Many insists that Solvency II should be introduced in its entirety, but Simon Kirby, Solvency II specialist, SAS UK & Ireland, argues that given the scale and complexity of the project, introducing Solvency II in “bite-size chunks” would be more practical and make the regulation more effective.
In practice, it will be difficult for the EU to reach an agreement on the remaining unresolved matters in time for member states to implement the directive by 30 November 2013 and for insurers to be ready by 1 January 2014.
As an ex-Financial Services Authority supervisor and someone who works closely with insurers in their preparations for Solvency II, it is a concern to observe delay after delay and all the associated costs this brings.
Insurers have been working hard on their preparations for a long time, and when Solvency II eventually goes live it will have been well over 10 years since it was given the green light. This has cost the industry millions of pounds, ultimately increasing customer premiums and consuming tax revenues. The main concern is that there is still a great deal of uncertainty over the exact rules that will be implemented.
The EU is becoming so embroiled in detail and harmonisation that it has taken its eye off the big picture: ensuring policyholder protection through a well-managed and appropriately capitalised insurance industry.
Solvency II is a large and complex piece of financial legislation, so it would make more sense for implementation to be completed in bite-sized chunks instead of the big-bang approach that the EU has failed to implement so far. Much of the desired protection could be achieved through the implementation of the Pillar II and Pillar III requirements alone. With this, insurers would be required to implement and conduct their own risk and solvency assessment alongside improved standards for corporate governance and risk management.
The minimum regulatory capital requirements could continue to follow the existing EU insurance and reinsurance directives until an acceptable approach can be agreed on and implemented.
It could be argued that the European Commission could cut through most of the existing sticking points if it moved back from the technical details of the directive to a more principles-based approach, allowing room for national specificities and organisational nuances. Such a directive would provide for the development of best practice over time that could be shared across the EU, creating a gradual evolution and refinement of the requirements.
Of course, it would be important for the EU to impose absolute minimum standards for the capital requirements that could be easily calculated by insurers.
Additionally, EIOPA should check that each EU member state is working within the requirements of the principles.
With this revised risk and principles-based approach, combined with consistent and transparent reporting requirements, insurers will have moved a significant step closer to the fundamental objectives of Solvency II, and the EU will have bought some time for the complex financial sticking points to be resolved.
This may also have the effect of saving the industry money, as many of the processes, systems and models required to achieve the pillar two and three requirements will be ready for use when everything else has been resolved.
The views expressed here are the author’s own.