The draft of the Solvency II Level 2 text (Delegated Acts) remains largely consistent with the October 2011 version, according to people familiar with the document.
“It appears that the Commission has been able to stick to its plan not to rewrite the entire text following the Omnibus II agreement on the Level 1 text last November,” a person familiar with the current draft and the version published in October 2011, said. A copy of the draft seen by Solvency II Wire, dated 10 January 2014, is 399 pages long. A Commission Official verified that a draft text has been sent to finance ministries in the Member States and circulated to selected stakeholders. The text will be discussed at the Commission’s Expert Group on Banking, Payments and Insurance (EGBIP) on 28 January.Home » Knowledge Base » Road to Solvency II » Solvency II News: new Level 2 draft broadly consistent with previous version
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I would certainly agree with the headline.
But a couple of areas where I would disagree with the commentary:
“According to the source, “Without a cap the CRA adjustment would be exposed to significant volatility which would flow through to the risk-free rate, making this hard to manage effectively.””
Actually, there is a specific requirement that the method “ensure the stability of the adjustment”, so that should not be a concern for managing the risk-free rate. In practice I think the CRA will be quasi-fixed, but with some scientific justification of it’s basis – rather like the fundamental spread.
And on the inclusion of property and equity in the Vol Adjustment portfolio, I think that’s a red herring. Classification is to stick assets in different buckets and given size of holdings you can’t ignore those two. But they don’t attract a vol adjustment – only government and other bonds do – so they aren’t really included – as the formula in Level II suggests.
Views on both of these – from Solvency II Wire, the “source”, or other readers – very welcome.
There are a few other areas that do seem to be changes from before eg relaxation of look through for funds, even better treatment of mortgages than before and removal of duration cap on spread tests, but overall doesn’t seem much new.
Also a few areas where drafting isn’t great so meaning ambiguous (eg how you treat matching adjustment in SCR, where their wording read literally makes no sense) – that’s where the lack of a consultation process is frustrating. The LTGA specs were similar to Level II in content but a lot less ambiguous.
Paul,
On your reference to the easing of look through on funds, can you elaborate?
From what I have seen, it looks like firms can use the investment mandate once this does not exceed 20{fe5cadadbb54208ab3a9fe6506ec07abb84961fe5f7860e6b90ac4d8e68f73da} of assets under management.
This would not ease the look through for a life insurer who would have a significantly higher percentage.
Well to my point on the sloppy drafting and the silly consultation process, it’s all a bit messy!
Yes there is a reference to a 20{fe5cadadbb54208ab3a9fe6506ec07abb84961fe5f7860e6b90ac4d8e68f73da} limit but that applies for “data grouping” but doesn’t seem to apply to the idea of basing your calculation on the target underlying asset allocation – which you could potentially do without grouping.
And in a wonderful piece of drafting they’ve ended up with a double negative. The condition that “they do not apply to no more than 20 {fe5cadadbb54208ab3a9fe6506ec07abb84961fe5f7860e6b90ac4d8e68f73da}” – actually says that data grouping is OK as long as it DOES exceed (rather than does NOT exceed) 20{fe5cadadbb54208ab3a9fe6506ec07abb84961fe5f7860e6b90ac4d8e68f73da}!
An Omnishambles (or strictly a LevelIIShambles).
Paul
The double negative is quite frankly hilarious !
But at the end of the day… Look through is going to be a requirement, not just for solvency II as defined, but for pension funds, risk in retail investors investing in complex instruments they don’t understand…. The list goes on.
The latest text is also rumoured to pick up on the reliance placed on external credit ratings …
Insurers should be performing their own credit assessments – at least for their large and more complex exposures.
If the models they use for this purpose haven’t been approved by the supervisor, they won’t be allowed to set aside less capital than they would otherwise be required to hold if they used the external credit rating.