14 November 2013

Insurers welcome EU agreement on Omnibus II; criticism from some quarters

EIOPA: The European Insurance and Occupational Pensions Authority (EIOPA) welcomes the trilogue agreement on the Omnibus II Directive. Omnibus II and the clarity over the Solvency II implementation timeline have been long awaited and will certainly contribute to the strengthening of insurance supervision in Europe.

This agreement is of extreme importance for EIOPA as a European institution, because it allows the Authority to fully perform its tasks related to the promotion of supervisory convergence and consistent supervisory practices.

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Insurance Europe: "The agreement reached on the Omnibus II Directive is an important milestone in the path towards the new Solvency II risk-based regulatory regime for EU insurers and commends the EU institutions for reaching agreement on Omnibus II", said its president, Sergio Balbinot. “It was important for Omnibus II — which updates the Solvency II Directive of 2009 — to be finalised now, as a great deal of work remains to be done on the technical details of the new regime before insurers and supervisors can be ready to apply it from the start of 2016.”

Insurers will have very little time between the finalisation of the delegated acts and technical standards, which provide important details on technical matters under Solvency II, and the proposed application date of 1 January 2016. Nevertheless, Insurance Europe remains committed to the current process for finalising the new regime. Europe’s insurers will do their utmost to meet the ambitious timetable. “While the compromise reached between the institutions on Omnibus II is not the ideal solution the insurance industry would have wished for in terms of correctly reflecting insurers’ long-term business and low exposure to market volatility, we do believe it is a workable base from which to develop the technical details of the new regulatory regime", said Balbinot.

From the outset, the European insurance industry has supported the goals of Solvency II. The new regulatory regime has the potential to deliver a state of the art prudential regime that will ensure very strong policyholder protection, maintain the competitiveness of the European industry and strengthen the European single market. “Solvency II will enhance the confidence of investors and policyholders in the European insurance industry, which is the largest in the world, with 33 per cent of global premiums”, said Balbinot.

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Fitch Ratings: The amendments are reported to be largely based on EIOPA's Long-term Guarantees Assessment study. Fitch believes this is unlikely to satisfy some insurers given the potentially significant extra capital that may still be needed.

EIOPA's study was intended to clarify appropriate capital requirements for long-term guaranteed products under volatile and exceptional market conditions. However, Fitch understands that several major insurers considered the study to be inconclusive because the scenarios underlying the assessment were not, in their opinion, meaningful.

The timetable set out in the latest agreement is ambitious, but workable for most insurers. Solvency II itself - and any new measures contained in the Omnibus II Directive - is unlikely to have any significant impact on insurers' balance sheets in the next few years because of the timescale involved in finalising and phasing-in new rules. Fitch does not expect Solvency II to have an impact on insurers' credit ratings during this time.

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ABI's Director of Regulation, Hugh Savill, said: "We are relieved that a deal for Solvency II has been finalised following months of intense discussions. The outcome is by no means perfect but we now have a solid basis for the industry to move forward and to prepare for the entry into force in 2016. The Commission should now consult on the full implementation measures as soon as possible.”

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PwC partner and SII leader, Charles Garnsworthy, commented: “Agreement yesterday between the European Council, European Parliament and Commission will give the market a degree of rule certainty, but will also allow European Insurance and Occupational Pensions Authority ("EIOPA") to finalise its own drafting on delegated acts and regulatory technical standards. The compromise reached will not satisfy all parties entirely, however it will represent relief for many, especially now that the way forward has become clearer.

“The timetable is now clear. EIOPA’s guidelines become effective from January 2014 and there is a very real short term need to be prepared to deliver in 2014 and 2015. Firms should now take stock of whether their programmes are going to meet the requirements and prioritise those areas needing attention. ”

Statement

FERMA

Julia Graham, President of Ferma, said the agreement between the European Parliament, Council and Commission takes 'us out of uncertainty for the time being at least'. "It creates a momentum and brings some stability for all the stakeholders involved in Solvency II: insurers, policyholders and investors. The timeline is now clear: vote before the election in May 2014 and January 2016 as the 'go live' date for Solvency II", she said.

"Ferma will remain cautious about the outcomes of these Level 2 measures, especially regarding the treatment of captives", she said.

Reporting © CRE

"We welcome the fact that there was an agreement", the German reinsurance giant Munich Re said. "The compromise is an appropriate balance between consumers, business and the insurers in Member States."

However, the deal drew criticism from some quarters for caving in to pressure from national governments on behalf of their domestic lobbies. Proposals for more sweeping and harmonised powers for the European Insurance and Occupational Pensions Authority were largely diluted.

David Simmons, managing director of analytics at reinsurance broker Willis Re, said many small insurers across Europe, particularly mutual insurers, will be hit particularly hard by Solvency II. He said the new regulation may penalise them for a lack of diversification, and they have only limited capacity to raise more capital. They also may not have the resources to pay for the more sophisticated risk management and reporting that Solvency II will require.

If the proposals had been in place in one of their earliest forms in 2008, the industry would have been forced into large fire sales of assets at the bottom of a market, said Paul Fulcher, managing director for asset liability management structuring at Nomura in London. Since then, he said, "it's become like one of those miniseries, like 'Lost' or 'Homeland', that start with a bang and a clearly defined narrative arc but that gradually wear out their welcome as yet another series is commissioned."

Further reporting © WSJ (subscription required)

Chris Cummings, Chief Executive of TheCityUK said: “This is a definite step in the right direction, and shows that businesses and their representatives can make an impact on policy decision-making in Brussels. The calibrations agreed upon will we hope increase the transparency of the package of regulations and ease the transition from Solvency I to Solvency II for the insurance sector. This step also shows that policymakers are responding to industry concerns, recognising the need for European regulation to support the competitiveness of financial services both in the UK and Europe.“

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