Media Briefing Note: FSA Publishes Consultations on Solvency II

LONDON, 11 November 2011 - Commenting today on the publication by the Financial Services Authority (FSA) of the first two consultation papers on Solvency II, Steven McEwan, Of Counsel in Hogan Lovells Financial Institutions Group, said:

"The FSA's first two consultation papers are a good start to what is certain to be a long and highly complex process.  The draft rules do not go much beyond what is in the directive, but it is helpful to see the proposed layout, which will be in a new handbook sourcebook to be known as 'SOLPRU'.  In addition, the lengthy list of record keeping requirements will be a useful summary for compliance officers.

Of particular note in the draft rules are the frequent cross-references to the 'Solvency II Regulation', a proposed EU regulation which will lay down more detailed requirements of Solvency II.  It means that firms will in future have to refer to the EU text rather than only the FSA rules.  As a result, obtaining guidance on points of interpretation may well become more difficult.

Chapter 22 includes an estimate of annual industry-wide compliance costs of £700m.  Compared to overall annual operating expenses of £22.5 billion, this is not immense and leads the FSA to conclude that there is unlikely to be a dramatic increase in marginal cost across the insurance industry as a whole.  Nevertheless, there may well be a significant impact for the 20% of insurers (most of them life insurers) who need to raise more capital, and on insurers who operate in business lines that are particularly adversely affected by Solvency II."

Steven also commented on the second consultation paper, concerning linked business:

"There are a number of areas where national regulators have discretion whether to regulate more tightly than Solvency II requires, and linked business (business where policy benefits depend directly on the value of underlying assets or indexes) is one of these.  Given the attention that the FSA has paid to this area in the past, it is not at all surprising that it has decided to use the discretion to continue to regulate linked business, and it is helpful to the industry that it has declared this intention and published its draft rules so early in the consultation process. 

Insurers are likely to be pleased by some of the relaxations of the rules, particularly that for policyholders who are trustees of defined benefit occupational pension schemes it will no longer be necessary to invest only in assets and indexes included in the list of permitted links."

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