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The European trialogue of November 14, 2013 reached an agreement in its Omnibus II discussions, setting out the treatment of long-term guarantees under Solvency II, the unified European regulatory framework for the insurance market.
The Omnibus II discussions have resulted in three decisions of particular significance to the industry, these include:
Increases in both the volatility adjustment and the matching adjustment
The extension of the phasing-in period for the existing insurance book of up to 16 years; and
Allowance of provisional equivalence of 10 years with the possibility of an extension for regulatory framework deemed broadly similar to Solvency II.
The increase in the calibration of the volatility adjustment, as well as the matching adjustment, reduces the volatility to which insurers’ net assets are exposed in times of market distress. Together with an extended phasing-in period from Solvency I to Solvency II – now up to 16 years – this will ease the pressure on insurers and stabilize their existing portfolios. It also supports the principle of proportionality by easing the burden of reporting for small and medium sized insurers. The decision on provisional equivalence, on the other hand, simplifies proceedings for insurers with global operations, and provides a possible solution for the important issue of US equivalence.
Eva Dewor, global head of Insurance Risk Management at Accenture maintains “Given the diversity of the European insurance landscape, reaching an agreement on the key regulations is beneficial to all market participants, from national regulators to insurers, as they now have the final guidance so desperately needed to tackle some of the most important questions left in the Solvency II implementation process.”
Dewor also said, “The decisions concerning Pillar 1, in particular, represent significant progress from previous proposals, allowing insurers to continue their work on model calculations, reserve planning and possible product portfolio adjustments. In addition, the national transposition of related parts of Pillars 2 and 3 can now be continued with much greater certainty. Altogether, the compromise facilitates the 2016 enforcement date and helps restore the uniform and coordinated approach Solvency II requires.”
Until recently, many players had let regulation slip down on their agendas due to the numerous delays in the political decision process. Some details still remain to be finalized. For example, the Omnibus II agreement is provisional until endorsed by European member states, and both delegated acts as well as regulatory technical standards still need to be drafted. However, in our view it makes sense for some market players to assign a greater priority to the topic of compliance, considering that transposition is scheduled for March 2015, and that the implementation of some significant elements will be expected during 2014.
With a tight schedule leading to enforcement, insurers should consider carefully planning the next steps they take on their regulatory implementation. Accenture’s 2013 Global Risk Management Study revealed that a significant amount of compliance preparation is still work in progress, but it also helped illustrate the importance of transforming insurers’ operating model by integrating risk management into their strategic decision-making and operational monitoring to help manage costs and accelerate growth.
In our view, insurers should consider seizing the momentum provided by the Omnibus II agreement and start preparing, not only for compliance in 2016, but also for higher performance once compliance is achieved.
December 24, 2013
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