27 March 2013
EIOPA launched a public consultation on Guidelines related to the preparation for Solvency II on 27 March 2013. The purpose of the Guidelines is to support both National Competent Authorities (NCA's) and undertakings in their preparation for the Solvency II requirements.
The Guidelines cover the areas that EIOPA considers fundamental to ensure effective preparation for Solvency II: system of governance, including risk management; forward looking assessment of the undertaking's own risk (based on the Own Risk and Solvency Assessment (ORSA) principles); submission of information to National Competent Authorities (NCA's); pre-application of internal models.
The public consultation will end on 19 June 2013. EIOPA invites comments from all interested parties. The relevant documentation can be accessed via the Open Consultations section of the EIOPA website.
20 December 2012
EIOPA has published an Opinion on the Interim Measures regarding Solvency II on its website. Between now and March 2013, EIOPA, with input from National Supervisory Authorities, will work on producing the guideline referred to in paragraph 13 of the opinion which will set out further detail. EIOPA plans to publically consult on this guideline, probably in Q2 2013.
Solvency II Implementation Update
Due to continuing uncertainties surrounding certain calibration issues and the timing of a final quantitative impact assessment, the envisaged implementation date of 1 January, 2014 will not now be met. The Central Bank encourages the European authorities to provide certainty as to a revised implementation date as soon as possible.
The Central Bank has already had discussions with representatives of the insurance industry regarding Solvency II and has decided not to bring forward proposals for early Solvency II implementation independently of action by EIOPA or other regulators. The Central Bank of Ireland is working closely with EIOPA to achieve a consistent and convergent approach across the EU to Solvency II implementation. This may entail early adoption by 2014 of some elements of Solvency II, primarily, but not limited to, Pillar 2. Aspects under discussion currently include systems of governance including risk management and ORSA, related reporting to supervisors, pre-application of internal models, along with supervisory review in relation to these elements. EIOPA is expected to publish a statement on the matter on its website during December.
The Central Bank recognises the substantial efforts by many firms in preparing for Solvency II and we appreciate that the current situation presents challenges in relation to the planning and management of Solvency II work programmes. In light of EIOPA’s forthcoming proposals, we recommend that firms focus on Pillar 2 aspects of Solvency II, in preparation for interim requirements. Once a revised implementation date for Solvency II is known, firms can then rework their full programme plans accordingly.
With regard to the Internal Model pre-application process, we will be working with firms over the coming weeks and months to revise the Internal Model pre-application plan. This will be informed by discussions with the relevant firms but will have regard to the revised implementation date for Solvency II.
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As final agreement on Omnibus II has not yet been reached it is widely accepted that the proposed timeline of Solvency II transposition by 30 June 2013 and implementation by 1 January 2014 is unrealistic. The European Parliament has recently rescheduled the plenary vote of the Omnibus II Directive from 20 November 2012 to 11 March 2013 (see forecasts on the European Parliament website). As yet, a revised timetable for Solvency II has not been set out. Given the uncertainty around the range of potential outcomes we would encourage industry to maintain its focus on Solvency II. When we have further clarity as to the revised timeline, we will communicate this to industry.
On 10th July, EIOPA published a report on the outcome of the public consultation on Solvency II reporting and disclosure requirements for Insurers. EIOPA recommends that industry should use the current reporting package as a basis to start the implementation phase.
The press release relating to the report can be accessed here and the corresponding report can be accessed here.
On 12th July, EIOPA published a report on the outcome of the public consultation on the ORSA. The press release relating to the report is available here and the corresponding report is available here.
As part of the reporting requirements under Solvency II, EIOPA is proposing a set of Quantitative Reporting Templates (QRTs). It publically consulted on a draft of these during the period November 2011 - January 2012, and is currently revising the draft in light of comments received.
The EIOPA QRTs leave scope for individual countries to define national templates, covering local market specifics and local legal requirements. These national templates are referred to as national specificities. Within the Central Bank, we propose to communicate with the (re)insurance industry regarding our national reporting requirements early in 2013. This date has been chosen because there is a clear dependency on the finalisation of the QRTs at an EIOPA level, and that is not anticipated until late 2012. Nevertheless we can state at this time that there may be additional reporting requirements for profit and loss information e.g. income statements by line of business.
The European Commission has recently drafted a short Directive to amend the original Solvency II implementation date of 31 October 2012 (as per Article 309, Directive 2009/138/EC). This is to take into account the timeline for finalisation of Omnibus II. The proposed date for transposition of Solvency II by Member States is 30 June 2013 while implementation of Solvency II remains targeted for 1 January 2014. The purpose of the mini-Directive is to clarify the legal position on the timing of the application of the Solvency II Directive and to avoid any legal uncertainty for the current Solvency I regime if Omnibus II were to be delayed beyond 31 October 2012.
