1. SOLVENCY II
1.1 Insurance Europe and other insurance sector bodies views on the Solvency II review
On 4 November 2020, Insurance Europe along with four other insurance sector bodies (Pan-European Insurance Forum (PEIF), the Association of Mutual Insurers and Insurance Cooperatives in Europe (AMICE), the European Insurance CFO Forum (CFO Forum) and the CRO Forum) published a letter headed, ‘Views of the insurance industry on the review of Solvency II' (the Letter) to the European Commission. The Letter highlights how the Solvency II review provides the key opportunity to enhance insurers' ability to support the European Commission's growth and sustainability objectives and raises serious concerns about the approach of the European Insurance and Occupational Pensions Authority (EIOPA) and the European Systemic Risk Board (ESRB) towards the review of the Solvency II Directive (2009/138/EC) (Solvency II Directive).
EIOPA is currently drafting its final advice to the European Commission on the review of Solvency II and is aiming for a “balanced outcome”. On the contrary, according to the Letter, EIOPA's current approach would lead to a significant increase in capital requirements for insurers, make insurers' solvency ratios even more volatile, especially during periods of crisis, and trigger more pro-cyclical behaviour.
The Letter also comments that the ESRB proposals for new macroprudential tools and measures would lead to unnecessary additional capital requirements and operational burdens for insurers, and make it harder for insurers to make the long-term investments that are needed to boost economic recovery and growth in Europe.
The Letter provides that the Solvency II review should focus on improving existing instruments to fully reflect insurers' long-term business models, mitigate artificial volatility and reduce unnecessary operational burdens.
This would avoid unnecessary costs for customers and help insurers to support the European Commission in delivering on the objectives it has set out in the European Union Green Deal and the Capital Markets Union.
A copy of the Letter can be accessed here.
1.2 EIOPA published its opinion on the 2020 review of Solvency II Directive
On 17 December 2020, EIOPA submitted its opinion on the 2020 review of the Solvency II Directive to the European Commission. The measures proposed by EIOPA aim at keeping the regime fit for purpose by introducing a balanced update of the regulatory framework and EIOPA's view is that overall the Solvency II framework is working well from a prudential perspective. The proposals from EIOPA include:
- adjustments to the treatment of interest rate risk - EIOPA 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 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, reducing its volatility and size, in particular for long-term liabilities; and
- revising 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's opinion reflects the need to supplement the current micro prudential framework with a macro-prudential perspective and introduces specific tools and measures to equip supervisors with sufficient powers to address all sources of systemic risk. In the opinion, EIOPA also proposes to establish 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.
The opinion can be accessed here.
2. EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY (EIOPA)
2.1 EIOPA launches study on diversification in internal models
On 1 October 2020, EIOPA launched a consultation on diversification in internal models under the Solvency II Directive. The study aims to:
- gain an overview of the current approaches in the market and analyse and compare the levels of diversification;
- facilitate a better understanding of modelling dependencies, aggregation of diversification benefits; and
- enhance quality and convergence of supervision on diversification in internal models.
The deadline for responses from insurance undertakings closes on 15 January 2020.
A copy of the consultation can be accessed here.
2.2 EIOPA publishes a report on its approach to the supervision of product oversight and governance
On 8 October 2020, EIOPA published a report on its approach to the supervision of product oversight and governance (POG) requirements under the Insurance Distribution Directive (2016/97/EU) (IDD). The report aims at providing more clarity for insurance manufacturers and distributors on the supervisory approach to POG requirements. The report outlines the approach for assessing whether:
- manufacturers have developed and implemented adequate systems and controls for their POG process and properly implemented product distribution arrangements that are aligned with manufacturers' distribution strategies to ensure products are sold within the right target market;
- manufacturers have processes and procedures in place to perform an adequate target market assessment;
- manufacturers have tested the insurance product and considered the customers' interests and needs throughout the product lifecycle
- manufacturers have developed an appropriate distribution strategy for the insurance product's target market and product characteristics; and
- manufacturers adequately monitor and regularly review products ad hoc or at intervals.
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