Insurers appear ill-prepared as Solvency II sets off on final lap

EIOPA is one of three new pan-European financial supervisory bodies created on January 1, a few days after the creation of the European Systemic Risk Board (ESRB). Michel Barnier, Commissioner for DG Internal Market and Services, said last week that the formation of three new authorities marked a ‘turning point’ for the European financial sector. “The crisis highlighted only too clearly the limits and sometimes the failings of our supervision system in Europe. The accumulation of excessive risk was not detected. Surveillance and supervision were not effective in time. When transnational financial institutions faced problems, the coordination between national authorities was far from optimal, and this happened even though these institutions are more and more numerous,” said Mr Barnier. “Europe is learning the lessons from the crisis and that is why today, it is giving itself a new apparatus of surveillance and supervision. To detect problems early and to act in time—in a coordinated and efficient way. This new structure is the control tower and the radar screens that the financial sector needs,” he continued. Mr Barnier explained that the ESRB will monitor the entire financial sector, to identify potential problems which could cause a crisis in future. hideIt is hoped that the ESRB will work closely with the three new supervisory authorities to help create a more secure and crisis-free system. But the commission is keen to stress that this new era does not signal the end of national control. “These will not replace national authorities and our objective is not to transfer the control of financial institutions to the EU. Our aim is to create a network of authorities, where the national authorities are responsible for the daily surveillance, and the European authorities—using the expertise of the national authorities and working hand in hand with them—are responsible for coordination, monitoring and if need be arbitration between national authorities, and will contribute to the harmonisation of technical rules applicable to financial institutions,” explained Mr Barnier. EIOPA takes over from CEIOPS as the commission’s main adviser on insurance and Solvency II at a critical time. QIS5, the final impact assessment of the proposed rules, is now complete and the fine details are currently being thrashed out on this basis. The template should be ready by the summer, according to the current timetable. It was surprising therefore to hear PwC announce this week that, according to its research, more than 40% of insurers are still only in the ‘preparatory’ stages or have yet to launch their Solvency II projects. The consulting firm also found that project budgets are expected to increase sharply over the next two years and that concerns remain over whether the amount of skilled people required to complete projects will be available. PwC said that nearly three quarters (74%) of insurers are ‘confident’ they will meet the 2013 deadline, despite the fact that over 40% of them are still in the preparatory stages or have not even launched their projects. The company’s survey of 115 insurers in 22 countries across Europe and outside the EEA found that 11% of companies have not yet launched their Solvency II projects. It also found that of those that have started the implementation process, the majority are only a quarter of the way through. The survey found that many insurers are unsure about the amount of additional money and people they will need to complete the project. Respondents expect most of the remaining costs to come from IT spend and staff recruitment, said PwC. The firm said that budgets for implementation of Solvency II vary but some 40% of companies have a budget of less than €1m. Only 9% of those surveyed predict that they will spend more than €20m on the whole Solvency II project. Of those that have already launched their projects, 83% have spent less than 20% of their overall budget, indicating that the majority of the effort will come in the next two years, said PwC. “The survey findings raise challenges about whether insurers are leaving enough time to tackle the more complex aspects of Solvency II. Some insurers could therefore find themselves with an excessively tough and disruptive late push for the line,” said Paul Clarke, global Solvency II leader at PwC. “Insurers are facing difficult questions over whether hiring the additional people needed with the required skills will be possible. Many could find themselves paying over the odds for people with the right skills if they don’t clarify their resource needs sooner rather than later. Solvency II budgets may have to rise considerably, as the majority of effort will need to come in the next two years as detailed rules in the level 2 implementing measures are issued.” The findings of the QIS5 impact study, carried out between August and November of last year, will largely determine where this budget needs to be spent. In one of its last statements before turning into EIOPA at year-end, CEIOPS announced that it had completed the first phase of the exercise which it said was carried out to ‘assess the practicability, implications and possible impact of specified approaches to insurers’ capital setting under Solvency II’. Almost 70% of all insurance and reinsurance companies under the scope of the Solvency II directive took part in QIS5, up from the 33% that participated in QIS4. Carlos Montalvo, General Secretary of CEIOPS, said: “The results from QIS5 will provide valuable input to help refine the calibration of the Solvency Capital Requirement standard formula as well as the requirements for technical provisions and own funds in the level 2 implementing measures.” National supervisory authorities are currently analysing the data and during the early part of this month will collaborate with CEIOPS to run a pan-European quantitative and qualitative analysis based on the collected data. CEIOPS said that this analysis will provide the basis for the final conclusions provided to the European Commission in the form of a final report that is planned for publication in March 2011. CEIOPS promised that the results of QIS5 will be ‘discussed in detail’ with the member states, as well as other stakeholders. FERMA hopes to be invited to join EIOPA’s formal group of stakeholder groups to represent the policyholder interest during this critical phase of the process.

Insurers appear ill-prepared as Solvency II sets off on final lap

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