Lack of agreement by lawmakers on Solvency II puts 2014 start date at further risk, insurers warn

Speaking to news agency Reuters Hugh Savill, director of prudential regulation at the Association of British Insurers (ABI) said that a breakdown in talks between officials representing the 'trialogue' of the European Commission, Parliament and Council of Europe meant that there would be no agreement on the text of the Omnibus II Directive until after the Parliament returned from its summer recess.

"This result raises questions about the timetable for Solvency II and will leave insurers in limbo until an agreement is reached," he told the agency. "This delay was not caused or asked for by industry who are keen to see the outstanding issues on Solvency II resolved."

The trade body warned in May that the compressed timetable for implementing the new regime, which is due to take effect from January 2014, left insurers with "little room to manoeuvre". The European Commission has pushed back the date by which the rules must be implemented into national legal systems until June 2013, pending finalisation of the Directive.

Omnibus  (155-page / 3.7MB PDF) is a draft EU Directive which sets out stronger risk management requirements for insurers and dictates how much capital firms must hold in relation to their liabilities. The regime, which was originally expected to come into force later this year, has proven controversial. London-based insurance firm Prudential has refused to deny press reports that it is considering switching its headquarters to Hong Kong as a result of the changes, while the UK pensions industry has spoken out against proposals to create similar standards for pensions.

Sharon Bowles, chair of the European Parliament's Economic and Monetary Affairs Committee (ECON) told Money Marketing that the implementation timetable would "inevitably come under pressure" if agreement on the outstanding issues could not be reached quickly when Parliament returned.

"Nobody amongst the parties negotiating wants a delay to the existing timetable but at the same time we do not want to deliver something that is wrong," she said. "The sticking point is around the provision of long-term guarantees, which for the UK means how to deal with annuities and whether a matching adjustment should be included in the final text."

The ABI has lobbied for the inclusion of a matching adjustment in the final text to remove the requirement for insurers to compensate for market volatility they are not exposed to when calculating capital requirements. Matching premiums allow insurers to hold less capital against annuities in recognition of the fact that, since annuity holders cannot cash in their policies, losses on the bonds insurers buy to fund annuity payments need never be crystallised.

Last week, UK regulator the Financial Service Authority (FSA) published the latest in its series of consultations that will see the Directive transposed into its UK handbook. The paper 324-page / 2.4MB PDF), which includes discussion of how the rules may apply to the Lloyd's insurance market and proposed changes to existing Handbook rules governing with-profits and unit linked businesses, is open for comment until 11 October.