12 April 2013

Risk.net: Solvency II set for inconsistent soft launch, lawyers warn

Absence of legal powers to enact guidelines in some jurisdictions threatens EIOPA's objectives. Unequal powers of national regulators and legal limits to enforcement are likely to result in a patchy implementation of the interim rules for Solvency II, legal experts are warning.

The European Insurance and Occupational Pensions Authority (EIOPA) launched a consultation on its proposed interim measures on March 27. The proposals include measures relating to systems of governance, forward-looking assessments of an insurer’s own risks, the submission of information to national regulators and the pre-application of internal models. National regulators are expected to implement the interim rules in 2014 – at least two years before the Solvency II Directive is now expected to come into force. EIOPA says the early guidelines are necessary to ensure uniform convergence towards the new regime and prevent national regulators from adopting their own measures.

But lawyers say that different national regulatory frameworks may jeopardise plans for a harmonised soft launch across the European Union (EU). Philip Jarvis, head of the insurance group at Allen & Overy in London, says that while the regulators in a number of countries, including the UK, have delegated powers that enable them to make the interim guidelines binding on firms, regulators from other Member States can only implement rules after new legislation has been enacted.

EIOPA recognises this political hurdle and says it is up to national regulators to determine how to comply with the guidance. In cases where national legislation is found wanting, the authority says consideration should be given to the fact that the aim of the measures is to prepare for Solvency II.

There are, however, other legal difficulties in achieving a uniform approach to preparing for Solvency II. Guy Soussan, insurance partner at Steptoe in Brussels, points to some situations where, because of the way the rules have been drafted, the implementation of the guidelines is left, to some extent, at each national regulator’s discretion. Enforcement of the interim measures is arguably a bigger challenge. EIOPA does not require national regulators to take supervisory action if insurers fail to comply with the guidelines, as Solvency II is not yet applicable.

In this context, the industry’s commitment and cooperation with national regulators will influence the pace of early implementation. Paul Clarke, global insurance regulatory leader at PwC in London, says Solvency II’s detractors may be less keen to adopt certain aspects of the proposals. “In general, the relationship and dialogue between the industry and the regulators is a constructive one. There is some appetite for Solvency II implementation, but those who regard Solvency II as very unattractive will see this as an attempt at early adoption of some of the points of detail they oppose.”

Others focus on the different degree of preparedness of firms and highlight how the protracted political discussions and subsequent delays have resulted in some firms reducing their efforts to prepare for Solvency II, which may have an impact on the application of the interim measures.

An inconsistent implementation of the guidelines, warns Jarvis, risks further exacerbating the industry’s concerns about Solvency II and widening divisions. “There will be tremendous pressure for EIOPA and the Prudential Regulatory Authority (PRA) [in the UK] to address the implementation of the guidelines in a proportionate and reasonable manner. This is acknowledged in the EIOPA proposal. The way I suppose this will play out is that the industry in the UK will robustly defend its position in relation to anything it feels has been put in a competitive disadvantage vis-à-vis its peers on the continent”, adds Jarvis.

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