European Union: Insurance Quarterly Legal And Regulatory Update - 1 July 2015 To 30 September 2015

SOLVENCY II

(i) European Commission proposes amendments to the Solvency II Delegated Regulation (2015/35) concerning the calculation of regulatory capital requirements for several categories of assets

On 30 September 2015, the European Commission adopted a Delegated Regulation amending the Solvency II Delegated Regulation concerning the calculation of regulatory capital requirements for several categories of assets held by insurance and reinsurance undertakings (the "Amending Regulation").

The aim of this Amending Regulation is to remove specific regulatory impediments to financing long term investment projects by insurers by amending the treatment of infrastructure investments, of European Long Term Investment Funds ("ELTIFs") and of equities traded on multilateral trading facilities under the Solvency II regime.

The revisions made include:

  • a new concept of 'qualifying infrastructure investments': this type of investment presents better risk characteristics than other infrastructure investments and insurers will need to hold a lower level of capital against their investment in these infrastructure projects. 'Qualifying infrastructure investments' will form a distinct asset category under Solvency II and will benefit from an appropriate risk calibration;
  • allowing investments in ELTIFs to benefit from lower capital charges under Solvency II. This brings them in line with investments in European Venture Capital Funds and European Social Entrepreneurship Funds, which benefit from the same equity capital charge as equities traded on regulated markets;
  • extending the application of a transitional measure for equity investments to unlisted equities, so that insurers will not suddenly withdraw from equity investments; and
  • granting equities traded on multilateral trading facilities (MTFs) the same capital charge as equities traded on regulated markets.

The European Parliament and the Council have up to three months to exercise their right of objection, with the possibility to extend this period for another period of three months at their initiative.

The proposed Amending Regulation can be accessed via the following link:

http://g8fip1kplyr33r3krz5b97d1.wpengine.netdna-cdn.com/wp-content/uploads/2015/09/EC-draft_Solvency-II-Delegated-Act.pdf

(ii) New EIOPA Solvency II DPM and XBRL taxonomy package published

On 28 September 2015, the EIOPA Solvency II DPM and XBRL taxonomy package was distributed to the stakeholders for review, before the publication of the official 2.0.1 on 21 October 2015.

This version incorporates the latest business changes on the Solvency II requirements, in particular:

  • the Amendments in the outcome of the public consultation including all the specific amendments; and
  • The additional validations incorporated in relation to the 2.0.0 version are included for consultation but not yet formally approved by EIOPA. This procedure will happen before the publication of 2.0.1.

This release also introduces two specific changes for which EIOPA seeks feedback from stakeholders in terms of the business and IT technical implementation:

  • change of the data type from boolean to enumerated values for certain metrics; and
  • all new validations (not included in 2.0.0).

Stakeholders should send any feedback on this release to EIOPA before 12 October 2015.

The release is available at the following link:

https://dev.eiopa.europa.eu/Taxonomy/Full/2.0.1RC/EIOPA_Solvency_II_2.0.1CR_Release_Notes.pdf

(iii) EIOPA publishes opinion on the group solvency calculation in the context of equivalence

On 25 September 2015, EIOPA published its opinion on group solvency calculation in the context of equivalence (the "Opinion"). The Opinion is of relevance for insurance or reinsurance groups that operate outside the European Economic Area ("EEA") in third countries whose solvency regimes are considered to be equivalent to the Solvency II regime. It aims to provide consistency on the group supervisor's approach towards the third country's capital requirement to be used for the calculation of the solvency position of such groups and to ensure that the supervisory assessment of the availability of the third country undertaking's eligible own funds is carried out in a convergent manner.

Gabriel Bernardino, Chairman of EIOPA, remarked:

"Supervisory convergence is an essential element in the implementation of Solvency II and is a high priority on EIOPA's agenda. With this Opinion, EIOPA intends to achieve a level playing field for the EU insurance groups by securing consistent practices by National Competent Authorities ("NCAs").

The Opinion is available via the following link:

https://eiopa.europa.eu/Publications/Opinions/Opinion%20on%20group%20solvency%20calculation%20in%20the%20context%20of%20equivalence.pdf

(iv) EIOPA publishes a speech on Solvency II

On 2 September 2015, the Chairman of EIOPA, Gabriel Bernardino gave a speech at the international conference "Solvency II: What Can Go Wrong?" in Slovenia. He outlined that Solvency II brings a new risk culture and enhanced consumer protection while using the latest international developments in risk-based supervision, actuarial science and risk management.

Mr Bernardino believes that insurers need to look at Solvency II as a tool to foster a true risk culture in the organisation and that insurance company boards need to make sure that the implementation of Solvency II is used as an opportunity to reinforce good governance in the organisation.

The speech outlines that insurers need to implement proper processes to deal with product design, development and marketing and identify and manage consumer risks. Mr Bernardino believes that this is a key feature to ensure that conduct risks are mitigated since inception.

Credible and independent supervision is a key important asset for the confidence of consumers and investors and in this regard, Mr Bernardino believes that it is in the insurance market's interest that the supervisory authorities have sufficient human and financial resources to ensure proper risk-based supervision.

