The prudential rules applicable to most insurers and reinsurers throughout the European Economic Area are being rewritten. These new rules, referred to as Solvency II, will take effect from 31 October 2012. Currently there is very little grandfathering or transitional relief within these rules, though this may change. The main aims of the new rules are to move to a risk-based capital adequacy regime and to generally harmonise the rules throughout Europe.
The Solvency II rules fall into three categories, which are called "pillars":
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Pillar 1 – capital adequacy
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Pillar 2 – governance and risk management
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Pillar 3 – regulatory reporting and public disclosure
The rules in Pillars 2 and 3 are often referred to collectively as the Pillar 5 rules (i.e., 2 plus 3).
These rules are being developed in accordance with the Lamfalussy process. The first level of this process was completed in 2009, with the passage of the Solvency II Directive (2009/138/EC). The Directive sets out a framework for the new regime and specifies a commencement date of 31 October 2012.
Detailed implementing measures (constituting level 2 of the Lamfalussy process) have been advised on by CEIOPS (the Committee of European Insurance and Occupational Pensions Supervisors) and are due to be adopted by the European Commission in 2011. Details of the European Commission’s proposals in this regard are due to be released later this year. Guidance on these implementing measures (constituting level 3 of the Lamfalussy process) will emerge this year and next.
Various issues of practical relevance have arisen in the context of CEIOPS’s advice on the level 2 implementing measures. An example is the high standards of loss absorption and subordination proposed by CEIOPS for Tier 1 own funds, coupled with the current lack of grandfathering relief for existing Tier 1 instruments. Another example is the limited applicability of an illiquidity premium in valuing annuity liabilities, which is a particular issue for UK annuity providers and the wider market for sterling-denominated corporate bonds in which such annuity providers typically invest.
These and other issues have created significant uncertainty for European insurers and reinsurers (as well as for the banks who service them). We have been involved in lobbying efforts in relation to Solvency II and have been actively discussing the reforms with various clients. We have also published a number of articles in our client newsletter Insurance Update.
Contacts
London
Duncan Barber
Partner +44 207 456 3356
duncan.barber@linklaters.com
Victoria Sander
Partner +44 207 456 3395
victoria.sander@linklaters.com
Luxembourg
Marc Loesch
Partner +35 22608 8270
marc.loesch@linklaters.com
Munich
Wolfgang Krauel
Partner +49 8941 808 326
wolfgang.krauel@linklaters.com
Frankfurt
Andreas Steck
Partner +49 6971 003 416
andreas.steck@linklaters.com
