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CEIOPS issues final advice Charles Garnsworthy, partner in the Solvency II practice at PricewaterhouseCoopers, says: ‘While CEIOPS has considered and in some cases amended its draft advice in response to the key areas of focus from industry comments, there are still a number of areas which have not been addressed in the final advice and are likely to be of concern to the industry.’ There is ongoing debate in some areas of CEIOPS’s advice, for example the continued non-inclusion of an illiquidity premium in the calculation of the discount rate used for the assessment of technical provisions, and the restriction of future premiums in the calculation, and CEIOPS has indicated that it will carry out further work in these areas. In other areas, notes PwC, for example the limits on the use of different tiers of capital, which the industry viewed as unduly restrictive, CEIOPS has clearly elected to maintain the position described in the consultation papers. Over the last few months the focus of lobbying has shifted from CEIOPS to the European Commission, who are not bound to accept CEIOPS’s advice either in whole or in part. The European Commission is obliged to adopt Level 2 implementing measures for Solvency II by 31 October 2011. ‘While there is no formal provision for further consultation with the industry, the European Commission may be willing to make amendments to the measures adopted to take into account the views of industry stakeholders,’ says Garnsworthy. ‘The calibration of the European Standard Formula used to calculate the Solvency Capital Requirement by insurers without an internal model, remains a key lobbying point, since many stakeholders consider the calibration to be inappropriate, and to result in an unnecessarily high capital charge for many insurers,’ he adds. ‘Since the insurance industry is considered to have been well capitalised throughout the financial crisis and recession at current levels of capitalisation, this point may be felt strongly by the industry. ‘The calibration contained in CEIOPS’s advice will be tested as part of the QIS5 survey in Autumn 2010. We expect that the capital requirements calculated under QIS5 will be significantly higher in some cases than those calculated under the earlier QIS4 survey in 2008. This may push an increasing number of firms, particularly those who have not participated in earlier QIS exercises, to seek internal model approval. However, it may be too late for many insurers starting on the internal model approval process after QIS 5 to gain pre-approval before Solvency II comes into force in October 2012.’ |
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