for firms and largely reflect good practice in conformity with existing rules, however, firms should be aware of the anticipated changes over the next two years and the level of detail the PRA expects as we progress towards Solvency II implementation.

The consultation closed on 15 November and the PRA plans to finalise the supervisory statement prior to the Guidelines coming into effect on 1 January 2014.

For further information: CP9/13 Solvency II: applying EIOPA’s preparatory guidelines to PRA-authorised firms

Commission proposes extending Solvency II application date to 1 January 2016

On 2 October, the European Commission published a proposal for a Directive to extend both the implementation and first application of Solvency II.

This is the second “quick fix” Directive to ensure the legal continuity of the current Solvency I provisions until the complete Solvency II package is in place.

Under the proposed timetable, Member States will be required to transpose the Solvency II regime into national law by 31 January 2015.

The Commission proposes extending the application date to 1 January 2016.

EIOPA final Guidelines on preparation for Solvency II

EIOPA issued the final Guidelines for the preparation of Solvency II on 27 September. EIOPA issued draft guidelines for consultation in March this year covering the key areas of the Solvency II regime: system of governance, ORSA principles, submission of information to NCAs; and pre-application for internal models. EIOPA received over 4000 comments during the consultation period.

The Guidelines aim to increase preparedness of insurers and supervisors once the Solvency II regime is in force. NCAs must decide how best to implement the Guidelines into their national regulatory or supervisory framework.

EIOPA expects to issue the Guidelines in all official EU languages on 31 October with the application date of 1 January 2014. NCAs will have two months from the date of issuance to report to EIOPA their compliance or intention to comply. In February 2015, NCAs will be required to submit a progress report on implementation of the Guidelines.

In response, the PRA has announced that it plans to publish for consultation a Supervisory Statement in relation to the Guidelines in the coming weeks. The Supervisory Statement will include expectations of firms from 1 January 2014.

PRA plan to implement early warning indicators sparks debate

A recent speech by Andrew Bailey, CEO of the PRA, outlining the regulator’s plans to continue with its Solvency II preparation has prompted criticism from the industry. Bailey defended his recent assessment of the “shocking” implementation of Solvency II but confirmed that the PRA continues to work with its European counterparts and the ESAs.

The PRA is hopeful that the outstanding issues will be resolved, and final agreement on Omnibus II reached, by the end of the year. This timeframe is not guaranteed, however, and the PRA has adopted a planning horizon of 31 December 2015. During this period firms will be able to use their Solvency II internal models to meet the current ICAS requirements; an approach knows as ICAS+.

Plans to make early adjustments to incorporate the ORSA into the existing regime will, according to the PRA, ensure that UK firms are better prepared when Solvency II is finally introduced.

The introduction of early warning indicators (EWIs) designed to monitor the on-going appropriateness of internal models has been met with strong resistance. Bailey explains that breach of an indicator’s threshold (calibrated in line with a firm’s SCR) would “trigger an immediate supervisory response”, most likely to be a capital add-on. Firms are expected to update their internal models regularly in order to reflect their changing risk profiles.

Work on possible indicators to monitor internal models is still being considered at European level, therefore, firms have raised concerns that the UK regulator is attempting to implement aspects of Solvency II ahead of the rest of Europe. The principle aim of the Solvency II Directive is to develop a pan-European solvency regime. Exceeding the terms of EU legislation, so-called “gold-plating”, is not allowed under Solvency II and, consequently, the PRA risks being accused of operating beyond its remit.

The PRA has defended its approach stating that Solvency II has so far failed to address potential issues resulting from an excessive reliance on modelled capital requirements. Bailey explains that early action to introduce “sensible backstops” for insurers will avoid the problems with capital level being set too low, as the PRA experienced in the banking sector.

Understandably considering the significant amount of time and resources spent on Solvency II thus far, some firms are reluctant to invest any more in a regime that is still some way from being finalised. Further, this could prove to be a temporary requirement if the PRA has to remove or substantially adapt these indicators once the Solvency II regime has been finalised.

