Solvency II Delegated Acts - Commission publish, world shrugs

Delegated Acts - handle with care

On Friday, the European Commission  released a "provisional" version of Solvency II's Delegated Acts via their own website.

Given how long they have taken to arrive, they rather surprisingly aren't chiselled into pyramid slabs or written on parchment - less surprisingly, they feature very little in the way of changes since the July 2014 version, so for those who want to know why it has taken 3 years for these to officially emerge, the January 2014 version is a better contrast (I summarise some of the changes between 2011's starter document and the January version here).

There has been enough comment since Friday (here, here, here and here for a start) to highlight what has changed since the summer, and more importantly, what has driven those changes - namely, encouraging EU insurers to plough money into long-term infrastructure assets by making them cheaper from a capital perspective, thus solving the European Union's economic woes in one fell swoop!

Bear in mind the first scrounging letter from the Commission came to EIOPA over two years ago, reminding them of what a "...potentially powerful financing channel" European insurers could be, provided any necessary "...adjustment or reduction" was made to Solvency II's capital requirements.

Little wonder then that it has taken a while for them to ensure that Solvency II remains prudential, while simultaneously unlocking long-term capital pools, though it sounds like the empirical basis of EIOPA's earlier calibration attempts has been overriden to get there.

Is it likely to get through the baying mob in ECON? The insurance industry's Green Party sparring partner had already flagged his distaste at the capital discounts now being offered, as well as the due process applied to recalibrating them.

It remains to be seen whether it is controversial enough to delay the inevitable in early January, but given the Acts seem to have been received with customary ambivalence by most affected parties, this is probably 'job done'.

Omnibus II and Delegated Acts - state of play summary (before it gets interesting!)

Unless you've been hiding in a cave since last summer, you shouldn't find anything new in this post, but I wanted to accumulate all relevant materials into one place for the run up to Omnibus II D-Day for my own convenience, and you're welcome to share.

At the moment we have;

European Parliament

• Omnibus II Plenary vote is still  scheduled for Tuesday March 11th. The Plenary page is here, but the forward agenda is not available, despite draft agendas apparently being due a month prior to Plenary meetings (suspicious?). There doesn't appear to have been any recent parliamentary agitation, from the steaming-mad Green contingent in particular, to suggests Omnibus II will get derailed at this point.

European Commission

• I'll cover the fineries of this on a separate post, but worth noting that the Commission's "draft implementing measures" document, which have been circulating for over 2 years, is now referred to as "Delegated Acts", after being Lisbonised.
• A revised draft of these rebadged Delegated Acts, on the assumption that Omnibus II gets through Plenary, will be delivered like an impatient baby in the deuxieme trimestre of this year (p21). 
• It apparently not be made available to the proles for public consumption beforehand (reported here and here). Still plenty of time for the faceless exponents of dark arts and back-room shenanighans to influence its content, so the lack of formal consultation is not necessarily a calendar breaker, though it is exceptionally poor form. 
• The Commission's advisers now come in the form of EGIBF (for Delegated Acts) and EIOPC (for Implementing Acts). EIOPC are evidently a garage without a car at the moment, having not published a scrap of material in 15 months while Omnibus II dragged its heels. 

EIOPA

• EIOPA's work on implementing technical standards is due to be released from April, in a phased manner.  I don't think that the activity is Omnibus II-dependent as such, even if EIOPA's influence is a little less formal without it!

Obviously as a practitioner in the Risk field who doesn't want to wallow in the details of European Union lexicon, the forthcoming spurt of activity is considerably murkier than it would have been pre-Lisbon. Virtually every relevant term or participating body in the Solvency II hemisphere has had a name or remit change in the interim, and I'm not seeing anyone offer a mapping between "Pre" and "Post"-Lisbon terms.

I'll have a stab on a separate post, for my own sanity if nothing else.

PRA briefing on Solvency II, IMAP and application of EIOPA's preparatory guidance

Santa's 'Omnibus 3' joke was not so

well received... 

Santa obviously couldn't wait to put a smile on the faces of the insurance industry this year, so his little helpers at the PRA delivered an industry briefing yesterday, and subsequently released a bucketload of materials which aimed to help give everyone's still-defrosting Solvency II programmes an early steer as to expectations over the next two years.

The main document released was a supervisory statement (along with a video explaining what a 'supervisory statement is!), which followed on from a recent consultation on how the PRA plan to apply EIOPA's preparatory guidelines.

That blog post is effectively still relevant, as virtually nothing changed as a result of the consultation which, at 18 responses, was appallingly participated in, and is perhaps symptomatic of the malaise with which the topic has been infected by during 2013.

