You win some, you lose some

Regulators cannot always be as tough or as lenient as they would like

The past month brought us several reminders that regulation is often the art of the possible – two of them from the UK and one from the US market. Taking the UK cases first, we have seen a note from the PRA on some of the contentious points in Solvency II and a consultation from the UK Treasury on the directive’s volatility adjustment. The PRA might like to have been clearer. The Treasury would probably have preferred to be tougher. In both instances, outside factors have constrained them.

How so? The PRA’s note was published partly in response to a letter from the Association of British Insurers detailing its interpretation of some of the grey areas in Solvency II. The PRA’s response on key issues, such as the matching adjustment, offered limited clarification and served mainly to remind the industry where matters are yet to be settled. In several cases, this is simply because the PRA is awaiting guidance from the European Insurance and Occupational Pensions Authority (Eiopa). Until then, the PRA cannot know how much leeway there will be in interpreting what can or cannot be fitted within the European framework. Even if it is minded to provide clarification, in some areas it simply cannot do so.

Conversely, on the volatility adjustment, the Treasury consultation suggests that UK supervisors are less than enthusiastic about its application. One concern is that the adjustment might be used by insurers to gain an upper hand on banks by offering bank-type savings products but using a capital structure intended for long-term insurance business. Here, though, the industry is understood to have pushed back and argued that the volatility adjustment is explicitly allowed for in the Solvency II Directive. As such, policy-makers might be limited to imposing some additional bureaucratic requirements around its use.

Meanwhile, in the US, state-based regulators and practitioners are getting heated over the technicalities of stop-gap rules for captives used in XXX-reserving transactions.

As barbs fly over the minutiae of VM-20 rules and net premium reserves, insurers are starting to wonder whether the bigger project of redrawing reserve requirements as a whole can possibly reach conclusion. Again, policy-makers must operate within the bounds of the possible.

Commission softens on securitisations
Meanwhile, some positive news from Brussels – capital charges for high-level securitisations have been relaxed in the final draft of the delegated acts (beyond Eiopa’s most recent recommendations). Infrastructure investments, where insurers are also looking for changes, will remain unchanged for now.

We also hear that the proposed review of Solvency II will be brought forward two years in the delegated acts. Thus, the review will take place three years after implementation, rather than five. Evidently, some things can be changed after all.