For further information: Meeting the challenges of a changing world – the PRA view

EIOPA publishes report on the long-term guarantees assessment

Earlier this year EIOPA conducted an assessment of the long-term guarantees 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, and threatened to further delay the already decade-long Solvency II project.

EIOPA published the results of the LTGA, along with its recommendations, on 14 June 2013. Gabriel Bernardino, EIOPA Chairman, stated the results of the LTGA “will provide the EU political institutions with a reliable basis for an informed decision on the long-term guarantee measures and a conclusion on the Omnibus II negotiations”.

The LTGA considered the following six regulatory measures aimed at ensuring an appropriate supervisory treatment of long-term guarantee products under volatile market conditions:

  1. Adaptation to the relevant risk-free term structure or Counter-Cyclical Premium (CCP)
  2. Extrapolation
  3. “Classical” Matching Adjustment
  4. Extended Matching Adjustment
  5. Transitional measures
  6. Extension of the Recovery Period.

Based on the outcome of the assessment, EIOPA:

  • Supports (with some minor amendments) the inclusion of the extrapolation, classical matching adjustment, extension of the recovery period, and transitional measures.
  • Advises that the trialogue parties replace the CCP with a formulaic, more reliable measure, known as the “volatility balancer”. The CCP is designed to reduce the impact of short-term volatility on the Solvency II balance sheet during crisis situations in financial markets. EIOPA states that extended application of the CCP has the potential to be detrimental to policyholder protection. Industry participants and supervisory authorities have raised concerns that the CCP might create “artificial stability” and is not an all-round crisis tool, for example, it does not addresses the challenges of a low-interest environment. In light of these concerns, EIOPA recommends the new volatility adjustment mechanism. EIOPA believes this measure will provide a solution to industry concerns and “deal in a predictable and permanent way with the unintended consequences of volatility”.
  • Recommends that the extended matching adjustment be removed altogether. EIOPA suggests excluding the extended matching adjustment, whilst retaining the “classical” matching adjustment. The LTGA raised significant concerns about the complexity of the extended matching adjustment. In addition, EIOPA reported that the extended version of the matching adjustment could provide “false risk management incentives, in particular in terms of credit quality of assets and with regards to the management of liquidity risk”.

In a press release published alongside the LTGA report, Bernardino described Solvency II as “a sound framework that needs to be implemented as soon as possible”.

Meanwhile, the industry and commentators have expressed concern that the changes proposed by EIOPA, particularly the new volatility balancer, may prompt further political discussion and risk delaying the regime yet again.

EU trialogue discussions are expected to restart shortly, with agreement on the final Omnibus II text currently scheduled for 22 October 2013.

For further information:

EIOPA Technical Findings on the LTGA

EIOPA - LTGA Appendix 1

EIOPA – LTGA Appendix 2

Update on early warning indicators

Last year, the PRA advised IMAP firms that it intends to monitor the ongoing appropriateness of internal models post approval through the use of EWIs. In a letter dated 23 May 2013, Julian Adams, set out the PRA’s implementation plan in this area.

Prior to the formal implementation of Solvency II, the PRA intends to “trial the use of EWIs in the ICAS regime for all firms using an internal model for regulatory capital assessment”. The PRA believes this will assist its supervision to monitor any downward drift in capital, and allow the regulator to test the calibrations of EWIs prior to use following implementation of Solvency II.

Following industry feedback and a data analysis exercise, the PRA has developed separate indictors for life, with-profits, and general insurance business (including London markets).

Life and general insurance business

For life and general insurers, the PRA considers the ratio between the modelled SCR and the Solvency II pMCR to be an appropriate EWI. Prior to implementation the PRA will use firms’ ICG as the capital requirement, whilst the pMCR will be calculated using EIOPA’s long-term guarantees assessment specifications. The PRA has set the ICG to pMCR indicator threshold at:

  • 300 per cent for life business (excluding with-profts); and
  • 175 per cent for general insurance, including London markets.

According to Adams, these levels are set so that around 10 per cent of firms will fall below them allowing the regulator to understand how EWIs operate.

