With a definitive date of 1 January 2016, Solvency II is finally set to be implemented – and insurers must make sure they are prepared
A tweet from internal market and services commissioner Michel Barnier, last November, confirmed the new capital adequacy programme is happening: “Solvency II will apply from 01/01/2016. This is the definitive date – no more changes! Insurers must be ready.”
The two-year delay to implementation has caused frustration to those insurers that had invested heavily into costly programmes and put in many months of work to be ready for the initial January 2014 deadline. And even now final rules are still to be released.
But, now the implementation date is known, there is pressure on insurers once more to ensure they are prepared – and on regulators and policymakers to ensure the new rules are ready to be adopted by the 28 EU member states.
The key objectives of Solvency II are improved consumer protection, modernised supervision and greater harmonisation of European supervisory regimes. But with so much variation in terms of capitalisation and sophistication of financial services markets across Europe, the much quoted ‘level playing field’ does not look like it is going to happen.
However, there is certainly hope there will be a raising of standards in weaker countries, and in some cases this will come as part of the required preparation work.
So far, it seems preparation is progressing nicely. EY conducted a major survey of European insurers and found nearly 80% of them expected to meet Solvency II requirements before the January 2016 deadline.
This is positive news – although as Rodney Bonnard, EY insurance partner says, the survey concentrated on larger players. “There are going to be smaller insurers that need to catch up, but time is running out and even if it is going to take a lot of effort, it should be possible to close to the gap.”
In terms of being most advanced in their progress, Holland, the UK and Nordic countries are most confident in meeting the requirements. French, German, Greek and Eastern European insurers, meanwhile, are less optimistic.
Commentators are reluctant to single out countries for being less likely to reach the appropriate compliance levels. As Bonnard says: “There is a great deal of variance and you cannot make direct comparisons. Local regulators may be taking a more pragmatic approach in some countries [which could take longer] – and even if it is going to take a lot of effort, most insurers should be able to get there.”
Clearly, the financial crisis experienced by Greece may well mean a number of its insurers may be less well capitalised. But the fact Germany is mentioned as being less optimistic may be more surprising, as Bonnard emphasises the country’s regulator, Ba Fin, is one of Europe’s most proactive.
However, Ba Fin’s rigorous approach appears to be directed at some of the country’s smaller life insurers – it said a few were at risk of failing the Solvency II regime since they had been badly hit by low interest rates. Meanwhile, anecdotally, it has been said that Italy and Spain are among the least prepared overall.
There is also variation in terms of which pillars of the regulation insurers feel most prepared to implement. EY found there are high levels of readiness to meet Pillar 1 – which refers to balance sheet issues such as the amount of capital an insurer should hold – and also Pillar 2, which relates to risk management.
However, there is less confidence when it comes to Pillar 3, which focuses on disclosure and transparency – also described as reporting requirements.
So what is it about Pillar 3 that is proving such a sticky issue? Danny Clark, insurance partner with KPMG, comments: “Insurers will need to provide more information more regularly – and quicker. It’s a triple whammy. There is also going to be more information [being] made public, which could also be a challenge in commercial terms.”
Final reporting requirements
Charles Portsmouth, director at Moore Stephens, explains there has been a delay in getting the final reporting requirements agreed, which has impacted the extent to which insurers have been able to prepare for this pillar.
“While the format of the quarterly reporting templates is reasonably well known, the granularity and sources for the data needed to complete them is still being evaluated. The data has to be found, documented and mapped and then will need to be capable of being manipulated into the required reporting format. Insurers are still working on more strategic solutions to these data issues.”
He continues that the need to report in XBRL [a global standard for exchanging business information] to the regulators creates another technological challenge for insurers.
“The UK’s Prudential Regulation Authority is still working out how the reporting will be done. In common with many other regulators across Europe, it has a small time-scale to get a lot of work done. In the UK this is a far greater issue because of the size and complexity of the UK insurance industry,” he says.
Portsmouth adds appropriate IT solutions will help - but these take time to implement: “Insurers are grappling with a less than well-defined end result.
“They are then trying to provide a robust and integrated data solution if possible, but are struggling with the design phase because of the need for flexibility for ad hoc regulatory and management reporting – as well as the quarterly reporting required.”
He says uncertainly over implementation also has created an element of inertia.
“The incredibly long process will have taken nearly seven years to complete from publication of the Solvency II Directive in late 2009 until implementation on 1 January 2016.”
IT problems have dogged the insurance industry for decades and the fact this is cited as causing concerns when it comes to Solvency II is no surprise. As Mike Wilkinson, Solvency II initiative lead for consultants at Towers Watson, says: “The reporting element – namely Pillar 3 – is the least developed and was also one of the first to be put on hold because of earlier delays with Solvency II.”
