In this issue:-

  • Solvency II Framework Directive – 2009/138/EC
  • Deloitte's External Study on the Impact Assessment of Solvency II
  • Insurance Block Exemption

SOLVENCY II FRAMEWORK DIRECTIVE - 2009/138/EC

On the 17 December, 2009, the definitive text of the Solvency II Directive (2009/138/EC) was published in the Official Journal. The Council of the European Union ("the Council") adopted the Directive on 10 November, 2009 and it was then signed by both the Council and the European Parliament on 25 November, 2009.

The Directive aims to strengthen the supervision and prudential regulation of insurance and reinsurance companies, particularly through the imposition of new solvency and governance requirements. It also establishes a new framework for EU regulation through the recasting of 13 insurance directives into a single text.

The Directive comes into force 20 days after its publication in the Official Journal, however a number of the provisions (including the repeal of existing insurance directives set out in Article 310) only apply from 1 November, 2012. Member States will have to implement the Directive by 31 October, 2012.

On the 29 January, 2010, the Financial Regulator published a document updating the industry on the response to its survey in August, 2009. In August, 2009 the Financial Regulator wrote to all Irish authorised insurance and reinsurance undertakings requesting the submission of certain information in relation to the use of internal models under Solvency II. The information was requested from 60 Life undertakings, 130 Non Life Insurance undertakings and 120 Reinsurance undertakings. Of the 310 institutions, 253 indicated that they intended using the Standard Model and 57 indicated that they intended to use an internal model. Of the 57 intending to use an internal model, only 16 will be using an internally-developed model, which will require to be approved by the Financial Regulator. The other 41 firms will be importing models developed at group level and authorised by regulators in other EU states.

Firms intending to use internal models are required to complete and return the second Questionnaire to the Financial Regulator by 31 March, 2010.

On the 4 February, 2010, the Financial Regulator published a letter addressed to the Society of Actuaries in Ireland providing feedback from its reviews of Financial Condition Reports and Statements of Actuarial Opinion. The Financial Regulator notes that in very many cases reports were not comprehensive enough. Actuaries should be documenting all considerations in their reports. The aim is to enable another actuary (in particular one working for the Financial Regulator) to understand the work undertaken. The Financial Regulator acknowledges that reports may be written for Directors who do not have actuarial experience, but notes that in the future and specifically with Solvency II in mind, greater technical knowledge will be demanded from Directors than has been the case in the past. This is an explicit signal from the Financial Regulator that it has high corporate governance expectations under Solvency II. While most work on Solvency II to date has concentrated on the valuation models and techniques, Solvency II contains a sizeable body of corporate governance requirements which have not yet been as widely considered by firms. The Financial Regulator notes that few actuaries gave much attention to Solvency II in their reports and have emphasised that it is very important that Boards receive advice on the expected impact of Solvency II.

DELOITTE'S EXTERNAL STUDY ON THE IMPACT ASSESSMENT OF SOLVENCY II

On the 20 January, 2010, the Financial Regulator published on its website the consultation paper being undertaken by Deloitte on the potential impact of Solvency II technical (Level 2) measures. The European Commission appointed Deloitte to conduct this study, which will look at the impact of the proposed move from Solvency I to Solvency II on insurance balance sheets and business behaviour, on insurance products and markets and social and economic impacts.

The consultation paper sets out the preliminary conclusions of the likely impact of the move to Solvency II and the impact of the various policy options which are under consideration. Respondents are asked to comment (no later than the 19 February, 2010) on these preliminary conclusions by providing business examples and highlighting possible exceptions to the general conclusions. The objective of this consultation is to ensure the maximum range of input is obtained from the industry. The information being gathered by Deloitte is additional to and independent of the consultation work being carried out by Committee of European Insurance and Occupational Pensions Supervisors' (CEIOPS) in relation to the implementation of Solvency II. The European Commission will produce and publish the Main Impact Assessment Report for the Solvency II level 2 measures based on contributions from Deloitte and other parties including CEIOPS.

Solvency II Level 2 Implementing Measures

In late 2009, CEIOPS established a Task Force to lead further work on the issue of the inclusion of a liquidity premium in the risk-free rate for discounting technical provisions as an additional input for Level 2 implementing measures. Having considered industry submissions, the Task Force issued its report on 1 March, 2010, which deals with the issue of liquidity premium under the following headings:

  • Methods of calculation of a liquidity premium for assets and liabilities;
  • Recognition of a liquidity premium in the standard formula for the Solvency Capital Requirement (SCR);
  • Split between interest rate risk and spread risk in the standard formula;
  • Changes to the spread risk model to permit a liquidity premium;
  • Adjustments to spread risk/other market risk correlation assumptions; and
  • Overall impact of a liquidity premium on solvency of insurers.

The Comité Européen des Assurances (CEA) has published a set of "key messages" on Solvency II Level 2 implementing measures. Whilst fully supporting the Solvency II project, the CEA has criticised the advice given by CEIOPS to the European Commission on the inclusion of a liquidity premium (discussed above).

The CEA considers that CEIOPS' advice is in contradiction with the objectives underpinning the Solvency II Framework Directive in a number of respects - particularly in suggesting an increase of financial requirements beyond the level stated in the Directive.

CEA feels this will create serious obstacles to the sound functioning of insurance business and have unavoidable negative effects on consumers, without delivering significant incremental benefit in terms of policyholder protection.

INSURANCE BLOCK EXEMPTION

After a detailed review of the functioning of the current Block Exemption Regulation (BER) adopted in 2003 and which expires on the 31 March, 2010, the Commission has adopted on the 24 March, 2010 a new Regulation (Commission Regulation (EU) 267of 2010) that block exempts certain types of agreements in the insurance sector from the EU's general prohibition of practices restrictive of competition.

The new BER, which will come into force on the 1st of April 2010, renews two of the four categories of agreements currently exempted, namely joint compilations, tables and studies, and co(re)insurance pools, with some amendments. Certain information exchange can be justified in order to allow insurers to accurately assess risks. Pooling is also important in order to ensure that all risks can be covered. These two types of agreements justify a block exemption. Other types of cooperation may also be legal but it will be for insurers to self-assess that they comply with the general competition rules.

The new regulation will be valid until 31 March, 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.