News
Putting the breaks on: Solvency II - implementation delay - 2011-08-11
The timetables for two key initiatives that will affect insurers have slipped recently. This article examines the implementation delays to both Solvency II and the international insurance accounting standard.
A number of key initiatives that will impact the regulation and financial reporting of insurers are beginning to slip behind their proposed timetables. Should insurers be happy that they have more time to prepare, or do the delays cause more problems?
Solvency II was due to have its next level of rule approved by the European Union by the end of June. This has not happened and it seems likely that this will not happen until early 2012, which would have left precious little time until the proposed implementation date of January 2013 – now likely to be pushed back until January 2014.
The level two rules, which put flesh on the directive, are an important part of the process and the European Insurance and Occupational Pensions Authority has issued its proposals based on consultations during 2009 and 2010 to the EU. There are, however, further changes in the drafts being unofficially consulted upon at present and these are likely to be subject to further change before being finalised.
Right to be wary
Details regarding several aspects of the rules have been criticised by insurers, including the potential level of some standard formula reserves and the potentially onerous level of various requirements. Until the final details are issued it is difficult for insurers to know whether the EU ahs taken much notice of this criticism and the exact nature of the rules they will ultimately need to comply with.
Although the proposals provided by Eiopa and the unofficial consultations can be used for planning to comply with Solvency II, insurers are right to be wary of over-engineering their approach if the requirements may be subsequently moderated by the EU. There are also a number of gaps to be refined within the proposals, such as aspects of how cross-border groups will be dealt with.
Another difficulty caused by the delay is that until the level two regulations are approved by the EU, the draft level three guidance providing further details of how to go about applying the regulations cannot be formally issued. Although there is a lot of behind-the-scenes discussion, the lack of front-of-house consultation in public makes it difficult for those entities not at the heart of Solvency II developments to keep fully up-to-date.
The latest draft reports from the EU suggest full implementation of Solvency II should not be implemented until January 2014. It is, however, likely that the EU will want to retain the original planned January 2013 date for at least a partial start, with full implementation a year later to allow adequate process time between the EU approval of regulations and guidance and their full implementation. It is not yet completely clear exactly what will be required for 2013, but it is hard to see how insurers can be expected to fully apply rules with less than a year between their finalisation and implementation.
Publication of the draft regulations, while awaiting EU approval, would be helpful and enable active involvement in consultants.
Recent surveys indicate that many insurers welcome more time to prepare but there is a large minority who would prefer to press on – essentially those who are ahead with their preparations. They fear that delay could add to the already significant costs of preparation and lead to a loss of momentum.
Additional publication of the draft regulations and guidance while awaiting EU approval would be very helpful for all insurers to enable their preparations to be as well informed as possible and to enable active involvement in the ongoing consultations of as many interested parties as possible.
In addition, the progress of a new international insurance accounting standard also appears to be slowing. The intended issue of proposals in June 2011 were not achieved.
The International Accounting Standards Board, which was developing the standard, underwent a significant change at the end of June, including the retirement of its chairman David Tweedie. Many other new standards were finalised as part of a tidying-up of work in progress before the handover to the new board. Unfortunately, failing to finalise the insurance contract standard before this change will inevitably lead to delays as the new board finds its feet.
Aiming for convergence
The latest timetable is for re-exposure of the standard between the fourth quarter of this year and sometime in 2012, with a finalised standard by late 2012 at the earliest, and no implementation date currently specified. If the new board continues to aim for convergence with the US it will be more difficult to get a new standard issued within a short timescale. Even without it, it is unlikely that any standard could now come into effect before 2014. Although many of the proposals in the standard are becoming more firmly agreed, many aspects remain in flux, which makes detailed planning difficult at present.
Despite the likely delay of full implementation of Solvency II until 2014, many aspects will probably be required for 2013. Even with good progress by the IASB, the new insurance accounting looks unlikely to apply before 2014. As there is a lot of common ground in the approach to Solvency II and the new accounting standard, it would be an attractive proposition if they came into play at the same time.
However, that looks unlikely on latest estimated timescales. Although decoupling the two changes may avoid a big bang, it will cause a prolonged bout of change and flux over the next few years. Insurers – and particularly their finance functions – are set to face the Chinese curse of living in interesting times between now and possibly 2015.
Neil Coulson is a partner in Littlejohn's financial services division. Contact Neil on 020 7516 2270 or by email
This article was first published in Post Magazine, 11 August 2011.
