Agreement on Solvency II Framework Directive reached

United Kingdom

The EU Presidency announced on 27 March that the political row that has stalled the completion of the Level One legislation for Solvency II was informally resolved on Thursday 26 March 2009. The legislation will now complete its passage through the European Parliament and Council, paving the way for the more detailed rules and regulations at Levels Two and Three. It is expected that the text of the Directive will be formally endorsed next week and that the European Parliament will put the Directive to a plenary vote on 22 April 2009. It is then likely that the Directive will be formally adopted during the Economic and Financial Affairs Council on 5 May 2009.

“Group support” abandoned

The price of achieving consensus on the Level One legislation for Solvency II was - as expected - the abandonment of the group support regime. This is a big disappointment for the major insurers, the CEA and the UK's ABI. The idea was also supported by the European Commission. It was to be the cornerstone of a major shift towards group level financial supervision, a policy that derived from the UK's Tiner review of insurance regulation. Group support would have permitted part of the regulatory capital requirement (the solvency capital requirement or SCR) of a subsidiary insurer to be met by a guarantee of support from the parent.

This would have required close cooperation between EU supervisors. It might have encouraged a move for the new European bodies now being developed following the de Larosière report recommendations last month, exercising a role as a supervisor of insurance groups in addition to the rule setting role that is now being discussed. If you would like to read our Law-Now on the de Larosière report please click here.

The tide turned against group support because too many countries feared a loss of control over foreign owned insurer subsidiaries. The Turner review, also raised concerns in the banking sector about too much emphasis on group level regulation of cross-border banks (although the risks in insurance are clearly different to the liquidity type issues that worried Lord Turner). Although the group support regime has been dismissed for now, there is always the possibility that it will be revisited but that will be many years away.

Agreement was reached on the other outstanding area – the inclusion of a counter-cyclical measure relating to insurer’s assets; the so called “duration approach” to equity risk is part of the broader drive to remove undesirable pro-cyclical effects from the regulatory regime (which is a major issue in the banking sector reforms). However, this approval is only to be available in relation to certain life insurance products.

If you would like to read our report on the progress of the rest of the Solvency II programme including the latest CEIOPS consultation on Level Two Implementing Measures, please click here.

Postscript - What is Solvency II?

Solvency II is the new European regime for the financial regulation of insurers and re-insurers that is due to replace the current European rules that are widely recognised as inadequate. The development of the Solvency II framework has been underway for several years and will not take effect for at least another three years.

Following the fall out from the Equitable Life crisis, the UK decided that it could not wait for Europe to agree the new regime. This is now seen as a wise decision as it allowed the FSA to introduce its enhanced and individual capital requirements ahead of the economic downturn. Current UK regulation therefore anticipates some of the techniques that are being developed within the Solvency II project.

If you are interested in the implications of Solvency II or in our training session for general counsel about Solvency II “What a Lawyer Needs to Know”, please contact Paul Edmondson.

To view our Solvency II Bulletin please click here.