Insights

On 13 November 2013, the European Trialogue, consisting of the European Commission, the European Parliament and the Council of the EU, struck a provisional agreement that paves the way for the long awaited introduction of the Solvency II Directive.

The biggest hurdle cleared was in relation to the amount of capital that (re)insurers must hold to meet long-term guarantees offered to policyholders (i.e. insurance products offering guaranteed returns over a long period of time). The European and Insurance Pensions Authority (“EIOPA”) had initially proposed certain long-term guarantee measurers which were met by strong opposition from the European insurance industry. Officials in Brussels have now agreed to adjust the current Solvency II framework to cope with “artificial” volatility and a low interest rate environment. In particular, the so-called “volatility adjustment”, which increases the discount rate applied to insurance liabilities in long-term guarantees from 20% to 65% of the portion of the spread that is not attributable to default risk, is aimed at reducing volatility of net assets in periods of market distress.

In addition, the new Solvency II regime is understood to include enhanced requirements for public disclosure, risk management, and the supervisory review process by EIOPA, in order to ensure further prudence and transparency. A phasing-in period of 16 years for existing insurance businesses to adjust from the Solvency I to Solvency II regime was also agreed upon by the European Trialogue.

The Solvency II Directive will now be subject to a final approval by the Council of the EU and a plenary vote by the European Parliament, currently expected to be held on 3 February 2014, before it can be implemented into European legislation. The expected timeline is for the Solvency II Directive to be fully operational from 1 January 2016, with transition into national regulation required by 31 March 2015.