Solvency II, the new prudential supervisory regime for the insurance sector, entered into force on 1 January in all countries of the European Union.
It was a long-awaited moment, at the conclusion of a regulatory process that lasted approximately 15 years, given the complexity of the reform and the need to adapt the project along the way, in the light of the two serious financial crises that occurred In the period.
The objectives of Solvency II are fully shared: the harmonization of the regulatory framework, which should make it possible to eliminate national differences; the need for companies to identify, measure and manage more effectively all types of risks to which they are exposed, which should strengthen their financial solidity; the obligations relating to governance e risk management, which should make company management more efficient; the harmonization of disclosure obligations, which should increase transparency and information available to supervisors, financial markets and consumers.
It is now a question of making sure that the new rules work appropriately and that they allow the pre-set objectives to be achieved without altering the characteristics of the business model of insurance companies, which are typically oriented towards a long-term horizon.
How do Italian insurers present themselves at the launch of Solvency II? The last two years have seen a notable intensification of preparatory activities and it can now be said that the insurance industry is overall ready for the new regime to take effect. It should be stressed, however, that the complexity of Solvency II was accompanied by the further difficulty represented by the delay with which the European rules were defined, which had a cascade effect on the time needed to adapt the national legal system.
In fact, a large part of the technical standards and EIOPA Guidelines were finalized in 2015 and published only in the last months of the year. From this it followed that the IVASS consultations for the transposition of some provisions into the national legal system only began last summer and that the process for some necessary regulatory changes has yet to be started.
For example, some essential aspects for business operations still remain to be defined, such as the confirmation of the exclusion of Italian products from the notion of ring-fenced funds, the treatment of deferred taxes, any external auditing obligations. Furthermore, a precise declination of the principle of proportionality is needed in all three pillars of the new regime, so as not to burden those companies and those activities with a contained risk profile with excessive administrative burdens. In this regard, it is positive that IVASS, in the recent consultation, asked the stakeholders specific insights on how to apply the concept of proportionality for the activities to be carried out under the ORSA (Own Risk and Solvency Assessment).
In essence, it will still take a few months before we can speak of a Solvency II regime fully defined at national level. The impacts of the new rules, however, are already being felt - and it could not be otherwise - at the level of business management, both on the organizational front and on the financial and commercial one. There governance of companies, for example, has been strengthened, just as the risk culture has been strengthened at all decision-making levels, starting with the Boards of Directors. Decisions to launch new products can no longer disregard the relative capital absorption and the same occurs for investment decisions.
But Solvency II shouldn't be thought of as a definitively closed construction site, far from it.
It is in fact essential that he come as soon as possible cThe European regulatory framework was completed with the issuing of the new provisions which introduce a more favorable treatment for investments in infrastructure projects and extend the applicability of the transitional measures in terms of equity risk.
In any case, it will be important to carefully monitor the impacts of the new regime, especially with regard to the calibration of capital requirements.
Already in 2018, in fact, a first revision by the European Commission of the Standard formula for calculating the Solvency Capital Requirement (SCR); other revisions are already planned for the following years.
In the longer term, it will be necessary to verify the overall stability of the new regime. This is the most delicate and methodologically more complex issue. Solvency II was conceived as a system centered i) on market values, in the assumption that these values were at all times the best approximation of reality; ii) on the assessment of risk over an annual period. The volatility experienced in specific periods of severe financial turbulence prompted regulators to introduce adjustments and following the best practices, known as the Solvency II Long Term Guarantee Package. It will be verified over time that these adjustments are actually able to ensure that the insurance industry continues to play its primary role as risk taker and long-term investor, in support of the financial markets and the real economy. Better still would be to evolve the Solvency II model in line with the most recent results of finance studies which show how volatility (ie risk) is reduced over time horizons longer than the year.
