29 January 2013Analysis

KPMG expresses concern over latest EIOPA impact study

KPMG expressed concern this week that the latest European Insurance and Occupational Pensions Authority (EIOPA) survey in the run up to Solvency II implementation—this time the long-term guarantees assessment impact study—could cause further delays to the already tardy regime.

Captive International spoke to Janine Hawes, insurance director at KPMG, about the potential ramifications of the delayed survey.

How have participating insurers reacted to the short turnaround time of this particular study?
There has been a mixed approach, but all focused on how to use resources most effectively.  EIOPA has indicated that the study should be completed on a ‘best efforts’ basis, so firms are considering their best approach. In some cases, this will result in simplifications being made. For others, they may not run all the scenarios requested, or may not complete all the sensitivities requested, concentrating on those elements that are most critical to their own business model.

What do you think is behind the delay of this particular study? How likely is it that the study will be completed on time?
The delay in launching the study was caused by delays in getting the terms of reference agreed between the trilogue parties. EIOPA could not finalise its requirements until its terms of reference were fully agreed.  In terms of completing the study, firms will need to meet the deadline for submission and an industry-wide extension is very unlikely to be seen.

What are the implications, if any, for the captive sector?
It very much depends on what business the captive covers. The survey is mainly testing life products with guarantees, most notably annuity products. However, some scenarios also address non-life products with similar cash flow profiles (for example, regular payments to fund care after a major car accident). So unless the captive is likely to have such regular cash payments instead of a lump sum settlement, then it isn't going to be relevant to them.

How can insurers deal with the delays and changes with minimum disruption to operations and maximum compliance with regulators?
This really depends on where firms are already.  Many UK insurers have undertaken a review of their Solvency II needs and either reduced their project team or refocused priorities.  Some aspects that are seen as business enhancing are continuing, but we have seen a general slow-down in relation to Pillar 3 reporting.  Internal model work has also slowed as a result of submission slots being pushed back.  However, companies are awaiting details of the FSA’s proposed ICA plus requirements to determine whether and how best to embed internal model development work into meeting their existing ICA requirements.  All other FSA rules have remained in force, so compliance with these must be maintained.

How do you think the relationship between regulators and firms is holding up, particularly in the face of this most recent delay?
Generally, the industry would like more certainty, especially regarding timetable. The hardest thing for firms to deal with is the continual uncertainty regarding both the detail of the final requirements and the timeline.

What would be KPMG’s ideal outcome for this particular hurdle?
In an ideal world, the results of the study would result in a single, very clear solution to resolve the impasse on the long-term guarantee issue.  However, it seems more likely that the results will indicate that different options work best for different countries and portfolios.

How would a further short-term delay at this stage—resulting specifically from a delay in completing this study—impact the implementation of Solvency II in the longer-term?
The long-term gurantee issue is a significant one for the industry, which is why the study was commissioned by the trilogue parties originally.  It is therefore critical that a solution is found.  If there is no clear solution, then the trilogue process will take longer to reach an agreed position, meaning that Omnibus 2 and all the later stages of Solvency II will be delayed.  The key thing for the industry then will be the extent to which there is an early phasing-in of some of the requirements, and which elements this will cover.