EIOPA’s Solvency II work is at a delicate turning point: it must continue drafting standards and guidelines while at the same time shifting attention to the challenges of implementing the Directive on 1 January 2016. All this while uncertainty remains in a number of key areas. In an extensive interview, Carlos Montalvo, EIOPA’s Executive Director talks to Gideon Benari, Editor of Solvency II Wire, about the past, present and future of Solvency II.
In Part 1 of this three-part article Mr Montalvo shares his concerns about the Omnibus II agreement, the impact of the delays and the damaging legacy of mixing technical and political matters. — Dos café con leche. We are in Madrid. Two days before New Year’s Eve. The waiter places the coffee and a little silver basket with a selection of biscuits on the round marble table. A curved wafer-thin biscuit drops onto the dark marble surface of the table. It looks like a curled up leaf. It will remain there, untouched, until the end of the interview. An agreement on Omnibus II less than two months prior to our meeting paved the way for Solvency II to go ahead, bringing the legislative process to the home stretch. I want to unpack some of the recent history, fraught with acrimony between industry, regulators and politicians, as I believe it may help us understand what happened, but also enlighten us as firms enter the next stage of the Solvency II process: preparing for implementation and, just as important, finalisation of the technical details. Both are as challenging as the political phase. [caption id="attachment_138676" align="alignright" width="229"]
Lesson 1: Of the political and technical
The need to address market volatility on the Solvency II balance sheet first became apparent around 2010 during the Eurozone crisis. Solvency II introduces market consistent valuation of insurers’ assets and liabilities. As fixed income, and in particular government debt, makes up the vast portion of insurance portfolio for long-term business, the debt crisis would have had a destructive impact on the balance sheet of many insurers.



Lesson 2: Time … too much time
Mr Montalvo’s second takeaway is that too much or too little time spent drafting legislation could have undesired effects. The Solvency II process was protracted due not only to the LTG and the crisis but also to a number of other factors such as European Elections and the Lisbon Treaty. In 2009 changes had to be introduced to the European legislative process to reflect the Lisbon Treaty. Omnibus II, the amending Directive to Solvency II, was originally only supposed to adapt these changes (essentially the formalisation of EIOPA), but the timing meant it could be used to change the Level 1 text to reflect some of the LTG concerns that were becoming apparent. This resulted in reopening some agreed issues thus creating one of Solvency II’s more damaging legacies. “When you open [agreed issues] you create automatically a feeling of mistrust, which is also I would say an important lesson out of this,” Mr Montalvo laments. “We can perhaps say that we are not in the level of trust of the different parties that is ideal in order to best work together. And one of the reasons has been precisely this reopening of things that some of us already thought were discussed and closed.” The issues that were reopened range from broad measures to specific calibrations and, as is often the case in acrimonious situations, it is difficult to identify who did what, when and where and whose fault it is and why. Who is to blame depends largely on who you ask. It makes for good TV drama but, what is important, is the outcome.
