Solvency II Averts Waterloo – This Month’s 2nd Biggest Surprise?

Engelbert Humperdinck

Solvency II vote was a bigger surprise this month than the decision to bring back Engelbert Humperdinck to represent the UK at the Eurovision song contest. PHOTO CREDIT: Wayne Dilger, Wikipedia

Two big European surprises in just a couple of days:  firstly, news breaks that in a desperate attempt to avoid another “null points” scenario, veteran crooner Engelbert Humperdinck has been brought back to represent the UK at the Eurovision song contest.  But perhaps a bigger surprise was that on 21 March, that other old favorite, Solvency II, won a vote that I had cynically expected it to fail.

All Kinds of Everything

On 21 March, the European Parliament Economic and Monetary Affairs Committee (ECON) voted in favor of a raft of ‘compromise amendments’ to the draft Omnibus II Directive.  As per my earlier blogs, the UK, Germany and France all had chosen means of overcoming specific problems of their life companies. Following the ECON vote, these are all covered by the draft directive.

Making Your Mind Up

We now enter a ‘trilogue phase’ which should see the European Parliament, Council of Ministers and Commission agree on a draft to be put to the parliament plenary vote recently delayed to 2 July and then today, to 10 September .

Just Another Year

The current timescale aims for a final version of Omnibus II to be passed into law by the European Council and Parliament on 1 January 2013, formally changing a number of provisions of the Solvency II Directive. Then the long awaited ‘go live’ date for Solvency II should follow on 1 January 2014, but given the stumbling progress made so far, nobody will be ruling out further delays.


The amendments passed in the ECON vote will bring comfort on some of the most contentious issues although more heated debate is likely as insurers and their representative bodies seek further changes and clarification on the current proposals.

Director General of the Association of British Insurers (ABI) Otto Thoresen said that the measures agreed in the ECON vote are “far from perfect but pave the way for a constructive discussion in the next phase of negotiations on Solvency II”.  But some in the European Parliament are gunning for the UK’s chosen methodology, matching premium.

Solvency II may imitate the Eurovision song contest as we find that some of our friends in Europe are minded not to vote for our favorite. Sven Giegold, a German member of ECON, called the Omnibus II compromise a “truly black day” for policyholders with the matching premium “the worst in the whole list” as he claimed it is based on a “flawed methodology” and tempts insurers to take higher risks.  The gloves are off.

Puppet on a String

Some have blamed German ECON rapporteur Burkhard Balz for pushing Germany’s preferred solution, extrapolation, before the UK’s matching premium.  A proposed methodology for a ‘matching premium’ is now included whereby the mechanism allows for adjustment in the discount factor applied to long-term liabilities to reflect market volatility in the assets set aside to back them. This was controversially dropped in a prior draft leading to an ABI warning that this could force insurers to hold an additional £50bn in capital, causing a 10 – 20% fall in annuity rates.


Following well publicized criticism by UK annuity writers, a last gasp deal was reached which saw the matching premium re-instated. So progress certainly, but the methodology proposed is very prescriptive in a number of areas, including detailed criteria for the qualifying status of appropriate assets.  The proposal is an opt in for local regulators, only applying to local business.  Insurers will also need to meet the Solvency Capital Requirement with the matching premium set to zero.

Take Me to Your Heaven

The particularly thorny issue of equivalence has been addressed to some degree but largely kicked farther down the road in true Solvency II style. We noted earlier the Prudential’s concerns and few can have missed their cautionary note that a re-domicile was an option if the final regulation would force it to hold significant additional capital against its US business, Jackson National Life.

The latest proposed amendments clarify that ‘temporary equivalence’ can be provided for up to 5 years which allows for some breathing space, but the issue of US equivalence has certainly not been put to bed, as frank comments from former New York insurance superintendent James Wrynn testify: “There’s no reason why a decision on equivalence can’t be made today rather than a year from now or five years from now. The longer they wait, the more uncertainty it will create and that doesn’t benefit anyone.”

Ne Partez Pas Sans Moi

The inclusion of French favorite, a counter-cyclical premium (CCP), will also be welcomed. Essentially this should allow insurers to use a higher discount rate for liabilities during periods of stressed financial markets. Long-term protection writers had been particularly concerned that market volatility could lead to forced sale of assets which would normally be held to maturity. But it isn’t clear how EIOPA and the European Systemic Risk Board will define a stressed market and also what the methodology will be for calculating an adjusted risk-free interest rate term structure. Insurers will clearly be keen for both of these issues to be addressed quickly.

Ein Bisschen Frieden

As discussed, the favored German method for extrapolating risk-free term structures has also been included, quietening German fears.  It is another measure aimed at reducing the impact of market volatility. Again, more detail will be sought by insurers on the implementation of this methodology.


Overall, the reaction is likely to be positive towards many of the amendments passed in the ECON vote but there certainly isn’t enough to calm everyone’s nerves and there is still is a long way to go.  The addition of some key points will be seen as an important step in the progress toward Solvency II, but further clarification on the fine detail is still required. The lobbying is not likely to ease up ahead of the trilogue discussion but what influence this will have on their decision at this stage remains to be seen.

You will probably have guessed that from the title “Waterloo” onwards, all the headings in this blog are all past winners of the Eurovision song contest.  Sadly I couldn’t find a way to fit in my favorite, the Swedish winner from 1984, Diggli-Loo Diggli-Lay, though the way Solvency II is going…    

About David Simmons

David is a Managing Director in the Willis Re Analytics team in London. He focuses on Enterprise Risk Management, i…
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