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The Actuary The magazine of the Institute & Faculty of Actuaries

Soapbox: Shirley Beglinger: Too slow a ride with Omnibus II

On 19 January 2011, the European Commission published its Omnibus II Directive. This weighty document waved a Eurocratic wand and transformed the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) into EIOPA - the European Insurance and Operational Pensions Authority. EIOPA will oversee national regulators’ implementation of Solvency II, combining central oversight with local expertise, thereby achieving consistent implementation across Europe.

EIOPA’s main goals are:

>> To better protect consumers - excuse me, we insurers didn’t require gazillion dollar bail-outs from our governments!

>> Ensure consistent and effective supervision across member states, taking into account the different nature of financial institutions - yeah, right...

>> Greater harmonisation - wince - and coherent application of rules - chuckle

>> Strengthen oversight of cross-border groups

>> Promote co-ordinated European supervisory response.

There is a six-member management board. The first chairman is Gabriel Bernadino, a Portuguese actuary with a strong pensions leaning. He chaired several of the groups drawing up Solvency II, so that may explain the heavy pensions bias in the legislation. His colleagues come from: Austria - proud owner of a budget-busting government pension scheme and almost no private sector pensions or independent non-life insurers; Denmark - ditto; Ireland - whose financial sector is doing famously well; Poland - no comment; Italy and the UK - represented by Hector Sants of the FSA, who has never publicly strayed too close to insurance.

To them will be entrusted the tasks of:

>> Setting binding technical standards

>> Mediating differences of opinion within colleges of local supervisors

>> Setting stress parameters for the standard formula calculation of the Solvency Capital Requirement (SCR)

>> Deciding what constitutes an ’exceptional fall in the markets‘ (insurers breaching the SCR after such a fall may be granted extra time to restore their SCR coverage)

>> Publishing data on capital add-ons at member state and aggregate level.

The directive also moves implementation from October 2012 to January 2013. This sounds like merely three months, but since implementation won’t be reviewed until the end of fiscal 2013, it is actually a 14-month extension.

Further still, Omnibus II goes on to propose transition periods for several fundamental pieces of Solvency II, including:

>> Valuation of assets and liabilities - 10 years

>> Ten years to make a choice of methods and assumptions to be applied for technical provisions, including the term structure for the relevant risk-free rate

>> Ten years for companies to get their capital up to the level required under the standard formula SCR calculation (tacit acknowledgement that standard formula SCR numbers are unrealistically high for many insurers within the EU)

>> Ten years to figure out how hybrid capital will be treated in the capital tiering

>> Five years for EIOPA to identify which non-EU countries’ supervisory regimes are ‘equivalent’ (meaning that insurers from those jurisdictions may transact business within the EU without submitting to the full gamut of Solvency II)

>> Five years for insurers to understand what exactly their supervisor will expect in terms of disclosure under Pillar 3 (this is welcome because, right now, the supervisors themselves don’t seem to know).

While these periods seem ridiculously long, the transition will likely go forward much faster. The Directive merely gives insurers breathing space - large swathes of the technical specifications won’t be published until mid-2012, so they would otherwise struggle to implement in time for the 2013 deadline. The gradual phasing in of asset/liability valuation also minimises the risk of disruption to capital markets: the new rules require steep capital underpinning for equities and long-dated debt, and capital markets could seize up if insurers all hastened to rejig their huge investment portfolios.

Perhaps EIOPA will use some of that time to design a standard model for non-life insurance that bears some resemblance to the real world in which we conduct our business because the current version sets out calibrations and correlations that would require non-life insurers to hold substantially more capital than is now the case.

Leaving aside concerns about the spurious precision of the 99.5% confidence interval, the treatment of non-proportional reinsurance - which treats risk mitigation as a function of the premium spend rather than as a function of the protection purchased - is simply unworkable.

Statistics suggest that only the top 20% of earners in the EU can afford personal pensions. This contrasts with the 80% who purchase non-life insurance products. If the capital rules go forward in their current form, the simple cost of capital will push the price of non-life insurance beyond the financial reach of the 80%. So it is to be hoped that EIOPA will use that long transition period to design something affordable for the majority as well as protective of the minority.

Shirley Beglinger is a director of Shires Partnership Ltd, a consultancy that specialises in insurance, reinsurance and risk management.