By Daniel Hunter
KPMG has warned that the insurance industry could face further delays to the Solvency II timeline after the launch of the long-term guarantees assessment impact study.
Following agreement of the terms of reference by the European Parliament, the Council and the Commission, European Insurance and Occupational Pensions Authority (‘EIOPA’) has launched the long-term guarantee impact study.
This study will test the application of Solvency II to products with attaching long-term guarantees. Although predominantly a life assurance issue, this also affects general insurance products that have similar features, and the study considers the application to both sectors.
Peter Ott, European Head of Solvency II at KPMG, welcomed the launch of the study - but expressed concern over the timing of the exercise.
“Nine weeks to complete such a critical study is not long, especially when that period coincides with the key financial reporting period," he said.
"This will put a lot of pressure on resources for those insurers that are participating. Given the delays in issuing the full specifications, significant time will be spent in the first few weeks assessing the detail required before the numerical assessment can even commence.”
There are 13 scenarios set out in the study covering each of the areas being assessed (matching adjustment, extended matching adjustment, extrapolation of interest rates, countercyclical premium and transitional measures) and these are considered at three dates (31 December 2011, 2009 and 2004). The first part of the technical specifications was issued in October and revised shortly before Christmas. However the key elements relating to the calculation of insurance technical provisions and the capital required for the affected contracts was only launched today.
Janine Hawes, insurance director at KPMG, commented: “The late release of the full requirements has limited the amount of preparation that firms have been able to do in advance of today’s launch, so detailed planning now is likely to be the key to successfully completing both the study and the year-end accounts.
“Completing all scenarios to the level required will require significant dedicated resources. Where firms have only limited resources available to support the work, they will need to determine how best to meet the requirements of the study. In some instances, they may decide to employ external resources to assist them, either directly in the study or to backfill other roles. Others may decide to adopt simplifications or perhaps not to cover every scenario required.
“Simplifications or reduced participation levels will impact on the final results. If Solvency II is to end up in a position that is viable for the [UK] insurance market, then results need to be representative of the market. It is not clear that this will be the case if a range of potentially inconsistent approaches is adopted within a market. Firms will need to clearly articulate the approach taken and explain in the narrative responses the practical issues they encountered during the exercise as well as the solvency impacts of these. EIOPA will need as much information as possible to enable it to suggest a way forward.”
KPMG warns that the time required for EIOPA to produce its report, expected in the second half of June, could itself result in further delays to the Solvency II timeline.
Janine Hawes, insurance director at KPMG, concluded: “The European Parliament plenary vote on Omnibus 2 was pushed back to accommodate this study and is currently scheduled for 10 June. However, it seems unrealistic to assume that a mutually acceptable solution to the long-term guarantees issues, as well as all remaining outstanding differences on Omnibus 2, will be fully resolved in the trilogue process before that date. We are expecting that this vote will be further delayed until after the summer recess, with a second ‘quick fix’ directive required to amend the implementation date.”
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