As the timetable for Solvency II is stretched yet again – this time to 2014 – David Blackman looks at the hurdles encountered so far and the many still to be faced
There has been unparalleled turbulence in the eurozone economies in recent months. But those hoping for a swift political solution to the sovereign debt crisis, which threatens the still fragile global recovery, will draw scant comfort from the EU’s agonisingly slow process for hammering out Solvency II.
Fresh delays have hit what has already been a long drawn-out process. Originally timetabled for introduction in 2010, the deadline for the directive’s implementation has been put back repeatedly. Last year, EU internal market commissioner Michel Barnier set it at new year’s day 2013.
But by the beginning of this year, concerns were mounting that even this new deadline was hopelessly optimistic. While insurers and regulators in some EU countries such as the UK have made good progress in ensuring they are Solvency II-compliant by the end of 2012, other member states have been less prepared.
Regulators and insurers in some of the smaller and southern European member states have found the European Commission’s timetable challenging. And for smaller and medium-sized insurers, which tend to make up a bigger chunk of the market in less mature economies, complying with the new regime’s provisions is especially onerous.
A hugely complicating factor is the Byzantine nature of the EU’s decision-making process. This has become even more convoluted since the passage of the Lisbon Treaty, which gave the European parliament a bigger voice in the production of directives such as Solvency II. It means that, as well as having to pass muster with member states through the Council of Ministers, any EU legislation must also be approved by the European parliament.
It may be a more democratic process, but the result is a legislative logjam in which Solvency II is caught up. The full implementation date now looks set to be pushed back a whole year to the beginning of 2014 under a new timetable to be agreed when the eurocrats return from their summer breaks.
But while member states will be required to formally transpose the directive into their national legislation by the earlier deadline, regulators and companies will not be obliged to comply with it. Existing capital and solvency requirements will continue to apply throughout 2013.
The intervening year will see the phasing in of the directive’s detailed provisions, and insurers will be required to provide their national regulators with an implementation plan.
European Insurance and Occupational Pensions Authority (Eiopa) chairman Gabriel Bernardino, in a recent interview with Global Reinsurance’s sister title Insurance Times, was anxious to deny that the new timetable was a delay. “You can’t start to enforce a system before implementing it,” he said.
Putting systems in place
But PricewaterhouseCoopers global Solvency II leader Paul Clarke says insurers should not take their foot off the preparation pedal. “Despite the delay, insurers cannot afford to be complacent with their plans, as they will still be required to file Solvency II information over the course of 2013 to prove their readiness. This means insurers will need to have systems and processes in place by the end of next year.”
Lloyd’s finance director Luke Savage adds: “If insurers have 18 months instead of six months, the work will stretch out. You won’t end up with a better solution, but you will spend more money and take more time.”
European insurers in general are more relaxed about the new deadline, according to a survey by Aon Benfield. A straw poll of European insurer delegates at a conference held by the reinsurance broker in the wake of the EU’s announcement revealed that 60% thought 2014 a better starting date for the new capital regime.
And given the lack of clarity over the Level 2 measures – which spell out how Solvency II will be implemented – it is hard to see EU decision-makers had any option but to postpone.
Many of these measures are being thrashed out by working parties set up to examine the thorniest issues, such as whether insurers should be allowed to hold capital in the currencies of the countries where they are insuring risks.
The overarching issue is that the existing implementation framework requires insurers to adopt an “overly conservative approach” to the level of capital they should hold, according to a letter sent earlier this year by leading insurance bodies to Barnier.
Lloyd’s estimates its members would need to raise an additional £25bn in order to comply with the existing standards. A number of working parties have been set up to iron out these issues.
All this means that the Level 2 rules won’t be finalised until well into 2012 under the existing timetable.
Light was shed on one key issue last month, when Eiopa published its thoughts on equivalence. While the insurance regimes in Japan and Switzerland meet the criteria for equivalence under the Solvency II regime, it said, Bermuda still has work to do.
This is a becoming an all-too familiar story: progress is being made on Solvency II, but nowhere near fast enough.