Solvency II Newsflash
Solvency II Delegated Acts published
13 Oct 2014 - Estimated reading time: 2 minutes
Remember the date. 10 October 2014. The day that months of clandestine drafting came to an end. The day that the Solvency II Delegated Acts were finally published.
And after all of that, there appear to be very few changes of significance from the July version of the draft level 2 text.
The most noteworthy change relates to a reduction in the Standard Formula spread risk capital charge for securitisations.
Securitisations
Cast your mind back to December 2013... EIOPA had just published the result of its investigation into the Standard Formula capital requirements for 'alternative' long-term investments. They proposed a distinction between high quality (so-called 'Type 1') securitisations and others ('Type 2'). However, for Type 1 securitisations they proposed only modest reductions to the capital charges from the then current draft text.
Roll forward to 10 October, and successful lobbying in the interim period has gradually slashed the capital charges for Type 1 securitisations. So the end result is much closer to where interested stakeholders wanted to be all along.
The specific carve out for Type 1 securitisations which are "fully, unconditionally and irrevocably guaranteed by the European Investment Fund (EIF) or the European Investment Bank" has been carried forward from the July draft. These attract a zero spread risk capital requirement, which will benefit, for example, SME loan securitisations backed by the EIF.
It is interesting to compare this with EIOPA's December 2013 report, where they said that even though such guarantees may provide for the timely payment of interest and principal, they did not see how it was possible to quantify the mark-to-market protection afforded by that guarantee. The European Commission, it seems, had no such problems.
Operational risk
Article 204 covers the Standard Formula operational risk capital requirement, one component of which is 25% of unit-linked expenses incurred in the previous 12 months. While the text of the article is unchanged from the July draft of the level 2 text, recital 67 clarifies the following point:
In view of the fact that acquisition expenses are implemented heterogeneously in different insurance business models, these expenses should not be taken into account in the volume measure for the amount of expenses incurred during the previous 12 months.
This effectively takes us back to the position prior to the July draft of the text where acquisition costs had been explicitly carved out in the wording of the article. This will be welcome news for those calculating operational risk capital requirements using the Standard Formula.
Risk margin
The most noteworthy unchanged text is that relating to the risk margin, putting to bed concerns that firms which successfully applied to use the matching adjustment would have had to include credit risk in the risk margin calculation. Had this been the case, we estimate this would have offset around two-thirds of the benefit from the matching adjustment. That this is seemingly not the case will be a source of relief, if not celebration, for the industry.
Next steps
A period of scrutiny by the European Parliament and European Council is already underway, and the level 2 text will come into force once both bodies approve it. This could take up to six months.
But one thing is for sure, Solvency II is back on track.
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