Delegated Act: Implementing rules for Solvency II

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On 10 October 2014 the European Commission adopted a Delegated Act containing implementing rules for Solvency II.  The European Parliament and Council now have until April 2015 to approve them.

What’s covered?

The implementing rules cover a wide range of areas including:

  • valuation of assets and liabilities including detailed rules for calculation of technical provisions
  • determination of own funds
  • solvency capital requirement (SCR) for standard formula firms
  • SCR for full and partial internal model firms; Minimum Capital Requirements (MCR)
  • investments in securitisation positions
  • systems  of governance
  • public reporting
  • supervisory reporting
  • SPVs
  • rules for groups
  • third party equivalence

The implementing rules provide more detailed rules and build on the Level 1 Directive.  These are Level 2 and they will make up a single prudential rulebook for all (re)insurance entities covered by Solvency II in the EU.  They will in due course be supplemented by Technical Standards (level 2.5) and Guidelines (level 3).  The Technical Standards will need to be adopted by the European Commission but guidelines do not as they are not legally binding.

What’s new?

The capital charges for high quality securitisation have been reduced.  EIOPA states that a more tailored treatment of these long-term investments has the advantage of increasing the risk-sensitivity of the capital requirements and thereby promoting good risk management and supporting the prudential robustness of the overall regime.  This will encourage insurers to invest in simpler securitisations that are more transparent and standardised.  The aim is that this will reduce the complexity and risk involved in investing in securitisations and thereby promoting sound securitisation markets which are needed by the EU economy.

What next?

These rules as they provide firms with clarity.  They form the detail of Solvency II.  Firms need to consider where the new rules vary from their current understanding of the requirements and assess what they need to do before 1 January 2016 to be ready for full Solvency II implementation.