Tag Archives: Omnibus II

Milliman Solvency II briefing – Omnibus II provisional agreement

On 13 November 2013 the European trilogue parties, comprising the European Parliament, the European Commission and the Council of the European Union reached a provisional agreement on the Omnibus II Directive allowing Solvency II to move forwards towards implementation. The Directive will now be subject to a final approval from the European Council and a Plenary vote by the European Parliament, currently expected to be held on 3 February 2014, before it can be approved into European legislation.

A press statement from the Presidency of the Council of the European Union stated that the agreed new rules contain “so-called “long term guarantees” (LTG) measures which adjust current Solvency II framework to cope with “artificial” volatility and low interest rate environment, and allow for the smooth transition from the Solvency I regime to Solvency II.”

In addition, the Omnibus II Directive is understood to include enhanced requirements for risk management, supervisory review process, public disclosure and the possibility to review the LTG measures, in order to ensure prudence and transparency of the framework.

At a press conference held on 14 November 2013 by Burkhard Balz MEP, the European Parliament economic and monetary affairs committee (ECON) rapporteur for Omnibus II, and Sharon Bowles MEP, Chair of the European Parliament’s ECON Committee, Balz noted that the Omnibus II text should present an “efficient and practical solution” under Solvency II for firms offering long-term guarantee products and should ensure that these firms can continue to operate in difficult market conditions and in low interest rate environments. Specifically, Balz noted that the solutions set out in the Omnibus II Directive should allow firms to continue to offer these products and to maintain their role as long-term investors.

The press conference confirmed a number of details of the content of the approved text, including:

• A matching adjustment (MA) to be applied to the discount rate used to value annuity-style liabilities meeting specific requirements in relation to the liability cashflows and the assets held to match these. The value of the MA looks set to be calculated as the spread over risk-free rates on the matching assets less an allowance for defaults (the fundamental spread). The fundamental spread is expected to have a floor of 30% of long-term average spreads for government bonds and 35% of long term spreads for other eligible assets.
• A volatility adjustment to be applied to the discount rate used to value all other business, calibrated as 65% of the risk-adjusted spread of assets in a representative portfolio.
• Transitional arrangements for existing life insurance business to adjust to Solvency II over a period of 16 years.

While the package of measures has deviated from that set out by the European Insurance and Occupational Pensions Authority (EIOPA) following the long-term guarantees assessment (LTGA) run earlier this year, in particular with less onerous calibrations on a number of the measures, Bowles and Balz noted that this has been balanced by the introduction of important qualitative requirements relating to the governance and disclosure of these measures. The press conference highlighted the need for firms to maintain a liquidity plan, for proper supervision of the LTG measures and for these measures to be applied in a transparent way.

While Balz acknowledged that the new rules were ambitious he highlighted the importance of respecting the principle of proportionality when applying them. In particular, he noted that while the reporting obligations will include asset-by-asset reporting and annual reporting, exemptions for certain parts may be available for smaller firms.

Significantly for European groups, the approved text includes an extended provision for transitional equivalence for third countries. This would allow the European Commission to grant provisional equivalence to third countries for a period of 10 years, at which point it would be reviewed with the option to extend for a further 10 years (and potentially indefinitely). The approval of this provision would allow the US to be considered as an equivalent regulatory regime, allowing European firms with US subsidiaries to use local regulatory methods when calculating group solvency requirements. While this provision has been developed as a specific response to the US regulatory situation it has been stressed that this will provide flexibility to develop pragmatic solutions for other regulatory regimes to ensure that European groups are not disadvantaged when operating in third countries.

Balz confirmed that the expected timeline is for Solvency II to be operational for firms from 1 January 2016 with transition into national regulation required by 31 March 2015. These dates are expected to be confirmed at an EP Plenary session in Strasbourg later this month.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found here.

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant, or email us here for more information.

Milliman Solvency II briefing – Proposed directive amending transposition of Solvency II

On 16 May 2012, a proposed directive of the European Parliament and the Council was published in order to amend the deadline for the transposition and subsequent implementation of the Solvency II Framework Directive (Directive 2009/138/EC) (link). Under the current deadlines set out in the Solvency II Framework Directive, the transposition must take place by 31 October 2012, while the existing Solvency I requirements would be repealed with effect from 1 November 2012.

While these deadlines are amended in the proposed Omnibus II Directive, there is a real risk that this will not have entered into force before the deadline for transposition of Directive 2009/138/EC expires on 31 October 2012. As such, the amending Directive proposes that the deadline for the transposition of Solvency II is extended to 30 June 2013 while the date for first application of Solvency II (and the corresponding repeal of Solvency I) is set at 1 January 2014.

This proposal highlights that “leaving this date unchanged would imply that the Framework Directive would need to be implemented without the transitional rules and other important adaptations foreseen in Omnibus II” and, as such, this Directive is necessary in order to prevent a uncertain legal situation occurring after 31 October 2012 whereby the EU legal system incorporates Solvency II requirements while Member States continue to apply Solvency I.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website: http://uk.milliman.com/perspective/

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant for more information.

