Today, 22 September 2021, Finance Commissioner Mairead McGuinness presents her long-awaited proposals for a revision of the European insurance rules Solvency II. It is the biggest amendment to date of the framework, which came into force in the EU in 2016 after years of negotiations. The new proposal builds on comprehensive recommendations which the European insurance supervisor EIOPA had prepared on behalf of the EU Commission and published in 2019 and 2020.
The package presented today by the EU Commission includes an amendment to the Solvency II Directive as well as a draft for a new directive on the resolution of insurance companies. However, important parts of the insurance framework are laid down in delegated acts, which are also to be updated. However, the EU Commission will present these changes only at a later stage.
The Commission’s proposal introduces several new elements into the framework, such as a resolution regime for ailing insurers, macroprudential tools for supervisors or a simplified framework for low-risk insurers. In the future, insurers are to integrate climate risks in their internal risk management by means of scenario calculations. In addition, EIOPA is mandated to propose possible adjustments to the capital requirements with regard to sustainability risks in a report by 2023.
Additionally, many parts of the existing framework will be adapted. Supervisory powers are to be expanded, especially for cross-border businesses. Negative interest rates will be properly captured in the future, and the absurdly high imputed long-term interest rates will be gradually lowered to a somewhat more realistic level until 2032. While the latter changes result in higher capital requirements in the long term, other measures take effect immediately: a broader scope of application for the long-term equity exemption, a significant reduction of the risk margin for technical provisions and other adjustments provide immediate capital relief for European insurers totalling 90 billion euros.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The European insurance rules continue to have more holes than Swiss cheese. Today, the EU Commission is missing the chance to finally make Solvency II strictly evidence-based. Instead, most lobby-driven exceptions remain in place or are even being expanded. The EU Commission overrides EIOPA’s recommendations and gives the European insurance industry an immediate capital relief of 90 billion euros. Insurance companies, as long-term investors, can play a significant role in the European Green Deal. But sustainability also means protecting policyholders’ rights and financial stability. This only works with honest risk measurement and adequate capitalisation. The EU Commission’s proposals go in the wrong direction overall.
With regard to sustainability risks, the EU Commission falls short of its own announcements in the Sustainable Finance Strategy and the standards in the banking sector. The consideration of climate risks only in the internal risk management of insurers is not sufficient. Long-term sustainability risks must also have a regulatory impact. In addition, the supervisory authorities must assess sustainability risks and, if necessary, impose capital surcharges, as is already common practice in the SREP for banks. It is not enough to let EIOPA now prepare the umpteenth expert report and postpone the issue again for years. Anyone who takes the European Green Deal seriously must also act in 2021.
EIOPA’s analyses show: Many of the new and old measures cannot be justified empirically. Long-term equity investments are desirable in terms of economic policy, but they are not low-risk. The reduced risk weighting of 22%, which is to be applied even more widely in the future, does not adequately reflect the actual risks. There is also no convincing justification for the drastic reduction of the risk margin in technical provisions. The same applies to the preferential treatment of strategic and infrastructure investments, which will remain unchanged. And also in the future, government bonds from the OECD may – contrary to all historical experience – be considered risk-free. The EU Commission’s downright post-factual approach undermines the credibility of the entire framework.
For a functioning European Capital Markets Union, we also need a European Insurance Union. Here, the EU Commission is shying away from the key measures. The harmonisation of national insurance guarantee systems as recommended by EIOPA is missing in today’s proposal, as is joint European supervision of the largest insurance groups. This also harms the protection of European consumers, who purchase insurance products cross-border but cannot rely on a uniform level of protection.”
Draft by the EU Commission for a revision of Solvency II from 22 September 2021:
EIOPA Opinion on the revision of Solvency II from 17 December 2020:
My take on the EIOPA Opinion from 17 December 2020:
EIOPA Opinion on sustainability in Solvency II from 30 September 2019:
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