Insurance updates: ESAs Joint Committee, G-SIIs, PRA and more


EIOPA publishes update on Guidelines and Submission of Information to NCAs: On 18 August, the European Insurance & Occupational Pensions Authority (EIOPA) published updated information concerning the guidelines on submission of information to the National Competent Authorities (NCAs) to support the implementation by insurance and reinsurance undertakings of the Solvency II Directive.

EBA, ESMA and EIOPA release joint consultation paper on risk concentration: The Joint Committee of the three European Supervisory Authorities (ESAs) launched a consultation on 24 July on draft RTS (Regulatory Technical Standards) on risk concentration and intra-group transactions within financial conglomerates. The technical standards are aimed at enhancing supervisory consistency in the application of the Financial Conglomerates Directive (FICOD). The objective of the draft RTS is to clarify which risk concentrations and intra-group transactions within a financial conglomerate should be considered as significant. In addition, the RTS provide some supervisory measures for coordinators and other relevant competent authorities when identifying types of significant risk concentration and intra-group transactions, their associated thresholds and reports.

Basic Capital Requirements for G-SIIs: On 9 July, the International Association of Insurance Supervisors (IAIS) issued the second public consultation document regarding the development of global Basic Capital Requirements (BCR) for Global Systemically Important Insurers (G-SIIs). The first consultation looked for feedback on design possibilities for the development of the BCR, while the second will allow the IAIS to gain input on a specific proposal to facilitate the final design and calibration of the BCR. The requirements are expected to apply from 2015. The latest consultation ended on 8 August. The BCR proposal, which is expected to be delivered to the G20 summit in November, includes the following definition of BCR ratio:

  • Qualifying capital resources: classified as either core or additional capital. The IAIS is still considering whether one or both categories will be assessed as far as compliance with the BCR is concerned. In the meantime, the BCR relies on the proposed ComFrame definition for core (equity and perpetual non-cumulative instruments) and additional (min. five year subordinated instruments with maturity lock-in or 20% p.a. amortisation in the final five years) capital resources.
  • Required capital: calculated on a consolidated group-wide basis and determined using a factor-based approach (15 factors applying to defined segments).
  • The development of the BCR is part of the IAIS’s project to develop group-wide global capital standards. It will be followed by the development of Higher Loss Absorbency requirements (HLA, which will expand on the BCR) to apply to G-SIIs, due to be completed by the end of 2015. The final step will be the development of a risk-based group-wide global Insurance Capital Standard (ICS) to be applied to Internationally Active Insurance Groups (IAIGs) from 2019.

United Kingdom

PRA publishes update on Solvency II implementation: On 29 August, the UK Prudential Regulation Authority (PRA) published an update on implementation of the Solvency II Directive. The update provides information on the relationship between the risk margin and the calibration of non-hedgeable risks, and provides clarity on assessing credit risk for matching adjustment portfolios.

PRA publishes supervisory statement on valuation risks for insurers: On 22 August, the PRA published a supervisory statement setting out its expectations of insurance firms in relation to rules already in place on the valuation of financial assets. The statement applies to all PRA-authorised insurers and may also be relevant to insurance holding companies and other entities in the same group. The statement is equally relevant to life and general insurers, whether they are mutuals or proprietary companies. The statement intends to reduce the risk to the PRA’s objectives caused by intended or unintended misstatement of values and hence misstatement of capital resources, by clarifying the PRA’s existing expectations. The statement aims to clarify the PRA’s expectations and does not represent any form of policy change. Further clarifications or expectations on the topic may be added to the statement in future.

PRA release final supervisory statement on the use of subordinated guarantees: the same day, the PRA released the final supervisory statement on the use of subordinated guarantees and the quality of capital for insurers following the consultation paper released on 30 May (see previous issue). The statement has been subject to a public consultation, which closed on 11 July, and reflects feedback received by the PRA. Some feedback suggested alternative wording to make the statement clearer and these suggestions were accepted where clarity would be improved. There is no change in policy intent following the consultation.

PRA publishes directors’ update: On 19 August, the PRA published an update letter to all Solvency II-affected life and general insurers. The update attaches a timetable of activity for the period August to December 2014 and includes more information on when the PRA will be communicating with firms. The update letter reminds firms that the PRA has issued its third consultation paper on Solvency II (CP16/14) (see below for more) and that the closing date for responses is 7 November. The letter also announces the PRA’s intention to conduct a pre-application process for the matching adjustment approval process in Q1 2015. Further information on this process, including timings and participation details, will follow in Q4.

PRA consults on the transposition of Solvency II: On 11 August, the PRA published a consultation paper that sets out proposed changes to the PRA’s rules to implement the Solvency II Directive as amended by the Omnibus II Directive (OMD II). It also contains draft supervisory statements that set out the PRA’s expectations of firms and what firms may expect of the PRA. CP16/14 is the third consultation on the transposition of Solvency II and consults on rules to transpose the amendments introduced by OMD II and on the implementation of areas deferred from the previous two CPs issued by the Financial Services Authority. The PRA is required to transpose the Solvency II Directive by 31 March 2015, while the Solvency II regime will apply to all affected firms from 1 January 2016. This consultation closes on 7 November.

  • The document sets out how regulatory capital items that could be used to meet capital requirements before 1 January 2016, but that do not meet the criteria for available basic own funds, will be treated under the Solvency II transitional measures for own funds, for up to 10 years from 1 January 2016. Upper Tier 2 GENPRU instruments will be grandfathered as restricted Tier 1.
  • In relation to paid-in ordinary share capital, matters such as the absence of mandatory fixed charges or encumbrances will be a characteristic until such time as a dividend is declared but the shares would cease to meet this criterion unless there is the ability to cancel a dividend after this point but prior to payment.

HM Treasury launches short consultation on Solvency II implementation: In addition to the PRA initiative, the HM Treasury released on 6 August a short consultation (Solvency II: resolving the remaining policy issues for UK transposition) intended to complete the consultative process on the UK transposition of Solvency II, which began in 2011. It seeks views on two policy issues. Firstly, on the use by undertakings of the volatility adjustment and whether it should be subject to prior approval by the PRA. Secondly, on the approach to be adopted in removing business permissions where an undertaking fails to meet the Minimum Capital Requirement. This consultation will run until 19 September. A further publication will take place later this year to include feedback on this consultation, an updated impact assessment and a final statutory instrument to be submitted for Parliamentary approval.

PRA publishes update on implementation of Solvency II: On 25 July, the PRA published an update to provide further clarity on progress towards the implementation of Solvency II. In the document, the regulator stated that it expects the Solvency II Delegated Acts and Implementing Technical Standards to include an availability assessment that requires the PRA to consider two types of restrictions: (1) the fungibility of the own fund items of related undertakings (i.e. whether they are dedicated to absorb only certain losses); and (2) the transferability of the own fund items of related undertakings. According to the PRA, some groups appear to have only considered the legal restrictions when providing information to the PRA on the availability of own funds at the group level. However, the PRA expects groups to consider both legal and regulatory restrictions when considering any limitations on availability. The authority expects this to be in line with the requirements to be set out in the Delegated Acts.