KPMG has concerns as to whether the recommendations from the long-term guarantees assessment impact study will be mutually satisfactory to all parties, and hence whether the insurance industry will be saved from further delays to the Solvency II timeline.
The study, which was completed by insurers across Europe, tested the application of Solvency II to products with attaching long-term guarantees – a topic of long debate. Since 31st March, when the results were due in, the European Insurance and Occupational Pensions Authority (‘EIOPA’) has been analysing the results in order to recommend potential solutions to this debate.
EIOPA has now publicly disclosed its letter of recommendations to the European Commission which include detailed analysis of the results of the study and rationale for their proposals. The key recommendations are to replace the counter cyclical premium with a volatility balancer which will be formulaic and hence predictable; to converge to the ultimate forward rate after a long period of time (e.g. 40 years); and to implement the strictest form of matching adjustment only.
Peter Ott, European Head of Solvency II at KPMG, was pleased to see some areas of clarity in the proposal – but was also concerned as to whether the proposed solutions go far enough to ensure that all parties are satisfied and hence further the debate.
Peter Ott said: “Although the “volatility balancer” concept will add some much needed predictability to the issue of volatility in unstable market conditions, the suggested magnitude is unlikely to be large enough to be fully effective. Coupled with the suggestion of a long convergence period, it is likely that certain European countries will look very unfavourably at the EIOPA proposals.”
EIOPA also specifically proposes to exclude the ‘extended matching adjustment’ which would have allowed credit for a wider variety of products and asset types than the narrower ‘classic matching adjustment’.
Nick Dexter, KPMG’s Head of Solvency II for the UK, commented: “The proposal to include the classic matching adjustment will be somewhat bittersweet for UK and Spanish companies. Whilst it is the narrowest form of matching adjustment tested, and therefore provides the lowest solvency benefit, it will at least be preferential to no allowance at all for matched assets held to maturity, which was the position we were in a few years ago.
“The proposal for a longer convergence period appears justified, given the recent concerns about the volatility introduced by a short convergence period and hence the disconnects between the market and the model. I think some European countries will still call for a short convergence period, so this conclusion will not necessarily ease the debates that will follow.”
Although the EIOPA report has been delivered in a timely manner, the proposals may not yield the preferred outcome of an agreed and signed Omnibus 2 Directive by the end of this year.
Nick Dexter concluded: “Although the European Parliament plenary vote on Omnibus 2 was pushed back to October to accommodate the findings of this study, new concepts such as the volatility balancer may require further testing, resulting in further delays. In addition, the proposed matching adjustment is effectively the same as that in previous drafts of the Directive and hence it may be viewed that the debate has not moved on. It could therefore be difficult for all European parties to reach a mutually agreeable conclusion this year.”