The speech is available in full via the following link:

https://eiopa.europa.eu/Publications/Speeches%20and%20presentations/2015-09-02%20Solvency%20II%20Conference%20Slovenia.pdf

(v) Solvency II Matters Newsletters

During this quarter, the Central Bank of Ireland (the "Central Bank") published issues 20 and 21 of the Solvency II Matters Newsletter in July and September, respectively.

In the July edition, the Director of Insurance of the Central Bank, Sylvia Cronin, stated that when discussing Solvency II with board members and senior managers a number of themes keep re-emerging, including:

  • finalising capital plans;
  • refining the governance framework;
  • the forward looking assessment of own risk ("FLAOR") process;
  • internal model progress;
  • reporting - Feedback from the test environment; and
  • ensuring board members and senior management have an appropriate understanding of the Solvency II regime.

The newsletter referred to EIOPA and, in particular, its publication of its draft Implementation Technical Standards ("ITS") and guidelines for Solvency II. The EIOPA publication covers areas from all three pillars and marks the completion of the regulatory framework.

The newsletter also reminds undertakings to keep a close watch on the finalised Solvency II reporting requirements.

The Online Reporting ("ONR") test environment remains open until the end of 2015. A supported version of the test environment will re-open in Q4 2015 to allow undertakings to complete the testing of their reporting processes in advance of Q3 returns.

The July newsletter is accessible via the following link:

http://www.centralbank.ie/regulation/industry-sectors/insurance-companies/solvency2/Documents/Solvency%20II%20Matters%20-%20July%202015.pdf

In the opening message of the September edition, Ms. Cronin, stated that, in preparation for the new system of supervision under Solvency II, the Insurance Directorate had been restructured. She stated that insurance undertakings should be considering the new supervisory regime and adapting. Specifically, the boards of undertakings should be moving beyond a compliance or implementation approach and should now be considering the long term or strategic implications that Solvency II will have for their business.

The new structural changes are as follows:

  • A new supervision division has been established which will be responsible for all firms supervised by the directorate. The new division will be led by Kieran Murphy. It will see the amalgamation of the current General Insurance and Life Insurance divisions into a single supervisory division. Ms Cronin outlined that the head of supervision will adopt a sector approach with dedicated supervisory teams for each of the domestic life, domestic non-life, reinsurance and cross border sectors.
  • A new advisory, analytics and actuarial division comprising these three new teams has been established and will be led by Mark Burke.

In order to supplement the on-going supervisory engagement and to assist progress reporting during the preparatory period, the Central Bank is conducting a survey on preparedness for Solvency II. The survey was issued to compliance officers on 16 September 2015 and will remain open until 30 October 2015.

The Central Bank has announced that, due to a number of regulatory changes, the following three different elements will be required from insurance companies in order to fulfil their future reporting requirements:

  • quantitative reporting templates ("QRTs") are required from all Irish undertakings subject to Solvency II. The new templates replace the regulatory reporting requirements that insurance companies are currently subject to;
  • the Central Bank requires additional information from insurance companies to facilitate the translation of the supervisory based data into macro-economic statistical concepts;
  • the Central Bank has introduced a number of national specific templates ("NSTs"). The prudential NSTs have been designed to capture information specific to the Irish market which is not captured in the EIOPA QRTs.

The newsletter also provided an update on the consultation on the Domestic Actuarial Regime and related Governance Requirements under Solvency II Consultation (CP92). The Feedback statement along with the final requirements will be published soon for information purposes. A new PCF position of Head of Actuarial Function (HoAF) will be introduced with effect from 1 January 2016 and the existing PCF positions of Chief Actuary and Signing Actuary will be removed with effect from 1 January 2016.

The September newsletter is available in full via the following link:

https://www.centralbank.ie/regulation/industry-sectors/insurance-companies/solvency2/Documents/Solvency%20II%20Matters%20-%20September%202015.pdf

(vi) EIOPA issues Set 2 draft ITS and Guidelines for Solvency II

On 6 July 2015, EIOPA published set 2 of its draft ITS and Guidelines for Solvency II. This second set covers different areas from all three Solvency II pillars (quantitative basis; qualitative requirements; reporting and disclosure).

As regards the publication, Gabriel Bernardino, Chairman of EIOPA stated:

"The publication of these Standards and Guidelines is a milestone for Solvency II and for EIOPA. It culminates a long and thorough process of development and public consultation. I want to thank all the different stakeholders that provided comments and engaged with EIOPA during the consultation phase, in particular the members of EIOPA's Insurance and Reinsurance Stakeholder Group. Their comments and suggestions contributed to a better balanced regulatory package."

