- Publication date
- 8 September 2022
Contribution to the Eurofi Magazine - September 2022
Solvency II established a framework for supervision of Europe’s insurance sector, underpinning the importance of a risk-based approach to assessing and mitigating risks. With the overarching objective of strengthening policyholder protection, the framework continues to work well. Nonetheless, it is important that the recent review concludes in a timely manner so that the regime remains fit for purpose, in particular given the current economic situation.
Overall, EIOPA is happy with the progress of the review, with all parties involved – the European Commission, the Council and the European Parliament – largely following the same objectives as those that EIOPA proposed: To target an evolution rather than a revolution and to recognize the economic situation and complete the regulatory toolbox with macro prudential tools and recovery and resolution measures.
Furthermore the Commission’s proposal for a Insurance Recovery and Resolution Directive, is to be welcomed. The ultimate goal is always to prevent failure or – if this is not possible – faciliatate an orderly market exit. The Commission’s proposal, which follows closely EIOPA’s technical advice, focusses very much on the preventive approach, addresses all relevant building blocks of a recovery and resolution framework, and also focusses on cooperation and coordination among authorities.
One area that remains of some concern – and where current proposals have moved away from EIOPA’s Opinion relates to proposed relaxations in the valuation of liabilities and capital requirements that have the potential to endanger the well-functioning of the regime, thereby generating an undue capital relief again at the cost of weakening the protection of policyholders. In this regard, the measures included in EIOPA’s Opinion have been designed specifically with the long-term nature of the insurance business and consumer protection in mind:
- The review of the extrapolation is key to make the liabilities realistic, improve incentives to risk management and thus ensure that insurers will be able to pay future claims.
- The Risk Margin is a consumer protection measure to ensure undertakings can transfer their liabilities to another undertaking without impacting the insurer’s future benefits. Revision of the risk margin can be introduced in order to recognize diversification over time thereby reducing size and volatility of the margin, especially for long-term liabilities. But the calibration should remain prudent, indeed a too high decrease of the Risk Margin value would be unjustified and harming policyholder protection.
- The revisions to the Volatility Adjustment are introduced as a consistent set of measures, in order to enhance its efficiency as a countercyclical adjustment. In particular, there can be a more favourable but prudent treatment of insurers’ long-term liabilities compared to those of shorter duration.
Further, there are technical arguments for the Solvency II Directive to address sustainability explicitly. The analysis on the prudential treatment of insurers’ activities associated with sustainability factors requires a strong legal basis, as does the requirement for proper climate risk assessment by the undertakings in their ORSA. This is intended to reinforce the risk based and evidence-based nature of the analysis.
Besides the topics mentioned above, EIOPA stresses that the SII review is a good opportunity to address diversity on board of insurers. There are existing provisions for management boards of banks and there should be in the same manner for insurers.
EIOPA also considers the review of Solvency II an opportune moment to include a targeted amendment regarding individual disclosures in the context of EU-wide stress test exercises. To that end, in April 2022, EIOPA published an Opinion to the European Institutions to recommend a consistent and disciplined communication of individual stress test results to enhance market discipline, increase stress test participants’ commitment and contribute to a level playing field among insurers and across the financial sector.
It is in everyone’s interest that discussion progress well and that the new Directive enters into force as early as possible. This is to the benefit of both the sector and policyholders. The very technical nature of some elements of the review deserve precise scientific treatment including reliable impact assessments and EIOPA – as a technical supervisory body – stands ready to support the co-legislators during the process of Trilogues and finalization of the texts in good time.
Thanks to Maxime Louardi for his contribution to this article.