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Solvency II - Time is Running Out

Any doubts that may have lingered about whether Solvency II would be go live in 2016 have been brushed aside by recent activity by the EU and the PRA (Prudential Regulation Authority). On the 19th March, Solvency II implementation regulations were issued in the Official Journal of the European Union.

Solvency clock

The regulations came into force on March 20th and now form part of the law in all EU member states. On the 20th March, the PRA published its final rules on the implementation of Solvency II in the UK. The Bank of England’s governor, Mark Carney stated “it is difficult to appreciate just how revolutionary Solvency II is for the prudential framework in Europe”, also mentioning that “our task now is to ensure a robust implementation of the new regime”. His comments preclude any equivocation on implementation. Moreover, deputy governor, Andrew Bailey noted that the rules “must be applied proportionally, with the emphasis on substance over form, if we are to maintain our focus as a forward-looking and judgement-based regulator". The driver for the proportionality reference may have been generated by concerns from the insurance industry regarding the desire to increase the rules burden for UK based firms. This could be partly due to the ECB add-on requirements.

ECB Add-ons

ECB Logo

The ECB has stated that it would like to increase the amount of data it receives from insurers. This request for information (unofficial QRTs) is bounded by asset and market coverage thresholds and legal obligations. Non Euro Zone countries are not bound by these legal requirements. The ECB has mentioned that Non Euro Zone countries could adapt to the statistical requirements and align themselves to the ECB regulations. However Mr Bailey’s comments layer doubt on that alignment. There are three interesting ECB add-ons for those firms under Euro zone regulations which sit outside the current SII requirement.

These relate to 1. Issue Dates: where the requirement is to provide the original maturity; 2. The provision of ESA2010 Classification (European System of Accounts 2010) in addition to NACE – given the difficulties of NACE provision adding another specialist statistical classification will complicate data sourcing, and 3. Reporting timelines where the ECB timeline is year-end, while Solvency II is the undertaking’s financial year end.

Government Bonds

A recurring theme played out in Solvency II asset allocation discussions within the insurance industry is the unseen hand of capital charges which will influence future capital flows. The benign charging regime applied to Government bonds with regard to concentration and spread risk belies the perceived sovereign risk attributed to the peripheral Euro zone. A study by the ESRB (European Systemic Risk Board) indicated that European insurers would need to raise an additional 80bn Euro, if sovereign debt was Solvency II risk charged at the same rate as corporate debt. With the upper limit set by this report, there is a lot of potential for increased capital requirements if sovereign debt risk/charging models were adapted to reflect more reasonable risk scenarios. There is also a broader economic and equitable issue relating to the optimal allocation of resources on a European wide basis. If insurers (who hold the largest pool of capital in the EU) look to minimize their solvency capital requirements by skewing asset allocation towards the sovereign sector, what impact will that have on market volatility and economic growth within the EU?

Europe and debt

Implementation Struggles

Solvency II seems to have been with us forever. Delays in the Solvency II timetable have extended deadlines for implementation over the last 4 years. With uncertainty comes the chase for resources and re-prioritisation of planning decisions. Solvency II gets pushed back and minds move on. Thus it isn’t surprising that in a recent Grant Thornton Survey of Insurers (Solvency II Pillar Three, The Final Hurdle. March 2015), in response to the question “Will you be ready for Pillar 3 prior to Solvency II going live, 18% were not sure and 5% stated No. Consultation on the 2nd set of EIOPA technical guidelines closed earlier this month, implementation is due in 9 months; so with testing and dry runs to be considered, time to get Solvency II in place and adjust to the potential changes in technical guidelines is running out.

ISC has and is delivering a variety of Solvency II assignments including; projects to provide Pillar I, II and III data from disparate global sources to ensure full data coverage, and implementing systems, data warehouses and processes to support the requirements of Solvency II. We have been involved in complex Solvency II projects. If you would like to hear and leverage our experience please contact us.

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