What are the chances of EU regulators playing in tune?
The rationale of the labyrinthine Solvency II project has always been that it is intended to be – in the words of the European Commission (EC) itself – “the first truly harmonised state-of-the-art solvency rules in the EU”. Some may argue that the only element of the project to date which could be described as harmonious is the criticism across the insurance industry about the way in which the project has been developed and implemented, writes Clyde & Co corporate insurance partner Andy Tromans.
As we approach the revised expected implementation date of 1 January 2016 it is worth exploring what the chances are of the EC’s harmonious nirvana being delivered.
The UK is a good place to start, particularly given the UK regulators have a track record in gold plating rules to reflect the ‘UK-knows-best’ approach. Ostensibly the signs are good in terms of harmony.
The deputy head of UK regulator the PRA, Paul Fisher, said in a speech on 22 January 2015, that the PRA recognises and respects “that Solvency II is a maximum-harmonising directive with a key objective of promoting supervisory co-operation. The PRA is committed to upholding this valued objective and will implement the directive as intended. The PRA can’t and won’t gold-plate.”
Which is all well and good in theory. However, is it what the insurance industry feels will happen in practice and is it supported by the actions of the regulator to date?
Let’s look at an example. The EC’s desire for harmonisation is illustrated by the fact that the Level 2 implementing measures have been made by way of regulation, which under European law have direct effect in individual member states without the need for implementation into individual rulebooks. So why did the PRA see the need to use (in its own words) an “intelligent copy out approach” to transpose the directive itself into its SOLPRU handbook, rather than simply passing a rule giving the directive direct effect, which is the approach other countries typically use to meet the implementation requirement?
Another example arises from the PRA’s consultation paper last year setting out its proposals for a revised regulatory regime for senior insurance managers. Although purportedly aimed at implementing Solvency II requirements, the PRA has also taken the opportunity to apply aspects of the regime it is proposing for banks, with the strong emphasis contained in those rules on individual accountability.
Is it realistic to assume that proposing a set of rules on this basis and in this detail will be consistent with the approach other member states will take in implementing the relevant article, which merely refers to those holding key functions being adequately experienced and of good repute and integrity? Or is a more likely outcome that most states will introduce very general rules broadly tracking the language of the directive, immediately giving scope for un-harmonious judgement and a divergence from the approach in the UK.
There is a perception developing within the insurance industry that there will be a spectrum of regulatory attitudes across Europe based on how exacting the respective regulators are likely to be when applying Solvency II.
It cannot be denied that the level of resources, expertise and experience available to regulators differs significantly across Europe. Whilst in some cases this may correlate to the size and complexity of their insurance industry, there will inevitably be differences that cannot be explained away on this basis.
And politics will inevitably have role to play here. Without wishing to single out individual regulators, is it realistic to assume that more economically-challenged states may be willing to spend money to provide the same level of resources as the UK and Germany are prepared to devote to this activity? And even if they did, given that regulation has become – and will remain for the foreseeable future – a political hot potato, will politicians in member states be content to sit back and accept a regulatory approach based on the lowest common denominator across Europe because of a requirement for harmonisation? For example, until recently Bermuda was on France’s blacklist of jurisdictions to do business with. Yet if, as is widely expected, Bermuda, obtains equivalence status for Solvency II purposes, French insurers would be free to deal with insurers and reinsurers within the jurisdiction in the same way as insurers in other member states, irrespective of what their own politicians may think.
The EC and member state regulators can pay whatever lip service they like to a desire to achieve maximum harmonisation, but the real test is whether insurers perceive them as all being in tune. At present, many believe that the regulators are not yet even singing from the same hymn sheet.