European Parliament backs Solvency II compromise measures

Industry publication Professional Pensions said that the latest version of the Omnibus II Directive, which will implement new standards branded Solvency II, officially postpones the implementation of the new regime to January 2013 rather than its original date of October 2012. It also grants new powers to European regulator the European Insurance and Occupational Pensions Authority (EIOPA), allowing it to define the “exceptional fall in financial markets” exemption which will give national supervisory bodies more time to meet capital requirements.

On its website, UK regulator the Financial Services Authority (FSA) said that although the changes have now been backed by the Parliament’s Economic and Monetary Affairs Committee (ECON), they will be subject to further discussions as the Parliament, Council and European Commission produce a new draft of the text. A plenary vote on this draft is due to take place in the European Parliament in July.

Omnibus II (155-page / 3.7MB PDF) is a draft EU Directive which sets out stronger risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities. Once it is finalised, implementation of the Directive is expected to happen on a phased basis from 2013 to 2014.

The compromise proposals will allow for the use of a ‘matching symmetrical adjuster’, similar to the so-called ‘matching premiums’ already popular in EU member states including the UK, Ireland and Spain, according to Reuters. Matching premiums allow insurers to hold less capital against annuities in recognition of the fact that, since annuity holders cannot cash in their policies, losses on the bonds insurers buy to fund annuity payments need never be crystallised.

Otto Thoresen, director general of the Association of British Insurers (ABI) said that the changes were “far from perfect” but would pave the way for a “constructive discussion in the next phase of negotiations”.

“The final text must not constrain European insurers from competing successfully in the global market,” he said. “The issue of equivalence must be resolved in order for the EU insurance industry to remain competitive and this will be an issue for which we, and our European counterparts, must seek a successful regulatory outcome.”

London-based insurance firm Prudential has refused to deny press reports that it is considering switching its headquarters to Hong Kong as a result of the changes. In a statement issued to the Hong Kong stock exchange last month, it said that “continued uncertainty” in relation to the measures could be taken into account in any decision intended to “maximise the strategic flexibility” of the company.

Equivalency rules in the draft Directive could mean that European insurers will have to hold extra reserves against subsidiaries in countries where standards are less strict. No decision has yet been taken on whether capital rules for US insurers are compatible with the new regime, which could have an impact on Prudential’s US subsidiary Jackson National Life.