17 February 2014

Risk.net: Concessions on Solvency II equivalence not followed through in level 2 proposals

Insurers claim that amendments on equivalence and provisional equivalence in the draft Omnibus II directive are not being followed through in the commission's latest draft level 2 text. They argue that the level 2 text places obstacles in the way of firms seeking to apply the so-called deduction and aggregation (D&A) method for calculating group solvency and may even prevent insurers from using this calculation method at all.

"The current level 2 draft does not really reflect the spirit of what was agreed in Omnibus II about equivalence, because the bar for insurers to get supervisory approval to use the deduction and aggregation method is still very high", says one European insurance executive.

The D&A method is an alternative to the consolidation method used for calculating group solvency under Solvency II. It discharges insurers from the requirement to consolidate business in equivalent third countries into their group balance sheets using Solvency II rules, instead allowing them to use the local solvency rules. This avoids, in practice, a second layer of regulation that would put those subsidiaries at a competitive disadvantage to local insurers.

Insurers are required to obtain supervisors' approval for using the D&A method. A previous draft of the level 2 text stated that firms have to demonstrate that the consolidation method is burdensome, and that using the D&A method does not materially affect the group solvency calculation.

Insurers say these requirements defeat the purpose of the rules on equivalence as using local solvency rules when applying the D&A method is likely to have a material impact on the group solvency calculation.

These concerns have been compounded by the introduction in the Omnibus II compromise text, agreed in November, of a category of provisionally equivalent countries, aimed at easing fears about key jurisdictions such as the US and Canada not being deemed equivalent. But a country that is provisionally equivalent will not necessarily bring its solvency rules in line with Solvency II, potentially making the impact of applying the D&A method even more significant.

The Commission has attempted to address the problem in its latest draft level 2 text. The recitals to the text say insurance supervisors, when comparing the results of using the different methods, will apply Solvency II rules rather than local rules for the purposes of assessing whether the D&A method can be used.

Full article (Risk.net subscription required)

© Risk.net