02 December 2013

BaFin: Solvency II

Translated from the German

Solvency II will require a stronger risk-adjusted capital adequacy of insurers. This will mean very specific challenges for the industry. I speak mainly of life insurance, for which the cost of the obligations on the liability side will be increasing considerably because of the transition to a market value consideration due to the continued low interest rates. The focus of the negotiations for the Omnibus II Directive was therefore on the so-called Long Term Guarantee Package, a set of measures to improve modeling of insurance business with long-term guarantees.

Hufeld was also very pleased that the compromise that has now been reached considered the most important positions from a German perspective. At the start time of Solvency II, it envisages an adequate transitional period for life insurers of 16 years, with a staggered phasing-in of the new rules and a more stable yield curve by an early extrapolation to the target interest rate - 20 years in the case of the euro. He further drew attention to the volatility adjustment, a instrument with ongoing impact, which will reduce the volatility in Solvency II balance sheets of the company as a result of a massive expansion of interest rate spreads in the financial markets and thus limits the risk of pro-cyclical investment behavior of firms.

In this context he also pointed out that life insurers were facing significant costs under Solvency II - even if they apply all measures to improve the image of long-term guarantees. For this they will have to spend €3-5 billion each year - subject to the same market conditions. As burdensome as this challenge might be, it is also necessary. The life insurance industry needs to be strengthened with sufficiently high own resources for the expected times of limited investment income, and guarantees and shares must be priced economically appropriate in the future.

Full article (in German)

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