11 April 2013

Risk.net: Insurers fear non-recognition of equivalence under Solvency II interim reporting requirements

On March 27, the European Insurance and Occupational Pensions Authority (EIOPA) published a series of public consultation papers on interim measures that national regulators are expected to implement in preparation for Solvency II. They include some Pillar III-style reporting standards that industry experts have already argued would prove burdensome for many firms.

Now insurance groups with international operations have raised fears that they may have to report the solvency capital requirement (SCR) of their non-European entities according to full Solvency II rules, even in jurisdictions undergoing an equivalence process.

Bruce Porteous, head of Solvency II and regulatory development at Edinburgh-based Standard Life, says: "According to the reporting requirements [for the interim measures] you are allowed to bring in third countries on an equivalent basis, but only if you use what is called the deduction and aggregation [D&A] method. This method means when you consolidate the group balance sheet, you just add in that particular [third-country] entity without fully consolidating."

The D&A method of accounting compares each individual entity's own funds with their individual solvency capital requirement (SCR) to come up with the final group requirement. This is in contrast to the accounting consolidation method, which calculates the group SCR based on the group's consolidated balance sheet. However, as the D&A method requires firms to seek supervisory clearance it is possible that some groups with non-EEA entities may be barred from using equivalence assumptions in their reports.

Porteous warns that barring European groups from factoring in equivalence assumptions in their reporting would cause firms like Standard Life a significant headache: "Potentially it would mean you have to report third countries on a Solvency II basis [rather than a local basis], meaning that you have to try to run these businesses according to two sets of rules, Solvency II at the level of the group, and local regulations in non-European markets. It is impossible to optimise your business according to two sets of conflicting rules and this will put European insurers at a competitive disadvantage, relative to local insurers, in important non-European markets like the US and Canada."

Other market participants are optimistic that regulators will respond sympathetically to applications to use the deduction and aggregation method. David Simmons, managing director of analytics at reinsurance broker Willis Re in London, says: "Some of these groups will have a college of supervisors within Europe, so there will be several voices [advising on the deduction and aggregation approach], and you would hope that this process might lead to greater conformity on this particular issue.

BaFin, the German insurance regulator, has already confirmed that it will be open to groups using the methodology.

EIOPA stresses that the requirement for the group supervisor's approval to use the deduction and aggregation method is not new, and insists that the consolidation method is the one best suited to achieving convergence in the implementation of Solvency II.

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