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Solvency II review starts to get serious

Posted May 15, 2018

David Worsfold

The preliminaries are over. The initial skirmishes have been conducted. Now the battle over the review of Solvency II is starting to get serious.

A year ago, Insurance Europe, which represents Europe’s insurers, was setting out its stall in response to what insurance companies saw as an over-ambitious approach of the European Insurance and Occupational Pensions Authority (EIOPA) to the scheduled review of Solvency II by the European Commission.

A year has passed and Insurance Europe fears that no-one at EIOPA is listening, as the regulator’s latest submission to the European Commission pushes the scope of the review further into unwelcome territory as far as insurers are concerned.

No-one will come out publicly and say so, but there is clearly a feeling running through the boardrooms of Europe’s major insurers that EIOPA is over-stepping the mark. It is meant to be providing “technical advice” to the European Commission but has been calling for some fundamental changes to Solvency II, which Insurance Europe argues should be left to the more wide-ranging review scheduled for 2020.

For the 2018 review, the Commission asked EIOPA to provide technical advice. This was delivered in February 2018. The advice covered the areas requested by the Commission, but also covered areas where EIOPA provided proposals on its own initiative and this is what has antagonised insurers. The Commission is now deliberating on this advice before it submits the changes to the European Parliament and Council of Ministers by the end of 2018.

One of this issues that was high on Insurance Europe’s agenda when it drew up its initial response last year –the treatment of infrastructure investments – has been ticked off:

“Some welcome improvements in the area of infrastructure were made by the European Commission as part of its work on the Capital Markets Union project, which aimed to remove regulatory barriers to investment”, says Insurance Europe.

However, it is by no means convinced these go far enough: “Excessive capital can increase the costs for customers and even make some products, such as guaranteed savings products, simply unavailable. Excessive capital also restricts the ability of insurers — who have more than €10tn of assets under management — to allocate capital to long-term investments. This includes investments that were identified as much needed by the Commission’s action plans for the Capital Markets Union and Sustainable Finance”.

Elsewhere, Insurance Europe’s normally cautious language takes a back seat in its latest submission to the Commission:

“While EIOPA’s advice includes several helpful improvements to a range of smaller issues, disappointingly, these are overshadowed by advice that not only ignores the EU’s growth objectives, but actually conflicts with them. Regrettably, EIOPA’s impact assessment has several weaknesses and ignores the effects on the cost and availability of products and on long-term investment. It is therefore key that, before the Commission finalises its views, it undertakes a comprehensive impact assessment, looking at the cumulative impact of EIOPA’s proposed changes”.

The insurers have two major areas of concern, says Insurance Europe’s submission and reminds the Commission that it did not ask EIOPA for any views on these areas.

“EIOPA’s proposed changes to interest rate risk and the loss absorbing capacity of deferred taxes (LAC DT) conflict with the Juncker Commission’s growth objectives and should not be taken forward.

No change to the calibration of interest rate risk. A change is not required to ensure policyholder protection, but would increase barriers to long-term business. Interest rates are directly related to wider and fundamental questions on valuation methodology and should be dealt with in the 2020 review.

No arbitrary limits should be imposed on the loss absorbing capacity of deferred taxes. Solvency II already requires high standards of evidence to support LAC DT use. The LAC DT limits relate to the percentage of tax recovery that can be used to offset capital requirements. The Commission should reject the artificial and conservative limits that were proposed by EIOPA under the pretext of convergence”.

Insurance Europe has also taken the opportunity of reminding the Commission of some things it believes do need changing:

“Reduce the cost of capital in the risk margin, by recognising the impact the current excessive risk margin can have on insurers’ long-term products and their ability to invest long-term.

Reduce the capital requirements for long-term investment in equity, not just unlisted equity. These are currently excessive when compared to the real risks and add to the disincentives for increasing investment”.

The tone of the submission is robust, at least in terms of the usual language of trade association lobbying in Europe, especially when it involves publicly criticising the industry’s regulator. It concludes with a very clear declaration of what insurers think will be the consequences of the Commission listening to EIOPA:

“Getting the measures wrong matters to consumers because it leads to higher premiums, lower benefits and less choice. It matters to the economy because it limits the ability of insurers to support economic growth”.

With everything else the Commission currently has on its plate – not least the Brexit negotiations – we are unlikely to see its own proposals before the summer, with consideration by the Parliament starting only in September at the earliest. If they are still not to Insurance Europe’s liking, expect it to step up the lobbying, wheeling out some of the big guns in Europe’s insurance sector to argue its case.

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