INSURANCE QUARTERLY LEGAL AND REGULATORY UPDATE
Solvency II
(i) EIOPA releases methodology and calculations for the ultimate forward rate under Solvency II
On 5 April 2017, EIOPA published a number of documents relating to the methodology and calculations for the ultimate forward rate (the "UFR"), the principles of which are defined in the Solvency II legislation. The UFR Methodology will be applied for the first time in the calculation of the risk-free interest rates of January 2018. The methodology is a result of extensive work and the documents published include the following:
Specification of the methodology to derive the UFR: This sets out information on updates to the UFR. EIOPA will annually calculate the UFRs and, where they are sufficiently different according to the methodology from the then applicable UFRs, EIOPA will update them at the beginning of the next year. The updated UFRs will be announced every year by the end of March. Nine months after the announcement of the updated UFRs, EIOPA will use them to calculate the risk-free interest rate term structures for the term structures of 1 January of the following year.
A copy of the specification of the methodology may be accessed here.
Calculation of the UFR for 2018: This sets out information on the calculation of the UFR, which is for the first time applicable for the calculation of the risk-free interest rates of 1 January 2018, including the calculation of the expected real rate, the expected inflation rate, the calculated UFRs and the UFRs applicable in 2018 and information on the projection of the UFR. It must be noted that an updated version of this document was published on 23 May 2017 (dated 17 May 2017) to correct the applicable UFR for the Mexican Peso on page 3.
A copy of the calculation of the UFR for 2018 can be accessed here.
Results of the impact analysis of changes to the UFR: This document sets out the results of the information request to (re)insurance undertakings that EIOPA carried out at the end of 2016 assessing the impact of changing the UFRs by 20 bps and by 50 bps on their prudential balance sheet and on their solvency position. The information request showed that the impact of these changes is very small.
The results of the impact analysis of changes to the UFR can be accessed here.
FAQs on the UFR: EIOPA also published a set of FAQs on the UFR providing information on, amongst other things, why EIOPA suggested changing the UFR and what steps EIOPA took to derive the methodology.
A copy of the FAQs may be accessed here.
On 23 May 2017, EIOPA published its Final Report on consultation paper no 16/003 on the methodology to derive the UFR (the "Final Report"). EIOPA consulted on the methodology in April 2016 and section 2 of the Final Report includes a summary of the main comments received and EIOPA's resolution of these comments. In addition, the Final Report contains the final methodology to derive the UFR and how it will be implemented in section 3, the results of the information request to undertakings on the UFR in section 4 and a resolution table with all stakeholder comments in the Annex.
A copy of the Final Report can be accessed here.
(ii) EIOPA issues proposed amendments to Solvency II technical standards on reporting and disclosure
On 21 April 2017, EIOPA published a press release in which it announced that it identified some required amendments to the implementing technical standards ("ITS") on the templates for the submission of information to the supervisory authorities ("ITS on Reporting") and the ITS relating to the procedures, formats and templates of the solvency and financial condition report ("ITS on Disclosure") under Directive 2009/138/EC (the "Solvency II Directive").
In addition to the ITS, the proposed amendments also concern the EIOPA guidelines on reporting for financial stability purposes and the EIOPA guidelines on the supervision of branches of third-country insurance undertakings. Some of the amendments have an impact on the Solvency II XBRL Taxonomy, namely the governance of Taxonomy releases.
All interested parties were invited to comment on the proposed amendments or to submit possible further amendments by 8 May 2017. The full press release can be accessed here.
(iii) EIOPA publishes call for evidence on the treatment of unlisted equity and debt without external rating in the standard formula
On 26 April 2017, EIOPA published a call for evidence on the treatment of unlisted equity and debt without an external credit assessment institution ("ECAI") rating in the standard formula (the "Call for Evidence").
The Call for Evidence follows the Commission's second call for advice on the Commission Delegated Regulation (EU) 2015/35 (the "Solvency II Delegated Regulation") in February 2017 which related to the removal of unjustified constraints to financing. More specifically, the Commission requested advice in the areas of unrated debt, unlisted equities and strategic equity investments. Strategic equity investments are outside the scope of the Call for Evidence which focuses on unrated debt and unlisted equities.
In relation to unrated debt, EIOPA was asked to provide clear criteria for unrated debt to identify those instruments with a better risk profile as a first step in reducing over-reliance on external credit ratings for regulatory purposes.
