EIOPA issued its first set of draft Solvency II Guidelines in June this year. The Guidelines are set out in five papers and include around 500 individual guidelines.
Pillar 1: Technical provisions (99 Guidelines)
The guidelines cover a wide range of areas, including contract boundaries, data quality, segmentation and unbundling, assumptions, calculation methodologies and validation. EIOPA provide helpful guidance and examples, but most of the material is not new. There are areas where further clarification will be required, for example the derivation of the discount rate curve. Notwithstanding this, these Guidelines should prevent the need for significant reworking.
Areas that we found particularly interesting are:
Pillar 1: Own Funds (56 Guidelines)
The guidelines cover four aspects of own funds: ancillary own funds, classification, ring-fenced funds and the treatment of related undertakings, including participations. Taken together with the draft delegated acts, there is little new in the Guidelines.
Areas that we found particularly helpful are:
Some firms may find the need to identify the effects of non-diversification in their reporting of the SCR by risk modules challenging.
Pillar 1: Standard Formula SCR (115 Guidelines)
The guidelines in this area cover a range of items: application of the look-through approach, basis risk, outwards reinsurance arrangements (non-life), market and counterparty risk, underwriting risk modules, loss-absorbing capacity (LAC) of technical provisions and deferred taxes and finally the use of undertaking-specific parameters (USP). Much of the new material relates to non-life firms.
Areas that we found particularly helpful are:
Pillar 1: Groups (36 Guidelines)
The guidelines cover: the scope of the group, group solvency calculation levels, calculation methodology, availability of group own funds, minimum group SCR (Accounting consolidation basis) and application of group capital add-ons.
There are some very significant changes introduced by the Guidelines that will affect firms’ approach to the group requirements. Whilst some offer a pragmatic solution, others appear to introduce further uncertainty.The most significant points we noted are as follows:
It is worth noting that there is an explicit requirement introduced for group instructions and guidance to be shared and for ensuring compliance with these, as well as a requirement to include an assessment of the non-available own funds for all the undertakings included in the calculation of the group solvency, together with an explanation of the adjustments made, within the group regular
Most of the Guidelines are conversions of the preparatory phase guidelines and EIOPA have helpfully highlighted material that is new, with just 10 new guidelines. The majority of changes relate to the provision of more clarity regarding the use of a group internal model by individual entities within the group. Generally, the guidelines provide helpful practical details on how to meet the requirements.
Areas that we highlight are:
The ORSA (own risks and solvency assessment) elements of this paper replicate almost entirely the preparatory phase guidelines, with the exclusion of material that has no relevance outside the preparatory phase. The system of governance section is a mix of preparatory phase guidelines and new material (28 new Guidelines plus some additions into others).
Key elements of the new governance Guidelines are:
The aim of this paper is to ensure that all NCAs adopt a risk-based, prospective and proportionate approach to supervision. There has been no public guidance in this area previously. The guidance is quite high level and unlikely to offer many surprises to the NCAs.
Whilst this paper is aimed at the national competent authorities (NCAs), firms may find the insights into the supervisory processes helpful, although it should be noted that there is a significant amount of supervisory discretion. However, probably the most important thing for firms to consider is how they will handle information requests from the various NCAs and ensure that they can respond on a timely basis and that there is consistency of approach throughout the group.
The three required elements of the supervisory review process, which should be applied consistently (subject to the proportionality principle and supervisory discretion dependent on the perceived risks) are as follows, and there should be effective communication, both with the authorised firm or head of the insurance group and fellow members of the college of supervisors:
This paper will only apply where the Commission has not decided either way on the equivalence of the country concerned and a group supervisor is undertaking its own equivalence assessment, either on its own initiative or at the request of the firm/group. This relates to all three aspects of equivalence (reinsurance placed (Article 172), inclusion of a non-EEA insurance entity within a group solvency calculation on a local basis (Article 227) and overall group supervision (Article 260).
Most of the paper comprises the technical aspects that need to be completed to support the Article 227 and 260 assessments, including the questionnaires to be completed by the relevant third country supervisory authority. These aim to ensure consistency with the process adopted for the Commission assessments. The process involves both communication with EIOPA and other NCA, since once a group supervisor reaches a determination on the equivalence status of a third country regime, it effectively becomes binding on all other NCA. For this reason, the assessment must be undertaken in relation to the system as a whole and other NCA have the ability to object to the conclusion reached.
Positive equivalence assessments will need to be reviewed at least every three years or upon significant changes in the local regulatory regime.
The paper appears to only deal with ‘full’ equivalence assessments as it states that proposed changes to that country’s supervisory regime cannot be taken into account in the equivalence assessment process until they are implemented. This suggests there may be a further paper to come dealing with the temporary and provisional equivalence transitional measures introduced through the Omnibus 2 amendments.
EIOPA’s comment that the ‘active cooperation of the third country supervisor is determinative’ in assessing group equivalence, together with an assessment process will take many months and could easily extend to a year or more, suggests that we will see very few NCA assessments performed.