The three areas where the PRA have provided specific clarifications following the consultation were;

• Sys Gov Guideline 30 (Securitised Instruments) - note that they will tell EIOPA that it is badly drafted, but that ultimately firms should focus on intended outcomes of it if in doubt 
• Sys Gov Guideline 41 (Actuarial Function) - confirm that the function will need to provide opinions on the reinsurance arrangements and underwriting policies during transition
• Reporting - Confirm that submissions in XBRL are expected by June 2015, but give some wriggle room should EIOPA not fix the templates!

Other than that, it is "as you were".

Julian Adams took time off from his new YouTube career to speak at the event as well - the speech, lovingly titled "A Turning Point", has been published, and from a UK Solvency II Programme perspective. I took the following from it;

General Solvency II

• "Certainty" on timetable, so while he appreciates that firms "downsized their Solvency II programmes", "...now is the time to reassess priorities" - so go tell your CFOs you need another cheque!
• "Expects to have discussions with firms" on the effect of the agreed matching adjustment on capital and technical provisions.
• On the 16-year transition to full Solvency II technical provisions, they are pleased "...to have the safeguard of the transitional floor" which will keep the old regime relevant for years to come
• The Commission "...hope to have a stable version [of delegated acts] ready by March", though won't be publishing them until summer. Does that mean we'll get another leak, like in October 2011?
• "...it is important that firms stay appraised of developments in delegated acts, implementing technical standards and guidance to be issued by the Commission and EIOPA" - PRA seemingly distancing themselves as an influencer at this point, and positioning itself as an administrator
• To that end, the PRA Handbook will follow "intelligent copy-out" rules, so the only elaboration we should expect in future outside of materials produced in the low countries will be in the form of Supervisory Statements (see above!)
• Some technical actuarial papers will be released by the PRA in the New Year 
• Reminder for standard formula firms that they will need to make sure their SCR calculation is suitable, including consideration of USPs/PIM

Specific to the PRA's application of EIOPA Preparatory Guidance

• "...emphasis is on preparations for Solvency II and not its early implementation"
• "We are not gold plating any of the guidelines" - no definition of what "gold plating" means though, which would have been useful.
• "[Proportionality] does not mean that firms can select which requirements to comply with or not"
• Expect incremental improvement in the quality of ORSA Supervisory Reports submitted between 2014 and 2015
• Industry Working Group on Reporting has been set up, as there is evidently enough discord within the UK at the prospect of parallel running numbers to justify a PRA/Industry jam session. That said, July 2015 remains the PRA expectation for XBRL reporting to come in from firms within the thresholds
• For IMAP, "it is critical that firms keep to their allocated submission slot" - if you miss, you "...will join the end of the queue", which might help free up some purse strings!
• "...no longer possible" to offer any flexibility to firms in the IMAP space. 

Omnibus II a done deal - Greens left feeling, errr, green?

So, having become bored with collapsing into their own tedium like a room-temperature flan, the Omnibus II negotiations reached an inevitably grim climax yesterday, with a deal bashed out to everyone's mutual distaste at the last possible minute - the basic details are here from the European Commission.  

Bearing in mind the volume of noise on the subject over the last 24 hours in particular, I figured I'd better pull a consolidation post together for my own benefit if nothing else!

The highlights are (apparently - no text released as yet);

1. Transitional measures extended for 16 years
2. Massive equivalence carve out (10 year "temporary" renewable facility)
3. Transposition date moved to end-March 2015
4. Matching adjustments and volatility adjustments more generous to the industry than recommended
5. The generosity of those adjustments countered by some qualitative measures around planning and disclosure.

Winners?

• Industry - Allianz's CFO rather boldly speaks on behalf of the entire European Insurance Industry, stating the deal is "...ambitious but acceptable". Prudential's CEO thinks it is "great progress" and "a good package", while Talanx "welcome the decision very much".
• Heavily indebted governments and companies - Burkhard Balz is happy to trumpet that "...we have also ensured that insurance companies will be able to continue to fulfil their role as long-term investors" through the lengthened transitionals and juicy adjustments. This will hopefully encourage insurers to splash some cash on long-term debt instruments and infrastructure projects where they may otherwise have stayed shorter-term.
• EIOPA - While they were happy to simply "welcome" the agreement, Sharon Bowles emphasises that "This marks the point at which Eiopa becomes fully fledged".
• Sharon Bowles - has surely enhanced her reputation by finally landing the most fraught European negotiation since the Abba reunion.
• Consultancies - will surely use the "tight timescale" routine to press gang the nation's NEDs and Execs into writing one more cheque.

Ambivalent?

• Insurance Europe didn't have much to say, other than acknowledging that the deal is not ideal, though provides a "workable base". They remain concerned about the "ambitious timetable".
• Groupe Consultatif also reinforce their continued support.
• The European Council apparently couldn't be bothered to send a big hitter to trumpet the big news, leaving it to one of the COREPER lads (well, an ambassador)!

Losers?

