Professor Karel Van Hulle was in charge of Solvency II at the European Commission from 2004 to 2013. After leaving the post in February of this year he spoke to Gideon Benari, Editor of Solvency II Wire, about what went right, what went wrong and why the industry’s strategy for handling the treatment of Long-Term Guarantees was misguided. — It feels a bit like being part of a film star’s entourage. The brief walk through the lobby of Grand Hotel Parco dei Principi, past the terrace and across the gardens to the poolside café should take no more than a minute. Not this time. I am walking with Karel Van Hulle, the retired Head of the Insurance and Pensions Unit of the European Commission and before we can make it out of the revolving door to the terrace he has already been approached by two excited ‘fans’, pleased to see him and keen to hear about life after the Commission. So am I. It’s the day before the Insurance Europe annual conference in Rome. Tomorrow Professor Van Hulle will take the stage as the moderator for the day. Having worked on Solvency II since 2004 his knowledge is second to none. It will be a unique privilege to have a moderator who is as knowledgeable, if not more so, about the subject than many of the panellists. For now we must pilot our way past the claques of senior insurance executives enjoying the post lunch break. We get through the door and he is immediately spotted by a group at a round table on the terrace. Lots of big hellos, hugs and handshakes. This is my true entourage moment. I stand a short distance from the goings on, close enough to be noticed but not enough to be approached. It’s an awkward place to be. A calmer sequence is repeated when we finally sit at a table in the café. I am eager to hear his thoughts on Solvency II and the regulatory process with the benefit of some hindsight and free from the shackles of official lines and a watchful press office. “There are very few projects that I remember in financial services where, from the outset, when we made our proposal in 2007, you had unanimous support, from industry, from finance ministries and from anybody from the outside world. So stakeholders, everybody said, this is the right way forward,” he says. Professor Van Hulle speaks with the conviction of a retired general who knows his war still rages on in his absence. It feels like he is still very much living in the Solvency II world. That “unanimous support” began to wane as problems emerged, especially after the financial crisis showed that under the holistic balance sheet approach of Solvency II (which values both assets and liabilities on a market consistent basis) many firms would not be as well capitalised as they were under Solvency I. “If you run into problems in the development of the project the voices of conservatism, the guys who say, after all Solvency I was not that bad because the insurance industry survived very well during the financial crisis, start to appear. The solvency margin under Solvency I shows that the insurance undertaking is doing well. That might be very different under Solvency II.” “But of course Solvency I ignores most of the risk. These people, I would say the conservative people, who are not moving with the way the world is moving, they become stronger the longer the project stalls.” “I have often called them the devils. I have often said, in a regulatory project, what you have to do is keep away the devils in the cupboard. When a project is stalling like Solvency II now, there is a risk that these devils come out of the cupboard. And these devils will not stop. And they cry louder.” “You can see that people who were saying in 2007 and 2009 that Solvency II was the right approach, now say the opposite because they hope that nobody will remember that they said the opposite. And they do that because unfortunately, in the insurance industry, you also have people who have a short-term view. And that is bad. Insurance is long-term. Insurance is what’s going to happen in the future. It’s not what’s going to happen during the lifetime of a CEO of a company. Yes, these conservative powers, they may indeed try to stall things, just until they resign as CEOs. They might be able to say now that they made their company great. But the day after they resign the difficulties might start to appear.” Professor Van Hulle does not mince his words. This is a j’accuse to those in the industry whom he believes are unhappy with how Solvency II has exposed their firm’s balance sheet and are now using any technical difficulties to delay its implementation. Despite the forthright words, he is relaxed. Leaning back in his seat, wearing jeans and a check short sleeve shirt as he laments the fate of the process. To the handful of holidaymakers enjoying the sun blazing down on this tranquil suburb of Rome we must look an odd pair: talking about “devils”, one in jeans and a short sleeve shirt, the other in a suit and tie. The scene turns all the more bizarre when pop music, the kind you hear at any beachfront café in the summer, starts booming out of what seem like unnecessarily large speakers. Our drinks arrive. A doppio espresso each. It’s Rome. You drink coffee. Never mind the thirty-degree