With-profits business

The data submitted by firms suggests that the simple pMCR may not be appropriate for with-profits funds. In addition to the simple ICG to pMCR ratio, the PRA will use the interim period to test an alternative modified indictor to reflect the complexity of with-profits funds. The regulator will assess at the end of this period whether the additional with-profits EWI is warranted.

The with-profits indicator thresholds have been set at:

  • 125 per cent for the original (ICG to pMCR) ratio for with-profits business; and
  • 200 per cent for the alternative modified indicator.

It is worth noting the following points:

  • From September onwards, the PRA expects firms to aware of how their internal model performs against the EWIs.
  • Firms should be prepared to discuss with their supervisor the performance of their internal models including the reasons for “any significant actual or potential change in position and the causes of those changes, especially any actual or potential fall below the thresholds”.
  • The PRA plans to use the EWI as an input to ICAS or ICAS+ review panels.
  • EIOPA is also considering implementing EWIs to monitor the ongoing appropriateness of internals models and the PRA is assisting with this project.

For further information: Monitoring levels of capital and early warning indicators – 23 May 2013

PRA letter to firms – May update

Julian Adams, Deputy Head of the PRA, in a letter to firms on 23 May 2013, providing an update on the UK implementation of Solvency II. Key points of interest include:

  • The PRA will decide whether it intends to comply with the EIOPA’s preparatory guidelines once they have been published (currently expected in September). If the PRA does not intend to comply with any of the guidelines, it will have to provide the reasons for non-compliance within two months. Adams notes that “timing is difficult as it leaves little time for us and for you to prepare”.
  • Uncertainty around the implementation timetable remains a significant issue and is unlikely to be resolved before the autumn, when work on the long-term guarantees assessment, Omnibus II discussions and the preparatory guidelines should come together.
  • Having scaled back its work on Solvency II, the PRA has “reduced considerably” the cost to industry. Since the “ICAS+” approach was announced early this year, nearly half of IMAP firms have submitted requests to the PRA to leverage the work carried out on their internal models to meet the current regulatory requirements. Adams confirms that this work is at a preliminary stage and the PRA plans to share learnings from ICAS+ as soon as possible.

The letter also provides an updated timetable for the rest of the year.

For further information: Solvency II update – 23 May 2013

Industry invited to comment on guidelines for Solvency II preparation

EIOPA Chairman Gabriel Bernardino has stated that he remains confident that "Solvency II is coming closer". Bernardino believes that stakeholders recognise that 2013 is a crucial year for the new regime.

EIOPA plans to present the findings and conclusions of the long term guarantee assessment in June 2013. Bernardino notes that the authority has been encouraged by the level of participation across the member states with more than 500 undertakings taking part.

In addition, Bernardino states that EIOPA is busy preparing supervisors and undertakings for the Solvency II in a consistent way. As such, EIOPA has issued guidelines covering:

  • system of governance;
  • forward looking assessment of the undertaking's own risk;
  • submission of information to national supervisors; and
  • pre-application of internal models.

The guidelines aim to ensure that authorities put in place the most important aspects of the prospective supervisory approach by 1 January 2014. The consultations set out how authorities should approach the preparatory phase of Solvency II. EIOPA is keen to point out that, although there is no definitive timetable for Solvency II implementation, NCAs are expected to continue to progress in their preparedness for the new regime.

The deadline for comments on the guidelines is 19 June 2013. EIOPA intends to publish the final guidelines in Autumn 2013.

For further information:

EIOPA consultation papers

Article by Gabriel Bernardino, Chairman of EIOPA, for the BörsenZeitung

EIOPA confirms it is working towards January 2016 implementation

EIOPA Executive Director, Carlos Montalvo, has commented on the uncertainty around the implementation date of Solvency II. In an interview with Reactions magazine, Montalvo stated that EIOPA is “confident that the framework will be applicable in 2016” but that ultimately the decision rests with the European Council, European Parliament and the European Commission.

Montalvo does however confirm that EIOPA “will do the necessary work to make the implementation of Solvency II happen on January 2016”.

Finally, Montalvo urges parties to avoid reopening more issues once the long term guarantee issue is settled. He concludes that Solvency II, although it will not be perfect on day 1, is a good framework.

