Commission and Parliament give assurance to buyers on Solvency II

A senior representative of the European Commission told Commercial Risk Europe that the position of captives under Solvency II would be investigated further over the next four to six weeks as it prepares the next detailed study of the impact of the rules on the market. Insurance buyer representative groups such as FERMA and ECIROA have become increasingly worried that political pressure placed on CEIOPS, the supervisory body that advises the Commission on the planned Directive, will result in a much more conservative regime than was originally planned. FERMA and ECIROA are particularly worried that the latest set of advice from CEIOPS deviated far from the original framework Directive and was so strict that it would drive industrial insurance capacity out of the market and many captives out of business. hideUnder the Framework Directive, for example, captives were supposed to be granted simplified treatment compared to commercial insurance companies under the doctrine of proportionality. But, CEIOPS’s latest set of advice included tighter requirements that would mean most captives would not qualify for the simplifications. Last Thursday Commercial Risk Europe held a high-level seminar in Brussels during which senior representatives of the European insurance buyer community were given the chance to challenge the Commission and Parliament on the direction of Solvency II. Jonathan Groves, head of the European captives business at broker Marsh summed up buyers concerns neatly when he said: "We need change otherwise we will have a problem. The biggest issue has only been briefly referred to today and that is that CEIOPS has extended its mandate. CP 79 changed the definition of captives from the Framework Directive." "According to CEIOPS data 28.3% of captives that participated in QIS4 [the previous impact study] did not meet the SCR Pillar I capital requirements. The average minimum capital increase, based on Marsh's data from QIS4 studies, was 3.3 times their current minimum. Catastrophe risk appears to be the biggest problem and main concern for captive owners as its calibration is often driving the ultimate capital required." Peter Skinner, MEP and Rapporteur for the Directive responsible for guiding Solvency II through parliament, promised buyers that he would do everything possible to ensure that CEIOPS’s advice was not allowed to deviate too far from the original Directive that had been approved by the parliament." “CEIOPS has gone beyond its mandate and the challenge for us is to ensure that the Level 1 document [Framework Directive] that was voted on in Parliament will be returned to. This is a little bit of a struggle, but, we will win because the law is on our side and the regulations will have to apply on a principles-based approach,” said Mr. Skinner. And, the battle to ensure that the supervisors stick to the original intentions of the Directive and do not bow to political pressure is more pressing then ever because CEIOPS will soon be granted new pan-European powers as it becomes the European Insurance and Occupational Pensions Authority (EIOPA) with the power to override national supervisors. “The regulators that we have spoken to, want to return to, in or around, that position [the framework Directive]. They are under pressure. But, that does not allow them to deviate from the specific set of outcomes that have to be adhered to. We are not going to let go of the toe on the foot of the regulators as they become EIOPA and will make sure that they stick to the principles,” said Mr. Skinner. “It is important that if we have new rules and regulations they are applied in the spirit of the Framework Directive that they were intended. These are technical provisions not a recast of Solvency II and I think that, from the discussions I have had with CEIOPS, that they understand that.” Peter Den Dekker, President of FERMA said that his main concern about the recently toughened up Solvency II proposals is that insurers would be forced to shift capital to less risky lines of business than industrial insurance to maintain their returns to investors. “Our main concern is the possible impact of Solvency II on the availability of capacity. There is a fear that the ‘overly prudent’ rules will make the situation critical. How can we prevent migration of capital away from higher risk lines?” he said during the main panel debate in Brussels. Mr. Den Dekker said that he and other insurance buyers are becoming increasingly frustrated by the apparent unwillingness of the rule-makers to listen to the concerns of those whom the new regime is designed to protect. “Europe needs to listen to our concerns because we represent the real economy. The long term goal of Solvency II was to ensure the long term viability of the insurance market. The protection of policyholders’ interests was a key aim of the new rules and I feel that currently policyholders, at least those involved with large catastrophe risk and long tail liabilities feel that they are maybe not listening to us,” said Mr. Den Dekker. Marc Mathijsen head of corporate insurable risk management at ING bank and President of BELRIM, the Belgian risk management association and co-host for the event agreed with Mr. Den Dekker that the Directive, as it stands, would have a big impact on the