The Left - while it is no surprise that Sven and the Greens were left sulking (and doesn't the boy blog well!), the extent of his rancour, whether Party line or personal, doesn't augur well for when he and the ECON crew take it through Plenary, for example noting that the deal;

• "...[is a] flagrant violation of common market principles"
• "...[is a] grab bag of goodies"
• "...ignores the advice of the European Systemic Risk Board"
• "...resulted in the EP adopting a far more industry-friendly package in self-denial of the original mandate voted by ECON "

Perhaps most bitterly, he then promises to "...personally make sure that all companies making use of the agreed privileges will be named and shamed on a website including their brands and the billions of missing capital". 

You don't want to make the Greens angry now, do you...

Solvency II, 2016 and "Quick Fix 2" - Let the music play...

So despite my best baiting at the start of the summer, it has taken until this week for the big news regarding Solvency II to emerge, namely that, via Quick Fix 2, a layer of formality is likely to be given to the year 2016 as the "go-live" date by the European Commission, provided this draft Directive gets safe passage. Apparently, assurances were given by the co-legislators (p3) that this should be enough time to get it done.

Let's have a look at what exactly has been pushed out, and by whom;

Commission - statement from Michel Barnier
- "The Commission [on 2nd Oct] at my request put forward a draft Directive postponing the application date of the Solvency II Directive to 1 January 2016"
- Current trilogues are "progressing well" and an agreement between the co-legislators is "within reach", which seems to tally with Gideon's report from last week - the Council's "state of play" meeting is still scheduled for 15th October, which being prior to that last trilogue meeting, may help all parties.
- Mr Barnier "...has always wanted rapid application of Solvency II", in case anyone thought otherwise.
- EIOPA's LTGA report is an "excellent" one, in case anyone thought otherwise.
- Postponement done "...only after obtaining assurance from the Council and the Parliament that they would not further change this new application date of Solvency II"

Consultancies
- Apparently KPMG reckon that the industry is breathing "...a sigh of relief", while PwC reckon the date set is indicative that Omnibus II will be settled "...ahead of the Parliamentary elections in 2014". Deloitte's finest highlights that the extended transposition period (effectively doubled) will aid NCAs in giving permission to arbitrary things such as day-one model applications, USPs etc.

Lobbyists
- Insurance Europe don't like it! Still seen by them as an "ambitious timetable", which will lead to a "...significant increase in costs for the industry", which makes one think that the "sigh of relief" heard by KPMG was their own relief at securing two more years of advisory cash...

How much scope is there for something to go wrong now, given the benevolence/pragmatism of the Commission in granting this two year kick-on? Chris Finney covers that off here, most pointedly with the fact that a number of the co-legislator top-dogs giving their "assurances" may have gone to pastures new well before 2016.

PS Programme Managers and CFOs - Try not to laugh or cry at point 4 on the draft Directive document - "The proposal has no implication for the EU Budget".

Solvency II, Omnibus II and Trilogue - two steps forward, two steps back?

Headline results from an Economist Intelligence Unit survey have been published this week, apparently suggesting that most global insurers continue to see Solvency II as their biggest regulatory challenge. Despite its prominence in the agendas of insurers' committees, boards and control functions, the legislation appeared to have taken a back seat in the decision-making fora of the European Union since the publication of EIOPA's LTGA in June.

So while the EU Parliamentarians go off for their hard earned 5 weeks in the sun (and by association Omnibus II/Solvency II will temporarily sit untouched like a pair of pink booties in Buckingham Palace), we can try and work out what the crack is with the dossier!

Trilogue
So with the Trilogue process itself necessarily one of closed doors, secret handshakes and unpublished shady deals, at least we formally know that they reconvened before the summer holidays thanks to Sharon Bowles' diary handler! Other than InsuranceERM's piece on a "muted start" to the negotiations (subscription only), the well is pretty dry on comment, suggesting that they got off to an inauspicious (re)start.

Parliament
As far as the latest ITER listings go (p1), ECON will not be considering the dossier again until 18th November 2013. From what I can read of the Parliamentary calendar, that is too close to supply the November Plenary with anything to vote on, and the December one is scheduled early in the month. Fair to say that, as indicated by Burkhard Balz last month, the Parliament won't vote on Omnibus II before 2014?

Council

Bed made - but covers stolen...

So the Lithuanian presidency is in town, and apparently sees the Omnibus II dossier as having "high importance" (p3) within their recently published work programme. ECOFIN have a state of play meeting provisionally scheduled for 15th October 2013.

That said, when pressed for comment when attending ECON before the summer holidays, they seems to have learned from the Paula Abdul school of making progress: for the two steps forward indicated by the Lithuanian Finance Minister's comment that the Presidency is committed to resolving, amongst other dossiers, Omnibus II (p12), he immediately takes two steps back by noting one of the key tactics will be "...focusing on uncontroversial technical issues to facilitate progress" (p13) - might be OK for some of the multitude of delayed dossiers, but not this one!