For further information: Interview with Carlos Montalvo

EIOPA opinion on interim measures

In preparation for Solvency II, EIOPA has published an opinion proposing a number of actions to ensure a consistent and convergent approach. EIOPA has identified the following key areas that need to be addressed to ensure proper management of undertakings:

  • system of governance;
  • pre-application of internal models; and
  • reporting to supervisors.

In light of this, EIOPA expects national authorities to:

  • Review and evaluate systems of governance ensuring sound and prudent management and assessment of risk.
  • Ensure undertakings have in place an effective risk management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report risks to which they are or could be exposed.
  • Continue to work with undertakings engaged in the internal model pre-application process.

Guidelines on how to proceed in the interim phase leading up to Solvency II will be published by EIOPA shortly. Each national authority must inform EIOPA whether it complies, or intends to comply, with the guidelines within two months of issuance.

For further information: EIOPA opinion on Solvency II interim measures

Long-term guarantee package to be launched on 28 January 2013

EIOPA has confirmed that it intends to launch the technical assessment of the LTG package on 28 January 2013 in cooperation with national supervisory authorities. The assessment had been delayed while the trilogue decided on the scope of EIOPA's mandate. The terms of reference have not been published but the assessment is expected to include the counter-cyclical premium, the matching adjustment and the extrapolation method. 

The Omnibus II trilogue parties have requested that EIOPA assess the impact of the LTG package under Solvency II on policyholders, beneficiaries, insurance and reinsurance undertakings, supervisory authorities and the financial system as a whole. Participating undertakings are expected to submit qualitative and quantitative information by the end of March 2013. EIOPA is due to report its findings by 14 June 2013, with the Commission planning to publish the final report by 12 July 2013.

Agreement on Omnibus II is currently scheduled for the plenary session on 10 June 2013, but it looks likely that this will slip. Reports suggest that agreement on the final text will be delayed until July, or possibly September. 

For further information: Long-term guarantees package

2012 articles

EIOPA indicates Solvency II implementation date of 2016

November 2012

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

October 2012

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 existingICAS 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

October 2012

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

October 2012

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 theEBA 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

September 2012

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

September 2012

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

September 2012

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:

  1. 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.
  2. 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.
  3. 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”.  
  4. 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.
  5. 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

July 2012

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 separatelydisclose, 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

July 2012

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

July 2012

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

June 2012

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

June 2012

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

May 2012

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

May 2012

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

March 2012

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

February 2012

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

February 2012

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

February 2012

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

January 2012

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 theSFCR 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

2011 articles

EIOPA publishes report on the calibration of premium and reserve risk factors in the standard formula

December 2011

On 12 December 2011, EIOPA published Calibration of the Premium and Reserve Risk Factors in the Standard Formula of Solvency II: Report of the Joint Working Group on Non-Life and Health NSLT Calibration.

When delivering its advice on the Level 2 measures, EIOPA agreed to carry out a comprehensive revision of the calibration of the premium and reserve risk factors in the NSLT underwriting risk module of the SCRstandard formula. To this end, EIOPA established a Joint Working Group consisting of representatives fromAMICE, Groupe Consultatif, the CEA and CRO Forum, as well as observers from the European Commission. The working group was tasked with discussing the most appropriate calibration methods and deriving recommendations for the premium and reserve risk factors. The report summarises the findings and recommendations of the working group.

The methodology used to carry out the calibrations took as its starting point the methodology previously applied by EIOPA’s predecessor, CEIOPS, in deriving its technical advice on the setting of premium and reserve risk factors for non-life underwriting risks in QIS5. Building on this, the report contends that, discussions in the working group led to significant improvements in the methodology, including a more systemic approach to the underlying statistical framework as well as the development of a comprehensive set of validation tools.

In the analysis undertaken, two broad options emerged for the setting of factors. Namely, a pan-European approach (favoured by EIOPA) and an averaging approach (favoured by the industry). Under the pan-European approach, the factors are set on the basis of a pooled European data set. Whereas, the averaging approach initially requires factors to be set at a regional level. The final Europe-wide factor is then determined by averaging across the regional factors.

