14 June 2013

EIOPA publishes results of its Long-Term Guarantees Assessment

The long-term guarantee assessment by the European Insurance and Occupational Pensions Authority (EIOPA) ran from 28 January to 31 March 2013. It tested various options for the measures to deal with long-term guarantees in Solvency II to assess their effects on policyholders and beneficiaries, (re)insurance undertakings, supervisory authorities and the financial system as a whole. This technical assessment will inform the debates on the EU’s Omnibus II Directive, which will update the Solvency II Framework Directive of 2009 before it comes into force.

In the assessment of the LTGA package, EIOPA used the following principles designed to ensure a high degree of policyholder protection, appropriate risk management incentives and effective superivory process:

• Alignment with the SII framework and the economic balance sheet concept;
• Full consistency and comparability in order to enhance the single market;
• Efficient linking of all the three pillars (quantitative basis, qualitative requirements and enhanced reporting and disclosure);
• Proportionality and simplicity; and
• Adequate treatment of transitional issues.

On the basis of the assessment and the outlined principles, EIOPA supports the inclusion of some of the measures tested: Extrapolation, “Classical” Matching Adjustment, Transitional measures and Extension of the Recovery Period, with slight amendments to provide the right incentives for sound risk management. EIOPA advises excluding the so-called Extended Matching Adjustment on the basis that it would not provide sufficient policyholder protection and would be unduly difficult to supervise. In addition, the Counter-Cyclical Premium was judged to be likely to have an adverse financial stability impact due to the way it would be triggered, as well as the perverse impacts on undertakings’ solvency requirements that it generated.

As a consequence, EIOPA advises replacing the CCP with a simpler, more predictable measure, the Volatility Balancer, which would deal with the unintended consequences on undertakings’ capital requirements of short-term volatility. EIOPA further recommends that the impact of the application of the measures on the solvency position of individual undertakings be publicly disclosed as part of the normal disclosure process.

Gabriel Bernardino, Chairman of EIOPA, said: “We are confident that the results of the LTGA, combined with the EIOPA advice will provide the EU political institutions with a reliable basis for an informed decision on the long-term guarantee measures and a conclusion on the Omnibus II negotiations”.

As he underlined: “insurance business is about promises towards policyholders. Both undertakings and supervisors should ensure that these promises are fulfilled and Solvency II will increase that likelihood. Solvency II is a sound framework that needs to be implemented as soon as possible. Experience will help us to further improve the regime once it is already in place”.

EIOPA hopes that the results presented will allow the co-legislators to finalise Omnibus II as soon as possible. 

Full results

Press release

Letter from Gabriel Bernardino to Jonathan Faull

© EIOPA