In relation to unlisted equities, EIOPA was asked to provide clear criteria applicable to portfolios of unlisted equity from the European Economic Area ("EEA") to identify instruments that could benefit from the same risk factor as a listed equity.
The Call for Evidence contains a number of questions to stakeholders on these topics in order to allow stakeholders to provide their views and collect evidence. Comments on the Call for Evidence were due by 24 May 2017.
EIOPA will prepare draft advice to the Commission based on the feedback received and plans to consult on these proposals in November 2017. The Call for Evidence may be accessed here.
(iv) Central Bank publishes updated policy notice on reporting under Solvency II
In May 2017, the Central Bank published an update to its policy notice on the Options and Discretions on submission of information under Solvency II (the "Policy Notice"). The Policy Notice replaces the October 2015 policy notice and sets out the Central Bank's updated requirements and guidance in relation to the implementation of discretions and options relating to the submission of information arising under Solvency II.
The Policy Notice deals with the following:
Exemptions from Solvency II quarterly regulatory reporting: The Central Bank had previously exercised its discretion to exempt certain undertakings from the requirement to submit certain templates on a quarterly basis. Following a review of its position and given only a small number of firms benefited from this exemption, the Central Bank has decided that with effect from 1 January 2017 all undertakings and groups, for which the Central Bank is group supervisor, are required to submit all quarterly supervisory reporting due in accordance with the Solvency II requirements.
Solvency II Reporting Currency: Solvency II gives discretion to the Central Bank to require undertakings and groups to prepare their Solvency II supervisory reports in a currency other than that used to prepare their financial statements. The Central Bank has not exercised the discretion and therefore (re)insurance undertakings and those undertakings/companies at the head of a group supervised by the Central Bank, must prepare and submit their Solvency II supervisory reports in the currency used to prepare the statutory financial statements and/or consolidated financial statements.
Exchange Rates: Solvency II provides for a discretion to permit undertakings and groups to use a different exchange rate from that used to prepare their Solvency II financial statements for the purposes of Solvency II regular supervisory reporting. The Central Bank has not exercised this discretion and therefore (re)insurance undertakings and those undertakings/companies at the head of a group supervised by the Central Bank, must use the exchange rate used to prepare their Solvency II financial statements and/or consolidated financial statements for the purposes of Solvency II regular supervisory reporting.
The Policy Notice can be accessed here.
(v) Solvency II Commission Implementing Regulation (EU) 2017/812 published in the Official Journal of the EU
On 18 May 2017, Commission Implementing Regulation (EU) 2017/812 of 15 May 2017 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 31 March 2017 until 29 June 2017 in accordance with the Solvency II Directive (2009/138/EC) (the "Commission Implementing Regulation") was published in the Official Journal of the EU.
For prudential reasons, it is necessary for (re)insurance companies to use the same technical information for the calculation of technical provisions and basic own funds for reporting, irrespective of the date on which they report to their competent authorities. The Commission Implementing Regulation provides that (re)insurance companies must use the technical information on relevant risk-free interest rate term structures, fundamental spreads for the calculation of the matching adjustment and volatility adjustments referred to in Article 1(2) of the Commission Implementing Regulation when calculating technical provisions and basic own funds for reporting with reference dates from 31 March 2017 until 29 June 2017.
In order to ensure uniform conditions for the calculation of technical provisions and basic own funds by (re)insurance undertakings, this Commission Implementing Regulation states in the recitals that this technical information should be laid down for every reference date.
The Commission Implementing Regulation entered into force on 19 May 2017, applies from 31 March 2017 and is binding in its entirety and directly applicable in all Member States.
This Commission Implementing Regulation can be accessed here.
(vi) EIOPA publishes the 2.2.0 draft version of Solvency II XBRL Taxonomy
On 7 June 2017, EIOPA published the 2.2.0 working draft version of the Solvency II XBRL Taxonomy which is to be applied by insurance companies for reporting with the reference date of 31 December 2017.
XBRL (eXtensible Business Reporting Language) is an IT language for the electronic preparation, exchange and analysis of business information. Solvency II XBRL Taxonomy is a systematised description of all Solvency II reporting requirements. It was developed by EIOPA to ensure the harmonised XBRL reporting under Solvency II.
EIOPA invited comments on the updated version of the Solvency II XBRL Taxonomy before 30 June 2017 with a view to releasing the final 2.2.0 version in mid-July 2017.
The release notes for the draft 2.2.0 Solvency II XBRL Taxonomy can be found here.
To view the full article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
