19.09.2013
Key Positions

Solvency II

Solvency II is a European legislative project to update the risk management rules for european insurers. In the future, regulatory capital requirements for insurance companies are based on the actual risks of the company’s portfolio. This means, for example, that a life insurer which promises its customers higher interest rates and engages in riskier investments will have to maintain more capital than a life insurer which offers a lower interest rate and invest in more secure assets. In addition, the requirements for qualitative risk management and reporting of insurers are also updated.

The introduction of Solvency II was postponed last year. The postponement became necessary because the trialogue parties (i.e. the European Parliament, Council and Commission) agreed to carry out a “Long Term Guarantee Assessment” (LTGA) before finalising the regulatory framework. This test specifically focuses on the elements of the regulatory framework which deal with long-term guarantees. From the point of view of the German insurance industry, this additional test is important and the right move, even if it will delay the introduction of Solvency II further.

Download

The core problem of Solvency II is that at the time the basic parameters of the regulatory framework were established, nobody had anticipated the artificially low interest rates that have now persisted on the European capital market for many years. Last year, German insurers carried out a voluntary test (QIS6) of the proposed regulatory framework. It was revealed that many of the proposed regulations did not work or did not work as planned under the current low-interest-rate conditions. In particular, insurers will hardly be able to provide their customers with long-term guarantees, as is typical for German life insurance.

The new european test (LTGA) is in part a repetition of the voluntary German test (QIS6) at the european level. With QIS6, the effects of an earlier extrapolation and anti-cyclical supervisory measure (the anti-cyclical premium) were tested for the German market. With the LTGA, additional proposed solutions will also be tested, including the matching adjustment to take account of the long-term investment horizon of insurers, and a proposal to simplify the transition to the new supervisory world.

It is likely that the findings from the LTGA will not differ fundamentally from the QIS6 results. Therefore, it is already foreseeable that adjustments to Solvency II will be necessary in accordance with the test results.

Due to the delay of Solvency II, there are now proposals to introduce parts of the regulatory framework earlier. The goal of the european Insurance and Occupational Pensions Authority (EIOPA) to keep national supervisory regulations from drifting apart is understandable in this regard. however, there have been crucial substantive reasons for postponing the start of Solvency II. Implementing parts of the regulatory framework early would not solve any of the still existing problems, and might even create new ones.

Our Positions
Implementing certain aspects of Solvency II with necessary sense of caution
The German insurance industry has had good experience in preparing for some parts of Solvency II at an early stage. With the minimum requirements for risk management, major parts of the future qualitative governance requirements and the own risk and solvency assessment (ORSA) have been implemented early. German insurers have carried out further quantitative impact studies, such as QIS6. All these items have made sense, as the requirements were already clear or new information was gained to improve the quality of the new requirements.
However, the current discussions about implementing parts of Solvency II early should not include those parts that are still being politically debated. This includes the capital requirements, which are now being tested by the LTGA, as well as reporting requirements, which are still the subject of trialogue negotiations. specifically in these sensitive areas, EIOPA should not preempt European legislators and create facts unilaterally. even if parts of Solvency II are implemented early, solvency I should remain the basis of supervision. Duplication of work should be avoided.
Draw consequences from the LTGA
The results of the european tests (LTGA) should not remain without consequence for the design of Solvency II. Measures have to be defined to enable insurers even under the low-interest-rate conditions to offer their customers old age provision with long-term guarantees. The instruments: extrapolation of the interest rate curve, countercyclical premiums and matching adjustments must be structured accordingly. It cannot be ruled out that new alternative instruments will have to be considered again as a necessary consequence of the LTGA.
Bring the proportionality principle to life
The additional test of long-term guarantees measures should not have the effect that other areas of concerns of Solvency II are forgotten. For example, the current general principles on the application of proportionality to various areas are still abstract and not practicable. In order to design Solvency II to be applicable for small and medium-sized insurers as well, serious simplifications are needed particularly with respect to the reporting requirements, governance requirements and the own risk and solvency assessment (ORSA). In the area of quantitative requirements, conservative approaches for a simplification should be permitted.
Limit reporting requirements
A reasonable balance between expenses and benefits must be found with respect to the reporting requirements under Solvency II. The currently proposed quantitative reporting requirements are exaggerated. The degree of detail, scope and frequency of the required reports is disproportionate to the additional supervisory benefit. Quarterly reports should not be required. Mandatory audits of Solvency II data by independent auditors should also be waived.
Ensure an adequate transitional concept
Irrespective of the concrete date when the new regime enters into force, a concept for a gradual transition from Solvency I to Solvency II is needed. Although more time will be given through the delayed implementation in some areas, this time cannot be used fully because of the significant legal insecurity at all regulatory levels. Insurers and supervisors should have sufficient time to prepare for the implementation of the new rules.