He continues: “The IT issue is a big challenge – a lot of insurers still have legacy systems with different data sets, added to this is the need to produce numbers quickly – this is not going to be easy if there is reliance on manual processes. But it’s encouraging that there is a lot of work going on now, not least to get interim numbers ready by 2015.”
Kim Durniat, partner at Barnett Waddingham, says: “I’d agree reporting is the most challenging area and, when it comes to IT, there are around 20 packages that may be able to help [insurers] do the job. [Capabilities] and cost vary a lot so it is not always an easy decision, even though the insurer may be under pressure and will be required to report quarterly under Solvency II.”
Pillar 2 may not be plain sailing either. While some 25% of insurers said they had designed or selected applications to meet Pillar 3 requirements according to EY, 66% said data and systems are not designed to support own risk and solvency assessment evaluations – a key element of Pillar 2 – beyond normal reporting cycles.
Firms will need to define how they create value for the various stakeholders and show they embed risk management into their governance and decision-making processes as part of the ORSA.
This requires a joined-up approach across the company and its purpose is to help make sound strategic decisions. Bonnard says: “There is work to be done across the board – not just for smaller insurers. One repeated theme we found in this year’s survey relates to Pillar 2 and risk management.
“Insurers may well have invested a lot of time into policies and procedures but have not properly tested these. There needs to be better checking – and this is not something that can be done in five minutes.”
Noleen John, consultant with Norton Rose Fulbright, emphasises that Solvency II’s reporting requirements are going to mean a culture shift. “It’s not just about numbers, there needs to be a lot more narrative and so, of course, a great deal of care about what is supplied. Equally, it is about the board being fully aware of governance requirements.
“This is something the European Insurance and Occupational Pensions Authority has emphasised. Previously, insurers will have delegated reporting work to committees – but they can no longer rubber stamp data.
“Even if they are delegating, they need to understand information and in some cases, this is going to require board members upskilling. Likewise, when it comes to having opted for an internal model, a partial model or the standard formula, they need to know how it has been put together,” warns John.
In addition, Neil Coulson, partner at PKF Littlejohn, comments: “Under Solvency II, insurers will need to report every investment, as banks do. This is going to mean more work for insurers, internal auditors and investment managers. It is going to mean a fair bit of evolution.”
He continues that smaller insurers are requiring the most support, but says certainly in terms of the UK, most should achieve compliance. “The PRA is a tough regulator, but also it wants to see insurers able to follow the rules. This is why some insurers may have dropped plans for internal models - it will put them in an easier position if they follow the standard formula.
“The message is smaller insurers should follow the spirit of Solvency II and there will be some pragmatism – although at the same time, there is no way the regulator will be seen as lax.”
Coulson’s view is backed up by the EY survey, which said the proportion of insurers planning to use partial internal models has declined since last year. Partial internal models have shown the most noticeable reduction, and companies adopting full internal models – notably the larger insurers – are more likely to be continuing with their plans.
There is no doubt regulators are quick to criticise insurers if they fail to meet required standards, but are regulators showing they are up to the task? The EY survey said while some European insurers believe the frequency of interaction with regulators is adequate, 79% said they are not satisfied in terms of support in the interpretation of regulatory requirements.
And some 75% said they are not satisfied in terms of the amount and quality of feedback on company-specific implementations, which EY said could reflect the fact that supervisors are understaffed as they cope with the new regulations.
Durniat comments: “There is some frustration that much of the focus has been on large insurers. We are aware of some insurers that have put in a lot of work and have not received satisfactory feedback – which is not helpful when they are trying to achieve compliance. This may be particularly important for those going down the internal model route. There needs to be a more interactive process.”
Meanwhile, Portsmouth adds: “It is not so much dissatisfaction with the regulators perhaps as dissatisfaction with the overall EU political process. The EU consists of 28 different states, each with differing insurance industries, and imposing a common set of standards across such a large space was always going to be extremely difficult.”
Solvency II is a massive undertaking, but this time, it seems the new law is finally on its way, with the commission stating that the dates were being moved to January 2016 “for the last time.” Insurers, it seems, now know that for better or worse, this is a change that is coming.
- 2018 Insurance Marketing & PR Awards: Full list of winners
- Marsh's JLT deal 'could drive further M&A'
- Marsh group buys JLT for $5.6bn
- Axa sees huge spike in cavity wall installation claims
- RSA's Carolyn Mackenzie on the delicate balance struck by whiplash reforms
- Allianz splashes out on Olympics sponsorship
- Police called to Brolly offices after overnight break in