EIOPA
EIOPA naturally consider their work largely done for Omnibus II, and consider the report a "reliable basis" for making decisions on LTGs, and ultimately Omnibus II itself. Sr. Bernadino did however admit at the ABI conference a week back that, for 2016 to remain a viable "Go Live" date, political agreement on Omnibus II would be needed by the end of this year. Judging by Parliament's position above, I guess 2016 is out then!

European Commission
While Commissioner Barnier had lavished praise on EIOPA's, errr, "very good [LTGA] report", the Commission has lost its Solvency II specialist to retirement during this year, which might lead some observers to believe the Commission will be less effective as a negotiator while the new boy learns the ropes. However, Gideon managed to get some words from Karel van Hulle's replacement a couple of weeks back, and his modus operandi doesn't sound like one which will lead to a swift decision at the expense of one or two angry outliers in any case.

Specifically his comment that "We need to find a solution that works for almost all Member States. That is our ambition. So we don’t like to get the project through, just about ", suggests that anyone at the table with a gripe will get some airtime. With the LTGA outcome causing more gripe than at a constipated nursery, I suspect that the delays caused by the current 5 week vacance soleil will be a mere drop in the ocean...

ABI and PRA on 'Meeting the Challenges of a Changing World' - Solvency II in particular...

Low Yield issue - not just for insurers

While I disposed of my son for the summer last week for an extensive potty training course in Bordeaux (PS you might want to avoid the 2013 whites!), the ABI gathered the great and good for their biennial conference, themed Meeting the Challenges of a Changing World.

A corresponding publication from the ABI which the event hung its hat off to a certain extent is particularly useful for anyone in the emerging risk/ORSA/reverse stress testing space, touching on 7 specific 'challenge' themes, which are themself further broken into sub-categories. With the ABI providing a mouthpiece for the interests of the UK insurance industry (and being currently Chaired by an avid opponent of Solvency II), it was worth picking up on this document's take on Solvency II, specifically;

• That it could be a future constraint on the nascent equity release market
• Its well documented "...potential effects on infrastructure financing"
• That British insurers should "...[continue] being proactive and engaged in trying to shape vital regulation such as Solvency II rather than simply criticising it from the sidelines". Not sure if the implication is that the UK is drifting from the box-seat in this regard, but certainly in the context of the next decade, a slated in/out referendum on EU membership may make proactivity on Solvency II a moot point!

The regulatory meat in this lobbyist event sandwich came from a keynote speech by the PRA's Andrew Bailey which, in the process of publicly revealing a few nuggets of truth, still left me safe in the knowledge that insurance is still the banking industry's boring cousin - that he needed to "...make clear at outset that insurance supervision matters as much as banking supervision" and stress that "...insurance supervision is a skill on its own" while supporting most prevailing regulatory techniques with the prefix 'what we learned from Banking is...' tells its own story.

That aside, the following comments are worthy of highlighting;

• The PRA's current trend of using "business model analysis" in their supervisory work - surprised that this was not already par for the course frankly (what else other than the types of analyses referenced at the bottom of p4 would you be doing?), but one would expect that the advent of ORSA will enhance everyone's activity in this field soon.
• Taking that into account, it is "...logical for us to make early adjustments to our existing regime to incorporate the ORSA under ICAS+"
• The suggestion that management "...take responsibility for understanding and mitigating the risks in their business" - 'managing', rather than 'mitigating' surely, we'll tolerate anything within appetite!
• That the truly woeful "Solvency II/Crossrail" costing analogy used by Mr Bailey to a parliamentary select committee was the PRA "...making a point on behalf of firms".
• That "PRA have not withdrawn from involvement in Solvency II, far from it", though recognises that the result around the classic matching adjustment is not what UK plc would wish for - goes on to comment that we "...still have a good way to go to make the Solvency II regime manageable in its use and implementation"
• That, as far as Sol II's legislative progress is concerned, negotiations "...continue over summer, with a conclusion expected in the autumn", and that the official implementation date discussed recently on this blog is "clearly unrealistic".

In a week where a wall of silence has descended upon the co-legislators and the Commission, it is reassuring to see at least one NSA body with a solid-ish implementation plan, regardless of the immediate lack of things to implement - however judging by the words captured by Gideon of Dr. Wiedner, the lightly briefed (and from what I could read, lightly fed) replacement of Karel van Hulle, I suspect that Solvency II on the whole remains "Klaus but no cigar"...

EU Commission and Quick Fix 2 - Silence is golden (delicious)...

We are a good week down the line since Solvency II technically became a rolling ball, at least from a 'transcription into national law' perspective, and the party has barely stopped around the EU...

