The Solvency II Experts News

This report is a follow-up to our articles on the reducing effect of reinsurance on the solvency capital requirement.

CEIOPS has submitted to the European Commission the second part of its interim work on EU supervisory powers and objectives “Preliminary Findings on Supervisory Powers”.

The conclusions of these findings were as follows:

In relation to powers, CEIOPS verified that a significant level of harmonisation between the analysed supervisory authorities exists for the powers defined in the Insurance and Reinsurance Directives. However, regarding the additional powers that some supervisory authorities have, the level of harmonisation is lower.

Regarding the mandates and objectives of the supervisory authorities there are several similarities that can be highlighted. The protection of policyholders and the preservation of the public confidence in the (re)insurance market, as well as the objectives of collecting and submitting information about the market and helping consumers making informed
decisions, are objectives that almost all supervisory authorities detain. However, some differences also exist.

An analysis of sanctioning powers, as well as the details on the actual use of administrative measures, are not included in this preliminary version of the report, but will be part of the final report to be submitted in February 2009.
Click here to download document.

Following today’s agreement by the EU Council of Economic and Finance Ministers to a general approach on a text of the draft Solvency II Framework Directive that excludes the group support regime, the CEA, the European insurance and reinsurance federation, calls for open and constructive discussions between the Council, the European Parliament and the European Commission to try to reach agreement on a common text.

“We have high hopes that the trialogue between the Council, Parliament and Commission will lead to a compromise on group support so that the text preserves the integrity of the economic risk-based principles that are the raison d’être for Solvency II,” said Michaela Koller, director general of the CEA.The CEA had already expressed disappointment that the text presented to the Council had removed all mention of the group support regime, which allows for the supervision of insurance groups in line with their economic reality. The CEA continues to believe that the group support regime is fundamental to Solvency II, since it allows for the economic assessment of a group’s risk and capital as well as the enhanced coordination of supervisors involved in the group’s oversight.

The European Parliament is due to vote early next year on its draft report that supports group supervision and the group support regime. Adoption of the report, if not coupled with a rapprochement of the positions of the Parliament and Council, would formalise the differences between the text agreed by the Council and the text adopted in Parliament, triggering a second reading.

“Given the different views in Council and in Parliament, it is important that the discussions on the open issues continue and that they are clearly focused on reaching a consensus that reflects the ultimate goals of the proposed regulatory regime and remains broadly in line with the original Commission proposals,” said Koller.

The consensus is the ‘perfect storm’ is brewing for run off, with the credit crunch, cat losses, possible market consolidation and the looming implantation of Solvency II on the horizon.

In recent years, there has been very little activity in the run off area, with increased competition and improved underwriting squeezing profit margins. However, in times of distress, those who deal in troubled waters can often find ways of making good returns – and the run off specialists are gearing up for a busy year in 2009.

While most think it is unlikely that many whole companies will be forced to close their doors, pushing their business into run off, the consensus is that everyone will be looking carefully at their books of businesses – and some less profitable lines will be placed in run off. Click here to read full article

In a letter sent to Christine Lagarde, the French minister for Economic Affairs, Finance and Employment who presides over the Council of the European Union’s Economic and Financial Affairs Council, The National Association of Insurance Commissioners (NAIC), a US based association, expressed serious reservations and concerns about several key aspects of the proposed “Solvency II” Framework Directive.

The NAIC wrote:”Although many essential components of Solvency II remain undefined, we question several features of the existing proposal, including the unbalanced focus on capital requirements and management’s ability to assess and quantify risks using internal models. And, while we understand the EU struggle to design an effective approach to group supervision, recent events further emphasize that any approach must ensure that all entities within a financial holding company – and their policyholders or depositors – are treated fairly and their benefits and rights fully protected.” Click here to read this letter

The European Commission has closed its consultation on extending Solvency II rules to occupational pension schemes. The Commission’s paper discussed proposals in relation to schemes which carried out cross-border activities and for schemes which underwrite risks linked to longevity or provided an investment guarantee without recourse to a sponsoring employer. Punter Southall head of research Jane Beverley said: “We welcome the fact that the EC has kept the scope of its current consultation limited. “This reflects a growing recognition within Europe that it would be inappropriate for the Solvency II directive to be applied to occupational pension schemes and it appears that this threat has been lifted, at least in the short term.” Click here to read full article.