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EU politicians reach Omnibus II agreement over Solvency II insurance rules: 2016 start date agreed

European Union politicians have broken the deadlock over the Omnibus II directive that will amend the Solvency II capital adequacy rules for the insurance sector. The deal reached this week will enable the risk-based capital regime, which mirrors the Basel III capital rules for the banking sector, to finally start in 2016.

The delay to the new insurance sector capital rules has centred around the Omnibus II long-term guarantee (LTG) and the liabilities of third countries under the Solvency II capital adequacy regime.

Solvency II is intended to harmonise the way insurers allocate capital against risk, but missed its planned start date last year. Its introduction has been delayed several times because of rows over topics like how to calculate the capital needed for products with LTGs, especially pension annuities and investments such as government bonds.

A 1 January 2016 start date for Solvency II is now planned by regulators, with a transitional period likely to be accepted. Insurers are Europe’s biggest institutional investors with EUR8.4 trillion under management, but they are lagging behind banks’ similar Basel III work in terms of adopting a new post-crash capital adequacy framework. Solvency II is designed to help insurers withstand losses in the event of another financial crisis such as the 2008 meltdown.

“The agreement reached between the European Council, European Parliament and Commission (EC) will give the market a degree of rule certainty, but will also allow the European Insurance and Occupational Pensions Authority (EIOPA) to finalise its own drafting on delegated acts and regulatory technical standards,” said PwC partner and SII insurance specialist, Charles Garnsworthy.

“The compromise reached will not satisfy all parties entirely,” warned Garnsworthy. “However it represents relief for many, especially now that the way forward has become clearer.

“The timetable is now clear,” he continued. “EIOPA’s guidelines become effective from January 2014 and there is a very real short term need to be prepared to deliver in 2014 and 2015. Firms should now take stock of whether their programmes are going to meet the requirements and prioritise those areas needing attention. ”

Market Reaction: PwC and CBI
The UK Confederation of British Industry (CBI) responded to the EU agreement on Omnibus II, which should lead the way to implementation of Solvency II in 2016, by saying it was welcome news. “After years of hard work it is good news that a sensible and workable agreement has finally been reached,” said Matthew Fell, CBI director for competitive markets, adding that it should ultimately benefit consumers and savers across Europe.

“The removal of regulatory uncertainty in the insurance sector should free up a major source of long-term investment in the UK and Europe, which will help to boost growth.”

By Neil Ainger