Man from Del Monte
- he says 'Non-Compliant'

Joking aside, the wonderfully obscure lobbying miscreants at ICODA released findings (expanded on here) of a straw poll they had issued to all member states around their preparedness to implement both Solvency II and EIOPA's interim measures. Not even half of those polled responded, and only 6 responded in full, so the sample isn't ideal. That said, there are enough seeds of doubt sown by the responses to grow a Del Monte-style orchard of non-compliance by next year.

As one would have anticipated off the back of the last-ditch attempt to secure a second 'quick fix' Directive, there would appear to be major concerns around NSAs meeting the requirements as at 1st Jan 2014, for example;

• All respondees are in favour of 'Quick Fix 2'
• 40% don't feel adequately prepared for ORSA obligations
• Half are not prepared for internal model pre-application obligations
• A quarter are not prepared for submission of information obligations

Is 'Quick Fix 2' simply being seen by some of the straggling NSAs as an opportunity to postpone the inevitable rather than to actually prepare for it, thus avoiding the decadent yet ultimately unnecessary project spend of the early adopters? Indeed, is 'Quick Fix 2' even legally possible now that the date for transcription into national law has passed?

I took the opportunity on Monday 1st July to contact representatives of note to ask where the legislation currently stands, specifically around the potential for retrospective 'Quick FIx 2', and received the following cavalcade of replies in the last 7 days;

• EU Commission - nothing
• An EU Parliamentarian heavily involved in Solvency II - nothing
• EIOPA - a holding e-mail thanking me for my question

I hope that world exclusive information helps you all with your preparations!

Late post-script - I didn't bother checking in with the Council, but they have surprisingly made public comment today due to the changeover in presidencies to the Lithuanian delegation. Knowing the guys in Vilnius are big fans of the whole Solvency II shooting match (?), it was interesting to see they only have "...continued negotiations on the Omnibus II insurance dossier" scheduled over the next 6 months, as opposed to something more positive. We'll certainly be seeing Santa before the Parliamentary Plenary vote then, big question is will we also see the 2014 Easter Bunny?

EIOPA's Long Term Guarantees Assessment and the early fallout - Plenary delay pending?

EIOPA's Long Term Guarantees Assessment rocked up last week while I was enjoying my new arrival, perhaps the most eagerly anticipated document out of Frankfurt since the days of Goethe...

Wielded fiercely all year by all stakeholders in need of an excuse for the delays in Solvency II's legislative passage (and hence the need for more budget), it appears to have variously pleased everyone and no-one at the same time. The key findings/recommendations are nicely summarised here.

Major players have since piped up with the following over the last week, none of which suggests the report's conclusions will be ole'd through the trilogue and parliamentary vote. 

EU Institutions

EIOPA 

- "We are confident that the results of the LTGA, combined with the EIOPA advice will provide the EU political institutions with a reliable basis for an informed decision on the long-term guarantee measures and a conclusion on the Omnibus II negotiations"

EU Commission

- "The Commission trusts that the Council and Parliament will use this very good report and its findings as a basis for an urgent agreement on Omnibus II and show pragmatism and willingness to compromise"

EU Parliament (via Burkhard Balz)

- "Speaking for the European Parliament, we are very confident that Eiopa's work and the subsequent analysis will provide for a successful restart of the negotiations, and as rapporteur, I am ready to start as quickly as possible, even before the summer break, to pre-launch trilogue negotiations. It is our firm intention to conclude the long-term package before the end of this year, so we can adopt Omnibus II in early spring 2014"

Industry representative and lobbying bodies 

- Insurance Europe - "Insurance Europe’s preliminary review of EIOPA’s proposed improvements to the Solvency II regulatory regime shows that adaptations are needed to avoid unnecessarily damaging insurers’ ability to provide long-term guarantees and invest long-term"

- GCAE - "With the publication of the report, the EU is one step closer in the process to finalising the Solvency II dossier"

- UK's ABI - "The EIOPA report is a small step in the right direction. But there is still a long way to go before British pensioners can be confident of a reasonable deal on their annuities"

- Institute and Faculty of Actuaries - "Today’s proposals outlined by EIPOA (sic) would seem to address many of the important issues. However, the detail needs to be worked through and the effect in a variety of scenarios assessed, before the full implications of the proposals for companies and their customers can be understood"

Ratings agencies

- Fitch - EIOPA’s proposals “offer no prospect of an end to the long-running dispute between regulators and insurers over suitable capital levels for products with long-term investment guarantees"

Print Media

- Commercial Risk Europe - "...unlikely to resolve key issues stalling the implementation of Solvency II and may lead to yet further delays to the Directive"

Consultancies

- PWC - "many insurers may find the proposals onerous and will not welcome the continued uncertainty over the final rules. We anticipate there may be concerns about the capital required for certain types of assets backing annuities in particular; and the effectiveness of measures designed to address short-term asset volatility"

- KPMG - "...it is likely that certain European countries will look very unfavourably at the EIOPA proposals."

