Insurer groups tell EC to calm down on Solvency II or face ‘dire consequences’

Analysts agreed that the results of the latest QIS5 study on the likely impact of the latest proposals on the sector were positive and would not lead to an overall capital or capacity crunch for consumers to deal with. Also Michel Barnier, the European commissioner for internal market and services, appeared to offer an olive branch to the sector when he reacted to the QIS5 results published by EIOPA early last month with promises of simplifications and more time to implement the new regime. This came after the Omnibus II Directive proposed in January by the commission, which also proposed a number of significant transitional measures that, if ratified, would enable Europe’s insurers to delay elements of the regime as far away as 2023. But Europe’s insurers are still not happy with what is currently on the table, particularly the probable impact on long-term savings markets and catastrophe business. They therefore warned early this week that the ‘stakes are high and time is running out’. hideIn a strongly worded letter sent on Monday to Mr Barnier, Gabriel Bernadino, head of EIOPA, and Peter Skinner, rapporteur for Solvency II in the European Parliament, that is co-signed by the CEA, the European insurance and reinsurance federation; the Pan European Insurance Forum; the CFO Forum; and the CRO Forum, the groups said: “It is absolutely imperative that changes are made to the overly conservative approach being adopted in several areas.” As ever the groups stressed their ‘full’ support for the principles set out in the Solvency II Framework Directive and its willingness to ‘engage constructively’ with the commission and the European Insurance and Occupational Pensions Authority (EIOPA) to solve what it identifies as crucial outstanding issues. The problem, according to the insurers and representative groups of the commercial insurance buyer lobby such as FERMA and ECIROA, is that EIOPA has strayed too far from the original Framework Directive in its subsequent proposals. According to the letter from the insurer groups, the key areas currently proposed by EIOPA in need of change include a more ‘balanced’ calibration of certain key elements, less pro-cyclicality and volatility in the Solvency II framework and a continued need to address unnecessary complexity. In particular, the insurers call for an economic treatment of the value of insurers’ in-force portfolio, with its value treated entirely as Tier 1 capital, the highest valued form of capital under the new regime. The insurer groups argue that Solvency II will fail to achieve its underlying principles if these problems are not addressed and warn that such a failure would: hamper insurers’ ability to offer policyholders appropriate long-term protection at a fair price, in the shape of pension or long-term care products; penalise the diversified growth of insurance companies, which they point out would be ‘at odds’ with the EU Single Market Strategy; introduce a complex, inconsistent and volatile prudential framework that would neither guarantee financial stability nor policyholders’ protection; and shorten insurers’ investment time horizon. The CEA stressed that it continues to be ‘fully engaged’ in the joint EIOPA/industry working groups on a number of outstanding issues. To help the discussion head in the direction it wants it has proposed a number of solutions. It said that these proposals aim to: introduce an ‘appropriate’ extrapolation of the risk-free rate curve used to discount technical provisions; ensure that a formulaic approach is used for the application of the illiquidity premium, a measure of the difference in price (or yield or expected return) between a liquid and equivalent illiquid asset, which should not depend on a subjective assessment by EIOPA to determine a period of ‘stress’; address issues related to the design and calibration of capital requirements and their potential pro-cyclical effects which the CEA claims are amplified for long-term products. The CEA is also currently analysing different proposals for ways to address issues related to what it sees as certain asset/liability valuation mismatches, which it says affect products with long-term guarantees. On non-life insurance, the CEA has proposed a series of solutions related to the current structure for catastrophe risk. It claims that the current proposal produces a capital level that does not appropriately reflect the underlying risk of each type of man-made or natural catastrophe and that this consequently produces a capital level that does not appropriately reflect the underlying risk of each type of man-made or natural catastrophes. The letter certainly did not suggest that the industry has been placated by the positive noises emanating from Brussels on Solvency II in recent weeks as the QIS5 results were announced and digested. “Members of the Pan European Insurance Forum (PEIF), of the CEA (European insurance and reinsurance federation), of the CFO Forum and of the CRO Forum would like to express their strong concerns with developments in the Solvency II process,” the letter stated. “At the very time that Europe is experiencing significant economic, financial and social challenges, the insurance sector’s aim is to contribute to the objectives of growth and financial stability. Unfortunately, the options tested by QIS5 and the draft Solvency II implementing measures/delegating acts risk driving insurers out of their long-term business and would introduce pro-cyclicality into the framework,” the letter continued. “Such an unfortunate development should not happen as it would have consequences on the availability and affordability of insurance products. It is of the utmost importance that the objectives set for Solvency II and the principles enshrined in the Framework Directive are achieved: i.e. creating an economic and risk-based approach,” stated the letter. The group stated that if the Level 2 implementing measures do not achieve the underlying principles of the Level 1 Directive, the Solvency II project will have failed. This failure would ultimately hamper insurers’ ability to offer policyholders appropriate long-term protection at a fair price, in the shape of pension or long-term care products, penalise the diversified growth of insurance companies and introduce a complex, inconsistent and volatile prudential framework that would neither guarantee financial stability nor policyholders’ protection and shorten insurers’ investment time horizon, claimed the insurer group. As a consequence the group stated that: “It is absolutely imperative that changes are made to the overly conservative approach being adopted in several areas of the current Level 2 text.” The group said that the publication of QIS5 intensified rather than assuaged their fears and feel that their ‘valid concerns’ have been consistently ignored. “As we have repeatedly stated, we observe that EIOPA advice and, as a result, several areas of the current draft of the Level 2 implementing measures/delegating acts, are characterised by a systematic injection of excessively conservative and prescriptive elements. “The genuine and valid concerns of the industry have been largely ignored or remain unaddressed. The latest draft Level 2 implementing measures/delegating acts have intensified our concerns rather than assuaged them. In fact, if anything, the text has moved further away from the economic principles enshrined in the Framework Directive,” stated the group letter to Commissioner Barnier. The insurers said that it is vital that the various working groups established by EIOPA and the commission deliver effective solutions to its concerns before this summer. The insurer group said that it still supports the implementation date of January 1, 2013 for the Solvency II rules. It added, however, that the timeline does not now allow for any slippage or change, especially since Omnibus II will not now be ratified until January next year instead of this summer as originally planned. The letter urged the commission to clarify how this delay will impact the negotiation and adoption of Level 2 and Level 3 of Solvency II. The group also urged the commission, parliament and council to ensure that there are no further changes to the dates. If that is not possible they asked the commission to consider whether a delay to the date on which Solvency II enters into force should be made before Omnibus II is ratified in January.

Insurer groups tell EC to calm down on Solvency II or face ‘dire consequences’

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