Solvency II News: documents reveal rift between co-legislators on impact assessment

The European Parliament disagrees with the Council and the Commission over the scope of products to be tested in the long-term guarantee impact assessment (LTGA). Documents obtained by Solvency II Wire show the Parliament has reluctantly agreed to go ahead with the current Terms of Reference despite strong reservations.

It is understood that details of the impact assessment will be published on 28 January. Firms selected to participate will be given approximately two months to complete the exercise and the final report is scheduled to be published on 12 July 2013 by the Commission. This should pave the way to completing the Omnibus II trilogue negotiations. However, the dispute indicates that there may still be a way to go before the Directive can be finalised.

“We still do not completely agree”

Since the Omnibus II trilogue negotiations were put on hold in September 2012 (Solvency II Wire 9/10/2012) the trilogue parties have been locked in discussions about the details of the impact assessment. The impasse was cleared when the Parliament finally agreed to accept the latest draft of the Terms of Reference on which the assessment will be based.

On 12 December 2012, Berkhard Balz, Omnibus II Rapporteur and Peter Skinner, Solvency II Rapporteur, wrote to Commissioner Barnier informing the Commission of the Parliament’s decision. Solvency II Wire has obtained a copy of the letter, which states, “Further to your letter of 30 November 2012, the Parliament’s Omnibus II negotiating team takes note that you are not prepared to incorporate Parliament’s major concerns in the Terms of Reference.”

Despite these reservations, they agreed to go ahead. “Although we still do not completely agree with your draft Terms of Reference, we can inform you that we now find it acceptable for EIOPA to proceed on the basis of the draft Terms of Reference received on 5 December 2012.”

The letter does not specify a reason for their agreement. But an internal email suggests that the Parliament’s decision was in part motivated by the recent public announcements of some national regulators (such as BaFin and the FSA) that they are considering implementing aspects of Solvency II ahead of the full implementation date.

Shortly afterwards, on 19 December 2012, Jonathan Faull, Director General, Internal Market and Services, European Commission, wrote to Gabriel Bernardino, Chair, EIOPA, informing him that the co-legislators have reached an agreement and that EIOPA could now begin the necessary preparations to conduct the assessment in early 2013. “This should allow you to draft the technical specifications so that undertakings can prepare the quantitative and qualitative information during the course of February/March 2013,” Mr Faull wrote. It is understood that EIOPA will provide its findings to the Commission by 14 June 2013 and the Commission will produce the final report by 12 July 2013.

Article 77e – Extended Matching Adjustment

Further details about the Parliament’s concerns are revealed in a third letter, obtained by Solvency II Wire. In addition to writing to the Commission, on 12 December 2012 the two Rapporteurs also wrote to Mr Bernardino giving a “green light” to go ahead with the assessment.

This letter states that agreement on most measures “seemed within reach” but expresses concerns about the details of a specific article – Article 77e. “The Council and the Commission were not sufficiently able to clarify the substance of the extended matching adjustment in Article 77e as proposed by the Council’s Presidency. It is for this specific reason that a technical assessment by EIOPA was initiated by Parliament. Consequently, a further extension of this Article’s scope causes even more concerns and will not facilitate reaching an agreement,” the letter said.

Article 77 of the 2009 Solvency II Directive 2009/138/EC relates to calculation of technical provisions and the use of the risk-free interest rate term structure. A number of new articles have been inserted into the original text during the trilogue negotiations, although most are not published as they represent competing draft amendments proposed by the Council and Parliament. However, Solvency II Wire has learnt that the articles relating to the calculation of the risk-free rate, which are most likely to be tested in the impact assessment, are Articles 77a through 77e defined as follows:

  • Article 77a – Counter-Cyclical Premium
  • Article 77b – Extrapolation
  • Article 77c – Matching Adjustment for certain life insurance obligations
  • Article 77e – Matching Adjustment for certain insurance obligations not covered in Article 77c.

Non of the official bodies involved with the process would specify what products were to be included under the cryptic Articles 77c and 77e.

It is broadly understood that the Matching Adjustment (Article 77c) is to apply to products with liabilities that have no option of surrender at a cost to the insurer and both assets and liabilities must have highly predictable cash flows. Some sources familiar with the discussions suggest that Article 77e refers to products that may have some options of early surrender, but for which it was highly unlikely these would be exercised because of tax implications or other incentives. It is also possible they would include items that have a surrender option at market value.

The Rapporteurs’ letter also calls for the report of the impact assessment to focus on Article 77e to help facilitate decision making. “This should be so as to help Parliament to also better understand the implications inherent in the “illiquidity” of such assets, their appropriateness for meeting liabilities as well as the overall robustness of the mechanism.” The latter refers to the assets that can be held in the Matching Adjustment.

The letters are a clear indication that there is still disagreement between the Parliament and the Council. While the technical scope of the Matching Adjustment is unclear, the tone of the letters suggest that the results of the impact assessment may be subject to considerable debate.

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