The Solvency II Experts News

As part of the Enterprise Risk Management Framework, Pillar 2 requires firms to undertake an Own Risk and Solvency Assessment (ORSA) to demonstrate “sound and prudent management of the business” and assess overall solvency needs. This article focusses on the impact of ORSA, the guidance to date, where companies currently stand and the key issues and challenges they face. Adhering to this aspect of Solvency II will mean significant and cultural change for many insurance companies. Click here to read full article.

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) today released for consultation the third set of advice on Solvency II Level 2 implementing measures.

The consultation papers are as follows:
CP 63 — Advice on repackaged loans investments
CP 64 — Extension of recovery period
CP 65 — Partial internal models
CP 66 — Group solvency for groups with centralized risk management
CP 67 — Treatment of participations
CP 68 — Treatment of ring-fenced funds
CP 69 — Design of the equity risk sub-module
CP 70 — Calibration of the market risk sub-module
CP 71 — Calibration of the non-life underwriting risk
CP 72 — Calibration of the health-underwriting risk
CP 73 — Calibration of the MCR
CP 74 — Correlation parameters
CP 75 — Undertaking specific parameters for SCR
CP 76 — Simplifications for technical provisions
CP 77 — Simplification for SCR
CP 79 — Simplifications for Captives
Stakeholders have until 11 December 2009 to submit their responses to CEIOPS.
Click here to download these papers.

The Bermuda Monetary Authority today published three market communications outlining proposals on various enhancements to its regulatory framework for Bermuda (re)insurers. These documents are: Consultation Paper on Eligible Capital, Discussion Paper on the Own Risk and Solvency Assessment (ORSA) Process, and Consultation Paper on the Insurance Code of Conduct. The Authority proposes introducing the enhancements outlined in the papers initially to Class 4 and Class 3B (re)insurers, in line with its risk-based approach to regulation.
Matthew Elderfield, CEO of the Authority said, “The Authority has made significant progress in enhancing Bermuda’s regulatory regime for (re)insurers, consistent with the requirements set under Pillars 1, 2, and 3 of Europe’s Solvency II Directive. The publication of these documents shows that we are keeping pace with international developments in insurance regulation and are on target for achieving regulatory equivalence with Solvency II.”

The Consultation Paper on Eligible Capital outlines the Authority’s planned approach to determining capital resources eligible to meet regulatory capital requirement levels. The Authority is proposing a three-tiered capital system which would classify a capital instrument into a given tier based on its ability to absorb losses. Eligibility limits would then be applied to each tier to determine what proportion of regulatory capital each one should cover for an insurer.
The proposals in the paper supplement the requirements of the Bermuda Solvency Capital Requirement, the Authority’s standard risk-based capital adequacy model that was implemented at the end of 2008.
Craig Swan, Director, Policy, Research and Risk Assessment said, “The Authority proposes to extend the system to Class 3A insurers one year after introduction, in accordance with the proportionality principle. We also propose to apply a three-tiered capital system to our group-wide supervisory regime upon its adoption.” Click here to download full paper

The Discussion Paper on Own Risk and Solvency Assessment (ORSA) relates to Pillar 2 of Solvency II. The ORSA process involves requiring firms to demonstrate the link between their capital model, risk governance and strategic decision-making. This process helps regulators better understand the risk-profile of companies. The Authority acknowledges that while ORSA is becoming a requirement of regulatory regimes worldwide, the concept is still very much in development. Therefore, the Discussion Paper provides high level guidance on the Authority’s approach to implementing an ORSA process suitable for the Bermuda market.
Mr. Swan said, “The Authority views the ORSA process as an opportunity to align management and regulatory reporting where information requested for regulatory purposes can be met to a great extent from existing management information. We also propose to use the ORSA process to consolidate regulatory reporting requirements and encourage sound risk management practices within the jurisdiction.” Click here to download full paper
The Consultation Paper on the Insurance Code of Conduct builds upon and codifies the governance standards already established within the jurisdiction. The Code establishes duties, requirements, and standards to be complied with by (re)insurers, including the procedures and sound principles to be observed by firms. It addresses such pertinent issues as corporate governance, risk management, governance mechanisms, outsourcing and market discipline and disclosure. Click here to download full paper

Draft European Union solvency rules that could force UK insurers to raise up to £50bn worth of capital are likely to be watered down.

According to Reuters UK, the Solvency II proposals, which have been heavily critisised by Britain’s leading annuity providers in particular, are now attracting criticism in continental Europe, increasing the probability they will be changed.
Next month, regulators from all 27 EU countries will meet in Berlin to agree on recommendations for final Solvency II legislation, which will be submitted to the European Commission early next year.