market and that some elements of the proposals have to change. "There will be a clean-up of insurers and captives but exactly in what direction is hard to say. The impact on the captives market is most important. Of course there could be a clean-up which may be not such a bad thing, but, it does not meant that all papers should be accepted, especially the definition of a captive. It is hard to see why third party liability risks should be excluded. It is often the same as pension fund liabilities for former employees and so does not make sense,” he said. Günter Dröse, head of ECIROA and insurance at Deutsche Bank in Frankfurt is equally worried, particularly about the apparent lack of attention paid to buyers’ concerns. “We will not stop lobbying until we get answers in writing. We have heard that they [the Commission] very much support our ideas. The question is how do you tell CEIOPS and its working groups that? We cannot assume that they agree and it is very difficult to tell whether they do or not.” Ulf Linder, recently appointed Deputy Head of the Insurance and Pensions unit within the Directorate-General Internal Market and Services at the European Commission said that it does listen to advice and promised captive owners that they would be consulted on the captive rules in particular later this month or in June. "We are now looking at the QIS 5 calibrations, the Commission has made a number of changes, most of them reducing the requirements proposed by CEIOPS. There are a number of areas that I cannot say where they will end up and CEIOPS is in that position too. We are in the middle of the process. We and CEIOPS are looking at the papers from groups such as FERMA and ECIROA and we are developing different elements of the SCR formula [the formula that will be used to calculate capital requirements],” said Mr. Linder, the deputy to Karel Van Hulle. “Then we will come in and see where we can do simplifications for captives for example, but, I cannot say for sure now because we are in the middle of a process. Overall the protection of policyholders and a more competitive market are the overarching aim, and the European Parliament and the Council will check very carefully that we deliver on this," he continued. “We are working on the implementing measures and we base our work on advice from CEIOPS. We also receive a lot of input from industry. There is a certain room for manoeuvre within the level 1 Directive. I cannot emphasise enough how important input from industry and specialists is at this stage. CEIOPS has given advice on certain simplifications for captives and we will use this for our implementing measures on captives. This one will be discussed with Member States and circulated to industry in May or June," added Mr. Linder. There is a growing suspicion within the risk and insurance market that stakeholders may be given more time to lobby for change because the whole project will be delayed till at least 2013. Mr. Droese among others asked Mr Linder and Mr. Skinner if more time could be granted to consider the potential impact of these complex rules. Neither Mr. Skinner nor Mr. Linder gave much reason for hope of a delay. "I think we started talking about Solvency II ideas in earnest in 2002 and at least 10 years before the Directive was drafted. It think it is fair to say that from the start of Solvency II it has been a very open project and now that we are going through the implementing measures that is very open and we have taken a lot of comments. So the time scale has not been that short really and there has been ample opportunity to become involved," said Mr. Linder. But, Marisa Attard, Head of Insurance at the Malta Financial Services Authority and a CEIOPS member, did concede that the deadlines would be tight. “To transpose the whole Solvency II framework into national legislation is tight on time and my very personal opinion is that the time frames are very tight, and we also need parliamentary approval . The time is very short for companies to be in line with the implementing measures. We, as the Maltese regulator, insisted that our market looked at the Consultation Papers to see what was coming, but, personally I do feel that the time frame is very short for companies to fully implement the measures. In some ways it is relatively easy for Directives to be transposed but ensuring the effective implementation of a Directive is another thing,” she said. The day after the Risk Frontiers event, CEIOPS published its main background document for its Level 2 advice on calibrations, the critical calculations needed to work out capital requirements. The calibration paper provides background information and compiles all the technical analysis carried out by CEIOPS in the calibration of the SCR standard formula, as well as key parameters for the calculation of the Technical Provisions. The European Commission has developed the draft technical specifications to test the overall impact of Level 2 measures in QIS 5, the final impact study that will be carried out this summer. -A full and exclusive analysis of the Risk Frontiers discussion and the impact of Solvency II on European insurance buyers will be published in the coming May issue of Commercial Risk Europe.

Commission and Parliament give assurance to buyers on Solvency II

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