9 October 2013

Solvency II Update

This alert addresses significant recent European developments regarding Solvency II.

The Solvency II Directive (“Solvency II”) aims to create a level playing field for the European insurance industry and signals a move towards a risk-based supervisory system. This alert addresses significant recent European developments regarding Solvency II.

Application date to be postponed
The current date of application for Solvency II is 1 January 2014. It had been anticipated widely for quite some time that application as per this date would not be feasible. In formal acknowledgement of this fact, the European Commission proposed a Directive on 2 October 2013 to postpone the application date to 1 January 2016. It is highly likely that this proposed Directive will be adopted.

Final Guidelines published
As postponement of the application date of Solvency II had been anticipated, the European Insurance and Occupational Pensions Authority (“EIOPA”) has sought another way to ensure that the insurance industry does not lose the momentum and keeps preparing for Solvency II: EIOPA has drafted Guidelines for the preparation of Solvency II. A consultation on the draft Guidelines was held from 27 March through 19 June 2013 and the final version of the Guidelines was published on 27 September 2013. You can find the Guidelines here. The Guidelines concern the following topics:

  • System of Governance
  • Forward Looking Assessment of Own Risks (based on ORSA principles)
  • Submission of Information to National Competent Authorities (“NCAs”)
  • Pre-application for Internal Models

The Guidelines will apply as of 1 January 2014. As the Guidelines only prepare for the application of Solvency II, the current regulatory regime will stay in place until Solvency II comes into effect.

The Guidelines aim to ensure that NCAs, insurance undertakings and groups implement key elements of Solvency II in a consistent and convergent way. They are directed at NCAs which must indicate whether they already, or intend to, comply with the Guidelines. Even though the Guidelines are not addressed to insurance undertakings directly, obviously the Guidelines will affect them as NCAs are expected to ensure that insurance undertakings take steps to prepare for Solvency II in line with the Guidelines.

As a result of the consultation, EIOPA has made a number of changes to the Guidelines. It notes the following changes as the most important.

  • System of Governance
    During the preparatory phase, the actuarial function should focus on data and methodologies, rather than on valuation of technical provisions. The framework for the valuation of technical provisions is still unclear as it is linked to the Omnibus II Directive (“OMDII”), for which negotiations are on-going.
  • Forward Looking Assessment of Own Risks (based on ORSA principles)
    The assessments of a) the continuous compliance with the Solvency Capital Requirement (“SCR”) and technical provisions and b) significance of the deviation of the risk profile from the assumptions underlying the SCR will be postponed to await the Pillar I technical specifications reflecting the OMDII agreement.
  • Submission of Information to NCAs
    Group solvency calculation methods: To prevent pre-empting future decisions on equivalence or on consolidation methods, EIOPA will enable a group to decide which method it would apply during the preparatory phase for the calculation of its group solvency with regard to third country undertakings. The group should make its decision after having considered the outcome of a dialogue with the group supervisor on the method of calculation.
    No submission of information for Q4 2015: EIOPA considers the submission of one quarter (Q3) as sufficient for the preparation for Solvency II. In the draft Guidelines, preparation of a submission for Q4 was also required. EIOPA stresses the importance of insurance undertakings and groups preparing for the quarterly submission of information within the deadlines that will apply to them under Solvency II. It therefore does not allow an extension of the quarterly reporting deadline.
    Extended reporting deadlines for annual reporting: The annual reporting deadline during the preparatory phase will be extended by two weeks. Therefore the solo submission of information to NCAs needs to be completed 22 weeks after year end and the group submission 28 weeks after year end.
    Proportionality and simplifications in reporting: Regarding assessments of materiality, EIOPA acknowledges that with respect to quarterly reporting of the balance sheet (except for technical provisions) quarterly measurements may need to rely on estimates and estimation methods more so than on measurements of annual financial data. However, EIOPA notes that the measurement procedures have to be designed to ensure that the resulting information is reliable and complies with the Solvency II standards and that all material information that is relevant for the understanding of the data is reported. With respect to the calculation of the technical provisions, EIOPA will allow undertakings to rely on simplified methods in the calculation of the risk margin and best estimate (as elaborated on in the Guidelines).
  • Pre-application for Internal Models
    EIOPA allows insurance undertakings engaged in a pre-application process for Internal Models to agree with their NCAs the submission related to the standard formula and its level of detail. The draft Guidelines required insurance undertakings engaged in such pre-application process to submit both internal model and standard formula forms.
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