European Commission adopts delegated acts under the Solvency II Directive
13 October 2014
The Commission adopted a Delegated Act containing implementing rules for Solvency II.
The Delegated Act - adopted on 10 October 2014 - will enter into force once the European Parliament and Council have both approved it, following their scrutiny, for which a maximum period of 6 months can be taken
The implementing rules cover, inter alia: the valuation of assets and liabilities, including the so-called 'long-term guarantee measures'; how to set the level of capital for asset classes an insurer may invest in; the eligibility of insurers' own fund items to cover capital requirements; how insurance companies should be managed and governed; equivalence assessments of third-country solvency regimes; the internal model framework; rules related to insurance groups. Simplified methods and exemptions apply in some cases to make the application of Solvency II easier for smaller insurers in particular.
The rules on capital requirements for asset classes promote high-quality securitisation by laying down lower capital requirements for investment by insurers in high-quality securitisation. The definition of high-quality securitisation, based on a report by EIOPA, is aligned in the Solvency II implementing rules and in the Commission's Delegated Act on a Liquidity Coverage Ratio for banks.
The Solvency II revision process aims to:
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take account of current developments in insurance, risk management, finance techniques, international financial reporting and prudential standards, etc.
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streamline the way that insurance groups are supervised and recognises the economic reality of how groups operate.
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strengthen the powers of the group supervisor, ensuring that group-wide risks are not overlooked
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ensure greater cooperation between supervisors. Groups will be able to use group-wide models and take advantage of group diversification benefits.
The new system will lay down:
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quantitative requirements and how to calculate them
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qualitative requirements (risk management and supervision)
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requirements for supervisory reporting and disclosure of information.
The new Solvency II Directive – a recast of several directives – will be applicable from 1 January 2016.
Full information
Text of the delegated Act on Solvency II
Risk.net: Commission slashes ABS charges in delegated acts
The acts slash the standard formula capital charge for Type 1 BBB rated securitisations to 3% per year of modified duration. This is a substantial reduction from the 5% floated in a draft version of the document circulated in July, and a huge cut from the 20% charge initially proposed by the European Insurance and Occupational Pensions Authority (Eiopa) during the long-term guarantees assessment last year. The capital charge for Type 1 A-rated securitisations has also been reduced from 4% to 3%. There has been no change to the charge for AAA and AA-rated instruments.
The Commission also states that a 0% risk charge will be applied to securitisations, which "are fully, unconditionally and irrevocably guaranteed by the European Investment Fund or European Investment Bank". This will benefit securitisations underpinned by loans to small and medium-sized enterprises that receive credit enhancement from the European Investment Fund.
Favourable treatment has also been extended to investments in closed-ended, unleveraged alternative investment funds (including specialist infrastructure funds) and infrastructure project bonds. These will receive the same capital charge as corporate bonds of the same rating.
But experts say the revisions still do not go far enough to incentivise large-scale investment by the sector. Paul Fulcher, managing director, ALM structuring at Nomura in London, says: "The incentive is not massive for infrastructure. All it means is infrastructure [funds] get treated the same as listed equities. It's not like they're saying infrastructure instruments that meet these criteria have no capital charge, they've just said you can treat it as a listed equity rather than an unlisted equity. This is better than a poke in the eye, but is not going to cause a stampede [in the market]."
Listed equities, classified as Type 1 equity under Solvency II, currently attract a 39% charge under the standard formula. Type 2 (unlisted) equity attracts a charge of 49%.
The Association for Financial Markets in Europe said in a release that the treatment of mortgage-backed securities is still too severe, and that it still makes economic sense for insurers to invest directly in pools of mortgage loans rather than securitisations. According to the association, a five-year AAA-rated retail mortgage-backed security will receive a capital charge of 10.5%, while a direct investment in a whole loan pool comprising the same mortgages will receive a capital charge of 0–3%.
There is also confusion in the European parliament as to the evidence the commission used to justify the surprise cut in BBB securitisation charges. The commission clearly states that "reductions in the capital charges for long-term investments have only been considered where there is a clear empirical case within the calibration standards applicable under Solvency II".
The European parliament and council have a six-month period in which to review the delegated acts and raise objections. If no objections are raised, the acts should be finalised by January 9, 2015.
© European Commission
