The bi-annual Risk Management Forum of the Federation of European Risk Management Associations (FERMA) kicked off with a reception on Sunday night for the 1400 plus delegates at the MECC Conference Center in the Dutch city of Maastricht.
FERMA got down to business this morning with opening remarks from President Jorge Luzzi, followed by an appraisal from Professor Karel Van Hulle, of the Business and Economics Faculty at the Catholic University of Leuven, and the former head of insurance and pensions at the European Commission, who retired in March.
He has played a key role in advancing EU’s Solvency II initiative to reform insurance regulations across the 27 member block, representing the EC’s views within the European Insurance and Occupational Pensions Authority (EIOPA), which is drafting the final regulations necessary to implement Solvency II’s provisions throughout the EU. In that position, he quite naturally backs the initiative, which was first presented in 2007, and has undergone a number of changes and additions.
In his opinion further delays to the implementation of Solvency II would compromise the ability of European insurers to deliver protection for their clients in a riskier world. “The insurance industry will become increasingly important in this risky world but without sound risk management and a risk-based solvency regime, insurers will not be able to deliver,” he said; as they will “lack the data and tools to know that they can honor their commitments.”
Solvency II is officially scheduled to come into force in January of 2014, but Hulle said “it will likely now be 2016” before it can be fully implemented. One of the principal impediments concerns the continued practice of configuring some life insurance products with long term guarantees for investment returns at a fixed level. Following the financial crisis, which has reduced interest rates to less than one percent in many EU countries, such guarantees are simply no longer sustainable.
In addition the question of including insurers, especially property casualty insurers, as systemically important insurers (SII’s) has yet to be full resolved, even though a number of the world’s biggest international carriers and reinsurers are expected to be so designated.
Hulle explained that the additional delay is encapsulated by the failure to agree on the terms of Omnibus II, a necessary set of rules to amend the framework directive for Solvency II, which has stalled developments since 2009. Ongoing discussions, dubbed a trilogue, are taking place between the European Parliament, the EU Council and the EC to hopefully resolve the main outstanding issues on Omnibus II by the end of October.
The effort to achieve, what Hulle described as the “twin peaks of regulation,” referring to the prudential side and the market side of the industry, are necessary, as the current regulations, contained in Solvency I, are based almost entirely on capital requirements, while Solvency II is based on an ongoing assessment of risk. Under Solvency I neither the current low interest rates nor the evolution of the insurance industry to address emerging risks, such as climate change and the Internet, are covered.
The process is further complicated by the need to include a number of international regulatory bodies in the process. These include the Financial Stability Board (FSB); which treats systemic risks; the International Association of Insurance Supervisors (IAIS), which is working on harmonizing insurance regulations on a global basis; the Organization for Economic Cooperation and Development (OECD), which coordinates financial policy among the more developed countries, as well as the EU, the EC, EIOPA and a number of industry organizations, such as FERMA.
Hulle also pointed out the problems these and other organizations are having in trying to figure out how to regulate multinational insurance groups, which frequently control dozens of separate companies within their structure, as well as the problem of on what terms Solvency II “equivalence” should be accorded to the regulatory systems of countries such as the U.S., Japan and Bermuda.
With all of that still on the table, it’s no wonder that the dates for implementing Solvency II have been repeatedly pushed back. Even 2016 might seem a bit too optimistic.