Further alterations are possible before final legislation is agreed in June 2011, but Reuters says British insurers are hopeful their concerns will be reflected in the regulators’ advice. Click here to read full article.

Some in the UK fear the FSA will apply the directive more strictly than its continental counterparts. Will “harmonization” succeed? Jessica Baylis investigates.

The approval of the Solvency II directive by the European Parliament and Council earlier this year has been the signal for some UK insurers and their advisers to start finding fault with it. The recent heavy coverage in the press of the costs to the UK pensions industry of Solvency II has been the most prominent example of this. But critics have also attacked the way they perceive the directive as being applied. Click here to read full article.

UK – Legal & General (L&G) has repeated a warning that annuity levels for UK-based defined contribution pension scheme members in the UK could fall by up to a fifth, if Solvency II is enacted in its current form.

The warning follows claims from the Association of British Insurers suggesting the European directive would force UK insurers to raise an extra £50bn (€57.16bn) in equity, leading to a sharp increase in premium rates paid by policyholders. The claims were made in a letter sent by the ABI to Alistair Darling, chancellor of the exchequer, urging both him and the European Commission to intervene.

Tim Breedon, chief executive of L&G, last month claimed the rules were “a betrayal of savers”, and said retirement income from annuities could be slashed by a fifth as insurers are forced to increase capital reserves. Click here to read full article

The CEA has sent a letter to CEIOPS expressing strong concerns over CEIOPS’ draft advice on the implementing measures for Solvency II. The CEA is concerned that CEIOPS appears to have abandoned the principles-based and economic approach it originally adopted. CEA comments that the draft advice is characterised by a ’systemic injection of quantitative and qualitative elements of conservatism’. According to CEA a number of the proposed measures are inconsistent with the principles underlying the Framework Directive and inconsistent with the agreed fundamentals of the new regime. Click here to download this letter

Today, CEIOPS is releasing for consultation its second set of advice developed on the basis of the Solvency II Level 1 text adopted by the European Parliament on 22 April 2009. The consultation papers provide advice on key aspects for the future implementation of the Solvency II framework. The issues are interlinked although they are presented in separate papers.

CEIOPS would like to highlight, inter alia, some areas in its consultation papers, on which comments and concrete input and proposals from stakeholders are especially welcomed. For example, the choice of discount rates (CP40, including the impact assessment on the risk-free rate), the assessment of the excess of assets over liabilities (CP46), and, in relation to capital add-ons (CP57), the appropriateness of listing the quantifiable risks not covered by the SCR standard formula that can be subject to a capital add-on, and the proposal to base the analysis of the significant deviation only on risks that are underestimated in the SCR, while allowing undertakings to present evidence that an overall approach could be followed.

click here to see a high level summary of papers and here to download these papers and their responses.

The consultation period for the first wave of CEIOPS’ 2009 consultation papers has now passed, with the second wave expected imminently. Although the consultation papers amounted to over 300 pages, across 12 consultation papers, it is probably fair to say that there were no ‘show-stoppers’ arising from the consultations. That is not to say that there were not any important issues arising from the consultations – there have been many comments made by various stakeholders identifying issues which will need to be addressed and considered – but it does demonstrate how an open and co-operative discussions between regulators and industry can help to develop a sensible, workable and more secure supervisory regime.

The remainder of 2009 is likely to be taken up with the remaining Second and Third consultation waves, currently expected to span July-September and November-December. However whilst the remaining consultation papers are awaited, it might be worth reflecting on some of the more salient issues arising from the first wave of consultations, at least from a General Insurance perspective.
The following issues are those that we have identified as some of the concern to our members who are general insurance companies operating in the London commercial insurance market.

Click here to read full article.

The postponement of the CEIOPS’ paper and the vagueness of current available information add to the confusion over how partial internal models might be used. These are however central to Solvency II as they are likely to be the choice of the majority of insurers. This article discusses definition problems and challenges that have been identified by various solvency II experts in relation to the use of partial internal models. Click here to read full article.

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has released its planned timetable for the next public consultation on Solvency II level 2 implementing measures. The timetable shows the topics to be covered and the dates of consultation.  Click here to download the timetable.

There will be two periods of consultation: July - September 2009 and November - December 2009. The timetable covers 44 topics and CEIOPS will publish its advice prior to each consultation period, although it’s understood that the papers for the first of these periods won’t be released till 1 July.