However, while all too aware of this force for change, a near all-consuming focus on the retail distribution review has left little, if any, time to consider other perhaps more ‘indirect’ regulatory impacts.
It makes sense then that the intermediary sector in general has little knowledge of the world of Solvency II – regulatory change directly affecting insurers which, like RDR for intermediaries, has been building for a number of years. However unlike the RDR it is still being pushed back in terms of actual live implementation and increasingly into question as to the shape of any definite implementation at all (albeit, as I will come to, there is implementation and there is use of Solvency II, and the two may not always be the same thing).
Before addressing directly the question of how advisers will be affected by Solvency II, and given the understandable lack of detailed knowledge of it among advisers, some background and definition is called for.
Solvency II – the risk-based capital idea
The Solvency II directive is, in short, the name of the new European directive for insurers covering their capital requirements and related supervision.
It seeks to introduce a more risk-based approach using market-consistent methods for valuing the assets and liabilities of insurance companies utilising, where possible, actual market prices or market value techniques to establish what a fair market price would be.
To demonstrate compliance with the requirements of Solvency II firms may use either their own internal financial models, once they have been through the internal model approval process, or a standard external model.
Pillar II qualitative requirements and supervision
Policyholder protection is an overriding objective of the new Solvency II regime. To achieve this supervision will take account of financial stability and fair markets. Supervisors will look at companies’ financial condition, progress and trends over time and the methods used by different companies.
To ensure that requirements are met, supervisors have the right to access company data as well as the premises of insurers, reinsurers and any providers of outsourced services.
Supervisors need to demonstrate that they act in a timely and proportionate fashion. Their role is to identify institutions with financial, organisational or other features that expose them to higher risk.
Pillar III supervisory reporting and public disclosure
All companies must produce their own risk and solvency assessment, approved by their main administrative or management body, on their financial condition and solvency. They must update this information and may also disclose additional information on a voluntary basis.
Disclosure is a key principle underlying Solvency II but there remain issues to be resolved about appropriate levels of disclosure for the various different audiences – regulators, advisers, analysts, policyholders, shareholders and so on.
The question of delays and in fact whether or not Solvency II will come into force or (in regulatory terms) at all is a notable one.
Solvency II was initiated by the European Commission in 2000 and until recently the intention was that it would come into force in 2014. However among other things a key vote has now been pushed back to October 2013 and there are now huge doubts about the start date. Some, including the new Prudential Regulatory Authority, have forecast an eventual start date of 2015 or, even more likely, 2016.