Omnibus II marks the next major milestone in the development of Solvency II. This is the vehicle which changes the implementation date of the new insurance regulatory regime, which is being welcomed by the insurance industry. "A two month delay may not sound much, but by changing the date from 31 October 2012 to 1 January 2013, the majority of the European insurance industry will gain a year of private reporting to regulators, rather than their first disclosures being made publicly” said Janine Hawes, director in KPMG's Insurance practice
However, this new directive contains much more than a date change. The European regulatory system overall changed on 1 January this year, with new European bodies coming into existence. For insurance, this meant the creation of the European Insurance and Occupational Pensions Authority (EIOPA) to replace the Committee of Insurance and Occupational Pensions Supervisors (CEIOPS), which has been heavily involved in helping to craft the new Solvency II regime. But there are significant changes - EIOPA has much wider powers than CEIOPS had and Omnibus II gives clarity regarding its role, which includes the power to set binding technical standards and settle disagreements between regulators.
Omnibus II also confirms that EIOPA must develop the draft technical standards, including templates and structures for disclosures by the latest of 31 December 2011. Many will remain concerned that this gives insufficient time to enable systems to be developed to report the required information, especially where this covers all group activities, including non-insurance and non-European companies.
Perhaps the area that will be welcomed most by the industry is greater clarity on the areas where transitional measures are to be introduced. These cover a range of areas including those related to valuation, determination of own funds (capital) and capital requirements. Importantly, Omnibus II emphasises that transitional arrangements should not result in lower policyholder protection than currently exists. "This is not about delaying implementation” says Hawes, "but introducing a smoothing approach to enable insurers to manage the transition to the new regime more efficiently and giving insurers more chance to manage any increased capital needs arising from the new regime.”
One thing that is not clear though is the period over which these transitional arrangements will last. Omnibus II sets maximum transitional periods in a number of areas, ranging from 3 to 10 years, but recognises that the implementing legislation may result in shorter periods being applied.
Another area that is uncertain is how the transitional arrangements in respect of equivalence will work in respect of third country groups. "As we had anticipated, third country regulators will need to be able to demonstrate clearly their commitment to convergence of the current prudential regime to one equivalent to Solvency II before the transitional period expires,” said Hawes. However, she continued to explain that "in some instances, there may be no existing group regime in place, so it is difficult to see how supervisors can place reliance on the third country regime in the meantime. Alternative means will need to be found to ensure that group risk is appropriately monitored and managed to protect policyholders of European companies while the gap exists.” The maximum period for the groups transitional period is 5 years (which is the same for each of the equivalence rules).
Hawes also pointed out that the Commission will need to determine whether the qualifying conditions for a regime to fall within the transitional assessment have been met. "This will require input from EIOPA, which will have to build time for this as well as its current workload on the equivalence reviews of the Swiss, Bermuda and Japan (reinsurance only) regimes, on which it is due to report in September this year. We believe the US regime is likely to be one of the first regimes to be considered, given its work on groups as part of its Insurance Modernization Initiative, but it is unclear whether there will be sufficient resources to undertake many other assessments before the start of Solvency II. Insurance groups headed outside of Europe are still left with considerable uncertainty at this stage regarding exactly what rules they will be complying with on 1 January 2013.”