Solvency II News: ECON vote reignites debate on long term guarantees

The European Parliament’s ECON committee approved the Omnibus II Directive text in a vote on 21 March 2012. The adoption of the text, which included over 500 amendments, consolidates the Parliament’s position and clears the path for the trialogue negotiations to begin. [caption id="attachment_17651" align="alignright" width="360"] Sharon Bowels MEP conducting the Omnibus II vote at ECON committee, 21 March 2012[/caption] The first trialogue meeting has been provisionally set for 11 April. The Council working group participating in the trialogues will review the text on 2 April. The Omnibus II trialogue discussions are one of about fifteen financial services dossiers which the Council will be considering before the end of July 2012. The legislations, including CRD IV, CRA and MIFID, are at various stages of negotiations. A further five dossiers are expected to be added to the list from September. The plenary vote in Parliament has been provisionally set for 2 July 2012. The vote in ECON passed (38 for, 5 against, 0 abstentions) after a breakthrough in the negotiations was brokered between the rapporteur Burkhard Balz (EPP) and Peter Skinner (S&D). The two main points of contention were long term guarantees and deemed equivalence. “I believe that what we have got now are texts which are on the same page [with the Council] but which are not as closely aligned as they should be,” Mr Skinner, the rapporteur for the original Solvency II Directive, said after the vote. All three mechanisms for addressing volatility and long term guarantees – the Matching Premium, Counter Cyclical Premium and Extrapolation – will now be part of the Level 1 text, according to the Parliament proposal. Ashley Fox, shadow rapporteur for the Omnibus II Directive said, “All these mechanisms are now on a permanent footing within the legislation. The compromise on Berkhart Baltz’s side was that we subject it to review after five years.” But the compromise and the inclusion of the the long term guarantees in the Parliament text came under heavy criticism from some. Speaking in the chamber after the vote, Sven Giegold (Greens/EFA) told the committee, “Some things happened during the process which I have never seen so far in this committee. First, there was a quite solid majority in the shadows for taking a strong position on some of the issues, in particular the matching premium … this was turned around despite strong scientific evidence we received in the workshop we held [and] despite, also, a lot of publications in this area.” Mr Giegold added that the inclusion of the matching premium meant that taxpayers will be taking additional risks for the solvency of the insurance sector in Europe. [caption id="attachment_17652" align="alignleft" width="360"] Omnibus II vote at ECON committee 21 March 2012[/caption] “This was, for me, a lobby festival which has turned around a majority in the house and will need some follow up between us,” he added. In a stinging rebuke of Parliament’s decision published later on the Green Party website (hat tip Allan Christian) Mr Giegold wrote, “The European Parliament failed to overcome regulatory capture by divergent national business interests and failed to develop a truly European crisis response for the insurance industry. The ‘Omnibus II’ deal in the European Parliament is even less ambitious than the Commission and Council positions.” On 12 February Parliament held a hearing in Strasbourg to discuss the matching premium. A similar hearing was organised by EIOPA and the Dutch National Bank in March last year (Solvency II Wire 11 March 2011). In both events the overwhelming majority of experts and academics warned of the short comings of using a matching premium. Alternatives include a temporary lowering of the SCR or a longer transition period. Mr Giegold’s concerns, further articulated in a background paper, are that including these measures in the Solvency II Directive will transfer risk onto policyholders and tax payers rather than the industry. As to his claims that this was a “lobby festival”, while it is well known that member states lobby to protect national interests and those of their industries it is worth pointing out that many of the proposals put forward in the Omnibus II text are opposed by large sections of the industry and have been labeled unworkable. In a press release, Insurance Europe, expressed disappointment over the agreed Parliament text, stating, “We recognise that the current text contains the package of measures that could, in principle, ensure that risks are correctly measured and avoid artificial balance sheet volatility but regret that it currently includes inappropriate restrictions that would prevent these measures from working as intended.” The following chart presented by Philipp Keller, Swiss Association of Actuaries, at the Parliamentary workshop shows who would bear the potential brunt of the costs of each proposed option. [caption id="attachment_17664" align="aligncenter" width="478"] Comparison of Measures SOURCE: Philipp Keller[/caption]  

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