Regulator says 2010 date not unreasonable for Europe's Solvency II insurer rules
LONDON, March 9 - A 2010 date for the coming into effect of the Solvency II regime for making Europe's insurance industry safer is not an unreasonable target, a senior European Union regulator said today.
Karel Van Hulle, head of the European Commission's insurance and pensions unit, acknowledged the timetable pressures exerted on the development of the complex, risk-focused Solvency II project.
The recent one-year postponement to end-2006 of plans to issue a draft Solvency II framework directive, or law, has increased speculation that implementation could be many years away, and possibly well after 2010. The Brussels-based Commission, which as the EU's executive arm is responsible for initiating financial regulation in the 25-nation EU bloc, has never set a formal implementation date for Solvency II. Previous `pencilled-in' dates, including one envisaging a 2007 start-date, have slipped.
But Van Hulle, asked by delegates at a London insurance conference for his opinion on timing, said 2010 "wasn't too far out" of line with reasonable expectations.
Paul Sharma, head of banking, insurance and securities policy at Britain's principal financial sector watchdog, the Financial Services Authority (FSA), said he hoped implementation would be closer than 2010.
Van Hulle said it was quickly clear to him when he took over as unit head in November that plans to have a draft directive ready by the end of this year were too optimistic, given the amount of work involved. Solvency II is modelled on the three-pillar structure of capital requirements, supervisory review and market discipline embodied in the Basel II upgrade of international capital rules for banks. Basel II will begin to apply to all EU banks and investment firms from 2007 via the Capital Requirements Directive.
Van Hulle said a new roadmap for the Solvency II project would be published soon. October 2006 is the new planned date for the appearance of the draft directive, although if this were to slip it would not be disastrous. "We've got to get Solvency II right," he added.
He calculated there would be two years or so of negotiation over the draft, leading to a finalised directive in 2009, ready for implementation in 2010.
Nevertheless, some insurance industry analysts have said they believe a draft directive won't be ready until late 2007 (see Global Risk Regulator newsletter, February 2005).
Van Hulle said the Commission "can't postpone the accounting issues (in Solvency II) for the sake of a perfect regime," referring to the delay in developing a global accounting rule for valuing insurance contracts, the insurance policies that form the bulk of insurer liabilities. Insurance contract valuation plays a crucial role in determining the solvency ratios and capital requirements that insurers need to absorb losses from the risks they face.
Industry analysts have said they don't expect the International Accounting Standards Board (IASB), the London-based accounting rule-maker, to have an insurance contract rule ready before the end of the decade. Earlier hopes had been that an IASB rule would be the benchmark for Solvency II.
Van Hulle said the Commission is in talks with member states on a best way forward on the accounting impasse which would anticipate, if possible, the likely shape of an eventual IASB solution.
The FSA's Sharma noted that a so-called "total balance sheet approach", where total capital requirements are calculated and then offset where appropriate against accounting provisions, would be one way to go. The approach is something like what in effect will happen under Basel II, he said.
In a session on accounting IASB member Gilbert Gélard said the IASB was completely open minded on the best way to value insurance contracts and added nothing was likely to emerge before three years at the earliest.
"Measuring an insurance liability is the most difficult thing we've encountered in our lives," Gélard said of the IASB's labours.
"And we're not going to be driven by the regulators on this," he added.
But on a separate matter - the dispute over the fair value option in the IAS 39 rule on valuing financial assets and liabilities - Gélard said he hoped a key roundtable meeting next week will permit the IASB to finalise a restrictive form of the option.
The IASB has had to negotiate a path between some banking regulators, who fear the option could be abused by weak banks, and firms, among which insurers are prominent, who want unrestricted use in order to avoid distortions in their accounts.
A compromise worked out by IASB staff now seems acceptable to both sides of the argument and they will debate the issue at the March-16 London meeting.
Meanwhile, Association of British Insurers (ABI) director general Mary Francis warned the conference that if regulators get the Solvency II regime wrong, "we will yet again enter the all-too-familiar EU spiral of over-regulation, gold-plating and higher costs."
"My plea is that the (UK) government and the FSA work closely with the industry to avoid that." The ABI, which organised the conference, is the UK insurance industry's leading trade body.
Francis said the FSA had created for the UK "probably the most sophisticated system of (insurance) capital adequacy regulation in Europe."
FSA chief executive John Tiner said the agency's new individual capital adequacy standards for insurers provide a "helpful model for the European standard and we are committed to influencing the debate to see that this emerges from the Solvency II discussions."
David Keefe (dkeefe@globalriskregulator.com)
