The Solvency II debate has now even made it into Prime Minister’s questions in the UK House of Commons. Prime Minister David Cameron said last week that the new European regulatory regime is a “good example of ill thought-out EU legislation”. He was reacting to the news of Prudential’s threat to relocate to Hong Kong to escape Solvency II’s punitive capital charges for assets that better hedge their liabilities, and the difficulties that the Pru’s US and Asian operations would face to remain locally competitive whilst meeting Solvency II’s capital requirements.
Earlier in the week, London’s Mayor Boris Johnson wrote to the CEO of the Pru, Tidjane Thiam, offering his support. Boris was “extremely concerned to learn that a change of domicile was under review” and promised to “lobby both in Brussels and London to ensure that Solvency II does not cause European insurers to relocate outside the EU”.
He particularly promised to lobby for US equivalence, which would allow Pru’s US subsidiary to hold capital consistent with their competitors under local rules – something I blogged about in my last post on the topic. He also said he would lobby for “proper” transition arrangements to be put into place to allow companies to recapitalize and/or sell their operations at a more opportune time, the last point no doubt welcome but perhaps missing the fundamental issue.
Now whilst the threat of a visit from Boris and the boys may scare some from making similar statements, perhaps prompting Aviva to announce that they have no such plans, Cameron and Johnson’s actions are evidence of a growing politicization of the Solvency II process.
The Omnibus is Late Again
Also last week the European Parliament delayed its planned vote on Omnibus II, the revised version of the Solvency II directive, by three months to July 2012. The announcement is interesting for a number of reasons:
- It seems that the European Commission were unaware of the delay, which implies that communication within Brussels is not all it could be.
- A member of ECON, the Parliament’s Economic and Monetary affairs committee, acknowledged tension between the Parliament and the Commission.
- A parliamentary press spokesman felt emboldened enough to say that the Commission’s drafting “was considered below par by MEPs and so more work has to be done.”
The backdrop to this is behind the scenes politicking. The ECON was scheduled to discuss the Omnibus II draft in January but that was rearranged to 21st March whilst arguments raged around mechanisms for handling long-term guarantees in life business. Each of the major EU economies had its own preference based upon the particular peculiarities of the business written in their country and the type of assets held to match these liabilities. Much blame has been heaped on the Germans for allegedly surreptitiously reopening previously agreed positions, but in truth it reflects the difficulties of trying to get 27 states, all very different in business and political culture, to agree a single set of rules.
The delay in the main parliamentary vote is to allow time for the wonderfully named “trialogue” between the European Parliament, European Commission and Council of the European Union to discuss the Omnibus II text after agreement by ECON. In practice, it is clearly possible that easing the time pressure reduces the probability of agreement in ECON. Certainly everything needs to be pretty well choreographed if the 2014 launch date will be met.
Is Switzerland the Model Answer?
A meeting hosted in the Willis Building last week by the British Swiss Chamber of Commerce compared the Swiss Solvency Test to Solvency II. Solvency II was likened to a camel, a horse designed by a committee, whilst the Swiss Solvency Test was lauded as a thoroughbred, perfectly fit for purpose. It was argued that Switzerland, very likely to be declared equivalent to Solvency II, represents a much better domicile for European insurers than any EU location. Certainly the debate was persuasive enough to make me consider an investment in shares of airlines flying into Zurich. Future traffic could be heavy, one way at least, unless these political issues are resolved.