SOLVENCY II
(i) EIOPA Publishes the Final Guidelines for the Preparation of Solvency II
The European Insurance and Occupational Pensions Authority ('EIOPA') published the final Guidelines for the Preparation of Solvency II (the 'Guidelines') on 27 September 2013. The Guidelines were finalised following the closing of the consultation on the Guidelines on 19 June. The consultation received over 4000 comments.
The Guidelines and the responses to the consultation can be viewed at the attached link: https://eiopa.europa.eu/consultations/consultation-papers/2013-closed-consultations/march-2013/guidelines-on-preparing-for-solvency-ii/index.html
The Guidelines aim to ensure that National Competent Authorities ('NCAs'), insurance companies and groups take active steps towards implementing certain key elements of Solvency II (as set out below) in a consistent and convergent way:
- The system of governance;
- Forward looking assessment of an undertaking's own risk (based on the Own Risk and Solvency Assessment (OSRA) principles). This operates on the assumption that the Omnibus II measures and updated Technical Specifications on Pillar 1 quantitative issues will be available in time for companies to carry out a forward looking assessment of own risks during 2014 and 2015;
- Submission of information to National Competent Authorities; and
- Pre-application for internal models.
EIOPA has stated that it envisages making the Guidelines publicly available in all the official EU languages on 31 October 2013.
It is expected that the Guidelines will be effective on 1 January 2014 subject to phasing in certain provisions over the course of 2014 and 2015.
EIOPA understands that undertakings will need time to establish the appropriate internal processes and IT systems. EIOPA's approach is that for preparatory purposes the annual information is submitted once before Solvency II is applicable and the quarterly information is submitted in relation to the two quarters prior to the application of Solvency II.
Based on the assumption that the Solvency II Directive will be applicable on 1 January 2016, the relevant guidelines therefore state that:
- For the annual submission, the first set of data will be expected in 2015 on the year end data from 2014. The deadline is 20 weeks for solo undertakings and 26 weeks for groups.
- For the quarterly submission, the first set of data will be expected from Q3 of 2015. The deadline is 8 weeks for solo undertakings and 14 weeks for groups.
These submission dates will be reviewed at the end of 2013 based on the latest developments with regard to Omnibus II.
The NCAs are required to report to EIOPA about their compliance or intention to comply before 27 November 2013. Now that the Guidelines have been finalised the Central Bank is expected to publish its Guidelines on Preparing for Solvency II shortly, which will closely reflect the EIOPA Guidelines. The Central Bank has revealed that its PRISM framework will be incorporated into its Guidelines and that all High and Medium High impact firms will be subject to the Central Bank Guidelines from 1 January 2014, with a phasing in period during 2014 and 2015 for Low and Medium Low firms.
The Central Bank plans to hold an industry event in November to provide further information on Solvency II preparation and how it will engage with firms when the Guidelines on Preparing for Solvency II apply.
(ii) Omnibus II
The European Parliament plenary vote on the Omnibus II Directive (which will amend the Solvency II Framework Directive) is scheduled for a plenary session on 3 February 2014, though this date is subject to change. The Central Bank has stated that its Solvency II preparation plans are based on an assumed Solvency II implementation date of 1 January 2016.
(iii) Central Bank Publishes Latest Edition of Solvency II Matters
The Central Bank published the eleventh edition of Solvency II Matters in September. This newsletter is intended to keep insurance and reinsurance undertakings informed and up-to-date on Solvency II policy developments, implementation activities and events.
The latest edition of Solvency II Matters provides an update on the following:
- Guidelines on Preparing for Solvency II;
- Industry Events;
- Long Term Guarantee Impact Assessment;
- Omnibus II; and
- Undertaking Specific Parameters.
The newsletter can be accessed at the following link:
EIOPA UPDATE
The Joint Committee of the three European Supervisory Authorities (the EBA, EIOPA and ESMA) published draft Regulatory Technical Standards ('RTS') on the consistent application of the calculation methods described in the Financial Conglomerates Directive, covering the assessment of the financial situation of credit institutions, insurance undertakings and investment firms which are part of a financial conglomerate on 29 July 2013. The draft RTS define the appropriate application of calculation methods for the determination of required capital at the financial conglomerate level and aim at harmonising the use of the calculation methods in order to ensure a consistent approach in the calculations is applied across different financial conglomerates. The draft RTS are available here:
EMIR
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ('EMIR') entered into force on 16 August 2012. EMIR is supplemented by a series of RTS and Implementing Technical Standards ('ITS') which came into effect on 15 March 2013. The main objective of EMIR is to mitigate the perceived risks associated with OTC derivative contracts by introducing the following obligations:
- Risk mitigation requirements for non-centrally cleared trades;
- Reporting to Trade Repositories ('TRs'); and
- Clearing obligations relating to standard OTC derivatives.
Risk Mitigation Requirements for non-centrally cleared trades
Counterparties who enter into OTC derivative transactions not cleared by a central counterparty ('CCP') must ensure "that appropriate procedures and arrangements are in place to measure monitor and mitigate operational risk and credit risk". Currently all OTC derivative transactions are subject to the risk mitigation requirements as the EMIR clearing obligations have not yet been imposed on any OTC derivative contract. Risk mitigation requirements for non-centrally cleared OTC derivatives as provided for in EMIR include (i) timely confirmations; (ii) portfolio reconciliation requirements; (iii) portfolio compression requirements; (iv) dispute resolution mechanisms; (v) daily marking to market; and (vi) collateral exchange and capital requirements. These requirements are all in effect save for (vi) above (collateral exchange and capital requirements) which is not expected to come into effect until 2015.
Reporting to Trade Repositories
Counterparties to all derivative contracts (OTC and exchange traded) are required to report post-trade details of any derivative contract which they have concluded to a registered TR. Counterparties are also required to report any modifications and terminations of such derivative contracts to a TR. Intragroup transactions should also be reported in the same manner as any other trades. ESMA has recently updated its EMIR implementation timetable and has indicated that the obligation by counterparties' to report to TRs is not expected to start before February 2014.
ESMA's EMIR implementation timetable is available at this link:
http://www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR.
Clearing obligations relating to standard OTC derivatives
One of the most significant changes introduced by EMIR is to require the clearing of certain OTC derivative contracts through an authorised CCP. On 12 July 2013, ESMA published a discussion paper (the 'Discussion Paper') regarding the clearing obligation under EMIR, which covers:
- The class of OTC derivatives that should be subject to the clearing obligation;
- The date or dates from which the clearing obligation takes effect; including any phase in and the categories of counterparties to which the obligation applies; and
- The minimum remaining maturity of OTC derivative contracts subject to the clearing obligations.
The Discussion Paper provides a description as to how ESMA will determine whether a class of OTC derivatives should be subject to the clearing obligation and the date from which the clearing obligation takes effect. The Discussion Paper was open for feedback until 12 September 2013. ESMA will now use the feedback received to draft its technical standards on the clearing obligation, which will be presented in future public consultations. It is expected that the clearing obligation will not take effect until 2015.
Relevance of EMIR to the Insurance Industry
EMIR is relevant to any entity that trades derivatives and in this way is relevant to the insurance industry. An insurance company may be caught by EMIR if:
- It enters into an OTC derivative contract for its own account or if a third party (e.g. such as an investment manager) enters into an OTC derivative contract on its behalf;
- Policyholder funds are invested into an index linked product, which in turn enters directly into an OTC derivative contract;
- It has defined benefit pension schemes that use OTC derivatives;
- It is an annuity writer and makes use of interest rate swaps;
- It sells with profit policies which make use of OTC derivatives to hedge guarantee and options.
To read this Update in full, please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
