16 January 2013

Risk.net: The question is not when Solvency II will come into effect, but in what form

Yet, it is naïve to think that the assessment, which will look at how the matching adjustment, the countercyclical premium and the extrapolation of the risk-free rate will perform in practice, will provide all the answers to the political divisions that have so far prevented agreement on Omnibus II and stalled the implementation of Solvency II for what is likely to be two years.

There are still significant areas of disagreement between the European Parliament and the Council of the European Union on key issues, such as transitional arrangements for Solvency II, which need to be resolved before Omnibus II can be finalised.

In addition, it is also unlikely that a swift agreement on Omnibus II will be reached after the impact assessment has been concluded. Against this backdrop, EIOPA and the European Commission want to phase in some elements of the Solvency II regime early, to ensure that national supervisors do not diverge in their approach to supervision as a result of the delays to Solvency II’s implementation.

EIOPA wants national supervisors to make sure insurance firms have in place effective systems of risk governance, including a forward-looking assessment of the firm’s own risks, based on the Own Risk and Solvency Assessment (ORSA) principles. It also wants undertakings to have in place an effective risk management system comprising strategies, processes and reporting procedures.

EIOPA is in the process of drawing up guidelines for supervisors to implement from January 1, 2014, (although there is some dispute between lawyers as to the authority’s legal powers to implement early a regime that has yet to come into effect).

These moves raise an interesting question: are we seeing the evolution of the Solvency II project into a new form? While much attention has been paid to the potential for delays to the regime’s implementation date, could Solvency II ultimately become a pared-down version of what was originally envisaged? There is, after all, more scope to achieve convergence on the risk governance and reporting aspects than there is on some of the quantitative elements.

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