INSURANCE : SOLVENCY II FACES BOTTLENECKS.
The question of long-term guarantees is a sensitive one. These guarantees are a potential series of measures aimed at ensuring appropriate supervisory treatment of long-term guarantee products (instruments with a life span of 20, 30 or more years). In June, the European Insurance and
Occupational Pensions Authority (EIOPA) published its findings from the long-term guarantee assessment, which recommends different measures to enable long-term products to better reflect their underlying value, rather than be overly affected by short-term volatility in financial markets. Measures such as matching adjustments (enabling insurers to improve their regulatory balance sheet) and volatility balancers (a tool that should allow insurers to better understand and manage their capital position) - previously the counter-cyclical premium - are proposed by the EIOPA.
Another roadblock that remains in the path of Solvency II is reporting requirements, which form part of Pillar III. On this, there is agreement between industry and the man who was in charge of Solvency II at the European Commission from 2004 to 2013, Professor Karel Van Hulle, who in an August interview stated that reporting and disclosure are "the path of most resistance". Insurers are concerned about the level of granularity stipulated in the annual and quarterly quantitative reporting templates being onerous. The level of granularity denotes the diversity of a portfolio - the higher the level, the more the risk is distributed. The task is rendered more complex by the requirement for insurers to comply with new International Financial Reporting Standards (IFRS), known as IFRS 4 Phase 2, which is based on a different concept for insurance contract boundaries that determine the cashflows that must be incorporated in technical provisions and discounting methods.
Some insurers have already made dry runs of their reporting obligations, and have ran into obstacles with ambiguity over the specific requirements demanded of them, for example narrative reporting. The EIOPA recognised this in its recently published guidelines on preparing for Solvency II, when it stated that it had taken on board the request by "many stakeholders" for more clarity on the submission of information. EIOPA therefore scrapped its demand for the quarterly report that insurers were supposed to submit in December 2015 and has extended the deadline for companies to conduct their annual dry run.
These changes have been welcomed by the insurance industry, which has been worried about the overwhelming amount of regulation considering that there are strict industry guidelines (Own Risk and Solvency Assessment - ORSA) in place.
Also blocking the way is the idea of equivalence under Solvency II, which includes provisions for assessments of the solvency systems and group supervision of countries outside the EU (referred to as "third countries"). An equivalent' country denotes one where the regimes and systems used to assess insurers are equivalent or comparable to the provisions of Solvency II, in a similar way to the Market in Financial Instruments Directive (MiFID) third country' rules. The equivalence rule also affects the methods insurers must use to calculate group solvency, as equivalence' requires that any funds or non-European entities owned by insurance groups must report the solvency capital requirement conforming completely to Solvency II standards, including in jurisdictions going through an equivalence process.