There have been a number of developments in recent times that will impact, whether directly or indirectly, on Solvency II.  This article summarises the main aspects of those developments:

Omnibus II Directive

The European Commission has published a draft of the Omnibus II Directive which grants EIOPA certain powers such as:

• Creating a mechanism for EIOPA to resolve disputes between national regulators
• Allowing discretion to EIOPA to specify the exceptional circumstances during which national regulators may allow an additional period for insurance and reinsurance companies to bring their SCR back into compliance with Solvency II provisions
• The ability to create, together with the Commission, detailed implementation measures for Solvency II

It is the provisions of Omnibus II that create transitional periods for Solvency II, however, that have received the most attention.  Arguably the most significant of these is the ten year transitional period for companies to come into compliance with the capital requirements of Solvency II.  These provisions will be of particular interest to insurance and reinsurance companies that are, for example having difficulty aligning their capital position to the Solvency II provisions due to contractual restrictions that pre-date the Level 1 draft text of Solvency II.

QIS5 Results – Irish National Report

The report on the Irish results from QIS5 was published by the Central Bank on 1 April 2011.  The report highlights the following areas as giving rise to the main issues:

• Some components of the Solvency Capital Requirement (SCR) were regarded as excessively complex.  These concerns centre on the Counterparty Default Risk calculation and the Non-Life Catastrophe Risk (method 1) calculation.   The Risk Margin element of the technical provisions calculations was also considered too complex
• The calibration of Non-Life Underwriting Risk is to be re-examined to determine if the current they give rise to the required 99.5% confidence level or if the parameters need to be revised
• The definition of “contract boundary” created issues for life companies and so may need to be refined or further explained in light of these issues

Of the 220 submissions, 43 companies would not have sufficient Own Funds to meet the SCR, while 12 companies would have needed additional capital to meet the Minimum Capital Requirement.

Most companies’ feel that they are reasonably well prepared to have Solvency II implemented before 1 January 2013 with 3% of companies unable to assess how prepared they are or fearing that they will not be prepared in advance of the deadline.

EIOPA Appointments

EIOPA’s main decision-making body will be its Board of Supervisors which consists of the various national regulators.  The Central Bank of Ireland will have voting powers on this Board, with The Pensions Board also having a permanent representative on the Board.

In addition, EIOPA also has a Management Board which will ensure that EIOPA carries out its mission and performs the tasks assigned to it.  The Management Board will consist of a Chairperson, six representatives of national regulators and a representative of the European Commission.  While the European Commission representative has yet to be named, the following are the first Chairperson and first six national regulator representatives:

• Mr Gabriel Bernardino (Chair) (Portugal)
• Mr Peter Braumüller (Austria)
• Mr Matthew Elderfield (Ireland)
• Mr Damian Jaworski (Poland)
• Ms Flavia Mazzarella ((Italy)
• Mr Jan Parner (Denmark)
• Mr Hector Sants (United Kingdom)

The first Executive Director of EIOPA is Mr Carlos Montalvo and his term in this position is to be five years.  Mr Montalvo was previously the Secretary General of CEIOPS and worked for the Spanish insurance and pension supervisor.

EIOPA Stress Test

On 23 March 2011, EIOPA launched its second European-wide stress test for insurers.  The aim of the stress test is to assess the strength of both individual insurers and the stability of the EU’s insurance sector.

The test replicates baseline, adverse and inflationary macroeconomic scenarios.  The baseline scenario represents a severely stressed scenario, with the adverse scenario representing a further deterioration in the main macroeconomic variables and an inflationary scenario imitating a scenario where inflation forces central banks to rapidly increase interest rates.

This test will be carried out by the end of May 2011.

Contributed by Eoin Caulfield and John Larkin.