The European Insurance and Occupational Pensions Authority (EIOPA) has published its Opinion on the Solvency II 2020 Review.
EIOPA’s approach has been “evolution not revolution”. The measures proposed aim at keeping the regime fit for purpose by introducing a balanced update of the regulatory framework, reflecting better the economic situation and completing the missing elements from the regulatory toolbox. From a prudential perspective, EIOPA is of the view that, overall, the Solvency II framework is working well and no fundamental changes are needed at this point in time but a number of adjustments are required to ensure that the regulatory framework continues as a well-functioning risk-based regime.
The proposals from EIOPA include the following:
- Adjustments to the treatment of interest rate risk, reflecting the steep fall of interest rates experienced during the last years and the existence of negative interest rates. EIOPA also 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 the 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, thereby reducing its volatility and size, in particular for long-term liabilities.
- Revise 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 also recommends to introduce a new process for applying and supervising the principle of proportionality. Clear risk-based quantitative criteria are proposed to identify low risk undertakings eligible for applying proportionality measures. These will capture not only the size but also the nature and complexity of the different risks and will provide legal certainty regarding the application of the proportionality principle. The undertakings complying with such criteria will be able, after a notification, to apply automatically a number of proportionality measures. These measures focus mainly on the system of governance and reporting. For example, the submission of the Regular Supervisory Report every three years will be the default approach for low risk profile undertakings.
Further proposals relate to cross-border business, in particular to support efficient exchange of information among national supervisory authorities during the process of authorisation and in case of material changes in cross-border activities.
The Opinion also reflects the need to supplement the current micro prudential framework with a macro-prudential perspective, including the introduction of specific tools and measures to equip supervisors with sufficient powers to address all sources of systemic risk.
Finally, EIOPA also proposes the establishment of 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.
This extensive Opinion is a result of almost two-years of work by EIOPA, including a public consultation and a holistic impact assessment. During this time, EIOPA closely consulted with a wide range of stakeholders.
Gabriel Bernardino, Chairman of EIOPA, said: “EIOPA’s Opinion on the 2020 Solvency II review achieves all the defined objectives: adapts the regime to the new interest rate market reality; creates conditions for more long-term investment; brings a paradigm shift on the application of proportionality; and completes the European insurance framework with a macro-dimension and proposals on recovery and resolution and insurance guarantee schemes. Most importantly, these adjustments will ensure that Solvency II will continue to be a credible and fit for purpose regime, capable of protecting policyholders and contributing to market stability even in stress situations.“
NN Insurance Comment;
NN Group has taken note of EIOPA’s Opinion to the European Commission on the Solvency II review published on 17 December 2020. The Opinion, which consists of a proposed package of measures, will be used as input for the European Commission to draft a legislative proposal which will be discussed with the European Council and European Parliament in the coming years. The resulting legislation is currently expected to be implemented at the earliest in 2024.
Based on the EIOPA Opinion and current market conditions, the net impact from the proposed changes to the risk-free curve extrapolation and risk margin calculation on NN Group’s Solvency II ratio at the expected implementation date is expected to be approximately -5%-points. This is compensated by an increase of operating capital generation of approximately EUR 50 million per annum as from the implementation date. These proposals do not change our capital return policy.