EIOPA has today published its opinion on the upcoming review of the European insurance rules called Solvency II. The European Commission is planning to propose amendments to the current regime in summer 2021 and had asked EIOPA for a broad assessment of the current framework. The rules have significant consequences for the stability of the insurance industry and its services to insurance holders.
The report calls for greater consideration of interest rate risks, especially in the current low interest rate environment. EIOPA also proposes a new methodology for determining long-term interest rates for supervisory calculations. Furthermore, the report recommends improvements in the so-called volatility adjustments and suggests a new calculation methodology for the risk margins for insurance liabilities. Finally, the criteria for long-term equity investments should be modified. In total, EIOPA has presented its recommendations and analyses on more than 1500 pages, which cover numerous further topics.
Today’s opinion does not cover questions related to sustainability and environmental risks. EIOPA had already published a separate opinion on these topics in September.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The biggest taboo in insurance regulation remains long-term interest rates. Under the current rules, insurers are often allowed to use exaggerated rates in their calculations. An assumed long-term interest rate of 3.75% seems esoteric when at the same time Austria can take on billions in debt over 100 years term at barely 0.88%. The current extrapolation rules for interest rates allow insurers to assume positive rates where market rates actually have been zero for a long time already. In today’s report, EIOPA therefore proposes an alternative methodology that takes greater account of long-term market rates. However, this is only a small step towards greater realism. It is high time to put a radical end to interest rate euphemisms in insurance regulation. As long as the state believes it knows true interest rates better than the market, the business model of many insurers remains questionable. This denial of reality must come to an end.
“The second big taboo in insurance regulation is the zero weighting of government bonds. Under the current rules, sovereign debt is considered risk-free. Yet historical experience shows that this is an illusion. Here, too, the state thinks it knows better than the markets. Unfortunately, this topic is not mentioned in today’s report.
“It is worrying that EIOPA proposes a far-reaching reduction in the risk margin for insurance liabilities. EIOPA estimates that this will provide insurers with a 15% relief on their risk margins. It may be that the current calculation method has weaknesses. However, a reduction in the proposed order of magnitude is not plausible. Without better justification, this looks like a Christmas present for the insurance industry.
“EIOPA makes a worrying judgement on the current rules for long-term equity investments. Since an amendment in 2019, insurers are allowed to assume a significantly lower risk for such investments. EIOPA’s analysis shows that this is not appropriate. At the same time, the scope of application is even to be extended in the future. The European Commission should therefore revoke the special treatment. Regulation must not be misused for subsidies, even when the goals deserve support.
“It is welcome that EIOPA calls for an extension of supervisory powers with regard to distributions by insurers in crisis times. During the pandemic, it became clear that supervisors lack the legal powers to broadly prohibit dividends and share buybacks. Several large insurers have paid out significant dividends to their shareholders in recent months, despite the enormous economic uncertainty. The state therefore needs more capacity to act to protect the interests of policyholders and taxpayers.”
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EIOPA opinion on Solvency II review:
https://www.eiopa.europa.eu/content/opinion-2020-review-of-solvency-ii
EIOPA opinion on sustainability within Solvency II:
https://www.eiopa.europa.eu/content/eiopa-issues-opinion-sustainability-within-solvency-ii_en