The second set of draft ITS for Solvency II was submitted to the European Commission for endorsement and includes the following:

  • Draft ITS on list of regional governments and local authorities;
  • Draft ITS on index for the equity dampener;
  • Draft ITS on currency shock for currencies pegged to the euro;
  • Draft ITS on standard deviations for health insurance obligation subject to health risk equalisation systems;
  • Draft ITS on procedures when assessing external credit assessments;
  • Draft ITS on supervisory transparency and accountability;
  • Draft ITS on capital add-ons;
  • Draft ITS on submission of information to the supervisory authorities;
  • Draft ITS on procedures, formats and templates of the solvency and financial condition report; and
  • Draft ITS on exchange of information on a systematic basis with colleges.

The draft ITS on the procedures, formats and templates of the solvency and financial condition report and the draft ITS on templates for submission of information to the supervisory authorities were updated on 8 September 2015.

Where EIOPA submits draft ITS to the European Commission, the European Commission is required to immediately forward it to the European Parliament and the Council. Following the receipt of draft ITS, the European Commission has 3 months to decide whether to endorse it. The European Commission may extend this period by 1 month.

EIOPA should be notified of the endorsement, part-endorsement or non-endorsement of the draft ITS during the next quarter. The draft ITS listed above can be found at the following link:

https://eiopa.europa.eu/publications/technical-standards/draft-implementing-technical-standards-on-the-supervisory-approval-processes-for-solvency-ii

On 14 September 2015, EIOPA issued the second set of Guidelines under the Solvency II Directive (2009/138/EC) in the official languages of the EU which includes the following:

  • Guidelines on Financial Stability Reporting;
  • Guidelines on the Extension of the Recovery Period;
  • Guidelines on the exchange of information within colleges;
  • Guidelines on the implementation of the long term guarantee measures;
  • Guidelines on the methods for determining the market shares for reporting;
  • Guidelines on reporting and public disclosure;
  • Guidelines on recognition and valuation of assets and liabilities other than technical provisions;
  • Guidelines on System of Governance; and
  • Guidelines on Own Risk Solvency Assessment (ORSA).

The aim of the Guidelines is to ensure the consistent application of EU law and to establish consistent, efficient and effective supervisory practices. EIOPA is of the opinion that the Guidelines are in line with Solvency II and the European Commission Delegated Regulation on Solvency II (Regulation 2015/35).

The Guidelines are addressed to the NCAs and the NCAs are required to confirm whether they comply or intend to comply with the Guidelines within two months of the issuance date. They will apply from 1 January 2016 and are available at the following link:

https://eiopa.europa.eu/publications/eiopa-guidelines

(vii) Update on Solvency II third country provisional equivalence

On 5 June 2015, the European Commission adopted its first third country equivalence decisions under Solvency II, granting Switzerland, Australia, Bermuda, Brazil, Canada, Mexico and the USA full or partial equivalence. While it was expected that the European Parliament would confirm these decisions quickly, on 16 July 2015, the European Parliament, by letter to the European Commissioner for Financial Stability, extended the time for scrutiny of the provisional equivalence decision by an additional three months i.e. until 7 December 2015. The European Parliament has given no reason for the extension of the scrutiny period.

On 14 July 2015, the European Council reached the conclusion that it would not object to the following European Commission's Solvency II third-country equivalence decisions:

  • judging the solvency and prudential regime for insurance and reinsurance undertakings in force in Switzerland to be equivalent to the requirements of Articles 172(2), 227(4) and 260(3) of the Solvency II Directive (2009/138/EC); and
  • solvency regimes in force in Australia, Bermuda, Brazil, Canada, Mexico and the United States and applicable to insurance and reinsurance undertakings with head offices in those countries to be equivalent to the requirements of Article 227(4) of the Solvency II Directive (2009/138/EC);

The European Commission's decisions are delegated acts pursuant to Article 290 of the Treaty on the Functioning of the EU. The first set of equivalence decisions can now enter into force, unless the European Parliament objects.

On 12 September 2015, the European Parliament updated its procedure file on the third country equivalence of Switzerland under the Solvency II Directive (2009/138/EC). In its procedure file, the European Parliament outlined that it will not object to the European Commission's decision to grant full equivalence to the Swiss insurance regulatory regime in all three areas of Solvency II i.e. solvency calculation under Article 227, group supervision under Article 260 and reinsurance under Article 172.

The letter confirming the extension of Solvency II third country provisional equivalence can be found via the following link:

https://polcms.secure.europarl.europa.eu/cmsdata/upload/b0f9a0c6-a751-47ef-8880-0c6e9b6b7235/D34841%20-%20Hill%20Solvency%20II%20-%20extending%20the%20deadline%20for%20objection%20to%20a%20DA.pdf

The European Council's acceptance of Solvency II third country equivalent decisions can be accessed via the following link:

https://fsregulation.files.wordpress.com/2015/07/st10879-en15.pdf

The European Parliament's updated procedure on the third country equivalence of Switzerland under Solvency II can be accessed via the following link:

http://ec.europa.eu/finance/insurance/docs/solvency/international/delegated-act-c-2015-3754_en.pdf

The press release is available at the following link:

https://eiopa.europa.eu/Pages/News/EIOPA-issues-the-second-set-of-its-Solvency-II-Guidelines-in-the-official-EU-languages-.aspx

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