COMMENT

“The possibility of earlier implementation of some Solvency II elements”

All or nothing or something in between
Two general approaches to handling the delay seem to have emerged. Those who believe there should, and could, be a partial implementation and those who take the all or nothing approach. Few at the conference were in the latter camp. Some even criticized the all or nothing approach as a delay tactic. The ‘demographic’ of each camp spans sectors, markets and national borders. One very broad distinction can be made between life and non-life firms. For the former, Pillar I contains significant unknowns because of the uncertainties around the treatment of long-term guarantees (LTG), while most non-life firms pretty much know what’s in store on that front (both for internal model firms and those opting for a standard formula). Another grouping can be made based on a firm’s level of preparedness. For firms and markets that have been making steady progress towards the 2014 implementation date it makes sense to start implementing parts of Pillars II and III. For those who are sufficiently far behind the incentive to do so is much less. There are also those who believe that at this point it would be more costly for all concerned to put everything on hold now until the rules are finalised instead of going for a partial implementation with a parallel run of Pillar I. The overwhelming sentiment, both in the panel discussions and at the fringes, was that some application of Pillars II and III into the current regime was desirable. Desirable, however, should not be confused with possible. The practicalities of a partial introduction of elements such as ORSA and reporting to existing regimes may yet prove demanding beyond anyone’s expectations.The horror, the horror … of Solvency 1.5

The ship has sailed
In some respects the question of allowing a partial implementation is becoming academic. In reality we are seeing more and more national regulators coming out with their plans to introduce elements of Solvency II into their existing regime. The UK, Germany, France, the Netherlands, Ireland, Denmark and Norway are leading the pack (expect more announcements before the end of the year). EIOPA can do nothing to stem the flow. And in many ways why should it? If anything, this is a testimony to the fact that these markets and firms have embraced Solvency II. Yet there are a few issues with this approach. From a technical point of view, how can you implement ORSA and some of the reporting requirements when you don’t know what your Pillar I capital calculation will look like? So much of the ORSA relates to the capital model, as is much of the reporting. A number of senior supervisors have expressed that at the individual firm level this would be possible. Essentially you can do your ORSA based on whatever capital model you are using now (Solvency I). As long as you do your ORSA properly and relate it to the assumptions in your model it is as good as any. The problem for supervisors is that, in the absence of a uniform Pillar I calculation, it will be virtually impossible to benchmark the ORSAs and identify outliers. The relative nature of the process (the ‘O’, we are endlessly reminded, is for ‘Own’) means it needs a common element in Pillar I as a basis for consistent application nationally.EIOPA’s mega headache

Politics versus reason
In all of this, what is clear is EIOPA’s acceptance that this process will never be perfect and that maximum harmonisation is a goal that one constantly strives to achieve but never does. The ‘EIOPAns’ (or is it ‘EIOPAites’?) project an air of optimistic realism. Acknowledging the magnitude of the project and at the same time accepting that something is better than nothing. EIOPA also recognises that elements such as the ORSA will be refined over time. Again, adding to its sooner-rather-than-later approach.
Great article! But, because but is there, I felt dizziness before, and now I’m feeling it again after reading the whole article.The conclusion: it seems the right way to act is to start a partial implementation soon but without EIOPA supervision, it could be a mess, it can push further away EU harmonisation. Like the big brothers think, Solvency 2 should be introduces in stages.
Brrrrr…..I fear the future and I’m not talking about december 21!