Uncertainty. The word is inseparable, almost synonymous, with Solvency II. Uncertainty is often discussed in the context of regulatory compliance; it is less frequently mentioned as a barrier to insurers’ day-to-day operations and business as usual planning.
Doubts about the start date of Solvency II have all but disappeared now. But clarity on the timeline, and more recently on the Delegated Acts, has given way to a new set of uncertainties.
Firms can no longer treat Solvency II as something that will happen ‘sometime in the future’. Concrete decisions have to be taken now. Actual numbers must be filled in forms and budgets allocated. At the same time there are still several requirements, formulas and calibrations that will only be clarified next year, yet others, will be left up to national supervisors. The combination of concrete deadlines and uncertain rules is forcing some firms into a difficult position of having to make long-term future plans based on assumptions and notional principles.
Uncertainty built into the rules
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More consultations to come
There are some measures that will require supervisory approval that have not been consulted on yet. Solvency II will allow the use of two transitional measures for business that has been in existence before the implementation date: risk-free interest rates (Articles 308c) and technical provisions (308d). In its recent consultation (CP 16/14) published in August, the PRA said that it would be consulting on any required rule changes at a later date. “At present, there is insufficient evidence to quantify the precise impact of changes to PRA rules,” the document states. According to Oliver Wareham, a partner of Slaughter and May, “It remains unclear in what circumstances the PRA will allow the use of the transitional measures on risk-free interest rate and technical provisions and how in practice those measures will feed into the stress scenarios in the SCR calculations.” Overall, the discretion afforded to national supervisors may compound the challenges for firms, Mr Wareham, said. “Although the Directive is intended to be maximum harmonising, I suspect that there will be many areas where national supervisors continue with divergent approaches, and firms will face uncertainties as to how their national regulators are going to interpret the rules or whether they are going to apply ‘gold-plating’.”Pressure on Internal Model firms
The problems outlined above become more acute for firms that are planning to use an Internal Model, as they must get model approval before the implementation date. What’s more, an application can only be accepted or rejected in its entirety. The tight deadline means there is little room to manoeuvre if firms don’t get it right the first time. National supervisors cannot process applications formally yet, but they have been engaging in active dialogue with firms. The supervisor’s approach to giving feedback and capacity to process the volume of applications will be critical. In Germany there are currently seven insurance entities in pre-application, a number that is likely to grow. A BaFin spokesperson told Solvency II Wire that more insurance companies have announced their intentions to apply after this first wave. In accordance with the Directive, the German regulator does not limit when a reapplication can be submitted. “A firm is allowed to send an application letter at any time. The result of the application depends on when and whether the firm meets the requirements,” the spokesperson, said.![Solvency II uncertainty A reality 5](https://www.solvencyiiwire.com/wp-content/uploads/2014/10/Solvency-II-uncertainty-A-reality-5.jpg)
Interaction with national rules
In some cases even when the rules are clear, firms can be caught up in ambiguities between European law and national discretion and initiatives. Insurance firms in run-off or administration may find themselves in limbo depending on the regulator’s approach to what constitutes the best path of policyholder protection.![Solvency II uncertainty A reality 2](https://www.solvencyiiwire.com/wp-content/uploads/2014/10/Solvency-II-uncertainty-A-reality-2.jpg)
Clarity
Ironically, the area where firms appear to be least prepared – reporting – is the one with the most clarity and has potentially the least disruptive impact on insurers’ business as usual operations. According to one reporting expert at a leading UK insurer, currently the firm is not experiencing significant impact on business as usual, this despite extensive Pillar III work. “The proposed changes to business as usual reporting in order to accommodate Solvency II reporting obligations are based on certain principles that are not expected to change significantly,” the expert said. These principles include the reporting deadlines and the accounting principles that are being based mostly on IFRS. Uncertainty is, however, affecting work at a more granular level, both for specific cells of the Quarterly Reporting Templates (QRTs) and in asset definition. In cases where information about specific cells is unclear the firm has drafted internal guidance. More significant questions are put to EIOPA through its Q&A facility. “Whilst awaiting a response, we use some form of internal assumption and hope that the final response does not create significant rework,” the expert added. Where there are various minor points of uncertainty (of which there are many), we develop pragmatic solutions and assumptions.”Asset data classification codes
Solvency II allows firms to classify assets based on the insurer’s risk exposure. In so doing it aims to provide a more risk relevant profile of the portfolio. The Complementary Identification Code (CIC) introduced in Solvency II combines an asset’s characteristics and risk exposure so the classification can change depending on an insurer’s use of the asset in the portfolio.![Solvency II uncertainty A reality 6](https://www.solvencyiiwire.com/wp-content/uploads/2014/10/Solvency-II-uncertainty-A-reality-6.png)
Uncertainty. A reality
The Delegated Acts have now been published, bringing with them the illusion of clarity and certainty. A lot more will be clear now, but not everything. Firms managing regulatory change must manage it as they would the myriad of factors affecting the business. It would be nice to have more certainty on Solvency II; it would be nice, too, to live in a world where everything else was more certain. — To subscribe to the Solvency II Wire mailing list for free click here.![Solvency II uncertainty A reality 1](https://www.solvencyiiwire.com/wp-content/uploads/2014/10/Solvency-II-uncertainty-A-reality-1.jpg)