The chairman of the new Eiopa says that while delays are frustrating, he is confident Solvency II will lead to higher standards worldwide
Gabriel Bernardino bellows with laughter when quizzed on whether he gets frustrated with the delays that bedevil the Solvency II process.
“I’m not a person who is easily frustrated. You shouldn’t come here if you get frustrated easily,” says the Portuguese regulator, who is settling into the role of first chairman of the recently established European Insurance and Occupational Pensions Authority (Eiopa).
It’s lucky that he’s the patient type, given the grindingly slow nature of the Solvency II process.
The original timetable was for the new directive to be ready by 2008. Last year, the implementation date of October 2012 was pushed back to New Year’s Day 2013.
Now it looks as if companies won’t have to abide by Solvency II until the beginning of 2014, with the European Parliament not due to vote on Omnibus II – an update needed to make the directive comply with wider changes to EU structures – until early next year. While Eiopa is responsible for advising on Solvency II, the Parliament and Council of Ministers make all final decisions in the EU.
The process has “been a long and difficult one”, acknowledges Bernardino, sitting in his 25th floor office, which overlooks Frankfurt’s financial district.
He should know. As a senior Portuguese regulator and then chairman of Eiopa’s predecessor body Ceiops (the Committee of European Insurance and Pensions Supervisors), Bernardino has been at the heart of the Solvency II process since its genesis.
Bernardino rejects suggestions that the new timetable being mooted in Brussels will delay the overall Solvency II process. Companies and supervisors will have to implement the mechanisms during 2013 that will enable Solvency II to be enforced from 2014, he insists.
“Delay is not an appropriate word. This process of having 2013 as the year when systems are being implemented is not a delay. You can’t start to enforce a system before implementing it.”
As an example, he argues that it is not possible to enforce a company’s Standard Capital Requirement before approving its internal model.
The European Commission will be publishing its proposed Level II implementing measures – the Solvency II rule book for companies and regulators – in the autumn. Then, in 2012, Eiopa will produce the technical standards, the detailed manuals for running Solvency II.
But getting a clear-cut decision early next year from the EU’s politicians on the over-arching Omnibus II document is vital, says Bernardino: “It is fundamental for everybody: for the market because we need a stable piece of regulation and fundamental for supervisors for preparing implementation.”
Bernardino says he is confident, in spite of past evidence, that 2013 is an achievable target for kick-starting the implementation of Solvency II.
“1 January 2013 is possible. But it’s not just possible, it should be our goal,” he says, adding that, irrespective of formal implementation dates, companies are already making their risk management and corporate governance processes Solvency II-compliant.
While many see the directive as merely a regulatory headache, Bernardino insists it will create a better run industry that is more attractive to investors, who will be able to compare insurers from across the EU.
“Europe has the biggest insurance industry in the world. We should be setting standards across the world. I really believe that Solvency II will set higher standards worldwide and these will be seen by investors as the reference point so I think it’s going to be positive for the European insurance industry.”
And while UK insurers worry about being pushed into the straightjacket of having to use standard formula when setting capital requirements, he says the more tailored internal model will become more common throughout Europe. “This will be a natural process and a natural flow in the other countries, because if you go to the basic idea of Solvency II, it is a better alignment between risk and capital.”
The debate over the level of capital that insurers must carry to guard against catastrophic risks is also heading in a more pleasing direction for Lloyd’s, he suggests. By collecting more data, he says Eiopa has been able to tweak the Level II measures to enable the level of capital that insurers must hold to be gauged more accurately to risks.
Overall, Bernardino rejects criticism that Eiopa has been overly conservative on Solvency II by framing rules that mean insurers have to store excessive capital. “On the calibration of specific risks, the point is that we are bound by the data, so it’s not a question of being prudent or excessively prudent,” he says. “I’ve no problem changing my opinion provided that it’s based on data.”
Solvency II is not the only item on Eiopa’s plate – it has recently completed a stress test of the EU industry. While the test’s results have already been out-paced by the growing sovereign debt crisis, Bernardino is confident the sector will weather the storm. “If you look at the most stressed situation we have now in the three countries with the most problems, the exposures are manageable. Of course, this is something that we will continue to monitor.”
Proof of the pudding
Eiopa is, in Bernardino’s words, “still in its infancy”. And while the organisation has grown nearly fivefold from Ceiops’ nine staff over the past six months, Eiopa’s offices in Frankfurt’s Docklands still feel under-occupied.
He says Eiopa may gain extra powers in the future, but has to prove itself first: “We need to have the proof of the pudding before having change. To do that you need to take the powers you have and be active. That’s what I want to do this year.”