The working group has, therefore, recommended the use of a combined approach (which combines the advantages of the two options described above) as a methodological basis for the calibration of the premium and reserve risk factors. The combined approach offers the advantage of taking into account the heterogeneity of the non-life risks in the individual markets for the setting of the European factors. At the same time, it ensures that the final factors are reflective of the average size of portfolios of insurers in the European markets to which they are applied.

For further information: Calibration of the Premium and Reserve Risk Factors in the Standard Formula of Solvency II: Report of the Joint Working Group on Non-Life and Health NSLT Calibration

HM Treasury publishes consultation paper on Solvency II

November 2011

On 23 November 2011, HM Treasury published a consultation paper inviting views on the changes the Government is making to UK legislation in order to transpose the Solvency II Directive. The Government accepts that there is still a level of uncertainty as to the detailed practical effect of implementing Solvency II, as Omnibus II is still under discussion (and will not be adopted until this consultation is complete) and the Level 2 implementing measures cannot be formally published by the European Commission until Omnibus II has been adopted by the European Council and European Parliament. However, the Government believes that discussions have reached a stage at which it is clear that the policy set out by Solvency II, and the legislation that needs to be transposed into UK law, is sufficiently stable to allow for the necessary transposition. The Government has therefore decided to consult at this juncture in order to give (re)insurance undertakings as much certainty and clarity as possible and to provide adequate time to prepare for the implementation of Solvency II.

To facilitate the full implementation of Solvency II, the Government needs to make changes to UK legislation and the FSA will amend its Handbook rules. The Statutory Instrument (available in Annex B of the consultation paper) contains provisions amending FSMA (as amended by the forthcoming Financial Services Bill which is due to be introduced into Parliament in early 2012). The required legislative changes fall into four broad categories:

  • The amendments necessary to set out the conditions under which undertakings may be authorised and de-authorised to carry out (re)insurance business.
  • New powers for the PRA, aimed mostly at enabling the PRA to provide the support and supervision required to enable (re)insurance undertakings to calculate their solvency position on a Solvency II basis.
  • New duties for the PRA aimed at mandating its participation in the new European supervisory framework.
  • Amendments to align UK terms and definitions with those set out in Solvency II.

The number of changes required to primary legislation is relatively small (as the majority of Solvency II requirements will be contained in the FSA Handbook) and the scope of the consultation is limited to amendments the Government intends to make to FSMA. To this end, the consultation does not cover the Level 2 implementing measures (which provide the technical details and processes through which Solvency II will take effect) as the Commission has indicated that these measures will be made by Regulation, once finalised, and will not require transposition into UK law.

The consultation period will run for 12 weeks and the closing date for responses is 15 February 2012.

For further information: HM Treasury: Consultation on Solvency II

FSA publishes consultation paper on the distribution of retail investments and Solvency II disclosures

November 2011

On 10 November 2011, the FSA published CP11/25 Distribution of retail investments RDR Adviser Charging and Solvency II disclosures. Amongst other things, the consultation paper sets out minor changes to the disclosure requirements in chapters 13 to 16 of COBS to implement Solvency II requirements.

Solvency II includes disclosure requirements, which incorporate and extend those required by the Consolidated Life Directive. The consultation considers how the FSA will incorporate these changes. It does not, however, cover changes to COBS 20 (with-profits) or COBS 21 (permitted links), which will be consulted on separately. The general application of Solvency II disclosure requirements is the same as for the Consolidated Life Directive, and for the most part the FSA proposes simply to replace the references to the Consolidated Life Directive in COBS 1 Annex 1 with references to the relevant provisions in Solvency II. In addition, most of the additional disclosure information set down in Article 185 of Solvency II is already required by FSA rules.

The consultation period ends on 10 January 2011 and the FSA plans to publish a policy statement in the first quarter of 2012.