I have emboldened the quote from Burkhard Balz above which suggests that the Omnibus II vote is going to move again. The rationale for that is two-fold; the prospective Plenary date (which was down as October 2013) appears to have suspiciously disappeared from the EU Parliament's Omnibus II procedure file altogether, while Mr. Balz clearly states early 2014 is targeted 'adoption date' while 'speaking on behalf of the Parliament'!

Omnibus II - back to October 2013

Following on from the barely noticeable number of previous posts on Omnibus II Plenary vote delays (here, here, here, here, here and here), we can now stick lucky number 7 in the pot, after the procedure file was updated today to show a postponement to October 2013 - whilst the delay was inevitable after EIOPA made it clear that the Long Term Guarantees Assessment report would only reach the co-legislators by July, the actual date helps with short-term planning for all stakeholders concerned.

I guess the big questions that emerge from a delay to October are:

• Whether it is enough time, factoring in the summer holidays, to consume the LTG report, acknowledge its outcomes regardless of which territory benefits most from the conclusions, and vote positively
• Whether it is actually too much time to pull apart the report's outcomes, and between the trilogue parties, industry lobbyists and any national political pressures than can be marshalled in the interim, October just becomes the next promises graveyard.
• The increasing proximity of this date to the campaigning for the 2014 EU parliamentary elections, which must surely impact on how the voting will go if the LTG report gives a duff outcome to those countries still writing swathes of guaranteed business
• The entry into the mix of Karel van Hulle's replacement (haven't seen a name yet)

Not certain if 2016 is exactly riding on Omnibus II approval by October, but one feels it would certainly help restore some credibility.

Long Term Guarantees and Pillar 2 - back to the future?

Just like the popular floor filler from Chris Rea*, it looks like the individual countries would like to "Go their own way" when it comes to capital calculations for long term business, so reports Reuters.

Clearly the elephant in this particular room of different products in different countries is "why wait 10 years to table this", on the basis that retirement products in Europe haven't changed seismically in the genesis period of Solvency II? A cynic might say that the conflicting market/product representatives each thought they would emerge victorious after the lobbying rounds (hence didn't ask for carve-outs at outset), only to find an economic crisis and the threat of an EU-wide 'lost decade' was the backdrop to negotiations.

To see a political move from the French Finance minister to attempt to outflank EIOPA's LTG assessment is pretty poor form, but is at least in keeping with DG Faull's letter to Sr. Bernadino, which did everything but tell him the desired answer to the LTG question, and I suppose the weight of public opinion if nothing else would suggest that discouraging long term investment right now (even if the initial maths say that the capital price is right) is politically naive and a shade obtuse economically.

This parting of the ways may certainly be the case for the balance sheet question, but oddly seems to also be rearing around early adoption of Pillar 2, where the Dutch are looking pretty keen while at the same time the Irish have stated that they will wait for the crowd.
*PS Shame on anyone who, with their Solvency II hats on, thought I might be talking about the "Road to Hell"!

Omnibus II - back to June 2013

Inevitably, the spectre of reality has successfully haunted the facade of optimism until it requires a change of underwear - the Omnibus II Plenary has been shifted out to June 2013 over the weekend. After last year's rather ambivalent stretching of the scheduled Plenary date once the summer holidays/change of presidency approached, this looks like it possibly has more legs next year (why talk Omnibus II when the weather is so nice!)

This certainly gives the beleaguered industry a bit of breathing space to perform whatever data collection is required during the LTG impact study/QIS6 at the same time as standard financial year-end pressures start to pile up for the largest lobbyists - strangely still haven't seen anything definitive on EIOPA's mandate for the study yet, the scope of which appears to have been harder to pin down that one would expect (the FSA's Insurance Standing Group indicating one source of discontent from their September minutes

The coincidence of this being announced at the same time as news of Mr Van Hulle's impending retirement broke is a funny old one, but as Peter Skinner's decision not to run for re-election is also referenced in that article, maybe this changing of these battle-fatigued protagonists over the next 12-18 months may encourage all sides to stop tip-toeing through the tulips.

PS Early retirement? Anyone would think they're trying to get their annuities bought prior to go-live before Solvency II wipes 20% off!

EIOPA Conference in Frankfurt - "The authenticity of hopelessness"

"What do we want?" - "SOLVENCY II"
"When do we want it?" - "WHENEVER!"

...or so goes the leitmotif of today's EIOPA conference in Frankfurt, attended by the great and good from EIOPA, the Commission and various regulatory/lobbying bodies - ably tweeted by DIMA and Mr Varnell.

