The article first appeared in German on www.versicherungsmonitor.de
Under the new Solvency II supervisory system, insurers are required to meet certain risk-based capital requirements. The higher the risks to which they are exposed, the more capital they must retain for the protection of policyholders. It has become clear that this mandatory target will not be met following the issuing by the European Commission of a ‘standard formula’ setting out detailed provisions for the calculation of capital requirements. In many instances, this is based not on objective risk assessment but on political targets, taking into account the special needs of individual Member States. For example, government bonds issued in all the EU Member States are classified as risk-free, which means that insurers are not required to retain capital against the risk of a fall in the market value thereof. This is a completely absurd decision, given the heavy losses in the value of bonds issued in recent years by Greece and other EU Member States. It threatens financial stability and exposes policyholders to the risk of their insurers being unable to honour their commitments as a result of financial difficulties arising from investment in government bonds.
Acting on the principle that ‘you can never get enough of a bad thing’, the Commission has recently decided to make matters still worse by introducing statutory provisions listing those regional and local authorities that are to be treated in precisely the same way as central government for the purpose of calculating capital requirements. In other words, insurers are not required to retain capital in respect of bonds issued by them. The list of authorities to whom this applies is based on guidelines issued by EIOPA, the EU insurance supervisory body, which has, to this end, been given the task of assessing the regional and local authorities in terms of their fiscal powers and institutional provisions.
The list includes not only the German ‘Länder’ (regions) and local authorities, but also the heavily indebted Spanish autonomous communities and the hard-pressed Austrian province of Carinthia, which is underwriting up to EUR 10 billion in loans to the failed Hypo Alpe-Adria-Bank. As a result of this massive financial burden, Carinthia decided in March 2015 to commence preparations for possible insolvency. That this has not yet come to pass is due in part to hopes of financial concessions from creditors. At the same time, it manifestly belies the classification of Carinthia by the Commission and EIOPA as a risk-free debtor.
There are striking discrepancies between the list of regional and local authorities drawn up for the purposes of the Solvency II system and that drawn up for the purposes of banking supervision, which should really be based on the same criteria. For example, the French regions, departments and municipalities are included on the former but not the latter.
This only serves to strengthen the impression that the list of regional and local authorities has not been drawn up on the basis of objective criteria. According to the Commission and EIOPA, the list is based on information provided by the national supervisory authorities, indicating that it might actually have come into being as a government wish list, despite the fact that the regional and local authorities concerned should have been the subject of an independent assessment by the Commission and EIOPA. The European Parliament can do little to remedy the Commission’s inaction in this instance, since the Commission alone is responsible for technical standards. However, even if Parliament has no co-decision rights on this matter, Commissioner Hill, who is responsible for financial stability, must be called to account and I shall ensure that he is.
Insolvency risk facing Carinthia referred to above: http://www.bloomberg.com/news/articles/2015-03-10/carinthia-prepares-for-insolvency-seeks-credit-through-treasury•
Current situation in Carinthia: http://diepresse.com/home/wirtschaft/economist/4875340/Kaernten_12-Mrd-fur-die-HetaLandeshaftungen
EBA list of regional and local authorities for banking supervision: https://www.eba.europa.eu/-/eba-publishes-lists-for-the-calculation-of-capital-requirements-for-credit-risk
For example, the French and Polish local authorities are included on the Solvency II list but not the EBA list. While the EBA publishes the list, it does not determine the content thereof. That is done, in accordance with the CRR, by the national supervisory bodies responsible for the regional and local authorities in their territory. The Commission plays no part in this. The statutory criteria are identical with the Solvency II criteria (which were copied from them) .
The final paragraph refers to recital 3 of the ITS: ‘Supervisory authorities have provided relevant information on the specific revenue-raising powers and existing institutional arrangements under national law in relation to the regional governments and local authorities in their jurisdiction and on the extent to which those governments and authorities comply with the requirements laid down in point (a) of Article 109a (2) of Directive 2009/138/EC.’