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11 March 2014

Omnibus II vote: A big step towards a safer and more competitive insurance industry


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The EP adopted in plenary session the "Omnibus II" Directive that completes the "Solvency II" Directive of 2009 and finalises the new framework for insurance regulation and supervision in the EU. (Includes responses from Insurance Europe, Greens/Giegold and Fitch.)


European Commissioner for Internal Market and Services Michel Barnier said: "The European Parliament has just taken a very important step towards the introduction of a modern and risk-based solvency regime for the insurance industry in Europe as of 1 January 2016, making it both safer and more competitive. This long-awaited and vital reform will finally become a reality.

I would like to warmly congratulate everyone who has contributed to reaching agreement on this highly complex file, in particular the European Parliament - Rapporteur Burkhard Balz and Sharon Bowles, Chair of the ECON Committee - as well as the Lithuanian Presidency which steered this file to an agreement in trilogue in November 2013.

The Commission is now preparing the next stage of implementation of Solvency II, which will be the adoption of a Commission Delegated Act containing a large number of detailed implementing rules planned for the summer of this year. EIOPA is also working on a package of Implementing Technical Standards that will ensure that everything will be ready for the application of Solvency II on 1 January 2016."

Next steps

The European Parliament and the Council agreed that the Solvency II Directive (including the amendments introduced by Omnibus II) should apply as of 1 January 2016, in line with the Commission proposal of 2 October 2013 postponing the application date of Solvency II (MEMO/13/841). After today’s adoption by the European Parliament, the Directive will need to be formally adopted by the Council and be published in the Official Journal. It will enter into force the day after publication.

Press release

Further information


Insurance Europe
 
Insurance Europe’s president, Sergio Balbinot, has warned that the details of the EU’s new Solvency II regulatory regime must be drafted correctly to ensure that the legislation works as intended and does not have negative consequences for the insurance industry and its customers.
 
The Delegated Acts that are currently being drafted to put the detail on to the Solvency II Directive deviate from the intentions of the legislators in several respects, such as long-term guarantees and third-country equivalence. “If not corrected, the Delegated Acts would seriously limit insurers’ ability to provide the long-term investment and stability Europe’s economies need. They would have a major impact on the availability and price of insurance products, and would harm the ability of European insurers to compete internationally", said Balbinot.
 
“In important areas, the wordings and calibrations would not work as intended. The insurance industry believes that workable solutions exist, without delaying the timetable for finalising Solvency II. In the interests of Europe’s economies, we must get Solvency II right.”
 
Among the many issues of concern in the current version of the Delegated Acts, Insurance Europe has highlighted eight priority areas:
  • The method for setting the credit risk adjustment, which is a significant component of the discount rates used for valuing all liabilities, is flawed. Changes are needed to ensure it is not calibrated too high and is not too volatile.
  • The volatility adjustment is applied to portfolios that do not meet the matching adjustment criteria, to provide some shelter from the short-term market volatility that is not relevant for insurers. The methodology for setting this lacks detail and requires further improvement to ensure the calibration does not deviate from the decisions made in Omnibus II.
  • The matching adjustment, which is applied for portfolios with very strict criteria, was designed to recognise the economic benefits of having highly matched long-term assets and liabilities. A number of improvements and clarifications are required to ensure that it works as intended.
  • Adjustments need to be made to extrapolation methods and calibrations, as well as to how these interact with the interest rate stress test, because the current draft adds significant unnecessary costs, particularly for long-term products.
  • The risk charges for long-term investments, such as infrastructure projects, investment in small and medium-sized enterprises and securitisations, are unnecessarily high. These faults can be corrected without jeopardising policyholder protection. The Delegated Acts must be improved for those asset classes most important for growth and employment in Europe.
  • The Acts negate the provisions on granting provisional equivalence to third-country regimes that are important to Europe’s internationally active groups.
  • The text for determining the capital charges for currency risk is flawed. It penalises entities for meeting local solvency capital requirements and incentives for poor currency management.
  • Unnecessary and costly restrictions on the classification of and limits to own funds need to be removed.

Press release

Letter to Financial Times, 12.3.14

The Financial Times (subscription) writes that such technical standards are supposed to cover non-political details of complex financial laws. However, they often prompt highly-charged policy debates, as officials struggle to translate the ambiguities of a high-level compromise into precise operating rules. The European Parliament and EU Member States have the right to revoke the standards proposed by the commission, but this power is rarely used.

Officials said they were aware of the concerns in the industry and expected to revise the draft rules in the coming days. “We intend to reflect that agreement faithfully", the Commission said. “We are aware of concerns expressed by some. Most issues can and will be ironed out during the normal phases of preparatory work taking place at the moment.”


Greens/EFA

Sven Giegold, economic and financial policy spokesman of the Greens and shadow rapporteur for Solvency II, commented on the vote: "Insurance companies are now allowed to ignore losses resulting from the financial crisis or the low interest rate environment. Companies can pay out higher dividends even if the market ​​suggests that they can not fulfill their obligations to the insured. This is irresponsible and careless, particularly against the background of weak long-term growth forecasts and the low interest rate environment. Some insurance companies would have difficulties to meet their obligations to their shareholders had they not been given this free pass. The big problem in the insurance industry will thus be covered up instead of addressed, as the State arrogates to better know the value of assets than the market.

The representatives of Great Britain, Spain, Italy, France and Germany have negotiated this deal for their respective insurers. Many of the rules adopted as under the Solvency II rules and regulations were tailored to the insurance markets of the large Member States. This is a flagrant violation of the principles of the European internal market.

We have done everything to achieve a balanced compromise. This should not be excessively attached to volatile market valuation, but still protect the insured. The Conservatives, Social Democrats and Liberals, however, have now adopted a package that unilaterally takes into account the interests of the insurance industry. They have thus decided against the decision of their own members in the Economic and Monetary Affairs Committee as well as against the proposal of EIOPA. It was evidently impossible for the Greens to agree to such a one-sided compromise. Nevertheless, one demand of the Greens has been taken into consideration, namely that insurance companies must meet at least a minimum level of transparency. Insurance companies which use the new long-term warranty evaluation measures must disclose the quantitative effects. 

Full press release (in German)


Fitch Ratings

"Today's vote by the European Parliament is a significant step towards implementing Solvency II and ensures the long-delayed regulatory regime for insurers is on track to take effect at the start of 2016, Fitch Ratings says. There are still several elements to be finalised, which could have a significant impact on capital levels, but we expect these to be agreed in time for implementation.

We understand that earlier industry concerns about the Solvency II treatment of long-term guarantee business, including annuities, have largely receded based on the latest draft of the rules. Legal & General is one of the insurers that stood to be most affected, given its sizable proportion of annuity business. Last week, L&G's Group CFO said the company expected its Solvency II capital surplus to be larger than under Solvency I.

Although we believe Solvency II is on track for finalisation, we estimate that the elements still to be decided could affect the capital positions of some major insurers by several hundred million pounds. Notable examples include details around determining the discount rate to calculate insurers' reserves and capital requirements, and the choice of economic and demographic assumptions by insurers using an internal model for Solvency II - which will be subject to regulatory approval. However, we believe the insurers we rate have sufficient capital buffers to absorb the potential effects of this remaining uncertainty.

Given the level of preparation to date and the likely transitional arrangements, we do not expect Solvency II to trigger changes to insurers' credit ratings in the next few years."

Press release



© European Commission


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