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Progress on Solvency II and Global Capital Standards

Solvency II latest legislative developments involve the publication by EIOPA of Implementing Technical Standards (ITS) and Guidelines (Levels 2-3) for consultation. The IAIS’s first proposal for a risk-based global Insurance Capital Standard (ICS) has also been issued for consultation.

Fri 23 Jan 2015

Solvency II

Last year marked the formal adoption of the Omnibus II Directive by the Council of the European Union (EU) (April 2014). This amended the Solvency II Directive, thus completing the Level 1 framework. This year the biggest focus of EU policymakers is finalisation of Solvency II’s detailed requirements, by putting in place outstanding Level 2 and 3 measures. These requirements legally take the form of Delegated Acts, Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), and are collectively referred to as ‘Level 2 measures’. Meantime, the European Insurance and Occupational Pensions Authority (EIOPA) proposes to supplement the Solvency II legislative package with Guidelines, referred to as ‘Level 3 measures’.

The Delegated Acts were formally adopted by the European Commission on 10 October 2014 and are likely to be agreed by the European Parliament and Council in the next few weeks. The rules contained in the Delegated Acts set out more detailed requirements for individual insurance undertakings as well as for groups.

During the first half of 2014, EIOPA released its first set of consultations on Solvency II Guidelines and ITS, to which Lloyd’s submitted its comments.

EIOPA are currently holding their second round of public consultations on Solvency II’s Guidelines and ITS. The deadline for submitting a response is 2 March 2015. A full list of the consultation papers can be found here.

What’s next

Solvency II’s provisions should be transposed by Member States into national law before 31 March 2015. On 1 April 2015, a number of approval processes can start, such as that for insurers' internal models used to calculate their Solvency Capital Requirement (SCR). The Solvency II regime will become fully applicable on 1 January 2016.

This timeline allows supervisors and undertakings to prepare for the application of the new regime. It is expected that the EIOPA’s proposed Guidelines and ITS will receive approval by July 2015.

Lloyd’s in-house key priority at the moment is preparing its proposed internal model application which will be subject to approval by the Prudential Regulation Authority (PRA), who is responsible for assessing internal models’ applications in the UK.

Global Capital Standards

Looking at the wider international scene, the Financial Stability Board (FSB) continues to place pressure on the International Association of Insurance Supervisors (IAIS) to develop global capital standards for insurers.

The IAIS’s pilot project in the area of insurance capital requirements is the Basic Capital Requirement (BCR). In November 2014, the BCR received formal endorsement from the G20. The BCR applies to Global Systemically Important Insurers (G-SIIs) as of 1 January 2015, on a confidential reporting basis.

The BCR is set to form the basis for Higher Loss Absorbency (HLA) requirements for G-SIIs. This is currently in the IAIS’s pipeline, being scheduled for completion in 2015 and full application from 2019.

The third step is for the IAIS to develop a risk-based group-wide global Insurance Capital Standard (ICS) by the end of 2016. Application of the ICS to all Internationally Active Insurance Groups (IAIGs) is expected to take place from 2019.

A first proposal for an ICS is currently in the spotlight, as the IAIS has issued a consultation paper inviting feedback from the insurance industry by 16 February 2015. Some of the proposed requirements are similar to the principles set out in the Solvency II framework. However, as the IAIS continues to take further steps towards the completion of an ICS, a key risk is that the IAIS’s final proposals may deviate from the Solvency II principles thus adding an extra-layer of capital requirements for EU insurers.

Application to Lloyd’s

The BCR and HLA will apply to G-SIIs only. Because Lloyd’s has not been designated a G-SII, it is not officially required to comply with these standards. The ICS will apply to IAIGs, designated by group-wide supervisors in accordance with the Common Framework for the Supervision of IAIGs (ComFrame). Although Lloyd’s may not be designated an IAIG, it is unlikely that an international capital standard will pass Lloyd’s by.

In any event, the IAIS’s capital standards are likely to have an impact on general insurance regulatory capital requirements.

What’s next

A second consultation on ICS is expected to be issued at the end of 2015, with finalisation expected by December 2016. The IAIS is to adopt the ICS by the end of 2018, after which national supervisors will begin implementation of the ICS as part of ComFrame.

For further information please contact the GPA Team.