EIOPA submitted—to the European Parliament, European Council, and EC—its 2018 and third annual report on Long-Term Guarantee (LTG) measures and measures on equity risk. The Solvency II Directive requires a review of the LTG measures and the measures on equity risk until January 01, 2021. As part of this review, EIOPA reports annually on the impact of the application of the LTG measures and the measures on equity risk to the European Parliament, European Council, and EC.
The report first provides information on the legal background of the review of the LTG measures and measures on equity risk, describes the data used for this report, and offers a short overview of the European insurance market. It then captures the overall and detailed impact of these measures on financial position of the undertakings, policyholder protection, investments, consumer protection, financial stability, competition, and a level playing field in the insurance market in EU. Finally, the report focuses on risk management aspects in view of the specific requirements for LTG measures, also including an analysis of detailed features and types of guarantees of products with long-term guarantees.
Similar to the analyses of previous years, the results this year show that most of the measures are widely used. Nearly 737 insurance and reinsurance undertakings in 23 countries with a European market share of 74% use at least one of the voluntary measures. The voluntary measures include the matching adjustment, the volatility adjustment, the transitional measures on the risk-free interest rates, the transitional measures on technical provisions (TMTP), and the duration-based equity risk sub-module. The volatility adjustment and the transitional measure on technical provisions are particularly widely used. The volatility adjustment is applied by 696 undertakings in 23 countries to mitigate the effect of exaggerations of bonds spreads. The transitional measure on technical provisions is applied by 162 undertakings in 11 countries with respect to contracts concluded before the start of Solvency II to ensure a smooth transition to the new regime.
The average Solvency Capital Requirement (SCR) ratio of undertakings using the voluntary measures is 231% and would drop to 172% if the measures were not applied. This confirms the importance of these measures for the financial position of insurance undertakings. Additionally, EIOPA conducted an analysis on risk management aspects in relation to the regulatory reporting by undertakings of the LTG measures. The analysis covered the following aspects:
- The liquidity plan for undertakings applying the matching or the volatility adjustment
- The assessment of sensitivity of technical provisions regarding the assumptions underlying the extrapolation, the matching adjustment, and the volatility adjustment
- The assessment of compliance with capital requirements, with and without the measures
- Potential measures to restore compliance and analysis of LTG measures in the own risk and solvency assessment
National supervisory authorities identified room for improvement in relation to the level of detail of the regular supervisory reporting. In addition, they performed case studies to further explore how insurers build-in the results of the assessments on asset-liability management (ALM) into their overall ALM and risk management system. Practices observed vary across countries and measures.
Keywords: Europe, EU, Insurance, Solvency II, Long-term Guarantee, Equity Risk, Matching Adjustment, Volatility Adjustment, TMTP, SCR, EIOPA