The European Insurance and Occupational Pensions Authority (EIOPA) submitted today to the European Commission its Opinion on the Solvency II 2020 Review. EIOPA’s approach has been “evolution not revolution”.
EIOPA’s approach has been “evolution not revolution”. The measures
proposed aim at keeping the regime fit for purpose by introducing a
balanced update of the regulatory framework, reflecting better the
economic situation and completing the missing elements from the
regulatory toolbox. From a prudential perspective, EIOPA is of the view
that, overall, the Solvency II framework is working well and no
fundamental changes are needed at this point in time but a number of
adjustments are required to ensure that the regulatory framework
continues as a well-functioning risk-based regime.
The proposals from EIOPA include the following:
- Adjustments to the treatment of interest rate risk, reflecting
the steep fall of interest rates experienced during the last years and
the existence of negative interest rates. EIOPA also recommends changes
to the interest rate curves used by insurers to value liabilities,
specifically in respect of the method of extrapolating risk-free rates
to better reflect market reality.
- Improvements to the volatility adjustment to better align the design
to its objectives, increase its effectiveness in curbing short-term
volatility and in particular rewarding insurers for holding illiquid
liabilities.
- Refinements to the calculation of the risk margin of insurance
liabilities, recognising diversification over time, thereby reducing its
volatility and size, in particular for long-term liabilities.
- Revise the criteria for the ability to hold equity long-term, by
making a link with long-term illiquid liabilities with the aim to better
reflect risks and further encourage long term investments in a sound
and prudent way.
EIOPA also recommends to introduce a new process for applying
and supervising the principle of proportionality. Clear risk-based
quantitative criteria are proposed to identify low risk undertakings
eligible for applying proportionality measures. These will capture not
only the size but also the nature and complexity of the different risks
and will provide legal certainty regarding the application of the
proportionality principle. The undertakings complying with such criteria
will be able, after a notification, to apply automatically a number of
proportionality measures. These measures focus mainly on the system of
governance and reporting. For example, the submission of the Regular
Supervisory Report every three years will be the default approach for
low risk profile undertakings.
Further proposals relate to cross-border business, in particular to
support efficient exchange of information among national supervisory
authorities during the process of authorisation and in case of material
changes in cross-border activities.
The Opinion also reflects the need to supplement the current micro
prudential framework with a macro-prudential perspective, including the
introduction of specific tools and measures to equip supervisors with
sufficient powers to address all sources of systemic risk.
Finally, EIOPA also proposes the establishment of a minimum
harmonised and comprehensive recovery and resolution framework and the
introduction of a European network of national Insurance Guarantee
Schemes that should meet a minimum set of harmonised features with the
primary aim to protect policyholders, paying compensation when needed or
ensuring the continuation of insurance policies.
This extensive Opinion is a result of almost two-years of work by
EIOPA, including a public consultation and a holistic impact assessment.
During this time, EIOPA closely consulted with a wide range of
stakeholders.
Gabriel Bernardino, Chairman of EIOPA, said: “EIOPA’s Opinion on
the 2020 Solvency II review achieves all the defined objectives: adapts
the regime to the new interest rate market reality; creates conditions
for more long-term investment; brings a paradigm shift on the
application of proportionality; and completes the European insurance
framework with a macro-dimension and proposals on recovery and
resolution and insurance guarantee schemes. Most importantly, these
adjustments will ensure that Solvency II will continue to be a credible
and fit for purpose regime, capable of protecting policyholders and
contributing to market stability even in stress situations.“
Opinion on the Solvency II 2020 Review.
© EIOPA
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