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30th January 2013

EIOPA launches technical assessment of Solvency II long-term guarantee package

The European Insurance and Occupational Pensions Authority (EIOPA) has launched a technical assessment of the long-term guarantee(LTG) package agreed by the Trilogue parties(the European Parliament, the Council of the EU and the European Commission) in the context of the Omnibus II Directive negotiations. Its aim is to test various options contained in the Solvency II LTG measures in order to assess the effects that the implementation of such measures may have on: policyholders and beneficiaries, insurance and reinsurance undertakings, supervisory authorities and the financial system as a whole.
The assessment will focus on the evaluation of the following key features(individually and in combination): adapted relevant risk-free interest rate term structure(“Counter-cyclical Premium”); extrapolation; matching adjustment(“Classic” and “Extended”); transitional measures; and extension of the “Recovery Period”.
In providing quantitative data for the purposes of this assessment, insurance undertakings should follow the Technical Specifications published on Monday by EIOPA, available at
Insurance undertakings will have until 31st March to carry out their estimation of the impact of the measures covered in the LTGA. In the course of April and May, the data submitted by insurance undertakings will, first, be validated by the national competent authorities (NCAs) and, then, be analysed by EIOPA at the EU level. The report presenting the technical results of the LTGA exercise together with EIOPA’s conclusions is planned to be published in the second half of June.
The assessment covers life as well as non-life insurance companies in the different national markets. The sample captures a range of undertakings of diverse size and nature.
Gabriel Bernardino, chairman of EIOPA, said “EIOPA’s independent supervisory assessment will provide a reliable basis for an informed political decision on the long term guarantee measures to be included in Solvency II. It is essential for policyholder protection and financial stability that Solvency II appropriately reflects the long term financial position and risk exposure of insurance and reinsurance undertakings carrying out insurance business of a long-term nature.”
“The decision to carry out the assessment shows that legislators recognise that changes are needed to ensure that Solvency II measures the real risks in insurers’ long-term business,” said Olav Jones, deputy director general of Insurance Europe.
Insurers are able to take a long-term approach to investment because of the long-term protection, savings and pension products they provide to policyholders. This long-term approach allows the insurance industry to provide better returns to policyholders and can have an important impact on the nature of the risks faced by an insurance company. It also helps the insurance companies to fund growth and stability in Europe. Without such long-term investors the recent financial crisis would have been far worse.
It is crucial that Solvency II does not jeopardise insurers’ ability to maintain this function. Solvency II should recognise the impact different business models have on risk and take this into account in measuring insurers’ balance sheets and capital requirements. Achieving this will avoid Solvency II unnecessarily forcing the industry away from providing long-term guarantees and becoming more short-term in its investments.
If these seemingly technical details of the new regime are not correct, the impact on the European insurance industry, its clients and the economy would be severe.“Solvency II must not create unnecessary barriers to insurers providing guarantees for customers and investing long-term, not least because the insurance industry is by far the largest institutional investor in Europe, with over E7.7trn in assets.”
The trade assocition added that the timetable for the technical assessment will be challenging, since it runs for just nine weeks and coincides with companies’ busy reporting period. Insurance Europe and its member associations will encourage as many companies as possible to take part.
Peter Ott, European Head of Solvency II at KPMG, welcomed the launch of the study-but expressed concern over the timing of the exercise. "This will put a lot of pressure on resources for those insurers that are participating. Given the delays in issuing the full specifications, significant time will be spent in the first few weeks assessing the detail required before the numerical assessment can even commence.”
There are 13 scenarios set out in the study covering each of the areas being assessed and these are considered at three dates (31 December 2011, 2009 and 2004). The first part of the technical specifications was issued in October and revised shortly before Christmas. However the key elements relating to the calculation of insurance technical provisions and the capital required for the affected contracts was only launched on Monday.
Janine Hawes, insurance director at KPMG, comments “The late release of the full requirements has limited the amount of preparation that firms have been able to do in advance of today’s launch, so detailed planning now is likely to be the key to successfully completing both the study and the year-end accounts.
Completing all scenarios to the level required will require significant dedicated resources. Where firms have only limited resources available to support the work, they will need to determine how best to meet the requirements of the study. In some instances, they may decide to employ external resources to assist them, either directly in the study or to backfill other roles. Others may decide to adopt simplifications or perhaps not to cover every scenario required.
Simplifications or reduced participation levels will impact on the final results. If Solvency II is to end up in a position that is viable for the [UK] insurance market, then results need to be representative of the market. It is not clear that this will be the case if a range of potentially inconsistent approaches is adopted within a market. Firms will need to clearly articulate the approach taken and explain in the narrative responses the practical issues they encountered during the exercise as well as the solvency impacts of these. EIOPA will need as much information as possible to enable it to suggest a way forward.”
KPMG warns that the time required for EIOPA to produce its report could itself result in further delays to the Solvency II timeline.
Hawes concluded “The European Parliament plenary vote on Omnibus 2 was pushed back to accommodate this study and is currently scheduled for 10th June. However, it seems unrealistic to assume that a mutually acceptable solution to the long-term guarantees issues, as well as all remaining outstanding differences on Omnibus 2, will be fully resolved in the trilogue process before that date. We are expecting that this vote will be further delayed until after the summer recess, with a second ‘quick fix’ directive required to amend the implementation date.”