Solvency II News: Implementation timeline, IMF report

Content: IMF Report, Solvency II implementation timeline.

IMF report warns of unintended effects of Solvency II and Basel III

Insurance and banking regulators must communicate to reduce unintended effects of the combined impact of Solvency II and Basel III on investor and firm behaviour, according to an IMF working paper. Possible Unintended Consequences of Basel III and Solvency II, published in August, stated, “The largely independent development processes of the two accords and differences in their content could lead to unintended consequences.” The combined effect of the two regulations could affect areas such as cost of capital, funding patterns and product and/or risk migration. It could also create arbitrage opportunities between the standard formula and the internal model in both regulations. The report (representing the views of the authors) said that the combined effect of the two regulations could also lead to excessive risk transfer to consumers. “There is already a strong debate whether consumers are exposed to excessive risk in pension products. Basel III and Solvency II may exacerbate the problem in Europe as many pension products are offered by insurers and because of the possibility (being discussed) to extend the Solvency II framework to pension funds.” Worries about leakages in group supervision were also expressed. “This is especially a concern under Solvency II, due to its restricted geographical application and the potential use of non-equivalent jurisdictions for reinsurance.” The report also highlighted the need for more research into the impact of the two regulations, a conclusion which echoes the findings of a BIS report on Solvency II published last month.

Solvency II implementation timeline (July 2011)

The proposed amendments to Omnibus II Directive published by the European Parliament’s Committee on Economic and Monetary Affairs on 27 July 2011 will bring welcome changes but also add complications. Analysis by Milliman said, “While we expect the aims behind most of the proposed amendments in the draft report to be welcomed by companies, the draft report appears to further complicate the already confusing array of documents currently circulating on Solvency II. As a result, it remains unclear how these proposals fit within the numerous iterations of the Presidency Compromise texts for Omnibus II and how the amendments will be considered going forwards.” The following timeline for Solvency II implementation is based on the Milliman analysis and additional commentary can be found in the document.
Date Publication / Action Notes
14 April 2011 Second Presidency Compromise text for Omnibus II published by Presidency of the Council of the European Union.
27 July 2011 Draft report on the proposed Omnibus II Directive (Rapporteur: Burkhard Balz) published by Committee on Economic and Monetary Affairs, European Parliament. Proposes a number of amendments to the Solvency II Directive including a shift in the implementation date to 2014.Areas covered:
  • transitional measures
  • illiquidity premium
  • third country equivalence
  • reporting requirements
  • MCR
September 2011 Next iteration of the Presidency Compromise text for Omnibus II is expected, according to the FSA.
1 March 2012 EIOPA to submit all regulatory technical standards. Areas covered to include:
  • supervisory approval of own funds
  • information to be provided to supervisors
  • valuation of assets and liabilities
  • calculation of best estimate liabilities and the risk margin
  • methodology and formula for the calculation of the illiquidity premium
  • assessment and eligibility of own funds
  • calculation of SCR by standard formula
  • internal models
  • calculation of the MCR
  • qualitative requirements for investments exceptional falls in financial markets
  • non-compliance with the SCR
  • finite reinsurance and SPVs
  • group SCR and internal model
1 June 2012 EIOPA to submit implementing technical standards (June & July depending on topic). These will set out the procedures to be followed and formats and templates to be used. Areas covered:
  • supervisory approval of own funds
  • supervisory approval process for USPs
  • internal model approval
  • approval of major changes to internal models
  • capital add-ons
  • solvency and Financial Condition Report (SFCR), solo and group
  • procedures for updating correlation parameters
  • SPVs
  • determination of the existence of an exceptional fall in financial markets
1 July 2012 EIOPA to submit remaining implementing technical standards. Areas covered:
  • Information to be provided to supervisors.
  • Information to be disclosed by member states.
1 January 2013 Phased-in implementation of Solvency II. From 1 January 2013, supervisors will have the power to decide on a number of items, including:
  • the approval of USPs
  • the approval of own funds classifications
  • the approval of ancillary own funds, including those of an intermediate insurance holding company
  • the approval of full or partial internal models (solo and group)
  • the choice of method for the calculation of group solvency
  • determine equivalence and temporary equivalence for third countries
1 July 2013 Important supervisory information to be provided. Companies will have to:
  • calculate their SCR, MCR, amount of own funds and determine the balance sheet and profit and loss account under Solvency II and provide this information to supervisors.
  • provide supervisors with the information set out in Article 35 as required for supervisory purposes.
1 January 2014 Full implementation of Solvency II.
1 January 2016 Last date which member states can allow companies to comply with certain phase-in elements. Areas covered:
  • comply with their SCR (provided their balance sheet total is less than EUR 500 billion (sic))
  • have in place appropriate systems and structures to meet their reporting requirements
  • have in place appropriate systems and structures to provide information for group supervision

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