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Outstanding issues delay implementation of Solvency II regime

Frustration rising as dispute could delay Europe's capital rules

Solvency II

Implementation of Europe's proposed risk-based capital regime for insurers looks to be delayed further after talks in Brussels failed last week to resolve critical outstanding issues.

The Solvency II regime, which is expected to increase capital costs for insurers, reinsurers and captives operating in the European Union, has largely been accepted by insurers, but the delay in implementation and ongoing uncertainty is frustrating for many in the industry, several experts say.

With the high costs associated with implementing Solvency II, insurers such as mutuals in Germany and France and individual country officials may take advantage of the delay to press for further changes, experts say.

The Solvency II Directive originally was due to be implemented this year, but last year was delayed to January 2014. That date, however, now looks in doubt because the European Parliament, the European Commission and the Council of Ministers failed to reach a compromise on the treatment of long-term guarantees in life and pension products at a meeting last week in Brussels.

In a bid to facilitate a compromise between the European Parliament and the Council of Ministers, European Commissioner for Internal Market and Services Michel Barnier proposed waiting for the results of an impact study into how the rules would affect long-term guarantees. The report is due in March 2013.

The European Parliament and the Council of Ministers now are considering whether to take the proposal forward, according to a spokeswoman for the commissioner. In an email, she said it is too early to say whether the January 2014 implementation of Solvency II would be pushed back.

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“The issue of the entry into force will need to be clarified by all parties in the trilogue over the coming weeks,” she said. “The commission remains convinced that this project needs to be concluded as quickly as possible.”

Mr. Barnier also stressed that the remaining issues being negotiated should be wrapped up quickly, so the only remaining issue would be the calibration of risks attached to insurance products.

However, experts now think it is likely that Solvency II-amending legislation, known as Omnibus II, will be finalized after the impact assessment is done, not later this year as had been planned.

“A delay to the current Solvency II implementation deadline of Jan. 1, 2014, seems inevitable,” said Olav Jones, deputy director general of Brussels-based Insurance Europe, a pan-European insurance and reinsurance trade association representing national insurance associations.

“There is no clarity yet on the impact on the overall timetable, although a delay of one year is reportedly being discussed,” said Mr. Jones. It is also unclear how Solvency II will be implemented and whether, for example, it might be introduced through a staggered approach, he said.

The issue concerning long-term guarantees is proving difficult to resolve. Talks between the three parties also failed to reach a compromise in July, said Paul Clarke, partner at PricewaterhouseCoopers L.L.P. in London.

“It now appears that some stakeholders want to wait for the result of an impact study in March to make a more informed decision. This runs straight through Plan A and the current timetable, which is why the parties are now having to work on a Plan B,” he said.

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The delay will further frustrate an industry that is becoming disillusioned with the proposed rules, said Simon Sheaf, general insurance practice leader at accountant Grant Thornton U.K. L.L.P. in London.

“It now seems almost inevitable that Solvency II will be delayed further, possibly by a year, although it could be longer,” he said. “This is bad news for insurers that are a long way down the road of preparation. They have invested significant time, money and resources in getting ready, but they will not be getting any practical benefit for several years,” Mr. Sheaf said.

For example, Lloyd's of London has estimated it could cost �300 million ($486.5 million) to implement Solvency II, and the Association of British Insurers has estimated it could cost �2 billion ($3.24 billion) for all British insurers to implement the new capital rules.

“Some companies are now dubious that Solvency II will ever happen and wonder if they should commit further significant investment,” Mr. Sheaf said.

There also is wider concern among insurers that delays could see controversial issues re-emerge, said Andrew Tromans, a partner at Clyde & Co. in London. Officials in some European countries, as well as certain mutual insurers, no longer think that Solvency II works for them and could press for bigger changes, he said.

“It is dangerous for insurers to push ahead on the presumption that there is just an issue with timing,” Mr. Tromans said. “There could yet be more fundamental changes to Solvency II.”

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Another potential obstacle for Solvency II could be disagreements between regulators on how to treat investment risk, in particular sovereign debt, slumping property values in countries such as Ireland and Spain, and financial institution securities in the face of the European debt crisis, said Stefan Holzberger, London-based managing director of analytics for Europe, the Middle East and Africa at A.M. Best Co. Inc.

“This is a politically sensitive issue, but one that needs to be overcome,” he said.

Further delaying Solvency II will only add to insurers' growing frustration, Mr. Holzberger said. “Most insurers take a diplomatic view of Solvency II, but there are undertones and, in some cases, vocal frustrations.”

Delays have cost implications for insurers that have considerable resources tied up with preparations, Mr. Holzberger said.

“Some companies are flabbergasted as to what has become of a sensible risk management regime. Many now see it as a massive bureaucratic exercise that has become so prescriptive as to overtake any good,” he said.

In particular, smaller insurers, captives and mutual insurers increasingly feel “overwhelmed” by Solvency II requirements. “Solvency II is a good risk-based regime, but it has turned into a monster, and clarity on proportionality remains an important issue,” he said.

Delaying implementation of Solvency II also threatens its credibility on the international stage, Mr. Clarke said.

“Solvency II could become the de facto international benchmark (for insurance regulation), but the delays and disputes will color the minds of those regulators looking to follow its lead,” he said.

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