* Chris Finney Commentary: EIOPA Brings Solvency 1½ a Step Closer
In December 2012, the European Insurance and Occupational Pensions Authority (EIOPA) said that it would consult on "comply or explain" Guidelines that would implement most of Solvency II's Pillar V across most of Europe in January 2014 (my earlier blog is here).
On 27 March 2013, EIOPA published four Consultation Papers on its proposed Guidelines, together with a cover note and three explanatory texts. These publications describe EIOPA's plans for the phasing in of Solvency II.
If the Guidelines are made in their current form, they'll be addressed to the National Competent Authorities (NCAs) of the European Member States, and they'll require them to apply a version of Pillar V to their firms; or explain - publicly - why they haven't done so.
The Guidelines on:
- The System of Governance, "develop" Solvency II's governance requirements;
- The ORSA, are based on EIOPA's Final Report of July 2012 (available here), with amendments to reflect the fact that EIOPA's Report was expressly subject to change, and this is merely a "preparatory phase";
- The Submission of Information to the NCAs, propose that the NCAs ask firms to submit (i) a subset of Solvency II's reporting templates and narrative reports on a quarterly and annual basis; and (ii) their ORSA results within 14 days of completion;
- Pre-Applications for Internal Models, cover most of the internal model framework, should "increase convergence of supervisory practices" and "help [firms] prepare to submit a final application".
These proposals deliberately seek to "phase in" Solvency II – even though:
- It's far from clear that the trilogue parties (including Europe's elected representatives) still want Solvency II to be made and brought into force;
- A material number of significant and relevant policy issues are still to be resolved; and
- Some Member States won't be able to comply, and others will choose not to do so.
In pure policy and project management terms, this is clever stuff. EIOPA is using the powers it has to work its way around some of the most significant obstacles to Solvency II delivery. It could also be good news for firms: UK (re)insurers have spent more than £3 billion preparing for Solvency II. This could help them get some return on their money. These things aside, it's not great. Although EIOPA's cover note explains that its planning assumption is that Solvency II will apply from January 2016, it still commits itself to a review "at the end of 2013 based on the latest [Omnibus II] developments". (The European Parliament pencilled a plenary Omnibus II vote in for late October. EIOPA is concerned that it will slip again.) EIOPA will also expect the NCAs to submit annual progress reports from 2015, and implies that they'll also be needed in 2016, 2017, 2018… That may be sensible - Solvency 1½ could be a permanent (temporary) solution. Add in the significant risk of further distortion in the single European market, the impact on competition within and between Member States, the costs of adjusting to another interim version of Solvency II before readjusting to the final rules; and it's becoming a bit of sorry (EEA) state.
Little wonder then that (i) a senior Lloyd's official is reported to have "slammed" these proposals by asking "what planet are these guys on?"; (ii) Andrew Bailey (CEO of the PRA) has described the cost of implementing Solvency II as "frankly indefensible"; and (iii) the FSA is still to update its website to tell us about the Guidelines and the approach the PRA will take when it decides whether to comply…or explain.
EIOPA's consultations are open until 19 June 2013. The final Guidelines will be made in the autumn.
Edwards Wildman Palmer UK LLP
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