Solvency II News: Omnibus II trilogue in disarray

Non-paper Following the trilogue meeting on 18 September (see Solvency II Wire 20/9/2012) in which negotiating parties failed to reach an agreement, the Commission circulated a “non-paper” (24/9/2012) on the LTG package and timings of Solvency II. The document, seen by Solvency II Wire, proposes two alternative implementation timelines depending on whether the impact assessment is carried out before or after Omnibus II is finalised.

• An ex ante approach – conducting the assessment before finalising Omnibus II – proposes conducting the assessment between November 2012 and April 2013; political agreement on Omnibus II will then be reached in June 2013. The Solvency II Directive will be published in October 2013 and full implementation will be set for 2015. The interim period between publication and full implementation will allow for adopting the Level 2 delegated acts.
• An ex post approach – conducting the assessment after finalising Omnibus II – proposes doing the assessment between October 2012 and March 2013; political agreement on Omnibus II will also be reached in October 2012. The Solvency Directive will be published in January 2013 and full implementation will be set for 2016. The later implementation date will allow for a two year observation period during which there will be a parallel run of Solvency I alongside Solvency II.

The document lists a set of assumptions on which these two proposals are based. These include: swift agreement on the terms of reference of the impact assessment, political agreement on all the remaining outstanding issues, and that supervisory approvals are given within a six month period. The Commission favours an ex ante approach, which, it said, is more likely to result in a framework more consistent with the EU’s single market objective. In the conclusion of the document it states, “Provided that the assumptions outline above hold, an ex ante approach is likely to prove the most expeditious and efficient means of achieving a prudential sound and fully harmonised Solvency II framework.”

Dear Commissioner letter No 1

The Parliament broadly agrees with an ex ante approach, but it is skeptical about the timelines proposed by the Commission. In a letter to Commissioner Barnier from Burkhard Balz, the rapporteur for Omnibus II, Mr Balz said that agreement with the approach did not mean Parliament fully agreed with the underlying assumptions and timetable of the non-paper. The letter also stated that the next trilogue should only be held after the results of the impact assessment are published and its consequences have been “properly analysed”. However an EP source told Solvency II Wire that some in the Parliament favoured an ex post approach as it would lead to earlier implementation of Solvency II and that the ex ante approach, favoured by the Commission, was considerably riskier given its assumptions on timing. The source called the Commission’s assumptions “baseless” and called it to provide a clear and credible timeline. “If an ex ante process is adopted, it will be crucial to agree an implementation timetable which offers credibility and certainty to industry and gives confidence that the EU will stick to its implementation date. Recent experience shows that this would be impossible to deliver and the timetable would almost certainly slip past 2015,” the source said.

National and industry interests

Although all parties have repeatedly expressed the need to reach a swift agreement on Solvency II, political interests of member states and their respective industries are still hampering the process. According to one source in the Parliament the political landscape has shifted and the main objections are no longer coming from Germany but France, and to a certain extent Italy, who are lobbying for a delay. “They have successfully persuaded Barnier to go for an ex-ante approach, which has totally derailed the timetable,” the source said. The main disagreement revolves around extending the LTG package (especially the Matching Adjustment) to cover a wider range of products than traditionally considered, including those exposed to lapse and mortality risks The Presidency for its part also seems unwilling to take decisive action. Since the summer it has become apparent, with the shift in the political landscape described above, that there was enough support to pass the Directive on a Qualified Majority Vote (QMV). However the Presidency has been either “unable or unwilling” to take actions, the source said. One commentator speculated that this had to do with the fact that in July, as it took the EU Presidency, Cyprus was asking for a bailout of close to €10 billion for its banks, process which is ongoing. It is an open secret in Brussels that certain member states would be happy with a delayed or watered down Solvency II. In June the Czech Republic became the first Member State to openly call for a 2015 implementation date. And now some senior officials in the Parliament have been heard to say they were “comfortable” with an implementation date of 2017 or beyond. In July the German Insurance Association (GDV) expressed its discontent with some aspects of Solvency II in a report: “The positions of German Insurers 2012”. The opening sentence of the introduction is indicative of the tone: “A medicine which helps the sick can be harmful for a healthy person.” However the latest developments may be giving rise to the wider consensus around Solvency II crumbling. Some sources close to the situation were even suggesting that Insurance Europe may be reconsidering its position and that there was growing dissatisfaction with Solvency II among some of its larger members. A spokesperson for Insurance Europe told Solvency II Wire that the federation’s position has not changed. “We remain supportive of Solvency II subject to the issues of the long-term guarantee package and equivalence being resolved satisfactorily and to certain calibration issues being addressed in Level 2. The implementation timetable must also be realistic for companies. Given the importance to the economy of getting all these issues right, we are confident that they will be resolved satisfactorily.” And there are wider questions about the process and conduct of all parties involved. Some question the very need to introduce the LTG package in the Level 1 text, arguing that this is a highly technical matter which should be addressed by the Commission, EIOPA and stakeholders in designing the Level 2 text. The complexity of the subject has been explored in the recent LTG Symposium published on Solvency II Wire. It is also unclear why the issue was raised at such a late stage – Solvency II was always going to be a market consistent regime and the effects of the financial crisis were visible by 2008. The differences appear to be contradictory at times. Within some member states that have purportedly been supportive of a delay, there are large players that have invested heavily in Solvency II preparations. For these firms any delay would be costly.

Dear Commissioner letter No 2

Meanwhile on 4 October a letter from Gabriel Bernardino, Chair, EIOPA to Michel Barnier articulated some of the concerns of the uncertainty to both firms, member states and Europe’s credibility in the G20. “I am writing to you and the other parties to the OMNIBUS II trialogue to set out EIOPA’s strong concerns regarding the stagnant OMNIBUS II negotiations and their impact on the Solvency II project,” (sic) Mr Bernardino begins the letter. He goes on to outline the main reasons Solvency II is needed and warns that, “Without a robust supervisory system at European level, European supervisors will be forced to develop national solutions.” He further warns that, “Conflicting national solutions will emerge.” Mr Bernardino also warned that the uncertainty would undermine the EU’s credibility internationally, “As Solvency II is meant as a reference framework for risk insurance based (sic) supervision at the international level.” Finally he calls on stakeholders to consider, “Earlier implementation of some Solvency II elements”. The letter adds to a growing chorus of concerns about Solvency II. All eyes appear to be on the Commission to come up with a credible timeline and implementation plan. Privately, several people close to the negotiations have expressed concerns of lack of clarity and decisiveness on the part of both the Presidency and the Commission. As one source put it, “There is a strong sense that nobody’s flying the plane.”]]>