Sr. Bernadino's early morning speech covers the IORP issue as well as pure Solvency II, and tells us;

• Politicial institutions should commit to Solvency II
• All need to agree on "sound and prudent regime" for valuing long-term guarantees - EIOPA hoping to receive a clear mandate "as soon as possible", which is not promising for outcome delivery to a March 2013 plenary session!
• Regardless of how long we stretch out to for full go-live ("not earlier than 2016" is his indication in the speech, rather than a fait accompli), EIOPA will look to co-ordinate early implementation of Pillar 2 and Pillar 3 elements based on their existing powers. Not certain if that means "existing" anticipates including or excluding the Omnibus II changes though.

Interestingly, on the same day our pals at Bloomberg produced this tidy summary of piecemeal introduction of elements of Pillars 2 and 3 which touches on some of the elements from my blog post the other week - particularly like Oliver Bate's "Balkanisation" comment!

Since Bernadino's speech the tweetosphere has been full of comment from the Montalvos/Van Hulles/Creedons etc around the practicalities of Pillar 1 parallel running, leading or following IAIS developments in insurance regulation, and ORSA - get stuck in on the #EIOPA2012 hashtag!

Solvency II implementation delay - round up

"No news is good news" so goes the old motto, but in the case of this blog, "no news is new news"! After last week's sneaky peek at the options presented during trialogue discussions, the inevitable change of  EU Parliamentary Procedure file for Omnibus II was duly applied, and will now be discussed at the Plenary on March 28-31^st 2013 (honest).

That wouldn't have ruled out either of the options on the table of the Trialogue parties at the moment, but they might struggle to squeeze in an impact study on LTGs and publish the findings between now and March, particularly after it was made publicly clear by one regulator that EIOPA were not going to start that work as scheduled. The EIOPA lads did push out the tech specs for balance sheet valuation today though, which should at least get the frog out of the box.

 

It would have been a push to complete the study and leave enough digestion-time by March-end even without a late kick-off, so our friend Sr Bernadino has happily corroborated the "Big 4" speculators and faceless "sources" promoting 2016 as the new "go-live" date by giving his own counsel to the Wall Street Journal (cited in this non-paywall article). His preference for 2015 is qualified with the probability that 2016 will prevail.

 

While thumbing my nose at the Reuters article above, it does make the link between postponement and the Commission's desire to immediately spur longer-term investment in a stagnating, rioting, semi-employed Eurozone (which is much easier without Solvency II's heavy embrace, particularly the calibration of capital requirements for long duration debt instruments which the document referenced in this post covers all too well).

 

However, for DG Faull to effectively command a recalibration of that element now the going is a bit better makes you wonder how many more cherries we are going to pick - un deux trois, nous irons aux bois...

Omnibus II and the inevitable delay - why it's not so clear cut

Fantastic work over on the Solvency II Wire from Gideon on the meat and potatoes inside the eternally-baking Omnibus II pie, illustrating why the trialogue parties haven't just rolled over and declared 2015 as the new 2014.

While it would appear that the lobbying arms at Insurance Europe, AMICE, GCAE etc haven't piped up on industry preference yet, it looks like we have two deeply unpleasant alternatives to look forward to; hard launching a year late (i.e Omnibus II would only get signed off after the recently requested LTG consultation but 2015 would be the definitive "go-live"), or soft launching with 2 years parallel running (i.e. Omnibus II can go through before the LTG consult is finished, but with the sword of Damocles hanging over its contibution to the regulations until 2016).

My guess would be that there is little appetite in the firms for parallel running Solvency I/Solvency II to 2016 based on the administrative burdens this would currently place on the UK in particular through the current ICA process. A 'hard' 2015 and some more effective leadership in Brussels would be welcome relief to Solvency II Programmes from a planning perspective, though the knock-on effect on the model approval process and other scheduled supervisory work is yet to be seen.

Oddly, the EIOP-ians of the world pushed out the 2013 Work Programme this week which of course skips over any of the practicalities around such a delay - so having "already achieved a great deal" in Solvency II prep, they will "finalise the [53] standards and guidelines" currently required of them, set up an "internal model support expert unit", and "finalise the preparation of the [supervisory] Colleges" - and all of this while Rome burns!

It is a perverse situation when a subject as politically divisive as capital requirements for long term guarantees across the union is not as complex as trying to get three well-briefed parties around a table to agree on an implementation date. At a time when the Commission wants an inflation-busting funding rise (which Parliament have 'ole'd through) and EIOPA have grown in headcount and cost by 50% y-o-y, the alarming regularity with which national self-interest and horse-trading has derailed a project of such significance makes me long for the jingoistic certainty of the Corn Laws - I'm guessing that's not a good thing...

Omnibus II moves again - accelerating the inevitable?

