04 September 2013

Risk.net: European Council cooks up Solvency II volatility balancer revamp

EU Member States are edging closer to an agreement on an overhaul of the volatility balancer and other elements of Solvency II's long-term guarantees package, ahead of the next round of political discussions on the Directive.

The progress comes ahead of the Omnibus II trilogue discussions, which are set to recommence next week, and is raising expectations that an agreement might be reached by the end of the year.

Draft papers currently circulating reveal policy-makers at the European Council are willing to make concessions to the insurance industry on both the design and the calibration of the volatility balancer, industry sources familiar with the negotiations say. The volatility balancer, which aims to shield insurers' balance sheets from undue short-term market volatility, has been rebranded the ‘volatility adjustment'.

An extension to the length of transitional measures is also on the table, say sources. This is a key feature for the German insurance industry and was behind the recent threat by Germany to walk away from the negotiations.

The new draft proposals should provide a solid ground for the trilogue parties that are reconvening on September 10 in a bid to close a deal on Omnibus II, the Directive that sets Solvency II's level 1 text.

The political negotiations on Omnibus II stalled last year over the treatment of long-term guarantees. As a result, the European Insurance and Occupational Pensions Authority (EIOPA) was tasked by the European Commission to carry out an impact study on the long-term guarantees package in the hope of unlocking the discussions. EIOPA's recommendations were published in June.

In its report EIOPA said the countercyclical premium should be replaced by a new volatility balancer that would allow insurers to take some benefit from credit spreads flying high and above the risk free rate. The insurance industry, however, was unconvinced with the proposal. Insurers criticised the fact that the mechanism would be an adjustment to own funds and opposed the cap of 20 per cent on the benefit that could be accrued.

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