Insurance accounting concerns seen in Solvency II advice call
BRUSSELS, February 23 - Concern that global accounting rule-makers won't be able to agree a rule for valuing insurance contracts on time, was reflected today in a call for advice by the European Commission on aspects of the risk-focused Solvency II project for making Europe's insurance industry safer.
The Brussels-based Commission, which is the European Union's executive arm and responsible for initiating financial regulation, asked for solutions to be proposed for the accounting treatment of items in the Solvency II capital requirements that might not fit with rules devised by the International Accounting Standards Board (IASB).
The IASB is the London-based accounting rule-maker that's still working on a rule for valuing insurance contracts, the insurance policies that make up the bulk of insurer liabilities. Some accounting experts believe the already delayed IASB project won't produce a final standard before the end of the decade (see the current February 2005 issue of Global Risk Regulator newsletter).
The Commission had originally hoped that the IASB would come up with a solution that would provide a benchmark for Solvency II. But it looks increasingly likely that the Commission staff will have to develop the accounting aspects of Solvency II internally and hope that these will more or less accord with the IASB's eventual decision.
The Commission said a new fundamental discussion of the accounting principles is necessary in the third and final wave of calls for advice on Solvency II which it issued today. The call is made to the Frankfurt-based Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), the grouping of insurance supervisors from the 25 member states of the European Union that advises the Commission on the details of the design and implementation of Solvency II.
The third wave of advice calls covers the elements making up capital, the independence of supervisors and cooperation between them. Questions also relate to procyclicality, small to medium sized insurers and so-called pillar 3 issues.
The planned Solvency II regime is modelled on the three-pillar structure of capital requirements (pillar 1), supervisory (pillar 2) and market discipline (pillar 3) embodied in the Basel II capital adequacy rules for bolstering the solvency of the world's banking system, but adjusted for the different circumstances of insurers. Pillar 3 aims to improve the action of market discipline on firms by getting them to give more information about their risk management practices and systems.
The two previous calls for advice focused on pillar 1 and pillar 2 issues.
In January the Commission decided to postpone by a year to end-2007 the issue of a draft framework Solvency II directive (law), which would define the general principles of the regime. Some industry analysts believe that the scale of the Solvency II project means a draft directive is in fact unlikely before end-2007.
The Commission plans to issue a new roadmap for the development of Solvency II in March in readiness for the April meeting of the Insurance Committee, which comprises regulators and government officials from the EU member nations.
(Draft Specific Calls for Advice from CEIOPS (Third Wave) - is available on http://europa.eu.int/comm/internal_market/insurance/solvency/solvency2-workpapers_en.htm)
David Keefe (dkeefe@globalriskregulator.com)
