The European Parliament yesterday passed the Omnibus II directive giving the European Union the authority to finalise the draft rules of Solvency II on insurance regulation and supervision.
Rules on the Omnibus II directive were agreed last year by European politicians. The Omnibus II directive, the legislation underpinning Solvency II, will introduce 'long-term guarantees' (LTG), which will adjust the current Solvency II framework to cope with 'artificial' volatility and the low-interest rate environment. This will also smooth the transition from the current Solvency I regime.
The directive also contains enhanced requirements for risk management, the supervisory review process, public disclosure and the possibility to review LTG in order to ensure prudence and transparency.
This means that the European Insurance and Occupational Pensions Authority can now consult on the detailed implementing measures.
Michel Barnier, European Commissioner for internal market and services, said: 'The European Parliament has just taken a very important step towards the introduction of a modern and risk-based solvency regime for the insurance industry as of 1 January 2016, making it both safer and more competitive. This long-awaited and vital reform will finally become a reality.
'The commission is now preparing the next stage of implementation of Solvency II, which will be the adoption of a Commission Delegated Act containing a large number of detailed implementing rules planned for the summer this year.
'The European Insurance and Occupational Pensions Authority is also working on a package of Implementing Technical Standards that will ensure that everything will be ready for the application of Solvency II on 1 January 2016.'
Peter Ott, European head of Solvency II at KPMG, said: 'After so many delays in reaching political agreement on a modern, risk-based and transparent supervisory regime for insurers, we are very pleased to see this milestone successfully passed.
'The political certainty that has been given will mean that Solvency II will become a single prudential regulatory rulebook for all insurers operating in the European Economic Area. Work can now continue building on the framework established, knowing that it is finally a stable base to work from.'
Echoing Ott, Simon Sheaf, head of actuarial and risk at financial advisory firm Grant Thornton, said her welcomed the passing of Omnibus II.
'Inevitably, in order to reach agreement on Omnibus II, compromise was required between the varying interests of different member states. In some areas, these have resulted in deviations from the original intentions of Solvency II. Despite this, we fully support the efforts to move to a risk-based regulatory regime for European insurers,' Sheaf said.
Fitch Ratings added: 'There are still several elements to be finalised, which could have a significant impact on capital levels, but we expect these to be agreed in time for implementation.
'We understand that earlier industry concerns about the Solvency II treatment of long-term guarantee business, including annuities, have largely receded based on the latest draft of the rules. Legal & General is one of the insurers that stood to be most affected, given its sizable proportion of annuity business. Last week, L&G's Group CFO said the company expected its Solvency II capital surplus to be larger than under Solvency I.
'Although we believe Solvency II is on track for finalisation, we estimate that the elements still to be decided could affect the capital positions of some major insurers by several hundred million pounds. Notable examples include details around determining the discount rate to calculate insurers' reserves and capital requirements, and the choice of economic and demographic assumptions by insurers using an internal model for Solvency II - which will be subject to regulatory approval.
'However, we believe the insurers we rate have sufficient capital buffers to absorb the potential effects of this remaining uncertainty.'