Another Step Towards Solvency II Approval

NU Online News Service, March 27, 11:36 a.m. EDT

A unit of European Union reached informal agreement yesterday on Solvency II, a broad framework to enhance insurer capital requirements and supervision. The action drew a positive response with some reservations from some insurance segments.

Preliminary approval for the revision of solvency standards came from the EU's Committee of Permanent Representatives and is expected to receive formal endorsement next week. The 27-member committee met yesterday in Brussels

The European Parliament is scheduled to put the Directive to a plenary vote April 22. A formal adoption of the Framework Directive could then take place during the May 5 Economic and Financial Affairs Council, according to CEA Insurers of Europe, the European insurance and reinsurance federation.

CEA Director General Michaela Koller in a statement called yesterday's move "a decisive step towards the new enhanced regulatory regime that we have been seeking for Europe's insurers. We are happy that the timetable for implementing the Directive is on track."

However, she said that the removal of text in the Framework which would apply its requirements to parent groups for global insurers rather than individual companies "missed the opportunity to introduce a tool that would have met the need for the effective supervision of multinational groups."

Janina Clark, spokesperson for Brussels-based CEA, said with a Framework for groups in place it would reflect economic reality. She said there was still hope that further along the provision might be reinstated.

International Underwriting Association of London (IUA) said it was happy the framework had received timely political approval becaus, "the insurance industry needs an efficient and transparent modern regulatory regime. With its emphasis on principles, risk management and models, Solvency II meets the necessary requirements."

However, Dave Matcham, IUA chief executive said in the group's statement that it regrets "removal of group support from the Framework. That would have ensured a truly effective correlation between the overall financial strength and competitiveness of a group and its solvency requirements."

Raj Singh, Swiss Re's chief risk officer in Zurich said in a statement that, "Against the background of the current financial crisis, the expected passing of the new Solvency II framework directive by the European Parliament and the Council will send a strong signal that an economic and risk-based view on insurance business is of utmost importance."

He said Solvency II "provides incentives for sound risk and capital management and provides policyholders with better protection" and the informal agreement comes at the right time for the meeting of the G-20 countries in London in April. It will clearly strengthen the position of the European insurance industry."

Philippe B. Brahin, head of group regulatory affairs at Swiss Re said it was regrettable that language concerning the ability of a supervisor to rely on group support to its subsidiaries was excised, but he noted that other language providing for group supervision was considered.

Mr. Brahin said the new proposals move call for moving from statutory accounting to economic valuation, which is the way that Swiss Re appraises its business operations internally. The new Solvency regime would also allow companies to use their internal models to assess capital needs.

He noted that the EU framework is geared to a more principle-based system for insurance company operations.

In 2002, limited Solvency I reforms were approved by the European Parliament and the Council. A fundamental wide-ranging review of solvency requirements was first proposed in 2007 and amended in February of last year.

A four-level approach is being used to develop the new solvency regime with primary legislation to define broad 'framework' principles as the first step followed by Commission adoption of technical implementing measures, assisted by a regulatory committee and taking account of advice from the Committee of European Insurance and Occupational Pensions Supervisors.

The third step will involve cooperation between national regulators to ensure consistent interpretation of rules that are adopted and finally enforcement to ensure that implementation of the EU legislation is consistent.