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Solvency II approval shifts focus to implementation countdown

The European Parliament has approved a key part of the European Union's Solvency II capital regime for (re)insurers, keeping the new rules on track to come into force by the much revised deadline of January 2016.

"Tuesday's (11 March) vote cleared the last major political hurdle and it gave insurers some very welcome certainty," said Tim Ford, global Pillar 1 leader for Ernst & Young's Solvency II team.

He said the approved Omnibus II directive provided clarity to insurers by confirming the timeline for delivery.

The EU council will have another month to raise any objections, but Ford said he "certainly" would not expect it to renege its commitments this late in the negotiations.

He said he expected the final text to be enshrined in the EU journal 20 days after the end of the objection period, at which point it would become effective.

Despite the parliamentary vote, which brought to an end more than a decade of political wrangling, Ford warned that there were still challenges to overcome.

"It now appears plain sailing politically, but less so when it comes to implementation and less so again when it comes to addressing the industry's concerns," he said.

"There are numerous hurdles for firms and similarly for the regulators over the period leading to full implementation."

Each EU member state will need to transpose Solvency II into national law. "They'll be published in the directive but the rules need to make their way in to the law of each of the member states," Ford explained.

"This could involve changing the remit and powers of the insurance supervisor," he added.

He said this could involve aligning the regulator with the central bank, which the UK did when it brought the Prudential Regulation Authority and Financial Conduct Authority under the control of the Bank of England.

Regulatory challenges aside, he said the next two years would be "enormously challenging" for firms, with a lot of the detail yet to emerge.

He said the bill met all the challenges that had previously been raised but had yet to resolve a number of concerns from insurers.

Shortly after the vote, industry lobby group Insurance Europe said the capital regime could have a negative impact on European insurers.

It said the drafted Delegated Acts, legislative provisions made by the European Commission to supplement a directive, were contrary to legislators' intentions.

Areas of concern included unnecessarily high risk charges for long-term investments and the negation of third country equivalence.

"If not corrected, the Delegated Acts would seriously limit insurers' ability to provide the long-term investment and stability Europe's economies need," warned Sergio Balbinot, president of Insurance Europe.

"They would have a major impact on the availability and price of insurance products, and would harm the ability of European insurers to compete internationally," he added.

But Ford said the capital requirements had "never been tested in anger".

He said the Eiopa stress tests would be a powerful and useful tool for understanding the implications of what has been agreed at a political level and what that means for the capital requirements of firms.

He warned that there would be "winners and losers" from Solvency II. "It's become much more risk sensitive than has been the case under Solvency I."

He said this could lead to a "wave" of M&A activity as firms struggle with the increased capital requirements.

He said this would be a result of the very substantial cost of implementing the new regime, as well as the costs of operating in a Solvency II environment. He said the burden of increasingly sophisticated reporting could also increase the level of consolidation.

As yet undecided elements of Solvency II could still affect the EU insurance industry's capital position by "several hundred million pounds", rating agency Fitch said.

In November, EU officials resolved a long-running dispute over how the capital requirements for life insurance contracts that offer guaranteed minimum returns to policyholders should be calculated, removing the last substantial obstacle to a final settlement.

Solvency II imposes a higher capital buffer on such contracts because they can inflict losses on insurers when investment yields are low, and countries where guaranteed life policies are common, including Germany, had had pushed for this aspect of the rules to be relaxed.

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