The plenary vote on Omnibus II in the European Parliament has been rescheduled from 17 April 2012 to 10 September 2012 (view the European Parliament notice here). This change of the plenary vote date was anticipated, in order to align with the ECON vote on 21 March 2012 and to allow sufficient time for the negotiations between the Parliament, the Commission and the Council of Ministers to take place. EIOPA's overall implementation timetable for Solvency II does not change as a result of this rescheduling. Our working assumptions on the timeline for Solvency II remain as follows:
- Solvency II will be transposed by Member States by 1 January 2013
- During 2013, there will be certain requirements for undertakings to report to supervisors on their progress towards full Solvency II implementation. Undertakings will also be able to submit formal requests to national supervisors for specific approvals (e.g. internal models, undertaking specific parameters, ancillary own funds) where it is intended to use these from the start of full implementation. The specific requirements for undertakings in 2013 will be outlined when Omnibus II is finalised.
- Solvency II comes in to full effect for all undertakings on 1 January 2014
In light of recent press and industry speculation and queries received regarding potential changes to the implementation date of Solvency II, the Central Bank of Ireland would like to provide this update.
At its Annual Conference on November 16th 2011, EIOPA provided an update on its on-going work for preparing the future implementation of the Solvency II directive and the timeline of activities necessary to prepare for Solvency II. The timing of activities is based on assumptions around the development of the political process: firstly, the approval of the Omnibus II directive by the European Parliament and the Council of the European Union and the publication of the proposal for a Delegated Act by the Commission in the first half of 2012; secondly, a phasing-in period of the new regime during 2013; and finally, the application of Solvency II as of 1 January 2014. EIOPA emphasizes that the work plan for the consultation may be adjusted depending on the realisation of these assumptions. Further details can be found on the EIOPA website or in the relevant Press Release.
The European Parliament and Council, in separate proposals, have drawn the distinction between implementation of Solvency II by Member States (1 January 2013) and application of Solvency II to insurance and reinsurance undertakings (1 January 2014).
We remind all companies that these proposals to defer the implementation date are still proposals and have not been agreed at this point in time.
If the full implementation of Solvency II for companies is delayed until 2014, it is clear that there will still remain significant additional requirements during 2013 for companies in terms of reporting and demonstrating to supervisors their readiness for full Solvency II implementation. Therefore, proposals for full application of the Solvency II requirements in 2014 should not be interpreted as allowing substantial extra time to prepare. We recommend that all companies continue to progress their individual Solvency II plans and remain focused on implementation
We will further update our position when Omnibus 2 is fully agreed and when implementation dates for undertakings and supervisors have been finalised. That update will include an outline of our plans with regard to formal application for internal models and other approvals.
HISTORY & BACKGROUND:
The Solvency II Framework Directive was adopted by the European Parliament on 22 April 2009 and was, subsequently, endorsed by the Council of Ministers on 5 May 2009. The revised implementation date for the Directive is 1 January 2013 and the new regime will come into force across the European Union on that date. EIOPA have published advice on a number of the Level 2 Implementing Measures that are available on the EIOPA website
The 4-Level process outlined under the Lamfalussy Framework provides the grounding under which the Solvency II project is being conducted. During 2004 and 2005, the European Commission issued three waves of Calls for Advice regarding different aspects of the new solvency system. Following completion of the consultation process, the Commission adopted the Solvency II Proposal in July 2007.
Solvency II is a risk based approach that aims to provide the basis for a more ‘root and branch’ review of the overall financial position of an insurance undertaking. It represents a new system of supervision that assesses the overall financial position of an insurance undertaking or group. The new supervisory system is concerned with, amongst other areas, highlighting the importance of holistic risk management and prudential standards. Solvency II also aims to reduce the possibility of both insurance undertaking failure and, in a wider sense, of disruption to the efficient operation of the insurance market.
Solvency II is based on a three pillar approach:
Pillar 1 covers the quantitative requirements of Solvency II. Within this pillar there are two capital requirements - the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR) – representing different levels of supervisory intervention. The SCR is a risk-based requirement and acts as the key solvency control level. Two methods for the calculation of the SCR have been set out: the European Standard Formula or firms’ own internal models. The SCR will cover all the quantifiable risks an insurer or reinsurer faces. Risk mitigation techniques are also a salient factor in relation to SCR calculations. The MCR, in comparison, is a lower requirement. A breach of the MCR triggers the ultimate supervisory intervention of the withdrawal of authorisation.
Pillar 2 is concerned with qualitative requirements such as insurance undertakings’/groups’ risk management and control systems. Falling under Pillar 2 is the Own Risk and Solvency Assessment (ORSA). The ORSA is an insurance firm’s own assessment of its capital needs taking into account the specific risk profile and strategy of the firm. It analyses areas not fully reflected by the SCR. It also requires a multi-year projection of available capital and capital required. (Perceived deficiencies in the ORSA may result in additional capital requirements).
Pillar 3 covers supervisory reporting and disclosure. Firms will need to disclose certain information publicly, which will bring in market discipline and aid in ensuring the stability of insurers and reinsurers. In addition, firms will be required to report a greater amount of information to their supervisors. The intention is to bring market discipline to bear on firms. Equally, supervisory authorities will be required to be transparent about the detail of their implementation of the Solvency II regime.