For further information: CP11/25 Distribution of retail investments RDR Adviser Charging and Solvency II disclosures

EIOPA publishes report on cross-border cooperation mechanisms between insurance guarantee schemes in the EU

October 2011

On 5 October 2011, EIOPA published a report summarising the findings of a mapping exercise on the existing mechanisms for cross-border cooperation between IGSs of Member States and national supervisory authorities. The report has been prepared in accordance with the work programme specified in the mandate of the EIOPA task force on IGSs and provides general recommendations to the European Commission.

In conducting the mapping exercise, the task force developed a questionnaire which collected relevant data from Member States about the motor insurance regime and banking sector deposit guarantee scheme in the EU, and the US insurance guarantee regime. The responses were then compared in order to identify any lessons that could be of benefit. For example, by considering the motor insurance regime in the EU, the task force concluded that a future IGS directive should aim at aligning the scope and principles of IGSs to avoid contradictory positions being adopted between national IGSs and to create legal certainty in areas in which cross-border cooperation is expected.

The report summarises the conclusions and proposals reached by the task force following completion of the mapping exercise. In the report, the task force advocates:

  • Clear cooperation procedures for consumer protection.

Effective cooperation between home and host state IGSs and between IGSs and supervisors will help to ensure that policyholders are protected when an insurance undertaking fails. The proposed IGS directive needs to set out a framework for cooperation. It should also ensure that IGSs have effective cooperation arrangements in place.

  • Exchange of information by IGSs as a prerequisite for effective policyholder protection.

IGSs will require access to information from supervisors, both during the handling of an insolvency situation and on an ongoing basis, to enable the IGS to prepare for its involvement in potential cases. IGSs should, on a regular basis, provide general information about their own schemes, such as any coverage offered beyond the minimum stipulated by the proposed IGS directive, any material changes to the coverage, and contact details, so that in the event of a failure, all IGSs already hold this basic information.

  • Provision of legal certainty for the purpose of confidentiality

The proposed IGS directive should include specific requirements relating to the exchange of information by supervisors and IGSs prior to, and during a winding-up procedure or other insolvency event. It should explicitly relieve the parties from their general duty to protect information. Supervisors and IGSs should be able to provide sensitive information without fear of breaching professional secrecy rules.

  • Provision of infrastructure for exchange of information

Colleges of supervisors should discuss, in conjunction with IGSs, how cooperation arrangements should work, both in normal times and in the event of failure.

  • Need for a mechanism to solve disputes

Parties should take all necessary steps to reach an agreement on how best to deal with an undertaking in financial difficulties. Nevertheless, disagreements may arise and the proposed IGS directive should provide a mechanism to settle such disputes. The task force suggests that the use of EIOPA’s mediation regime could be considered.

For further information: Report on the cross-border cooperation mechanisms between Insurance Guarantee Schemes in the EU

European Parliament publishes report on insurance guarantee schemes

September 2011

The European Parliament has published a report, produced by ECON, on IGSs. The report explains that IGSs are designed to reduce the risk to policyholders in the event of the failure of an insurer. Essentially these schemes are a policyholder’s last resort when insurers are no longer able to meet their commitments. The issue is complex as there are already a number of IGSs in place throughout Europe (for example, the UK operates the Financial Services Compensation Scheme) and there is an interplay with other issues currently under consideration at EU level, most notably the Solvency II Directive. According to the report, an EU dimension is necessary in order to ensure:

  • consumer protection in the event of the bankruptcy of an insurer;
  • equal consumer protection regardless of the home state of the insurer;
  • consumer protection in the event of fraud or mis-selling; and
  • tax payer protection in the event of the failure of an IGS.

The report suggests that these goals can be met by a minimum harmonisation directive that ensures the same level of consumer protection regardless of the location of the insurer writing the policy and limits the exposure of tax payers in a market where the size of one or a number of insurers vis-à-vis the overall market is such that the failure would imperil the ability of an IGS to meet the claims of policyholders. Within these boundaries the design of the scheme will be a matter of subsidiarity (i.e. beyond the minimum requirements of the directive, individual Member States will be responsible for designing the scheme). Furthermore, the report does not support the introduction of a compulsory ex-ante scheme. In a situation where the failure of one or a number of insurers could place significant strain on the ability of an IGS to absorb all claims made, it is suggested that the home state regulator should ensure that the additional risk posed is accounted for through further supervisory standards. Given the implications of the failure of an IGS, national supervisors in cooperation with EIOPA should conduct market specific and Europe-wide stress testing to ensure that schemes are capable of withstanding the failure of one or more insurers.

