After extended delays Europe’s great insurance project is finally within sight. EIOPA’s chairman Gabriel Bernardino encourages the industry to help steer a course towards its final form.
The year 2014 sees the final countdown to Solvency II implementation. The new regulatory framework for insurance will enter into force as of January 1, 2016; we all have two years to prepare.
It is important that all 28 member states of the European Union make this preparation in a consistent way. Only by avoiding national solutions will we be able to create a level playing field for all insurance companies across the EU.
On October 31, 2013, the European Insurance and Occupational Pensions Authority (EIOPA) issued its Guidelines on Preparing for Solvency II. In fact it is not one but four sets of guidelines that cover the areas EIOPA considers fundamental in order to ensure consistent preparation for the new framework:
- System of governance, including risk management;
- Forward-looking assessment of own risk (based on the own risk and solvency assessment [ORSA] principles);
- Submission of information to national competent authorities (NCAs); and
- Pre-application for internal models.
The objective of these guidelines is to allow supervisors and companies alike to set up structures and get familiar with new requirements and a new system; to start the process of enhanced communication between supervisors and insurers; and in general to use this two-year preparatory phase as a warm-up for Solvency II implementation.
All the NCAs have already reported to EIOPA about compliance or their intention to comply with the guidelines.
EIOPA’s Q&A tool
The most important part begins now, when the NCAs will start incorporating the guidelines within their own regulatory and supervisory frameworks. In order to support them and ensure consistent application of the guidelines across the single market, EIOPA has established a dedicated questions and answers tool. The tool can be used by supervisors, financial institutions and all other stakeholders involved in the process.
“Solvency II is not ideal because ideal regimes don’t exist. But it is a top quality risk-based regime and a very good point at which to start.”
In December 2013, we published on our website answers relating to the guidelines on the submission of information to NCAs. We will continue publishing online all our further answers, so that everybody can consult them. We are aiming to answer each question quickly and in most cases within six weeks. However, it should be noted that EIOPA’s answers have no binding force in law and do not constitute professional or legal advice. EIOPA guidelines are addressed to NCAs and it is up to the NCAs to decide how to comply with the national application of the guidelines.
The purpose of our Q&A tool is to clarify the intention or meaning of guidelines and/or to provide—where appropriate—clarification regarding how the guidelines should be interpreted within a particular context. And I would like to encourage all the interested parties to profit from our Q&A tool and to ask us about all the issues that seem to be unclear or complicated.
Importance of proportionality
Another important issue we took a close look at while developing our guidelines is proportionality. EIOPA guidelines will be used not only by the large insurance groups, but also by small and medium-sized companies and we need to make sure that they are implemented in a manner proportionate to the nature, scale and complexity of the companies’ risk profiles.
For example, for our Guidelines on Forward-looking Assessment of Own Risks, we have made strong use of the application of this principle: only large companies and groups with more than €12 billion of assets will be required to do an ORSA during the preparatory phase. Small and medium-sized captives will not be obliged to make an ORSA and will have the opportunity to discuss their preparations with NCAs.
The proportionality principle is also followed in our Guideline on Submission of Information to NCAs. There we have a provision that undertakings may rely on simplified methods in the calculation of the risk margin and best estimate.
We also considered the specific case of insurance and reinsurance captives, in particular in relation to the quarterly submission of information. We have included a provision allowing NCAs to exempt appropriately-sized captives from the submission of information regarding the third quarter of 2015. At the same time insurance captives will need to submit their annual information and should be considered in the calculation of market share.
We strongly believe that not only the preparatory phase, but also the implementation of the Solvency II regime in general, should not be too burdensome for small and medium-sized operators. This is why for the next two years the application of proportionality principles is going to be one of the focuses in EIOPA’s regulatory and supervisory work.
Solvency II regulatory developments
On November 13, 2013, the trilogue parties (the European parliament, the Council of the EU and the European Commission [EC]) reached a political agreement on the Omnibus II Directive and in particular on the Long-Term Guarantee (LTG) measures. This agreement confirmed the powers of EIOPA and allowed the EU to move forward with further developing the Solvency II regulatory framework. With Omnibus II we gained clarity that will certainly contribute to the strengthening of insurance supervision in Europe.
In 2014, we will see the following regulatory developments. During the first quarter, Omnibus II will be voted on by the European parliament. In summer 2014, the EC will publish its proposal for more detailed rules regarding Solvency II—the so-called Implementing Measures.
EIOPA is going to conduct public consultations on its Implementing Technical Standards and Guidelines as soon as possible in the course of 2014 and 2015.
It is essential that during this legislative work we avoid re-opening old discussions because it will put at risk the whole project. Let us be frank: Solvency II is not ideal because ideal regimes don’t exist. But it is a top quality risk-based regime and a very good point at which to start. Fine-tuning amendments can be done once the new framework is in force. And this is where EIOPA sees its mission: to closely monitor the impact of Solvency II implementation and to signal the need to improve the framework where necessary.
Gabriel Bernardino is chairman of EIOPA. For more information visit: www.eiopa.europa.eu/
Solvency II, EIOPA, regulation