Every week brings new announcements of delays in the Solvency II process. What should insurers and reinsurers make of these? With the latest 'guesstimates' set at 2017 for its introduction, it is perhaps time to look at what the consequences for the industry might be of the slipping timetable, and ask whether the benefits of more preparation time might be outweighed by the costs of ongoing uncertainty and confusion.
Are you ready?
The latest round of rumours about potential delays has coincided with the publication of several surveys on the Solvency II readiness of insurers and reinsurers. On the 19th October, the French regulator – the Autorité de contrôle prudentiel (ACP) – presented the high level findings of its own survey of the French market, pending detailed results. The data, collected from 362 single entities and 46 groups, provides some insight into the level of preparedness and expectations of the market.
According to the survey, preparation is most advanced for Pillar I, with 78% of respondents declaring that more than half the work has been delivered. This drops to 60% for Pillar II, and 8% for Pillar III – for which nearly a quarter of respondents have not yet started work. The key issues identified by the regulator are the production of the Solvency II balance sheet, the ORSA, the quality of data and the adaptation of IT systems.
The survey also provides an insight into what impact respondents believe Solvency II will have. For instance, only 21% believe that the project will result in changes to their products, while 20% of groups anticipate that they will need to "restructure" and 18% are contemplating a "strategic rapprochement" with another insurer. The latter includes mergers and, acquisitions but also joint ventures and, more surprisingly, reinsurance or co-reinsurance arrangements.
Several other studies have also recently been published, by Ernst & Young and KPMG particular, which confirm the trend that readiness for Pillar I is more advanced than for Pillars II and III, with significant disparities amongst Member States.
So, is a further delay to the implementation of Solvency II an opportunity – providing scope to finish the preparatory work and reduce some of the costs related to the change-over? As with so much else to do with Solvency II, the answer is not that simple.
More time – a blessing or a curse?
It is generally agreed that Solvency I is an inadequate supervisory framework. Some Member States, such as the UK, have put their own system in place, although Julian Adams, Director of Insurance at the FSA acknowledged recently that "the only thing that we can say with a reasonable amount of assurance is that we will have to live with our current regime for longer than any of us expected.".
Regulators in other Member States have long compensated the shortcomings of Solvency I by implementing a more sophisticated approach to supervision. For example, in France having enough assets to cover the Solvency I capital requirement has been only one of many factors considered by the ACP for some time.
Now that Solvency II is to be delayed for several years, and during a time when prudential supervision is under scrutiny, there is pressure on Member States to anticipate Solvency II, at least partially. Last October, Gabriel Bernardino, chairman of EIOPA, warned Commissioner Barnier that further delays to the project could have "serious consequences for policyholder protection" and would encourage supervisors to come up with "conflicting" national solutions.
Pillars II and III look like good candidates for early adoption, with fewer blocking points than Pillar I. Nevertheless, attempting to anticipate ORSA or prudential reporting may prove both challenging and costly, especially for pan-European groups which would be face a compliance headache. Non-EEA jurisdictions aiming for equivalence are also showing signs of impatience as they risk finding themselves Solvency II-compliant before their European competitors.
On Pillar III, EIOPA published its "final report on reporting and disclosure requirements for insurance undertakings and insurance groups" in July, containing the draft proposals of the Quantitative Reporting Templates (QRTs) as well as the draft guidelines for the various reports that insurers and reinsurers will be required to prepare. This is the clearest indication yet as to what reporting requirements will look like under Solvency II, and early compliance would entail significant costs for insurers and reinsures, particularly in ensuring the accuracy of data. 56% of respondents to the ACP survey said they would need between 12 and 18 months to implement Solvency II reporting, and 30% expected it would take more than 18 months. The ACP also confirmed that the European Central Bank would require reporting for statistical purposes, which may be based on Solvency II reporting.
A vicious circle of delay
In the complex framework of the Lamfalussy process, the technical "level 2" implementing measures can only be adopted once the "level 1" framework directive is adopted. Therefore, the implementing measures may not be adopted until the Omnibus II Directive modifying the 2009 Solvency II Directive is adopted, hopefully in 2013.
However, the draft Omnibus II Directive provides that implementing measures must take the form of either delegated acts or implementing technical standards. The European Parliament and the Council have up to three months to consider the delegated acts, so lengthening the adoption timeframe. In practice, the Solvency II delegated acts will need to be adopted well before the next European Parliament elections scheduled for June 2014.
There is now a real danger that this deadline may not be met, meaning that the adoption would be delayed to the next parliamentary term – almost certainly causing further delays as the new MEPs get to grips with this complex set of legislation.
Delays therefore generate further delays, thus prolonging the uncertainty of the regulatory framework.
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