No sooner has the holiday season drawn to a close (and by that I mean everyone else's holiday season, as we don't 'do holidays' at Governance Matters...) than our good friend Omnibus II has jogged down the road another month - the procedure file has just been updated to show it will be hitting the November parliamentary Plenary (by my count, the 5th postponement since 2011).

Not entirely sure of the rather abrupt nature of this movement, bearing in mind the main players are probably still wearing their 'budgie smugglers' in the Med at the moment, but Gideon over on the Wire picked up on an issue which may have led to an early concession that October was simply too early, with an impact assessment on LTGs likely to roll off the back of the next trialogue.

We are also close enough to the finish line (don't laugh) to be getting into the national political cesspits, so a whiff of sabotage and national interest may also be coming to bear. Not only have the UK political opposition decided that Solvency II is controversial enough to start point scoring on, but last month Sharon Bowles (current Chair of ECON) gave an astonishingly frank interview to Risk.net (subscription only I'm afraid) where Das Küchenspüle was thrown at the German contingent. Quotes included;

• "...certain leading German MEPs have publicly said that Solvency II is never going to happen anyway" and
• "...I think there is a subtext here that the Germans - and I think this is well known - are trying to jettison the whole of Solvency II"

Well if Der Wahnsinn really is eine schmale brücke like the song says, its probably best not to cross it!

Barnier speech to the Insurance Europe conference

Msr Barnier put a few words out for the great and good the other week at the Insurance Europe conference, which have finally been published for the proletariat on the EUROPA website this week. As well as touching on the conjoined matters of IORP and IMD, he wades into Solvency II in a pretty forthright manner (driven by the increasingly fractious and desparate attempts of the EU to jump-start economic growth, and what the Insurance industry can do to aid this), noting;

• Solvency II should not prevent or discourage investment in certain asset classes per se
• Insurers with long-term guarantees should therefore be rewarded (via a reduced capital burden) for investing in long-term assets, and that Omnibus II should mop up outstanding concerns from individual countries.
• That politically, the EU Parliament has had plenty of time to reflect on Omnibus II, and their tardiness has ultimately led to the need for Solvency 1.5

Interesting to see real world politics and probles interacting with the legislative timetable, and in particular how quick the Commission have been to point the finger at their Parliamentary pals when under duress!

Solvency II - additional FT articles

FT also posted a couple of supplementary articles on Solvency II today. One covers some old ground on calibration lobbying, but notes that the Solvency Experts Group is meeting this week with the Commission (one to look out for). It also reiterates that FT party line of move to 2014 implementation as more of a fait accompli.

The second quotes an ABI and KPMG straw poll that talks of the raft of supervisory changes in the UK (Solvency II and FSA-PRA changeover) is not helping support consumer trust in the industry.

Solvency II Level 2 Public Consultation release - New news is old news!

As eagerly awaited as the Eurovision result this Saturday (it's Jedward's to lose!), the EC released the results of the November 2010 public consultation at the end of last week.

Most of the substantial argument has been well and truly aired by the local regulators, CEA, EIOPA and the chief forums, but always healthy to list the sticking points.

• Risk-free interest rate curve - application of illiquidity premium
• Cost of capital rate - lower than CEIOPS 6%
• Risk margin - divergence on which of the options is most realistic
• Own funds - treatment of EPIFP
• SCR Formula - Many aspects
• Holdings in particpations and subs
• SCR Internal Model - all looking for least burdensome option
• Pillar II dampener for Procyclicality - divergence in length of time
• Capital add-ons - working on what divergence between profile and SCR is a "significant deviation"
• Actuarial function - some tension on what will consist of applicable 'standards' for the profession post-Solvency II, including EIOPA's role as an enforcer
• Supervisory reporting - some fishing for less frequent reporting to evidence "concrete application of the principal of proportionality", due in part to Level 3 indications of complexity. More telling, a desire for 5-6 years of transitionals is also shown., as well as debate on what data should be audited, and how frequently
• Public disclosure - Straightforward defensive position from most respondents on avoiding disclosing competitive information, as well as views on what should be disclosed in order to benefit consumers and stakeholders
• Supervisory co-operation - coverage on how colleges should work

It also covers the following impacts;

• Products - low capital charge products become high priority sales, with price rises likely for long-term guaranteed products and innovation in unit-linked world. End predicted for cross-subsidisation.
• Markets - diversification benefits will work against niche and smaller insurers. Maximise branch networks, more level playing field, and issues again with impact of proportionality if not applied adequately. Captives singled out as not deserving of special treatment
• Social - long term guarantee products the key issue flagged, namely whether they become prohibitively expensive and pressurise social security systems instead. Also a whole suite of suggestions about how it will impact on investment strategy, both asset type and duration.

It is a handy document in that it shows the wide divergence on a number of matters (which is shown by the length and complexity of the lobbying process). Also important is the small participation (68 responses, the vast majority being Industry, Public Authorities or Interest Groups).