ECON also believes that the geographical scope of an IGS should be decided on the basis of the home country principle. Ultimately the failure of an insurer will be linked to the inadequacy of supervision by the home supervisor. Therefore, the burden of compensating policyholders affected by that failure should be borne by the home IGS. The report considers a number of other key features and suggests that IGSs should fully cover valid policy claims across all forms of insurance, the claims compensation process should be consistent for all consumers and that IGSs should only cover natural persons at this stage (although national schemes may choose to include legal persons). Finally, the report calls on the European Commission to rapidly put forward its proposal for a directive on IGSs to complement the Deposit Guarantees Scheme Directive, the Investor Compensation Schemes Directive and the Solvency II Directive.

For further information: Report on Insurance Guarantee Schemes - Committee on Economic and Monetary Affairs

European Commission publishes a summary of responses to the consultation on the Level 2 implementing measures for Solvency II

May 2011

On 24 November 2010, the European Commission invited submissions from stakeholders and other interested parties on the Level 2 implementing measures for Solvency II. The Commission received 68 responses to the public consultation and has now published a document summarising these contributions.

The Commission reports that, by virtue of the nature and volume of the comments received, the consultation identified a small number of key issues that were of particular concern to stakeholders.

The impact on long-term products

A large number of respondents were concerned about the effect of the Level 2 implementing measures on long-term products, particularly those with guarantees. QIS5 suggested that it will no longer be viable for insurers to continue to offer these products. The problem is caused by the volatility of the value of assets and liabilities under a market consistent valuation framework and the measurement of specific risks that undertakings offering these products are exposed to. As a result of these comments, the Commission has established a working party which is currently analysing these issues. The Commission states that necessary measures will be taken to ensure that the characteristics and risks of long-term products are adequately reflected in the implementing measures.

Volatility and pro-cyclicality

Respondents also highlighted the need for mechanisms designed to address pro-cyclicality to work effectively and not create artificial volatility. The merits of the illiquidity premium as an anti-cyclicality measure were also observed and respondents suggested that a similar mechanism should be used to address distortions in the government bond market.

Proportionality and limiting the reporting burden

Many respondents cited the need for the concrete application of the proportionality principle in relation to Pillar III requirements, for example through exempting certain undertakings from quarterly reporting based on the size, nature and complexity of the risks in their business. Furthermore, respondents stressed the need to apply the proportionality principle across all three of the Solvency II pillars.

Transitional measures

The consultation highlighted the need for transitional measures in certain areas to ensure a smooth transition to the new Solvency II regime and to avoid market disruption. The areas in which transitional measures were deemed necessary include own funds, reporting requirements and third country equivalence.


Finally, the respondents made reference to the new European supervisory architecture and the importance of EIOPA in ensuring a harmonised application of the requirements. The need for a harmonised approach between supervisors was specifically mentioned in relation to capital add-ons, supervisory reporting and the actuarial function.

EIOPA announces the results of QIS5

March 2011

On 14 March 2011, EIOPA published the results of QIS5. QIS5 assessed the practicability, implications and impact of specified approaches to (re)insurers’ valuation of assets and liabilities as well as capital settings under Solvency II.

In comparison to QIS4, which was conducted in 2008, there was a marked increase in the participation of insurers. EIOPA reported that almost 70 per cent of all insurance and reinsurance companies falling under the scope of Solvency II participated (an increase of 33 per cent).

QIS5 revealed that the financial position of the European insurance and reinsurance sector, assessed against the SCR set down in Solvency II, remains sound. At present, the insurance companies that participated hold €395 billion and €676 billion of excess capital to meet their SCR and MCR respectively. EIOPA feels that this highlights the strong position of the sector as the capital surplus was achieved despite a difficult market situation.

