- Agreement on Omnibus II/Solvency II
On 11 March, the European Parliament formally adopted the Omnibus II Directive which introduces substantial changes to the Solvency II Directive. The directive will now be formally adopted by the Council and will then be published in the Official Journal.
Significant regulatory work still needs to be completed by January 1, 2016, the date agreed for Solvency II’s application. EU financial services legislation is multi-layered. The Solvency II Directive sets out the general principles of the new regime (level 1), but “level 2” texts, known as “delegated acts,” as well as “level 2.5” regulatory/implementing technical standards (over 400 pages) are needed before the new rules will fully apply in practice.
Attention now turns to work by EIOPA and the Commission to finalize these implementing measures. Only once all the new rules are in place will (re)insurers be able to assess their level of compliance with the new regime. The Commission has indicated that the delegated acts will not be adopted before Q3 2014 and, therefore, should enter into force beginning 2015. EIOPA will carry out public consultation on the implementing technical standards relevant for the approval processes between April and June 2014 and on the remaining technical standards - between December 2014 and March 2015. The two sets of the draft implementing technical standards should be submitted to the Commission by 31 October 2014 and 30 June 2015 respectively. Thus, (re)insurers will need to work under a rather tight schedule to meet the 2016 deadline. Certain phasing-in measures will apply even earlier, as of April 1, 2015. Additionally, EIOPA intends to supplement the legally binding rules with as many as 36 level 3 guidelines. Two sets of these guidelines are scheduled for publication in February and July 2015.
The Solvency II Directive must be transposed into the national laws and regulations of the 28 EU Member States (and EEA States: Iceland, Liechtenstein and Norway). Although national administrations and supervisors do cooperate closely together through EIOPA and through colleagues, there is still a significant risk that by the deadline (January 31, 2015) (re)insurers may find that Member States have taken different approaches. Despite a much more detailed and EU-wide regime than Solvency I, the risk of national “gold plating” or unilateral interpretation by solo and group supervisors will remain when the new rules become effective in 2016.
Under the new regime, dispute resolution will also be challenging, with more than one EU body empowered to resolve diverging views: both the Commission and EIOPA will have their own set of tools to address any misapplication of EU rules. Although the Commission is the “guardian of the Treaty” with power to initiate infringement proceedings against Member States, EIOPA will also be able to investigate alleged breaches or non-application of Union law.
- A New Provisional Equivalence Regime
During the final round of negotiations on Omnibus II, the EU institutions agreed significant changes to the rules on equivalence. The introduction of the category of “provisional equivalence” for the purposes of solvency calculation and the Solvency II is a noteworthy development.
For a period of ten years (renewable for subsequent periods of ten years), affected (re)insurance groups will be allowed to calculate own funds and solvency capital requirements for their non-EU operations according to the relevant third-country rules even if that jurisdiction has not applied for Solvency II equivalence or would not meet the equivalence standard. As such, this new provisional equivalence regime is relevant for EU groups and EU subgroups of international groups which use the deduction and aggregation method to calculate their group solvency under Solvency II and which have (re)insurance subsidiaries in third countries.
The Commission and EIOPA will have to demonstrate either that the current solvency regime of the relevant jurisdiction concerned would be capable of meeting full equivalence criteria if such assessment were carried out or, even more tenuously, that such a regime is likely to be adopted by the jurisdiction concerned and applied at an unspecified date in the future. This approach introduces a political choice to the equivalence process as the jurisdiction concerned will not need to take any active steps. This equivalence ‘fiction’ will ensure that EU groups and EU subgroups are not penalized by the Solvency II regime for their foreign operations.
The agreement also finalizes the Solvency II provisions governing full and temporary equivalence. While the full equivalence provisions remain relatively unchanged, the final Omnibus II text contains an important change in the benefits attached to temporary equivalence for group supervision.
Initial texts had provided an option for Member States to rely on third-country group supervision. This was strengthened in the negotiation process and the text now requires Member States to rely on such supervision (with one possible exception, i.e. where an EU (re)insurer within the group has a balance sheet total that exceeds the balance sheet total of its non-EU parent).
The full and temporary equivalence regimes are far from finalized. Omnibus II provides the legal basis for delegated acts which will set out criteria for full equivalence and will further specify criteria for temporary equivalence. Drafts of those texts date back to 2011 and the Commission is likely to review these criteria, at least to reflect Omnibus II.