Short delay
A delay in implementation to 2015 has probably been anticipated by most, and many firms plan for such an event. Standard Life, for example, regularly preforms scenario analysis to identify the consequences and mitigating actions of a delay. Bruce Porteous, Head of Solvency II, said the firm’s medium term plans are unlikely to have a material change in the event of a delay to January 2015. “We would continue to deliver most of our Solvency II deliverables, asset
quality and systems of governance requirements for example, on schedule. Other Solvency II requirements, such as the internal model application and reporting requirements, might need to be deferred and we would expect to roll these out into the appropriate business area for delivery once the rules have been finalised.”
Others would agree that the main impact of a short delay is to a firm’s planning timeline. According to Peter Skjødt, Executive Director, Danish Insurance Association, if certainty about 2015 can be reached the implications will be limited given the anticipated delay. “The problem is the uncertainty,” he said. “It makes it hard for companies to decide on their speed of adjustment.”
Uncertainty also makes it difficult to transition out of project mode. According to Jan Piekoszewski, Solvency II Programme Manager, Atradius, “The continued uncertainty has cost implications as it is not possible to transition to ‘business as usual’ while the regulatory framework has not been finalised.”
Questions will also be raised about the state of the current rules. Paul Clarke, Global Solvency II Leader, PwC, said. “From a practical perspective existing regimes will remain in force although we expect regulators to progressively accept Solvency II output in substitution for some features of the existing regime such as ICAS in the UK.”
But behind the timeline uncertainty lurks a bigger beast – uncertainty about the shape of the final rules. The current delay is due to disagreement on a number of key elements of the Directive. Topping the ‘outstanding issues chart’ are the treatment of long-term guarantees (LTG), equivalence, certain calibrations of the standard formula, and reporting requirements.
It is this uncertainty that is especially worrying because of its knock-on effects. For example, failure to finalise Pillar I capital requirement rules means firms are unable to calculate their final capital requirements. In the case of long-term guarantees, for example, this could represent significant changes to available capital, which in turn could have implications for investment decisions and asset allocation. Such implications and their consequences are amplified the further the deadline is pushed into the future.
Longer delay
The Commission has already proposed an alternative implementation date in 2016 and there is some speculation that the Directive could be kicked even further into the long grass. While few would suggest ditching Solvency II altogether, persistent uncertainty could result in significant loss of resources, opportunity and faith in the project as a whole. The Slovenian regulator, the National Bank of Slovenia, believes it is too late to turn back. According to a spokesperson, “There has been so much investment in resources and a lot of effort put into Solvency II preparation on both regulatory and supervisory side as well as from the market so it is not probable that Solvency II could be scrapped.” This view is echoed by industry. “We feel that it is extremely unlikely that Solvency II would be scrapped altogether as most stakeholders agree and support its objectives, if not the way in which it is being implemented,” Mr Porteous said. Allianz refused to be drawn into speculation on timeline and said it remained strongly supportive of Solvency II although it insists that clarity on the rules must be reached before implementation. Dr. Martina Baumgärtel, Head of Group Regulatory Policy, said, “Solvency II enables a more precise and transparent assessment of the capital strength of insurers than Solvency I. That will strengthen us for future crises. But it is in the interests of everyone that sound principles and clarity must prevail over readiness.”![PwC_75x50 PwC](https://solvencyiiwire.com/wp-content/uploads/2012/11/PwC_75x50.jpg)
![Atradius logo 300 Atradius](https://solvencyiiwire.com/wp-content/uploads/2011/07/Atradius-logo-300.png)
Filling the Solvency II void
The question marks hanging over Solvency II is leading to some speculation on possible alternatives. Mr Skjødt warned it is unlikely things will continue as is. “Implicitly it seems that it is assumed that Solvency I would just continue. But there is a framework directive that has been approved. And Solvency I is obsolete – not only in terms of the capital requirement measurement, but also, for example, in relation to the quantitative investment limits. And the basic problem, nominal guarantees which run for decades in life insurance, still needs to be addressed.” Mr Skjødt believes that a long delay would create a vacuum. “If Solvency II is much delayed or scrapped, we would see a patchwork of national solutions topping up the European legislation. In the Danish case, most likely the authorities would push for an early introduction of Solvency II on a national basis. But it is important for us to assure harmonisation, i.e. a level playing field for all actors.”![Implications of Solvency II delay 3](https://solvencyiiwire.com/wp-content/uploads/2012/11/Implications-of-Solvency-II-delay-3.jpg)
Piecemeal implementation of Solvency II
It remains to be seen if other national regulators will take similar steps, but capitalising on work already done is looking like an attractive option. The idea sounds sensible but the question is whether it can work in practice. EIOPA have certainly been supportive of a partial or staggered implementation approach. Gabriel Bernardino, Chair, EIOPA, said in his letter to Commissioner Barnier, “A reflection should be made on the possibility of earlier implementation of some Solvency II elements.” Further clarification from EIOPA suggest these ‘elements’ are to do with risk management.![Allianz logo Allianz logo](https://solvencyiiwire.com/wp-content/uploads/2012/04/Allianz-logo.jpg)
![FSA FSA](https://solvencyiiwire.com/wp-content/uploads/2012/11/FSA.png)
In spite of the political wranglings in Brussels, the French regulator, ACP, has indicated that it plans on bringing in a national flavour of Solvency II reporting from 2014. The ACP indicated at a conference in Paris on 19 October that it will open its web portal from the end of 2013 and that Pillar 3 reporting in XBRL will be mandatory from Q1 2014. While it is an uncharacteristic move, the ACP opined that too much time and money has been spent by all concerned for Solvency II not to happen, in some shape or form. It remains to be seen whether or not other regulators follow suit, and what this will mean for the European harmonisation that is supposed to lie at the heart of the Directive.
Its not unsurprising that ultimately it will be the policyholders that suffer, in my view and with recent experience in New Zealand of the devastating earthquakes of 2010-2012 and with the changing global climate and the rapidly increasing numbers of natural disasters the insurance industry as a whole is becoming untenable. Nations will have to begin to find their own workable solutions to the ever increasing number of catastrophic events. See http://thechristchurchfiasco.wordpress.com/2012/11/06/a-stormy-and-uncertain-future-for-property-insurance-in-new-zealand-and-around-the-globe/