17 June 2013

Risk.net: Long-term guarantee measures must be flexible – Balz

Speaking at Insurance Europe's 2013 conference in Rome, Balz argued that the diverse nature of the European insurance industry meant the final calibration of Solvency II's requirements for these products would have to be adaptable to different national and market contexts.

"It should be possible to adjust [the measures] to changing economic conditions. Permanent solutions raise some concerns… They have to be calibrated in [such] a way that [a] certain flexibility in their application is still included and, furthermore, they should promote financial stability and asset diversification", he said.

Balz added that the long-term measures should also be transparent to ensure a level of comparability in their implementation, and applied proportionately to large and small entities, to ensure no insurer is disadvantaged by the measures because of its size.

The European Insurance and Occupational Pensions Authority (EIOPA) released its report on the long-term guarantees impact assessment (LTGA) on June 14. The assessment tested several policy measures designed to reduce the balance sheet volatility for long-term products under the current Solvency II calibration, including a counter-cyclical premium (CCP), a variety of matching adjustments, and a revised extrapolation of the risk-free rate.

In light of its findings from the assessment, EIOPA advises the trilogue parties debating the final calibration of Omnibus II to implement the so-called 'classical' matching adjustment, extend the period between the extrapolation point of the risk-free rate to the ultimate forward rate from 10 years to around 40 years, and discard the CCP in favour of a new 'volatility' balancer" to adjust the risk-free rate at times of market stress.

Gabriel Bernardino, chairman of EIOPA, remarked: "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."

Balz said he hoped for a speedy conclusion to the debate.

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