Last week Moody’s Investment Services went on record to say a ‘likely further delay’ of Solvency ll (the new risk based regime for European Insurers) will have ‘broadly negative implications’.
So what exactly is Solvency ll? Well to quote Charlie McCreevy, Internal Market and Services Commissioner at the launch of the Solvency ll draft Framework Directive:
This is an ambitious proposal that will completely overhaul the way we ensure the financial soundness of our insurers. We are setting a world-leading standard that requires insurers to focus on managing all the risks they face and enables them to operate much more efficiently
At the highest level, Solvency ll has a 3 pillar framework:
- Pillar 1
Contains two capital requirements, the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR). The MCR reflects an absolute minimum level of required capital below which supervisory action will automatically be triggered. The SCR represents additional capital to firms to absorb significant unforeseen losses.
- Pillar 2
Will focus on supervisory activities of regulators with the aim of identifying firms with a higher risk profile. Those firms may be required to hold capital at a higher level than the amount suggested by the SCR calculation and/or to take steps to reduce identified risks.
- Pillar 3
Requires disclosure of additional information that supervisors feel they need in order to perform their regulatory functions.
The European Commission had planned to implement Solvency ll from January 1st 2014, but delays in getting approval from the European Parliament have led to discussions about a postponement. EU lawmakers are holding a plenary vote on the so-called Omnibus ll Directive which includes a decision on the criteria for calculating capital requirements under the new legislation. As this vote has been delayed from November 20th this year until March 11th 2013 there is virtually unanimous agreement that this will delay the launch of Solvency ll – knocking it into 2015 if not beyond.
In the opinion of Moody’s Investment Services, this delay would defer a ‘stronger, credit-enhancing regulatory regime’ allowing insurers to ‘incur more risk than regulators would allow under the new regime’, favouring companies that are less advanced with the rules’ implementation.
‘A delay in planning because of a delay in the final rules’ should not be an option. A powerful and agile technical infrastructure will be essential to provide the framework for delivering the directive’s three pillars. This will be a challenge given that many Insurers have grown through mergers and acquisitions resulting in their operating across multiple applications with incompatible data management systems, often delivered by legacy technology.
We agree that any delay to implementation of wide-reaching legislation is never easy, as it leads to uncertainty and procrastination especially when requirements are complex, challenging and lack a clear implementation specification. However, even though the exact terms of the legislation and date of implementation are yet to be finalised, there is no doubt that Solvency ll will come to pass. Fundamentally the legislation is designed to drive a change in behaviour by placing risk based management at the heart of Insurance, and this includes having the infrastructure in place to support the largest ever regulatory change for insurance firms within Europe.
Total Systems recognised the need to support complex compliance requirements when designing its ‘bluescape’ software modules, and are confident of supporting a compliant platform for our clients.