heat. When discussing Solvency II these days, all roads lead to the long-term guarantees debate. The problem whirs around with the peskiness of a mosquito. The size of an elephant. You can’t ignore it and if you’re not careful it will crush you. There is undoubtedly a sense of pride in Professor Van Hulle’s voice when he talks about the achievements of Solvency II. A pride, which is accompanied by a glass-half-full attitude to the process: even the long-term guarantees difficulties. “One of the big achievements of Solvency II is that we had agreed on how to value insurance liabilities for solvency purposes. And it is the financial crisis that came in between that put into question not so much the way we designed it, that is to say to apply market consistent valuation, but it’s what discount rate you use to value these liabilities.” The problem is that the debate is often approached from too much of an actuarial perspective, and people tend to look at market consistent valuation as a pure mathematical issue. “I have always argued that if you have a long-term liability, the way you value the liability – considering that you have a 20, 30, 40 year life span – doesn’t matter so much. I mean we need to have an agreement how to do that but I would not lose sleep if it was not what we originally conceived it to be. So I think it is important that we are a bit more pragmatic in that. And that is the challenge that we have now.” “Some people say, ‘ignore market risk’. That’s crazy. We should stick to a solvency balance sheet where both assets and liabilities are valued in a market consistent way. That is the basic philosophy of Solvency II.” This is an interesting time to get his perspective on Solvency II given its odd state of limbo. The framework Directive is in force but Omnibus II, the amending directive, looms large as there is as yet no agreement on the treatment of long-term guarantee products. Everything hangs on the outcome of the trilogue negotiations in the autumn. Meanwhile, EIOPA has issued some preparatory guidelines for consultation. The whole thing is there but not quite. What’s more, the problem has clogged up the decision making pipeline which has some pretty substantial issues that need addressing. Chief among them are third country equivalence and reporting requirements. A series of smaller yet not entirely insignificant issues are still to be addressed in the Level 2 text as well. The way he sees it the long-term guarantees bottleneck must not spoil the whole thing. “90% of Solvency II is there. Is agreed. So it’s the last bit that we are talking about.” There’s that glint of the glass-half-fullness again. “So a company that has been preparing itself, that has set up a good governance system, a good risk management culture, is ready for Solvency II”. He pauses. There is a sense of frustration in his voice. “It’s that last bit, the remaining 10%, that we are struggling with. That doesn’t change the whole thing.” “Don’t get me wrong,” he hastens to add. “I am not saying that this is not important. I think it is of crucial importance. What I am trying to say is that the basic philosophy is already there.” Despite his somewhat paradoxical attitude to the long-term guarantees he is in no doubt about the importance of implementing Solvency II. “Today, some insurance [firms] are offering products which they cannot honour because they have been badly designed. Badly designed in a sense that these products do not necessarily take account of the changing, or changed, economic environment. And Solvency I lets them go on with this without sanction. This has got to change.” Perhaps that is why he is hesitant to accept industry’s argument that it will need more time to prepare. “Under Solvency II more companies have participated in a QIS [Quantitative Impact Study] exercise than ever happened in the banking sector. So you can’t even start arguing that companies were not prepared. Companies were prepared. Because a lot of companies have had to get themselves organised to deliver the data requested in very detailed spreadsheets. These follow-up QIS exercises were indeed practical exercises.” When the Solvency II Level 1 Directive was adopted in 2009 the implementation date was set for 1 November 2012. During 2011 the date was pushed back to 1 January 2014 and then, when the trilogue negotiations broke down in September last year, the Commission proposed two new alternative dates: 2015 or 2016, depending on the timing of the Long-Term Guarantees Impact Assessment. Today the latter is touted as the first realistic implementation date. As for the actual state of play … take your pick from this smorgasbord of surveys:
- 24.5% “currently ready to comply” (Moody’s, 2013).
- 57% expect to be Solvency II-compliant by January 2014” (EY, 2012).
- 63% said “their ideal implementation date” was 1 January 2013 or 1 January 2014” (Barnett Waddingham, 2012).
- “Vast majority” of participants believe they will be ready (if necessary) by 1 January 2014” (Grant Thornton, 2012).
- 43% “confident” or “very confident” that EU insurance industry can comply by December 2012. (Deloitte, 2011).
- 78% “feel that their programmes are on track” (KPMG, 2011).