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FS Reg S gulato Ce ory entre of Ex xcellen nce 20 Jan 0 nuary 2011

Omnibu II Directive: The E O us Europea Com an mmission publi ishes dr raft amendm a ments to the Solvency II Dir y rective
Wh is the issue? hat
On 19 January 201 a provisiona version of th draft text of the Omnibus II Directive was published 9 11 al he f s w d. This directive will, if adopted, am mend the Solv vency II Direct tive. A summa of Omnibus II’s more ary signif ficant proposa is set out below. als

Key messa y ages
Imp plementa ation date e
As wi idely anticipat a two mon delay to the ted nth imple ementation da of Solvency II is propose so ate y ed that i will now com into force o 1 January it me on y 2013 3.

Tra ansitiona measur al res
Omn nibus II propos a number o areas where the ses of e European Commis ssion (‘the Com mmission’) ma ay adopt transitional measures and sets out the d imum duration of those tran n nsitional meas sures. maxi Omn nibus II makes it clear that th actual time s he e perio selected by the Commissi for any od ion trans sitional may be for a lesser p e period than th he maxi imum permitte Any transi ed. itional requi irements shou be at least equivalent to the uld t requi irements unde existing (‘So er olvency I’) insur rance and rein nsurance direc ctives and shou uld encou urage insurers to move towa s ards complian nce with the full Solven II requirem ncy ments as soon as n possi ible. The m more significa areas wher it is propose ant re ed that t transitional m measures may b introduced are be summ marised below w: • Eq quivalence – f a period of up to 5 years the for f Co ommission ma on a case b case basis, allow ay, by a th hird country su upervisory reg gimes to be tre eated as ‘equivalent’ w s whilst they ada and imple apt ement a solvency regim that would fully satisfy th me d he eq quivalence crit teria.

• Sy ystems and po olicy regarding reporting to g su upervisors – fo a period of up to 3 years1 or in nsurers may be permitted to continue to m e o meet re equirements a least as strin at ngent as those un nder Solvency I relating to production of y p ac ccounts and periodic submi ission of return ns ra ather than hav ving to apply Solvency II’s S re equirements regarding syste ems, structure es an policies ove supervisory reporting. nd er y • G Governance – f a period of up to 3 years for f in nsurers may be permitted to continue to m e o meet re equirements a least as strin at ngent as those un nder Solvency I regarding systems of y go overnance rath than havin to apply her ng So olvency II’s go overnance requirements. • Pu ublic reportin - for a period of up to 3 ye ng ears in nsurers may be exempted from publishing a e g fu Solvency an Financial Condition Report ull nd C bu as a minim ut, mum, will be re equired to pub blish a ‘high level sum mmary’. • V Valuation of assets and liabil lities – for a pe eriod of up to 10 year insurers ma be permitted to f rs ay co ontinue to valu specified as ue ssets and/or lia abilities in acc cordance with the local rules that ex xisted at 31 De ecember 2012 rather than h having to apply Solven II’s valuation requirements. o ncy • Calculation of t technical prov visions - for a pe eriod of up to 10 years insur rers may be pe ermitted to co ontinue to mee conditions a et at le east as stringen as those tha applied und nt at der So olvency I rega arding the calc culation of te echnical provis sions rather th having to han ap pply Solvency II’s requirements.
Or p possibly 5 years. The draft text is inconsistent o this . i on point t.
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Breaking News FS Regulatory Centre of Excellence 20 January 2011

• Own funds – for a period of up to 10 years insurers may be permitted to continue to meet conditions at least as stringent as those that applied under Solvency I regarding the classification of own funds rather than having to apply Solvency II’s requirements on the tiering of own funds. • Solvency Capital Requirement (SCR) – for a period of up to 10 years insurers may be permitted to calculate a ‘transitional SCR’ with modified stresses, scenarios, correlation coefficients and parameters provided that the ‘transitional SCR’ is no lower than the sum of the Minimum Capital Requirement (MCR) and 50% of the difference between the SCR and the MCR. The transitional measures are summarised in more detail in the Appendix below.

