Eiopa ‘politically naive’ to scrap national vetoes on long-term guarantees package

Agreement on Omnibus II more difficult if opt-outs removed, warn experts

Proposals to apply Solvency II's long-term guarantees package to cross-border businesses will make political agreement on the recommendations harder to achieve, experts say.

The European Insurance and Occupational Pensions Authority (Eiopa), in its report on the long-term guarantees assessment released last week, said that member states should not be able to opt out of elements of the measures for products with long-term guarantees. It also said that cross-border business should not be excluded from the package of measures, which includes the matching adjustment and proposals for a new volatility balancer.

But experts say that removing the ability for states to opt out will create an additional obstacle to achieving political consensus in the negotiation on Omnibus II. The ability for member states to cherry-pick elements of the long-term guarantees package, they argue, could be crucial to overcoming the hard-to-reconcile differences between national authorities on the regulatory treatment of long-term guarantees.

Trying to remove national vetoes over individual elements of the package, while technically "correct" is politically "naive", says Paul Fulcher, managing director, ALM structuring at Nomura in London.

"The reason why the long-term guarantees package is taking so much time to agree is because different countries want different parts of it. Not only do they want different elements, they often don't like the elements other national supervisors value," he says.

The Dutch authorities, for instance, have made it clear they are not keen to apply the matching adjustment, which is considered a crucial tool by both the UK and Spanish insurance industries.

"If every element applies in every country and if every element applies to cross-border businesses, then it is going to make it more complicated to get an agreement," adds Fulcher.

Constraints on the application of the long-term guarantees package are not to be based on technical or prudential reasons, Eiopa says it in its report.

Taking away member states' ability to opt out is necessary to promote a harmonised, single market and remove constraints to cross-border businesses. Otherwise, firms operating in countries where elements of the long-term guarantees package are applied could find themselves at a competitive disadvantage to foreign firms benefiting from all the elements of package.

"If, say, a German insurer has got an advantage in selling products in the UK over and above the UK regulation, you are bound to get huge complaints [from the UK industry]," says Neil Chapman, senior consultant director at Towers Watson in London.

But, Chapman says, it will be a challenge to ensure consistency between member states as they are starting from very different positions. However, he recognises that allowing for opt-outs at this stage will make it more difficult to achieve the ultimate goal of fostering the single market.

William Coatesworth, a consulting actuary at Milliman in London, agrees that while removing member states' options is more consistent with the aims of Solvency II, this poses political challenges.

"While this appears to better reflect one of the original aims of Solvency II, to create a common market and a uniform regulatory environment across all member states, this may make it more difficult to find the political agreement for the package of measures required to allow Solvency II to move forward," he says.