Disclaimer
This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.

European Parliament ECON vote on Omnibus II


On the 21 March 2012 the European Parliament’s Committee on Economic and Monetary Affairs (ECON) voted through its amended text for Omnibus II, setting out the Parliamentary proposal for the Solvency II Framework Directive.

The Parliament text has been subject to significant debate and scrutiny over the last couple of weeks following the reported removal of the matching premium from an earlier proposal. While the ABI has commented that the text approved by the committee is “far from perfect” (link) it does include allowance for a matching premium, seen as key for the survival of the UK and Spanish annuity markets.

While full details of the Parliamentary text are currently not public, approval of this version of the text paves the way for trilogue discussions between the European Parliament, the European Commission and the Council of the European Union in order to establish a finalised version of the Omnibus II text to be voted on at a plenary sitting of the European Parliament, currently scheduled for 2 July 2012.

While all three parties of the trilogue discussions have their own versions of the text for Omnibus II, we note that, following the approval of the Parliamentary version of the text, all include an allowance for a matching premium. However, it is not yet clear whether the proposals for the premium are consistent between texts or whether any significant differences in the design and application remain.

Today’s vote is seen as critical to ensuring that Solvency II remains on track for a full implementation date of 1 January 2014. While formal consultation and approval on key areas of the Level 2 and Level 3 texts cannot proceed before the final version of Omnibus II has been approved and enshrined in European law, the current system of informal pre-consultations will continue in order to maintain the momentum in these areas.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website: http://uk.milliman.com/perspective/

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant, or email SolvencyII@milliman.com for more information.

Disclaimer
This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.

Milliman Solvency II eAlert – EIOPA work programme for 2012


On 23 January 2012, the European Insurance and Occupational Pensions Authority (EIOPA) published its work programme for 2012 setting out EIOPA’s goals and deliverables for 2012 (link).

In relation to Solvency II, this plan reflects the urgency with which EIOPA is seeking to move from drafting regulation to ensuring implementation in what should be the final preparatory year before Solvency II becomes operational.

The document states that while pre-consultations on the Solvency II standards and guidelines will continue during the beginning of the year, EIOPA intends to launch a “major wave of public consultations” on these documents throughout May and June 2012. This should mark the final stage in the preparation of the regulation required for Solvency II to be implemented. Final delivery of the standards and guidelines is currently planned for September 2012 although this may depend on the ultimate timing of the ECON vote on Omnibus II, which has recently been delayed until 21 March 2012 (and the Parliamentary Plenary sitting currently scheduled for 17 April 2012), as well as the subsequent approval of the final Delegated Acts.

We note that there have been a number of public consultation papers already in circulation and that the Groupe Consultatif has made public its comments on several of these (on the ORSA and Quantitative Reporting Templates) on its website (link).

EIOPA has stated that, during this year, it will also be putting into place the necessary procedures for carrying out its obligations under Solvency II, including the specification of the discount rate and monitoring on-going consistency of Solvency II with international accounting standards.

The document sets out EIOPA’s priorities for 2012, which it has stated will be elaborated in the form of standards or guidelines. These include:

– Valuation of assets and liabilities (including determination of the risk-free interest rate curve and guidelines for the calculating the best estimate and risk margin);
– Further specification of the SCR requirements for specific areas such as catastrophe risk or health risk;
– The assessment and approval processes for the use and issuance of own funds;
– Convergence and consistency of internal model application reviews between supervisors;
– Supporting national implementation of the binding technical standards on reporting requirements;
– Finalisation of guidelines for the ORSA, the risk assessment framework and on the process of supervision; and,
– Ensuring application of Solvency II requirements for group solvency and supervision – including guidelines on intra-group transactions and clarification on how Solvency II would apply to third country insurers operating in the EU via branches.

The workplan also sets out the work that EIOPA will be carrying out in relation to occupational pension schemes, and in particular how the Institutions for Occupational Retirement Provision (IORP) Directive could be extended to achieve a harmonised and risk based supervisory and regulatory framework. Methodologies for achieving this via a holistic balance sheet approach will be developed, in cooperation with the industry, over the first half of 2012 setting the stage for a QIS exercise targeted at these areas later in the year.

Copies of Solvency II summary papers, together with copies of papers on other topics published by Milliman, can be found on our website http://uk.milliman.com/perspective/.

We look forward to hearing from you if you have any questions or comments on this briefing or any other aspect of Solvency II.

Please contact your usual Milliman consultant, or email SolvencyII@milliman.com for more information.

Disclaimer
This e-Alert is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation and persons should consult qualified professionals before taking specific actions. Neither the authors, nor the authors’ employer, shall have any responsibility or liability to any person or entity with respect to damages alleged to have been caused directly or indirectly by the content of this e-Alert.