Solvency II: An EU Regulation in a non-EU Nation

By Madhvi Mavadiya | 28 June 2016

Following the Brexit campaign, many financial professionals have been left wondering what to do about regulation. Michael Gove claimed that the UK would be better off without the £600 million a week that is spent on EU regulation costs. Although this is a disputed subject, it must be said that the number of European directives and standards in place is colossal. Will the UK continue to comply with EU regulations such as Solvency II, or will there be a stream of new standards that come into force in the years to come?

According to The Independent, the UK has been on the side of lighter regulations, but the Capital Requirements Directive IV is expensive and therefore a burden. However, according to Fortune, the EU is preparing to move the European Banking Authority from London and will possibly move to Paris or Frankfurt, two of the largest financial centres in Europe. Sven Giegold, a German Green EU lawmaker said that the “UK cannot expect special treatment for the City of London during the exit negotiations,” Fortune reported.

With Solvency II only arriving in the EU at the start of this year, it questions how long it is here to stay to govern over the UK’s insurance regulator. The Financial Times explained that although the European Insurance and Occupational Pensions Authority were responsible for the implementation in the EU, it is the Prudential Regulation Authority’s responsibility to put it into practice. Solvency II is founded on the model: the riskier the business, more precaution needs to be taken.

The rules have three so-called pillars: the first is quantitative, laying down how much capital the insurers must hold; the second covers internal governance and formal supervision; and the third covers public disclosure and transparency, with the aim that the market will be able to assess (an price) the insurers properly,” the FT explored.

The sharp fall of the pound was predicted by many, but the 11% decline was shocking and brutal for investors and alongside this, we are seeing share values drop. The end of last week saw insurance group Aviva’s shares down by 16% and a further 4% this Monday; however, Aviva issued an update stating that the Brexit would not have a major impact on operations, according to the Guardian.

Aviva’s capital position is resilient to market stress, and the company estimates that as of close of the markets on Friday 24th June 2016, its Solvency II coverage ratio remained close to the top of its working range of 150% - 180%,” the statement read. It continued to explain that in the group’s 2015 preliminary results, Aviva reported a Solvency II ratio of 180% and a surplus of £9.7 billion. “Aviva will continue to monitor the technical implications of the vote to leave, which will only be resolved after several years of negotiating a new relationship between the UK and the EU.

The Guardian also quoted Macquarie analysts who said that post-Brexit, Aviva share prices fell by more than other UK insurers and were more in line with the declines seen by UK banks last Friday. “Aviva have taken action to reduce volatility ahead of the solvency II framework including disposing distressed property loans, reducing equity volatility (a 25% fall in markets was only 3% off the solvency II ratio at the year-end.)

Nick Nesbitt, Consulting Services Director, Tagetik wrote for bobsguide and highlighted that technology could be the saving grace in these uncertain times for the insurance industry.While an in-house built solution could be an option, the main question you’ll need to ask yourself is if you are prepared to keep up with EU regulations, and potentially new, post Brexit UK regulations, using internal resources alone. Most legacy systems, and essentially all spreadsheet-based systems, are likely to struggle under the weight of these requirements.

Reporting needs to be repeatable and auditable on a regular basis, and spreadsheets require manual intervention that consumes loads of staff resource, and the evolving nature of regulation means future-proofing will always be required of the software.” This is an attitude that Graham Buck, editor of GTNews, mirrored in an article earlier this year, where he explored Accountagility’s claims about the use of spreadsheets and how over-reliance could cause problems for insurance firms.

The UK-based financial software provider conducted a survey which found that 73% of CFOs were concerned about the reliability of spreadsheets. Alongside this, four in five CFOs reported a fault in their spreadsheet planning processes, which provides evidence for how using tools that over three decades old is not efficient. “Relying on spreadsheets for Solvency II has two principal impacts – errors and process inefficiency,” Robert Gothan, CEO and founder of Accountagility said.

Firms dealing with spreadsheets are spending too little time reviewing the data they have created, leaving errors potentially undiscovered for months to come. Given that the Solvency II framework does not contain allowances for wither mechanical error or lack of efficiency, the review stage is the most important, particularly for firms required to file solvency returns across the EU,” Gothan said.

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