The Omnibus II Directive will provide a framework of the areas where transitional arrangements will be available, the maximum periods that the transitional arrangements will apply for and the minimum requirements that will have to be met during the transitional period. However, the actual transitional requirements and their duration will be determined in delegated acts. It is expected that draft delegated acts will be published for consultation in June 2011 and are expected to be finalised by the end of 2011. As a result, the expected impact of the transitional arrangements will not be clear until mid-2011 and are not expected to be known with certainty until the end of the year. Finally, it is worth noting that as the transitional arrangements are being specified in delegated acts they will be EU-wide in nature and so it is expected that the nature and duration of the transitional arrangements will be consistent across all Member States.

EIOPA’s responsibilities
Omnibus II clarifies the areas in which the European Insurance and Occupational Pensions Authority (EIOPA) will be tasked with developing draft binding technical standards for submission to the Commission by 31 December 2011. In addition Omnibus II proposes charging EIOPA with certain other responsibilities such as: • Resolving disagreements between supervisors in areas such as the approval of applications to use an internal model at group and subsidiary levels where Solvency II provides for joint decisions to be made by national supervisors. EIOPA’s role will be to mediate between conflicting views of supervisors rather than overruling their judgement. • Publishing the relevant risk-free interest rate structures including an illiquidity premium in periods of stressed liquidity. • Publishing certain inputs to the standard formula SCR calculation in order to achieve harmonisation of approach. • Determining the conditions that constitute an ‘exceptional fall in the financial markets’ for the purpose of determining when an extended recovery period following a breach of SCR is permitted. ‘From Regulation to Supervision’, EIOPA’s recently published Solvency II medium term work plan sets out EIOPA’s planned activities over the coming years including plans for the drafting of the binding technical standards proposed by Omnibus II.2

Am I affected?
Insurers that fall under the scope of the Solvency II Directive will be affected by amendments introduced in the Omnibus II Directive.

What do I need to do?
Insurers might wish to consider the impact of the proposed amendments on their Solvency II implementation plans. In considering the potential impact of these proposals it is important to bear in mind that the draft Omnibus II Directive sets out the maximum transitional periods that the Commission will be able to adopt. The Commission will determine the actual period for each transitional measure (which may well be shorter than the maximum) taking into account how long it is expected insurers will need to prepare to apply Solvency II’s full requirements. As indicated above, the impact of transitional arrangements on implementation plans will not be clear until delegated acts are published in the second half of 2011.

Contacts
If you would like to discuss the content of this Breaking News in more detail please contact:
Paul E Clarke Charles Garnsworthy Jim Bichard Mike Vickery 020 7804 4469 020 7804 4147 020 7804 3792 011 7923 4222 paul.e.clarke@uk.pwc.com charles.e.garnsworthy@uk.pwc.com jim.bichard@uk.pwc.com mike.p.vickery@uk.pwc.com

What next?
The draft text of the Directive will be considered for approval at the European Council and European Parliament. When approved, the amendments will be incorporated into the Solvency II Directive which will be effective from 1 January 2013.

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https://eiopa.europa.eu/fileadmin/tx_dam/files/aboutceiops/WorkinP rogress/SolvencyII-Medium-Term-Work-Plan-2011-2014.pdf