For insurance and reinsurance groups, QIS5 showed a reduction in their capital surplus. When compared to the calculation under Solvency I, insurance groups have €86 billion less surplus capital available. However, QIS5 demonstrated that this reduction could be largely absorbed if insurance groups apply internal models and transitional measures to calculate their capital requirements under Solvency II.

QIS5 also examined the calibrations within Solvency II. While these are generally accepted as appropriate, EIOPA reports that it is already performing additional work to improve the calibrations, especially in regards to the areas of non-life and catastrophe modules. As QIS5 was designed to encourage insurance companies and supervisors to prepare for Solvency II, EIOPA has been able to use the exercise to identify areas where further guidance is necessary and where the feasibility and complexity of the proposals should be addressed to facilitate proper implementation by all undertakings. EIOPA cites various examples including the design of the non-life and health catastrophe risk sub-modules, the definition of contract boundaries and related valuation of deferred taxes, and expected profits in future premium.

Similarly, QIS5 identified areas, which were not tested in this exercise, that require further attention from the industry in the preparation for Solvency II. These areas are governance, risk management and reporting requirements.

To summarise, QIS5 showed that a prudent framework has to be based upon sound capital requirements, with particular attention paid to the quality of capital. EIOPA concludes that transitional measures are needed to ensure a smooth transition from Solvency I to Solvency II but stresses that an important balance needs to be struck. Transitional measures should be limited and not extended excessively due to a potential adverse effect on competition and the incentive for the insurance sector to implement Solvency II, nor should they be too short a duration so as to limit their effectiveness.

European Commission publishes the long-awaited Omnibus II Directive Proposal

January 2011

On 19 January 2011, the European Commission published the long-awaited proposal for the Omnibus II Directive (Omnibus II). Omnibus II will make changes to existing legislation to enable supervisory convergence under the new European regulatory architecture. Omnibus II sets out the scope of how the newESAs will exercise their powers, including their capacity to develop draft technical standards and settle disagreements between national supervisors. Omnibus II will also make a series of amendments to the Level I Solvency II Directive, including moving the implementation date back by a couple of months.

The ESAs will replace the former Lamfalussy level 3 Committees CESR , CEBS and CEIOPS , which had only advisory powers. In contrast, the ESAs have been given enhanced powers including the power to develop technical standards, draw up specific rules for national authorities and financial institutions, take action in emergency situations (for example banning certain products) and settle disputes between national supervisors. The new ESAs are EIOPA, EBA and ESMA.

The amendments made by Omnibus II will fall broadly into the following categories:

  • Definition of the appropriate scope in which the ESAs will be able to propose technical standards as an additional tool for supervisory convergence and with a view to developing a single European rule book.
  • Detail of how the ESAs will settle disagreements in those areas where common decision making processes already exist in sectoral legislation.
  • General amendments which are necessary for the existing directives in the financial services sector to operate in the context of the ESAs, for example, renaming the level 3 committees as the ESAs and ensuring that the appropriate gateways for the exchange of information are present.

The legislative proposal contains a limited set of amendments to Solvency II. These include the provision of more specific tasks for EIOPA, such as ensuring harmonised technical approaches on the use of ratings in relation to Solvency Capital Requirements, and extending the implementation date by two months (to 31 December 2012) to ensure better alignment with the end of the financial year for the majority of insurance and reinsurance undertakings. The amendments will also allow the Commission to specify transitional measures in certain areas if deemed necessary to avoid market disruption and to allow a smooth transaction to the new regime.

The proposal will now be sent to the European Parliament and the Council of the European Union for consideration. The European Parliament has announced an indicative date of 15 November 2011 for its plenary session on Omnibus II.

For further information:
Omnibus II Directive Proposal
Financial services: additional legislative proposal to complete the framework for financial supervision in Europe (Press Release)


Solvency II will radically change the supervision of insurers and reinsurers across Europe. Under the Solvency II Framework Directive, existing insurance directives will be amended and recast into the new regime which aims to introduce a consistent, risk-based, solvency regime which better reflects modern solvency and reporting requirements.

The Solvency II Framework Directive, which was adopted by the European Council on 10 November 2009, requires the provisions of the new regime to be in force by the end of December 2012.