European regulations - Solvency 2 has begun to seem like a pale version of the second coming – long awaited, much discussed and not here. Julien Bedhouche of Ferma discusses a thorn in the side of European insurers and their customers.

Solvency 2 has begun to seem like a pale version of the second coming – long awaited, much discussed and not here. This autumn, the European Parliament and Council along with the Commission will discuss, in what they call a ‘trialogue’, an effort to adopt the Omnibus 2 Directive, which is itself an update of Solvency 2.

The topic that is currently delaying progress on adoption of the directive relates to long-term guarantee products. How should financial instruments with a life span of 20, 30 or more years be valued in the current low interest rate economic environment while respecting market-consistent valuation which is at the core of the Solvency 2 philosophy?

Commercial insurers’ worries that they could have to find significant additional capital to support volatile market-based asset valuations carries more political weight than risk managers’ long standing concerns about that the effect of the reporting and capital requirements of Solvency 2 on captives.

The proportionality issue, that the regulation of captives should reflect the prudential risk, therefore remains unsettled, and so a source of uncertainty for captives owners who want to plan for future development.

The former head of insurance and pensions at the European Commission, Professor Karel Van Hulle, is therefore a welcome speaker at the 2013 risk management forum of the Federation of European Risk Management Associations (FERMA) which starts on 29 September in Maastricht.

Since retiring from the Commission, Van Hulle who is a lawyer by background has continued his professional career as an academic.  He is a member on the law faculty of the Catholic University of Leuven in Belgium and of the executive board of the International Centre for Insurance Regulation at the Goethe University in Frankfurt.

And he has shown himself very open to discussing Solvency 2 with which he lived with from 2004 now that he is no longer under the constraint of being a civil servant.

FERMA has been lobbying on behalf of its members for the application of the proportionality principle to captives. Its consistent view is that Solvency 2 should make a clear distinction between insurance companies serving the public and captive insurers whose only business comes from their parent companies.  

The FERMA forum will shine a light on this and other concerns of the various insurance market segments, risk and insurance managers, brokers and insurers, in a set of three panel discussions. Airmic chairman Chris McGloin will join Annemarie Schouw, the president of the Dutch risk management association NARIM, Alexander Mahnke, CEO insurance, Siemens Financial Services and Andrew-Richard Bradley, head of group risk services, Nestlé, on the risk managers’ discussion.

This sessions follows almost immediately after Van Hulle’s keynote address on the opening day of the forum. The risk managers are expected to produce challenges for brokers and insurers whose panel discussions will take place on the following day.

It will be interesting to see if the representatives of the four global companies who make up the insurance panel believe that the delay to Solvency 2 is affecting the property-casualty market, even though it results from long term contracts issues.

The Parliament-Council-Commission trialogue was interrupted in October 2012 because of a dispute over long term guarantee products. The European Insurance and Occupational Pensions Authority (EIOPA) was asked to assess the matter and in June, it published a report with several recommendations. This will form the basis for the renewed trialogue.

Once Omnibus 2 has been adopted, the Commission will draft the technical details of the directive (also known in the EU jargon as Level 2 implementation measures).This is expected to happen in 2014, with 2015 as the transition year and full implementation of Solvency 2 as the new regulatory regime for the insurance industry in January 2016.

For more information about the FERMA Forum 2013, see http://www.ferma.eu/ferma-forum-2013/

Julien Bedhouche is FERMA’s European affairs adviser. 

Julien Bedhouche - FERMA