Breaking News FS Regulatory Centre of Excellence 20 January 2011

Appendix – Summary of transitional measures to be included in the Solvency II directive
Area Solvency II Requirements which may be disapplied Directive article Requirement to have appropriate systems and structures in place to fulfil the requirements in respect of reporting to supervisors as well as a written policy, approved by the administrative, management or supervisory body of the insurance or reinsurance undertaking, ensuring the ongoing appropriateness of the information submitted. Requirement for effective system of governance which provides for sound and prudent management. Requirement for written policies in relation to at least risk management, internal control, internal audit and, where relevant, outsourcing. Requirement to publish a Solvency and Financial Condition Report (SFCR). Requirement for valuation based on arm’s length transaction between knowledgeable willing parties. Maximum duration 3 or 5 years (inconsistency in draft Omnibus II text) 3 years Minimum conditions to be met in transitional period The transitional requirements must comply at least with the laws, regulations and administrative provisions relating to production of accounts and periodic submission of returns that exist under the Solvency I Directives. The transitional requirements must comply at least with the laws, regulations and administrative provisions related to the system of governance that exist under the Solvency I Directives. Systems and policy 35(5) and 254(2) regarding reporting to supervisors Governance 41(1) and 41(3)

Public reporting

51(1) and 256(1)

3 years

As a minimum, a ‘high level summary’ of the information the Solvency II Directive would otherwise require to be in the SFCR must be published. The transitional valuation requirements must comply at least with the Member State's laws, regulations and administrative provisions for valuation of such assets and liabilities which were applicable on 31 December 2012. The transitional requirements must comply at least with the laws, regulations and administrative provisions related to the calculation of technical provisions that exist under the Solvency I Directives.

Valuation of assets 75(1) and liabilities

10 years

Calculation of technical provisions

76(2), 76(3) and 76(5)

Requirements for technical provisions to: • correspond to the amount insurers would have to transfer their obligations immediately to another insurer; • be calculated making use of and being consistent with information provided by the financial markets and generally available data on underwriting risks; • be calculated as a best estimate plus a risk margin; • be calculated by internal processes and procedures which ensure the appropriateness, completeness and accuracy of the data used; • comply with specified implementing measures.

10 years

Tiering of own funds

94

Criteria by which own funds are classified into tiers 1, 2 and 3.

10 years

The transitional requirements must comply at least with the laws, regulations and administrative provisions relating to the classification of own fund items that exist under the Solvency I Directives.

Breaking News FS Regulatory Centre of Excellence 20 January 2011
Area SCR Solvency II Requirements which may be disapplied Directive article Maximum duration Minimum conditions to be met in transitional period The calculation of the ‘transitional SCR’ may include modifications to the stresses, scenarios, correlation coefficients and parameters of the SCR standard formula that would otherwise apply. Insurers must comply with a transitional SCR that is no higher than the SCR and no lower than the sum of the MCR and 50% of the difference between the SCR and the MCR. Where a transitional SCR is applied then need for any capital add-on must instead take into account the assumptions underlying the transitional SCR. The calculation of group own funds and group SCR must be calculated in accordance with the transitional provisions adopted for the tiering of own funds and the calculation of a transitional SCR at a solo level. The eligible group own funds covering the transitional group SCR must be available in the group. The conditions to be met by the third country will be specified in delegated acts and may include: • commitments given by the third country supervisory authority; • the third countries convergence to an equivalent regime over a period of time; • the existing or intended content of the regime; and • matters of cooperation, exchange of information and professional secrecy obligations. The decisions will be made on a case by case basis and will be reviewed regularly.

100 (paragraph 1), Requirement to hold own funds to cover the SCR; requirement for SCR 10 years 101(3), 103 and to be calibrated to a 99.5% Value At Risk (VAR) over a one year period; 104 requirement to calculate SCR at least annually (and to update it without delay if risk profile changes); prescribed structure of the Basic SCR within the standard formula. 37(1)(a) and 37(2) Imposition of capital add-on when standard formula SCR does not capture risk profile. Requirement for capital add-on to be calibrated to a 99.5% VAR. 218(2) - (3) and 213(2)(c) Requirement for insurance groups headed in the EEA and in nonequivalent third countries to maintain own funds at least equal to the group SCR. 10 years

Group SCR

Equivalence of third countries

172(3) & 134(1), 227(1) and 261(1)

The criteria by which equivalence is assessed in respect of: • the group supervisory regime of a third country; • the solvency regime of a third country applied to both insurance and reinsurance activities; • the solvency regime of a third country applied to reinsurance activities only.

5 years

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