EU Official Confirms 2012 Goal as Insurers Raise Concerns Over Solvency II

Recent events point to growing concern within the insurance industry over the impact of Solvency II's implementation as European Union officials insist the current timetable for adoption will be met.

Some say there is also emerging evidence that Solvency II will put stress on the regulators who will have to implement it.

In a March 17 talk given at the Insurance Institute of London, Karel van Hulle, head of insurance and pensions at the European Commission's Internal Markets and Services division, tamped down speculation that the October 2012 date for Solvency II's implementation across the European Union would be delayed.

In his presentation, van Hulle said there was no reason to delay implementation of Solvency II. Van Hulle was speaking at the institute on the topic, "The EU response to the financial turmoil."

"We are close to the end," said van Hulle. "That is why we have to finish."

Van Hulle said Quantitative Impact Study 5 -- the final in a series of stress tests of Solvency II on insurers -- "will be the ultimate test of the standard formula" of Solvency II capital adequacy.

As for timing, van Hulle said his department will hold a stakeholders meeting in April on technical specifications for QIS 5. A public hearing will be held May 4 in Brussels, Belgium. Final technical specifications for QIS 5 will be set in June, and QIS 5 will begin in August.

"Implementing measures" for Solvency II will be adopted in 2011, and final implementation of Solvency II will take place at "end of 2012, beginning of 2013," said van Hulle.

The implementation process will take place over time, and van Hulle stressed there will be flexibility as specific situations warrant.

Van Hulle's comments came a day after members of the Brussels-based CEA, Europe's umbrella insurance trade group, and members of the Committee of European Insurance and Occupational Pensions Supervisors were scheduled to address a workshop of the European Parliament on Solvency II.

A CEIOPS spokeswoman confirmed the group's chairman, Gabriel Bernardino, attended the workshop. Bernardino was traveling and unavailable for comment.

On March 16, CEIOPS reported the results of its Europe-wide financial stress tests on "28 large and important European insurance groups," which represent about 60% of European premiums. The tests found these insurance groups would "remain resilient even in severe scenarios."

In one scenario, labeled "adverse" and mirroring the financial crisis of September 2008-September 2009, CEIOPS found the insurance groups would see "only a marginal impact" of a loss of 10 billion euros, or 3% of available capital.

In two "severe" scenarios, the impact on available capital was "considerably higher," with a loss of up to 25% of available capital, said CEIOPS.

Bernardino said in a statement that "all participating insurance groups held assets sufficient to cover policyholder liabilities."

A spokeswoman for the CEA confirmed Deputy Director General Alberto Corinti presented at the workshop as well. Corinti, too, was unavailable for comment, but the CEA provided BestWeek Europe with his presentation slides, entitled "How to get it right."

In his presentation, Corinti stressed the CEA supports Solvency II as a "state of the art" capital adequacy regime. But he also warned that excessive capital requirements are a real danger and could harm the industry and its ability to deliver quality services to customers at proper pricing levels.

Corinti's presentation focused on CEIOPS's most recent recommendations, which he said raises "strong concerns" about the calibration of capital requirements, the calculation of available capital and the treatment of the eligibility of capital.

The CEA also recently published a paper, "Why excessive capital requirements harm consumers, insurers and the economy," outlining its concerns over recent CEIOPS recommendations.

Pressure on Regulators

The head of Germany's financial services regulator, BaFin, has also called for caution on Solvency II's implementation. Ben Fischer, a spokesman for BaFin, refuted recent media reports that Thomas Steffen, head of the organization's insurance directorate, had suggested a delay in Solvency II's implementation.

"Given the complexity of the Solvency II project, he has expressed his view as national supervisor that he thinks quality is more important than speed, to get things right," said Fischer. "He added that lessons out of the [financial] crisis and resulting capital requirements must be tested properly under QIS 5 in 2010, including a review mechanism in 2011, to avoid overburdening of the industry.

"On this basis, he concluded that if the European Commission driving the Solvency II process decided at a later stage to postpone the implementation of Solvency II, he would not oppose," Fischer said.

On the same day as van Hulle's London appearance, the U.K. Financial Services Authority released its new Business Plan 2010/2011. One notable item in the plan: the regulator will be recruiting 460 additional staff "to implement Solvency 2, and to deliver the intensive supervisory approach needed for the very largest firms."

The FSA did not respond to an inquiry for further information by BestWeek Europe's deadline.

FSA Chief Executive Hector Sants said in a statement the regulatory body has moved from "retrospective intervention to proactive challenge" in its approach.

"Intensive supervision is inherently more confrontational," said Sants in a statement. "Our supervisors are making judgments both about the robustness of the business models of firms and the suitability of the products they are selling. We will then intervene promptly if we anticipate problems."

Sants is set to leave his post as head of the FSA this summer, after having served three years (BestWire, Feb. 9, 2010).

Van Hulle said in his talk the global financial crisis of the past two years was something for which the market "had not planned. It hit you right in the face."

As the "biggest project in insurance regulation in the last 30 years," that last thing Solvency II needed as it was being finalized was a financial crisis of the magnitude the financial services industry faced, he said.

In the wake of the crisis, van Hulle said he asked the EU member states, insurance supervisors and the industry what they thought should be done about Solvency II. "I am very pleased that all of them said the best response to the financial crisis for the insurance industry was a speedy adoption of Solvency II," he said.

Van Hulle also touched on one of the most sensitive unresolved issues about Solvency II -- the supervision of insurance groups. Describing groups as something like a "ghost," he said "it has economic power, but the supervisors across the European Union have to supervise together this economic concept which we call a group, all in their own way. And that is not going very well at the moment."

Another key to Solvency II is the convergence of supervisory efforts, said van Hulle. While the 27 member states "like to go their own way," common ground must be found for cross-border insurance supervision, he said.

(By David Pilla, international editor, BestWeek: [email protected])