Solvency II Wire Regular Meeting Group report, May 2015

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27 May 2015, 15:00 – 17:00, Paris The meeting was attended by members of the following organisations: Amundi, AXA, Covéa, CPR AM, EY, Generali FR, MACSF, Societe Generale Corporate & Investment Banking, XBRL-Europe Chair: Gideon Benari, Editor, Solvency II Wire The Solvency II Wire Regular Meeting Group brings together a wide range of practitioners to discuss Solvency II and related matters. The following is a summary of the key discussion topics addressed at the meeting. — As with other markets across Europe, France is experiencing increasing levels of activity in the run up to the implementation deadline of 1 January 2016. The French regulator has pushed forward with implementing the interim measures, and the Directive has already been transposed into national law. The transposition includes the rules on governance, which were particularly difficult in the French market given the management structure of many insurers.

Equities, hedging and QE

The discussion on Pillar I was dominated by the quest for yield, the impact of the Quantitative Easing (QE) recently introduced by the ECB and the emerging clarity on the use of the LTG measures. The combined impact of these factors, according to several participants, was driving a number of investment behaviours. Insurers were now looking to invest in new forms of illiquid assets in the hunt for yield. A number of examples from across Europe were cited including the move by some German insurers to invest in alternative forms of illiquid assets such as aircraft financing. From a hedging perspective it was noted that some insurers were exploring ways of locking in unrealised gains from the narrowing of spreads on government bond yields, ahead of potential future  spread rises. Further to comments made in the January meeting about growing interest in investing in equities by French insurers, participants noted that the introduction of QE and a rise in equity markets was consolidating the trend. The discussion also addressed some of the strategies employed by insurers looking at tactical hedging, as it is believed QE will increase volatility. One such solution involved investing in equities with hedging of extreme risks using put options as a way of reducing the market SCR of equities. One participant noted that hedging strategies were also being used to exploit the recent market conditions and recent good performance of equity markets rather than to manage the SCR.

Equities in investment funds

The discussion turned to address the treatment of equities held indirectly via collective investment funds OPCVM (Organismes de Placements Collectifs en Valeurs Mobilières) – or UCITS (Undertaking for Collective Investment in Transferable Securities) – under the Solvency II grandfathering arrangements (treatment of investments held prior to 1 January 2016). At the meeting it was noted that until recently it was not clear how rebalancing within the fund would be treated. The interpretation of the Delegated Acts transposition into the Code des Assurances published in May this year, was that insurers will not have to apply a look through approach on Funds purchased before January 1 2016 to assess whether equities in the funds have been acquired before or after that date. However, since the meeting was held, it has emerged that the ITS to be published will in fact state the opposite. The grandfathering rules will require insurers to look through to the underlying securities in the fund to determine the percentage of equities bought by the fund before 1 January 2016. That means that rebalancing of the portfolio before and after January 1st 2016 will impact the Market SCR of the fund.

Transitional measures

One participant quoted an ACPR report (“Analyse et Synthèses – Stress Tests EIOPA 2014 -: échantillon européen, situation domestique et benchmarkings”) that reported that only 4.8% of firms across Europe would use transitional measures on technical provisions (9.1% in France), and 10.2% the transitional measure on equities (72.7% in France). However, this view was challenged by some around the table, arguing that the low interest rate environment was forcing more insurers to consider the use of transitional across Europe. It was also suggested that some undertakings in some European countries were reluctant to use the equity transitionals because it may attract additional scrutiny from the regulator.

Managing the ORSA and the RSR

The meeting also discussed some difficulties in deciding how to balance the narrative information between the ORSA report and the Regular Supervisory Report (RSR). Both reports are private. The RSR is to be delivered to the supervisor at least every three years. The regular ORSA report is to be filed annually, but an exceptional ORSA can be filed in cases of significant changes in the solvency position. Participants noted that as French insurers have not yet been required to file an RSR, lack of feedback from the regulator made it difficult to know how to balance the information in the two reports. A concern was expressed about the difficulty of working out how much overlap there should be in narrative reporting between the two reports. To a certain extent it was believed this depended on the date of filing of the two reports. Although the Directive only required the RSR to be filed every three years, the national authority, based on criteria specified by EIOPA, will define its preferred frequency of submission for each insurer. It was noted by one participant that some of the difficulty arises from the fact that the ORSA needs to start off with the last reference date (the date at which a prudential balance sheet and SCR have been officially reported), consequently a variable degree of analysis would be required to explain evolutions since the last reference date.

XBRL data quality

One participant expressed a view that the use of XBRL in Europe was set to expand as it is already used in the prudential reporting in the banking and insurance sectors in the EU. It was believed as well that ESMA would adopt the format for reporting information mandated by the Transparency Directive. The Directive requires issuers of securities traded on regulated markets within the EU to ensure appropriate transparency for investors through the disclosure and dissemination of regulated information to the public. The related XBRL reporting taxonomy is likely to follow the EU IFRS standard. This will produce comparable reporting to the US GAAP taxonomy currently used by the SEC in the United States. — Solvency II Wire Regular Meeting Group report May 2015

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