A compromise on Omnibus II level 1 text was reached in November, but some controversial issues were pushed down to level 2 or level 3. Is there any reason to fear negotiations could reach another stalemate, threatening the 2016 implementation date?
I don't think so. The application date of 2016 was agreed by the Commission and the co-legislators, and it is realistic to think we will complete the work on the delegated acts and the technical standards within this time frame. Both the Commission and EIOPA are bound to act in accord with the requirements of the Directive. The European Parliament, together with Member States, will play an important role of control in an approval procedure and this will help to ensure the commission delivers effective and proportionate solutions. This last point is very important to me.
The fine details of the extrapolation have yet to be agreed, too. The compromise text mentions a 20-year last liquid point and a 40-year convergence to the ultimate forward rate for euro, but it does so in the recitals. What is the significance of this?
From my point of view, the text of the Directive is binding. Whether the contents are mentioned in the recitals or in articles, it is not important as regards its practical implementation. For the euro, we will stick to the 20/40-year period. I would like to add that the recitals also include provisions for non-euro currencies. These give them flexibility to decide on the starting point and the speed of convergence depending on their swap and bond markets.
The calibration of the standard formula is also going to be decided at level 2. EIOPA concluded its review on the treatment of certain long-term investments at the request of the commission in December. It proposed a more granular treatment of asset-backed securities, but it stood behind the calibrations for other asset classes. To what extent do you expect the Commission to follow the authority's recommendations?
I expect the Commission to provide a formal draft of the delegated acts in the summer and then we will have a look at that. I am very reluctant to talk about expectations at that stage. The commission is currently reconsidering some calibrations and this certainly is the right thing to do.
The compromise text sets a cap of 65 per cent for the benefit of the volatility adjustment, but it provides no detail on the elements used to calculate the risk-corrected spread, namely the reference portfolio and the allowance for default and unexpected losses. What do you expect from the commission and Eiopa on these two elements?
The volatility adjustment evolves from the assessment EIOPA made of the counter-cyclical premium (CCP). I personally expect that the underlying assumptions used for CCP will be reflected in the volatility adjustment at levels 2 and 3.
Will the risk-free rate used in the construction of the volatility adjustment and the matching adjustment include an adjustment for credit risk or not?
My view is that a CRA to the risk-free rate is applied in the context of long-term guarantee measures. What needs to be clarified is how the adjustment will look.
In return for a relaxation of the calibrations of the LTG measures proposed by EIOPA, qualitative requirements were added to the compromise text. These include a requirement to disclose information without the benefit of LTG measures and another requirement to put together liquidity plans assuming the benefit of LTG measures has been taken away. What is the point of allowing for the benefit of LTG measures and then ask for companies to consider and even plan under a scenario in which they are not available?
Long-term guarantee measures will probably be used in different ways across different insurance and reinsurance markets. Some of the measures can be used in parallel, while others cannot. The qualitative requirements were the same for every insurer. Disclosure is an important tool to reinforce comparability of European undertakings. As regards the liquidity plans, they should promote responsibility and accountability of those using LTG measures.
The compromise text comes with a review clause for the measures in the LTG package. Five years after Solvency II's application, the Commission will report on the impact of the measures and propose changes, if relevant. Given the long-term nature of life insurers' business, is it not fair to say that this clause creates too much regulatory uncertainty? What is the likelihood of measures being changed?
The first review of the Directive - with the possibility to propose amendments - is scheduled for 2021 and the review of the LTG package fits in this timeline. This is a good control mechanism. Furthermore, I would like to say it is rather common for European directives and regulations to be reviewed. For instance, we are about to have the review of the regulation on supervisory agencies, just three years after application. Reviews usually happen three or five years after application.
The IAIS is working on a global capital standard for the insurance industry, under ComFrame. The finalisation of this requirement will happen at the same time as the application of Solvency II and some have suggested this will mean European rules will have to be adjusted. Are you ready to reopen Solvency II?
From my point of view, there is no appetite to reopen Solvency II, now that the process is finally coming to end. Undertakings have to adjust to a new regulatory environment. They have spent a huge amount of time and money preparing for Solvency II and we should provide them with clarity and prospects for planning ahead. This should be on the basis of Solvency II and Omnibus II Directives - this much is clear to me. My concern is that international developments create parallel regulatory requirements for European insurers.
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